-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WuvtbL8/IXcD2FvdaVgZlteo4CC1VQVbnoViuxiB+OYHhETwJZW+McoDWECcbuxB GlPPZ0AyfVZmfciP+zkG6Q== 0000013372-99-000008.txt : 19990714 0000013372-99-000008.hdr.sgml : 19990714 ACCESSION NUMBER: 0000013372-99-000008 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990713 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOSTON EDISON CO CENTRAL INDEX KEY: 0000013372 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 041278810 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-02301 FILM NUMBER: 99663443 BUSINESS ADDRESS: STREET 1: 800 BOYLSTON ST STREET 2: ROOM P 344 CITY: BOSTON STATE: MA ZIP: 02199 BUSINESS PHONE: 6174242000 MAIL ADDRESS: STREET 1: 800 BOYLSTON ST STREET 2: ROOM P 344 CITY: BOSTON STATE: MA ZIP: 02199 10-K405/A 1 BOSTON EDISON FORM 10-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission file number 1-2301 BOSTON EDISON COMPANY (Exact name of registrant as specified in its charter) Massachusetts 04-1278810 - ------------------------------------------ ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 800 Boylston Street, Boston, Massachusetts 02199 - ------------------------------------------ -------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 617-424-2000 ------------ Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 26, 1999: None Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding at March 26, 1999 -------------------------- ----------------------------- Common Stock, $1 par value 100 shares 1 Boston Edison Company - ------------------------------------------------------------------------------ Form 10-K/A Annual Report - ------------------------------------------------------------------------------ December 31, 1998 - ------------------------------------------------------------------------------
Part I Page - ------------------------------------------------------------------------------ Item 1. Business 2 Item 2. Properties and Power Supply 6 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 9 Part II - ------------------------------------------------------------------------------ Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters 12 Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis 13 Item 8. Financial Statements and Supplementary Financial Information 28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 53 Part III - ------------------------------------------------------------------------------ Item 10. Directors and Executive Officers of the Registrant 54 Item 11. Executive Compensation 57 Item 12. Security Ownership of Certain Beneficial Owners and Management 65 Item 13. Certain Relationships and Related Transactions 65 Part IV - ------------------------------------------------------------------------------ Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 66
2 Part I ------ Item 1. Business - ----------------- (a) General Development of Business - ----------------------------------- Boston Edison Company (Boston Edison), an investor-owned regulated public utility incorporated in 1886 under Massachusetts law, received final approval of its reorganization plan to form a holding company structure from the Securities and Exchange Commission (SEC) in May 1998. Effective May 20, 1998 the holding company, BEC Energy (BEC), was formed with Boston Edison as a wholly owned subsidiary of BEC. Effective June 25, 1998, Boston Energy Technology Group (BETG) ceased being a subsidiary of Boston Edison and became a wholly owned subsidiary of BEC. Within its newly restructured industry, BEC has announced its intention to focus its utility operations on the transmission and distribution of energy. The sale of Boston Edison's fossil generating assets to Sithe Energies, Inc. (Sithe) was completed in May 1998. In November 1998, Boston Edison signed an agreement with Entergy Nuclear Generating Company (Entergy) to sell its wholly owned nuclear generating unit, Pilgrim Nuclear Power Station (Pilgrim). BEC signed a merger agreement with Commonwealth Energy System (CES) in December 1998 that will create an energy delivery company serving approximately 1.3 million customers located entirely within Massachusetts, including more than one million electric customers in 81 communities and 240,000 gas customers in 51 communities. (b) Financial Information about Industry Segments - ------------------------------------------------- Boston Edison operates as a regulated electric public utility, therefore industry segment information is not applicable. (c) Narrative Description of Business - ------------------------------------- Principal Products and Services Boston Edison currently supplies electricity at retail to an area of 590 square miles, including the city of Boston and 39 surrounding cities and towns. The population of the area served with electricity at retail is approximately 1.5 million. In 1998 Boston Edison served an average of approximately 660,000 customers. It also supplies electricity at wholesale for resale to other utilities and municipalities. Electric operating revenues by class for the last three years consisted of the following:
1998 1997 1996 - --------------------------------------------------------------------------- Retail electric revenues: Commercial 51% 51% 50% Residential 27% 27% 27% Industrial 9% 9% 9% Other 1% 1% 2% Wholesale and contract revenues 12% 12% 12% ===========================================================================
3 Sources and Availability of Fuel On May 15, 1998, Boston Edison completed the sale of its non-nuclear generating assets to Sithe Energies. In April 1998, Boston Edison began soliciting expressions of interest for the sale of its nuclear generating unit, Pilgrim as part of the previously announced strategy to exit the generation business. On November 19, 1998, Boston Edison announced that Entergy, a subsidiary of New Orleans-based Entergy Corporation, had been selected as the winning bidder for Pilgrim. A purchase and sale agreement has been signed and all required approvals are anticipated in the second quarter of 1999. Company generation by type of fuel for each of the last five years were as follows:
Percentage of Company Generation by Source (%) -------------------------------- 1998 1997 1996 1995 1994 - ----------------------------------------- Oil 8.1 32.0 16.1 17.5 27.8 Gas 20.8 31.1 33.3 39.9 31.6 Nuclear 71.1 36.9 50.6 42.6 40.6 =========================================
The decrease in company oil and gas generation resulting from the fossil divestiture was partially offset by higher purchased power in 1998 that included a six-month transitional power purchase contract with Sithe that began in May. In order to obtain fuel for use at Pilgrim Station, Boston Edison must obtain supplies of uranium concentrates and secure contracts for these concentrates to go through the processes of conversion, enrichment and fabrication of nuclear fuel assemblies. Boston Edison currently has contracts for supplies of uranium concentrates and the processes of conversion, enrichment and fabrication through 2002, 2000, 2004 and 2012, respectively. Following the planned sale of Pilgrim, it is expected that each of these contracts for future commitments will either be terminated or permitted to expire in accordance with their terms. Boston Edison may be subject to a penalty of approximately $10 million to terminate one of these contracts. Management anticipates any payment will be collected from customers under the terms of the Boston Edison settlement agreement. None of these supply contracts have been assigned to Entergy. Franchises Through its charter, which is unlimited in time, Boston Edison has the right to engage in the business of producing and selling electricity, steam and other forms of energy, has powers incidental thereto and is entitled to all the rights and privileges of and subject to the duties imposed upon electric companies under Massachusetts laws. The locations in public ways for electric transmission and distribution lines are obtained from municipal and other state authorities which, in granting these locations, act as agents for the state. In some cases the action of these authorities is subject to appeal to the Massachusetts Department of Telecommunications and Energy (DTE). The rights to these locations are not limited in time, but are not vested and are subject to the action of these authorities and the legislature. Pursuant to the Massachusetts electric utility industry restructuring legislation enacted in November 1997, the DTE has defined the service territory of Boston Edison based on the territory actually served on July 1, 1997, and following, to the extent possible, municipal boundaries. The legislation further provided that, until terminated by effect of law or otherwise, Boston Edison shall have the exclusive obligation to provide distribution service to all retail customers 4 within such service territory. No other entity shall provide distribution service within this territory without the written consent of Boston Edison which consent must be filed with the DTE and the municipality so affected. Seasonal Nature of Business Kilowatt-hour (kWh) sales and revenues are typically higher in the winter and summer than in the spring and fall as sales tend to vary with weather conditions. Refer to the Selected Consolidated Quarterly Financial Data (Unaudited) in Item 8 for specific financial information by quarter for 1998 and 1997. Competitive Conditions The utility industry has continued to change in response to the marketplace demands for improved customer service and lower prices for energy. These pressures have resulted in an increasing trend in the industry to seek competitive advantages and other benefits through business combinations. On December 5, 1998, BEC and CES, headquartered in Cambridge, Massachusetts, entered into an Agreement and Plan of Merger (the Merger Agreement). Management's Discussion and Analysis ("Merger with COM/Energy") in Item 7 provides further details regarding the Merger Agreement. Boston Edison has been anticipating and responding to changes in the electric energy business as a result of industry restructuring proceedings at both the federal and state levels. Management's Discussion and Analysis ("Retail Access") in Item 7 provides further details regarding Boston Edison's response to the industry climate, including details of its industry restructuring settlement agreement. Environmental Matters Boston Edison is subject to numerous federal, state and local standards with respect to the management of wastes, air and water quality and other environmental considerations. These standards could require modification of existing facilities or curtailment or termination of operations at these facilities. They could also potentially delay or discontinue construction of new facilities and increase capital and operating costs by substantial amounts. Noncompliance with certain standards can, in some cases, also result in the imposition of monetary civil penalties. Environmental-related capital expenditures for the years 1998 and 1997 were $0.6 million and $1.4 million, respectively. Management believes that its remaining operating facilities are in substantial compliance with currently applicable statutory and regulatory environmental requirements. Additional expenditures could be required as changes in environmental requirements occur. Number of Employees As of March 26, 1999, Boston Edison had 2,893 full-time and 48 part-time employees including 1,966 represented by two locals of the Utility Workers Union of America, AFL-CIO. The locals' labor contracts are effective through May of the year 2000. Management believes it has satisfactory employee relations. Approximately 600 employees are expected to terminate employment as a result of the divestiture of Pilgrim Station in 1999. Refer to the Generating Assets Divestiture section of Item 7 for information regarding employees affected by the nuclear divestiture. 5 (d) Financial Information about Foreign and Domestic Operations and Export - -------------------------------------------------------------------------- Sales - ----- Boston Edison delivers electricity to retail and wholesale customers in the Boston area. Boston Edison does not have any foreign operations or export sales. (e) Additional Information - -------------------------- Regulation Boston Edison and its wholly owned subsidiary, Harbor Electric Energy Company (HEEC), operate primarily under the authority of the DTE, whose jurisdiction includes supervision over retail rates for electricity and financing and investing activities. In addition, the Federal Energy Regulatory Commission (FERC) has jurisdiction over various phases of Boston Edison's business including rates for power sold at wholesale for resale, facilities used for the transmission or sale of that power, certain issuances of short-term debt and regulation of the system of accounts. The Nuclear Regulatory Commission (NRC) has broad jurisdiction over the siting, construction and operation of nuclear reactors with respect to public health and safety, environmental matters and antitrust considerations. A license granted by the NRC may be revoked, suspended or modified for failure to construct or operate a facility in accordance with its terms. Boston Edison currently holds an operating license for Pilgrim Station which expires in 2012. Continuing NRC review of existing regulations and certain operating occurrences at other nuclear plants have periodically resulted in the imposition of additional requirements for all nuclear plants in the United States, including Pilgrim Station. NRC inspections and investigations can result in the issuance of notices of violation. These notices can also be accompanied by orders directing that certain actions be taken or by the imposition of monetary civil penalties. In addition, management could undertake certain actions regarding Pilgrim Station at the request or suggestion of its insurers or the Institute of Nuclear Power Operations, a voluntary association of nuclear utilities dedicated to the promotion of safety and reliability in the operation of nuclear power plants. Nuclear power continues to be a subject of political controversy and public debate manifested from time to time in the form of requests for various kinds of federal, state and local legislative or regulatory action, direct voter initiatives or referenda or litigation. Management cannot predict the extent, cost or timing of any modifications to Pilgrim which could be necessary as a result of additional regulatory or other requirements. As discussed in Sources and Availability of Fuel of this item, Boston Edison entered into a purchase and sale agreement with Entergy for the sale of Pilgrim Station. The DTE approved the sale of Pilgrim in March 1999. Other required approvals are anticipated in the second quarter of 1999. Such approvals are required for the completion of the Pilgrim sale. Provided that all required approvals are received and the sale of Pilgrim proceeds as planned, Boston Edison will transfer its regulatory and legal liability and responsibility for Pilgrim to Entergy, except for any outstanding liabilities related to pre-closing occurrences. If the required approvals are not received as anticipated, the agreement with Entergy could be terminated. If Boston Edison is ultimately unable to sell Pilgrim, management expects it would recover all stranded Pilgrim costs, including decommissioning under the Boston Edison settlement agreement. 6 Plant Expenditures and Financings The most recent estimates of plant expenditures (excluding nuclear fuel), allowance for funds used during construction (AFUDC), long-term debt maturities and preferred stock payment requirements for the years 1999 through 2003 are as follows:
(in thousands) 1999 2000 2001 2002 2003 - ------------------------------------------------------------------------------ Plant expenditures $127,000 $113,000 $ 96,000 $ 75,000 $ 78,000 AFUDC $ 1,200 $ 1,200 $ 1,200 $ 1,200 $ 1,200 Long-term debt $ 1,600 $166,600 $ 1,600 $ 1,600 $151,650 Preferred stock $ - $ - $ 50,000 $ - $ - ==============================================================================
Management continuously reviews its plant expenditure and financing programs. These programs and, therefore, the estimates included in this Form 10-K/A are subject to revision due to changes in regulatory requirements, environmental standards, availability and cost of capital, interest rates and other assumptions. Plant expenditures in 1998 were $118 million and consisted primarily of additions to Boston Edison's distribution and transmission systems. The majority of these expenditures were for system reliability and control improvements, customer service enhancements and capacity expansion to allow for long range growth in the Boston Edison service territory. Refer to the Liquidity section of Item 7 for more information regarding capital resources to fund construction programs. Item 2. Properties and Power Supply - ------------------------------------ Total electric generation capacity from facilities owned by Boston Edison consisted of the following:
Year Unit (a) Location Capacity (b) Type Installed - ------------------------------------------------------------------------------ Pilgrim Nuclear Plymouth, Mass. 670 Nuclear 1972 Power Station New Boston Station South Boston, Mass. 760 Fossil 1965-1967 Units 1 and 2 Mystic Station Everett, Mass. Units 4-5-6 388 Fossil 1957-1961 Unit 7 592 Fossil 1975 Combustion turbine 14 Fossil 1969 generator Combustion turbine Various 276 Fossil 1966-1971 generators (nine) ============================================================================== (a) As discussed in Sources and Availability of Fuel of this item, Boston Edison completed the sale of its fossil generating assets to Sithe Energies in May 1998. In addition, Pilgrim Station is expected to be sold to Entergy in 1999. (b) In megawatts (MW) based on winter capability audit results in 1997.
7 Boston Edison's high-tension transmission lines are generally located on land either owned or subject to easements in its favor. Its low-tension distribution lines are located principally on public property under permission granted by municipal and other state authorities. As of December 31, 1998, Boston Edison's transmission system consisted of 376 miles of overhead circuits operating at 115, 230 and 345 kilovolts (kV) and 171 miles of underground circuits operating at 115 and 345 kV. The substations supported by these lines are 45 transmission or combined transmission and distribution substations with transformer capacity of 11,053 megavolt amperes (MVA), 57 4 kV distribution substations with transformer capacity of 932 MVA and 16 primary network units with 79 MVA capacity. In addition, high tension service was delivered to 248 customers' substations. The overhead and underground distribution systems cover approximately 3,700 and 3,200 circuit miles, respectively. HEEC, Boston Edison's regulated subsidiary, has a distribution system that consists principally of a 4.1 mile 115 kV submarine distribution line and a substation which is located on Deer Island in Boston, Massachusetts. HEEC provides the ongoing support required to distribute electric energy to its one customer, the Massachusetts Water Resources Authority, at this location. Purchased Power Contracts Boston Edison entered into a 13-month agreement effective December 1, 1998 to transfer all of the unit output entitlements from its long-term power purchase contracts to Select Energy (Select), a subsidiary of Northeast Utilities, Inc. In return, Select will provide full energy service requirements to Boston Edison, including New England Power Pool (NEPOOL) capability responsibilities, at FERC approved tariff rates through December 31, 1999. For more information regarding these long-term contracts refer to Note L to the Consolidated Financial Statements in Item 8. Sales Contracts Boston Edison currently sells a percentage of Pilgrim Station's output to Commonwealth Electric Company (Commonwealth), Montaup Electric Company (Montaup) and various municipalities under long-term contracts. Under these contracts, the utilities and municipalities pay their proportionate share of the costs of operating the station and associated transmission facilities. The long-term power sales contracts with Commonwealth and Montaup will be terminated upon the closing of the sale of Pilgrim Station to Entergy. The contracts with the municipalities remain in place whereby Boston Edison will purchase power for resale to the municipalities under a purchase power agreement entered into with Entergy. Refer to Notes K and L to the Consolidated Financial Statements in Item 8 for more information regarding these contracts. New England Power Pool Boston Edison is a member of NEPOOL, a voluntary association of electric utilities and other electricity suppliers in New England responsible for the coordination, monitoring and directing of the operations of the major generating and transmission facilities in the region. To obtain maximum benefits of power pooling, the electric facilities of all member companies are directed by an Independent System Operator (ISO New England) as if they were a single power system. This is accomplished through the use of a central dispatching system that uses the lowest-priced generation and transmission equipment available at any given time. NEPOOL's goal is to ensure a reliable energy supply for the New England region at the lowest possible price. 8 During 1997, the power pool was restructured with changes taking effect to the membership and governance provisions of the power pooling agreement along with the transfer of operating responsibility of the integrated transmission and generation system in New England to ISO New England. Previously, NEPOOL dispatched generating units for operation based on the lowest operating costs of available generation and transmission. Under the new structure, generators will be required to provide ISO New England with market prices at which they will sell short-term energy supply. These prices will form the basis for dispatch anticipated to begin in the second quarter of 1999. As noted in the Purchased Power Contracts section above, Boston Edison will receive all of its power supply requirements from Select in 1999. Therefore, the change to NEPOOL's operations and pricing structure is expected to have no material impact on Boston Edison's costs for purchased electric energy. Item 3. Legal Proceedings - -------------------------- Industry and corporate restructuring legal proceedings The DTE order approving the Boston Edison settlement agreement and the DTE order approving the formation of BEC as a holding company were appealed by certain parties to the Massachusetts Supreme Judicial Court (SJC). In December 1998, the SJC dismissed the appeal of the order approving the holding company formation. One settlement agreement appeal remains pending, however there has to date been no briefing, hearing or other action taken with respect to this proceeding. In addition, along with other Massachusetts investor-owned utilities, Boston Edison has been named as a defendant in a class action suit seeking to declare certain provisions of the Massachusetts electric industry restructuring legislation unconstitutional. Management is currently unable to determine the outcome of these outstanding proceedings however, if an unfavorable outcome were to occur, there could be a material adverse impact on business operations, the consolidated financial position or results of operations for a reporting period. A referendum seeking repeal of the Massachusetts electric industry restructuring legislation that was enacted in November 1997 was overwhelmingly defeated by a better than 70% to 30% margin in a state-wide general election held on November 3, 1998. This outcome allows the comprehensive framework established for the restructuring of the electric industry to continue as intended under the enacted legislation. Regulatory proceedings In October 1997, the DTE opened a proceeding to investigate Boston Edison's compliance with the 1993 order which permitted the formation of BETG and authorized Boston Edison to invest up to $45 million in unregulated activities. Hearings began in the fourth quarter of 1998 and are expected to be completed in the first half of 1999. Each of the Reading Municipal Light Department, the Littleton Electric Light Department and the West Boylston Municipal Light Department have filed separate claims for arbitration in Massachusetts alleging that the proposed transfer of Pilgrim Station constitutes a breach of their respective power sale agreements and seeking to terminate those agreements. The remaining municipal light departments have also indicated that they plan to file similar claims for arbitration. Boston Edison has requested the FERC to exercise its pre-emptive authority to consider the claims of the municipal light 9 departments. In the event that either the FERC determines, or as a result of the arbitrations, that the contracts should be terminated, Boston Edison would continue to be obligated to purchase power from Entergy that it intended to resell to the municipal light departments. Boston Edison may not be able to resell such power in the short-term power exchange at a price equal to or greater than the price it is required to pay to Entergy. However, Boston Edison has filed at the DTE for recovery of any such shortfall as part of its Pilgrim divestiture filing through the transition charge. Management is currently unable to determine the outcome of these proceedings however, if an unfavorable outcome were to occur, there could be a material adverse impact on business operations, the consolidated financial position or results of operations for a reporting period. Other litigation In October 1998, the town of Plymouth, Massachusetts, the site of Pilgrim Station, filed suit against Boston Edison. The town claimed that Boston Edison wrongfully failed to execute an agreement with the town for payments in addition to taxes due to the town under the Massachusetts electric industry restructuring legislation. Boston Edison and the town agreed on a 15-year, $141 million property tax package in March 1999. Payments in each of the first four years are approximately $15 million after which payments gradually decline. All payments under this agreement will be recovered from customers through the transition charge. In the normal course of its business Boston Edison is also involved in certain other legal matters. Management is unable to fully determine a range of reasonably possible legal costs in excess of amounts accrued. Based on the information currently available, it does not believe that it is probable that any such additional costs will have a material impact on its consolidated financial position. However, it is reasonably possible that additional legal costs that may result from a change in estimates could have a material impact on the results of a reporting period in the near term. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ Not applicable. 10 Executive Officers of the Registrant - ------------------------------------ The names, ages, positions and business experience during the past five years of all the executive officers of Boston Edison as of March 1, 1999 are listed below. There are no family relationships between any of the officers, nor any arrangement or understanding between any officer and another person pursuant to which the position as officer is held. Officers hold office until the first meeting of the directors following the next annual meeting of the stockholders and until their respective successors are chosen and qualified.
Business Experience Name, Age and Position During Past Five Years - ---------------------- ---------------------- Thomas J. May, 51 Chairman of the Board, President Chairman of the Board, President and Chief Executive Officer (since and Chief Executive Officer 1995), Chairman of the Board and Chief Executive Officer (1994- 1995), President and Chief Operating Officer (1993-1994); Director (since 1991) Ronald A. Ledgett, 60 Executive Vice President (since Executive Vice President 1997), Senior Vice President - Fossil, Field Service and Electric Delivery (1996-1997), Senior Vice President - Power Delivery (1991- 1995) Alison Alden, 50 Senior Vice President - Sales, Senior Vice President - Sales, Services and Human Resources Services and Human Resources (since 1996), Vice President - Sales & Service (1993-1996) L. Carl Gustin, 55 Senior Vice President - Corporate Senior Vice President - Corporate Relations (since 1995), Senior Relations Vice President - Marketing & Corporate Relations (1989-1995) Douglas S. Horan, 49 Senior Vice President - Strategy Senior Vice President - Strategy and Law and General Counsel and Law and General Counsel (since 1995), Vice President and General Counsel (1994-1995), Deputy General Counsel (1991-1994)
11
Business Experience Name, Age and Position During Past Five Years - ---------------------- ---------------------- James J. Judge, 43 Senior Vice President - Corporate Senior Vice President - Corporate Services and Treasurer (since Services and Treasurer 1995), Assistant Treasurer (1989- 1995), Director - Corporate Planning (1993-1995) Robert J. Weafer, Jr., 52 Vice President - Finance, Vice President - Finance, Controller and Chief Accounting Controller and Chief Officer (since 1991) Accounting Officer Theodora S. Convisser, 51 Clerk of the Corporation (since Clerk of the Corporation 1986) and Assistant General Counsel (since 1984)
12 Part II ------- Item 5. Market for the Registrant's Common Stock and Related Stockholder - ------------------------------------------------------------------------- Matters - ------- Market information for Boston Edison's common stock prior to the formation of the holding company structure is included in Item 5 of BEC Energy's report on Form 10-K/A. The following information is furnished in connection with the Registration Statement on Form S-3 of the Registrant (File No. 33-57840), filed on February 3, 1993. Ratio of earnings to fixed charges and ratio of earnings to fixed charges and preferred stock dividend requirements for the year ended December 31, 1998: Ratio of earnings to fixed charges 3.38 Ratio of earnings to fixed charges and preferred stock dividend requirements 2.98
Item 6. Selected Financial Data - -------------------------------- The following table summarizes five years of selected consolidated financial data (in thousands).
1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------- Operating revenues $1,622,972 $1,778,531 $1,668,856 $1,628,503 $1,544,735 Net income $ 157,337 $ 144,642 $ 141,546 $ 112,310 $ 125,022 Total assets $3,104,478 $3,622,347 $3,729,291 $3,637,170 $3,608,699 Long-term debt $ 955,563 $1,057,076 $1,058,644 $1,160,223 $1,136,617 Redeemable preferred stock $ 92,040 $ 163,093 $ 203,419 $ 206,514 $ 208,514 ===========================================================================
13 Item 7. Management's Discussion and Analysis - --------------------------------------------- BEC Energy Boston Edison Company (Boston Edison) received final approval of its reorganization plan to form a holding company structure from the Securities and Exchange Commission (SEC) in May 1998. Effective May 20, 1998, BEC Energy (BEC) was formed with Boston Edison as a wholly owned subsidiary of BEC. Effective June 25, 1998, Boston Energy Technology Group (BETG) ceased being a subsidiary of Boston Edison and became a wholly owned subsidiary of BEC. The holding company structure clearly separates the unregulated and regulated operations of BEC and provides management with greater organizational flexibility in order to take advantage of utility and nonutility business opportunities in a more timely manner, including the merger with Commonwealth Energy System (CES). Merger with COM/Energy The utility industry has continued to change in response to the marketplace demands for improved customer service and lower prices for energy. These pressures have resulted in an increasing trend in the industry to seek competitive advantages and other benefits through business combinations. On December 5, 1998, BEC and CES, headquartered in Cambridge, Massachusetts, entered into an Agreement and Plan of Merger (the Merger Agreement). Pursuant to the Merger Agreement, BEC and CES will be merged into a new holding company which has not yet been named (Newco). Holders of BEC common shares will receive one share of Newco common stock for each share held while CES common shareholders will receive 1.05 shares of Newco common stock for each share held. Alternatively, current BEC and CES common shareholders have the right to receive $44.10 of cash for each share held, up to an aggregate maximum of $300 million. At the close of the merger, BEC shareholders are expected to own approximately 68% of Newco common stock and CES shareholders are expected to own approximately 32%. The merger is expected to occur shortly after the satisfaction of certain conditions, including the receipt of certain regulatory approvals including that of the Massachusetts Department of Telecommunications and Energy (DTE). The regulatory approval process is expected to be completed during the second half of 1999. The merger will create an energy delivery company serving approximately 1.3 million customers located entirely within Massachusetts, including more than one million electric customers in 81 communities and 240,000 gas customers in 51 communities. The Merger Agreement may be terminated under certain circumstances, including by any party if the merger is not consummated by December 5, 1999, subject to an automatic extension of six months if the requisite regulatory approvals have not yet been obtained by such date. The merger will be accounted for using the purchase method of accounting. Upon effectiveness of the merger, Thomas J. May, BEC's current Chairman, President and Chief Executive Officer (CEO), will become the Chairman and CEO of Newco. Russell D. Wright, CES' current President and CEO, will become the President and Chief Operating Officer of Newco and will serve on Newco's board of trustees. Also, upon the effective date of the merger, Newco's board of trustees will consist of BEC's and CES' current trustees. 14 Retail Access Boston Edison has been anticipating and responding to the changes in the electric energy business as a result of industry restructuring proceedings at both federal and state levels. In January 1998, the DTE approved Boston Edison's restructuring settlement agreement. The DTE found that the settlement agreement substantially complied or was consistent with key provisions of a Massachusetts law enacted in November 1997 establishing a comprehensive framework for the restructuring of the electric utility industry. Prior to this settlement agreement, retail electric customers within Boston Edison's service territory received all services related to the provision of electricity from Boston Edison. This included the procurement of the electricity supply (either through purchase contracts or generation) and the transmission and distribution to customers' facilities. Major provisions of the settlement agreement included the ability for retail electric customers to choose their electricity supplier (referred to as retail access) effective March 1, 1998 (the retail access date). Boston Edison will continue to provide all transmission and distribution of electricity services to all of its retail customers. Under its settlement agreement, Boston Edison provides standard offer service to all customers of record as of the retail access date. Customers continuing to buy electricity under the standard offer are receiving service at rates designed to give 10% savings from the rates in effect prior to the retail access date. These standard offer customers will realize an additional 5% average savings, after an adjustment for inflation, by September 1, 1999. Boston Edison expects to be able to meet this additional rate reduction as a result of the divestiture of the fossil generating assets which is discussed below. The proceeds from the divestiture are being utilized to reduce customer rates. New retail customers in the Boston Edison service territory and previously existing customers that are no longer eligible for the standard offer due to choosing a competitive supplier are on default service. The price of default service is intended to reflect the average competitive market price for power. As of December 31, 1998, 87% of customers are receiving standard offer service, while 13% are receiving default service. No customers received generation service from competitive suppliers during 1998. Refer also to the Electric revenues section for more information. Generating Assets Divestiture The Boston Edison restructuring settlement agreement included a provision for the divestiture of its fossil generating assets no later than six months after the retail access date. On May 15, 1998, Boston Edison completed the sale of its non-nuclear generating assets to Sithe Energies, Inc. (Sithe). Boston Edison received proceeds from the sale of $655 million, including $121 million for a six-month transitional power purchase contract. The amount received above net book value on the sale of these assets is being returned to Boston Edison's customers over the settlement period. That amount is partially offset by the costs to provide standard offer service incurred by Boston Edison's fossil generating assets prior to the divestiture which are recoverable under Boston Edison's settlement agreement. In April 1998, Boston Edison began soliciting expressions of interest for the sale of its nuclear generating unit, Pilgrim Nuclear Power Station (Pilgrim) as part of the previously announced strategy to exit the generation business. On November 19, 1998, Boston Edison announced that Entergy Nuclear Generating Company (Entergy), a subsidiary of New Orleans-based Entergy Corporation, had been selected as the winning bidder for Pilgrim. In the nation's first competitive bid process for a nuclear power plant, Entergy is expected to purchase Pilgrim in a deal valued at an estimated $121 million. In addition, 15 under the agreement Boston Edison will fully fund and transfer its decommissioning trust fund to Entergy and Entergy will then assume full liability and responsibility for decommissioning the Pilgrim site. A purchase and sale agreement has been signed and all required approvals are anticipated in the second quarter of 1999. The purchase price includes reimbursement for costs to be expended by Boston Edison in 1999 primarily related to the refueling and maintenance outage scheduled for May 1999. Therefore, the actual proceeds could be impacted by the ultimate timing of the transaction. As part of a benefits package offered to employees affected by the nuclear divestiture, eligible non-represented nuclear and designated nuclear support employees were offered unreduced retirement and transition benefits under a voluntary early retirement program (VERP). Sixteen employees elected to participate in the VERP. A retention benefit program was offered to all non- represented nuclear and designated nuclear support employees that did not elect or were ineligible to retire under the VERP who continue to work through the sale closing date. It is anticipated that approximately 300 non- represented nuclear and designated nuclear support employees will receive one- time retention payments under this program. Costs associated with the VERP and retention program are recoverable under Boston Edison's settlement agreement. At December 31, 1998, approximately $24 million in one-time benefit charges were deferred as a regulatory asset related to the nuclear divestiture. For more information on the nuclear divestiture refer to the November 23, 1998 Boston Edison Report on Form 8-K announcing the purchase and sale agreement with Entergy. Results of Operations 1998 versus 1997 Net income was $157 million in 1998 compared to $145 million in 1997. This increase of 8.8% is described below. Operating revenues Operating revenues decreased 8.7% from 1997 as follows:
(in thousands) - ------------------------------------------------------ Retail revenues $(148,272) Wholesale revenues (3,721) Short-term sales and other revenues (3,566) - ------------------------------------------------------ Decrease in operating revenues $(155,559) ======================================================
Retail revenues were $1,375 million in 1998 compared to $1,523 million in 1997, a decrease of $148 million or 10%. Retail revenues reflect the impact of the mandated 10% retail rate reduction. A 2.0% increase in retail kilowatt-hour (kWh) sales in 1998 partially offset the impact of the rate reduction. Retail revenues also reflect a decrease due to the timing effect of fuel and purchased power cost recovery. Prior to its cessation as of March 1, 1998, the fuel clause charge was lower than the prior year as the 1997 charge reflected the recovery of substantial prior year undercollections. Fuel clause revenues were offset by fuel and purchased power expenses and, therefore, had no net effect on earnings. Short-term sales and other revenues were $106 million in 1998 compared to $109 million in 1997, a decrease of $3 million or 3%. Boston Edison experienced a $20 million decrease in short-term power sales revenues consistent with an 11% 16 reduction in short-term kWh sales, primarily as a result of the expiration of certain short-term sales contracts. The decrease has no net impact on earnings as it is offset by a corresponding decrease in fuel and purchased power expenses. In addition, the decrease includes a $2 million decrease from Harbor Electric Energy Company. These decreases were partially offset by the recognition of $20 million of revenue related to the support of standard offer service provided by Boston Edison's fossil generating units prior to divestiture. Operating expenses Fuel and purchased power expense was $568 million in 1998 compared to $679 million in 1997, a decrease of $111 million or 16%. Fuel expense related to fossil generation units decreased approximately $161 million. This decrease reflects the divestiture of those units in May 1998. Purchased power expense increased approximately $94 million, an increase of 26%. This increase reflects Boston Edison's purchased power requirements in the absence of its fossil generating units. Prior to the retail access date, the fuel and purchased power clause component of its electric rates allowed Boston Edison to adjust its rates to fully collect fuel and purchased power costs. Since the retail access date, Boston Edison similarly adjusts its electric rates to fully collect the cost of providing standard offer and default service. Fuel and purchased power expense reflects a reduction of approximately $7 million related to these mechanisms in 1998. In 1997, fuel and purchased power expense reflects an increase of approximately $37 million related to these mechanisms. Due to the rate adjustment mechanisms, this net reduction in operating expenses of $44 million had no net impact on earnings. Operations and maintenance expense was $377 million in 1998 compared to $423 million in 1997, a decrease of $46 million or 11%. The most significant driver of this decrease was a $28 million decrease in power production expenses primarily due to the fossil divestiture in May 1998. Employee benefit expenses decreased by approximately $24 million due to lower pension and other postretirement benefit costs. These favorable impacts were partially offset by a $4 million increase in general and administrative expenses primarily due to spending related to electric industry restructuring and the year 2000 computer issue. Depreciation and amortization expense was $192 million in 1998 compared to $189 million in 1997, an increase of $3 million or 1%. Depreciation on distribution utility plant increased approximately $10 million, as Boston Edison was required to increase this depreciation under the terms of its settlement agreement. This increase was partially offset by an $8.7 million nonrecurring charge recorded in 1997 to reflect the removal of specific nuclear-related intangible assets from the balance sheet. These intangible assets related to costs incurred for plant design and safety studies. These studies were superceded by updated studies. Demand side management (DSM) and renewable energy programs expense was $52 million in 1998 compared to $30 million in 1997, an increase of $22 million or 74%. This increase reflects an increase in the required spending for DSM programs in 1998. In addition, the renewable energy programs expense of $8 million in 1998 is the result of a new state mandate for the funding of renewable energy that became effective March 1, 1998. Renewable energy expenses are collected through a separate rate mechanism and, therefore, have no net effect on earnings. 17 Property and other taxes were $84 million in 1998 compared to $106 million in 1997, a decrease of $22 million or 21%. The decrease is due to a decrease in municipal property taxes resulting from the fossil divestiture. Operating income taxes were $100 million in 1998 compared to $94 million in 1997, an increase of $6 million or 7%. The increase in operating income taxes is primarily the result of a $4 million reduction in investment tax credit amortization due to the divestiture of the fossil generating assets. Refer to Note C to the Consolidated Financial Statements for more information on income taxes. Other income (expense), net Other expense, net of tax was $2.9 million in 1998 compared to $6.4 million in 1997, a decrease of $3.5 million or 54%. Prior to the consideration of tax benefits, other expenses were $20.8 million in 1998 compared to $17.7 million in 1997, an increase of $3.1 million. BETG's equity losses in the RCN and EnergyVision joint ventures were $9.0 million in 1998 compared to $9.2 million in 1997. 1998 also reflects $23.2 million of costs related to the fossil divestiture that is offset by the recognition of investment tax credits disclosed below and $2.6 million of costs associated with the referendum that sought to repeal the Massachusetts electric industry restructuring law. These negative amounts are offset in 1998 by $7.6 million of interest income due to levels of cash on hand as a result of the proceeds from the fossil divestiture. In addition to the other items mentioned, 1997 results reflect a charge of $12.9 million from the nuclear asset impairment which is discussed further in Note B to the Consolidated Financial Statements. Offsetting the negative impacts in 1997 was $5.0 million of interest income received related to the favorable outcome of an IRS audit. Other miscellaneous income was $6.4 million in 1998 and other miscellaneous expense was $0.6 million in 1997. Income tax benefits related to other expenses were $17.9 million in 1998 and $11.3 million in 1997. The 1998 income tax benefit includes $10.9 million related to the recognition of previously deferred investment tax credits associated with the fossil generating stations. Interest charges Interest charges on long-term debt were $83 million in 1998 compared to $92 million in 1997, a decrease of $9 million or 10%. The decrease reflects $6 million due to the maturing of $100 million of 5.95% debentures in March 1998 and the cessation of amortization of the associated redemption premiums and $2 million due to the redemption of a $100 million 6.662% bank loan in June 1998. Short-term interest charges were $8 million in 1998 compared to $15 million in 1997, a decrease of $7 million or 44%. The decrease is due to the redemption of Boston Edison's outstanding short-term debt with proceeds from the fossil divestiture. Preferred stock dividends Preferred stock dividends were $9 million in 1998 compared to $13 million in 1997, a decrease of $4 million or 33%. Preferred stock dividends decreased $1 million as a result of Boston Edison's redemption of 40,000 shares of 7.27% series cumulative preferred stock in May 1998 and 1997 and the remaining 320,000 shares in July 1998. An additional $3 million decrease was due to the redemption of 400,000 shares of 7.75% series cumulative preferred stock in July 1998 and 400,000 shares of 8.25% series in June 1997. Refer to Note G to the Consolidated Financial Statements. 18 1997 versus 1996 Net income was $145 million in 1997 compared to $142 million in 1996. This increase of 2.2% is described below. Operating revenues Operating revenues increased 6.6% over 1996 as follows:
(in thousands) - ------------------------------------------------------ Retail revenues $ 88,484 Wholesale revenues (765) Short-term sales and other revenues 21,956 - ------------------------------------------------------ Increase in operating revenues $109,675 ======================================================
Retail revenues were $1,523 million in 1997 compared to $1,435 million in 1996, an increase of $88 million or 6%. Retail base revenues, consistent with the 0.8% increase in kWh sales in 1997, were $923 million compared to $920 million in 1996. Increases due to warmer than normal temperatures in June and July, cooler temperatures in October and December and the stronger local economy were offset by milder than normal winter conditions during the first quarter of 1997 and lower industrial sales. Industrial sales continued to be adversely affected by the decline in manufacturing activity in the Boston Edison service territory. In addition, revenues in 1996 reflect one more day of sales due to the leap year. The increase in retail electric revenues is primarily due to the timing effect of fuel and purchased power cost recovery. An $88 million increase in fuel and purchased power clause revenues reflects the recovery of substantial prior year undercollections. These higher revenues are offset by higher fuel and purchased power expenses and, therefore, have no net effect on earnings. Pilgrim performance revenues, which varied annually based on the operating performance of Pilgrim Station prior to the retail access date, decreased $4 million primarily due to a lower annual capacity factor effective November 1996 reflecting the scheduled refueling and maintenance outage in the first quarter of 1997. Short-term sales and other revenues were $109 million in 1997 compared to $87 million in 1996, an increase of $22 million or 25%. Short-term sales revenues increased approximately $16 million. This was due to the continued reduction in available nuclear energy supply in New England combined with a 42% increase in fossil generation allowing for increased sales to the power exchange. Revenues from these short-term sales resulted in a corresponding reduction to future fuel and purchased power billings to retail customers and, therefore, had no net effect on earnings. Operating expenses Fuel and purchased power expense was $679 million in 1997 compared to $589 million in 1996, an increase of $90 million or 15%. This increase reflects $57 million related to the timing effect of fuel and purchased power cost recovery. In addition, company fuel expense increased $50 million primarily due to the increase in fossil generation. These increases were partially offset by a $22 million decrease in power exchange purchases. These fuel and purchased power expenses are substantially recoverable through fuel and purchased power revenues. Operations and maintenance expense was $423 million in both 1997 and 1996. The $6 million incremental impact associated with service restoration efforts resulting from the severe snow storm in April 1997 that struck the greater 19 Boston area offset the impact of lower spending from cost control efforts and significantly less overhaul activity at the fossil generating units. Depreciation and amortization expense was $189 million in 1997 compared to $186 million in 1996, an increase of $3 million or 2%. An $8.7 million nonrecurring charge was recorded to depreciation expense in the third quarter of 1997 to reflect the removal of specific nuclear-related intangible assets from the balance sheet. These intangible assets related to costs incurred for plant design and safety studies. These studies were superceded by updated studies. In 1996 a $5.2 million adjustment was recorded to correct the accumulated depreciation balance of certain large computer equipment. Operating income taxes were $94 million in 1997 compared to $88 million in 1996, an increase of $6 million or 6%. Income taxes increased as a result of higher net income offset by the impact of the favorable outcome of an Internal Revenue Service (IRS) appeal received in the third quarter related to investment tax credits (ITC). This also resulted in an increase in unamortized ITC which is being reflected as a reduction to income tax expense over the life of the related assets. Refer to Note C to the Consolidated Financial Statements for more information on income taxes. Other income (expense), net Other expense, net was $6 million in 1997 compared to income of $4 million in 1996, a net increase in expense of $10 million. 1997 reflects the charge of approximately $13 million ($8 million after tax) from the nuclear asset impairment which is further discussed in Note B to the Consolidated Financial Statements in addition to BETG equity losses of $9 million ($6 million after tax). These decreases were partially offset by approximately $5 million ($3 million after tax) in interest income from the IRS appeal. Interest charges Interest charges on long-term debt were $92 million in 1997 compared to $95 million in 1996, a decrease of $3 million or 2%. The decrease reflects $6 million due to the maturing of $100 million of 5.70% debentures in March 1997 and the cessation of amortization of the associated redemption premiums. This was partially offset by a $5 million increase due to the March 1997 issuance of a $100 million 6.662% bank loan due in 1999. The decrease also reflects $2 million from the maturity of $100 million of 5 1/8% debentures in March 1996. Allowance for borrowed funds used during construction (AFUDC), which represents the financing costs of construction, was $1 million in 1997 compared to $2 million in 1996, a decrease of $1 million or 48%. AFUDC decreased primarily due to a lower average construction work in progress (CWIP) balance in 1997. The 1996 average CWIP balance included nuclear fuel purchased in anticipation of Pilgrim Station's scheduled refueling outage in the first quarter of 1997. Preferred stock dividends Preferred stock dividends were $13 million in 1997 compared to $15 million in 1996, a decrease of $2 million or 14%. The decrease in preferred stock dividends is the result of the redemption of 20,000 of mandatory and 20,000 of optional shares of 7.27% series cumulative preferred stock in May 1997 and 400,000 shares of 8.25% series in June 1997. Refer to Note G to the Consolidated Financial Statements. 20 Electric Sales and Revenues Electric sales Total kWh sales increased 2.3%. The 2.0% increase in 1998 retail kWh sales was primarily due to the positive impact of a continued strong local economy on commercial customers. The commercial sector represents approximately 50% of electric operating revenues. The Boston area commercial office vacancy rate is at a 17-year low. In addition, the Massachusetts employment rate increased 2.8% over 1997. These positive impacts associated with the economic conditions along with warmer than normal summer weather were partially offset by the mild winter weather conditions in the first quarter of 1998. Wholesale sales increased primarily due to a 32% increase in sales to Pilgrim contract customers. That increase reflects a 97% capacity factor in 1998, the plant's highest annual performance ever achieved. The lower level of sales in 1997 reflected that year's refueling outage. Short-term sales decreased due to lower sales to other contract customers. Retail kWh sales increased 0.8% in 1997. This was primarily attributable to the commercial sector. The commercial increase reflects the impact of a continued strong economy in the Boston area and very warm temperatures in June and July and cooler than normal temperatures in the fourth quarter. Hotel occupancy rates and non-manufacturing employment continued to increase in 1997. Residential revenues were also positively impacted by the weather. These positive impacts were offset by milder winter weather in the first quarter of 1997 and declines in manufacturing employment affecting the industrial sector. In addition, revenues in 1996 reflect one more day of sales due to the leap year. Total kWh sales increased 3.1% as a result of the continued reduction in available nuclear energy supply in New England. This reduction, combined with an increase in fossil generation allowed for increased sales to the power exchange. Electric revenues Boston Edison's electric delivery business provides standard offer customers service at rates designed to give 10% savings from the rates in effect prior to the retail access date. As part of the Massachusetts restructuring legislation enacted in November 1997, these customers will realize an additional 5% average savings, after an adjustment for inflation, by September 1, 1999. Boston Edison expects to meet this additional rate reduction as a result of the proceeds received from the divestiture of the fossil generating assets. All Boston Edison distribution customers must pay a transition charge as a component of distribution electric rates. The purpose of the transition charge is to allow Boston Edison to collect certain costs from customers which would not be collected in the competitive energy supply market. Such costs include the above market costs related to purchased power contracts and its own generating stations, as well as the cost to decommission Pilgrim Station. The plant and regulatory asset balances which will be recovered through the transition charge until 2009 were approved by the DTE. The other costs will be reviewed by the DTE on an annual basis. Under the settlement agreement, the aggregate amount of the transition charge is reduced by the net proceeds from fossil divestiture. The cost of providing standard offer service, which includes fuel and purchased power costs, is recovered from customers on a fully reconciling basis. The price of default service is intended to reflect the average competitive market price for power. As part of the settlement agreement, the annual performance adjustment charge ceased and the cost recovery mechanism for Pilgrim Station changed effective March 1, 1998. Approximately 25% of the operations and capital costs, 21 including a return on investment, continues to be collected under wholesale contracts with other utilities and municipalities. Boston Edison's long-term power sales contracts with the utilities, Commonwealth Electric Company and Montaup Electric Company, will be terminated upon the closing of the sale of Pilgrim Station to Entergy. Boston Edison's contracts with the various municipalities remain in place. However, upon the Pilgrim sale closing date, Boston Edison will purchase power for resale to the municipalities under a purchase power agreement entered into with Entergy. Through the sale closing date, Boston Edison will share 25% of any profit or loss from the sale of Pilgrim's output with distribution customers through the transition charge. In addition, Boston Edison will obtain transition payments up to a maximum of $23 million per year depending on the level of costs incurred for such items as property taxes, insurance, regulatory fees and security requirements. Under its settlement agreement, Boston Edison's distribution rates will remain unchanged through December 31, 2000, subject to a minimum and maximum return on average common equity (ROE). The ROE is subject to a floor of 6% and a ceiling of 11.75%. If the ROE is below 6%, Boston Edison is authorized to add a surcharge to distribution rates in order to achieve the 6% floor. If the ROE is above 11%, it is required to adjust distribution rates by an amount necessary to reduce the calculated ROE between 11% and 12.5% by 50%, and a return above 12.5% by 100%. No adjustment is made if the ROE is between 6% and 11%. The cost of providing transmission service to distribution customers is recovered on a fully reconciling basis. Boston Edison filed proposed adjustments to its standard offer and transition charges with the DTE in November 1998. The DTE approved these proposed adjustments to be effective January 1, 1999. The DTE is continuing to examine Boston Edison's cost recovery mechanisms. The rates provide an approximate 12% reduction from inflation-adjusted pre-retail access date rates. Liquidity Cash requirements for utility plant expenditures have been met in recent years with internally generated funds. These funds are cash flows from operating activities, adjusted to exclude changes in working capital and the payment of dividends. During 1998, 1997 and 1996 internal generation of cash provided 111%, 211% and 177%, respectively of plant expenditures. Plant expenditures, excluding nuclear fuel, forecasted for 1999 are $127 million. This spending level includes the 1999 portion of business system replacements discussed below. Plant expenditures over the next five years are forecasted to be approximately $490 million. In addition to plant expenditures, debt and preferred stock payment requirements are $1.6 million in 1999, $166.6 million in 2000, $51.6 million in 2001, $1.6 million in 2002 and $151.65 million in 2003. Boston Edison supplements internally generated funds as needed, primarily through the issuance of short-term commercial paper and bank borrowings. Boston Edison has authority from the Federal Energy Regulatory Commission (FERC) to issue up to $350 million of short-term debt. Boston Edison has a $200 million revolving credit agreement with a group of banks as well as other arrangements with several banks to provide additional short-term credit on an uncommitted and as available basis. No amount was outstanding under the revolving credit agreement as of December 31, 1998. In December 1998, Boston Edison filed a securitization financing plan with the DTE. Under the plan, a special purpose entity (SPE) will be formed as a wholly owned subsidiary of Boston Edison. The SPE will pay Boston Edison an 22 amount equal to the generation-related regulatory assets to be securitized by issuing debt securities. A portion of the net proceeds will be used to fund the nuclear decommissioning trust. In addition, Boston Edison may also utilize a portion of the proceeds to reduce capitalization and for general corporate purposes. Boston Edison will remit amounts to the SPE as these amounts are collected from customers through a separate component of the transition charge over the settlement period. A DTE order regarding the securitization plan is expected by the second quarter of 1999. Refer to Note H to the Consolidated Financial Statements for more information regarding these debt agreements. Year 2000 Computer Issue The year 2000 issue is the result of computer programs that were written using two digits rather than four to define an applicable year. If computer programs with date-sensitive functions are not year 2000 compliant, they may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions and engage in other normal business activities. BEC has a year 2000 program in place to address the risk of non-compliant internal business software, internal non-business software and embedded chip technology and external noncompliance of third parties. BEC is addressing the year 2000 issue on a coordinated basis. BEC has inventoried and assessed all date-sensitive information and transaction processing computer systems and has determined that approximately one-third of business critical systems software need modification or replacement. BEC defines its business critical systems as those which are necessary for the delivery of and billing and accounting for electricity to its customers. Plans have been developed and are being implemented to correct and test all affected systems, with priorities assigned based on the importance of the supported activity. As systems are being remediated or replaced, they are tested for operational and year 2000 compliance in their own environment. After completion of implementation, the systems are then tested for their integration and compliance with other interactive systems. Management estimates that approximately 70% of the efforts necessary to implement and test its critical computer systems to alleviate the year 2000 issue are complete and expects to complete all efforts by the end of the second quarter of 1999. In addition, all other non-critical systems have been inventoried and assessed. Approximately one-third of these systems require modification or replacement. Under the year 2000 plan, each non-critical system has a form of readiness acceptance commensurate with its business importance. The more important and complex systems are being tested as a means of acceptance. Less important and non-complex systems may refer to industry test results, vendor test results and/or vendor statements of readiness as a means of acceptance. Management expects to complete the remediation, replacement and testing of at least 95% of its non-critical computer systems by the end of the second quarter of 1999. All non-critical systems are scheduled for completion by the third quarter of 1999. BEC has also inventoried its non-information technology systems that may be date-sensitive and that use embedded technology such as micro-controllers or micro-processors. Approximately 27% of these systems require modification or replacement. The three categories of these systems are (1) telecommunications, (2) distribution system controls and (3) other distribution equipment. BEC is 55%, 30% and 80% complete, respectively, with its efforts to resolve and remediate the systems that have been identified as 23 year 2000 non-compliant within each category. BEC expects completion of resolution and testing by the end of the second quarter of 1999. Costs incurred to remediate non-compliant systems are expensed as incurred. In addition, a decision has been made to use this opportunity to upgrade some of BEC's inefficient centralized business systems. Systems' replacement costs will be capitalized and amortized over future periods. BEC expects the modification and testing of its information and transaction processing systems to cost $32 million. BEC has expended $19 million on this project through December 31, 1998. BEC has funded and plans on continuing to fund all costs related to year 2000 with internally generated cash flows. In addition to its internal efforts, BEC has initiated formal communications with its significant suppliers, service providers and other vendors to determine the extent to which BEC may be vulnerable to their failure to correct their own year 2000 issues. BEC has received responses from over 500 third party vendors including all business critical vendors. Approximately 40% of the vendors indicated their systems would not be adversely impacted by year 2000 issues. All of the vendors contacted have indicated that they will be year 2000 compliant by the end of the fourth quarter of 1999. In addition, BEC has contacted all of its significant power suppliers. Each has indicated that they either are or will be year 2000 compliant by the end of the fourth quarter of 1999. In addition to the risk faced from its dependence on third party suppliers for year 2000 compliance, BEC has a risk that power will not be available from the New England Power Pool (NEPOOL) for the purchase and distribution to Boston Edison's customers. Should NEPOOL fail to resolve its year 2000 issues as planned, there would be an adverse impact on Boston Edison and its customers. To mitigate this risk, efforts are being coordinated with NEPOOL to establish inter-utility testing guidelines to determine year 2000 readiness. Boston Edison is also a participant in the NEPOOL/ISO New England Year 2000 Joint Oversight Committee which has responsibility for the operational reliability of NEPOOL. Overall regional activities, including those of NEPOOL/ISO New England, will be coordinated by the Northeast Power Coordinating Council, whose activities will be incorporated into the interregional coordinating effort by the North American Electric Reliability Council. The target for the completion of this effort is mid-1999. In addition, parts of the global infrastructure, including national banking systems, electrical power grids, gas pipelines, transportation facilities, communications and government activities, may not be fully functional after 1999 due to the year 2000 issue. Infrastructure failures could significantly reduce BEC's ability to acquire energy and its ability to serve its customers as effectively as they are now being served. BEC believes that its efforts to address the year 2000 issue will allow it to successfully avoid any material adverse effect on its operations or financial condition. However, it recognizes that failing to resolve year 2000 issues on a timely basis would, in a most reasonable worst case scenario, significantly limit its ability to acquire and distribute energy or process its daily business transactions for a period of time, especially if such failure is coupled with third party or infrastructure failures. Similarly, BEC could be significantly affected by the failure of one or more significant suppliers, customers or components of the infrastructure to conduct their respective operations normally after 1999. Adverse effects on BEC could include, among other things, business disruption, increased costs, loss of business and other similar risks. BEC's year 2000 program includes contingency plans. If required, these plans are intended to address both internal risks as well as potential external risks related to vendors, customers and energy suppliers. Plans have been 24 developed in conjunction with available national and regional guidance and are based on system emergency plans that were developed and successfully tested over the past several years. Included within its contingency plans are procedures for the procurement of short-term power supplies and emergency distribution system restoration procedures. The contract with ISO New England requires that ISO New England dispatch at all times sufficient resources to meet total New England load requirements. ISO New England has the responsibility and authority to dispatch all regional generation sources including maintaining sufficient operating reserves to respond to unanticipated system conditions. ISO New England, in conjunction with the New England Power Pool has an extensive year 2000 readiness program underway to ensure that it will have sufficient generation and transmission resources to reliably serve load. In addition, ISO New England plans to increase its operating reserves during the early year 2000 period from approximately 15% to 40%. The foregoing discussion regarding year 2000 project timing, effectiveness, implementation and costs includes forward-looking statements that are based on management's current evaluation using available information. Factors that might cause material changes include, but are not limited to, the availability of key year 2000 personnel, the readiness of third parties and BEC's ability to respond to unforeseen year 2000 complications. Other Matters Environmental Boston Edison is an owner or operator of approximately 20 properties where oil or hazardous materials were spilled or released. Boston Edison also continues to face possible liability as a potentially responsible party in the cleanup of five multi-party hazardous waste sites in Massachusetts and other states where it is alleged to have generated, transported or disposed of hazardous waste at the sites. Refer to Note K.4. to the Consolidated Financial Statements for more information regarding hazardous waste issues. Uncertainties continue to exist with respect to the disposal of both spent nuclear fuel and low-level radioactive waste resulting from the operation of nuclear generating facilities. The United States Department of Energy (DOE) is responsible for the ultimate disposal of spent nuclear fuel. However, uncertainties regarding the DOE's schedule of acceptance of spent fuel for disposal continue to exist. Under the purchase and sale agreement with Entergy, Entergy will assume full liability and responsibility for decommissioning and waste disposal at Pilgrim Station. Refer to Note D to the Consolidated Financial Statements for further discussion regarding nuclear decommissioning and waste disposal. Public concern continues regarding electromagnetic fields (EMF) associated with electric transmission and distribution facilities and appliances and wiring in buildings and homes. Such concerns have included the possibility of adverse health effects caused by EMF as well as perceived effects on property values. Some scientific reviews conducted to date have suggested associations between EMF and potential health effects, while other studies have not substantiated such associations. The National Research Council previously reported that there is no conclusive evidence that exposure to EMF from power lines and appliances presents a health hazard. The panel of scientists, working with the National Academy of Sciences, report that more than 500 studies over the last several years have produced no proof that EMF causes leukemia or other cancers or harms human health in other ways. Boston Edison continues to support research into the subject and participates in the funding 25 of industry-sponsored studies. It is aware that public concern regarding EMF in some cases has resulted in litigation, in opposition to existing or proposed facilities in proceedings before regulators or in requests for legislation or regulatory standards concerning EMF levels. It has addressed issues relative to EMF in various legal and regulatory proceedings and in discussions with customers and other concerned persons; however, to date it has not been significantly affected by these developments. Boston Edison continues to monitor all aspects of the EMF issue. Industry and corporate restructuring legal proceedings The DTE order approving the Boston Edison settlement agreement and the DTE order approving the formation of BEC as a holding company were appealed by certain parties to the Massachusetts Supreme Judicial Court (SJC). In December 1998, the SJC dismissed the appeal of the order approving the holding company formation. One settlement agreement appeal remains pending, however there has to date been no briefing, hearing or other action taken with respect to this proceeding. In addition, along with other Massachusetts investor-owned utilities, Boston Edison has been named as a defendant in a class action suit seeking to declare certain provisions of the Massachusetts electric industry restructuring legislation unconstitutional. Management is currently unable to determine the outcome of these outstanding proceedings however, if an unfavorable outcome were to occur, there could be a material adverse impact on business operations, the consolidated financial position or results of operations for a reporting period. Regulatory proceedings In October 1997, the DTE opened a proceeding to investigate Boston Edison's compliance with the 1993 order which permitted the formation of BETG and authorized Boston Edison to invest up to $45 million in unregulated activities. Hearings began in the fourth quarter of 1998 and are expected to be completed in the first half of 1999. Each of the Reading Municipal Light Department, the Littleton Electric Light Department and the West Boylston Municipal Light Department have filed separate claims for arbitration in Massachusetts alleging that the proposed transfer of Pilgrim Station constitutes a breach of their respective power sale agreements and seeking to terminate those agreements. The remaining municipal light departments have also indicated that they plan to file similar claims for arbitration. Boston Edison has requested the FERC to exercise its pre-emptive authority to consider the claims of the municipal light departments. In the event that either the FERC determines, or as a result of the arbitrations, that the contracts should be terminated, Boston Edison would continue to be obligated to purchase power from Entergy that it intended to resell to the municipal light departments. Boston Edison may not be able to resell such power in the short-term power exchange at a price equal to or greater than the price it is required to pay to Entergy. However, Boston Edison has filed at the DTE for recovery of any such shortfall as part of its Pilgrim divestiture filing through the transition charge. Management is currently unable to determine the outcome of these proceedings however, if an unfavorable outcome were to occur, there could be a material adverse impact on business operations, the consolidated financial position or results of operations for a reporting period. 26 Other litigation In October 1998, the town of Plymouth, Massachusetts, the site of Pilgrim Station, filed suit against Boston Edison. The town claims that Boston Edison has wrongfully failed to execute an agreement with the town for payments in addition to taxes due to the town under the Massachusetts electric industry restructuring legislation. Boston Edison has disputed the town's claim and will vigorously defend itself. In addition to this pending litigation, Boston Edison and the town of Plymouth are also parties in proceedings before the Appellate Tax Board and the DTE concerning substantially the same dispute. Management is unable to determine the ultimate outcome of these proceedings however, if an unfavorable outcome were to occur, there could be a material adverse impact on business operations, the consolidated financial position or results of operations for a reporting period. In the normal course of its business Boston Edison is also involved in certain other legal matters. Management is unable to fully determine a range of reasonably possible legal costs in excess of amounts accrued. Based on the information currently available, it does not believe that it is probable that any such additional costs will have a material impact on its consolidated financial position. However, it is reasonably possible that additional legal costs that may result from a change in estimates could have a material impact on the results of a reporting period in the near term. Refer to Note K.6. to the Consolidated Financial Statements for more information on legal matters. Interest rate risk Boston Edison is exposed to changes in interest rates. Carrying amounts and fair values of mandatory redeemable cumulative preferred stock, sewage facility revenue bonds and unsecured debt as of December 31, 1998, are as follows:
Carrying Fair Weighted average (in thousands) amount value interest rate - ----------------------------------------------------------------------------- Mandatory redeemable cumulative preferred stock $49,040 $54,190 8.00% Sewage facility revenue bonds $30,900 $33,914 7.32% Unsecured debt $930,000 $994,294 7.79%
Safe harbor cautionary statement Management occasionally makes forward-looking statements such as forecasts and projections of expected future performance or statements of its plans and objectives. These forward-looking statements may be contained in filings with the SEC, press releases and oral statements. Actual results could potentially differ materially from these statements. Therefore, no assurances can be given that the outcomes stated in such forward-looking statements and estimates will be achieved. The preceding sections include certain forward-looking statements about BEC's merger with CES, the divestiture of nuclear generating assets, operating results, year 2000 and environmental and legal issues. The merger with CES could differ from current expectations. This could occur if the requisite approvals are delayed or not obtained. 27 The nuclear divestiture plan could differ from current expectations. The timing and a final closing of the sale may differ from management's expectations if required approvals are delayed or not obtained. The impacts of continued cost control procedures on operating results could differ from current expectations. The effects of changes in economic conditions, tax rates, interest rates, technology and the prices and availability of operating supplies could materially affect the projected operating results. The timing and total costs related to the year 2000 plan could differ from current expectations. Factors that may cause such differences include the ability to locate and correct all relevant computer codes and the availability of personnel trained in this area. In addition, management cannot predict the nature or impact on operations of third party noncompliance. The impacts of various environmental and legal issues could differ from current expectations. New regulations or changes to existing regulations could impose additional operating requirements or liabilities other than expected. The effects of changes in specific hazardous waste site conditions and cleanup technology could affect the estimated cleanup liabilities. The impacts of changes in available information and circumstances regarding legal issues could affect the estimated litigation costs. 28 Item 8. Financial Statements and Supplementary Financial Information - --------------------------------------------------------------------- Consolidated Statements of Income
years ended December 31, (in thousands) 1998 1997 1996 - --------------------------------------------------------------------------- Operating revenues $1,622,972 $1,778,531 $1,668,856 - --------------------------------------------------------------------------- Operating expenses: Fuel and purchased power 567,806 679,131 588,893 Operations and maintenance 377,316 423,040 422,642 Depreciation and amortization 191,704 189,489 186,117 Demand side management and renewable energy programs 51,839 29,790 30,825 Taxes-property and other 84,091 106,428 107,086 Income taxes 100,492 93,709 88,313 - --------------------------------------------------------------------------- Total operating expenses 1,373,248 1,521,587 1,423,876 - --------------------------------------------------------------------------- Operating income 249,724 256,944 244,980 Other income (expense), net (2,941) (6,392) 3,741 - --------------------------------------------------------------------------- Operating and other income 246,783 250,552 248,721 - --------------------------------------------------------------------------- Interest charges: Long-term debt 82,951 92,489 94,823 Other 8,163 14,610 14,644 Allowance for borrowed funds used during construction (1,668) (1,189) (2,292) - --------------------------------------------------------------------------- Total interest charges 89,446 105,910 107,175 - --------------------------------------------------------------------------- Net income $ 157,337 $ 144,642 $ 141,546 ===========================================================================
Consolidated Statements of Retained Earnings
years ended December 31, (in thousands) 1998 1997 1996 - --------------------------------------------------------------------------- Balance at the beginning of the year $ 328,802 $ 292,191 $ 257,749 Net income 157,337 144,642 141,546 - --------------------------------------------------------------------------- Subtotal 486,139 436,833 399,295 - --------------------------------------------------------------------------- Dividends declared: Dividends to common shareholders 22,802 91,208 90,834 Dividends to BEC Energy 141,000 0 0 Preferred stock 8,765 13,149 15,365 Transfer of BETG to BEC Energy 8,392 0 0 - --------------------------------------------------------------------------- Subtotal 180,959 104,357 106,199 - --------------------------------------------------------------------------- Provision for preferred stock redemption and issuance costs (a) 7,833 3,674 905 - --------------------------------------------------------------------------- Balance at the end of the year $ 297,347 $ 328,802 $ 292,191 =========================================================================== (a) Refer to Note A.7. to the Consolidated Financial Statements.
Per share data is not relevant because Boston Edison Company's common stock is wholly owned by BEC Energy. The accompanying notes are an integral part of the consolidated financial statements. 29 Consolidated Balance Sheets
December 31, (in thousands) 1998 1997 - ------------------------------------------------------------------------------ Assets Utility plant in service, at original cost $2,720,681 $4,457,831 Less: accumulated depreciation 926,020 $1,794,661 1,713,067 $2,744,764 - ------------------------------------------------------------------------------ Generation-related regulatory asset, net 366,336 0 Nuclear fuel, net 68,706 67,935 Construction work in progress 40,965 33,291 - ------------------------------------------------------------------------------ Net utility plant 2,270,668 2,845,990 Nonutility property 0 8,137 Nuclear decommissioning trust 172,908 151,634 Equity investments 20,769 35,455 Other investments 10,029 7,107 Current assets: Cash and cash equivalents 92,563 4,140 Accounts receivable 206,003 207,093 Accrued unbilled revenues 14,322 30,048 Fuel, materials and supplies, at average cost 15,030 60,834 Prepaids and other 102,404 430,322 31,283 333,398 - ------------------------------------------------------------------------------ Deferred debits: Regulatory assets 167,642 195,370 Other 32,140 45,256 - ------------------------------------------------------------------------------ Total assets $3,104,478 $3,622,347 ============================================================================== Capitalization and Liabilities Common equity $1,039,891 $1,073,454 Cumulative preferred stock 92,040 161,093 Long-term debt 955,563 1,057,076 Current liabilities: Long-term debt/preferred stock due within one year $ 667 $ 102,667 Notes payable 0 137,013 Accounts payable 100,753 87,015 Accrued interest 19,991 24,289 Dividends payable 25,993 24,748 Other 176,823 324,227 128,061 503,793 - ------------------------------------------------------------------------------ Deferred credits: Accumulated deferred income taxes 348,557 485,738 Accumulated deferred investment tax credits 45,930 60,736 Nuclear decommissioning liability 176,578 155,182 Power contracts 58,415 71,445 Other 63,277 53,830 Commitments and contingencies - ------------------------------------------------------------------------------ Total capitalization and liabilities $3,104,478 $3,622,347 ==============================================================================
The accompanying notes are an integral part of the consolidated financial statements. 30 Consolidated Statements of Cash Flows
years ended December 31, (in thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- Operating activities: Net income $157,337 $144,642 $141,546 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 229,668 223,529 228,259 Deferred income taxes and investment tax credits (152,798) (21,664) (4,057) Allowance for borrowed funds used during construction (1,668) (1,189) (2,292) Net changes in: Accounts receivable and accrued unbilled revenues 29,666 45,678 (11,719) Fuel, materials and supplies 29,834 (5,486) (2,171) Accounts payable 19,697 (47,068) 609 Other current assets and liabilities (25,525) 25,428 (44,514) Other, net (7,517) (4,640) 50,815 - ----------------------------------------------------------------------------- Net cash provided by operating activities 278,694 359,230 356,476 - ----------------------------------------------------------------------------- Investing activities: Plant expenditures (excluding AFUDC) (117,803) (114,110) (145,347) Proceeds from sale of fossil assets 533,633 0 0 Nuclear fuel expenditures (26,182) (4,089) (52,967) Investments (33,600) (27,689) (34,314) - ----------------------------------------------------------------------------- Net cash provided by (used in) investing activities 356,048 (145,888) (232,628) - ----------------------------------------------------------------------------- Financing activities: Issuances: Common stock 0 144 12,559 Long-term debt 0 100,000 0 Redemptions: Preferred stock (71,519) (44,000) (4,000) Long-term debt (201,600) (101,600) (101,600) Net change in notes payable (101,878) (64,441) 75,013 Dividends paid (171,322) (104,956) (106,010) - ----------------------------------------------------------------------------- Net cash used in financing activities (546,319) (214,853) (124,038) - ----------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 88,423 (1,511) (190) Cash and cash equivalents at the beginning of the year 4,140 5,651 5,841 - ----------------------------------------------------------------------------- Cash and cash equivalents at the end of the year $ 92,563 $ 4,140 $ 5,651 ============================================================================= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest, net of amounts capitalized $ 89,531 $100,795 $100,810 Income taxes $ 79,900 $ 99,326 $ 98,668
The accompanying notes are an integral part of the consolidated financial statements. 31 Notes to Consolidated Financial Statements Note A. Summary of Significant Accounting Policies 1. Nature of Operations Boston Edison Company (Boston Edison) received final approval of its reorganization plan to form a holding company structure from the Securities and Exchange Commission (SEC) in May 1998. Effective May 20, 1998 the holding company, BEC Energy (BEC), was formed with Boston Edison as a wholly owned subsidiary of BEC. Within its newly restructured industry, BEC has announced its intention to focus its utility operations on the transmission and distribution of energy. The sale of Boston Edison's fossil generating assets to Sithe Energies, Inc. (Sithe) was completed in May 1998. In November 1998, Boston Edison signed an agreement with Entergy Nuclear Generating Company (Entergy) to sell its wholly owned nuclear generating unit, Pilgrim Nuclear Power Station (Pilgrim). BEC signed a merger agreement with Commonwealth Energy System (CES) in December 1998 that will create an energy delivery company serving approximately 1.3 million customers located entirely within Massachusetts, including more than one million electric customers in 81 communities and 240,000 gas customers in 51 communities. Boston Edison currently supplies electricity at retail to an area of 590 square miles, including the city of Boston and 39 surrounding cities and towns. It also supplies electricity at wholesale for resale to other utilities and municipalities. Electric operating revenues are approximately 90% retail and 10% wholesale. 2. Basis of Consolidation and Accounting Under the new holding company structure the owners of Boston Edison's common stock became BEC common shareholders. Existing debt and preferred stock of Boston Edison remained obligations of the regulated utility business. Effective June 25, 1998, BETG ceased being a subsidiary of Boston Edison and became a wholly owned subsidiary of BEC. The accompanying consolidated financial statements include the results of operations and cash flows of BETG prior to the reorganization. BETG is excluded from the consolidated results of operations and cash flows beginning in the third quarter of 1998. The consolidated balance sheet at December 31, 1997 reflects the financial position of Boston Edison which also included BETG. BETG is excluded from the consolidated balance sheet at December 31, 1998. The consolidated financial statements for each period presented include the activities of Boston Edison's wholly owned subsidiary, Harbor Electric Energy Company (HEEC). All significant intercompany transactions have been eliminated. Certain reclassifications have been made to the prior year data to conform with the current presentation. Boston Edison follows accounting policies prescribed by the Federal Energy Regulatory Commission (FERC) and the Massachusetts Department of Telecommunications and Energy (DTE). In addition, Boston Edison is subject to the accounting and reporting requirements of the SEC. The consolidated financial statements conform with generally accepted accounting principles (GAAP). As a rate-regulated company Boston Edison has been subject to Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (SFAS 71), under GAAP. The application of SFAS 71 results in differences in the timing of recognition of certain expenses from that of other businesses and industries. As a result of the 32 Massachusetts electric industry restructuring legislation enacted in November 1997 and the DTE order regarding the related Boston Edison settlement agreement, as of December 31, 1997, the provisions of SFAS 71 are no longer being applied to the generation business. The distribution business remains subject to rate-regulation and continues to meet the criteria for application of SFAS 71. Refer to Note B to these Consolidated Financial Statements for more information on the accounting implications of the electric utility industry restructuring. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. 3. Revenues Estimates of retail base (transmission and distribution) revenues for electricity used by customers but not yet billed are recorded at the end of each accounting period. 4. Utility Plant Utility plant is stated at original cost of construction. The costs of replacements of property units are capitalized. Maintenance and repairs and replacements of minor items are expensed as incurred. The original cost of property retired, net of salvage value, and the related costs of removal are charged to accumulated depreciation. 5. Depreciation and Nuclear Fuel Amortization Depreciation of utility plant is computed on a straight-line basis using composite rates based on the estimated useful lives of the various classes of property. Excluding the effect of the adjustment discussed below, the overall composite depreciation rates were 3.28%, 3.30% and 3.33% in 1998, 1997 and 1996, respectively. Upon the completion of a review of Boston Edison's electric generating units, management determined that the oldest and least efficient fossil units (Mystic 4, 5 and 6) were unlikely to provide competitively-priced power beyond the year 2000. Therefore the estimated remaining economic lives of these units was revised to five years in 1996. These units were sold in May 1998. Refer to Note B to these Consolidated Financial Statements. The cost of decommissioning Pilgrim Station is excluded from depreciation rates. Refer to Note D to these Consolidated Financial Statements for a discussion of nuclear decommissioning. The cost of nuclear fuel is amortized based on the amount of energy Pilgrim Station generates. Nuclear fuel expense also includes an amount for the estimated costs of ultimately disposing of spent nuclear fuel and for assessments for the decontamination and decommissioning of United States Department of Energy nuclear enrichment facilities. 6. Deferred Nuclear Outage Costs The incremental costs associated with nuclear refueling and maintenance outages are deferred when incurred and amortized over Pilgrim Station's two- year operating cycle. 33 7. Costs Associated with Issuance and Redemption of Debt and Preferred Stock Consistent with the recovery in electric rates, discounts, redemption premiums and related costs associated with the issuance and redemption of long-term debt and preferred stock are deferred. The costs related to long-term debt are recognized as an addition to interest expense over the life of the original or replacement debt. Beginning in 1996, consistent with an accounting order received from the FERC, costs related to preferred stock issuances and redemptions are reflected as a direct reduction to retained earnings upon redemption or over the average life of the replacement preferred stock series as applicable. 8. Allowance for Borrowed Funds Used During Construction (AFUDC) AFUDC represents the estimated costs to finance utility plant construction. In accordance with regulatory accounting, AFUDC is included as a cost of utility plant and a reduction of current interest charges. Although AFUDC is not a current source of cash income, the costs are recovered from customers over the service life of the related plant in the form of increased revenues collected as a result of higher depreciation expense. AFUDC rates in 1998, 1997 and 1996 were 5.88%, 6.04% and 5.87%, respectively, and represented only the cost of short-term debt. 9. Cash and Cash Equivalents Cash and cash equivalents are comprised of highly liquid securities with maturities of 90 days or less when purchased. Boston Edison's banking arrangement does not require it to fund checks until they are presented for payment. Therefore, outstanding checks are included in cash and accounts payable until presented for payment. 10. Allowance for Doubtful Accounts Accounts receivable are substantially recoverable. This recovery occurs both from customer payments and from the portion of customer charges that provides for the recovery of bad debt expense. Accordingly, a significant allowance for doubtful accounts balance has not been maintained. 11. Regulatory Assets Regulatory assets represent costs incurred which are expected to be collected from customers through future charges in accordance with agreements with regulators. These costs are expensed when the corresponding revenues are received in order to appropriately match revenues and expenses. The majority of these costs is currently being recovered from customers over varying time periods. Refer to Note B to these Consolidated Financial Statements for information regarding the recovery of regulatory assets related to the generation business. 34 Regulatory assets consisted of the following:
December 31, 1998 1997 - -------------------------------------------------------------------- Power contracts $ 58,415 $ 71,445 Income taxes, net 52,168 51,096 Redemption premiums 23,419 27,019 Postretirement benefits costs 21,592 22,441 Decontamination and decommissioning 11,351 12,282 Other 697 11,087 - -------------------------------------------------------------------- $167,642 $195,370 ====================================================================
12. Related Party Transactions The December 31, 1998 consolidated balance sheet of Boston Edison includes a $20 million receivable from BETG's wholly owned subsidiary, BECoCom. The receivable is for construction and construction management services provided by Boston Edison and its contractors. Note B. Electric Utility Industry Restructuring 1. Accounting Implications Under the traditional revenue requirements model, electric rates have been based on the cost of providing electric service. Under this model, Boston Edison has been subject to certain accounting standards that are not applicable to other businesses and industries in general. The application of SFAS 71 requires companies to defer the recognition of certain costs when incurred if future rate recovery of these costs is expected. As a result of the Massachusetts electric industry restructuring legislation enacted in November 1997 and the DTE order regarding Boston Edison's related settlement agreement, as of December 31, 1997, the provisions of SFAS 71 are no longer being applied to the generation business. Under the settlement agreement, approximately 75% of the net assets of Pilgrim Station are recoverable through the non-bypassable transition charge of the utility's distribution business. The distribution business continues to be subject to rate-regulation. The remaining 25% is collected under Pilgrim's wholesale power contracts. The 1998 consolidated balance sheet reflects a reclassification of the Pilgrim net assets recoverable through the transition charge from utility plant to regulatory asset. This Pilgrim regulatory asset, included in the generation- related regulatory asset on the consolidated balance sheet continues to be grouped with utility plant for financial statement presentation. Completion of the sale of Boston Edison's fossil generating assets took place in May 1998. Boston Edison received proceeds from the sale of $655 million, including $121 million for a six-month transitional power purchase contract. The amount received above net book value on the sale of these assets is being returned to Boston Edison's customers over the settlement period. That amount is partially offset by certain costs recoverable through the transition charge due to the support of standard offer service provided by Boston Edison's fossil generating assets prior to the divestiture. The net deferred gain is included as a reduction to the generation-related regulatory asset on the 1998 consolidated balance sheet. In addition, Boston Edison received $19 million from Sithe for inventory and other closing adjustments. The implementation of the Boston Edison settlement agreement had certain accounting implications. The highlights of these include: 35 Generation-related plant and other regulatory assets Plant and other regulatory assets related to the generation business, except for those related to Pilgrim's wholesale contracts, are recovered through the transition charge. This recovery, which includes a return, will occur over a twelve-year period that began on March 1, 1998 (the retail access date). Depreciation The composite depreciation rate for distribution utility plant increased from 2.38% to 2.98% as of the retail access date. Fuel and purchased power charge The fuel and purchased power charge ceased as of the retail access date. The net remaining overcollection of fuel and purchased power costs will be reflected in future customer billings. These over recovered costs are included as an offset to the settlement recovery mechanisms on the 1998 consolidated balance sheet. Standard offer charge Customers have the option of continuing to buy power from the electric delivery business at standard offer prices as of the retail access date. The standard offer charge began at 2.8 cents/kWh at the retail access date, increased to 3.2 cents/kWh on June 1, 1998, to 3.69 cents/kWh on January 1, 1999 and is scheduled to increase to 5.1 cents/kWh by 2004. The cost of providing standard offer service, which includes fuel and purchased power costs, is recovered from standard offer customers on a fully reconciling basis. Distribution and transmission charges Distribution rates are subject to a minimum and maximum return on average common equity (ROE) through December 31, 2000. The ROE is subject to a floor of 6% and a ceiling of 11.75%. If the ROE is below 6%, Boston Edison is authorized to add a surcharge to distribution rates in order to achieve the 6% floor. If the ROE is above 11%, it is required to adjust distribution rates by an amount necessary to reduce the calculated ROE between 11% and 12.5% by 50%, and a return above 12.5% by 100%. No adjustment is made if the ROE is between 6% and 11%. In addition, distribution rates will be adjusted for any changes in tax laws or accounting principles that result in a change in costs of more than $1 million. The cost of providing transmission service to distribution customers is recovered on a fully reconciling basis. Nuclear generation Under the settlement agreement, the annual performance adjustment charge ceased and the cost recovery mechanism for Pilgrim Station changed effective March 1, 1998. Approximately 25% of the operations and capital costs, including a return on investment, continues to be collected under Pilgrim's wholesale contracts. Through Pilgrim's sale closing date, 25% of any profit or loss from the sale of Pilgrim's output will be shared with distribution customers through the transition charge. In addition, Boston Edison will obtain transition payments up to a maximum of $23 million per year depending on the level of costs incurred for such items as property taxes, insurance, regulatory fees and security requirements. 36 2. Generating Assets Divestiture The Boston Edison restructuring settlement agreement included a provision for the divestiture of its fossil generating assets no later than six months after the retail access date. In December 1997, Boston Edison entered into a purchase and sale agreement with Sithe Energies, a privately-held company headquartered in New York, to purchase these non-nuclear generating assets. The sale of these assets was finalized on May 15, 1998. In April 1998, Boston Edison began soliciting expressions of interest for the sale of its nuclear generating unit, Pilgrim Station as part of the previously announced strategy to exit the generation business. On November 19, 1998, Boston Edison announced the selection of Entergy, a subsidiary of New Orleans- based Entergy Corporation, as the winning bidder for the purchase of Pilgrim. Entergy is expected to purchase Pilgrim in a deal valued at an estimated $121 million. In addition, under the agreement Boston Edison will fully fund and transfer its decommissioning trust fund to Entergy and Entergy will then assume full liability and responsibility for decommissioning the Pilgrim site. A purchase and sale agreement has been signed and all required approvals are anticipated in the second quarter of 1999. The purchase price includes reimbursement for certain costs to be expended by Boston Edison in 1999. Therefore, the actual proceeds could be impacted by the ultimate timing of the transaction. As part of a benefits package offered to employees affected by the nuclear divestiture, eligible non-represented nuclear and designated nuclear support employees were offered unreduced retirement and transition benefits under a voluntary early retirement program (VERP). Sixteen employees elected to participate in the VERP. A retention benefit program was offered to all non- represented nuclear and designated nuclear support employees that did not elect or were ineligible to retire under the VERP who continue to work through the sale closing date. It is anticipated that approximately 300 non- represented nuclear and designated nuclear employees will receive one-time retention payments under this program. Costs associated with the VERP and retention program are recoverable under Boston Edison's settlement agreement. 3. Nuclear Asset Impairment As part of the settlement agreement, the net investment in Pilgrim Station as of December 31, 1995 (adjusted for depreciation through 1997) is recovered through the distribution transition charge. Due to the market pressures in the industry, the ultimate recovery of investments made in Pilgrim since 1995 is not certain. Therefore, in 1997 the investment in Pilgrim was reduced by the $13 million invested in the plant since January 1, 1996 as an impairment loss under Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. An after tax charge of approximately $8 million due to this reduction was recorded to non-operating expense on the consolidated statement of income in the fourth quarter of 1997. Note C. Income Taxes Income taxes are accounted for in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109 requires the recognition of deferred tax assets and liabilities for the future tax effects of temporary differences between the carrying amounts and the tax basis of assets and liabilities. In accordance with SFAS 109 net regulatory assets of $52.2 million and $51.1 million and corresponding net increases in accumulated deferred income taxes were recorded as of 37 December 31, 1998 and 1997, respectively. The regulatory assets represent the additional future revenues to be collected from customers for deferred income taxes. Accumulated deferred income taxes consisted of the following:
December 31, (in thousands) 1998 1997 - ------------------------------------------------------------------------------ Deferred tax liabilities: Plant-related $412,358 $535,460 Other 85,497 79,930 - ------------------------------------------------------------------------------ 497,855 615,390 - ------------------------------------------------------------------------------ Deferred tax assets: Plant-related 13,174 11,926 Investment tax credits 29,622 33,125 Other 106,502 84,601 - ------------------------------------------------------------------------------ 149,298 129,652 - ------------------------------------------------------------------------------ Net accumulated deferred income taxes $348,557 $485,738 ==============================================================================
No valuation allowances for deferred tax assets are deemed necessary. Previously deferred investment tax credits are amortized over the estimated remaining lives of the property giving rise to the credits. Components of income tax expense were as follows:
years ended December 31, (in thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- Current income tax expense $242,411 $115,373 $92,370 Deferred income tax expense (137,992) (14,104) 14 Investment tax credit amortization (3,927) (7,560) (4,071) - ----------------------------------------------------------------------------- Income taxes charged to operations 100,492 93,709 88,313 - ----------------------------------------------------------------------------- Taxes on other income (17,853) (11,254) (331) - ----------------------------------------------------------------------------- Total income tax expense $ 82,639 $ 82,455 $87,982 =============================================================================
The effective income tax rates reflected in the consolidated financial statements and the reasons for their differences from the statutory federal income tax rate were as follows:
1998 1997 1996 - ----------------------------------------------------------------------------- Statutory tax rate 35.0% 35.0% 35.0% State income tax, net of federal income tax benefit 4.6 4.5 4.3 Investment tax credit amortization (6.2) (3.3) (1.8) Other 1.0 0.1 0.7 - ----------------------------------------------------------------------------- Effective tax rate 34.4% 36.3% 38.2% =============================================================================
The 1998 effective tax rate declined by 4.5% as a result of the recognition in net income of the remaining unamortized investment tax credits related to Boston Edison's fossil generating assets at the time of their sale. This shareholder benefit is included in other expense, net on the 1998 consolidated statement of income. The 1997 effective tax rate declined by 0.8% as a result of the favorable outcome of an Internal Revenue Service appeal related to investment tax credits. 38 Note D. Nuclear Decommissioning and Nuclear Waste Disposal 1. Nuclear Decommissioning As a nuclear generating facility, Pilgrim Station will be required to be decommissioned upon the expiration of its operating license. Decommissioning means to remove nuclear facilities from service safely and reduce residual radioactivity to a level that permits termination of the Nuclear Regulatory Commission (NRC) license and release of the property for unrestricted use. Estimated decommissioning costs are recorded to depreciation expense on the consolidated statements of income over Pilgrim's expected service life. These costs are recovered through charges to retail and wholesale contract customers. In November 1998, Boston Edison filed an update of Pilgrim Station's decommissioning cost study with the DTE. The updated study includes an estimate of decommissioning and fuel storage costs of approximately $600 million in 1997 dollars. 2. Spent Nuclear Fuel The spent fuel storage facility at Pilgrim Station is expected to provide storage capacity through approximately 2003. Boston Edison has a license amendment from the NRC to modify the facility to provide sufficient room for spent nuclear fuel generated through the end of Pilgrim's operating license in 2012; however, any further modifications are subject to review by the DTE. Delays in identifying a permanent storage site have continually postponed plans for the United States Department of Energy's (DOE) long-term storage and disposal for spent nuclear fuel. The DOE's current estimate for an available site is no earlier than 2010. In November 1997, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the lack of an interim storage facility does not excuse the DOE from meeting its contract obligation to begin accepting spent nuclear fuel no later than January 31, 1998. This decision was in response to petitions filed by Boston Edison and other interested parties seeking declaratory rulings concerning enforcement and remedies for the DOE's failure to accept spent fuel in a timely manner. The court directed the plaintiffs to pursue relief under terms of their contracts with the DOE. Based on this ruling, the DOE may have to pay contract damages for not taking the spent nuclear fuel as scheduled. Under the Nuclear Waste Policy Act of 1982, it is the ultimate responsibility of the DOE to permanently dispose of spent nuclear fuel. Boston Edison currently pays a fee of $1.00 per net megawatthour sold from Pilgrim Station generation under a nuclear fuel disposal contract with the DOE. The DOE denied Boston Edison's petition to suspend payments to the Nuclear Waste Fund based on its interpretation of the U.S. Court of Appeal's decision made in November 1997. The DOE has, however, made an offer to consider amendments to existing contracts to address the hardships the anticipated delay in accepting spent fuel may cause individual contract holders. 3. Nuclear Divestiture As discussed in Note B to these Consolidated Financial Statements, in November 1998 Boston Edison announced the selection of Entergy as the winning bidder for the purchase of Pilgrim. A purchase and sale agreement has been signed and all required approvals are anticipated in the second quarter of 1999. Under the agreement Boston Edison will fully fund and transfer its decommissioning trust fund to Entergy and Entergy will then assume full liability and responsibility for decommissioning and waste disposal at Pilgrim Station. 39 Note E. Pensions and Other Postretirement Benefits The following information is presented in accordance with Statement of Financial Accounting Standards No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, effective for fiscal years beginning after December 15, 1997. 1. Pensions Boston Edison has a defined benefit funded retirement plan with certain contributory features that covers substantially all employees and an unfunded supplemental retirement plan for certain management employees. The changes in the benefit obligation and plan assets were as follows:
December 31, (in thousands) 1998 1997 - ---------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation at the beginning of the year $ 457,436 $ 409,760 Service cost 13,645 12,625 Interest cost 31,981 31,537 Plan participants' contributions 214 248 Plan amendments - 1,081 Actuarial loss 67,564 32,762 Curtailment gain (15,644) (6,916) Special termination benefits 665 3,530 Settlement payments (16,246) - Benefits paid (41,627) (27,191) - ---------------------------------------------------------------------------- Benefit obligation at the end of the year $ 497,988 $ 457,436 ============================================================================ Change in plan assets: Fair value of plan assets at the beginning of the year $ 401,182 $ 331,299 Actual return on plan assets 44,589 60,602 Employer contribution 86,440 36,224 Plan participants' contributions 214 248 Settlement payments (16,246) - Benefits paid (41,627) (27,191) - ---------------------------------------------------------------------------- Fair value of plan assets at the end of the year $ 474,552 $ 401,182 ============================================================================
The plans' funded status were as follows:
December 31, (in thousands) 1998 1997 - ---------------------------------------------------------------------------- Funded status $ (23,436) $ (56,254) Unrecognized actuarial net loss 96,310 50,646 Unrecognized transition obligation 3,856 5,704 Unrecognized prior service cost 15,557 19,121 - ---------------------------------------------------------------------------- Net amount recognized $ 92,287 $ 19,217 ============================================================================ Amount recognized in the consolidated balance sheets consist of: Prepaid retirement cost $ 94,049 $ 20,584 Accrued supplemental retirement liability (9,856) (9,763) Intangible asset 8,094 8,396 - ---------------------------------------------------------------------------- Net amount recognized $ 92,287 $ 19,217 ============================================================================
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the supplemental retirement plan with accumulated 40 benefit obligations in excess of plan assets were $11,387,000, $9,856,000 and $0, respectively, as of December 31, 1998, and $11,076,000, $9,763,000 and $0, respectively, as of December 31, 1997. Weighted average assumptions were as follows:
1998 1997 1996 - ---------------------------------------------------------------------------- Discount rate at the end of the year 6.50% 7.25% 7.75% Expected return on plan assets for the year 10.00% 10.00% 10.00% Rate of compensation increase at the end of the year 4.00% 4.25% 3.90%
Components of net periodic benefit cost were as follows:
years ended December 31, (in thousands) 1998 1997 1996 - ---------------------------------------------------------------------------- Service cost $ 13,645 $ 12,625 $ 13,452 Interest cost 31,981 31,537 32,325 Expected return on plan assets (39,140) (31,250) (29,826) Amortization of prior service cost 1,847 1,827 1,831 Amortization of transition obligation 860 934 934 Recognized actuarial loss 808 1,799 3,790 - ---------------------------------------------------------------------------- Net periodic benefit cost $ 10,001 $ 17,472 $ 22,506 ============================================================================
As a result of the fossil and nuclear divestitures discussed in Note B to these Consolidated Financial Statements, amounts recognized for curtailment, settlement and special termination benefit costs were $2,705,000, $0 and $665,000, respectively for 1998 and $1,300,000, $3,162,000 and $3,530,000, respectively for 1997. These amounts are recoverable under Boston Edison's settlement agreement. Boston Edison experienced a high number of employee retirements from 1994 to 1996. A large number of these retirements were as a direct result of the 1995 corporate restructuring. In 1997, a review of the accounting for the pension expense related to the retirements revealed that an adjustment to the pension costs related to these employees was necessary. Therefore, pension regulatory asset was increased by $8.6 million in 1997 for the adjustment related to the period covered by the 1992 Boston Edison settlement agreement. Through 1995, in accordance with the 1992 settlement agreement, the difference between the net pension cost of the retirement plan and its annual funding amount was deferred. The remaining adjustment did not have a material impact on the consolidated results of operations or financial position. Boston Edison also provides defined contribution 401(k) plans for substantially all employees. It matches a portion of employees' voluntary contributions to the plans. Matching contributions of $8 million were made in 1998, 1997 and 1996, respectively. 2. Other Postretirement Benefits In addition to pension benefits, Boston Edison also provides health care and other benefits to retired employees who meet certain age and years of service liability requirements. These benefits are not available to management employees hired on or after January 1, 1995. 41 The changes in the benefit obligation and plan assets were as follows:
December 31, (in thousands) 1998 1997 - ---------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation at the beginning of the year $ 237,616 $ 230,905 Service cost 3,892 3,543 Interest cost 16,895 17,006 Plan participants' contributions 1,178 395 Actuarial loss 27,845 4,093 Curtailment gain (14,665) (5,531) Special termination benefits 75 450 Benefits paid (14,080) (13,245) - ---------------------------------------------------------------------------- Benefit obligation at the end of the year $ 258,756 $ 237,616 ============================================================================ Change in plan assets: Fair value of plan assets at the beginning of the year $ 103,989 $ 72,702 Actual return on plan assets 14,344 18,852 Employer contribution 8,387 25,285 Plan participants' contributions 1,178 395 Benefits paid (14,080) (13,245) - ---------------------------------------------------------------------------- Fair value of plan assets at the end of the year $ 113,818 $ 103,989 ============================================================================
The plan's funded status and amount recognized in the consolidated balance sheets were as follows:
December 31, (in thousands) 1998 1997 - ---------------------------------------------------------------------------- Funded status $(144,938) $(133,627) Unrecognized actuarial net loss 24,922 12,916 Unrecognized transition obligation 88,814 127,107 Unrecognized prior service cost (9,827) (14,128) - ---------------------------------------------------------------------------- Net amount recognized $ (41,029) $ (7,732) ============================================================================
Weighted average assumptions were as follows:
1998 1997 1996 - ---------------------------------------------------------------------------- Discount rate at the end of the year 6.50% 7.25% 7.75% Expected return on plan assets for the year 9.00% 9.00% 9.00%
For measurement purposes, a 5% annual rate of increase on the per capita cost of covered health care benefits was assumed. A 13% annual rate of increase on the per capita cost of covered prescription drug benefits was assumed, decreasing gradually to 5% in the year 2012 and remaining level thereafter. A 4% annual rate of increase on the per capita cost of covered dental benefits was assumed. 42 A 1% change in the assumed health care cost trend rate would have the following effects:
One-Percentage-Point Increase Decrease -------- -------- Effect on total of service and interest cost components for 1998 $ 3,319 $ (2,605) Effect on December 31, 1998 postretirement benefit obligation $ 34,088 $(27,270)
Components of net periodic benefit cost were as follows:
years ended December 31, (in thousands) 1998 1997 1996 - ---------------------------------------------------------------------------- Service cost $ 3,892 $ 3,543 $ 4,616 Interest cost 16,895 17,006 16,815 Expected return on plan assets (8,563) (6,421) (4,738) Amortization of prior service cost (942) (1,017) (1,614) Amortization of transition obligation 8,474 9,151 9,151 Recognized actuarial loss 662 1,003 1,977 - ---------------------------------------------------------------------------- Net periodic benefit cost $ 20,418 $ 23,265 $ 26,207 ============================================================================
As a result of the fossil and nuclear divestitures discussed in Note B to these Consolidated Financial Statements, amounts recognized for curtailment and special termination benefit costs were $21,187,000 and $79,000, respectively for 1998 and $7,895,000 and $456,000, respectively for 1997. These amounts are recoverable under Boston Edison's settlement agreement. Note F. Stock-Based Compensation In 1997, Boston Edison initiated a Stock Incentive Plan (the Plan) which was adopted by the board of directors and approved by common stockholders. The Plan permits a variety of stock and stock-based awards, including stock options and deferred (nonvested) stock to be granted to certain key employees. The Plan limits the terms of awards to ten years. Since the reorganization into a holding company structure, all stock-based compensation involves BEC Energy common shares. Subject to adjustment for stock-splits and similar events, the aggregate number of shares of common stock that may be delivered under the Plan is 2,000,000, including shares issued in lieu of or upon reinvestment of dividends arising from awards. During 1998, 19,150 shares of deferred stock and 419,200 ten-year non-qualified stock options were granted under the plan. During 1997, 73,820 shares of deferred stock and 298,400 ten- year non-qualified stock options were granted. The weighted average grant date fair value of the deferred stock issued during 1998 and 1997 is $39.75 and $27.26, respectively. The options were granted at the full market price of the stock on the date of the grant. Both awards vest ratably over a three- year period. 43 Compensation cost for stock-based awards is recognized under the provisions of Accounting Principals Board Opinion 25, which requires compensation cost to be measured by the quoted stock market price at the measurement date less the amount, if any, an employee is required to pay. The required fair value method disclosures are as follows:
(in thousands, except per share amounts) 1998 1997 - ---------------------------------------------------------------------------- Net income Actual $157,337 $144,642 Pro forma $156,952 $144,572
Stock option activity of the Plan was as follows:
1998 1997 - ---------------------------------------------------------------------------- Options outstanding at January 1 273,000 0 Options granted 419,200 298,400 Options exercised (3,800) 0 Options forfeited (21,800) (25,400) - ---------------------------------------------------------------------------- Options outstanding at December 31 666,600 273,000 ============================================================================
Summarized information regarding stock options outstanding at December 31, 1998:
Range of Weighted Average Remaining Weighted Average Exercise Prices Contractual Life (Years) Exercise Price - --------------- -------------------------- ---------------- $25.75-$26.00 8.44 $25.85 $39.75-$40.50 9.30 $39.75
There were 87,200 stock options exercisable at December 31, 1998 with a weighted average exercise price of $25.85. The stock options granted during 1998 have a weighted average grant date fair value of $4.61. The fair value was estimated using the Black-Scholes option pricing model with the following weighted average assumptions: Expected life (years) 4.0 Risk-free interest rate 5.66% Volatility 16% Dividends 4.88%
Compensation cost recognized in the consolidated statements of income for stock-based compensation awards in 1998 and 1997 was $850,000 and $275,000, respectively. 44 Note G. Capital Stock
December 31, (dollars in thousands, except per share amounts) 1998 1997 - ----------------------------------------------------------------------------- Common equity: Common stock, par value $1 per share, 100,000,000 shares authorized; 100 and 48,514,973 shares issued and outstanding: $ - $ 48,515 Premium on common stock 742,544 696,137 Retained earnings 297,347 328,802 - ----------------------------------------------------------------------------- Total common equity $1,039,891 $1,073,454 =============================================================================
Upon the formation of the holding company in 1998, outstanding shares of Boston Edison Company were converted into shares of BEC Energy. In addition, 100 shares of Boston Edison Company common stock were issued to BEC Energy as part of this transaction. Cumulative preferred stock: Par value $100 per share, 2,890,000 shares authorized; issued and outstanding: Nonmandatory redeemable series:
Current Shares Redemption Series Outstanding Price/Share - ----------------------------------------------------------------------------- 4.25% 180,000 $103.625 $ 18,000 $ 18,000 4.78% 250,000 $102.800 25,000 25,000 7.75% - - 0 40,000 - ----------------------------------------------------------------------------- Total nonmandatory redeemable series $ 43,000 $ 83,000 =============================================================================
Mandatory redeemable series:
Current Shares Redemption Series Outstanding Price/Share - ----------------------------------------------------------------------------- 7.27% - - $ 0 $ 36,000 8.00% 500,000 - 50,000 50,000 - ----------------------------------------------------------------------------- 50,000 86,000 Less: redemption and issuance costs (960) (5,907) due within one year 0 (2,000) - ----------------------------------------------------------------------------- Total mandatory redeemable series $ 49,040 $ 78,093 =============================================================================
Cumulative Mandatory Redeemable Preferred Stock Boston Edison redeemed the remaining 360,000 shares of 7.27% sinking fund series cumulative preferred stock during 1998. The stock was subject to a mandatory sinking fund requirement of 20,000 shares each May at par plus accrued dividends. Boston Edison also had the noncumulative option each May to redeem additional shares, not to exceed 20,000, through the sinking fund at $100 per share plus accrued dividends. It redeemed, at par value, 40,000 shares in 1998, 1997 and 1996. In addition, 320,000 shares were redeemed in 1998 at $101.94 per share. Boston Edison is not able to redeem any part of the 500,000 shares of 8% series cumulative preferred stock prior to December 2001. The entire series is subject to mandatory redemption in December 2001 at $100 per share plus accrued dividends. 45 Note H. Indebtedness
December 31, (in thousands) 1998 1997 - ----------------------------------------------------------------------------- Long-term debt: Debentures: 5.950%, due March 1998 $ 0 $ 100,000 6.800%, due February 2000 65,000 65,000 6.050%, due August 2000 100,000 100,000 6.800%, due March 2003 150,000 150,000 7.800%, due May 2010 125,000 125,000 9.875%, due June 2020 100,000 100,000 9.375%, due August 2021 115,000 115,000 8.250%, due September 2022 60,000 60,000 7.800%, due March 2023 200,000 200,000 - ----------------------------------------------------------------------------- Total debentures 915,000 1,015,000 Less: due within one year 0 (100,000) - ----------------------------------------------------------------------------- Net long-term debentures 915,000 915,000 - ----------------------------------------------------------------------------- Sewage facility revenue bonds 30,900 32,500 Less: due within one year (667) (667) Less: funds held by trustee (4,670) (4,757) - ----------------------------------------------------------------------------- Net long-term sewage facility revenue bonds 25,563 27,076 - ----------------------------------------------------------------------------- Massachusetts Industrial Finance Agency bonds: 5.750%, due February 2014 15,000 15,000 6.662% bank loan, due 1999 0 100,000 - ----------------------------------------------------------------------------- Total long-term debt $ 955,563 $1,057,076 ============================================================================= Short-term debt: Notes payable: Bank loans $ 0 $ 94,013 Commercial paper 0 43,000 - ----------------------------------------------------------------------------- Total notes payable $ 0 $ 137,013 =============================================================================
1. Long-term Debt The 9 7/8% debentures due 2020 are first redeemable in June 2000 at a redemption price of 104.483%, the 9 3/8% series due 2021 are first redeemable in August 2001 at 104.612%, the 8.25% series due 2022 are first redeemable in September 2002 at 103.780% and the 7.80% series due 2023 are first redeemable in March 2003 at 103.730%. No other series are redeemable prior to maturity. There is no sinking fund requirement for any series of debentures. Sewage facility revenue bonds were issued by HEEC. The bonds are tax-exempt, subject to annual mandatory sinking fund redemption requirements and mature through 2015. Scheduled redemptions of $1.6 million were made in 1998, 1997 and 1996. The weighted average interest rate of the bonds is 7.3%. A portion of the proceeds from the bonds is in reserve with the trustee. If HEEC should have insufficient funds to pay for extraordinary expenses, Boston Edison would be required to make additional capital contributions or loans to the subsidiary up to a maximum of $1 million. The 5.75% tax-exempt unsecured bonds due 2014 are redeemable beginning in February 2004 at a redemption price of 102%. The redemption price decreases to 101% in February 2005 and to par in February 2006. 46 The aggregate principal amounts of Boston Edison's long-term debt (including HEEC sinking fund requirements) due through 2003 are $1.6 million in 1999, $166.6 million in 2000, $1.6 million in 2001 and 2002 and $151.6 million in 2003. 2. Short-term Debt Boston Edison currently has regulatory authority to issue up to $350 million of short-term debt. Boston Edison has a $200 million revolving credit agreement with a group of banks. This agreement is intended to provide a standby source of short-term borrowings. Under the terms of this agreement Boston Edison is required to maintain a common equity ratio of not less than 30% at all times. Commitment fees must be paid on the unused portion of the total agreement amount. It also has arrangements with several banks to provide additional short-term credit on an uncommitted and as available basis. At December 31, 1998, Boston Edison did not have any short-term debt outstanding. Information regarding consolidated short-term borrowings is as follows:
(dollars in thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- Maximum short-term borrowings $219,000 $316,100 $272,500 Weighted average amount outstanding $51,483 $212,663 $208,914 Weighted average interest rates excluding commitment fees 5.81% 5.85% 5.65% - -----------------------------------------------------------------------------
Note I. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of securities for which it is practicable to estimate the value: Nuclear decommissioning trust: The cost of $173 million approximates fair value based on quoted market prices of securities held. Cash and cash equivalents: The carrying amount of $93 million approximates fair value due to the short-term nature of these securities. Mandatory redeemable cumulative preferred stock, sewage facility revenue bonds and unsecured debt: The fair values of these securities are based upon the quoted market prices of similar issues. Carrying amounts and fair values as of December 31, 1998, are as follows:
Carrying Fair (in thousands) Amount Value - ------------------------------------------------------------------------------ Mandatory redeemable cumulative preferred stock $ 49,040 $ 54,190 Sewage facility revenue bonds $ 30,900 $ 33,914 Unsecured debt $ 930,000 $ 994,294 - ------------------------------------------------------------------------------
Note J. Segment and Related Information Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, requires the disclosure of certain financial and descriptive information by operating segments. Boston 47 Edison operates primarily as a regulated electric public utility for which separate segment information is not applicable. Note K. Commitments and Contingencies 1. Contractual Commitments At December 31, 1998, Boston Edison had estimated contractual obligations for plant and equipment of approximately $27 million. This includes $13.5 million for nuclear fuel fabrication. Under the Pilgrim purchase and sale agreement, Entergy will assume any unpaid portion of this obligation for the current refueling and maintenance outage scheduled for May 1999 upon the sale closing date. Boston Edison also has leases for certain facilities and equipment. The estimated minimum rental commitments under both transmission agreements and noncancellable leases for the years after 1998 are as follows:
(in thousands) - ------------------------------------------------------ 1999 $ 18,464 2000 17,769 2001 14,771 2002 13,331 2003 11,272 Years thereafter 89,381 - ------------------------------------------------------ Total $164,988 ======================================================
The total of future minimum rental income to be received under noncancellable subleases related to the above leases is $146,125. Boston Edison will capitalize a portion of lease rentals as part of plant expenditures in the future. The total expense for both lease rentals and transmission agreements was $29.4 million in 1998, $27.5 million in 1997 and $26.3 million in 1996, net of capitalized expenses of $1.3 million in 1998, $1.2 million in 1997 and $2.9 million in 1996. Boston Edison had previously entered into various take or pay and throughput agreements, primarily to supply the New Boston fossil generating station with natural gas. As part of the fossil divestiture agreement, Sithe Energies assumed these obligations. The total expense under these agreements was $47.1 million in 1997 and $49.5 million in 1996. 2. Electric Company Investments Boston Edison has an approximately 11% equity investment in two companies which own and operate transmission facilities to import electricity from the Hydro-Quebec system in Canada. As an equity participant Boston Edison is required to guarantee, in addition to its own share, the total obligations of those participants who do not meet certain credit criteria. At December 31, 1998, Boston Edison's portion of these guarantees was $15.2 million. Boston Edison has a 9.5% equity investment of approximately $2 million in Yankee Atomic Electric Company (Yankee Atomic). In 1992 the board of directors of Yankee Atomic decided to discontinue operations of the Yankee Atomic nuclear generating station permanently and decommission the facility. Yankee Atomic received approval from the FERC to continue to collect its investment and decommissioning costs through 2000, the period of the plant's operating license. The estimate of Boston Edison's share of Yankee Atomic's 48 investment and costs of decommissioning is approximately $8 million as of December 31, 1998. This estimate is recorded on the consolidated balance sheet as a power contract liability and an offsetting regulatory asset. Boston Edison also has a 9.5% equity investment in Connecticut Yankee Atomic Power Company (CYAPC) of approximately $10 million. In December 1996, the board of directors of CYAPC, which owns and operates the Connecticut Yankee nuclear electric generating unit (Connecticut Yankee), unanimously voted to retire the unit. The decision was based on an economic analysis of the costs of operating the unit through 2007, the period of its operating license, compared to the costs of closing the unit and incurring replacement power costs for the same period. Boston Edison's share of Connecticut Yankee's remaining investment and estimated costs of decommissioning is approximately $51 million as of December 31, 1998. This estimate is recorded on the consolidated balance sheet as a power contract liability and an offsetting regulatory asset similar to Yankee Atomic. In December 1996, CYAPC filed for rate relief at the FERC seeking to recover certain post-operating costs, including decommissioning. In August 1998, the FERC Administrative Law Judge (ALJ) released an initial decision regarding CYAPC's filing. This decision called for the disallowance of the common equity return on the CYAPC investment subsequent to the shutdown. The decision also stated that decommissioning collections should continue to be based on a previously approved estimate, with an adjustment for inflation, until a more reliable estimate is developed. In October 1998, both CYAPC and Northeast Utilities, a 49% equity investor in CYAPC, filed briefs on exceptions to the ALJ decision. If the initial decision is upheld, CYAPC could be required to write off a portion of its investment in the generating unit and refund a portion of the previously collected return on investment. Management is currently unable to determine the ultimate outcome of this proceeding, however, the estimate of the effect of the ALJ's initial decision does not have a material impact on its consolidated financial position or results of operations. 3. Nuclear Insurance The federal Price-Anderson Act currently provides $9.8 billion of financial protection for public liability claims and legal costs arising from a single nuclear-related accident. The first $200 million of nuclear liability is covered by commercial insurance. Additional nuclear liability insurance up to $9.6 billion is provided by a retrospective assessment of up to $88.1 million per incident levied on each of the 109 nuclear generating units currently licensed to operate in the United States, with a maximum assessment of $10 million per reactor per accident in any year. Boston Edison has purchased insurance from Nuclear Electric Insurance Limited (NEIL) to cover some of the costs to purchase replacement power during a prolonged accidental outage and the cost of repair, replacement, decontamination or decommissioning of utility property resulting from covered incidents at Pilgrim Station. Boston Edison's maximum potential total assessment for losses which occur during current policy years is $8.1 million under both the replacement power and excess property damage, decontamination and decommissioning policies. 49 4. Hazardous Waste Boston Edison is an owner or operator of approximately 20 properties where oil or hazardous materials were spilled or released. As such, Boston Edison is required to clean up these remaining properties in accordance with a timetable developed by the Massachusetts Department of Environmental Protection. There are uncertainties associated with these costs due to the complexities of cleanup technology, regulatory requirements and the particular characteristics of the different sites. Boston Edison also faces possible liability as a potentially responsible party in the cleanup of five multi-party hazardous waste sites in Massachusetts and other states where it is alleged to have generated, transported or disposed of hazardous waste at the sites. Boston Edison is one of many potentially responsible parties and currently expects to have only a small percentage of the total potential liability for these sites. Through December 31, 1998, BEC had approximately $6 million accrued on its consolidated balance sheet related to these cleanup liabilities. Management is unable to fully determine a range of reasonably possible cleanup costs in excess of the accrued amount. Based on its assessments of the specific site circumstances, it does not believe that it is probable that any such additional costs will have a material impact on its consolidated financial position. However, it is reasonably possible that additional provisions for cleanup costs that may result from a change in estimates could have a material impact on the results of a reporting period in the near term. 5. Generating Unit Performance Program Boston Edison's generating unit performance program ceased March 1, 1998. Under this program the recovery of incremental purchased power costs resulting from generating unit outages occurring through the retail access date is subject to review by the DTE. Proceedings relative to generating unit performance remain pending before the DTE. These proceedings will include the review of replacement power costs associated with the shutdown of the Connecticut Yankee nuclear electric generating unit which is discussed in item 2. Management is unable to fully determine a range of reasonably possible disallowance costs in excess of amounts accrued. Based on its assessment of the information currently available, it does not believe that it is probable that any such additional costs will have a material impact on its consolidated financial position. However, it is reasonably possible that additional disallowance costs that may result from a change in estimates could have a material impact on the results of a reporting period in the near term. 6. Legal Proceedings Industry and corporate restructuring legal proceedings The DTE order approving the Boston Edison settlement agreement and the DTE order approving the formation of BEC as a holding company were appealed by certain parties to the Massachusetts Supreme Judicial Court (SJC). In December 1998, the SJC dismissed the appeal of the order approving the holding company formation. One settlement agreement appeal remains pending, however there has to date been no briefing, hearing or other action taken with respect to this proceeding. In addition, along with other Massachusetts investor-owned utilities, Boston Edison has been named as a defendant in a class action suit seeking to declare certain provisions of the Massachusetts electric industry restructuring legislation unconstitutional. 50 Management is currently unable to determine the outcome of these outstanding proceedings however, if an unfavorable outcome were to occur, there could be a material adverse impact on business operations, the consolidated financial position or results of operations for a reporting period. A referendum seeking repeal of the Massachusetts electric industry restructuring legislation that was enacted in November 1997 was overwhelmingly defeated by a better than 70% to 30% margin in a state-wide general election held on November 3, 1998. This outcome allows the comprehensive framework established for the restructuring of the electric industry to continue as intended under the enacted legislation. Regulatory proceedings In October 1997, the DTE opened a proceeding to investigate Boston Edison's compliance with the 1993 order which permitted the formation of BETG and authorized Boston Edison to invest up to $45 million in unregulated activities. Hearings began in the fourth quarter of 1998 and are expected to be completed in the first half of 1999. Each of the Reading Municipal Light Department, the Littleton Electric Light Department and the West Boylston Municipal Light Department have filed separate claims for arbitration in Massachusetts alleging that the proposed transfer of Pilgrim Station constitutes a breach of their respective power sale agreements and seeking to terminate those agreements. The remaining municipal light departments have also indicated that they plan to file similar claims for arbitration. Boston Edison has requested the FERC to exercise its pre-emptive authority to consider the claims of the municipal light departments. In the event that either the FERC determines, or as a result of the arbitrations, that the contracts should be terminated, Boston Edison would continue to be obligated to purchase power from Entergy that it intended to resell to the municipal light departments. Boston Edison may not be able to resell such power in the short-term power exchange at a price equal to or greater than the price it is required to pay to Entergy. However, Boston Edison has filed at the DTE for recovery of any such shortfall as part of its Pilgrim divestiture filing through the transition charge. Management is currently unable to determine the outcome of these proceedings however, if an unfavorable outcome were to occur, there could be a material adverse impact on business operations, the consolidated financial position or results of operations for a reporting period. Other litigation In October 1998, the town of Plymouth, Massachusetts, the site of Pilgrim Station, filed suit against Boston Edison. The town claims that Boston Edison has wrongfully failed to execute an agreement with the town for payments in addition to taxes due to the town under the Massachusetts electric industry restructuring legislation. Boston Edison has disputed the town's claim and will vigorously defend itself. In addition to this pending litigation, Boston Edison and the town of Plymouth are also parties in proceedings before the Appellate Tax Board and the DTE concerning substantially the same dispute. Management is unable to determine the ultimate outcome of these proceedings however, if an unfavorable outcome were to occur, there could be a material adverse impact on business operations, the consolidated financial position or results of operations for a reporting period. In the normal course of its business Boston Edison is also involved in certain other legal matters. Management is unable to fully determine a range of 51 reasonably possible legal costs in excess of amounts accrued. Based on the information currently available, it does not believe that it is probable that any such additional costs will have a material impact on its consolidated financial position. However, it is reasonably possible that additional legal costs that may result from a change in estimates could have a material impact on the results of a reporting period in the near term. Note L. Long-Term Power Contracts 1. Long-Term Contracts for the Purchase of Electricity Boston Edison entered into a 13-month agreement effective December 1, 1998 to transfer all of the unit output entitlements from its long-term power purchase contracts to Select Energy (Select), a subsidiary of Northeast Utilities, Inc. In return, Select will provide full energy service requirements to Boston Edison, including NEPOOL capability responsibilities, at FERC approved tariff rates through December 31, 1999. Information relating to the contracts as of December 31, 1998 is as follows:
proportionate share (in thousands) Units of ----------------------------------- Capacity Debt Contract Purchased Minimum Outstanding Expiration ----------- Debt Through Cont. Annual Generating Unit Date % MW Service Exp. Date Cost - ------------------------------------------------------------------------------ Canal Unit 1 2002 25.0 141 $ 1,433 $ 4,496 $ 22,936 Mass. Bay Trans- portation Authority - 1 2005 100.0 34 - - 1,089 Ocean State Power - Unit 1 2010 23.5 72 3,996 15,970 22,120 Ocean State Power - Unit 2 2011 23.5 72 3,420 14,370 23,111 Northeast Energy Associates (a) (a) 219 - - 116,248 L'Energia (b) 2013 73.0 63 - - 28,220 MassPower 2013 44.3 117 10,727 65,127 53,143 Mass. Bay Trans- portation Authority - 2 2019 100.0 34 - - 450 - ------------------------------------------------------------------------------ Total $19,576 $99,963 $267,317 ============================================================================== (a) Boston Edison purchases 75.5% of the energy output of this unit under two contracts. One contract represents 135MW and expires in the year 2015. The other contract is for 84MW and expires in 2010. Energy is paid for based on a price per kWh actually received. Boston Edison does not pay a proportionate share of the unit's capital and fixed operating costs. (b) Boston Edison pays for this energy based on a price per kWh actually received. An agreement has been made with L'Energia to terminate this contract. FERC approval of this agreement is pending.
52 Boston Edison's total fixed and variable costs associated with these contracts in 1998, 1997 and 1996 were approximately $267 million, $288 million and $281 million, respectively. Boston Edison's minimum fixed payments under these contracts for the years after 1998 are as follows:
(in thousands) - ------------------------------------------------------ 1999 $ 86,072 2000 88,291 2001 88,662 2002 91,431 2003 81,927 Years thereafter 856,790 - ------------------------------------------------------ Total $1,293,173 ====================================================== Total present value $ 743,716 ======================================================
2. Long-Term Power Sales Contracts In addition to other wholesale power sales, Boston Edison sells a percentage of Pilgrim Station's output to other utilities and municipalities under long- term contracts. Information relating to these contracts is as follows:
Contract Units of Capacity Sold Expiration ---------------------- Contract Customer (a) Date % MW - ------------------------------------------------------------------------------ Commonwealth Electric Company 2012 11.0 73.7 Montaup Electric Company 2012 11.0 73.7 Various municipalities 2000 (b) 3.7 25.0 - ------------------------------------------------------------------------------ Total 25.7 172.4 ============================================================================== (a) Under these contracts, the utilities and municipalities pay their proportionate share of the costs of operating Pilgrim Station and associated transmission facilities. These costs include operation and maintenance expense, insurance, local taxes, depreciation, decommissioning and a return on investment. The long-term power sales contracts with Commonwealth Electric Company and Montaup Electric Company will be terminated upon the closing of the sale of Pilgrim Station to Entergy. The contracts with the municipalities remain in place whereby Boston Edison will purchase power for resale to the municipalities under a purchase power agreement entered into with Entergy. (b) Subject to certain adjustments.
53 Selected Consolidated Quarterly Financial Data (Unaudited)
(in thousands) Operating Operating Net Revenues Income Income - ------------------------------------------------ 1998 - ---- First quarter $394,117 $ 49,203 $22,859 Second quarter 385,708 65,300 35,340 Third quarter 479,304 100,806 82,492 Fourth quarter 363,843 34,415 16,646 1997 - ---- First quarter $422,856 $ 47,138 $20,935 Second quarter 426,835 59,633 33,978 Third quarter 520,414 106,673 81,418 Fourth quarter 408,426 43,500 8,311
Item 9. Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosure - -------------------- Not applicable. 54 Part III -------- Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------ (a) Identification of Directors - -------------------------------- Information about Nominees and Incumbent Directors The Boston Edison board has fixed the number of directors at eleven as permitted under its bylaws. Boston Edison's restated articles of organization provides for the classification of the Boston Edison board into three classes serving staggered three-year terms. The four persons named below have been nominated by the Boston Edison board for election as Class II directors for a term expiring at the year 2002 annual meeting and until their successors are duly chosen and qualified. The remaining directors will continue to serve as provided below, with the Class III directors having terms expiring in 2000 and the Class I directors having terms expiring in 2001. If any of the nominees shall be unavailable as a candidate at the Boston Edison annual meeting by reason of death, disability or resignation, votes exercised through the proxies will be cast for a substitute candidate as may be designated by the Boston Edison board, or in the absence of a designation, in a manner the directors may determine in their discretion. Alternatively, in this situation, the Boston Edison board may take action to fix the number of directors for the ensuing year at the number of nominees named herein who are then able to serve. The Boston Edison board has adopted the following director retirement policy. Directors who are employees of BEC Energy or Boston Edison Company, with the exception of the chief executive officer, retire from the Boston Edison board when they retire from employment with BEC Energy or Boston Edison Company. Under the Boston Edison board's current policy, directors who are not employees of BEC Energy or Boston Edison Company or who have served as chief executive officer retire from the board at the annual shareholder meeting following their seventieth birthday. The Boston Edison board, which held seven regular meetings and one special meeting in 1998, has an Executive Committee, a Nuclear Oversight Committee, and a Pricing Committee. During 1998, the Executive Committee, which is authorized to exercise in the intervals between Boston Edison board meetings those powers of the Boston Edison board which can be delegated, to act as a nominating committee, and to review director compensation, met three times. The Nuclear Oversight Committee, which is responsible for overseeing Boston Edison's nuclear generation operations, met three times. Prior to the establishment of BEC Energy in May 1998, the Boston Edison board also had an Audit, Finance and Risk Management Committee, the responsibilities of which included recommendations as to the selection of independent auditors, review of the scope of the independent audit, annual financial statements, internal audit reports, and financial and accounting controls and procedures, and review of BEC Energy's financial requirements, insurance coverages, and legal compliance programs, and an Executive Personnel Committee, the responsibilities of which included reviewing executive officer compensation, personnel planning and performance, some company benefit programs, and human resources policies. Each of these committees met twice in 1998 before their responsibilities were transferred to the corresponding committees of the BEC Energy board. The Pricing Committee, which is authorized to approve the terms of debt and equity offerings, did not meet in 1998. All directors attended at least 75% of the aggregate of the total number of meetings of the Boston Edison board and the total number of meetings held by all committees of the 55 Boston Edison board on which he or she served, with the exception of Mr. Egan, who attended 65% of these meetings. (b) Identification of Executive Officers - ----------------------------------------- The information required by this item is included at the end of Part I of this Form 10-K/A under the caption Executive Officers of the Registrant. (c) Identification of Certain Significant Employees - ---------------------------------------------------- Not applicable. (d) Family Relationships - ------------------------- Not applicable. (e) Business Experience - ------------------------ The names of the nominees as Class II directors and the incumbent Class I and Class III directors and selected information concerning them are shown in the table below. Unless a specific time period is indicated, each nominee and director has held the position first listed across from his or her name for at least five years. Nominees as Class II Directors - Terms Expiring in 2002 -------------------------------------------------------
Nominees Principal Occupation and Directorships - -------- ------------------------------------------------- Charles K. Gifford Chairman (since 1997 and from 1995-1996) and Age: 56 Chief Executive Officer (since 1995), formerly Boston Edison Company President (1989-1995), BankBoston Corporation Director since: 1990 (Bank Holding Company), and Chairman and Chief Member: Audit, Finance Executive Officer (since 1995), formerly and Risk Management, President (1989-1996), BankBoston, N.A.; Executive Personnel Director, Boston Edison Company, BankBoston and Pricing Committees Corporation, BankBoston, N.A., Massachusetts Mutual Life Insurance Company. Paul A. LaCamera President and General Manager (since 1997), Age: 55 WCVB-TV Channel 5, formerly Vice President and Boston Edison Company General Manager (1994-1997); Director, Boston Director since: 1998 Edison Company. Member: Audit, Finance and Risk Management Committee Thomas J. May Chairman, President and Chief Executive Officer Age: 51 (since 1998), BEC Energy, and Chairman, Boston Edison Company President (since 1995) and Chief Executive Director since: 1991 Officer, Boston Edison Company; Director, Boston Member: Executive Edison Company, BankBoston Corporation, and Pricing Committees BankBoston, N.A., Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, Liberty Financial Companies, Inc., RCN Corporation.
56
Nominees Principal Occupation and Directorships - -------- ------------------------------------------------- Sherry H. Penney Chancellor (1988-1995 and 1996 to present), Age: 61 University of Massachusetts at Boston, formerly Boston Edison Company President (1995) (interim), University of Director since: 1990 Massachusetts; Director, Boston Edison Company. Member: Audit, Finance and Risk Management and Executive Personnel Committees
Incumbent Class III Directors - Terms Expiring in 2000 ------------------------------------------------------
Directors Principal Occupation and Directorships - --------- ------------------------------------------------- Gary L. Countryman Chairman of the Board, Liberty Mutual Insurance Age: 59 Company and Liberty Life Assurance Company of Boston Edison Company Boston, formerly Chief Executive Officer (1985- Director since: 1986 1998), Liberty Mutual Insurance Company and Member: Executive Liberty Life Assurance Company of Boston; and Executive Director, Boston Edison Company, Liberty Mutual Personnel Committees Insurance Company, Liberty Life Assurance Company of Boston, Liberty Mutual Fire Insurance Company, Liberty Financial Companies, Inc., BankBoston Corporation, BankBoston, N.A., The Neiman-Marcus Group, Inc., Alliance of American Insurers. Thomas G. Dignan, Jr. (1) Partner, Ropes & Gray (Law Firm); Director, Age: 58 Boston Edison Company. Boston Edison Company Director since: 1983 Member: Executive Committee Herbert Roth, Jr. Former Chairman of the Board (1978-1985) and Age: 70 Chief Executive Officer (1968-1985), LFE Boston Edison Company Corporation (Traffic and Industrial Process Director since: 1978 Control Systems); Director/Trustee, Boston Member: Audit, Edison Company, Landauer, Inc., Tech/Ops Sevcon, Finance and Risk Inc., Phoenix Home Life Mutual Insurance Management Committee Company, Phoenix Series Fund, Phoenix Total Return Fund, Inc., Phoenix Multi-Portfolio Fund, The Bid Edge Series Fund, Mark IV Industries. Stephen J. Sweeney Former Chairman of the Board (1986-1992) and Age: 70 Chief Executive Officer (1984-1990), Boston Boston Edison Company Edison Company; Director, Boston Edison Company, Director since: 1983 Selecterm, Inc., Liberty Mutual Insurance Member: Audit, Company, Liberty Mutual Fire Insurance Company, Finance and Risk Liberty Life Assurance Company of Boston, Management Committee Liberty Financial Companies, Inc., Uno Restaurant Corporation.
57 Incumbent Class I Directors - Terms Expiring in 2001 ----------------------------------------------------
Directors Principal Occupation and Directorships - --------- ------------------------------------------------- Nelson S. Gifford Principal, Fleetwing Capital (Venture Age: 68 Investments); formerly Chairman (1986-1990) and Boston Edison Company Chief Executive Officer (1975-1990), Dennison Director since: 1981 Manufacturing Company (Stationery Products, Member: Executive Systems and Packaging); Director, Boston Edison Committee Company, John Hancock Mutual Life Insurance Company, Reed and Barton, J.M. Huber Corp., Nypro Inc, Partners Fund. Richard J. Egan Chairman of the Board, EMC Corporation (Storage Age: 63 Related Computer System Products); Director, Boston Edison Company Boston Edison Company, Cognition Inc., Shiva Director since: 1997 Corporation, New York Stock Exchange Listed Member: Executive Company Advisory Committee. Personnel Committee Matina S. Horner Executive Vice President, Teachers Insurance and Age: 59 Annuity Association/College Retirement Equities Boston Edison Company Fund; formerly President (1972-1989), Radcliffe Director since: 1988 College; Director, Boston Edison Company, The Member: Executive, Neiman-Marcus Group, Inc. Audit, Finance and Risk Management and Pricing Committees (1) During 1998, Boston Edison Company paid legal fees to the firm of Ropes & Gray.
(f) Involvement in Certain Legal Proceedings - --------------------------------------------- Not applicable. (g) Promoters and Control Persons - ---------------------------------- Not applicable. Item 11. Executive Compensation - -------------------------------- Director Compensation In 1998, the compensation programs for directors were reviewed and revised with the assistance of an external compensation consultant. The review was initiated to assure that the level of compensation be appropriate in reference to comparable programs, the plan design supports BEC Energy's and Boston Edison's strategic objectives, and the interests of the directors are aligned with those of BEC Energy's shareholders. When BEC Energy was established in May of 1998, the persons serving as directors of Boston Edison were also named as trustees of BEC Energy. Members of the Executive Committee of the BEC Energy board also serve on the Executive Committee of the Boston Edison board. The compensation program for service on the two boards was established to take into account the dual responsibilities. Therefore, the payments described below represent the entire compensation received by the trustees/directors serving on the boards of both entities. 58 Each director who is not an employee of Boston Edison receives an annual board retainer of $20,000 in cash. Each director also receives an annual retainer of $20,000 worth of BEC Energy common shares which is deferred until the director retires from the board. Each non-employee director who is a member of the Executive Committees of the two entities receives an additional retainer of $3,000 and each director who chairs a BEC Energy or Boston Edison board committee receives an additional retainer of $3,000. All other retainers were discontinued as of October 1998. Each director who is not an employee of Boston Edison receives $1,000 for attendance in person at each meeting of the Boston Edison board or a committee and $500 for participating in a meeting by telephone. When BEC Energy and Boston Edison board or executive committee meetings are held consecutively, which is usually the case, only one meeting fee is paid. Directors may elect to defer part or all of their directors' fees under BEC Energy/Boston Edison deferred fee plan. In 1998, two director compensation programs were discontinued: the 1991 Director Stock Plan and the 1993 Directors' Retirement Benefit. An amount equal to the present value of the benefit each outside director accrued under the Directors' Retirement Benefit was deposited in deferred accounts. Receipt is deferred until the director's retirement from the BEC Energy/Boston Edison boards. Report of the Executive Personnel Committee As noted above, when BEC Energy was established, the responsibilities of the Boston Edison Executive Personnel Committee were transferred to the BEC Energy Executive Personnel Committee. Below is the report of the BEC Energy Executive Personnel Committee. Under the rules established by the SEC, BEC Energy is required to provide specified data and information with regard to the compensation and benefits provided to its executive officers, including BEC Energy's chief executive officer and the four other most highly compensated executive officers. The disclosure requirements for these officers (the "Named Executive Officers") include tables summarizing total compensation and a report explaining the rationale and considerations that led to fundamental executive compensation decisions affecting those individuals for the prior year. The Executive Personnel Committee BEC Energy's executive compensation program is administered by the Executive Personnel Committee, a committee of the BEC Energy board composed of the four non-employee trustees listed as signatories to this report. Except as discussed below, none of these non-employee trustees has any interlocking or other relationship with BEC Energy that would require disclosure to the SEC. Generally, all decisions of the Executive Personnel Committee regarding the compensation of the chief executive officer are subject to the approval of the non-employee trustees of BEC Energy, none of whom is eligible to participate in the incentive plans described below. The Executive Personnel Committee administers the 1997 Stock Incentive Plan discussed below. The Named Executive Officers The officers identified as the five most highly compensated executive officers of BEC Energy are all employees of Boston Edison Company, BEC Energy's principal subsidiary. Three of the Named Executive Officers, Messrs. May, Horan and Judge, also serve as officers of BEC Energy, in the following capacities: Mr. May as Chairman, President and Chief Executive Officer; Mr. Horan as Senior Vice President and General Counsel; and Mr. Judge as 59 Senior Vice President and Treasurer. BEC Energy does not have any employees of its own. Compensation Philosophy The executive compensation philosophy of BEC Energy is to provide competitive levels of compensation that advance BEC Energy's annual and long-term performance objectives, reward corporate performance, and assist BEC Energy in attracting, retaining and motivating highly qualified executives. The framework for the compensation committee's executive compensation program is to establish base salaries which are competitive with electric utilities in general and to incentivize excellent performance by providing executives with the opportunity to earn additional remuneration under the annual and long-term incentive plans. The incentive plan goals are designed to improve the effectiveness and enhance the efficiency of BEC Energy's operations and to create value for shareholders. The committee also seeks to link executive and shareholder interests through equity-based incentive plans. Accordingly, in 1997, upon the committee's recommendation, the Boston Edison board approved stock ownership guidelines of three times base salary for the chief executive officer and one to one-and one-half times base salary for the other executive officers of BEC Energy and Boston Edison Company. These guidelines allow the executives five years to acquire this amount of stock. Components of Compensation Compensation paid to the Named Executive Officers, as reflected in the following tables, consists of three primary elements: base salary, annual incentive awards, and long-term incentive awards. BEC Energy compares its compensation levels against those of other growth-oriented investor-owned electric utility companies. BEC Energy's strategy is to establish total compensation, i.e., base salary and annual incentives, at the 60th percentile of the utility industry, and to compare its long-term incentive plan to those of more aggressive utilities and general industry companies that focus on value creation. During 1998, the committee thoroughly reviewed data collected by nationally recognized compensation experts as well as by Boston Edison's human resources group to determine whether BEC Energy's compensation strategy was being met. The review evaluated base salary and annual incentives of nearly all electric utility companies, and long-term incentives of a blend of utilities and general industry. The data demonstrated that BEC Energy was in conformity with its compensation strategy to the satisfaction of the committee. The income tax deductions of publicly traded companies may be limited to the extent total compensation for particular executive officers exceeds one million dollars during any year. This deduction limit, however, does not apply to payments which qualify as "performance based". The committee has reviewed the regulations issued by the Internal Revenue Service and will continue to review the application of these rules to future compensation. However, the committee intends to continue basing its executive compensation decisions primarily upon performance achieved, both corporate and individual, while retaining the right to make subjective decisions and to award compensation that may or may not meet all of the Internal Revenue requirements for deductibility. Annual Incentive Plan Annual incentive payments to the Named Executive Officers, reported in the fourth column of the Summary Compensation Table below, are based on both 60 corporate and business unit performance objectives which are derived from the corporate operating plan and approved by the committee. Corporate performance objectives include a comparison of target to actual earnings per share from operations. Business unit performance objectives include predetermined levels for operating and capital budgets, as well as key operating goals. The annual incentive plan award for Mr. May is based solely on BEC Energy's achieving the earnings per share objective. In 1998, BEC Energy's basic earnings per share were $2.76, which exceeded the plan target. The annual incentive plan awards for Messrs. Gustin, Horan, Judge and Ledgett were based 50% on earnings per share and 50% on specific business unit performance objectives to achieve various budget and operating plan targets. All four officers exceeded the specified business unit performance levels. Long-Term Compensation Under the 1997 Stock Incentive Plan, executive officers and other key employees are eligible to receive grants from time to time of stock-related awards of seven general types: (i) stock options, (ii) stock appreciation rights, (iii) restricted stock awards, (iv) deferred stock awards, (v) performance unit awards, (vi) dividend equivalent awards, and (vii) other stock-based awards. The long-term grant in May of 1998 consisted of non- qualified stock options, deferred shares and dividend equivalents on the deferred shares, and was based upon the committee's evaluation of performance towards key strategic objectives, and competitive award data provided by an external consultant. The committee did not weight any of these factors. The options and the deferred shares vest at the rate of 33% per year over a three- year period from the date of grant, and the options may be exercised over a ten-year period. Other Plans At various times in the past, BEC Energy and Boston Edison Company have adopted various broad-based employee benefit plans in which officers are permitted to participate on the same terms as non-executive employees who meet applicable eligibility criteria. These plans include pension, life, and health insurance plans, as well as a section 401(k) savings plan which includes a company matching contribution equal to the first six percent of pay contributed by the employee up to a maximum excludable 401(k) contribution allowed by the Internal Revenue Code. In addition, Boston Edison Company has a deferred compensation plan in which officers and senior managers may elect to participate. In 1996, the committee implemented a supplemental executive retirement plan which provides eligible participates with supplementary retirement income of up to 60% of final average cash compensation, depending upon each participant's years of service, reduced by 50% of the participant's social security benefit and further reduced by benefits the participant receives under Boston Edison's pension plan. Mr. May's 1998 Compensation The Executive Personnel Committee makes decisions regarding the compensation of the chief executive officer using the same philosophy and criteria described above. As with the compensation of all officers, BEC Energy compares compensation levels for the chief executive officer to those of all other investor-owned electric utility companies. Each year BEC Energy approves the adjustment of salary ranges for the chief executive officer and other corporate officers based on studies conducted by 61 external executive compensation consultants and Boston Edison Company's human resources group. The 1998 studies found BEC Energy's executive compensation levels to be within the approved 60th percentile position to market. Mr. May received a 5% increase to his base salary in 1998. Mr. May's annual incentive award, shown in the fourth column of the Summary Compensation Table below, was in conformity with the provisions of the annual incentive plan described above, and was based on BEC Energy surpassing its operating plan targets. The committee's policy is to base individual long- term incentive awards on an annual study by the compensation consultant comparing the value of long-term incentive grants to salary levels for a blend of electric utility and general industry companies. The 6,000 deferred shares and 60,000 options granted Mr. May in 1998 reflect this policy. Compensation Committee Interlocks and Insider Participation Charles K. Gifford, who is a member of BEC Energy's Executive Personnel Committee, is Chairman and Chief Executive Officer of BankBoston Corporation and BankBoston, N.A. Thomas J. May, BEC Energy's Chairman, President and Chief Executive Officer, serves on the boards of directors of BankBoston Corporation and BankBoston, N.A. Gary L. Countryman, who is the Chairman of BEC Energy's Executive Personnel Committee, is Chairman of the Board and Chief Executive Officer of Liberty Mutual Insurance Company and Liberty Mutual Fire Insurance Company and Chairman of the Board of Liberty Financial Companies, Inc. Mr. May serves on the boards of directors of Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, and Liberty Financial Companies, Inc. By the Executive Personnel Committee, Gary L. Countryman (Chairman) Richard J. Egan Charles K. Gifford Sherry H. Penney Executive Compensation Tables The following information is given regarding annual and long-term compensation earned by the chief executive officer and the four other most highly compensated executive officers of BEC Energy and Boston Edison Company with respect to the years 1996, 1997 and 1998. 62 Summary Compensation Table --------------------------
Annual Long-Term Compensation Compensation Awards Payouts ------------------ --------------------- ------- Securities Other Deferred Underlying Name and Annual Share Options/ LTIP All Other Principal Position Year Salary Bonus Compensation(1) Awards(2) SARs(#) Payouts Compensation(3) - ------------------ ---- -------- -------- --------------- --------- ---------- ------- --------------- Thomas J. May..... 1998 $519,583 $600,000 - 238,500 60,000 - $ 9,600 Chairman, 1997 496,875 498,750 - 426,400 100,000 - 9,600 President and 1996 463,625 324,750 - - - - 9,000 Chief Executive Officer BEC Energy and Boston Edison Company Ronald A. Ledgett. 1998 277,875 248,850 - 99,375 27,000 - 84,600 Executive Vice 1997 232,500 216,750 - 118,450 28,600 - 9,600 President, 1996 193,667 119,300 - - - - 9,000 Boston Edison Company Douglas S. Horan.. 1998 208,750 196,750 - 59,625 14,000 - 59,600 Senior Vice 1997 195,417 140,000 - 103,000 25,000 - 9,600 President, 1996 175,833 83,750 - - - - 9,000 BEC Energy and Boston Edison Company James J. Judge.... 1998 205,417 196,750 - 59,625 14,000 - 59,600 Senior Vice 1997 183,667 136,400 - 97,850 23,400 - 9,600 President, 1996 167,000 80,000 - - - - 9,000 BEC Energy and Boston Edison Company L. Carl Gustin.... 1998 194,375 163,875 - 51,675 12,000 - 9,600 Senior Vice 1997 187,813 121,250 - 97,850 23,800 - 9,600 President, 1996 182,507 67,262 - - - - 9,000 Boston Edison Company (1) None of the Named Executive Officers received amounts of other annual compensation in 1996, 1997, or 1998 which would require disclosure under SEC rules. (2) Deferred common share awards are valued at the closing market price as of the date of the grant. The awards vest one-third on each of the first, second and third anniversaries of the date of the grant. Dividends will accrue on the awards from the date of grant and will be be payable in the form of additional shares which will vest at the same time the awards vest. Aggregate deferred common share holdings and values based on the closing price of the common shares on December 31, 1998 are as follows: Mr. May, 16,933 shares ($697,428); Mr. Ledgett, 5,567 shares ($229,291); Mr. Gustin, 3,833 shares ($157,872); Mr. Horan, 4,167 shares ($171,628) and Mr. Judge, 4,033 shares ($166,109). (3) Messrs. Ledgett, Horan and Judge received payments in the amounts of $75,000, $50,000 and $50,000 respectively, under retention agreements entered into in 1996. All other amounts in this column represent Boston Edison's matching contribution under its 401(k) plan.
63 Option Grants in Last Fiscal Year ---------------------------------
Individual Grants ------------------------------------------------ % of Total Options Grant Number of Granted Exercise Date Securities to or Present Underlying Employees Base Expiration Value Name Options Granted(1) in 1998 Price Date (2) - ---- ------------------ --------- -------- ---------- ------- Thomas J. May..... 60,000 14.3% $39.75 4/22/08 $276,600 Ronald A. Ledgett. 27,000 6.4% $39.75 4/22/08 $124,470 L. Carl Gustin.... 12,000 2.9% $39.75 4/22/08 $ 55,320 Douglas S. Horan.. 14,000 3.3% $39.75 4/22/08 $ 64,540 James J. Judge.... 14,000 3.3% $39.75 4/22/08 $ 64,540 (1) Options vest one-third annually beginning April 22, 1999. (2) The grant date present values were determined using the Black-Scholes option pricing model. There is no assurance that the value realized would be at or near the value estimated by the Black-Scholes model. Assumptions used for the model are as follows: stock volatility, 16%; risk-free interest rate, 5.66%; dividend yield, 4.88%; and time to exercise, four years.
Aggregated Option/SAR Exercises and Fiscal Year-End --------------------------------------------------- Option Value Table ------------------
Number of Securities Value of Securities Underlying Underlying Unexercised Unexercised Options In-the-Money Options Shares/SARs At Fiscal Year-End At Fiscal Year-End (1) Acquired on Value ------------------------- ------------------------- Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable - ---- ----------- -------- ------------------------- ------------------------- Thomas J. May..... 0 $0 33,333 / 126,667 $506,245 / $1,098,755 Ronald A. Ledgett. 0 $0 9,533 / 46,067 $147,166 / $333,159 L. Carl Gustin.... 0 $0 7,933 / 27,867 $122,466 / $262,197 Douglas S. Horan.. 0 $0 8,333 / 30,667 $128,641 / $277,422 James J. Judge.... 0 $0 7,800 / 29,600 $120,413 / $260,950 (1) Based on the closing price of BEC Energy common shares on December 31, 1998 of $41.1875.
64 Pension Plan Table The following table shows the estimated annual retirement benefits payable to executive officers under the qualified pension plan and the supplemental executive retirement plan, assuming retirement at age 65. The Supplemental executive retirement plan is a non-qualified pension plan providing a maximum benefit of 60% of compensation after the executive has accumulated 20 years of credited service and has reached age 60. The supplemental executive retirement plan provides the incremental benefits in excess of the benefits paid under the qualified plan necessary to reach the benefit shown in the table. Each of the officers named in the Summary Compensation Table participates in the supplemental executive retirement plan. The benefits presented are based on a straight life annuity and do not take into account a reduction in benefits of up to 50% of the participant's primary social security benefit.
Years of Credited Service Average Annual ---------------------------- Compensation 10 15 20 - -------------- -------- -------- -------- $200,000....................................... $ 60,000 $ 90,000 $120,000 $300,000....................................... 90,000 135,000 180,000 $400,000....................................... 120,000 180,000 240,000 $500,000....................................... 150,000 225,000 300,000 $600,000....................................... 180,000 270,000 360,000 $700,000....................................... 210,000 315,000 420,000 $800,000....................................... 240,000 360,000 480,000 $900,000....................................... 270,000 405,000 540,000
For purposes of the retirement plans, Messrs. May, Ledgett, Gustin, Horan and Judge currently have 23, 18, 18, 21 and 21 years of credited service, respectively. Final average compensation for purposes of calculating the benefits under the supplemental executive retirement plan is the highest average annual compensation of the participant during any consecutive 36-month period. Compensation taken into account in calculating the benefits described above includes salary and annual bonus, including any amounts deferred under the terms of the deferred compensation plan. Mr. May can elect, and Mr. Ledgett receives, an alternative supplemental retirement benefit equal to 33% of final base salary annually for 15 years, which at the current level would provide Mr. Ledgett with approximately $7,000 in excess of the amounts shown in the table above. Change of Control Agreements Boston Edison Company has change of control agreements with various key employees, including those named in the Summary Compensation Table, which provide severance benefits in the event of specified terminations of employment following a change in control of Boston Edison. Events which constitute a change of control under these agreements are described below. If, following a change in control, the employee's employment is terminated without cause or the employee terminates employment for good reason, the employee receives severance pay in an amount equal to two times, three times in the case of Mr. May, the sum of annual base salary (at the rate in effect immediately prior to the date of termination or immediately before the change of control, whichever is higher) plus actual bonus paid in respect of the most recently completed fiscal year or target bonus for the fiscal year in which the termination occurs, whichever is higher. In addition, the change of 65 agreements provide for a pro rated bonus payment for the year in which the termination occurs, the immediate vesting of bonus awards, immediate payment of deferred compensation amounts upon the termination and payments equal to the benefit the employee would have received under Boston Edison Company's retirement plan assuming the executive was vested and remained employed for an additional two years, three years in the case of Mr. May. For two years, three years in the case of Mr. May, following termination of employment, the employee would be entitled to continue to participate in all welfare plans provided by Boston Edison Company. The change of control agreements further provide for a "gross-up" payment under which, if amounts paid under these agreements would be effectively reduced a federal excise tax on "excess parachute payments," Boston Edison Company will pay the employee an additional amount of cash, so that, after payment of all parachute taxes by the employee, the employee will have received the amount the employee would have received in the absence of any such tax. A change of control under these agreements generally includes the following events: (i) a person or group becomes the beneficial owner of more than 30% of the voting power of Boston Edison Company's securities; (ii) continuing directors cease to be a majority of the Boston Edison Company board; (iii) a consolidation, merger or other reorganization or sale or other disposition of all or substantially all of the assets of Boston Edison Company, other than certain defined transactions; or (iv) approval by the stockholders of a complete liquidation or dissolution of Boston Edison Company. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ (a) Security Ownership of Certain Beneficial Owners - ---------------------------------------------------- Boston Edison's common stock is wholly owned by BEC Energy. (b) Security Ownership of Management - ------------------------------------- No director or executive officer is the beneficial owner of Boston Edison's cumulative preferred stock. (c) Changes in Control - ----------------------- Not applicable. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- Not applicable. 66 Part IV ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------------------------------------------------------------------------- (a) The following documents are filed as part of this Form 10-K/A:
1. Financial Statements: Page ---- Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 28 Consolidated Statements of Retained Earnings for the years ended December 31, 1998, 1997 and 1996 28 Consolidated Balance Sheets as of December 31, 1998 and 1997 29 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 30 Notes to Consolidated Financial Statements 31 Selected Consolidated Quarterly Financial Data (Unaudited) 53 Report of Independent Accountants 74
2. Financial Statement Schedules: No financial statement schedules are included as they are either not required or not applicable. 3. Exhibits: Refer to the exhibits listing beginning on the following page. (b) Reports on Form 8-K: A Form 8-K dated November 23, 1998, was filed during the fourth quarter of 1998 disclosing that Entergy Nuclear Generating Company was selected as the winning bidder for the purchase of Pilgrim Station. 67
Exhibit SEC Docket ------- ---------- Exhibit 3 Articles of Incorporation and By-Laws - --------- ------------------------------------- Incorporated herein by reference: 3.1 Restated Articles of Organization 3.1 1-2301 Form 10-Q for the quarter ended June 30, 1994 3.2 Boston Edison Company Bylaws 3.1 1-2301 April 19, 1977, as amended Form 10-Q January 22, 1987, January 28, 1988, for the May 24, 1988 and November 22, 1989 quarter ended June 30, 1990 Exhibit 4 Instruments Defining the Rights of - --------- ---------------------------------- Security Holders, Including Indentures -------------------------------------- Incorporated herein by reference: 4.1 Medium-Term Notes Series A - Indenture 4.1 1-2301 dated September 1, 1988, between Form 10-Q Boston Edison Company and Bank of for the Montreal Trust Company quarter ended September 30, 1988 4.1.1 First Supplemental Indenture 4.1 1-2301 dated June 1, 1990 to Form 8-K Indenture dated September 1, 1988 dated with Bank of Montreal Trust Company - June 28, 1990 9 7/8% debentures due June 1, 2020 4.1.2 Indenture of Trust and Agreement among 4.1.26 1-2301 the City of Boston, Massachusetts Form 10-K (acting by and through its Industrial for the Development Financing Authority) and year ended Harbor Electric Energy Company and December 31, Shawmut Bank, N.A., as Trustee, dated 1991 November 1, 1991 4.1.3 Votes of the Pricing Committee of the 4.1.27 1-2301 Board of Directors of Boston Edison Form 10-K Company taken August 5, 1991 re for the 9 3/8% debentures due August 15, 2021 year ended December 31, 1991
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Exhibit SEC Docket ------- ---------- 4.1.4 Revolving Credit Agreement dated 4.1.24 1-2301 February 12, 1993 Form 10-K for the year ended December 31, 1992 4.1.4.1 First Amendment to Revolving Credit 4.1.10 1-2301 Agreement dated May 19, 1995 Form 10-K for the year ended December 31, 1995 4.1.4.2 Second Amendment to Revolving Credit 4.1.4.2 1-2301 Agreement dated July 1, 1997 Form 10-K for the year ended December 31, 1997 4.1.5 Votes of the Pricing Committee of the 4.1.25 1-2301 Board of Directors of Boston Edison Form 10-K Company taken September 10, 1992 re for the 8 1/4% debentures due September 15, 2022 year ended December 31, 1992 4.1.6 Votes of the Pricing Committee of the 4.1.26 1-2301 Board of Directors of Boston Edison Form 10-K Company taken January 27, 1993 re for the 6.80% debentures due February 1, 2000 year ended December 31, 1992 4.1.7 Votes of the Pricing Committee of the 4.1.27 1-2301 Board of Directors of Boston Edison Form 10-K Company taken March 5,1993 re for the 6.80% debentures due March 15, 2003, year ended 7.80% debentures due March 15, 2023 December 31, 1992 4.1.8 Votes of the Pricing Committee of the 4.1.28 1-2301 Board of Directors of Boston Edison Form 10-K Company taken August 18, 1993 re for the 6.05% debentures due August 15, 2000 year ended December 31, 1993
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Exhibit SEC Docket ------- ---------- 4.1.9 Votes of the Pricing Committee of the 4.1.9 1-2301 Board of Directors of Boston Edison Form 10-K Company taken May 10, 1995 re for the 7.80% debentures due May 15, 2010 year ended December 31, 1995
Management agrees to furnish to the Securities and Exchange Commission, upon request, a copy of any agreements or instruments defining the rights of holders of any long-term debt whose authorization does not exceed 10% of total assets.
Exhibit SEC Docket ------- ---------- Exhibit 10 Material Contracts - ---------- ------------------ Incorporated herein by reference: 10.1 Key Executive Benefit Plan 10.3.1 1-2301 Standard Form of Agreement, May Form 10-K 1986, with modifications for the year ended December 31, 1991 10.2 Executive Annual Incentive 10.5 1-2301 Compensation Plan Form 10-K for the year ended December 31, 1988 10.2.1 Supplemental Executive Retirement 10.1 1-2301 Plan Form 10-Q for the quarter ended June 30, 1997 10.2.2 1997 Stock Incentive Plan 10.2 1-2301 Form 10-Q for the quarter ended June 30, 1997
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Exhibit SEC Docket ------- ---------- 10.3 Boston Edison Company Deferred 10.11 1-2301 Fee Plan dated January 14, 1993 Form 10-K for the year ended December 31, 1992 10.4 Deferred Compensation Trust 10.10 1-2301 between Boston Edison Company Form 10-K and State Street Bank and for the Trust Company dated year ended February 2, 1993 December 31, 1992 10.4.1 Amendment No. 1 to Deferred 10.5.1 1-2301 Compensation Trust dated Form 10-K March 31, 1994 for the year ended December 31, 1994 10.5 Boston Edison Company Deferred 10.9 1-2301 Compensation Plan, Amendment and Form 10-K Restatement dated January 31, 1995 for the year ended December 31, 1994 10.6 Employment Agreement applicable to 10.10 1-2301 Ronald A. Ledgett dated April 30, 1987 Form 10-K for the year ended December 31, 1994 10.7 Change in Control Agreement applicable 10.2 1-2301 to Thomas J. May dated July 8, 1996 Form 10-Q for the quarter ended June 30, 1996 10.8 Form of Change in Control Agreement 10.3 1-2301 applicable to Ronald A. Ledgett, Form 10-Q L. Carl Gustin, Douglas S. Horan, for the James J. Judge and certain other quarter ended officers dated July 8, 1996 June 30, 1996
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Exhibit SEC Docket ------- ---------- 10.9 Boston Edison Company Restructuring 10.12 1-2301 Settlement Agreement dated July 1997 Form 10-K for the year ended December 31, 1997 10.10 Boston Edison Company and Sithe 10.1 1-2301 Energies, Inc. Purchase and Sale Form 10-Q and Transition Agreements dated for the December 10, 1997 quarter ended March 31, 1998 Filed herewith: 10.11 Boston Edison Company Directors' Deferred Fee Plan Restatement effective October 1, 1998 10.12 Boston Edison Company and Entergy Nuclear Generation Company Purchase and Sale Agreement dated November 18, 1998 Exhibit 12 Statement re Computation of Ratios - ---------- ---------------------------------- Filed herewith: 12.1 Computation of Ratio of Earnings to Fixed Charges for the Year Ended December 31, 1998 12.2 Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements for the Year Ended December 31, 1998 Exhibit 21 Subsidiaries of the Registrant - ---------- ------------------------------ 21.1 Harbor Electric Energy Company (incorporated in Massachusetts), a wholly owned subsidiary of Boston Edison Company
72
Exhibit SEC Docket ------- ---------- Exhibit 23 Consent of Independent Accountants - ---------- ---------------------------------- Filed herewith: 23.1 Consent of Independent Accountants to incorporate by reference their opinion included with this Form 10-K/A in the Form S-3 Registration Statement filed by Boston Edison Company on February 3, 1993 (File No. 33-57840) Exhibit 27 Financial Data Schedule - ---------- ----------------------- Filed herewith: 27.1 Schedule UT Exhibit 99 Additional Exhibits - ---------- ------------------- Incorporated herein by reference: 99.1 Settlement Agreement between Boston 28.1 1-2301 Edison Company and Commonwealth Form 8-K Electric Company, Montaup Electric dated Company and the Municipal December 21, Light Department of the Town of 1989 Reading, Massachusetts, dated January 5, 1990 99.2 Settlement Agreement Between Boston 28.2 1-2301 Edison Company and City of Holyoke Form 10-Q Gas and Electric Department et. al., for the dated April 26, 1990 quarter ended March 31, 1990 99.3 Information required by SEC Form 1-2301 11-K for certain employee benefit Form 10-K/A plans for the years ended Amendments to December 31, 1997, 1996 and 1995 Form 10-K for the years ended December 31, 1997, 1996 and 1995 dated June 25,1998, June 26, 1997 and June 27, 1996, respectively
73 SIGNATURE --------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BOSTON EDISON COMPANY By: /s/ Robert J. Weafer, Jr. ---------------------------------------- Robert J. Weafer, Jr. Vice President-Finance, Controller and Chief Accounting Officer Date: July 12, 1999 74 Report of Independent Accountants To the Stockholders and Directors of Boston Edison Company: In our opinion, the accompanying consolidated financial statements listed in Item 14(a) of this Form 10-K/A present fairly, in all material respects, the consolidated financial position of Boston Edison Company and its subsidiary at December 31, 1998 and 1997 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. These financial statements are the responsibility of management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts January 28, 1999 EX-10.11 2 BOSTON EDISON COMPANY DIRECTORS' DEFERRED FEE PLAN RESTATEMENT 1 Exhibit 10.11 BOSTON EDISON COMPANY DIRECTORS' DEFERRED FEE PLAN (Restated Effective October 1, 1998) 1. Purpose and Effective Date This Plan provides an arrangement whereby Outside Directors can elect to defer receipt of designated percentages or amounts of their retainers and meeting fees. This Plan also provides Outside Directors with nonelective Company credits. This Plan document constitutes an amendment, restatement and continuation of the Directors' Deferred Fee Plan, previously restated effective January 1, 1998. This Plan document, along with prior plan restatements replace the form of deferred fee agreement approved, authorized and adopted by the Board of Directors at its November 27, 1985 meeting and amended at its November 26, 1986 and August 24, 1989 meetings (agreements in such individual form being hereinafter referred to as the "Prior Agreements"). This Plan document also replaces the Outside Directors retirement benefit adopted by the Board of Directors at its meeting on April 6, 1993 and terminated effective as of September 30, 1998. This amended Plan is effective October 1, 1998. 2. Definitions (a) "Board of Directors" means the board of directors of the Company. (b) "Change of Control" has the meaning set forth in Appendix A. (c) "Code" means the Internal Revenue Code of 1986 as amended from time to time. 2 (d) "Company" means Boston Edison Company. (e) "Company Credit Account" means the Company credit account described in Section 7. (f) "Deferral Account" means the deferral account described in Section 6. (g) "Outside Director" means a member of the Board of Directors who is not an employee of the Company or any of its affiliates. Solely for purposes of elective deferrals under Section 4, "Outside Director" also means a member of the board of trustees of BEC Energy who is not an employee of BEC Energy or any of its affiliates. (h) "Participant" means an Outside Director who participates in the Plan. (i) "Plan" means Boston Edison Company Directors' Deferred Fee Plan as set forth herein and as from time to time amended. (j) "Plan Administrator" means the Board of Directors or other person or persons authorized to administer the Plan in accordance with Section 10. (k) "Retirement" means the termination of a Participant's service as a member of the Board of Directors (or as a member of the board of trustees of BEC Energy) other than by reason of death. (l) "Shares" means shares of BEC Energy. 3. Eligibility An Outside Director shall be eligible to participate in the Plan provided he or she completes such forms as the Plan Administrator may require. Effective as of January 1, 1990 amounts deferred pursuant to a Prior Agreement in respect of any person who is a Participant hereunder shall be payable from his or her Deferral Account under this Plan and not separately 3 under such Prior Agreement. To the extent a Prior Agreement would conflict with the terms and conditions of this Plan (including in such terms and conditions any election by the Participant in connection with enrollment in this Plan), the terms and conditions of this Plan shall control. 4. Elective Deferrals A Participant may elect to defer all or any portion of his or her retainers or other fees otherwise payable by the Company (or BEC Energy in the case of an Outside Director of BEC Energy) in or for a calendar year, subject to such minimum deferral amounts as the Plan Administrator may prescribe prior to the start of such calendar year. 5. Deferral Elections A Participant's election of deferral under Section 4 shall be in such form and subject to such terms and conditions as the Plan Administrator shall prescribe. The election of deferral must be filed prior to the first day of the "Deferral Period" as hereinafter defined. Each election shall specify the percentage or amount of the Participant's retainers or other fees to be credited to his or her Deferral Account instead of being paid currently to the Participant, and the payment period (including a single lump-sum payment if so elected) for the distribution in respect of such deferral. Each election shall be binding with respect to the retainers and other fees for such period (not less than one year) as the Plan Administrator shall specify (the "Deferral Period") and shall be irrevocable after January 1 of the calendar year to which it applies, or in the case of a Deferral Period of more than one year, January 1 of the first calendar year to which it applies. 4 6. Deferral Account The Plan Administrator shall maintain a Deferral Account on the books and records of the Company for each Participant as follows: (a) Opening Balance. If the Participant has deferred retainers or --------------- fees prior to January 1, 1990 pursuant to one or more Prior Agreements, the Plan Administrator shall credit to the Deferral Account for the Participant the amount credited to the Participant's account or accounts determined as of December 31, 1989 under such Prior Agreements. (b) Deferrals. For each deferral election made by the Participant in --------- respect of periods on and after January 1, 1990, the Plan Administrator shall credit to the Participant's Deferral Account the amounts of retainers or other fees, as applicable, which the Participant has elected to defer. In each case credits shall be made as of the dates the retainers or other fees would have been payable if not deferred. (c) Investment Measurements. From time to time the Company will ----------------------- establish investment measurements to be used to adjust the balance of each Participant's Deferral Account. Such investment measurements may be changed from time to time by the Company. The Plan Administrator may establish rules and procedures to permit Participants to select notational investments for their respective Deferral Accounts from among available investment measurements. From time to time, as determined by the Plan Administrator, each Participant's Deferral Account will be adjusted to reflect such investment measurements. 7. Company Credit Account Effective as of October 1, 1998 the Plan Administrator shall maintain a Company Credit Account on the books and records of the Company for each Participant as follows: 5 (a) Opening Balance. If a Participant was entitled to a retirement --------------- benefit from the Company prior to October 1, 1998, the Plan Administrator shall credit to the Company Credit Account for the Participant an amount equal to the lump sum actuarial equivalent value of such retirement benefit determined by the Company in its sole discretion as of September 30, 1998. (b) Company Credits. As of October 1, 1998, and as of each April 1 --------------- and October 1, thereafter, provided the Participant is an Outside Director on such date, the Plan Administrator will credit to the Participant's Company Credit Account the amount of $10,000, or such other amount as the Company shall determine. (c) Investment Measurement. The sole investment measurement for ---------------------- determining the value of the Participant's Company Credit Account shall be the value of Shares which could be purchased (or which are purchased) with Company Credits as soon as possible following the date of such Credits. Any dividends on such Shares will be reinvested or deemed reinvested in such Shares. In such manner and at such time as the Plan Administrator shall determine, each Participant's Company Credit Account will be adjusted to reflect such investment measurement. The Company may, but shall not be required to, purchase Shares to satisfy its obligations to Participants under this paragraph. If such Shares are purchased, the Company may, in its discretion and subject to such limitations as it may determine, permit a Participant to exercise voting rights with respect to Shares allocated to his or her Company Credit Account. 8. Commencement of Distributions; Payment Periods (a) Inservice Distributions. At the time the Participant makes an ----------------------- election of deferral under Section 4, and subject to the conditions of this Section, a Participant may also elect to 6 receive a lump sum payment from his or her Deferral Account of all or a specified portion of the amount attributable to such deferral on a fixed date prior to the Participant's Retirement (hereinafter referred to as the "initial fixed date"). Such initial fixed date must be at least five years after the date of such deferral. In addition, at least two years prior to the initial fixed date, a Participant may elect to defer payment of such amount to a later fixed date (hereinafter referred to as the "subsequent fixed date") which must be at least three years after the initial fixed date. Furthermore, at least two years prior to the subsequent fixed date, a Participant may elect to defer payment of such amount until his or her Retirement. The rules and procedures for such elections will be promulgated by the Plan Administrator. All elections under this Section 8(a) require the consent of the Company to become effective. No portion of a Participant's Company Credit Account may be paid under this Section 8(a). (b) Retirement. Upon the Participant's Retirement, the Participant ---------- shall be entitled to receive the balance in each of his or her Deferral Accounts and his or her Company Credit Account. The Participant's Deferral Account shall be payable as the Participant shall have specified in his or her election of deferral from among the lump sum and installment options prescribed by the Plan Administrator and, if payment is made other than in an immediate lump sum, shall be adjusted to reflect the investment measurements in such manner as the Plan Administrator shall prescribe. The Participant's Company Credit Account shall be payable in a lump sum. Payment of the Participant's Company Credit Account shall be in the form of Shares (plus cash for any fractional shares). Payment of Deferral Accounts and Company Credit Accounts shall be made or commence on the first day of the calendar quarter following Retirement or as soon as practicable thereafter. 7 (c) Death. If the Participant dies prior to the payment or ----- commencement of payment of his or her Deferral Account or Company Credit Account as described in Section 8(b), the Participant's designated beneficiary or beneficiaries shall be entitled to receive the balance in the Participant's Deferral Account and Company Credit Account as of the date of death. Payments shall be made in a lump sum on the first day of the second month following the month in which the Participant dies or as soon as practicable thereafter. Payment of a Participant's Company Credit Account shall be in the form of Shares (plus cash for any fractional shares). If the Participant dies after payment of his or her Deferral Account has commenced to be paid in installments but prior to the exhaustion of such Account, payment of the remaining balance of such Account (adjusted as provided in Section 8(b)) shall continue to the Participant's designated beneficiary or beneficiaries over the installment period selected by the Participant. Designation of a beneficiary or beneficiaries for purposes of the Plan shall be made on a form and in a manner prescribed or approved by the Plan Administrator. If no beneficiary has been designated, payment due under this Section will be made to the Participant's estate. 9. Emergency Benefit If a Participant suffers a financial emergency, upon the written request of the Participant, the Plan Administrator, in its sole discretion, may distribute that portion of the Participant's Deferral Account, if any, which it determines to be necessary to meet the immediate financial emergency. A financial emergency shall include major uninsured medical expense, major uninsured casualty or property losses, and such other financial emergencies as the Plan Administrator may, in its sole discretion, determine, provided that the Participant 8 demonstrates to the Plan Administrator's satisfaction that he or she lacks available resources to meet the emergency. Any such distribution shall reduce the balance in the Participant's Deferral Account available for distribution in accordance with Section 8. No portion of a Participant's Company Credit Account may be paid under this Section 9. 10. Administration of the Plan For purposes of prescribing the forms and conditions for deferral elections under Section 5 and inservice distributions under Section 8(a) (or other forms required to administer the Plan), and for purposes of Sections 6 and 7, the functions of the Plan Administrator shall be performed by the Chief Financial Officer of the Company in his or her sole discretion or by his or her delegates. All other administrative and interpretative functions under the Plan shall be vested in the sole discretion of the Board of Directors. A decision by the Plan Administrator shall be final, conclusive and binding on all Participants and any person claiming under or through any Participant. The Plan Administrator shall exercise its functions hereunder in such manner as it deems appropriate and may, in its discretion, waive the application of any rule to any Participant. The Plan Administrator shall have no responsibility to exercise its discretion in a uniform manner among similarly situated Participants, and no decision with respect to any Participant shall give any other Participant the right to have the same decision applied to him or her. The Plan Administrator shall have all powers necessary or appropriate to discharge its duties and responsibilities under the Plan. 11. Nature of Claim for Payments Except as herein provided, the Company shall not be required to set aside or segregate any assets of any kind to meet any of its obligations hereunder, and all obligations of the 9 Company shall be reflected by book entries only. The Participant shall have no rights on account of this Plan in or to any specific assets of the Company. Any rights that the Participant may have on account of this Plan shall be those of a general, unsecured creditor of the Company. However, the Company may establish a trust of which the Company is treated as the owner under Subpart E of Subchapter J, Chapter 1 of the Code (a "grantor trust"), and may from time to time deposit funds (which funds shall be in the form of Shares with respect to a Participant's Credit Account) in such trust to facilitate payment of the benefits provided under the Plan. In the event the Company establishes such a grantor trust with respect to the Plan and, at the time of a Change of Control, such trust (i) has not been terminated or revoked and (ii) is not "fully funded" (as hereinafter defined), the Company shall within ten days of such Change of Control deposit in such grantor trust assets sufficient to cause the trust to be "fully funded" as of the date of the deposit. For purposes of this paragraph, the grantor trust shall be deemed "fully funded" as of any date if, as of that date, the fair market value of the assets held in trust with respect to this Plan (such fair market value to include, in the case of any insurance policy or contract held in the trust, only that amount which can be promptly realized in cash through borrowing under the policy or contract) is not less than the sum of the Deferral Account balances and the Company Credit Account balances as of that date, including without limitation the remaining balance in any Deferral Account in pay status that has not been fully distributed. If, prior to the Change of Control, the Company has deposited in such grantor trust amounts estimated to be sufficient to cause the trust to be "fully funded," the Company shall be under no obligation following the Change of Control to deposit additional amounts in trust. 10 In the event a grantor trust is established and, following a Change of Control, the Company obtains an opinion of counsel acceptable to itself and to the trustee of such trust that amounts held by the grantor trust with respect to the Plan would by reason of the existence of such trust be includible in the income of Participants prior to distribution, and as a result thereof the grantor trust is terminated, all Deferral Accounts and Company Credit Accounts, to the extent of the assets then held in such trust, shall become payable in the form of lump sum distributions. 12. Rights Are Non-Assignable Neither the Participant nor any beneficiary nor any other person shall have any right to assign or otherwise alienate the right to receive payments hereunder, in whole or in part, which payments are expressly agreed to be non- assignable and non-transferable, whether voluntarily or involuntarily. 13. Termination; Amendment The Plan shall continue in effect until terminated by action of the Board of Directors. Upon termination of the Plan, no deferral of retainers or other fees thereafter paid or payable to a Participant shall be made, no additional Company credits shall be made to the Participant's Company Credit Account, and no individual not a Participant as of the date of termination shall become a Participant thereafter. If, at the time of termination, there is any Participant or beneficiary of a Participant who is or will be entitled to a payment hereunder, the Plan Administrator shall elect either (a) to make payments to such Participants or beneficiaries in the normal course as if the Plan had continued in effect, or (b) to pay to such Participants or 11 beneficiaries the balance in the Participants' Deferral Accounts and Company Credit Account in a single lump sum payment. The Board of Directors may at any time and from time to time amend the Plan in any manner; provided that no such amendment shall reduce the amounts previously credited to the Deferral Accounts or Company Credit Account of any Participant, and provided, further, that no amendment following a Change of Control shall eliminate or reduce the Company's obligation to deposit assets in the grantor trust as described in Section 11. BOSTON EDISON COMPANY By: /s/ Alison Alden ------------------------------ Alison Alden Date: September 22, 1998 ------------------ 12 APPENDIX A ---------- "Change of Control" ------------------- A "Change of Control" will occur for purposes of this Plan if (i) any individual, corporation, partnership, company or other entity (a "Person"), which term shall include a group, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of securities of the Company representing more than 30% of the combined voting power of the Company's then-outstanding securities (other than as a result of acquisitions of such securities from the Company), (ii) there is a change of control of the Company of a kind which would be required to be reported under Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act) (or a similar item in a similar schedule or form), whether or not the Company is then subject to such reporting requirement, (iii) the Company is a party to, or the stockholders approve, a merger, consolidation, or other reorganization (other than (a) a merger, consolidation or other reorganization which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent, either by remaining outstanding or by being converted into vested securities of the surviving entity, more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger, consolidation, or other reorganization, or (b) a merger, consolidation, or other reorganization effected to implement a recapitalization of the Company or establish a holding company structure, or similar transaction in which no Person acquires more than 20% of the combined voting power of the Company's then outstanding securities, a sale of all or substantially all assets, or a plan of liquidation or (iv) individuals who, at the date hereof, constitute the Board cease for any reason to constitute a majority thereof; PROVIDED, HOWEVER, that any director who is not in office at the date hereof but whose election by the Board or whose nomination 13 for election by the Company's stockholders was approved by a vote of at least a majority of the directors then still in office who either were directors at the date hereof or whose election or nomination for election was previously so approved (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be deemed to have been in office at the date hereof for purpose of this definition. Notwithstanding the foregoing provisions of this APPENDIX A, a "Change of Control" will not be deemed to have occurred solely because of the acquisition of securities of the Company (or any reporting requirement under the Exchange Act relating thereto) by an employee benefit plan maintained by the Company for its employees. EX-10.12 3 BOSTON EDISON COMPANY AND ENTERGY NUCLEAR GENERATION COMPANY PURCHASE AND SALE AGREEMENT Exhibit 10.12 PURCHASE AND SALE AGREEMENT FOR PILGRIM NUCLEAR POWER STATION AND RELATED AGREEMENTS BOSTON EDISON COMPANY ENTERGY NUCLEAR GENERATION COMPANY COMMONWEALTH ELECTRIC COMPANY MONTAUP ELECTRIC COMPANY VOLUME 1 of 2 NOVEMBER 18, 1998 BOSTON EDISON COMPANY and ENTERGY NUCLEAR GENERATION COMPANY NOVEMBER 18, 1998 INDEX ----- Volume 1 of 2 ------------- SUBJECT TAB ------- --- Purchase and Sale Agreement: Boston Edison Company - Entergy Nuclear 1 Generation Company Exhibits to P&S 2 Deeds A Bill of Sale B Assignment and Assumption Agreement C Asset Demarcation Agreement D Property Tax Agreement E Chapter 61 Affidavit F Interconnection and Operation Agreement G Schedules to P&S 3 Guaranty: Entergy International Holdings LLC 4 Volume 2 of 2 ------------- Interconnection and Operation Agreement: Boston Edison Company - 5 Entergy Nuclear Generation Company Power Purchase Agreement: Entergy Nuclear Generation Company - 6 Boston Edison Company Power Purchase Agreement with respect to Municipal Customers: Entergy 7 Nuclear Generation Company - Boston Edison Company Power Purchase Agreement: Entergy Nuclear Generation Company - 8 Commonwealth Electric Company Power Purchase Agreement: Entergy Nuclear Generation Company - 9 Montaup Electric Company Fourth Amendment of Power Sale Agreement: Boston Edison Company - 10 Commonwealth Electric Company Third Amendment of Power Sale Agreement: Boston Edison - Montaup 11 Electric Company Partial Assignment of Municipal Power Sale Agreements: Entergy Nuclear 12 Generation Company - Boston Edison Company 001 EXECUTION COPY -------------- - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- PURCHASE AND SALE AGREEMENT BETWEEN ENTERGY NUCLEAR GENERATION COMPANY AND BOSTON EDISON COMPANY November 18, 1998 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- 002 TABLE OF CONTENTS Page 1. Preamble .......................................................... 1 -------- 2. Acquisition of Assets by Buyer .................................... 1 ------------------------------ 2.1. Purchase and Sale of Assets ................................ 1 --------------------------- 2.2. Excluded Assets ............................................ 3 --------------- 2.3. Assumption of Liabilities .................................. 4 ------------------------- 2.4. Liabilities Not Assumed .................................... 5 ----------------------- 2.5. Purchase Price ............................................. 6 -------------- 2.6. Adjustment to Purchase Price ............................... 7 ---------------------------- 2.7. Allocation of Purchase Price ............................... 9 ---------------------------- 2.8. Proration .................................................. 10 --------- 2.9. The Closing ................................................ 11 ----------- 2.10. Deliveries by the Seller at the Closing .................... 11 --------------------------------------- 2.11. Deliveries by Buyer at the Closing ......................... 13 ---------------------------------- 3. Representations, Warranties and Disclaimers of the Seller ......... 14 --------------------------------------------------------- 3.1. Organization of the Seller ................................. 14 -------------------------- 3.2. Authorization of Transaction ............................... 14 ---------------------------- 3.3. Noncontravention ........................................... 14 ---------------- 3.4. Brokers' Fees .............................................. 15 ------------- 3.5. Title to Acquired Assets ................................... 15 ------------------------ 3.6. Legal and Other Compliance ................................. 15 -------------------------- 3.7. Taxes ...................................................... 15 ----- 3.8. Contracts and Leases ....................................... 15 -------------------- 3.9. Insurance .................................................. 16 --------- 3.10. Litigation ................................................. 16 ---------- 3.11. Employees .................................................. 16 --------- 3.12. Environmental Matters ...................................... 17 --------------------- 3.13. Condemnation ............................................... 17 ------------ 3.14. Regulation as a Utility .................................... 17 ----------------------- 3.16. Operability ................................................ 17 ----------- 3.17. NRC Generic Letter 98-01 ................................... 17 ------------------------ 3.18. Disclaimers Regarding Acquired Assets ...................... 17 ------------------------------------- -i- 003 4. Representations and Warranties of the Buyer ....................... 18 ------------------------------------------- 4.1. Organization of the Buyer .................................. 18 ------------------------- 4.2. Authority of Transaction ................................... 18 ------------------------ 4.3. Noncontravention ........................................... 19 ---------------- 4.4. Brokers' Fees .............................................. 19 ------------- 4.5. Litigation ................................................. 19 ---------- 4.6. No Knowledge of the Seller's Breach ........................ 19 ----------------------------------- 4.7. "As Is Sale" ............................................... 20 ------------ 4.8. Qualified Buyer ............................................ 20 --------------- 5. Covenants ......................................................... 20 --------- 5.1. General .................................................... 20 ------- 5.2. Notices, Consents and Approvals ............................ 20 ------------------------------- 5.3. Operation of Business During Interim Period ................ 22 ------------------------------------------- 5.4. Access and Investigations During Interim Period ............ 23 ----------------------------------------------- 5.5. Interim Period Notice ...................................... 25 --------------------- 5.6. Further Assurances ......................................... 26 ------------------ 5.7. Employee Matters ........................................... 28 ---------------- 5.8. Cooperation after Closing .................................. 30 ------------------------- 5.9. NEPOOL ..................................................... 31 ------ 5.10. Risk of Loss ............................................... 32 ------------ 5.11. Remittance of Pilgrim Fixed Operating Costs ................ 33 ------------------------------------------- 5.12. Nuclear Insurance .......................................... 33 ----------------- 5.13. Nonwaiver of Third Party Environmental Liabilities ......... 34 -------------------------------------------------- 5.14. Site Contamination Validation .............................. 34 ----------------------------- 5.15. Remediation ................................................ 34 ----------- 5.16. Refueling Costs ............................................ 34 --------------- 5.17. Post-Closing Services ...................................... 35 --------------------- 5.18. Gas Supply Line ............................................ 35 --------------- 5.19. Maintenance of Financial Stability ......................... 35 ---------------------------------- 5.20. Availability of Funds ...................................... 35 --------------------- 5.21. Funding of the Decommissioning Trust and the Provisional -------------------------------------------------------- Trust ................................................... 35 ----- 5.22. Early Shutdown Study ....................................... 37 ------------------- 6. Conditions to Obligation to Close ................................. 37 --------------------------------- 6.1. Conditions to Obligation of the Buyer to Close ............. 37 ---------------------------------------------- 6.2. Conditions to Obligation of the Seller to Close ............ 39 ----------------------------------------------- 7. Confidentiality ................................................... 41 --------------- 8. Taxes ............................................................. 43 ----- -ii- 004 9. Non-Survival; Effect of Closing and Indemnification ............... 43 --------------------------------------------------- 9.1. Non-Survival of Representations and Warranties; Survival -------------------------------------------------------- of Covenants and Agreements ............................. 43 -------------------------- 9.2. Effect of Closing .......................................... 43 ----------------- 9.3. Indemnity by the Seller .................................... 44 ----------------------- 9.4. Indemnity by Buyer ......................................... 44 ----------------- 9.5. Exclusive Remedy ........................................... 45 ---------------- 9.6. Matters Involving Third Parties ............................ 45 ------------------------------- 9.7. Net of Taxes and Insurance ................................. 46 -------------------------- 9.8. Release .................................................... 46 ------- 9.9. No Recourse ................................................ 47 ----------- 9.10. Survival ................................................... 47 -------- 10. Termination ....................................................... 47 ----------- 10.1. Termination of Agreement ................................... 47 ------------------------ 10.2. Effect of Termination ...................................... 49 --------------------- 11. Miscellaneous ..................................................... 49 ------------- 11.1. Press Releases and Public Announcements .................... 49 --------------------------------------- 11.2. No Third Party Beneficiaries ............................... 49 ---------------------------- 11.3. No Joint Venture ........................................... 49 ---------------- 11.4. Entire Agreement ........................................... 49 ---------------- 11.5. Succession and Assignment .................................. 49 ------------------------- 11.6. Counterparts ............................................... 50 ------------ 11.7. Headings ................................................... 50 -------- 11.8. Notices .................................................... 50 ------- 11.9. Governing Law .............................................. 51 ------------- 11.10. Change in Law .............................................. 51 ------------- 11.11. Consent to Jurisdiction .................................... 51 ----------------------- 11.12. Amendments and Waivers ..................................... 51 ---------------------- 11.13. Severability ............................................... 52 ------------ 11.14. Expenses ................................................... 52 -------- 11.15. Construction ............................................... 52 ------------ 11.16. Incorporation of Exhibits and Schedules .................... 52 --------------------------------------- 11.17. Specific Performance ....................................... 52 -------------------- 11.18. Dispute Resolution ......................................... 52 ------------------ 11.19. Bulk Transfer Laws ......................................... 53 ------------------ 12. Definitions ....................................................... 53 ----------- -iii- 005 Exhibits -------- A - Deed B - Bill of Sale C - Assignment and Assumption Agreement D - Asset Demarcation Agreement E - Property Tax Agreement F - Chapter 61 Affidavit G - Interconnection and Operation Agreement Schedules --------- Schedule 1.1 - Easements Schedule 2.1 - Pilgrim and Chiltonville Training Center Schedule 2.1(a) - Real Property Schedule 2.1(b) - Personal Property Schedule 2.1(c) - Leases Schedule 2.1(d) - Transferable Permits Schedule 2.1(e) - Material Contracts Schedule 2.1(g) - Names of Facilities Schedule 2.1(l)(i) - Emergency Preparedness Equipment Schedule 2.1(l)(ii) - Emergency Preparedness Agreements Schedule 2.1(m) - Vehicles -iv- 006 Schedule 2.1(o) - Intellectual Property Schedule 2.2(a) - Excluded Assets Schedule 2.2(d) - Municipal Contract Customers Schedule 2.10(k) - Matters for Opinion from Counsel to the Seller Schedule 2.11(j) - Matters for Opinion from Counsel to the Buyer Schedule 3.3 - Matters of Contravention Schedule 3.5 - Title Commitments Schedule 3.6 - Compliance Schedule 3.9 - Insurance Schedule 3.10 - Litigation Schedule 3.11 - Labor Matters Schedule 3.12 - Environmental Schedule 3.13 - Condemnation Schedule 3.15(a) - Trust Agreement Schedule 4.3 - Noncontravention Schedule 5.3 - Pre-Approved Projects Schedule 5.12 - Nuclear Insurance Schedule 5.14(a) - Criteria for Site Assessment Schedule 5.15 - Known Remediation Concerns Schedule 5.17 - Post-Closing Services Schedule 5.21 - Funding of the Decommissioning Trust and the Provisional Trust -v- 007 Schedule 6.1(c) - Buyer's Regulatory Approvals Schedule 6.2(c) - Seller's Regulatory Approvals -vi- 7a PURCHASE AND SALE AGREEMENT 1. Preamble -------- This Purchase and Sale Agreement (the "Agreement") is entered into on November 18, 1998, by and between Entergy Nuclear Generation Company, a Delaware corporation (the "Buyer"), and Boston Edison Company, a Massachusetts corporation (the "Seller"). The Buyer and the Seller are each referred to herein as a "Party" or, collectively, as the "Parties." This Agreement contemplates a transaction in which the Buyer will purchase certain assets of the Seller (as defined in Section 2.1 below) in consideration of the Purchase Price (as defined in Section 2.5 below). Now, therefore, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties, and covenants herein contained, the Parties agree as follows: 2. Acquisition of Assets by Buyer. ------------------------------ 2.1. Purchase and Sale of Assets. The Seller agrees to sell, --------------------------- assign and transfer to the Buyer, and the Buyer agrees to purchase from the Seller at the Closing, subject to and upon the terms and conditions contained herein, free and clear of any Lien, all of the right, title and interest in and to the following properties and assets constituting, or used in and necessary for the operation of, the Facilities (collectively, the "Acquired Assets"): (a) the real property and Improvements thereon as described in Schedule 2.1(a), subject to and only to the extent provided in the Title Commitments and the exceptions listed therein (the "Real Property"); (b) the machinery, equipment, furniture and other personal property owned by the Seller and located at the Site at the Closing Date, and Inventories, including without limitation all Radioactive Material owned by the Seller and the items of personal property described on Schedule 2.1(b) (including the telephone switch and related equipment currently under lease described therein, which shall be bought out by Seller prior to the Closing, subject to the purchase price adjustment set forth in Section 2.6) as well as all warranties from manufacturers or vendors relating thereto, to the extent that such warranties are transferable without any further action by the Seller; (c) all assignable rights with respect to leasehold interests and subleases and rights thereunder relating to the Real Property, including without limitation those as set forth on Schedule 2.1(c) (the "Leases"); 008 (d) all Permits relating to ownership or operation of the Facilities which are transferable by the Seller to the Buyer by assignment, or which will pass to the Buyer as successor in title to the Facilities by operation of law, including without limitation those as set forth on Schedule 2.1(d) (the "Transferable Permits"); (e) except as provided in Section 2.2(e) and Section 2.10(g), all rights of the Seller under the contracts, agreements, software licenses and personal property leases relating to the operation of Facilities described in Schedule 2.1(e) (the "Material Contracts"), provided that Seller shall retain the rights held by it prior to the Closing under any document expressly providing it continued indemnity and exculpation rights for pre-Closing occurrences for which it remains liable and for which Seller indemnifies Buyer under this Agreement; (f) all books, records, engineering designs, blueprints, as-built plans, specifications, procedures, studies, reports and equipment repair, safety, maintenance or service records of the Seller relating specifically to the design, construction, licensing, regulation, operation or decommissioning of the Facilities, but expressly excluding financial records and books of account; (g) all rights of the Seller in and to the use of the names of the Facilities as described in Schedule 2.1(g); (h) all right, title and interest (legal or beneficial) of the Seller in the Decommissioning Trust and the Provisional Trust (if any); (i) all right, title and interest of the Seller to the NRC License; (j) all right, title and interest of the Seller in Nuclear Fuel and Spent Nuclear Fuel on the Closing Date; (k) all rights to the Seller's Nuclear Electric Insurance Limited Accounts as provided in Schedule 5.12 and Section 2.5(b); (l) all right, title and interest of the Seller in the property and assets used or usable in providing emergency warning or associated with emergency preparedness, as set forth in Schedule 2.1(l)(i) (the "Emergency Preparedness Equipment") and all rights of the Seller that the Seller has the right to transfer under the contracts and agreements associated with emergency preparedness as set forth in Schedule 2.1(l)(ii) (the "Emergency Preparedness Agreements"); (m) all right, title and interest of the Seller in the vehicles as set forth in Schedule 2.1(m) that the Buyer notifies the Seller prior to the Closing that it desires to purchase subject to the purchase price adjustment as provided in Section 2.6 (the "Vehicles"); -2- 009 (n) any rights of Seller under purchase orders, licenses or contracts that are not Material Contracts but that are identified by the parties during the Interim Period and mutually agreed in writing to be an obligation to be assigned to and assumed by Buyer; (o) all trade secrets, copyrights, patents, trademarks or other intellectual property rights of Seller developed or owned by Seller exclusively in connection with the operation of the Facilities, including without limitation all rights to the Seller-owned software applications listed on Schedule 2.1(o) (collectively, the "Intellectual Property"); provided that Seller shall have no obligation following the Closing to provide Buyer with any updates, maintenance or technical support with respect to the Intellectual Property; and provided further that Seller shall retain an irrevocable, perpetual and fully paid-up license to use the Intellectual Property; (p) the right to use the drawings, designs, specifications and other documents necessary for the licensing, operation and decommissioning of the Facilities; (q) American Nuclear Insurers (ANI) nuclear liabilities policies and reserve premium to the extent provided in Schedule 5.12; (r) the Seller's VEBA assets to the extent and at the time provided in Section 5.7; and (s) the Transferred Voting Shares. 2.2. Excluded Assets. Notwithstanding anything to the contrary in --------------- this Agreement, there shall be excluded from the Acquired Assets to be sold, assigned, transferred, conveyed or delivered to the Buyer hereunder, and to the extent in existence on the Effective Date or on the Closing Date, there shall be retained by the Seller, any and all right, title or interest to the following assets, properties and rights (collectively, the "Excluded Assets"): (a) the property comprising or constituting any or all of the T&D and Telecommunications Assets; (b) all Cash, accounts and notes receivable, checkbooks and canceled checks, bank deposits and property or income tax receivables (except for property tax abatements to be apportioned pursuant to Section 2.8(b); (c) all contracts, instruments or other agreements between the Seller and each of Commonwealth Electric and Montaup relating to the sale by the Seller of electric capacity or energy under wholesale rates, or otherwise subject to regulation by the FERC (the "Wholesale Power Contracts"); -3- 010 (d) all contracts, instruments or other agreements between the Seller and the municipalities set forth on Schedule 2.2(d) relating to the sale by the Seller of electric capacity or energy under wholesale rates, or otherwise subject to regulation by the FERC (the "Municipal Contracts"); (e) all rights of the Seller in and to any causes of action against a Third Party relating to any period through the Closing Date, whether received as a payment or credit against future liabilities, including without limitation any refunds relating to property Taxes paid by the Seller for any period prior to the Closing Date (except for property tax abatements to be apportioned pursuant to Section 2.8(b)), insurance proceeds and condemnation awards; provided that Seller shall not institute or settle any such cause of action that would have a Buyer Material Adverse Effect; (f) all rights of the Seller to the words "BECo" and "Boston Edison Company" and any Trademark which is comprised of or comprises any derivative thereof; and (g) any claims of Seller related or pertaining to the Department of Energy's defaults under the DOE Standard Contract accrued as of the Closing Date, whether relating to periods prior to or following the Closing Date. 2.3. Assumption of Liabilities. On the terms and subject to the ------------------------- conditions set forth herein, from and after the Closing, the Buyer will assume and satisfy or perform all of the following Liabilities of the Seller (the "Assumed Liabilities"): (a) all Environmental Liabilities and Remediations, except as and to the extent set forth in Section 2.4(b) and subject to Seller's prior Remediations as required by Section 5.15 below; (b) only to the extent all rights under such agreements and permits are assigned to Buyer, all Liabilities under (i) the Material Contracts, Leases, Emergency Preparedness Agreements and the Transferable Permits in accordance with the terms thereof, (ii) the other contracts, leases and other agreements entered into by the Seller with respect to the Acquired Assets that are identified in accordance with Section 2.1(n), and (iii) the contracts, leases, commitments and other agreements entered into by the Seller with respect to the Acquired Assets during the Interim Period relating to Pre- Approved Projects or Required Nuclear Expenditures; except in each case, to the extent such Liabilities, but for a breach or default by the Seller, would have been paid, performed or otherwise discharged on or prior to the Closing Date, or to the extent the same arise out of any such breach or default; (c) all Liabilities under the Permitted Encumbrances, except as excluded pursuant to Section 2.4(i); -4- 011 (d) all Liabilities for which the Buyer is responsible under Section 5.7 relating to Employees; (e) all Liabilities of the Seller in respect of (i) the decommissioning of PNPS following permanent cessation of operations, (ii) the management, storage, transportation and disposal of Spent Nuclear Fuel, and (iii) any other post-operative disposition of PNPS or any other of the Acquired Assets; (f) all Liabilities from and after the Closing Date relating to the Decommissioning Trust and the Provisional Trust (if any), including the obligation of due and punctual performance of all of the covenants and conditions in the Trust Agreement and the Provisional Trust Agreement (if any); (g) any Liability of Seller for any Price-Anderson Secondary Financial Protection retrospective premium obligations for (i) Seller's nuclear worker liability attributable to employment prior to Closing or (ii) for any third- party nuclear Liability arising out of any pre-Closing occurrence; (h) all Liabilities under the NRC License including fees or charges imposed after the Closing Date by the NRC or any other Governmental Authority; (i) all other Liabilities expressly allocated to the Buyer in this Agreement or in any of the Related Agreements, including, without limitation, any Liabilities for Taxes allocated to the Buyer pursuant to Section 8; and (j) all Liabilities of Seller for retrospective premium obligations under Seller's Nuclear Electric Insurance Limited policies, subject to the conditions set forth in Schedule 5.12. 2.4. Liabilities Not Assumed. Notwithstanding any provision hereof ----------------------- to the contrary, the Buyer shall not assume, pay or perform any Liabilities of Seller that are not expressly identified as an Assumed Liability, including, without limitation, the following excluded liabilities: (a) any Liability in respect of the Excluded Assets or any other assets of the Seller that are not Acquired Assets; (b) any Liabilities, including without limitation any Environmental Liabilities, relating to the disposal, storage, transportation, discharge, Release, recycling, or the arrangement for such activities, by the Seller, of Hazardous Substances that were generated at the Site, at any Offsite Hazardous Substance Facility or at another location that is not the Site (other than as a result of migration from the Site), where the disposal, storage, transportation, discharge, Release or recycling occurred on or prior to the Closing Date; -5- 012 (c) any Liability of the Seller arising from the making or performance of this Agreement or a Related Agreement or the transactions contemplated hereby or thereby; (d) any Liability arising out of any Employee Benefit Plan established or maintained by the Seller or to which the Seller contributes or any Liability for the termination of any such plan; (e) any Liability arising out of the Wholesale Power Contracts and any Liability of the Seller arising out of the Power Purchase Agreements; (f) any Liability to make payments in addition to or in lieu of property Taxes under Section 71 of the Act, including any liability under any agreements entered into by the Seller regarding such payments ("Section 71 Transition Payments"), whether such agreements are entered into prior to, on or after the Closing, and any Liability in respect of Taxes attributable to the Acquired Assets for taxable periods ending on or before the Closing Date, except those Taxes expressly allocated to the Buyer pursuant to Section 8; (g) any Liability arising out of the Municipal Contracts; (h) any Liabilities of Seller for wages, withholding obligations, workers compensation, overtime, severance, employment taxes or similar obligations accruing on or prior to the Closing Date and all Liabilities for which the Seller is responsible under Section 5.7 relating to Employees; (i) any Liabilities arising from Seller's breach on or prior to the Closing Date of any contract, license, permit or other instrument relating to the Acquired Assets; and (j) all Liabilities of the Seller for assessments for enrichment decommissioning and decontamination fund fees under 42 USC Section 2297g-1. 2.5. Purchase Price. -------------- (a) The Buyer agrees to assume at the Closing the Assumed Liabilities and pay to the Seller at the Closing an aggregate amount equal to $ 80,000,000 (the "Purchase Price"). Such Purchase Price shall be adjusted pursuant to Section 2.6 and shall be payable in cash by wire transfer to the Seller in accordance with written instructions of the Seller given to the Buyer at least three (3) Business Days prior to the Closing. The Buyer's agreement to assume the Assumed Liabilities and pay the Purchase Price to the Seller is expressly premised upon the Seller's delivery of a Fully Funded Decommissioning Trust pursuant to Section 2.1(h), the conditions of Section 6.1 and the Seller's delivery of the Seller's VEBA assets to the extent and at the time provided in Section 5.7. -6- 013 (b) In addition to the amount due pursuant to Section 2.5(a) and in consideration of the assignment to Buyer of all of Seller's right, title and interest in Seller's Nuclear Electric Limited Insurance Accounts ("Seller's NEIL Member Accounts") including without limitation Seller's interest in the account balances therein as of the Closing Date and all earnings thereon and distributions therefrom all as referred to in Section 2.1(k), Buyer shall pay Seller on December 31 next following the Closing Date and on each December 31 thereafter to and including the later of (i) December 31 of the year in which Buyer gives the NRC Notice of Permanent Cessation of Operations pursuant to 10 C.F.R., sec. 50.82(a)(1)(i) of Pilgrim, and (ii) December 31, 2012 ("Termination Date") 85% of the cash distributions or dividends, if any, actually received by Buyer during the calendar year ending on such December 31 from and in respect to the Seller's NEIL Member Accounts. It is expressly understood that Buyer's obligation to pay Seller pursuant to this Section 2.5(b) shall be limited by and to the extent Buyer actually receives cash distributions or dividends (whether such distributions are of earnings or the account balance itself) with respect to the Seller's NEIL Member Accounts and is otherwise without recourse to Buyer. Credits made to Buyer's account without the actual distribution of cash are not a distribution for purposes hereof. The NEIL Bye-Laws presently do not give a member the option to elect to reduce its current NEIL premium in exchange for accepting a lesser cash distribution or dividend with respect to its member accounts. However, in the event this option is made available to Buyer in the future, Buyer will not elect to reduce its premium so as to reduce the cash distributions or dividends which would otherwise be payable to Seller under this Section 2.5(b). It is also expressly understood that for purposes of determining the fund with respect to which any dividend or distribution is made the Seller's NEIL Member Accounts refer only to the account balance amount transferred pursuant to the transaction contemplated by this Agreement as subsequently increased by earnings and credits thereto and decreased by distributions and debits therefrom and shall not include, and Seller shall have no right whatsoever in, any other Nuclear Electric Insurance account balances of Buyer, whether existing on the date hereof or at any time hereafter and whether relating to Pilgrim or any other facility. Buyer and Seller shall request Nuclear Electric Insurance Limited ("NEIL") to create a subaccount, if possible, to segregate the Seller's NEIL Member Accounts from Buyer's accounts. As soon as possible after the Closing, Buyer and Seller will in conjunction with NEIL determine and certify as to the actual Closing Date balance of Seller's NEIL Member Accounts as transferred pursuant to this Agreement. 2.6. Adjustment to Purchase Price. The Purchase Price shall be ---------------------------- increased or reduced as set forth in this Section 2.6. (a) Such increases or reductions, as the case may be, shall be referred to herein as the "Purchase Price Adjustment" and shall be determined and paid as set forth below: (i) The Purchase Price shall be increased by the net book value of all Inventories (excluding the value of items that are no longer useable at or for -7- 014 PNPS under applicable laws and regulations) held by the Seller as of the Closing Date less $20,053,272, the net book value of the Seller's 1997 year-end Inventory. In the event that the net book value of all Inventory held by the Seller as of the Closing Date less $20,053,272 is a negative number, the Purchase Price shall be decreased by the difference between such amounts; (ii) The Purchase Price shall be increased to account for the net book value of all the Seller's Nuclear Fuel as of the Closing Date less $67,934,706, the net book value of the Seller's 1997 year-end Nuclear Fuel. In the event that the net book value of the Seller's Nuclear Fuel as of the Closing Date less $67,934,706 is a negative number, the Purchase Price shall be decreased by the difference between such amounts; (iii) The Purchase Price shall be increased by any expenses related to Required Nuclear Expenditures actually paid by the Seller during the Interim Period; (iv) The Purchase Price shall be decreased to the extent any of the Pre-Approved Projects have not been completed and paid for prior to the Closing Date, but the decrease shall be the lesser of (i) the budgeted amount for ------ the incomplete portion of the Pre-Approved Project as set forth in Schedule 5.3 or (ii) the amounts that Buyer is required to pay for such Pre-Approved Projects following the Closing; (v) Assuming completion of the Refueling Outage prior to Closing, the Purchase Price shall be decreased by the amortized portion of the Refueling Costs as of the Closing Date (which shall be amortized by the Seller over a 24 month period commencing the Business Day following the completion of the Refueling Outage); (vi) The Purchase Price shall be decreased by the amount as of the Closing Date reflected in Seller's Low Level Waste Disposal Account, Acct. No. 253360; and (vii) The Purchase Price shall be increased by an amount equal to the cost to the Seller to buy-out the telephone switch and related equipment lease described in Schedule 2.1(b) and the leases in respect of any Vehicles identified by Buyer pursuant to Section 2.1(m). (b) at least twenty (20) Business Days prior to the Closing Date, the Seller shall prepare and deliver to the Buyer an Estimated Closing Statement (the "Estimated Closing Statement") that shall set forth the Seller's best estimate of all adjustments to the Purchase -8- 014a Price required by Section 2.6(a) (the "Estimated Adjustment"). Within ten (10) Business Days following the delivery of the Estimated Closing Statement by the Seller to the Buyer, the Buyer may object in good faith to the Estimated Adjustment in writing. If the Buyer objects to the Estimated Adjustment, the Parties shall attempt to resolve such dispute by negotiation. If the Parties are unable to resolve such dispute before five (5) Business Days prior to the Closing Date (or if the Buyer fails to object to the Estimated Adjustment), the Purchase Price shall be adjusted (the "Closing Adjustment") for the Closing by the amount of the Estimated Adjustment not in dispute; and (c) within thirty (30) days following the Closing Date, the Seller shall prepare and deliver to the Buyer a closing statement that shall set forth the Seller's completion of the Purchase Price Adjustment and the components thereof (the "Post-Closing Statement"). Within twenty (20) days following the delivery of the Post-Closing Statement by the Seller to the Buyer, the Buyer may object to the Post-Closing Statement in writing. The Seller agrees to cooperate with the Buyer to provide to the Buyer or the Buyer's Representatives information used to prepare the Post-Closing Statement and information relating thereto. If the Buyer objects to the Post-Closing Statement, the Parties shall attempt to resolve such dispute by negotiation. If the Parties are unable to resolve such dispute within twenty (20) days of any objection by the Buyer, the Parties shall appoint Arthur Andersen LLC, who shall, at the Seller's and the Buyer's joint expense, review the Closing Statement and determine the appropriate Purchase Price Adjustment under this Section 2.6. The agreed upon Post-Closing Statement or the finding of such accounting firm, as the case may be, shall be the Purchase Price Adjustment and shall be binding on the Parties. Upon the determination of the Purchase Price Adjustment, the Party owing the Purchase Price Adjustment shall deliver the Purchase Price Adjustment, increased or decreased as the case may be, by amounts paid pursuant to the Estimated Adjustment, to the other Party no later than two (2) Business Days after such determination in immediately available funds or in any other manner as reasonably requested by the payee. The acceptance by the Buyer and the Seller of the Purchase Price Adjustment shall not constitute or be deemed to constitute a waiver of the rights of such Party in respect of any other provision of this Agreement. 2.7. Allocation of Purchase Price. The Buyer and the Seller shall ---------------------------- use their good faith best efforts to agree upon an allocation among the Acquired Assets of the sum of the Purchase Price and the Assumed Liabilities consistent with Section 1060 of the Code and the Treasury Regulations thereunder within 120 days of the Effective Date (or such later date as the Parties may mutually agree) but in no event fewer than 30 days prior to the Closing. Because the assets of the Decommissioning Trust and the Provisional Trust (if any) are exclusively and unalterably dedicated to secure the liability for decommissioning Pilgrim when its license expires, the Parties intend and expect that the Buyer's assumption of the Pilgrim decommissioning liabilities pursuant to Section 2.3(e) will constitute purchase price paid for Seller's right, title and interest in the Decommissioning Trust and the Provisional Trust, and concomitantly intend that purchase price represented by such assumed liabilities will be -9- 015 allocated between the Decommissioning Trust and the Provisional Trust in proportion to their respective fair market values as of the Closing Date. The Buyer and the Seller may jointly agree to obtain the services of an independent engineer or appraiser (the "Independent Appraiser") to assist the Parties in determining the fair value of the Acquired Assets solely for purposes of such allocation under this Section 2.7. If such an appraisal is made, both the Buyer and the Seller agree to accept the Independent Appraiser's determination of the fair value of the Acquired Assets. The cost of the appraisal shall be borne equally by the Buyer and the Seller. Each of the Buyer and the Seller agrees to file Internal Revenue Service Form 8594 and all federal, state, local and foreign Tax Returns in accordance with such agreed allocation. Except to the extent required to comply with audit determinations by a taxing authority with jurisdiction over either party, both the Buyer and the Seller shall report the transactions contemplated by this Agreement and the Related Agreements for federal Income Tax and all other Tax purposes in a manner consistent with the allocation determined pursuant to this Section 2.7. Each of the Buyer and the Seller agrees to provide the other promptly with any other information required to complete Form 8594. Each of the Buyer and the Seller shall notify and provide the other with reasonable assistance in the event of an examination, audit or other proceeding regarding the agreed upon allocation of the Purchase Price. 2.8. Proration. --------- (a) The Buyer and the Seller agree that all of the items normally prorated, including those listed below, relating to the business and operations of the Acquired Assets will be prorated as of the Closing Date, with the Seller liable to the extent such items relate to any period through the Closing Date, and the Buyer liable to the extent such items relate to periods after the Closing Date: (i) personal property, Real Property, occupancy and water, Taxes, assessments and other charges of the type that could give rise to a Permitted Encumbrance, if any, on or associated with the Acquired Assets; (ii) rent, Taxes and other items payable by or to the Seller under any of the Contracts, Emergency Preparedness Agreements or Leases assigned to and assumed by the Buyer hereunder; (iii) any Permit, license, registration or fees with respect to any Transferable Permit assigned to Buyer associated with the Acquired Assets; (iv) sewer rents and charges for water, telephone, electricity and other utilities; (v) any fees or charges imposed by INPO, NEI, the NRC or any other Governmental Authority; and (vi) payments regarding the Pilgrim Fixed Operating Costs pursuant to Section 5.11. (b) In connection with the prorations referred to in Section 2.8(a), if the actual figures are not available at the Closing Date, the proration shall be based upon the actual Taxes or fees for the preceding year (or appropriate period) for which actual Taxes or fees are available and such Taxes or fees shall be re-prorated upon request of either the Seller, on the one hand, or the Buyer, on the other hand, made within 60 days of the date the actual amounts become available. If the Taxes which are apportioned are thereafter reduced by abatement, the amount of such abatement, less the reasonable cost of obtaining the same, shall be apportioned between the Parties; provided that neither party shall be obligated to institute or -10- 016 prosecute an abatement unless required pursuant to the Property Tax Agreement or otherwise agreed in writing. The Seller and the Buyer agree to furnish each other with such documents and other records that may be reasonably requested in order to confirm all adjustment and proration calculations made pursuant to this Section to 2.8. 2.9. The Closing. Unless otherwise agreed to by the Parties, the ----------- closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Ropes & Gray, One International Place, Boston, Massachusetts, commencing at 9:00 a.m. eastern time on the date that is fifteen (15) days (or, if the fifteenth day is not a Business Day, then the next Business Day following such fifteenth day) following the date on which all of the conditions set forth in Sections 6.1 and 6.2 have either been satisfied or waived by the Party for whose benefit such condition exists, such satisfaction or waiver to conform to Section 11.8, provided, however, that the -------- ------- deliveries contemplated by Sections 2.10 and 2.11 shall not be considered when determining whether the conditions to obligations to Close set forth in Sections 6.1 and 6.2 have been satisfied. The date of Closing is hereinafter called the "Closing Date" and shall be effective for all purposes herein as of 11:59 p.m. eastern time on the Closing Date. 2.10. Deliveries by the Seller at the Closing. At the Closing, the --------------------------------------- Seller shall deliver the following to the Buyer, duly executed and properly acknowledged, if appropriate: (a) the deed for the Real Property and Improvements, substantially in the form attached hereto as Exhibit A, reserving the necessary Easements to be retained by the Seller; (b) the Bill of Sale, substantially in the form attached hereto as Exhibit B, for the tangible personal property included in the Acquired Assets; (c) the Assignment and Assumption Agreement, substantially in the form attached hereto as Exhibit C, in recordable form if necessary; (d) the Asset Demarcation Agreement, substantially in the form attached hereto as Exhibit D; (e) a FIRPTA Affidavit by the Seller; (f) the Property Tax Agreement, substantially in the form attached hereto as Exhibit E; (g) copies of all consents, waivers or approvals obtained by the Seller with respect to the Acquired Assets, the transfer of the Transferable Permits or the consummation of the transactions contemplated by this Agreement and the Related Agreement, to the extent specifically required under this Agreement or the Related Agreements (without limiting the generality of the foregoing, Seller is specifically required to provide Buyer with copies of -11- 017 written consents to assign to Buyer each of the Material Contracts executed by the third parties to such Material Contracts or include within the opinion referenced in clause (k) below an assurance that Seller's rights under such Material Contracts may be assigned without such third party consent); provided that if a Material Contract cannot be effectively assigned to Buyer at Closing, then Seller shall notify Buyer of such nonassignability, and, subject to Buyer's prior written consent (which shall not be unreasonably withheld), Seller shall, at its sole discretion, enter into substitute contracts (the "Substitute Material Contracts") prior to the Closing that will provide Buyer with substantially similar benefits and obligations to those that would have been provided if the nonassignable Material Contracts had been transferred to Buyer at Closing and shall provide evidence at the Closing that such Substitute Material Contracts are effectively assigned to Buyer at the Closing. To the extent that, as a result of any payment or other consideration provided by Seller, either Seller or Buyer is able to obtain pricing or terms for a Substitute Material Contract more favorable than those under the existing Material Contracts which cannot be assigned to Buyer, Buyer shall pay to Seller as and when such favorable benefits are realized by Buyer an amount equal to the value differential between the price or terms of such Substitute Material Contract and the Material Contract that the Seller could not assign, up to a maximum amount equal to 100% of the costs incurred by Seller in obtaining consents to the assignment of all Material Contracts; (h) a certificate from an authorized officer of the Seller, dated the Closing Date, to the effect that, to such officer's Knowledge, the conditions set forth in Section 6.1 have been satisfied; (i) a copy, certified by the Clerk of the Seller, of corporate resolutions authorizing the execution and delivery of this Agreement and the Related Agreements and instruments attached as exhibits hereto and thereto, and the consummation of the transactions contemplated hereby and thereby; (j) a certificate of the Clerk of the Seller which shall identify by name and title and bear the signature of the officers of the Seller authorized to execute and deliver this Agreement and the Related Agreements and instruments attached as exhibits hereto and thereto; (k) an opinion or opinions from one or more counsel to the Seller (who shall be reasonably satisfactory to Buyer and any of whom may be an employee of the Seller), dated the Closing Date and reasonably satisfactory in form to the Buyer and its counsel, covering substantially the matters set forth in Schedule 2.10(k); (l) all such other instruments of sale, transfer, conveyance, assignment or assumption as the Buyer and its counsel may reasonably request in connection with the sale of the Acquired Assets, provided however, that this subsection (l) shall not require the Seller to prepare or obtain any surveys relating to the Real Property; -12- 018 (m) a Certificate from an authorized Officer of Seller, dated the Closing Date that each of the concerns referenced in Section 5.15 below have been fully and successfully addressed and no longer constitute Environmental Liabilities; (n) the items and documents listed in Section 2.1(f); and (o) the items to be delivered by Seller pursuant to Section 6.1(h). 2.11. Deliveries by Buyer at the Closing. At the Closing, the Buyer ---------------------------------- shall deliver to the Seller, properly executed and acknowledged, if appropriate: (a) the Purchase Price; (b) the Assignment and Assumption Agreement, substantially in the form attached hereto as Exhibit C to the Agreement, and if necessary or desirable to the Seller, in recordable form; (c) the Asset Demarcation Agreement, substantially in the form attached hereto as Exhibit D; (d) the Chapter 61 Affidavit, substantially in the form attached hereto as Exhibit F. (e) the Property Tax Agreement, substantially in the form attached hereto as Exhibit E; (f) a certificate from an authorized officer of the Buyer, dated the Closing Date, to the effect that, to such officer's Knowledge, the conditions set forth in Section 6.2 have been satisfied; (g) a copy, certified by the Clerk of the Buyer, of resolutions authorizing the execution and delivery of this Agreement and the Related Agreements and instruments attached as exhibits hereto and thereto, and the consummation of the transactions contemplated hereby and thereby; (h) a certificate of the Clerk of the Buyer which shall identify by name and title and bear the signature of the officers of the Buyer authorized to execute and deliver the Agreement and the Related Agreements and instruments attached as exhibits hereto and thereto; (i) evidence of the Buyer's membership in NEPOOL; (j) an opinion or opinions from one or more counsel to the Buyer (who shall be reasonably satisfactory to the Seller and any of whom may be an employee of the Buyer), -13- 018a dated the Closing Date and reasonably satisfactory in form to the Seller and its counsel, covering substantially the matters set forth in Schedule 2.11(j); and (k) all such other instruments of sale, transfer, conveyance, assignment or assumption as the Seller and its counsel may reasonably request in connection with the sale of the Acquired Assets or assumption of the Assumed Liabilities. 3. Representations, Warranties and Disclaimers of the Seller. The Seller --------------------------------------------------------- represents and warrants to the Buyer that, to the Seller's Knowledge, the statements contained in this Section 3 are correct and complete as of the Effective Date. 3.1. Organization of the Seller. The Seller is duly organized, -------------------------- validly existing and in good standing under the laws of The Commonwealth of Massachusetts. Copies of the articles of organization and by-laws of the Seller, each as amended to date, have been heretofore delivered to the Buyer and are accurate and complete. 3.2. Authorization of Transaction. The Seller has the power and ---------------------------- authority (including full corporate power and authority) to execute and deliver this Agreement and the Related Agreements and, subject to receipt of all Seller's Regulatory Approvals, to perform its obligations hereunder and thereunder. All corporate actions or proceedings to be taken by or on the part of the Seller to authorize and permit the due execution and valid delivery by the Seller of this Agreement and the Related Agreements and the instruments required to be duly executed and validly delivered by the Seller pursuant hereto and thereto, the performance by the Seller of its obligations hereunder and thereunder, and the consummation by the Seller of the transactions contemplated herein and therein, have been duly and properly taken. This Agreement has been duly executed and validly delivered by the Seller and constitutes the valid and legally binding obligation of the Seller, enforceable in accordance with its terms and conditions and when each Related Agreement has been executed and delivered, such Related Agreement will likewise constitute a valid and legally binding obligation of the Seller, enforceable in accordance with its terms. 3.3. Noncontravention. Subject to the Seller obtaining the ---------------- Seller's Regulatory Approvals, neither the execution and the delivery of this Agreement or any of the Related Agreements, nor the consummation of the transactions contemplated hereby and thereby (including the assignments and assumptions referred to in Sections 2.10(p) and 2.11(l) above), will (a) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, license or other restriction of any Governmental Authority to which the Seller or any of its property is subject or any provision of the articles of organization or by-laws of the Seller, or (b) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which the Seller is bound or to which any of the Acquired Assets is subject (or -14- 019 result in the imposition of any Lien upon any of the Acquired Assets), except for matters that, in the aggregate, will not have a Material Adverse Effect or that are disclosed in Schedule 3.3 or any other Schedule. 3.4. Brokers' Fees. The Seller has no Liability or obligation to ------------- pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which the Buyer could become liable or obligated. 3.5. Title to Acquired Assets. Except for Permitted Encumbrances, ------------------------ the Seller holds good and marketable title to the Real Property to the extent, and only to the extent, specified in the title policy commitment attached hereto on Schedule 3.5 (the "Title Commitment"). Except as set forth in Schedule 3.5 and except for Permitted Encumbrances, the Seller has good and valid title to or a valid leasehold interest in the other Acquired Assets. There are no Permitted Encumbrances arising out of any Tax or other charge as assessed by any Government Authority except for which the Seller will indemnify the Buyer pursuant to Section 9.3. 3.6. Legal and Other Compliance. The Seller has not received -------------------------- written notice from any Governmental Authority that it is not in compliance in all material respects with all Laws, applicable to the condition or operation of the Acquired Assets, other than as disclosed in Schedule 3.6 and Seller has not violated Laws, except for violations that, in the aggregate, will not have a Material Adverse Effect. Seller has duly filed all reports and returns required to be filed by it with Governmental Authorities and obtained governmental permits and licenses and other governmental consents which are required in connection with the business of owning and/or operating the Facilities, the failure of which to file and obtain likely would have a Material Adverse Effect. All such permits, licenses and consents are in full force and effect and no proceedings for the suspension or cancellation of any of them is pending or threatened. 3.7. Taxes. The Seller has filed all Tax Returns that it was ----- required to file, and has paid all Taxes that have become due as indicated thereon, except where the Seller is contesting the same in good faith by appropriate proceeding, where the failure so to file or pay could have a Material Adverse Effect. There is no unpaid Tax due and payable that could have a Material Adverse Effect on the Buyer's ownership, operation or use of the Acquired Assets for which the Buyer could become liable. 3.8. Contracts and Leases. -------------------- (a) Except (i) as listed in Schedule 2.1(e) or 2.1(c) or any other Schedule, (ii) for contracts, agreements, personal property leases, commitments, understandings or instruments which will be fully performed or terminated prior to the Closing Date, and (iii) for agreements with suppliers entered into in the ordinary course of business that are subject to being assumed by and assigned to Buyer in absence of a third party consent thereto, the Seller is not a party to -15- 020 any written contract, agreement, personal property lease, commitment, understanding or instrument which is material to the business or operations of the Acquired Assets. (b) Each of the Material Contracts constitutes a valid and binding obligation of the Buyer and is in full force and effect. (c) Seller has complied with all of the material provisions of each of the Material Contracts and there does not exist any event of default under any such Material Contract or any event which, after notice of lapse of time or both, would constitute an event of default under any such Material Contract. There is no action, suit, proceeding or investigation pending, or threatened against Seller before any court or before any governmental or administrative agency for the renegotiation of or any other adjustment of any such Material Contract or any other agreement to be assigned to Buyer hereunder. 3.9. Insurance. The policies of liability, fire, worker's --------- compensation and other forms of insurance owned or held by the Seller as set forth in Schedule 3.9 and in Section 5.12 are in full force and effect, all premiums with respect thereto covering all periods up to and including the Closing Date have been or will be paid prior to the Closing (other than retroactive premiums and any retrospective premium adjustments which may be payable by Seller) and no written notice of cancellation or termination has been received with respect to any such policy which was not replaced on substantially similar terms prior to the date of such cancellation. Except as described in Schedule 3.9, the Seller has not been refused any insurance with respect to the Acquired Assets nor has its coverage been limited by any insurance carrier to which it has applied for any such insurance or with which it has carried insurance during the last twelve months. The policies of insurance identified in Schedule 3.9 insure Seller, its properties and those aspects of its business pertaining to the ownership or operation of the Facilities against such losses and risks, and in such amounts, as are adequate for its business. Seller is not, and no party is, in breach of default of any such policy (including with respect to the giving of notices) and no event has occurred which, with notice of lapse of time, would constitute such breach or default or permit termination, modification or acceleration under the policy. 3.10. Litigation. Except as disclosed in Schedule 3.10, no claims ---------- are pending or threatened, that would be reasonably likely to result, in the aggregate, in a Material Adverse Effect or that question the validity of this Agreement or the Related Agreements or of any action taken or to be taken pursuant to or in connection with the provisions of this Agreement or the Related Agreements. There are no judgments, orders, decrees, citations, fines or penalties heretofore assessed against the Seller that, in the aggregate, have a Material Adverse Effect. A petition filed or pending under 10 C.F.R. Section 2.206 or Section 2.802, or any claim for review of any action thereon, shall not be considered to be within the scope of this representation. -16- 021 3.11. Employees. Schedule 3.11 contains a list of all collective --------- bargaining agreements to which the Seller is a party and which relate to employees of the Seller where employment relates primarily to the Acquired Assets (the "Collective Bargaining Agreements"), true and correct copies of which have heretofore been delivered to the Buyer. As of the Effective Date, except as described in Schedule 3.11: (i) the Seller has not experienced any labor disputes or work stoppage due to labor disagreements in the past five (5) years; (ii) the Seller is in compliance with all applicable Laws respecting employment and employment practices, terms and conditions of employment and wages and hours; (iii) the Seller has not received written notice from any Governmental Authority of any unfair labor practice charge or complaint against the Seller pending or threatened before the National Labor Relations Board; and (iv) no arbitration proceeding arising out of or under any collective bargaining agreement with respect to the Acquired Assets is pending against the Seller. 3.12. Environmental Matters. Except as disclosed in Schedule 3.12, --------------------- the Seller has not received any written notice from any Governmental Authority that it is not or has not been in compliance with Environmental Laws the violation of which could have a Material Adverse Effect and there are no known Environmental Liabilities existing at the Site, except as disclosed in the Phase I Site Assessment, that, in the aggregate, would be expected to require Remediation in excess of One Million Dollars ($1,000,000), except for such matters as Seller has agreed to Remediate at Seller's expense. 3.13. Condemnation. Except as set forth in Schedule 3.13, the ------------ Seller has received no written notice from any Governmental Authority of any pending or threatened proceeding to condemn or take by power of eminent domain or otherwise, by any Governmental Authority, all or any part of the Acquired Assets, which would constitute a Material Adverse Effect. 3.14. Regulation as a Utility. The Seller is an "electric company" ----------------------- within the meaning of Chapter 164 of the Massachusetts General Laws. 3.15. Decommissioning Trust. Schedule 3.15(a) contains a true and --------------------- correct copy of the Trust Agreement. 3.16. Operability. The Acquired Assets constitute all of the assets ----------- necessary for the Seller to operate Pilgrim substantially in the manner as it has been operated by the Seller. 3.17. NRC Generic Letter 98-01. Seller has adopted and is ------------------------ implementing a Pre-Approved Project designed to meet the requirements of NRC Generic Letter 98-01. 3.18. Disclaimers Regarding Acquired Assets. EXCEPT FOR ANY ------------------------------------- REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS SECTION 3, THE ACQUIRED ASSETS ARE SOLD "AS IS, WHERE IS," AND THE SELLER EXPRESSLY DISCLAIMS ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND OR -17- 022 NATURE, EXPRESS OR IMPLIED, AS TO LIABILITIES, OPERATIONS OF THE FACILITIES, TITLE, CONDITION, VALUE OR QUALITY OF THE ACQUIRED ASSETS OR THE PROSPECTS (FINANCIAL AND OTHERWISE), RISKS AND OTHER INCIDENTS OF THE ACQUIRED ASSETS AND THE SELLER SPECIFICALLY DISCLAIMS ANY REPRESENTATION OR WARRANTY OF MERCHANTABILITY, USAGE, SUITABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE WITH RESPECT TO THE ACQUIRED ASSETS, OR ANY PART THEREOF, OR AS TO THE WORKMANSHIP THEREOF, OR THE ABSENCE OF ANY DEFECTS THEREIN, WHETHER LATENT OR PATENT, OR COMPLIANCE WITH ENVIRONMENTAL REQUIREMENTS, OR AS TO THE CONDITION OF THE ACQUIRED ASSETS, OR ANY PART THEREOF, OR WHETHER THE SELLER POSSESSES SUFFICIENT REAL PROPERTY OR PERSONAL PROPERTY TO OPERATE THE ACQUIRED ASSETS. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, THE SELLER FURTHER SPECIFICALLY DISCLAIMS ANY REPRESENTATION OR WARRANTY REGARDING THE ABSENCE OF HAZARDOUS SUBSTANCES OR LIABILITY OR POTENTIAL LIABILITY ARISING UNDER ENVIRONMENTAL LAWS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, THE SELLER EXPRESSLY DISCLAIMS ANY REPRESENTATION OR WARRANTY OF ANY KIND REGARDING THE CONDITION OF THE ACQUIRED ASSETS OR THE SUITABILITY OF THE FACILITIES FOR OPERATION AS POWER PLANTS AND NO OTHER MATERIAL OR INFORMATION PROVIDED BY OR COMMUNICATIONS MADE BY THE SELLER OR ITS AGENTS, OR BY ANY BROKER OR INVESTMENT BANKER, INCLUDING WITHOUT LIMITATION ANY INFORMATION OR MATERIAL CONTAINED IN THE OFFERING MEMORANDUM DATED JUNE 1998 AND ANY ORAL, WRITTEN OR ELECTRONIC RESPONSE TO ANY INFORMATION REQUEST PROVIDED TO THE BUYER, WILL CAUSE OR CREATE ANY WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE, CONDITION, VALUE OR QUALITY OF THE ACQUIRED ASSETS. 4. Representations and Warranties of the Buyer. The Buyer represents and ------------------------------------------- warrants to the Seller, to the Buyer's Knowledge, that the statements contained in this Section 4 are correct and complete as of the Effective Date. 4.1. Organization of the Buyer. The Buyer, a Delaware corporation, ------------------------- is duly organized, validly existing and in good standing under the laws of the State of Delaware. Copies of the articles of organization and bylaws of the Buyer, each as amended to date, have been heretofore delivered to the Seller and are accurate and complete. 4.2. Authority of Transaction. The Buyer has the power and ------------------------ authority (including full corporate power and authority) to execute and deliver this Agreement and the Related Agreements and, subject to receipt of all Buyer's Regulatory Approvals, to perform its obligations hereunder and thereunder. All corporate actions or proceedings to be taken by or -18- 023 on the part of the Buyer to authorize and permit the due execution and valid delivery by the Buyer of this Agreement and the instruments required to be duly executed and validly delivered by the Buyer pursuant hereto and thereto, the performance by the Buyer of its obligations hereunder and thereunder, and the consummation by the Buyer of the transactions contemplated herein and therein, have been duly and properly taken. This Agreement has been duly executed and validly delivered by the Buyer and constitutes the valid and legally binding obligation of the Buyer, enforceable in accordance with its terms and conditions and when each Related Agreement has been executed and delivered, such Related Agreement will likewise constitute a valid and legally binding obligation of the Buyer, enforceable in accordance with its terms. 4.3. Noncontravention. Subject to the Buyer obtaining the Buyer's ---------------- Regulatory Approvals, neither the execution and the delivery of this Agreement or any of the Related Agreements, nor the consummation of the transactions contemplated hereby and thereby (including the assignments and assumptions referred to in Sections 2.10(o) and 2.11(m) above), will (i) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, license or other restriction of any Governmental Authority to which the Buyer is subject or any provision of the articles of organization or bylaws of the Buyer or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which the Buyer is a party or by which it is bound or to which any of its assets is subject, except for matters that will not constitute a Buyer Material Adverse Effect or that are disclosed on Schedule 4.3. 4.4. Brokers' Fees. The Buyer has no Liability or obligation to ------------- pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which the Seller could become liable or obligated. 4.5. Litigation. No claim, demand, action or suit is pending or ---------- threatened that would be reasonably likely to result in a Buyer Material Adverse Effect or that questions the validity of this Agreement or the Related Agreements or of any action taken or to be taken pursuant to or in connection with the provisions of this Agreement or the Related Agreements. There are no judgments, orders, decrees, citations, fines or penalties heretofore assessed against the Buyer that have a Buyer Material Adverse Effect or impair, estop, impede, restrain, ban or otherwise adversely affect Buyer's ability to satisfy or perform of the Assumed Liabilities under any federal, state or local Law. For purposes of this Section 4.5, a petition filed or pending under 10 C.F.R. Section 2.206 or Section 2.802, or any claim for review of any action thereon, shall not be considered to be within the scope of this representation. 4.6. No Knowledge of the Seller's Breach. On the Effective Date, ----------------------------------- the Buyer has no Knowledge of any breach by the Seller of any representation or warranty contained in Section -19- 024 3 hereof, or of any condition or circumstance that would excuse the Buyer from performance of its obligations under this Agreement or the Related Agreements. 4.7. "As Is Sale". The representations and warranties set forth in ------------ Section 3 and Section 4 hereof constitute the sole and exclusive representations and warranties of the Seller and Buyer in connection with the transactions contemplated hereby. There are no representations, warranties, covenants, understandings or agreements among the Parties regarding the Acquired Assets or their transfer other than those incorporated in this Agreement. Except for the representations and warranties expressly set forth in Section 3, the Buyer disclaims reliance on any representations, warranties or guarantees, either express or implied by the Seller, including but not limited to any representation or warranty expressed or implied in the Offering Memorandum dated June 1998 and any oral, written or electronic response to any information request provided to the Buyer. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, THE BUYER ACKNOWLEDGES AND AGREES THAT THE ACQUIRED ASSETS ARE BEING ACQUIRED "AS IS, WHERE IS" ON THE CLOSING DATE, AND IN THEIR CONDITION ON THE CLOSING DATE, AND THAT THE BUYER IS RELYING ON ITS OWN EXAMINATION OF THE ACQUIRED ASSETS, AND IS NOT RELYING ON ANY REPRESENTATION OR WARRANTY MADE BY THE SELLER OR ITS AGENTS, OR ANY BROKER OR INVESTMENT BANKER EXCEPT FOR WARRANTIES, IF ANY, SET FORTH IN ARTICLE 3 AND THE INSTRUMENTS OF TRANSFER AND CONVEYANCE. 4.8. Qualified Buyer. The Buyer is qualified, or will be qualified --------------- as of the Closing Date, to obtain any Permits necessary for the Buyer to own and operate the Acquired Assets as of the Closing Date, to the extent such operation is either required by any Related Agreement or this Agreement, or is contemplated by the Buyer. 5. Covenants. The Parties agree as follows: --------- 5.1. General. Each of the Parties will use its best efforts to ------- take all actions and to do all things necessary, proper or advisable in order to consummate and make effective the transactions contemplated by this Agreement and the Related Agreements (including satisfaction, but not waiver, of the closing conditions set forth in Section 6 below). 5.2. Notices, Consents and Approvals. ------------------------------- (a) The Seller and the Buyer shall each file or cause to be filed with the Federal Trade Commission and the United States Department of Justice any notifications required to be filed under the Hart-Scott-Rodino Act and the rules and regulations promulgated thereunder with respect to the transactions contemplated hereby. The Parties shall use their best efforts to make such filings as promptly as possible after the Effective Date, to respond promptly to any requests for additional information made by either of such agencies. The Buyer will pay all -20- 025 filing fees under the Hart-Scott-Rodino Act, but each Party will bear its own costs for the preparation of any filing. Both Parties shall use Commercially Reasonable Efforts to cause any waiting period under the Hart-Scott-Rodino Act with respect to the transactions contemplated by this Agreement and the Related Agreements to expire or terminate at the earliest possible time. (b) The Seller and the Buyer shall cooperate with each other and use all Commercially Reasonable Efforts to (i) promptly prepare and file all necessary documentation, (ii) effect all necessary applications, notices, petitions and filings and execute all agreements and documents, (iii) obtain the transfer, issuance or reissuance to the Buyer of all necessary Permits and (iv) obtain all necessary consents, approvals and authorizations of all other parties necessary or advisable to consummate the transactions contemplated by this Agreement or in any of the Related Agreements (including, without limitation, the Seller's Regulatory Approvals and the Buyer's Regulatory Approvals) or required by the terms of the Trust Agreement or any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument to which the Seller or the Buyer is a party or by which either of them is bound. Both Parties shall have the right to review in advance all characterizations of the information relating to the transactions contemplated by this Agreement or in any of the Related Agreements which appear in any filing made by either Party in connection with the transactions contemplated hereby or thereby. (c) Nuclear Regulatory Commission Approval. -------------------------------------- 1. Application. As promptly after the Effective ----------- Date as may be feasible, the Buyer and the Seller shall jointly prepare and file with the NRC an Application. Thereafter, the Buyer and the Seller shall cooperate with one another to facilitate review of the Application by the NRC Staff, including but not limited to the prompt provision to the NRC Staff of any and all documents or information in the possession of either Buyer or Seller that the NRC Staff may request. 2. Prosecution of Application. The Application -------------------------- shall identify the Buyer and the Seller as separate parties to the Application, with separate representation. In the event that the NRC processing of the Application becomes a Contested Proceeding, and until such Contested Proceeding becomes Final, the Buyer and the Seller shall separately appear therein by their own counsel, and shall continue to cooperate with each other to facilitate a favorable result. 3. Costs of Application and Prosecution. The Buyer ------------------------------------ and the Seller will each bear their own costs of the preparation, submission and processing of the Application, including any Contested Proceeding that -21- 026 may occur in respect thereof, provided, however, that the Buyer shall bear the costs of all NRC staff fees payable in connection with the Application. 5.3. Operation of Business During Interim Period. ------------------------------------------- (a) During the Interim Period, the Seller will operate and maintain the Acquired Assets in the ordinary course consistent with Prudent Utility Practices unless otherwise contemplated by this Agreement or with the prior written consent of the Buyer. Without limiting the generality of the foregoing, the Seller shall not, without the prior written consent of the Buyer, during the Interim Period, with respect to the Acquired Assets: (i) sell, lease (as lessor), transfer or otherwise dispose of, any of the Acquired Assets, other than as used, consumed or replaced in the ordinary course of business consistent with Prudent Utility Practices, or encumber, pledge, mortgage or suffer to be imposed on any of the Acquired Assets any encumbrance other than Permitted Encumbrances; (ii) make any material change in the levels of Inventories customarily maintained by the Seller with respect to the Acquired Assets, except for such changes that are consistent with Prudent Utility Practices; (iii) enter into, amend, or otherwise modify any real or personal property Tax agreement, treaty or settlement, other than as contemplated by the Property Tax Agreement; (iv) enter into any commitment for the purchase or sale of fuel, other than Nuclear Fuel, (whether commodity or transportation) having a term greater than six (6) months and not terminable either (x) automatically on the Closing Date; or (y) by option of the Buyer in its sole discretion at any time after the Closing Date, where the aggregate payment under such fuel commitment and all other then outstanding fuel commitments would be expected to exceed $1 million; (v) enter into any commitment for the purchase of Nuclear Fuel; (vi) terminate or materially amend any of the Material Contracts or the Transferrable Permits except as may be necessary in order to transfer Seller's rights thereunder to Buyer at the Closing; or (vii) enter into any contract or commitment which individually exceeds $1,000,000 or in the aggregate exceeds $10,000,000, unless such contract or -22- 027 commitment is to be fully performed prior to the Closing or can be terminated by Buyer at its option at any time following the Closing without penalty or cancellation charge. Notwithstanding anything in this Section 5.3(a) to the contrary, the Seller may, in its sole discretion, make or incur an obligation to make subject to the adjustment provisions as set forth in Section 2.6, (i) Pre-Approved Projects as set forth in Schedule 5.3, and (ii) Required Nuclear Expenditures. (b) During the Interim Period, in the interest of facilitating an orderly transition of the management of the Acquired Assets in contemplation of NRC approval of the Transfer of License and permitting informed action by the Buyer regarding its rights pursuant to Section 5.3(a) to grant consent or to waive prohibitions or limitations under Section 5.3(a), the Parties agree as follows: (i) A committee comprised of two individuals designated by the Seller and two individuals designated by the Buyer, and such additional individuals as may be appointed by the individuals originally appointed to such committee (the "Transition Committee") will be established as soon after the Effective Date as is practicable to examine the business issues affecting the Acquired Assets during the Interim Period, giving emphasis to cooperation between the Buyer and the Seller. From time to time, the Transition Committee shall report its findings to the senior management of each of the Seller and the Buyer; provided, however, that the Seller shall be under no obligation to act on or follow any such findings and the Seller shall be entitled, subject to this Agreement, to conduct its business in accordance with its own judgment and discretion. The Transition Committee shall have no authority to bind or make agreements on behalf of the Seller or the Buyer; or to issue instructions to or direct or exercise authority over the Seller or the Buyer or any of their respective officers, employees, advisors or agents. (c) Seller will continue to operate and maintain the Facilities in substantially the same manner as prior to the Effective Date. However, notwithstanding anything to the contrary herein, the Seller shall have the right, until the Closing has occurred, in its sole discretion, to shut down Pilgrim and file a Notice of Permanent Cessation of Operations with the NRC, pursuant to 10 C.F.R., sec. 50.82(a)(1)(i), and exercise the termination provision contained in Section 10.1(c)(viii). 5.4. Access and Investigations During Interim Period. During the ----------------------------------------------- Interim Period, the Seller will permit one or more designated officers, employees or agents of the Buyer to have access upon reasonable notice, in a manner so as not to interfere with the normal business operations of the Seller, to observe and inspect all premises, properties, management, -23- 028 personnel, books, records, (including tax records), and other information, including without limitation all information necessary to enable Buyer to verify Seller's representations and warranties as set forth in Article 3 are correct and that Seller has complied with the covenants set forth herein, and any other information or documents associated with or pertaining to the Acquired Assets. Such inspections are contemplated to include Buyer's environmental inspections and testing by an environmental engineering firm at Buyer's expense of the Site and Facilities. However, all access and Buyer's inspections are subject to the following provisions: (a) Costs. All costs of such investigations and observations, ----- including but not limited to the compensation paid to the persons involved and their expenses, and including also any discrete incremental costs incurred by Seller in connection with such investigation and observation, shall be borne by Buyer. (b) Physical Access (Escorted and Unescorted). ----------------------------------------- (i) For each person whom Buyer wishes be provided with escorted access to PNPS, it will make a request therefor (directed to Mr. Marc Potkin at (508) 830-8254) not less than 24 hours before the time at which the person is to arrive, providing the following information for each individual: name, date of birth, social security number, and the name of each nuclear power plant at which the person has a current badge for unescorted access. The Seller reserves the right where necessary to limit the number of persons to whom escorted access is provided at any one time on account of reasonable logistical considerations. (ii) For each person whom Buyer wishes be provided with unescorted access to PNPS, the person must comply with all existing PNPS and NRC requirements for unescorted access, including (but not limited to) background investigation, GET and other training requirements, fitness-for-duty requirements, a psychological assessment and behavioral observation. (iii) In the event that the Buyer has its own fitness-for-duty program meeting the requirements of 10 C.F.R., Part 26, the Buyer may request that any person subject to the Buyer's program be excused from compliance with the Seller's program, in which event the provisions of 10 C.F.R. Section 26.23 shall be applicable to unescorted access granted to the person(s) subject to the Buyer's program, and the Buyer shall reimburse the Seller for the cost of reviewing and auditing the Buyer's program, as required by 10 C.F.R. Section 26.23. (iv) Regardless of whether a person has qualified for escorted or unescorted access, the Seller will withhold access to any area of the PNPS -24- 029 facility that would reveal "Safeguards Information," "classified National Security Information" or "Restricted Data" to any person to whom such information is not to be made available under the following sub-section. (c) Access to Records and Information. --------------------------------- (i) Except as provided in the next paragraph, the Seller will not provide access to any documents or information constituting or containing "Safeguards Information." (ii) In the event that the Buyer wishes for one or more designated persons acting on its behalf to have access to "Safeguards Information," the Buyer must first obtain authorization or concurrence from the NRC for the disclosure of such information to such person(s). (iii) Under no circumstances will the Seller provide access to any documents or information constituting or containing "classified National Security Information" or "Restricted Data." (iv) Except as provided in paragraphs (i)-(iii) above, Buyer shall have the right to receive copies of all documentary information and records associated with the Acquired Assets subject to the nondisclosure provisions of Article 7. (d) Limitations. Notwithstanding anything to the contrary in this ----------- Section 5.4, the Seller shall: (i) only furnish or provide such access to personnel records and medical records as is allowed by any Law, (ii) not provide any information that the Seller or the Seller's counsel believes constitutes or could be deemed to constitute a waiver of the attorney-client privilege, and (iii) not be required to supply the Buyer with any information that the Seller is under a legal obligation not to supply. 5.5. Interim Period Notice. --------------------- (a) The Buyer shall notify the Seller promptly if any information comes to its attention that would or might excuse the Buyer from the performance of its obligations under this Agreement or the Related Agreements or would or might cause any condition to close set forth in Sections 6.1 or 6.2 not to be satisfied. In the event that the Buyer fails to so notify the Seller within thirty (30) days of obtaining Knowledge of such information, the Buyer shall be deemed to have waived the performance of such obligations or the fulfillment of such conditions. (b) The Seller shall notify the Buyer promptly if any information comes to its attention that would or might excuse the Seller from the performance of its obligations under this -25- 030 Agreement or the Related Agreements or would or might cause any condition to close set forth in Sections 6.1 or 6.2 not to be satisfied. In the event that the Seller fails to so notify the Buyer within thirty (30) days of obtaining Knowledge of such information, the Seller shall be deemed to have waived the performance of such obligations or the fulfillment of such conditions. (c) The Seller may elect at any time to notify the Buyer of the existence of any matter, which if in existence on the Effective Date or the Closing Date would or might cause any of the representations or warranties in Section 3 above to be untrue or incorrect. Unless the Buyer has the right to terminate this Agreement pursuant to Section 10.1(b)(vii) below by reason of such notice and exercises that right within the period of 15 days referred to in Section 10.1(b)(vii) below, the written notice pursuant to this Section 5.5(c) shall be deemed to have amended the appropriate Schedule or Schedules as of the Effective Date, to have qualified the representations and warranties contained in Section 3 above as of the Effective Date, and to have cured any misrepresentation or breach of warranty that otherwise might have existed hereunder by reason of the existence of such matter. (d) The Buyer may elect at any time to notify the Seller of the existence of any matter, which if in existence on the Effective Date or the Closing Date would or might cause any of the representations or warranties in Section 4 above to be untrue or incorrect. Unless the Seller has the right to terminate this Agreement pursuant to Section 10.1(c)(vii) below by reason of such notice and exercises that right within the period of 15 days referred to in Section 10.1(c)(vii) below, the written notice pursuant to this Section 5.5(d) shall be deemed to have amended the appropriate Schedule or Schedules as of the Effective Date, to have qualified the representations and warranties contained in Section 4 above as of the Effective Date, and to have cured any misrepresentation or breach of warranty that otherwise might have existed hereunder by reason of the existence of such matter. 5.6. Further Assurances. ------------------ (a) At any time and from time to time after the Closing, without further payment, at the request of a Party, the other Party will execute and deliver such instruments of sale, transfer, conveyance, assignment and confirmation and take such action as is necessary to transfer, convey and assign to the Buyer, and to confirm the Buyer's title to or interest in the Acquired Assets and Assumed Liabilities or to put the Buyer in actual possession and operating control of the Acquired Assets. (b) In the event that any asset that is an Acquired Asset shall not have been conveyed to the Buyer at the Closing, the Seller shall, without further payment, subject to Section 5.6(d), use its best efforts to convey such asset to the Buyer as promptly as is practicable after the Closing. In the event that any Easement shall not have been retained by -26- 031 the Seller after the Closing, the Buyer shall use its best efforts to grant such Easement to the Seller as promptly as is practicable after the Closing. (c) To the extent that the Seller's rights under any contract included as an Acquired Asset, other than a Material Contract, may not be assigned without the consent of another Person which consent has not been obtained by the Closing Date, this Agreement shall not constitute an agreement to assign the same if an attempted assignment would constitute a breach thereof or be unlawful, and the Seller, at its expense, shall use its Commercially Reasonable Efforts to obtain any such required consent(s) as promptly as possible. The Seller and the Buyer agree that if any consent to an assignment shall not be obtained, or if any attempted assignment would be ineffective or would impair the Buyer's rights and obligations under the contract in question, so that the Buyer would not in effect acquire the benefit of all such rights and obligations, the Seller, to the maximum extent permitted by law and such contract, shall, after the Closing, appoint the Buyer to be the Seller's agent with respect to such contract, and the Seller shall, to the maximum extent permitted by law and such contract, enter into such reasonable arrangements with the Buyer as are necessary to provide the Buyer with the benefits and obligations of such contract. The Seller and the Buyer shall cooperate and shall each use their Commercially Reasonable Efforts after the Closing to obtain an assignment of such contract to the Buyer; provided that the Buyer shall not have any obligation to offer or pay any consideration in order to obtain any such consents. (d) Except for warranties contained in the Material Contracts, to the extent that the Seller's rights under any warranty or guaranty described in Section 2.1(b) may not be assigned without the consent of another Person, which consent has not been obtained by the Closing Date, this Agreement shall not constitute an agreement to assign the same, if an attempted assignment would constitute a breach thereof, or be unlawful. The Seller and the Buyer agree that if any consent to an assignment of any such warranty or guaranty would be ineffective or would impair the Buyer's rights and obligations under the warranty or guaranty in question, so that the Buyer would not in effect acquire the benefit of all such rights and obligations, the Seller, shall use Commercially Reasonable Efforts, at the Buyer's sole cost and expense, to the extent permitted by law and such warranty or guaranty, to enforce such warranty or guaranty for the benefit of the Buyer so as to the maximum extent possible to provide the Buyer with the benefits and obligations of such warranty or guaranty. Notwithstanding the foregoing, the Seller shall not be obligated to bring or file suit against any Third Party, provided that if the Seller shall determine not to bring or file suit after being requested by the Buyer to do so, the Seller shall assign, to the extent permitted by law of any applicable agreement or contract, its rights in respect of the claims so that the Buyer may bring or file such suit. (e) To the extent that any lease of personal property that is not a Material Contract cannot be assigned to the Buyer or is not subject to arrangements described in Section 5.6(c), upon the Buyer's request and at the Buyer's sole expense, the Seller will use -27- 032 Commercially Reasonable Efforts to acquire the assets relating to such lease and to include them in the Acquired Assets before the Closing Date. 5.7. Employee Matters. ---------------- (a) Buyer is required to offer employment to those employees of the Seller who were employed in non-managerial positions and whose employment relates primarily to providing services for operation of the Acquired Assets ("Non-Managerial Employees") at any time during the three month period prior to the Closing Date, at levels of wages and overall compensation not lower than the employees' prior levels, for a period of six months beginning at the Closing Date. All union represented Non-Managerial Employees shall be vested as of the Closing Date in the Seller's tax-qualified plans under Section 401(a) of the Internal Revenue Code. (b) Buyer has the option, but is not required, to offer employment to employees of the Seller who were employed in managerial positions and whose responsibilities primarily relate to the Acquired Assets. Buyer will enroll any of these managerial employees, along with any non-represented non- supervisory employees and confidential employees, who are offered and who accept employment with the Buyer (collectively, the "Nonrepresented Employees") in those of Buyer's Employee Welfare Benefit Plans providing for retiree health and life insurance benefits which are provided to Buyer's similarly situated employees. To the extent that, at least 60 days prior to the Closing, any such Nonrepresented Employees enter into a Special Retention Agreement with the Seller (the "Special Retention Employees"), Buyer will apply such Special Retention Employees' prior service with Seller towards any eligibility, vesting or other waiting period requirements under such retiree plans, and will waive any pre-existing condition provisions. All Nonrepresented Employees shall be vested as of the Closing Date in the Seller's tax-qualified plans under Section 401(a) of the Internal Revenue Code. Buyer shall have no obligation for severance payments or other benefits of any kind with respect to Nonrepresented Employees to whom it does not offer employment or who do not accept employment if offered. (c) Within six months after the Closing Date, Seller will deliver to Buyer a schedule which defines the amount of the unreduced age 65 accrued benefit as of the Closing Date payable to each of Seller's employees hired by Buyer, as a single life annuity from Seller's tax-qualified defined benefit pension plan. (d) Within 30 days after the Closing Date, Seller will cause the trustees of Seller's VEBAs to transfer the Transferred Amount (as defined below) to the trustees of Buyer's VEBA for the purpose of providing retiree health and life insurance benefits to any Special Retention Employees and to the union represented employees of Seller who became employees of Buyer on the Closing Date (collectively, the "Transferred VEBA Eligible Employees"). Transferred VEBA Eligible Employees do not include (1) Seller's employees who as of the -28- 033 Closing Date have attained age 55 and have satisfied Seller's age and service qualification requirements for the receipt of Seller's retiree health and life insurance benefits nor (2) Nonrepresented Employees hired by Seller after December 31, 1994. The Transferred VEBA Eligible Employees shall not be eligible for retiree health and life insurance from Seller. The "Transferred Amount" shall be (A) with respect to the Special Retention Employees, the lesser of the amount calculated under paragraph (i) below and the amount calculated under paragraph (ii) below, and (B) with respect to the employees represented by a union, the lesser of the amount calculated under paragraph (i) below and $5.0 million: (i) the amount necessary to fund the accumulated post-retirement benefit obligation ("APBO") for retiree health and life insurance benefits (determined as of the Closing Date) relating to the Transferred VEBA Eligible Employees, determined using the actuarial assumptions and plan provisions from the FAS 106 valuation of the Buyer except for the following: 1. Medical claim costs to be adjusted for geographic cost differences; 2. Attribution period in determining APBO begins at a Transferred VEBA Eligible Employee's date of hire with the Seller and ends at the Closing Date; 3. Discount rate equal to the annual rate of interest on the 30-year Treasury Securities on the Closing Date plus 135 basis points. (ii) the amount necessary to fund the APBO for retiree health and life insurance benefits (determined as of the Closing Date) relating to the Transferred VEBA Eligible Employees, determined using the actuarial assumptions and plan provisions from the FAS 106 valuation of the Seller except for the following: 1. Attribution period in determining APBO begins at a Transferred VEBA Eligible Employee's date of hire with the Seller and ends at the Closing Date; 2. Discount rate equal to the annual rate of interest on the 30-year Treasury securities on the Closing Date plus 135 basis points. For the purposes of both (i) and (ii), the FAS 106 valuation to be used shall be the actuarial valuation reflected in the party's most recent annual corporate financial disclosure as of the -29- 034 Closing Date. Buyer's Employee Welfare Benefit Plan will provide the Transferred VEBA Eligible Employees with retiree health and life insurance benefits funded through the Buyer's VEBA with a value, determined under generally accepted accounting principles, at least equal to the Transferred Amount. (e) With respect to the business or operations of the Acquired Assets, the Seller shall not, except as otherwise required by the terms of the Collective Bargaining Agreements or in the ordinary course of business: (i) hire in connection with, or transfer to, the Acquired Assets any new employees prior to the Closing Date other than to fill vacancies in existing positions in the reasonable discretion of Seller; (ii) increase salaries or wages of employees prior to the Closing Date; (iii) take any action prior to the Closing Date to effect a change in the Collective Bargaining Agreements; or (iv) take any other action prior to the Closing Date to amend, adopt or terminate any benefit plans applicable to employees, except as required by law. (f) Any individual covered as of the Closing Date pursuant to the provisions of COBRA under any Seller Employee Benefit Plan that is a Group Health Plan, or with respect to whom a qualifying event, as defined under COBRA, has occurred on or prior to the Closing Date and who later elects continuation coverage under COBRA for such qualifying event, shall continue to be covered by such Group Health Plan after Closing in accordance with the provisions of COBRA and such Group Health Plan after Closing. On or before the Closing Date, Seller shall relocate or terminate the employment of all of its employees (both Managerial and Non-Managerial) whose responsibilities primarily relate to the Acquired Assets and shall be solely responsible for payments of all wages and compensation including, without limitation, accrued and unused vacation pay, bonuses, severance pay, overtime, all benefits under any Seller's Employee Benefit Plan that become payable on account of such termination of employment, or any other amounts to which those employees may be entitled for services rendered prior to their termination or by virtue of their termination. Seller agrees to timely perform and discharge all requirements under the WARN Act and under applicable state and local laws and regulations for the notification of its employees arising from the sale of the Acquired Assets to Buyer up to and including the Closing Date. After the Closing Date, Buyer shall be responsible for all legally required employee notification with respect to the Acquired Assets. (g) As of the Effective Date, the authorized employee complement for PNPS includes approximately 630 site personnel and 38 corporate support personnel. 5.8. Cooperation after Closing. ------------------------- (a) Records and Support. After the Closing Date, the Seller shall ------------------- have reasonable access and rights to copy to all of the records, books and documents related to the Acquired Assets to the extent that such access may reasonably be required by the Seller in connection -30- 034a with matters relating to or affected by the operation of the Facility by the Seller prior to the Closing Date. Such access shall be afforded by Buyer upon receipt of reasonable advance notice and during normal business hours. The Seller shall be solely responsible for any costs or expenses incurred by it pursuant to this Section 5.8(a). However, Buyer will not have any obligation to Seller under this Agreement to maintain any records, books or documents relating to operations prior to Closing beyond five (5) years from the Closing Date, except to the extent that such records, books or documents are required to be maintained under applicable law, rule or regulation. If the Buyer shall desire to dispose of any of records, books or documents that may relate to operation of the Facility prior to the Closing Date, the Buyer shall, prior to such disposition, give to the Seller a reasonable opportunity, at the Seller's expense, to segregate and remove such records, books or documents as the Seller may select. (b) Employees. After the Closing Date, both parties shall have --------- reasonable access to the employees of the other party, for purposes of consultation or otherwise, to the extent that such access may reasonably be required in connection with matters relating to or affected by the operations of the Seller prior to the Closing. (c) Both parties agree to cooperate with each other in connection with any investigation by any Governmental Authority, litigation or regulatory or other proceeding which may arise following the Closing Date and which relates to the operation of the Facilities by Seller prior to the Closing Date; and both parties agree to cooperate with each other with respect to any litigation or regulatory or other proceeding relating or pertaining to the Department of Energy's defaults under the DOE Standard Contract, including the providing of access to records and employees. 5.9. NEPOOL. ------ (a) On and after the Closing Date, the Buyer agrees to maintain membership in good standing in NEPOOL, and to submit to the governance of the ISO as established by the NEPOOL Agreement. (b) The Seller shall assign at the Closing, to the Buyer, and the Buyer shall assume, the portion of the Seller's Voting Shares that are based on Generation Ownership Shares which relate to the generation assets of the Seller that are Acquired Assets (the "Transferred Voting Shares"). The Transferred Voting Shares will be assigned in full to the Buyer as of the Closing Date and the Seller shall have no further right or obligation relating to such Transferred Voting Shares pertaining to periods following the Closing Date, all of which right and obligation shall rest with the Buyer. The intended effect of this assignment is that items "C" and "X" (subparagraph (i) only) of Section 6.3 of the NEPOOL Agreement shall be calculated: (a) with respect to the Seller, as though the Seller did not own the generation assets that are Acquired Assets during the twelve month period preceding the Closing and (b) with respect to the Buyer, as though the Buyer owned the generation assets that are Acquired Assets during the -31- 035 twelve month period preceding the Closing. Accordingly, the assignment of such Transferred Voting Shares to the Buyer will not result in a greater aggregate number of Voting Shares that are based on the Generation Ownership Shares which are related to the Acquired Assets for the Buyer and the Seller together than the Seller would have had in the absence of this Agreement and the transactions contemplated thereby. (c) In accordance with Section 21.3 of the NEPOOL Agreement, the Buyer hereby expressly assumes all of the Seller's rights and obligations under the NEPOOL Agreement with respect to the generation assets that are Acquired Assets (collectively, the "NEPOOL Obligations"), and such NEPOOL Obligations hereby shall become the binding rights and obligations of the Buyer. 5.10. Risk of Loss. Except as otherwise provided in this Section ------------ 5.10, during the Interim Period all risk of loss or damage to the property included in the Acquired Assets shall be borne by the Seller. If during the Interim Period the Acquired Assets are damaged by fire or other casualty (each such event, an "Event of Loss"), or are taken by a Governmental Authority by exercise of the power of eminent domain (each, a "Taking"), then the following provisions shall apply: (a) the occurrence of (i) any one or more Events of Loss, of which the aggregate costs to restore, repair or replace, less any insurance proceeds received or payable to the Seller in connection with such Event or Events of Loss (provided that any insurance proceeds received or payable in connection with the Event or Events of Loss are either used to restore, repair or replace such Event or Events of Loss or made available to the Buyer) that do not constitute a Material Adverse Effect, and/or (ii) any one or more Takings, of which the aggregate condemnation proceeds equal an amount that would not constitute a Material Adverse Effect, shall have no effect on the transactions contemplated hereby; (b) upon the occurrence of (i) any one or more Events of Loss, of which the aggregate costs to restore, repair or replace, less any insurance proceeds received or payable to the Seller in connection with such Event or Events of Loss (provided that any insurance proceeds received or payable in connection with the Event or Events of Loss are either used to restore, repair or replace such Event or Events of Loss or made available to the Buyer) that does constitute a Material Adverse Effect, (ii) any one or more Takings, of which the aggregate condemnation proceeds equal an amount that constitutes a Material Adverse Effect (a "Major Loss"), the Seller shall have, in the case of a Major Loss relating to one or more Events of Loss, the option, exercised by notice to the Buyer, to restore, repair or replace the damaged Acquired Assets prior to Closing. If the Seller elects to restore, repair or replace the Acquired Assets relating to a Major Loss, which election shall be made by notice to the Buyer prior to Closing within fifteen (15) days following the occurrence of the Major Loss, the completion of the repair, replacement or restoration will be a condition to the Closing and the Closing Date shall be postponed at the election of the Seller for the amount of time reasonably necessary to -32- 036 complete the restoration, repair or replacement, not to exceed one hundred and eighty (180) days without the Buyer's consent. If the Seller elects not to restore, repair or replace the Acquired Assets affected by a Major Loss, or such Major Loss is the result of one or more Takings, the provisions of Section 5.10 (c) will apply; (c) in the event that the Seller elects not to restore, repair or replace a Major Loss, or in the event that the Seller, having elected to repair, replace or restore the Major Loss, fails to complete the repair, replacement or restoration within the one hundred eighty (180) days, or in the event that a Major Loss is the result of one or more Takings, then the Parties shall, within thirty (30) days following the Seller's election, failure to complete, or the occurrence of such Takings, as the case may be, negotiate in good faith an equitable adjustment in the Purchase Price to reflect the impact of the Major Loss, as mitigated by any repair, replacement or restoration work actually completed by the Seller, on the Acquired Assets being sold to the Buyer, and proceed to Closing. To assist the Buyer in its evaluation of any and all Events of Loss, the Seller shall provide the Buyer such access to the Acquired Assets and such information as the Buyer may reasonably request in connection therewith; and (d) in the event that the parties fail to reach agreement on an equitable adjustment of the Purchase Price within the thirty (30) days provided in Section 5.10(c), then the Buyer shall have the election, exercisable by notice to the Seller within fifteen (15) days immediately following the expiration of the thirty (30) day period, to either (a) proceed with the consummation of the transaction at Closing, with a reduction in the Purchase Price consistent with the Seller's last offer communicated to the Buyer, in which event the Seller shall assign over or deliver to the Buyer at Closing all condemnation proceeds or insurance proceeds which the Seller receives, or to which the Seller becomes entitled by virtue of the Events of Loss, less any costs and expenses reasonably incurred by the Seller in obtaining such condemnation proceeds or insurance proceeds, or (b) terminate this Agreement, in which event this Agreement shall terminate and neither Party shall thereafter have any obligation or liability to the other by reason of this Agreement. If the Buyer fails to make the election within the fifteen (15) day period, The Buyer will be deemed to have made the election to proceed with the Closing. 5.11. Remittance of Pilgrim Fixed Operating Costs. For each month ------------------------------------------- during the period commencing on the Closing Date through December 31, 2000, the Seller will remit to the Buyer $1,916,666.66 (equal to 1/12 of the Pilgrim Fixed Operating Cost component of the Access Charge (as that term is used in Section 2.1(a) of the Settlement Agreement)), such amount to be pro-rated for any partial month during such period. Such amount shall be paid by Seller in arrears on the fifteenth day of each month, commencing on the fifteenth day following the first full month during such period. 5.12. Nuclear Insurance. The Parties' respective rights and ----------------- obligations with respect to nuclear insurance matters shall be as set forth in Schedule 5.12. -33- 037 5.13. Nonwaiver of Third Party Environmental Liabilities. In the -------------------------------------------------- event Buyer, either before or after the Closing Date, discovers Environmental Liabilities assumed pursuant to Section 2.3(a) the genesis of which occurred, in whole or in part, prior to the Closing Date, Seller agrees to cooperate and provide Buyer with any information in Seller's possession that will assist Buyer in locating any Third Party who may be a "responsible party" as defined by any Environmental Laws with respect thereto, and Seller shall not waive or excuse the liability of any Third Party who may share responsibility for any of such Environmental Liabilities that will have adverse effect on Buyer. 5.14. Site Contamination Validation. ----------------------------- (a) Assessment. Seller will, at its own expense, prior to Closing, ---------- cause an assessment of the Site's contamination to be conducted and completed by Duke Engineering & Services, Inc. using the criteria set forth in Schedule 5.14(a). The results of such assessment will be provided to Buyer at least twelve (12) weeks prior to the Closing. (b) Adjustment. Buyer will use the results from the assessment ---------- performed pursuant to Section 5.14(a) in order to develop and submit to Seller an estimate of the actual volume of contamination at the Site and a proposed adjustment to the Decommissioning Trust Closing Amount for Seller's review (based on Envirocare's then prevailing per volume rate multiplied by such volume) and approval at least nine (9) weeks prior to Closing. Within two (2) weeks following Buyer's delivery of such volume estimate and proposed adjustment, Seller shall either accept or object in good faith thereto. Any objection shall be in writing and shall state with specificity any calculations or assumptions that Seller disputes. If the parties are unable to resolve any such dispute before six (6) weeks prior to the Closing, then the parties shall jointly engage a mutually acceptable independent firm (or, in the event that the Parties cannot agree, an independent firm chosen by Duke Engineering & Services, Inc.), who shall, at the Parties' joint expense, review the Phase I Site Assessment, the Assessment pursuant to Section 5.14(a), any Buyer assessments pursuant to Section 5.4, the proposed volume estimate and adjustment submitted by Buyer pursuant to this Section and Seller's disputes relating thereto and shall determine the appropriate adjustment to the Decommissioning Trust Closing Amount prior to Closing. Such determination shall be binding upon the Parties. On or before the Closing Date, the Decommissioning Trust Closing Amount shall be adjusted as determined by such independent firm in the case of a dispute or as proposed by Buyer if Seller did not dispute such proposal. 5.15. Remediation. Prior to the Closing, and at its expense, Seller ----------- shall fully and successfully correct and complete the Remediation of the recognized environmental concerns described in the Phase I Site Assessment as listed in Schedule 5.15. -34- 038 5.16. Refueling Costs. In the event that the Closing occurs prior --------------- to the commencement of the Refueling Outage, Seller shall pay to Buyer the lesser of (i) $40 million or (ii) costs actually incurred by Buyer after the Closing that relate to the Refueling Outage. Such payment will be made within ten (10) days of Seller's receipt of Buyer's bi-weekly statements of cost actually incurred by Buyer relating to the Refueling Outage. 5.17. Post-Closing Services. Buyer recognizes that the Seller is --------------------- currently evaluating and reorganizing various corporate support functions and systems. The Seller agrees at the request of Buyer to provide the support functions identified in Schedule 5.17 (to the extent that the resources necessary to provide these functions are still available to Seller following such evaluation and reorganization; provided that, notwithstanding such evaluation and reorganization, Seller shall make available and support the MMAPPS application until the earlier of (i) December 31, 1999 and (ii) the six month anniversary of the Closing Date) for a period not to exceed six (6) months from the Closing Date. Buyer shall reimburse Seller for all costs properly chargeable or allocable to the services performed, including all direct and indirect labor costs and related overheads. Seller will bill Buyer for such services monthly and will provide adequate information and detail to support such invoices. Buyer shall pay all such bills within thirty (30) days after receiving them. The parties shall use good faith efforts to execute and deliver a transitional services agreement on or before the Closing Date. 5.18. Gas Supply Line. At Buyer's request prior to or following the --------------- Closing Date, Seller shall negotiate with Buyer in good faith for possible easements or other rights relating to installation of a gas supply line at locations other than the Site. Such easements or other rights, if agreed to, shall be subject to any required approvals of Governmental Authorities, as well as all applicable laws, rules and regulations. 5.19. Maintenance of Financial Stability. During the term on the ---------------------------------- NRC License, the Buyer shall at all times maintain itself in full compliance with all applicable financial qualification requirements imposed upon it by the NRC and shall provide the Seller with copies of all filings with the NRC made by the Buyer relating to its fulfillment of such requirements. 5.20. Availability of Funds. By January 31, 1999, the Buyer shall --------------------- have delivered to the Seller evidence of sufficient funds available to it or binding written commitments from responsible financial institutions to provide sufficient funds to pay the Purchase Price in accordance with Section 2.5. 5.21. Funding of the Decommissioning Trust and the Provisional -------------------------------------------------------- Trust. ----- (a) On the Closing Date, Seller shall fully fund and transfer to Buyer in accordance with this Section 5.21 an aggregate amount equal to or greater than the minimum amount required by the Nuclear Regulatory Commission regulations for the decommissioning of -35- 039 Pilgrim. Such funding and transfer is intended to occur in as tax efficient manner as possible in order to minimize the rate impact on Seller's ratepayers. Accordingly, Seller shall have or establish as of the Closing Date a Decommissioning Trust and, if necessary, a Provisional Trust. Absent any pre-closing change in the tax law, rule or regulation as in existence on the Effective Date, or an IRS ruling issued to either the Seller or Buyer, the aggregate amount to be funded for decommissioning in both the Decommissioning Trust and the Provisional Trust shall be based upon the assumption that the Decommissioning Trust and the Provisional Trust will be treated upon transfer to the Buyer as one hundred percent (100%) "non-qualified" pursuant to Section 468A of the Code. If the Closing Date is April 1, 1999, and no Pre-Closing Change (as defined below) has occurred, the Decommissioning Trust Closing Amount shall be $396 million, and the amount of funding for the Provisional Trust shall be $70 million. If the Closing Date is June 30, 2000, and no Pre- Closing Change has occurred, the Decommissioning Trust Closing Amount shall be $418 million, and the amount of the funding for the Provisional Trust shall be $70 million. If the Closing Date occurs on a date between April 1, 1999 and June 30, 2000, the Parties shall determine the Decommissioning Trust Closing Amount by computing a daily adjustment factor determined on the basis of the difference in the funding amount necessary for such two closing dates and the amount of funding for the Provisional Trust shall be $70 million. (b) If before the Closing Date there is an amendment of Section 468A of the Code or the Treasury regulations promulgated thereunder, or the IRS's interpretations thereof, which has the effect of causing the funds of the Decommissioning Trust to accumulate more rapidly than possible under the federal tax laws as of the Effective Date (e.g., the applicability of a lower tax rate) (a "Pre-Closing Change"), the funding amount for the Provisional Trust described above shall be decreased in accordance with Schedule 5.21; provided, that if such amount is decreased to zero, no Provisional Trust shall be established. (c) If on or after the Closing Date and before December 31, 2002, there is an amendment of Section 468A of the Code or the Treasury regulations promulgated thereunder, or the IRS's interpretations thereof, which has the effect of causing the funds of the Decommissioning Trust to accumulate more rapidly than possible under the federal tax laws as of the Closing Date (e.g., the applicability of a lower tax rate) (the "Post-Closing Change"), the amount of funds in the Provisional Trust shall be reduced in accordance with Schedule 5.21 and such reduction shall be rebated in accordance with the Provisional Trust; provided, however, that any such reduction and rebate shall be accomplished in a manner consistent with the Atomic Energy Act, the Code and other applicable law. Under no condition shall Buyer be personally liable for any payments or refunds except to the extent permitted to be paid from the Provisional Trust under applicable law. (d) Prior to the Closing, the Trust Agreement shall not be amended by the Seller to provide for the consolidation of its Qualified Fund and Non- Qualified Fund, and shall not be amended in any other manner if and to the extent such amendment would constitute a -36- 039a Disqualification Event, as defined herein. Following the Closing and prior to December 31, 2002, the Trust Agreement shall not be amended by the Buyer to provide for the consolidation of its Qualified Fund and Non-Qualified Fund, and shall not be amended in any other manner if and to the extent such amendment would constitute a Disqualification Event, as defined herein. As used herein, the term "Disqualification Event" shall mean any amendment to the Trust Agreement which, assuming that the Qualified Fund was not disqualified upon the Closing, would disqualify such fund under (1) Section 468A of the Code and the Regulations promulgated thereunder as in effect on the Closing; (2) any federal legislation that has been introduced into Congress; (3) any final, temporary or proposed regulations published by the Department of Treasury; or (4) any other written guidance published by the Internal Revenue Service. The execution and delivery of the Supplemental Indenture by the Buyer and Seller shall not be deemed an amendment prohibited by this Section 5.21(d). 5.22. Early Shutdown Study. Buyer recognizes that Seller is -------------------- required under its Settlement Agreement in Attachment 3 section 2.1(b) to perform steps to minimize costs in the event of an unanticipated early shutdown. These steps include, but are not limited to: establishing the optimum strategy for spent fuel storage; executing long-lead portions of the plan necessary to minimize fuel storage costs (e.g. dry fuel storage/crane upgrade/spent fuel pool cooling); creating the regulatory infrastructure to allow an effective transition to decommissioning (e.g. defueled technical specifications, emergency plan, security plan); and conducting a radiological and non-radiological site characterization initiative (such site characterization to be performed and paid for by Seller as provided in Section 5.14). The Buyer has indicated to the Seller that it also intends to undertake decommissioning pre-planning work and agrees that it will work jointly with the Seller to expeditiously define a mutually acceptable scope of work, the estimated costs of which shall not exceed $3 million. The Buyer recognizes that the Seller is required to pursue these steps on an expedited basis and agrees to perform such work in accordance with the mutually agreed scope. Buyer will pay for such work. In the event that the Closing does not occur, Seller agrees to reimburse Buyer for costs incurred under this Section 5.22 up to a maximum of $3 million and Buyer will transfer all material, assets and rights associated with this project to the Seller. 6. Conditions to Obligation to Close. --------------------------------- 6.1. Conditions to Obligation of the Buyer to Close. The ---------------------------------------------- obligation of the Buyer to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions precedent: (a) Representations and Warranties. The representations and ------------------------------ warranties set forth in Section 3 above shall be true and correct in all material respects as though made at and as of the Closing Date (except with respect to any representation or warranty expressly made as of the Effective Date, which shall be deemed made as of the Effective Date); -37- 040 (b) Performance by the Seller. The Seller shall have performed and ------------------------- complied in all material respects with all of its covenants, agreements and obligations hereunder through the Closing; (c) Buyer's Regulatory Approval. The Buyer shall have received the --------------------------- consents, approvals and authorizations referenced in Section 5.2(b) and the Buyer's Regulatory Approvals specified in Schedule 6.1(c) in each case without terms and conditions that unacceptably affect the Buyer in the Buyer's reasonable discretion, except for matters that, in the aggregate, have no Material Adverse Effect; (d) Absence of Litigation. No suit, action or other proceeding --------------------- against any Party or its Affiliates or any of the Acquired Assets shall be pending before any Governmental Authority which seeks to restrain or prohibit any of the transactions contemplated by this Agreement or to obtain damages or other relief in connection with this Agreement or the actions contemplated hereby, except for matters that, in the aggregate, will not have a Material Adverse Effect. There shall not be any injunction, judgment, order, decree, ruling, charge or laws in effect preventing consummation of any of the transactions contemplated by this Agreement or the Related Agreements, except as shall not have a Material Adverse Effect; (e) Anti-trust Matters. All applicable waiting periods (and any ------------------ extensions thereof) under the Hart-Scott-Rodino Act shall have expired or otherwise been terminated; (f) Deliveries. The Seller shall have complied in all material ---------- respects with the delivery requirements of Section 2.10; (g) Decommissioning Trust Fully Funded. On the Closing Date, the ---------------------------------- Decommissioning Trust shall be Fully Funded and the Provisional Trust (if any) shall be funded in accordance with Section 5.21, and the Decommissioning Trust and the Provisional Trust (if any) shall have been amended by a Supplemental Indenture; (h) Title Commitment. Commonwealth Land Title Insurance Company shall ---------------- have provided a commitment to the Buyer in the form of the Title Commitment for a policy to be issued immediately following the Closing, which policy shall provide for a coverage amount equal to the value determined pursuant to Section 2.7 (which may include reinsurance through other reasonably acceptable title insurance companies). Seller shall have signed customary closing affidavits with respect to mechanic's liens and parties in possession and shall satisfy the conditions enumerated in Schedule B, Section 1 of the Title Commitment, except for item numbers 5, 9 (with respect to shareholders), 10, 11 and 14; (i) Material Adverse Effect. Since the Effective Date, there shall ----------------------- not have occurred and be continuing a Material Adverse Effect, other than such arising from facts or circumstances (i) that were within Buyer's Knowledge on the Effective Date and were not -38- 041 required to be corrected or Remediated before Closing by this Agreement, or (ii) that were disclosed on any of the Schedules; (j) Tax Rulings. Buyer shall have received an opinion of counsel to ----------- the Buyer, or one or more private letter rulings shall have been issued by the National Office of the Internal Revenue Service, to the effect that: (i) Buyer shall recognize no taxable income as a result of the transfer to it of the Acquired Assets (including beneficial interests in any decommissioning trusts); (ii) Immediately after the transaction, the tax basis of the assets in any decommissioning trusts the beneficial interests in which are transferred to Buyer will equal the fair market value of these assets on the date of transfer; and (iii) Any decommissioning trust the sole beneficial interest in which is transferred to Buyer will be treated as a "Grantor Trust" under Code sections 671 through 677 with Buyer as the grantor; (k) Outage. Neither the Refueling Outage nor any other outage shall ------ be in progress or continuing on the date of Closing; (l) PPA's. The PPA's shall be in full force and effect as of the ----- Closing Date. (m) Interconnection and Operation Agreement. The Interconnection and --------------------------------------- Operation Agreement shall be in full force and effect as of the Closing Date. The Buyer may waive any condition specified in this Section 6.1 if it executes a writing so stating at or prior to the Closing and such waiver shall not be considered a waiver of any other provision in this Agreement unless the writing specifically so states. 6.2. Conditions to Obligation of the Seller to Close. The ----------------------------------------------- obligation of the Seller to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions: (a) Representations and Warranties. The representations and ------------------------------ warranties set forth in Section 4 above shall be true and correct in all material respects at and as of the Closing Date (except with respect to any representation or warranty expressly made as of the Effective Date, which shall be deemed made as of the Effective Date); -39- 041a (b) Performance by Buyer. The Buyer shall have performed and complied -------------------- in all material respects with all of its covenants, agreements and obligations hereunder through the Closing; (c) Seller's Regulatory Approval. The Seller shall have received the ---------------------------- Seller's Regulatory Approvals specified in Schedule 6.2(c), in each case without terms and conditions that unacceptably affect the Seller in the Seller's reasonable discretion, except for matters that, in the aggregate, have no material adverse effect on Seller; (d) Absence of Litigation. No suit, action or other proceeding --------------------- against any Party or its Affiliates or any of the Acquired Assets shall be pending before any Governmental Authority which seeks to restrain or prohibit any of the transactions contemplated by this Agreement or to obtain damages or other relief in connection with this Agreement or the actions contemplated hereby, except for matters that, in the aggregate, will not have a material adverse effect on Seller. There shall not be any injunction, judgment, order, decree, ruling, charge or laws in effect preventing consummation of any of the transactions contemplated by this Agreement or the Related Agreements, except as shall not have a material adverse effect on Seller; (e) D.T.E. Approval. The D.T.E. Approval shall have occurred and all --------------- the terms and conditions of the D.T.E. Approval shall be acceptable to the Seller in its sole discretion; (f) Deliveries. The Buyer shall have complied in all material ---------- respects with the delivery requirements of Section 2.11; (g) NEPOOL. The Buyer shall be a member of NEPOOL; ------ (h) Anti-trust Matters. All applicable waiting periods (and any ------------------ extensions thereof) under the Hart-Scott-Rodino Act shall have expired or otherwise been terminated; (i) Securitization. The Seller shall have issued, pursuant to Section -------------- 1H of Chapter 164, Electric Rate Reduction Bonds that have been securitized by the recovery of reimbursable transition costs set forth in Section 1G(b)(1)(ii) of Chapter 164, in an amount sufficient to ensure that (a) the Decommissioning Trust Value is equal to the Decommissioning Trust Closing Amount and (b) the Provisional Trust is funded in accordance with Section 5.21; (j) Decommissioning Trust Transfer. With respect to federal income ------------------------------ taxes, either (1) prior to Closing, federal legislation has been enacted that will permit the Seller to fund the Decommissioning Trust in an amount equal to the Decommissioning Trust Closing Amount and to take a current income tax deduction for all amounts contributed by the Seller to the Decommissioning Trust; or (2) the Seller shall have received, prior to Closing, an opinion of counsel to the Seller, in form and substance satisfactory to the Seller in the Seller's sole -40- 042 discretion, to the effect that although the legislation referred to in Clause (1) has not been enacted prior to Closing, the federal income tax consequences to the Seller of transferring the Decommissioning Trust to the Buyer, with a balance equal to the Decommissioning Trust Closing Amount, are not materially worse than if the legislation referred to in Clause (1) were enacted; (k) Host Community Tax Agreement. The Seller shall have either (i) ---------------------------- entered into a Host Community Tax Agreement or (ii) arbitrated at the D.T.E. a final resolution of the Seller's liability under Section 71 of the Act; (l) Municipal Contracts and Wholesale Power Contracts. The Seller ------------------------------------------------- shall have resolved, through termination, amendment, assignment or otherwise, to its sole satisfaction, any issues (including receipt of any related approvals of Governmental Authorities by any party to the Municipal Contracts and the Wholesale Power Contracts, and any required approvals by either Commonwealth Electric or Montaup of such regulatory approvals) related to the Municipal Contracts and the Wholesale Power Contracts; (m) PPA's. The PPA's shall be in full force and effect as of the ----- Closing Date. (n) Interconnection and Operation Agreement. The Interconnection and --------------------------------------- Operation Agreement shall be in full force and effect as of the Closing Date; and (o) Decommissioning Funding. Notwithstanding any other provision of ----------------------- this Agreement, Seller shall not be required to proceed with the Closing in the event that the specific dollar amounts identified in Section 5.21(a) as the Decommissioning Trust Closing Amount and the required funding for the Provisional Trust are in the aggregate less than the minimum amount required as of the Closing Date by NRC regulations for the decommissioning of Pilgrim. The Seller may waive any condition specified in this Section 6.2 if it executes a writing so stating at or prior to the Closing and such waiver shall not be considered a waiver of any other provision in this Agreement unless the writing specifically so states. 7. Confidentiality. --------------- (a) Each Receiving Party will treat and hold as such all of the Proprietary Information, refrain from using any of the Proprietary Information except in connection with this Agreement and the Related Agreements and transactions contemplated hereby and thereby, and, if this Agreement is terminated prior to Closing, deliver promptly to the Disclosing Party or destroy, at the request and option of the Disclosing Party, all tangible embodiments (and all copies) of the Proprietary Information which are in his or its possession. All Proprietary Information relating to the Acquired Assets as may be delivered to Buyer prior to Closing shall -41- 043 become Buyer's Proprietary Information and Buyer shall be deemed to be the Disclosing Party with respect thereto upon consummation of the Closing and Seller shall not thereafter disclose any such Proprietary Information except to the extent allowed herein. In the event that the Receiving Party is requested or required (by oral question or request for information or documents in any legal proceeding, including without limitation the Buyer's Regulatory Approval and the Seller's Regulatory Approval processes, interrogatory, subpoena, civil investigative demand, or similar process) to disclose any Proprietary Information, the Receiving Party will notify the Disclosing Party promptly of the request or requirement so that the Disclosing Party may seek an appropriate protective order or waive compliance with the provisions of this Section 7. If, in the absence of a protective order or the receipt of a waiver hereunder, the Receiving Party is, on the advice of counsel, compelled to disclose any Proprietary Information to any tribunal or else stand liable for contempt, that the Receiving Party may disclose the Proprietary Information to the tribunal; provided, however, that the Receiving Party shall use its best efforts to obtain, at the request of the Disclosing Party, an order or other assurance that confidential treatment will be accorded to such portion of the Proprietary Information required to be disclosed as the Disclosing Party shall designate. (b) The obligations of the Party contained in this Section 7 shall be in full force and effect for three (3) years from the date hereof and will survive the termination of this Agreement, the discharge of all other obligations owed by the Parties to each other and any transfer of title to the Acquired Assets. Nothing in this Section 7 shall in any way alter the Buyer's obligations under the Confidentiality Agreement dated April 29, 1998, by and between the Buyer and the Seller. (c) Upon the Disclosing Party's prior written approval (which will not be unreasonably withheld), the Receiving Party may provide Proprietary Information to the D.T.E., the NRC, the FERC or any other Governmental Authority with jurisdiction, as necessary, to obtain any consents, waivers or approvals as may be required for the Receiving Party to undertake the transactions contemplated herein. The Receiving Party will seek confidential treatment for such Proprietary Information provided to any such Governmental Authority and the Receiving Party will notify the Disclosing Party as far in advance as is practicable of its intention to release to any such Governmental Authority any such Proprietary Information. (d) Notwithstanding anything set forth herein, nothing in this Agreement shall be interpreted as precluding either Party from reporting or disclosing any information (i) to the NRC of or concerning any perceived safety issue within the NRC's regulatory jurisdiction (ii) with the prior written consent of the Disclosing Party or (iii) to its Affiliates, attorneys, financial advisors and accountants who are assisting either Party in connection with the transactions contemplated by this Agreement. -42- 044 8. Taxes. ----- (a) All transfer and sales Taxes incurred in connection with this Agreement and the transactions contemplated hereby shall be borne by the Buyer, including, without limitation (a) Massachusetts state sales/use tax, and (b) the Massachusetts excise tax on deeds imposed by M.G.L. c. 64D Section 1, and the Buyer, at its own expense, will file, to the extent required by applicable law, all necessary Tax Returns and other documentation with respect to all such transfer or sales/use Taxes, and, if required by applicable law, the Seller will join in the execution of any such Tax Returns or other documentation. (b) With respect to Taxes to be prorated in accordance with Section 2.8 of this Agreement only, the Buyer shall prepare and timely file all Tax Returns required to be filed after the Closing with respect to the Acquired Assets, if any, and shall duly and timely pay all such Taxes shown to be due on such Tax Returns. The Buyer's preparation of any such Tax Returns shall be subject to the Seller's approval, which approval shall not be unreasonably withheld. Within twenty (20) Business Days after the Tax Returns are prepared, the Buyer shall make such Tax Returns available for the Seller's review and approval. The Seller shall respond no later than twenty-five (25) Business Days prior to the due date for filing such Tax Return. With respect to such Tax Return, the Seller shall pay to the Buyer its appropriate share of the amount shown as due on the Tax Returns determined in accordance with Section 2.8 of this Agreement. (c) The Property Tax Agreement shall set forth the agreement between the Parties with respect to property Taxes. 9. Non-Survival; Effect of Closing and Indemnification. --------------------------------------------------- 9.1. Non-Survival of Representations and Warranties; Survival of ----------------------------------------------------------- Covenants and Agreements. The representations and warranties in this - ------------------------ Agreement shall terminate at the Closing or the termination of this Agreement pursuant to Section 10.1, as the case may be. The covenants and agreements contained in this Agreement that by their terms survive the Closing or termination of this Agreement shall survive such Closing or termination, as the case may be, and all other covenants and agreements shall terminate at the Closing or the termination of this Agreement pursuant to Section 10.1, as the case may be. 9.2. Effect of Closing. Except as otherwise provided herein, upon ----------------- the Closing any condition in favor of either Party that has not been satisfied, or any representation, warranty or covenant, that has been breached or left unsatisfied by either Party will be deemed waived by the Parties as of the Closing Date, and each Party will be deemed to fully release and forever discharge the other Party on account of any and all claims, demands or charges, known or unknown, with respect to the same. Nothing in this provision shall affect or cause to be -43- 045 waived those matters specifically stated to survive or to occur after the Closing pursuant to this Agreement. 9.3. Indemnity by the Seller. The Seller hereby agrees to ----------------------- indemnify, defend and hold harmless the Buyer, its Affiliates and any of their officers, directors, employees or agents against and in respect of all claims, Liabilities, obligations, judgments, Liens, injunctions, charges, orders, decrees, rulings, damages, dues, assessments, Taxes, losses, fines, penalties, damages, expenses, fees, costs, amounts paid in settlement (including reasonable attorneys' and expert witness fees and disbursements in connection with investigating, defending or settling any action or threatened action), arising out of any claim, damages, complaint, demand, cause of action, audit, investigation, hearing, action, suit or other proceeding asserted or initiated or otherwise existing in respect of any matter (collectively, the "Losses"), provided that such Losses exceed One Million Dollars ($1,000,000) in the aggregate and result or arise from: (a) any Liability of the Seller that becomes a Liability of the Buyer under any bulk transfer law of any jurisdiction; (b) any Third-Party Claim against the Buyer based on Seller's ownership, operation or use of the Acquired Assets prior to the Closing that is not related to the Assumed Liabilities; (b) the Excluded Assets; (d) Liabilities not assumed by Buyer within the scope of Section 2.4; (e) Any breach by Seller of any covenant, agreement or obligation of the Seller contained in this Agreement or any certificate required to be delivered by Seller pursuant to this Agreement and any intentional misrepresentation or fraudulent breach of representation or warranty inducing Buyer to proceed to the Closing and causing Buyer to suffer Losses; or (f) Any contracts, leases or other agreements or commitments entered into or made by Seller with respect to the Acquired Assets, unless Buyer has agreed to assume Liabilities under such agreements or commitments. 9.4. Indemnity by Buyer. The Buyer hereby agrees to indemnify, ------------------ defend and hold harmless the Seller and its Affiliates and any of their officers, directors, employees or agents against and in respect of all Losses, provided that such Losses exceed One Million Dollars ($1,000,000) in the aggregate and result or arise from: (a) any Third Party Claim against the Seller based on or relating to the Buyer's ownership, operation or use of the Acquired Assets after the Closing; -44- 046 (b) any Third Party Claim arising out of, or related to the contracts, warranties or guaranties, or any agreements or that have been properly transferred or assigned to Buyer by Seller except to the extent the Third Party Claim arises from a breach of the contract or agreement by Seller prior to Closing; (c) the Assumed Liabilities; (d) any breach by Buyer of any covenant, agreement or obligation of Buyer contained in this Agreement and any intentional misrepresentation or fraudulent breach of warranty inducing Seller to enter into this Agreement and causing Seller to suffer Losses; or (e) any action or inaction by Buyer in connection with the maintenance or provision of post-retirement health and welfare benefits to Special Retention Employees. 9.5. Exclusive Remedy. From and after the Closing, the remedies ---------------- set forth in this Section 9 constitute the sole and exclusive remedy for any and all claims, damages, complaints, demands, causes of action, investigations, hearings, actions, suits or other proceedings relating to this Agreement and are in lieu of any and all other rights and remedies which the Seller or the Buyer may have under this Agreement or otherwise for monetary relief with respect to any breach or failure to perform or with respect to the Assumed or Excluded Liabilities other than equitable remedies for fraud and except for obligations to be performed after the Closing hereunder. Each Party waives any provision of law to the extent that it would limit or restrict the agreements contained in this Section 9. Nothing herein shall prevent either Party from terminating this Agreement in accordance with Section 10. 9.6. Matters Involving Third Parties. ------------------------------- (a) If any Third Party shall notify any Party (the "Indemnified Party") with respect to any matter (a "Third Party Claim") which may give rise to a claim for indemnification against any other Party (the "Indemnifying Party") under this Section 9, then the Indemnified Party shall promptly notify the Indemnifying Party thereof in writing; provided, however, that no delay on the part of the Indemnified Party in notifying the Indemnifying Party shall relieve the Indemnifying Party from any obligation hereunder unless (and then solely to the extent) the Indemnifying Party thereby is prejudiced. (b) Any Indemnifying Party will have the right to defend, at its expense, the Indemnified Party against the Third Party Claim with counsel of its choice reasonably satisfactory to the Indemnified Party so long as (i) the Indemnifying Party notifies the Indemnified Party in writing within fifteen days after the Indemnified Party has given notice of the Third Party Claim that the Indemnifying Party will indemnify the Indemnified Party from and against the entirety of any Losses the Indemnified Party may suffer resulting from, arising -45- 047 out of, relating to, in the nature of, or caused by the Third Party Claim, (ii) the Indemnifying Party provides the Indemnified Party with evidence acceptable to the Indemnified Party that the Indemnifying Party will have the financial resources to defend against the Third Party Claim and fulfill its indemnification obligations hereunder, (iii) the Third Party Claim involves only money damages and does not seek an injunction or other equitable relief, settlement of, or an adverse judgment with respect to, the Third Party Claim is not, in the good faith judgment of the Indemnified Party, likely to establish a precedential custom or practice adverse to the continuing business interests of the Indemnified Party, and (iv) the Indemnifying Party conducts the defense of the Third Party Claim actively and diligently. (c) So long as the Indemnifying Party is conducting the defense of the Third Party Claim in accordance with Section 9.6(b) above, (i) the Indemnified Party may retain separate co-counsel at its sole cost and expense and participate in the defense of the Third Party Claim, (ii) the Indemnified Party will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnifying Party (which consent shall not unreasonably be withheld), and (iii) the Indemnifying Party will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim unless written agreement is obtained releasing the Indemnified Party from all liability thereunder. (d) In the event any of the conditions in Section 9.6(b) above is or becomes unsatisfied, however, (i) the Indemnified Party may defend against, and consent to the entry of any judgment or enter into any settlement with respect to, the Third Party Claim in any manner it may deem appropriate (and the Indemnified Party need not consult with, or obtain any consent from, any Indemnifying Party in connection therewith), (ii) the Indemnifying Party will reimburse the Indemnified Party promptly and periodically for the costs of defending against the Third Party Claim (including attorneys' fees and expenses, notwithstanding Section 9.3), and (iii) the Indemnifying Party will remain responsible for any Losses the Indemnified Party may suffer resulting from, arising out of, relating to, in the nature of, or caused by the Third Party Claim to the fullest extent provided in this Section 9. 9.7. Net of Taxes and Insurance. Any calculation of a Loss under -------------------------- this Section 9 shall, in each case, give full effect to (i) any and all income Tax benefits to the Indemnified Party in respect of the Loss, and (ii) any and all insurance or other proceeds received or payable to the Indemnified Party in respect of the Loss. Any Party seeking indemnity hereunder shall use Commercially Reasonable Efforts to seek coverage for both costs of defense and indemnity under applicable insurance policies. 9.8. Release. Except as provided in Section 9.3, the Buyer hereby ------- releases, holds harmless and forever discharges the Seller from any and all claims, damages, complaints, demands, causes of action, investigations, hearings, actions, suits or other proceedings of any kind or character whether known or unknown, hidden or concealed resulting from or arising -46- 048 from any Environmental Liability, except for the Environmental Liability retained by Seller pursuant to Section 2.4(b). The Buyer hereby waives any and all rights and benefits that it now has, or in the future may have conferred upon it by virtue of any statute or common law principle which provides that a general release does not extend to claims which a party does not know or suspect to exist in its favor at the time of such release, which if known, would have materially affected such Party's settlement with the other Party. In this connection, the Buyer hereby acknowledges that factual matters now unknown to it may have given or may hereafter give rise to claims, damages, complaints, demands, causes of action, investigations, hearings, actions, suits or other proceedings that are presently unknown, unanticipated and unsuspected, and it further agrees that this Section 9.8 has been negotiated and agreed upon in light of that awareness and it nevertheless hereby intends to release the Seller as set forth in the first sentence of this Section 9.8. 9.9. No Recourse. To the extent the transfer, conveyance, ----------- assignment and delivery of the Acquired Assets to the Buyer as provided in this Agreement is accomplished by deeds, assignments, easements, leases, licenses, bills of sale, or other instruments of transfer and conveyance, whether executed at the Closing or thereafter, these instruments are made without representation or warranty by, or recourse against, the Seller, except as expressly provided in this Agreement or in any such instrument. 9.10. Survival. The provisions of this Article 9 shall survive the -------- Closing. 10. Termination. ----------- 10.1. Termination of Agreement. The Parties may terminate this ------------------------ Agreement as provided below: (a) the Parties may terminate this Agreement by mutual written consent at any time prior to the Closing; (b) the Buyer may terminate this Agreement by giving written notice to the Seller at any time prior to the Closing if any of the following has occurred: (i) the Seller has breached any representation, warranty or covenant contained in this Agreement in any material respect, the Buyer has notified the Seller of the breach, and the breach has continued without cure for a period of 30 days after the notice of breach; (ii) the Closing shall not have occurred on or before December 31, 1999 (provided that such date shall be extended to June 30, 2000, in the event that the Closing shall not have occurred due to the pending appeal of any of Seller's Regulatory Approvals or Buyer's Regulatory Approvals) by reason of the failure of any condition precedent under Section 6.1 hereof (unless the failure results primarily from the Buyer itself breaching any representation, warranty, or covenant contained in this Agreement); (iii) any of the Buyer's Regulatory Approvals shall have been finally denied or shall have been granted subject to terms or conditions that unacceptably affect Buyer, in Buyer's reasonable -47- 049 discretion, except for any matters that have no Material Adverse Effect, and all appeals of such determination shall have been taken and have been unsuccessful; (iv) one or more courts of competent jurisdiction shall have issued an order, judgment or decree permanently restraining, enjoining or otherwise prohibiting the Closing, which order, judgment or decree shall have become final and non-appealable; (v) any statute, rule or regulation shall have been enacted by any Governmental Authority which, directly or indirectly, prohibits the consummation of the transactions contemplated hereby; (vi) in accordance with Section 5.10 hereof; (vii) (W) the Seller has within the then previous 15 days given the Buyer any notice pursuant to Section 5.5(c) above and the matter that is the subject of such notice, if in existence on the Effective Date or the Closing Date, would cause the representations and warranties of the Seller set forth in Section 3 hereof not to be true and correct, (X) such matter would have a Material Adverse Effect, (Y) the Buyer has notified the Seller of its intent to terminate pursuant to this Section 10.1(b)(vii), and (Z) the matter that is the subject of such notice continues to exist for a period of 30 consecutive days after such notice by the Buyer; or (viii) any outage of six (6) consecutive months or longer is ongoing; (c) the Seller may terminate this Agreement by giving written notice to the Buyer at any time prior to the Closing if any of the following has occurred: (i) the Buyer has breached any representation, warranty, or covenant contained in this Agreement in any material respect, the Seller has notified the Buyer of the breach, and the breach has continued without cure for a period of 30 days after the notice of breach; (ii) the Closing shall not have occurred on or before December 31, 1999 (provided that such date shall be extended to June 30, 2000, in the event that the Closing shall not have occurred due to the pending appeal of any of Seller's Regulatory Approvals or Buyer's Regulatory Approvals) by reason of the failure of any condition precedent under Section 6.2 hereof (unless the failure results primarily from the Seller itself breaching any representation, warranty, or covenant contained in this Agreement); (iii) any of the Seller's Regulatory Approvals shall have been finally denied or shall have been granted subject to terms or conditions that unacceptably affect Seller, in Seller's reasonable discretion, except for any matters that, in the aggregate, have no material adverse effect on Seller, and all appeals of such determination shall have been taken and have been unsuccessful, (iv) one or more courts of competent jurisdiction shall have issued an order, judgment or decree permanently restraining, enjoining or otherwise prohibiting the Closing, which order, judgment or decree shall have become final and non-appealable; (v) any statute, rule or regulation shall have been enacted by any Governmental Authority which, directly or indirectly, prohibits the consummation of the transactions contemplated hereby; (vi) in accordance with Section 5.10 hereof, (vii) (W) the Buyer has within the then previous 15 days given the Seller any notice pursuant to Section 5.5(d) above and the matter that is the subject of such notice, if in existence on the Effective Date or the Closing Date, would cause the representations and warranties of the Buyer set forth in Section 4 hereof not to be true and correct, (X) such matter would have a material adverse effect on Seller, (Y) the Seller has notified the Buyer of its intent to terminate pursuant to this Section 10.1(c)(vii), and (Z) the matter that is the subject of such notice continues to exist for a period of 30 consecutive days -48- 050 after such notice by the Seller; or (viii) the Seller has filed a Notice of Cessation of Operation pursuant to Section 5.3 hereof; and (d) the Seller may, on thirty (30) days' notice at any time after the issuance of the D.T.E. Approval, terminate this Agreement if in its sole discretion the Seller finds one or more terms of the D.T.E. Approval unacceptable. 10.2. Effect of Termination. If any Party terminates this Agreement --------------------- pursuant to Section 10.1 above, all rights and obligations of the Parties hereunder shall terminate without any Liability of any Party to any other Party (except for any Liability of any Party then in breach). 11. Miscellaneous. ------------- 11.1. Press Releases and Public Announcements. No Party shall issue --------------------------------------- any press release or make any public announcement relating to the subject matter of this Agreement prior to the Closing without the prior approval of the other Party; provided, however, that any Party may make any public disclosure it believes in good faith is required by applicable law or any listing or trading agreement concerning its publicly-traded securities (in which case the disclosing Party will provide the other Party with the opportunity to review in advance the disclosure). 11.2. No Third Party Beneficiaries. This Agreement shall not confer ---------------------------- any rights or remedies upon any Third Party. 11.3. No Joint Venture. Nothing in this Agreement creates or is ---------------- intended to create an association, trust, partnership, joint venture or other entity or similar legal relationship between the Parties, or impose a trust, partnership or fiduciary duty, obligation, or liability on or with respect to either Party. Except as provided in Section 5.6 hereof, neither Party is or shall act as or be the agent or representative of the other Party. 11.4. Entire Agreement. This Agreement (including the Related ---------------- Agreements and any other documents referred to herein) constitutes the entire agreement between the Parties and supersedes any prior understandings, agreements, or representations by or between the Parties, written or oral, to the extent they related in any way to the subject matter hereof, provided however, that the Confidentiality Agreement dated as of April 29, 1998, and executed by the Buyer shall remain in full force and effect without regard to any provision of this Agreement. All conflicts or inconsistencies between the terms hereof and the terms of any of the Related Agreements, if any, shall be resolved in favor of this Agreement. 11.5. Succession and Assignment. This Agreement shall be binding ------------------------- upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. -49- 051 No Party may assign either this Agreement or the Related Agreements or any of its rights, interests, or obligations hereunder or thereunder without the prior written approval of the other Party. 11.6. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 11.7. Headings. The section headings contained in this Agreement -------- are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 11.8. Notices. All notices, requests, demands, claims, and other ------- communications hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given (i) upon confirmation of facsimile, (ii) one Business Day following the date sent when sent by overnight delivery and (iii) five Business Days following the date mailed when mailed by registered or certified mail return receipt requested and postage prepaid at the following address: If to the Seller: ---------------- Douglas S. Horan, Esq. Senior Vice President and General Counsel Boston Edison Company 800 Boylston Street, 36th Floor Boston, MA 02199 Copy to: ------- David A. Fine, Esq. Ropes & Gray One International Place Boston, MA 02110-2624 If to the Buyer: --------------- Carolyn C. Shanks, CPA Vice President, Finance and Administration Entergy Nuclear Generation Company Street Address P.O. Box 31995 -------------- Jackson, MS 39286-1995 1340 Echelon Parkway Jackson, MS 39213 -50- 052 Copy to: ------- Joseph L. Blount, Esq. General Attorney Entergy Nuclear Generation Company Street Address P.O. Box 31995 -------------- Jackson, MS 39286-1995 1340 Echelon Parkway Jackson, MS 39213 Any Party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any Party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other Party notice in the manner herein set forth. 11.9. Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the domestic laws of the Commonwealth of Massachusetts without giving effect to any choice or conflict of law provision or rule (whether of the Commonwealth of Massachusetts or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the Commonwealth of Massachusetts. 11.10. Change in Law. If and to the extent that, during the Interim ------------- Period, any laws or regulations that govern any aspect of this Agreement shall change, so as to make any aspect of this transaction unlawful, then the Parties agree to use good faith efforts to negotiate such modifications to this Agreement as may be reasonably necessary for the Agreement to accommodate any such legal or regulatory changes, without materially changing the overall benefits or consideration expected hereunder by either party. 11.11. Consent to Jurisdiction. Each of the Seller and the Buyer ----------------------- consents to the nonexclusive jurisdiction of any local, state or federal court located within the City of Boston, Suffolk County, Commonwealth of Massachusetts, for adjudication of any suit, claim, action or other proceeding at law or in equity relating to this Agreement, or to any transaction contemplated hereby. The Seller and the Buyer each accept, generally and unconditionally, the nonexclusive jurisdiction of the aforesaid courts and waive any objection as to venue, and any defense of forum non conveniens. 11.12. Amendments and Waivers. No amendment of any provision of this ---------------------- Agreement shall be valid unless the same shall be in writing and signed by the Buyer and the Seller. No waiver by any Party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent -51- 053 default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 11.13. Severability. Any term or provision of this Agreement that is ------------ invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 11.14. Expenses. Each of the Buyer and the Seller will bear its own -------- costs and expenses (including legal and accounting fees and expenses, except as otherwise provided in Section 9 above) incurred in connection with this Agreement and the transactions contemplated hereby. 11.15. Construction. Ambiguities or uncertainties in the wording of ------------ this Agreement will not be construed for or against any Party, but will be construed in the manner that most accurately reflects the Parties' intent as of the Effective Date they executed this Agreement. The Parties acknowledge that they have been represented by counsel in connection with the review and execution of this Agreement, and, accordingly, there shall be no presumption that this Agreement or any provision hereof be construed against the Party that drafted this Agreement. 11.16. Incorporation of Exhibits and Schedules. The Exhibits and --------------------------------------- Schedules identified in this Agreement are incorporated herein by reference and made a part hereof. 11.17. Specific Performance. Each of the Parties acknowledges and -------------------- agrees that the other Party would be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each of the Parties agrees that the other Party shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in any court of the United States or any state thereof having jurisdiction over the Parties and the matter in addition to any other remedy to which it may be entitled, at law or in equity. 11.18. Dispute Resolution. Prior to instituting any litigation or ------------------ alternative dispute resolution mechanism, the Parties will attempt in good faith to resolve any dispute or claim promptly by referring any such matter to their respective chief executive officers for resolution. Either Party may give the other Party written notice of any dispute or claim. Within ten (10) days after delivery of said notice, the executives will meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary to exchange information and to attempt to resolve the dispute or claim within thirty (30) days. -52- 054 11.19. Bulk Transfer Laws. Without admitting the applicability of ------------------ the bulk transfer laws of any jurisdiction, the Parties agree that they will not comply with any applicable bulk transfer or similar law in connection with the transactions contemplated by this Agreement. 12. Definitions. ----------- "Acquired Assets" has the meaning set forth in Section 2.1. "Act" means "An Act Relative to Restructuring the Electric Utility Industry in the Commonwealth, Regulating the Provision of Electricity and Other Services, and Promoting Enhanced Consumer Protection Therein," St. 1997, Ch. 164. "ADEA" means the Age Discrimination in Employment Act of 1967, as amended. "Affiliate" has the meaning set forth in Rule 12b-2 of the regulations promulgated under the Securities Exchange Act of 1934, as amended. "Agreement" has the meaning set forth in the preamble above. "APBO" has the meaning set forth in Section 5.7(d)(i). "Application" means whatever steps may be determined necessary or appropriate to request NRC action in respect of a Transfer of License. "Asset Demarcation Agreement" means the agreement between the Parties evidencing their agreement as to the demarcation of ownership with respect to certain assets not situated wholly on real property owned, or to be owned, by either the Seller or the Buyer, in substantially the form attached hereto as Exhibit D. "Assignment and Assumption Agreement" means the agreement between the Parties by which the Seller shall assign certain rights, liabilities and obligations and the Buyer shall assume the Assumed Liabilities, in substantially the form attached hereto as Exhibit C. "Assumed Liabilities" has the meaning set forth in Section 2.3. "Atomic Energy Act" or "AEA" is the Atomic Energy Act of 1954, as amended, 42 U.S.C. Section 2011 et seq., or any successor statute. "Bill of Sale" means the form of bill of sale by which the title to personal property shall be conveyed to the Buyer, substantially in the form attached hereto as Exhibit B. -53- 055 "Business Day" means any day other than a Saturday, Sunday or day on which banks are legally closed for business in Boston, Massachusetts. "Buyer" has the meaning set forth in the preamble above. "Buyer Material Adverse Effect" means any material adverse change in, or effect on, the business, financial condition, operations, results of operations or future prospects of Buyer, including any change or effect that is materially adverse to the Buyer's ability to own, operate or use the Acquired Assets as so owned, operated and used by the Seller prior to the Effective Date, taken as a whole; provided that any change or effect that is cured prior to Closing shall not be considered a Buyer Material Adverse Effect. "Buyer's Regulatory Approvals" means those approvals identified on Schedule 6.1(c) attached hereto to be obtained by the Buyer as a condition to the Buyer's obligation under this Agreement. "Cash" means cash and cash equivalents (including marketable securities and short term investments) calculated in accordance with GAAP. "Chapter 61 Affidavit" means the affidavit, substantially in the form attached hereto as Exhibit F. "Chiltonville Training Center" means the facility identified in Schedule 2.1 "Closing" has the meaning set forth in Section 2.9. "Closing Adjustment" has the meaning set forth in Section 2.6(c). "Closing Date" has the meaning set forth in Section 2.9. "C.M.R." means Code of Massachusetts Regulations. "COBRA" means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. "Code" means the Internal Revenue Code of 1986, as amended. "Collective Bargaining Agreements" has the meaning set forth in Section 3.11. "Commercially Reasonable Efforts" means efforts which are reasonably within the contemplation of the Parties at the Effective Date and which do not require the performing Party to expend any funds other than expenditures which are customary and reasonable in -54- 056 transaction of the kind and nature contemplated by this Agreement in order for the performing Party to satisfy its obligations hereunder. "Commonwealth Electric" shall mean the Commonwealth Electric Company. "Contested Proceeding," when used in connection with a Transfer of License, means a proceeding commenced by the issuance of a "notice of hearing" under 10 C.F.R. Section 2.104 or Section 2.105 Subsection (e)(2), as the case may be. "Decommissioning Trust" shall mean the irrevocable trust created pursuant to the Trust Agreement, consisting of assets held in a "qualified nuclear decommissioning reserve fund," as defined in Internal Revenue Code 468A (a "Qualified Fund") and of assets held in a non-qualified fund (a "Non-Qualified Fund"). "Decommissioning Trust Closing Amount" shall mean the amount determined pursuant to Section 5.21. "Decommissioning Trust Value" shall mean the fair market value of the property in the Decommissioning Trust from time to time, as from time to time certified by the Trustee. "Deed" means the form of deed by which the Real Property shall be conveyed to the Buyer, substantially in the form attached hereto as Exhibit A. "Disclosing Party" has the meaning set forth in the definition of Proprietary Information. "DOE Standard Contract" means the Contract for Disposal of Spent Nuclear Fuel and/or High-Level Radioactive Waste, No. DE-CR01-83NE, dated as of June 17, 1983, between the United States of America, represented by the United States Department of Energy, and Boston Edison Company. "D.T.E." means the Massachusetts Department of Telecommunications and Energy. "D.T.E. Approval" means the order or orders of the D.T.E. approving this Agreement and the Related Agreements and the consummation of the transactions contemplated hereby and thereby and all related matters, including without limitation (a) approval of the proceeds of the sale of the Acquired Assets and (b) authorization and approval to recover and securitize, pursuant to Section 1H of Chapter 164, those transition costs specified in Section 1G(b)(1)(ii) of Chapter 164, such order or orders to be in a form which is Final. "Easements" means the reservations of easements to be included in the Deed, substantially as set forth hereto in Schedule 1.1. -55- 057 "Effective Date" means the date on which this Agreement has been duly executed and validly delivered by the Parties. "Electric Rate Reduction Bonds" has the meaning set forth in Section 1H(a) of Chapter 164. "Emergency Preparedness Equipment" has the meaning set forth in Section 2.1(l). "Emergency Preparedness Agreement" has the meaning set forth in Section 2.1(l). "Employee Benefit Plan" means any (a) nonqualified deferred compensation or retirement plan or arrangement which is an Employee Pension Benefit Plan, (b) qualified defined contribution retirement plan or arrangement which is an Employee Pension Benefit Plan, (c) qualified defined benefit retirement plan or arrangement which is an Employee Pension Benefit Plan (including any Multiemployer Plan), (d) Employee Welfare Benefit Plan or material fringe benefit plan or program or (e) profit sharing, bonus, stock option, stock purchase, equity, stock appreciation, deferred compensation, incentive, severance plan or other benefit plan. "Employee Pension Benefit Plan" has the meaning set forth in ERISA Section 3 Subsection (2). "Employee Welfare Benefit Plan" has the meaning set forth in ERISA Section 3 Subsection (1). "Environment" means soil, land surface or subsurface strata, real property, surface waters (including navigable waters, ocean waters, streams, ponds, drainage basins and wetlands), groundwater, water body sediments, drinking water supply, stream sediments, ambient air (including indoor air), plant and animal life (including fish and all other aquatic life) and any other environmental medium or natural resource. "Environmental Laws" mean the Massachusetts Contingency Plan (310 C.M.R. 40.000), the Massachusetts Hazardous Waste Management Act (M.G.L. 21C), the Massachusetts Oil and Hazardous Material Release Prevention Act (M.G.L. 21E), the Comprehensive Environmental Response, Compensation and Liability Act, the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et. seq.), the Clean Air Act (42 U.S.C. Section 1860 et. seq.), and the Clean Water Act (33 U.S.C. Section 1251 et. seq.), each, as amended or hereinafter in effect and any other federal, state, local or foreign law, regulation or legal requirement, as now or hereinafter in effect, relating to: (a) the Release, containment, removal, remediation, response, cleanup or abatement of any sort of any Hazardous Substance; (b) the manufacture, generation, formulation, processing, labeling, distribution, introduction into commerce, use, treatment, handling, storage, recycling, disposal or transportation of any Hazardous Substance; (c) exposure of persons, including employees, to any Hazardous Substance; (d) the physical structure, use or condition of a building, facility, -56- 058 fixture or other structure, including, without limitation, those relating to the management, use, storage, disposal, cleanup or removal of asbestos, asbestos-containing materials, polychlorinated biphenyls or any other Hazardous Substance; (e) the pollution, protection or clean up of the Environment; or (f) noise. "Environmental Liabilities" means any Liability under or related to former or current Environmental Laws or the common law, whether such liability or obligation or responsibility is known or unknown, contingent or accrued, arising as a result of or in connection with (i) any violation or alleged violation of Environmental Law, prior to, on or after the Closing Date, with respect to the ownership, operation or use of the Acquired Assets other than any fines or penalties imposed by a Governmental Agency to the extent such obligations arise out of or relate to acts or omissions of the Seller that constitute criminal violations; (ii) loss of life, injury to persons, property or business or damage to natural resources (whether or not such loss, injury or damage arose or was made manifest before the Closing Date or arises or becomes manifest after the Closing Date), caused (or allegedly caused) by the presence or Release of Hazardous Substances at, on, in, under, adjacent to or migrating from the Acquired Assets prior to, on or after the Closing Date, including, but not limited to, Hazardous Substances contained in building materials at the Acquired Assets or in the soil, surface water, sediments, groundwater, landfill cells, or in other environmental media at or adjacent to the Acquired Assets; (iii) the investigation and/or Remediation (whether or not such investigation or Remediation commenced before the Closing Date or commences after the Closing Date) of Hazardous Substances that are present or have been Released prior to, on or after the Closing Date at, on, in, under, adjacent to or migrating from the Acquired Assets, including, but not limited to, Hazardous Substances contained in building materials at the Acquired Assets or in the soil, surface water, sediments, groundwater, landfill cells, or in other environmental media at or adjacent to the Acquired Assets; (iv) compliance with applicable Environmental Laws prior to, on or after the Closing Date with respect to the ownership or operation or use of the Acquired Assets; (v) loss of life, injury to persons, property or business or damage to natural resources caused (or allegedly caused) by the offsite disposal, storage, transportation, discharge, Release or recycling, or the arrangement for such activities, of Hazardous Substances, prior to, on or after the Closing Date, in connection with the ownership or operation of the Acquired Assets; and (vi) the investigation and/or remediation of Hazardous Substances that are disposed, stored, transported, discharged, Released, recycled, or the arrangement of such activities, prior to, on or after the Closing Date, in connection with the ownership or operation of the Acquired Assets. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Estimated Adjustment" has the meaning set forth in Section 2.6(c). "Estimated Closing Statement" has the meaning set forth in Section 2.6(c). -57- 059 "Event of Loss" has the meaning set forth in Section 5.10. "Excluded Assets" has the meaning set forth in Section 2.2. "Exhibits" means the exhibits to this Agreement. "Facility" means either of and "Facilities" means both of Pilgrim and the Chiltonville Training Center. "FERC" means the Federal Energy Regulatory Commission, or its regulatory successor, as applicable. "Final" or "finally," when applied to a decision, approval or act of any Governmental Authority, means that the decision, approval or act has occurred, purports to be the final resolution and is unappealable by any Person, including exhaustion of all administrative and judicial appeals or remedies and the running of time periods and statutes of limitation for rehearing and judicial review. "Final Purchase Price Adjustment" has the meaning set forth in Section 2.6(c). "Fully Funded" as applied to the Decommissioning Trust, means that there has been deposited to the Decommissioning Trust on or prior to the Closing Date an amount equal to or greater than the difference between (i) the Decommissioning Trust Value certified by the Trustee, upon request of the Seller, as of the 14th day prior to the Closing Date, and (ii) the Decommissioning Trust Closing Amount. "FIRPTA Affidavit" means the affidavit to be delivered by the Parties at Closing pursuant to Section 1445(b)(2) of the Internal Revenue Code, to establish that each Party is not a "foreign person" within the meaning of that Section. "GAAP" means United States generally accepted accounting principles as in effect from time to time. "Generation Ownership Shares" has the meaning set forth in the NEPOOL Agreement. "Governmental Authority" means any federal, state, local or other governmental, regulatory or administrative agency, commission, department, board, or other governmental subdivision, court, tribunal, arbitral body or other governmental authority, but excluding the Buyer and any subsequent owner of the Sites (if otherwise a Governmental Authority under this definition). "Group Health Plan" has the meaning set forth in Section 5000 Subsection (b)(1) of the Code. -58- 060 "Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Hazardous Material" or "Hazardous Materials" means oil and hazardous materials or wastes, air emissions, hazardous or toxic substances, wastewater discharges and any chemical, material or substance or other emissions that may give rise to liability under, or is listed or regulated under, applicable Laws as a "hazardous" or "toxic" substance or waste, or as a "contaminant," or is otherwise listed or regulated under applicable Laws because it poses a hazard to human health or the environment. "Hazardous Substance" means any Hazardous Material or Radioactive Material, including any substance that may be both a Hazardous Material and a Radioactive Material. "Host Community Tax Agreement" means an agreement or agreements with the Town of Plymouth regarding property taxes in accordance with Section 71 of the Act. "Improvements" means all buildings, structures (including all fuel handling and storage facilities), machinery and equipment, fixtures, construction in progress, including all piping, cables and similar equipment forming part of the mechanical, electrical, plumbing or HVAC infrastructure of any building, structure or equipment, located on and affixed to the Sites. "Indemnified Party" has the meaning set forth in Section 9.6(a). "Indemnifying Party" has the meaning set forth in Section 9.6(a). "Independent Appraiser" has the meaning set forth in Section 2.7. "INPO" means Institute of Nuclear Power Operations. "Interim Period" means that period of time commencing on the Effective Date and ending on the Closing Date. "Inspections" means all tests, reviews, examinations, inspections, investigations, verifications, samplings and similar activities conducted by any Party or such Party's agents or representatives with respect to the Acquired Assets prior to the Closing. "Intellectual Property" has the meaning set forth in Section 2.1(o). "Interconnection and Operation Agreement" means the agreement between the Parties relating to the interconnection of the Acquired Assets with the regional transmission facilities retained by Seller, substantially in the form attached as Exhibit G. -59- 061 "Inventory" or "Inventories" means fuel inventories, but not Nuclear Fuel or Spent Nuclear Fuel, materials, spare parts, consumable supplies and chemical and gas inventories located at the Site, in transit to the Site or identified in any Schedule to the extent owned and paid for by the Seller prior to Closing. "ISO New England" means the Independent System Operator of New England, as established by NEPOOL. "Knowledge" means the actual, current knowledge (without independent investigation) or reckless disregard of facts, duty or obligations of due inquiry that would result in such knowledge of a Party's Board of Directors or any of its corporate officers charged with responsibility for the function at the relevant time or, with respect to any certificate delivered pursuant to this Agreement, on the date of delivery of the certificate. "Laws" means all laws, rules, regulations, codes, injunctions, judgments, orders, decrees, rulings, interpretations, constitution, ordinance, common law, or treaty, of any federal, state, local municipal and foreign, international, or multinational government or administration and related agencies. "Leases" has the meaning set forth in Section 2.1(c). "Liability" or "Liabilities" means any liability or obligation (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, whether incurred or consequential and whether due or to become due), including any liability for Taxes. "Lien" means any mortgage, pledge, lien, security interest, charge, claim, equitable interest, infringement of a third party patent, copyright, trade secret or other intellectual property right, encumbrance, restriction on transfer, conditional sale or other title retention device or arrangement (including, without limitation, a capital lease), transfer for the purpose of subjection to the payment of any indebtedness, or restriction on the creation of any of the foregoing, whether relating to any property or right or the income or profits therefrom; provided, however, that the term "Lien" shall not include any of the following "Permitted Encumbrances": (i) Liens for Taxes or other charges or assessments by any Governmental Authority to the extent that the payment thereof is not in arrears or otherwise due or is being contested in good faith, (ii) encumbrances in the nature of zoning restrictions, building and land use laws, ordinances, orders, decrees, restrictions or any other conditions imposed by any Governmental Authority provided the same do not materially detract from operation or use of such property or the business of the Seller; (iii) easements (including without limitation the Easements and any other easement or like right granted by an instrument executed in connection with this Agreement or the Related Agreements or the transactions contemplated hereby or thereby, but excluding such encumbrances that secure indebtedness), rights, -60- 062 restrictions, conditions, title imperfections and similar matters if the same do not materially detract from the operation or use of such property in the business of the Seller and do not materially detract from the value of the Acquired Assets; (iv) deposits or pledges made in connection with, or to secure payment of, worker's compensation, unemployment insurance, old age pension programs mandated under applicable laws or other social security regulations; (v) statutory or common law liens in favor of carriers, warehousemen, mechanics and materialmen, statutory or common law liens to secure claims for labor, materials or supplies and other like liens, which secure obligations to the extent that payment thereof is not in arrears or otherwise due in the case of (i) - (v), which have been incurred under Prudent Utility Practices; (vi) any Lien with respect to the Acquired Assets that arises under Prudent Utility Practices and is not material to the operation or use of the Acquired Assets in the business of the Seller and which does not materially detract from the value of the Acquired Assets; (vii) any Lien or title imperfection with respect to the Acquired Assets created by or resulting from any act or omission of the Buyer; and (viii) all exceptions set forth in the Title Commitment. "Local 369" means the Utility Workers of America, Local 369, Production and Maintenance Unit. "Local 387" means the Utility Workers of America, Local 387, Office Technical and Professional Unit. "Losses" has the meaning set forth in Section 9.3. "Major Loss" has the meaning set forth in Section 5.10(b). "Material Adverse Effect" means any unexpected losses, claims or occurrences relating to the Acquired Assets prior to the Closing that are not disclosed on any Schedule and that would reasonably be expected to require Buyer to (i) expend within two (2) years following the Closing Date funds greater than or equal to $5,000,000 per incident of loss, claim or occurrence, or (ii) expend within five (5) years following the Closing funds greater than or equal to $10,000,000 in the aggregate (provided that no individual loss, claim or occurrence shall be considered in calculating such aggregate amount unless it exceeds $1,000,000); other than any such losses, claims, occurrences resulting from: (a) changes in the international, national, regional or local wholesale or retail markets for electric power or fuel used in connection with the Acquired Assets or (b) changes in the North American, national, regional or local electric transmission systems or operations thereof; and provided that any loss, claim, occurrence, change or effect that is cured prior to Closing or that Seller commits to cure after the Closing at Seller's expense shall not be considered a Material Adverse Effect. "Material Contracts" has the meaning set forth in Section 2.1(e). -61- 063 "Montaup" shall mean Montaup Electric Company. "Multiemployer Plan" has the meaning set forth in ERISA Section 3 Subsection (37). "Municipal Contracts" has the meaning set forth in Section 2.2(d). "NEI" means Nuclear Energy Institute. "NEPOOL" means the New England Power Pool, established by the NEPOOL Agreement, or its successor. "NEPOOL Agreement" means the Agreement establishing NEPOOL, dated September 1, 1971, as amended by the Restated NEPOOL Agreement filed with FERC on December 31, 1996, as finally approved by FERC and as further amended from time to time. "NEPOOL Obligations" has the meaning set forth in Section 5.9(c). "Non-Managerial Employees" has the meaning set forth in Section 5.7(a). "Nonrepresented Employees" has the meaning set forth in Section 5.7(b). "Non-Qualified" has the meaning set forth in the definition of Decommissioning Trust. "NRC" is the United States Nuclear Regulatory Commission, as established by Section 201 of the Energy Reorganization Act of 1974, as amended, 42 U.S.C. Section 5841, or any successor commission, agency or officer. "NRC License" means any and all licenses, permits, approvals or other official acts by the NRC on the basis of which Boston Edison is authorized to own, possess and operate PNPS, including but not limited to Facility Operating License No. DPR-35 "NRC Regulations" are the regulations from time to time promulgated by the NRC and in effect, including but not limited to those found at 10 C.F.R., Part 50. "NRC Staff" means the regulatory Staff of the NRC. "Nuclear Fuel" means all fuel assemblies in the PNPS reactor on the Closing Date and any irradiated fuel assemblies that have been temporarily removed from the PNPS reactor as of that date and all unirradiated fuel assemblies awaiting insertion into the PNPS reactor as well as all fuel constituents in any stage of the fuel cycle which are in the process of fabrication for use in the PNPS reactor, which are owned by the Seller on the Closing Date. -62- 064 "Offsite Hazardous Material Facility" means a location, other than a Facility, which regularly accepts or accepted Hazardous Materials from the Seller and other Persons. "Partial Assignments" means the agreements between the Buyer and the Seller, dated as of the date hereof, relating to the Seller's assignment to the Buyer, effective as of the Closing Date, of certain of the Seller's obligations under the Municipal Contracts. "Party" and "Parties" have the meanings set forth in the preamble above. "Permits" means all certificates, licenses, permits, approvals, consents, orders, exemptions, decisions and other actions of a Governmental Authority pertaining to a particular Acquired Asset, or the ownership, operation or use thereof. "Permitted Encumbrances" has the meaning set forth in the definition of Lien. "Person" means an individual, a partnership, a corporation, an association, a joint stock company, a trust, a joint venture, a limited liability company, an unincorporated organization, or a governmental entity (or any department, agency, or political subdivision thereof). "Phase I Site Assessment" means the September 1998 report of ENSR (Document Number 0970-018) as supplied by Seller to Buyer prior to the Effective Date. "Pilgrim" or "PNPS" refers to that portion of the Acquired Assets constituting the land, buildings, equipment and other property constituting the nuclear utilization facility presently owned and operated by the Seller at Plymouth, Massachusetts, as identified on Schedule 2.1. "Post-Closing Change" has the meaning set forth in Section 5.21(b). "Post-Closing Statement" has the meaning set forth in Section 2.6(c). "Power Purchase Agreements" or "PPAs" means (i) the agreement between the Buyer and the Seller, dated as of the date hereof, relating to the purchase by the Seller of certain capacity, energy and ancillary services from Pilgrim; (ii) the agreement between the Buyer and Commonwealth Electric, dated as of the date hereof, relating to the purchase by Commonwealth Electric of certain capacity, energy and ancillary services from Pilgrim; (iii) the agreement between the Buyer and Montaup, dated as of the date hereof, relating to the purchase by Montaup of certain capacity, energy and ancillary services from Pilgrim; and (iv) the agreement between the Buyer and the Seller, dated as of the date hereof, relating to the purchase by the Seller from the Buyer and the re-sale by the Seller pursuant to the Municipal Contracts of certain capacity, energy and ancillary services from Pilgrim. "Pre-Approved Projects" means those projects set forth on Schedule 5.3. -63- 065 "Pre-Closing Change" has the meaning set forth in Section 5.21(b). "Property Tax Agreement" means the agreement between the Parties, substantially in the form attached hereto as Exhibit E. "Proprietary Information" means all information about either Party (the "Disclosing Party") or its properties or operations furnished to the other Party (the "Receiving Party") or its Representatives by the Disclosing Party or its Representatives, regardless of the manner or medium in which it is furnished. Proprietary Information does not include information that (a) is or becomes generally available to the public, other than as a result of a disclosure by the Receiving Party or its Representatives in violation of this Agreement; (b) was available to the Receiving Party on a nonconfidential basis prior to its disclosure by the Disclosing Party or its Representatives; (c) becomes available to the Receiving Party on a nonconfidential basis from a person, other than the Disclosing Party or its Representatives, each of whom, to the Receiving Party's Knowledge, is not otherwise bound by a confidentiality agreement with the Disclosing Party or its Representatives, or is not otherwise under any obligation to the Disclosing Party or any of its Representatives not to transmit the information to the Receiving Party or its Representatives, or (d) the Disclosing Party discloses to others on a non- confidential basis. "Provisional Trust" shall mean the decommissioning trust established and funded pursuant to the Provisional Trust Agreement. "Provisional Trust Agreement" shall mean an agreement executed with an independent trustee with terms including the following: (i) the Provisional Trust shall terminate on a date no later than December 31, 2002; (ii) the Provisional Trust trustee shall be required to make payments to Seller or its designees in amounts determined by reference to Schedule 5.21 in the event that there is a Post-Closing Change; (iii) the Provisional Trust trustee shall make any such payments within 60 days after the occurrence of the Post-Closing Change; and (iv) upon the termination of the Provisional Trust, the remaining corpus and income in such trust shall be paid into the Decommissioning Trust, as amended by a Supplemental Indenture. "Prudent Utility Practices" means any of the practices, methods and acts engaged in or approved by a significant portion of the electric utility industry in New England during the relevant time period, or any of the practices, methods or acts which, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with applicable Laws and good business practices, reliability, safety and expedition. Prudent Utility Practices are not intended to be limited to the optimum practice, method or act to the exclusion of all others, but rather to be acceptable practices, methods or acts generally accepted in the region. "Purchase Price" has the meaning set forth in Section 2.5(a). -64- 066 "Purchase Price Adjustment" has the meaning set forth in Section 2.6. "Qualified Fund" has the meaning set forth in the definition of Decommissioning Trust. "Radioactive Material" means any material that is radioactive or contaminated with radioactivity. "Real Property" has the meaning set forth in Section 2.1(a). "Receiving Party" has the meaning set forth in the definition of Proprietary Information. "Refueling Costs" means all costs actually incurred by the Seller during the period of the Refueling Outage, provided, however, that the Refueling Costs shall not exceed $40 million and shall not include any costs for the Pre-Approved Projects. "Refueling Outage" means the Pilgrim refueling outage currently scheduled for April of 1999. "Related Agreements" means the Assignment and Assumption Agreement, the Bill of Sale, the Deed, the Interconnection and Operation Agreement, the Partial Assignments, the Power Purchase Agreements, the Supplemental Indenture (if any), the Property Tax Agreement and the Asset Demarcation Agreement. "Release" means any actual, threatened or alleged spilling, leaking, pumping, pouring, emitting, dispersing, emptying, discharging, injecting, escaping, leaching, dumping, or disposing of any Hazardous Substance into the Environment that may cause an Environmental Liability (including the disposal or abandonment of barrels, containers, tanks or other receptacles containing or previously containing any Hazardous Substance). "Remediation" means any or all of the following activities to the extent they relate to or arise from the presence of Hazardous Substances at a Site: (a) monitoring, investigation, assessment, treatment, cleanup containment, removal, mitigation, response or restoration work; (b) obtaining any permits, consents, approvals or authorizations of any Governmental Authority necessary to conduct any such activity; (c) preparing and implementing any plans or studies for any such activity; (d) obtaining a written notice from a Governmental Authority with jurisdiction over the Sites under Environmental Laws that no material additional work is required by such Governmental Authority; (e) obtaining a written opinion of a Licensed Site Professional (as defined in M.G.L. c.21A, Section 19), as contemplated by the relevant Environmental Laws and in lieu of a written notice from a Governmental Authority, that no material additional work is required to address Hazardous Substances at the Sites; and (f) any -65- 067 other activities reasonably determined by a Party to be necessary or appropriate or required under Environmental Laws to address the presence of Hazardous Substances at the Sites. "Representative" means, as to any Person, such person's Affiliates and its and their directors, officers, employees, agents, advisors (including, without limitation, financial advisors, counsel and accountants). "Required Nuclear Expenditure" means a capital expenditure that (i) is, in the Seller's judgment, required in order to satisfy an NRC Order, (ii) is, in the Seller's reasonable judgment, required in order to preclude, forestall or satisfy any form of NRC enforcement action (including, without limiting the generality of the foregoing, a so-called "confirmatory action letter"), or (iii) is, in the Seller's reasonable judgment, necessary in order to cause PNPS to meet NRC regulations. "Schedule" means a schedule to this Agreement. "Section 71 Transition Payments" has the meaning set forth in Section 2.4(f). "Seller" has the meaning set forth in the preamble. "Seller's Regulatory Approvals" means those approvals identified on Schedule 6.2(c) hereto to be obtained by the Seller as a condition to the Seller's obligation to close under this Agreement. "Settlement Agreement" means the Restructuring Settlement Agreement filed by the Seller on July 9, 1997, with the Massachusetts Department of Public Utilities (now the D.T.E.) in Dockets Nos. 96-100 and 96-23. "Site" means the Real Property and Improvements forming a part of, or used or usable in connection with, a Facility. Any reference to a Site shall include, by definition, the surface and subsurface elements, including the soils and groundwater present at such Site, and any reference to items "at the Site" shall include all items "at, on, in, upon, over, across, under and within" the Site. "Special Retention Agreement" means an agreement between any Nonrepresented Employee and the Seller relating to the Boston Edison Company Nuclear Divestiture Retention Program pursuant to which (i) the Special Retention Employee will not receive retention benefits equal to the portion of the Transferred Amount attributable to such employee, calculated in the manner set forth in Section 5.7(d), but rather will receive credit for prior service with Seller towards any eligibility, vesting, or waiting periods under Buyer's Employee Welfare Benefit Plans providing retiree health and life insurance benefits; and (ii) the Special -66- 068 Retention Employee will release the Seller from any ADEA or other claims potentially arising in connection therewith. "Spent Nuclear Fuel" means all fuel assemblies and greater than Class C Waste that have been, or hereafter are, permanently withdrawn from the PNPS reactor and stored in the PNPS spent fuel pool or reprocessed. "Substitute Material Contracts" has the meaning set forth in Section 2.10(k). "Supplemental Indenture" shall mean (i) a supplemental indenture between the Seller, the Buyer and The Bank of New York amending and supplementing the Trust Agreement in a manner acceptable to Buyer and Seller, and (ii) a supplemental indenture between the Seller, the Buyer and the trustee of the Provisional Trust amending and supplementing the Provisional Trust Agreement in a manner acceptable to Buyer and Seller; in each case pursuant to which (a) the Buyer shall agree to assume the due and punctual performance of all Liabilities of the Seller arising after the Closing Date under the relevant trust agreement (except to the extent provided in the last sentence of Section 5.21(c)), (b) the Buyer shall succeed to and be substituted for the Seller thereunder, (c) the relevant trust agreement shall be amended as necessary to ensure that Buyer has the right to appoint and remove the trustee and the investment manager and the ability to direct the investment of funds in the Decommissioning Trust in any investment permitted by applicable law, rule or regulation. "T&D and Telecommunications Assets" means the transmission, distribution, communication, substation and other assets necessary to current or future transmission and distribution operations of the Seller (whether or not regarded as a "transmission", "distribution" or "generation" asset for regulatory or accounting purposes), as well as all Permits and Contracts, to the extent they relate exclusively thereto, and those certain assets and facilities identified for use or used by the Seller or others pursuant to an agreement or agreements with the Seller for telecommunications purposes, all as and only to the extent identified in Schedule 2.1(b) -- "Pilgrim Communications Divestiture Summary", Schedule 2.2(a), the Interconnection and Operation Agreement or the Asset Demarcation Agreement, or any document or exhibit referred to or incorporated in the Interconnection and Operation Agreement or the Asset Demarcation Agreement. "Taking" has the meaning set forth in Section 5.10. "Tax" or "Taxes" means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code Section 59A), customs duties, capital stock, franchise, profits, withholding, social security (or similar, including FICA), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, -67- 069 alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not. "Tax Return" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. "Third Party" means a Person who is not a Party, an Affiliate of a Party, a Representative of a Party, a Representative of an Affiliate of a Party or a shareholder of any of a Party, a Party's Affiliate or a Party's Representative. "Third Party Claim" has the meaning set forth in Section 9.6. "Title Commitments" has the meaning set forth in Section 3.5. "Trademarks" means any trademarks, service marks, trade dress, and logos, together with all translations, adaptations, derivations, and combinations thereof and including all goodwill associated therewith. "Transfer of License" means the transfer of the NRC License from the Seller to the Buyer and includes any act for which the approval of the NRC is required by AEA Section 184 and 10 C.F.R. Section 50.80 or otherwise. "Transferable Permits" has the meaning set forth in Section 2.1(d). "Transferred Amount" has the meaning set forth in Section 5.7(d). "Transferred Nonqualified Employees" has the meaning set forth in Section 5.7(d). "Transferred Voting Shares" has the meaning set forth in Section 5.9(b). "Transition Committee" has the meaning set forth in Section 5.3(b)(i). "Trust Agreement" means the Master Decommissioning Trust Agreement dated January 1, 1995 between the Seller and The Bank of New York, as Trustee, as amended by the First Amendment thereto dated December 12, 1996. "Trustee" has the meaning set forth in the definition of "Trust Agreement". "VEBA" means a trust which constitutes a "Voluntary Employees' Beneficiary Association" as defined in Section 501(c)(9) of the Code which is used to fund post-retirement Employee Welfare Benefit Plan Obligations. -68- 070 "Vehicles" has the meaning set forth in Section 2.1(m). "Voting Shares" has the meaning set forth in the NEPOOL Agreement. "WARN" means Workers Adjustment and Retraining Notification Act of 1988, as amended. "Wholesale Power Contracts" has the meaning set forth in Section 2.2(c). -69- 071 Purchase and Sale Agreement --------------------------- ***** IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on the date first above written. ENTERGY NUCLEAR GENERATION COMPANY By: /s/Donald C. Hintz ______________________________________ Name: Donald C. Hintz Title: Chairman and Chief Executive Officer BOSTON EDISON COMPANY By: /s/ Thomas J. May ______________________________________ Name: Thomas J. May Title: Chairman, President and Chief Executive Officer -71- PURCHASE AND SALE AGREEMENT FOR PILGRIM NUCLEAR POWER STATION AND RELATED AGREEMENTS BOSTON EDISON COMPANY ENTERGY NUCLEAR GENERATION COMPANY COMMONWEALTH ELECTRIC COMPANY MONTAUP ELECTRIC COMPANY VOLUME 2 of 2 NOVEMBER 18, 1998 BOSTON EDISON COMPANY and ENTERGY NUCLEAR GENERATION COMPANY NOVEMBER 18, 1998 INDEX ----- Volume 1 of 2 ------------- SUBJECT TAB ------- --- Purchase and Sale Agreement: Boston Edison Company - Entergy Nuclear 1 Generation Company Exhibits to P&S 2 Deeds A Bill of Sale B Assignment and Assumption Agreement C Asset Demarcation Agreement D Property Tax Agreement E Chapter 61 Affidavit F Interconnection and Operation Agreement G Schedules to P&S 3 Guaranty: Entergy International Holdings LLC 4 Volume 2 of 2 ------------- Interconnection and Operation Agreement: Boston Edison Company - 5 Entergy Nuclear Generation Company Power Purchase Agreement: Entergy Nuclear Generation Company - 6 Boston Edison Company Power Purchase Agreement with respect to Municipal Customers: Entergy 7 Nuclear Generation Company - Boston Edison Company Power Purchase Agreement: Entergy Nuclear Generation Company - 8 Commonwealth Electric Company Power Purchase Agreement: Entergy Nuclear Generation Company - 9 Montaup Electric Company Fourth Amendment of Power Sale Agreement: Boston Edison Company - 10 Commonwealth Electric Company Third Amendment of Power Sale Agreement: Boston Edison - Montaup 11 Electric Company Partial Assignment of Municipal Power Sale Agreements: Entergy Nuclear 12 Generation Company - Boston Edison Company 565 POWER PURCHASE AGREEMENT BETWEEN ENTERGY NUCLEAR GENERATION COMPANY AND BOSTON EDISON COMPANY FOR PILGRIM NUCLEAR POWER STATION 566 TABLE OF CONTENTS ----------------- ARTICLE 1. Definitions .................................................... 1 ARTICLE 2. Purchase and Sale of Installed Capability, Operable Capability and Energy .......................................... 3 ARTICLE 3. Term, Termination .............................................. 4 ARTICLE 4. Purchase Rate for Installed Capability, Operable Capability and Energy .......................................... 4 ARTICLE 5. Dispatch ....................................................... 4 ARTICLE 6. Billing, Meter Reading ......................................... 5 ARTICLE 7. Limitation of Liability; Indemnification; Insurance; Relationship of Parties ........................................ 6 ARTICLE 8. Miscellaneous Provisions ....................................... 7 ARTICLE 9. Assignment ..................................................... 8 ARTICLE 10. Force Majeure ................................................. 8 ARTICLE 11. Default ....................................................... 9 ARTICLE 12. Governing Law, Dispute Resolution ............................ 10 ARTICLE 13. Waiver ....................................................... 10 ARTICLE 14. Corporate Authorization ...................................... 10 ARTICLE 15. Notice ....................................................... 12 567 POWER PURCHASE AGREEMENT BETWEEN ENTERGY NUCLEAR GENERATION COMPANY AND BOSTON EDISON COMPANY AGREEMENT entered into this 18th day of November 1998 by and between Entergy Nuclear Generation Company, a Delaware corporation (hereafter referred to as "Seller"), and Boston Edison Company, a Massachusetts corporation having its principal place of business at 800 Boylston Street, Boston, Massachusetts 02199, (hereafter referred to as "Company"). WHEREAS, Seller wishes to sell to Company and Company wishes to purchase from Seller, Installed Capability, Operable Capability, and Energy following the closing pursuant to the Purchase and Sale Agreement dated November 18,1998 by and between Company and Seller (the "Purchase and Sale Agreement") pursuant to which Seller shall purchase the specific generating facility known as Pilgrim Nuclear Power Station, from the Company, and Seller and Company shall enter into the Interconnection and Operation Agreement of even date herewith (the "Interconnection Agreement"). NOW, THEREFORE, in consideration of the mutual promises and agreements contained herein, Seller and Company hereby agree as follows: ARTICLE 1. Definitions When used with initial capitalizations, whether in the singular or in the plural, the following terms shall have the meanings set forth below. (a) Agreement: This document, including its appendices, as amended --------- from time to time. (b) Capability Audit: The procedure used pursuant to the NEPOOL ---------------- Agreement to determine the Summer Net Capability and the Winter Net Capability of the Facility as currently set forth in the NEPOOL Standards. (c) Company's Entitlement: The percentage specified below of the --------------------- Installed Capability, Operable Capability and Energy of the Facility for the applicable calendar years. 1999 74.26867% 2000 74.26867% 2001 74.26867% 2002 58.66867% 2003 35.26867% 2004 35.26867% (d) Energy: The actual hourly electricity production of the Facility ------ adjusted for station service use and transformer losses. Page 1 of 12 568 (e) Delivery Point: The point where capacity and energy generated by -------------- the Facility is delivered to the Pool Transmission Facilities, as defined by the NEPOOL Agreement. (f) Facility: The Pilgrim Nuclear Power Station, a 670 MW nuclear -------- generating facility located in Plymouth, Massachusetts. (g) FERC: The Federal Energy Regulatory Commission. ---- (h) Installed Capability: The Winter Net Capability during the -------------------- Winter Period and the Summer Net Capability during the Summer Period. (i) ISO-NE: The Independent System Operator of New England provided ------ for in the NEPOOL Agreement, or its successor. (j) MDTE: The Massachusetts Department of Telecommunications and ---- Energy. (k) NEPOOL: The New England Power Pool, established by the NEPOOL ------ Agreement, or its successor. (l) NEPOOL Agreement: The agreement, dated September 1, 1971, as ---------------- amended from time to time, governing the operation of NEPOOL, as in full force and effect. (m) NEPOOL Standards: All Criteria, Rules and Standards (CRS), ---------------- NEPOOL Automated Billing System Procedures (NABS), Operating Procedures (OP), and Market Rules (MR) issued or adopted by NEPOOL, ISO-NE and its satellite agencies, or their successors, as amended from time to time and all successor regulations, rules and standards. (n) Operable Capability: The portion of Installed Capability of the ------------------- Facility which is operating or available to respond within an appropriate period (as defined by NEPOOL) to the ISO-NE call to meet the Energy requirements of the NEPOOL operating area. (o) Party: Seller or Company and its respective successors or ----- assigns. (p) Prime Rate: That rate as announced by BankBoston (or its ---------- successor) as its prime rate in effect on the first day of the month. (q) Prudent Utility Practice: Any practices, methods and acts ------------------------ engaged in or approved by a significant portion of the electric utility industry during the relevant time period, or any of the practices, methods and acts which, in the exercise of reasonable judgment in light of facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety and expedition and giving due regard for the requirements of governmental agencies having jurisdiction. Prudent Utility Practice is not intended to be limited to the optimum practice, method, or act to the exclusion of all others, but Page 2 of 12 569 rather to be acceptable practices, methods, or acts generally accepted in the electric utility industry. (r) Summer Net Capability (Capability): The Maximum Claimed ---------------------------------- Capability, as defined in NEPOOL CRS - 4 , of the Facility during the Summer Period, expressed in kilowatts, and as determined by Capability Audit, exclusive of the capacity required for Facility use. (s) Summer Period: Summer Period shall have the meaning set forth in ------------- the NEPOOL Agreement. (t) Winter Net Capability (Capability): The Maximum Claimed ---------------------------------- Capability, as defined in NEPOOL CRS - 4 , of the Facility during the Winter Period, expressed in kilowatts, and as determined by Capability Audit, exclusive of the capacity required for Facility use. (u) Winter Period: Winter Period shall have the meaning set forth in ------------- the NEPOOL Agreement. ARTICLE 2. Purchase and Sale of Installed Capability, Operable Capability and Energy (a) Seller agrees to sell and to deliver and Company agrees to purchase and to accept delivery of the Company's Entitlement at the Delivery Point, for Company's own use and/or sale to others for the term of this Agreement. (b) Seller shall use Prudent Utility Practices in all aspects of the management and operation of the Facility. Seller shall use commercially reasonable efforts to maintain the Facility's Installed Capability at the level demonstrated by the most recent Capability Audit at the time of the Purchase and Sale Agreement and use its commercially reasonable efforts to make Energy and Operable Capability available to Company on an ongoing basis. Notwithstanding the foregoing, Seller may permanently retire the Facility upon 30 days written notice to the Company, at which time this Agreement will terminate. (c) Periodically after the execution of this Agreement, Seller shall undergo Capability Audits pursuant to NEPOOL Standards to demonstrate and audit the Summer Net Capability and/or the Winter Net Capability of the Facility. The Capability Audit shall be performed pursuant to NEPOOL Standards or standards mutually agreed to by the Parties if NEPOOL ceases to establish such standards. Seller agrees to provide to Company the results of the demonstrations and audits (NX-17s and supporting material). (d) Seller shall schedule maintenance activities in accordance with NEPOOL Standards. As soon as practically possible, Seller shall provide advance notice of planned Page 3 of 12 570 maintenance activities and unplanned outages by telephone or telecopy to Company's designated agent. ARTICLE 3. Term, Termination (a) The obligations of the Parties under this Agreement shall commence on the Closing Date as defined in the Purchase and Sale Agreement and, subject to the termination provisions set forth in this Agreement, shall continue through December 31, 2004. In addition, applicable provisions of this Agreement shall remain in effect after termination hereof, including Article 7 and provisions necessary to provide for final billings, billing adjustments, and payments. (b) Notwithstanding the foregoing, the obligations of the Parties under this Agreement are subject to and contingent upon receipt of an acceptable (in each Party's sole discretion) final, non- appealable order of (i) the MDTE approving this Agreement and (ii) the FERC accepting this Agreement. ARTICLE 4. Purchase Rate for Installed Capability, Operable Capability and Energy (a) Company shall pay Seller monthly (on a $/Mwh basis) for Installed Capability, Operable Capability and Energy, according to the following formula: TMA = P x U t t t where: TMA = Total monthly amount due in month (t) t P = The Purchase price expressed in $/Mwh t = 35.00 $/Mwh for all the months in the year 1999 = 38.00 $/Mwh for all the months in the year 2000 = 35.19 $/Mwh for all the months in the year 2001 = 38.89 $/Mwh for all the months in the year 2002 = 43.52 $/Mwh for all the months in the year 2003 = 47.22 $/Mwh for all the months in the year 2004 U = The Energy portion of the Company's Entitlement t delivered to Company in month (t) expressed in megawatthours. ARTICLE 5. Dispatch (a) Seller shall make the Facility available for dispatch by ISO-NE. Page 4 of 12 571 (b) Seller shall comply with all NEPOOL Standards applicable to Seller. (c) Seller shall submit all forms to ISO-NE with a copy to Company. (d) Seller's and Company's designated agent shall mutually agree to any revision to the existing ISO-NE NX-12B Forms to be submitted to ISO-NE in accordance with the provisions of the NEPOOL Agreement and NEPOOL Standards. (e) Whenever Company's system or the systems with which it is directly interconnected experience an emergency, as designated by the affected utility, or whenever it is necessary to aid in the restoration of service on Company's system or on the systems with which it is directly or indirectly interconnected, or, whenever requested by ISO-NE, Seller or its designee shall curtail or interrupt the delivery of all or a portion of the production of electricity at the Facility provided such curtailment or interruption shall continue only for as long as reasonably necessary to deal with the emergency. (f) Whenever Seller's Facility experiences an emergency, Seller or its designee shall have the right to curtail or interrupt all or a portion of Seller's obligation hereunder, provided such curtailment or interruption shall continue only for so long as reasonably necessary to deal with the emergency, and provided Seller promptly notifies Company of the occurrence of such an emergency. ARTICLE 6. Billing, Meter Reading (a) Seller shall deliver Company's Entitlement to the Delivery Point. Seller is responsible for maintaining metering and telemetering equipment at the Facility. The metering equipment shall be capable of registering and recording instantaneous, and time- differentiated electric energy and other related data from the Facility, and shall comply with the requirements of NEPOOL's Standards as may be issued or revised from time to time. The telemetering shall be capable of transmitting such data to location(s) specified by Company. (b) Each day, Seller shall be required to provide Company with hourly integrated megawatt hour readings for each hour of the previous day. Seller shall record hourly meter readings and log sheets and, upon Company's request, provide copies of daily meter recordings and log sheets by electronic means with hard copy back-up. All metering equipment installed shall be routinely tested in accordance with Prudent Utility Practice. Any meter tested and found to register within one-half of one percent (0.5%) of the recognized comparative standard shall be considered correct and accurate. If at any time, any metering equipment is found to be defective or inaccurate, Seller shall cause such metering equipment to be made accurate or replaced at Seller's expense. Notwithstanding subarticle (e) below, in such event, a billing adjustment shall be made by Seller correcting all measurements made by the defective meter for either: (i) the actual period during which inaccurate measurements were made, if such period is determinable to the mutual satisfaction of the Company and Seller; or (ii) if such period Page 5 of 12 572 is not determinable, for a period equal to one-half the time elapsed since the prior test, but in no event greater than six months. (c) Seller shall submit, by telecopy or other agreeable same day delivery mechanism, an invoice for all applicable Article 4 charges to Company as soon as practicable after the end of each calendar month that shall include the time and date of the meter readings. This invoice shall include such reasonable detail to enable the Company to determine the basis for the charges of such month. Seller and Company agree to provide additional information reasonably requested by the other Party as necessary for billing purposes or data verification. Invoices may be rendered on an estimated basis. Each invoice shall be subject to adjustment for any errors in arithmetic, computing, estimating or otherwise. Seller and Company shall include any such invoicing adjustments as promptly as practicable. (d) All payments shown to be due on such invoice, except amounts in dispute, shall be due and payable as shown on the invoice. Company shall pay by wire transfer per instructions on the invoice on or before ten (10) days after receipt of the invoice. (e) Any undisputed amounts unpaid after the Due Date shall bear interest at a rate equal to the Prime Rate then in effect on the Due Date, compounded on a monthly basis. Company may dispute all or any part of any invoice by written notification to Seller within 30 days of receipt of such invoice. All amounts paid by the Company which are subsequently determined to have been improperly invoiced by Seller under this Agreement shall be subject to refund with interest at a rate equal to the Prime Rate then in effect on the Due Date, compounded on a monthly basis. (f) Seller shall keep complete and accurate records and meter readings of its operations and shall maintain such data for a period of at least one (1) year after invoice for the final billing is rendered. Company shall have the right, upon five (5) business days prior notice, during normal business hours, to examine and inspect all such records and meter readings in so far as may be necessary for the purpose of ascertaining the reasonableness and accuracy of all relevant data, estimates or statements of charges submitted to it hereunder but shall not impair or interfere with the operation of the Facility owned by Seller. ARTICLE 7. Limitation of Liability; Indemnification; Insurance; Relationship of Parties (a) Notwithstanding subarticle (b) hereof or any other provision of this Agreement to the contrary, neither Company nor Seller nor their respective officers, directors, agents, employees, parent, subsidiaries or affiliates or their officers, directors, agents or employees shall be liable or responsible to the other Party or its parent, subsidiaries, affiliates, officers, directors, agents, employees, successors or assigns, or their respective insurers, for incidental, indirect, exemplary, punitive or consequential damages, connected with or resulting from performance or non-performance of this Agreement, or anything done in connection therewith including, without limitation, Page 6 of 12 573 claims in the nature of lost revenues, income or profits (other than payments expressly required and properly due under this Agreement), and increased expense of, reduction in or loss of power generation production or equipment used therefor, irrespective of whether such claims are based upon breach of warranty, tort (including negligence, whether of Seller, Company or others), strict liability, contract, operation of law or otherwise, but excluding acts of gross negligence or willful misconduct. (b) Each Party (the "Indemnifying Party") shall defend, indemnify and save the other Party (the "Indemnified Party"), its officers, directors, agents, employees and affiliates and their respective officers, directors, agents and employees harmless from and against any and all claims, liabilities, demands, judgments, losses, costs, expenses (including reasonable attorneys' fees), suits, or damages arising by reason of bodily injury, death or damage to third party property sustained by any person or entity (whether or not a party to this Agreement) caused by or attributable to a breach of this Agreement by the Indemnifying Party or an action of gross negligence or willful misconduct of the Indemnifying Party or an officer, director, agent or employee of Indemnifying Party. (c) Seller shall maintain insurance coverage at its sole expense. (d) The rights, obligations and protections afforded by subarticles (a) and (b) above shall survive the termination, expiration or cancellation of this Agreement, and shall apply to the full extent permitted by law. (e) Nothing in this Agreement shall be construed as creating any relationship between the Parties other than that of independent contractors for the sale and purchase of Installed Capability, Operable Capability and Energy generated at the Facility. The Parties do not intend to create any rights, or grant any remedies to, any third party beneficiary of this Agreement. ARTICLE 8. Miscellaneous Provisions (a) The Parties hereto agree that time shall be of the essence of this Agreement. (b) This Agreement may not be modified or amended except in writing signed by or on behalf of both Parties by their duly authorized officers, and if applicable, after obtaining any required regulatory approvals. (c) It shall be the responsibility of Seller to take all necessary actions to satisfy any regulatory requirements which may be imposed on Seller by any statute, rule or regulation concerning the sale of Installed Capability, Operable Capability and Energy. Company shall cooperate with Seller and provide information or such other assistance, without cost to Company, as may be reasonably necessary for Seller to satisfy regulatory requirements relating specifically and only to the sale of Installed Capability, Operable Capability and Energy from the Facility. Seller shall cooperate with Company and provide information or such other assistance, without cost to Seller, as may be reasonably necessary for Company to satisfy regulatory requirements relating Page 7 of 12 574 specifically and only to the purchase of Installed Capability, Operable Capability and Energy from the Facility. (d) Notwithstanding subarticle (c) above, Seller agrees to provide, at no cost to Company, all necessary forms, data, and other information reasonably requested of Company by ISO-NE, NEPOOL, or any governmental or regulatory agency or authority having jurisdiction. ARTICLE 9. Assignment (a) Neither Party shall have the right to assign this Agreement or its rights or obligations hereunder without the express written consent of the other Party. Such consent shall not be unreasonably withheld. No assignment shall be effective until any and all necessary regulatory approvals of the assignment have been obtained. (b) Notwithstanding the provisions in Section 9(a) above: (i) Seller may assign this Agreement to any affiliate to whom the Facility is transferred, without the Company's prior consent; provided that Seller shall not be released from liability hereunder without the Company's prior written consent. (ii) Seller may collaterally assign its rights in this Agreement to its lenders. (iii) The Company has the right to assign or transfer all of its rights and obligations under this Agreement without the consent of Seller provided that Company shall first provide Seller with thirty (30) days prior written notice of the proposed assignment or transfer and documentary evidence of the assignee's or transferee's financial capacity to satisfy any and all obligations so assigned; and provided further that such documentary evidence may be that such assignee or transferee has a current agency report indicating an investment grade rating from any two of the following: Standard & Poor's, Moody's, Duff & Phelps, or Fitch. Any assignment or transfer by the Company shall include an explicit requirement that the assignee or transferee agrees to undertake each and every obligation that the Company has under this Agreement. The Seller understands and acknowledges that the Company intends to assign or transfer all of its rights and obligations under this Agreement. ARTICLE 10. Force Majeure (a) If either Party is rendered wholly or partly unable to perform its obligations under this Agreement because of a Force Majeure event, that Party shall be excused from whatever performance is affected by the Force Majeure event to the extent so affected, provided that the non-performing Party shall: (i1) provide prompt notice to the other Party of the Page 8 of 12 575 occurrence of the Force Majeure event giving an estimation of its expected duration and the probable impact on the performance of its obligations hereunder and submitting good and satisfactory evidence of the existence of the Force Majeure event; (ii) exercise all reasonable efforts to continue to perform its obligations hereunder; (iii) expeditiously take action to correct or cure the Force Majeure event and submit good and satisfactory evidence that it is making all reasonable efforts to correct or cure the Force Majeure event; (iv) exercise all reasonable efforts to mitigate or limit damages to the other Party to the extent such action shall not adversely effect its own interests; and (v) provide prompt notice to the other Party of the cessation of the Force Majeure event; provided further that any obligations of either Party which arose before the occurrence of the Force Majeure event causing non-performance shall not be excused as a result of the occurrence of a Force Majeure event. (b) "Force Majeure" means the failure or imminent threat of failure of facilities or equipment, flood, freeze, earthquake, storm, fire, lighting, other acts of God, epidemic, war, acts of a public enemy, riot, civil disturbance or disobedience, strike, lockout, work stoppages, other industrial disturbance or dispute, sabotage, restraint by court order or other public authority, and action or non-action by, or failure or inability to obtain the necessary authorizations or approvals from, any governmental agency or authority, which by the exercise of due diligence such Party could not reasonably have been expected to avoid and by exercise of due diligence its effect can not be overcome. Nothing contained herein shall be construed so as to require the Parties to settle any strike, lockout, work stoppage or any industrial disturbance or dispute in which it may be involved, or to seek review of or take an appeal from any administrative or judicial action. In no event shall the lack of funds or an inability to obtain funds or any action by any governmental authority that disallows, prevents or limits the recovery through rates of all or any portion of the charges imposed by this Agreement be a Force Majeure event. ARTICLE 11. Default (a) "Event of Default" shall mean, in relation to a Party (the "Defaulting Party"): (i) the Defaulting Party fails to perform any of its material obligations hereunder, and such failure is not excused by Force Majeure and continues for thirty (30) days after the Defaulting Party receives written notice from the Non- Defaulting Party of such failure; provided, however, if a period in excess of thirty (30) days is required to cure such failure, the Defaulting Party shall have additional amount of time, not to exceed 180 days, as may be necessary to cure such failure provided that the Defaulting Party uses reasonable diligence to remedy such failure and provided further that, the foregoing "cure" provisions shall not apply to: y) failure by Company to make payments to Seller pursuant to Article 6, or z) failure by Seller to make available and deliver Company's Entitlement; or Page 9 of 12 576 (ii) the Defaulting Party makes an assignment or general arrangement for the benefit of creditors, files a petition, or otherwise commences any proceeding, in bankruptcy or under similar law, otherwise becomes bankrupt (however evidenced) or is unable to pay its debts as they fall due. (b) Upon an Event of Default, the Non-Defaulting Party may resort to all remedies available at law or in equity, including, without limitation: (i) the termination of service; (ii) specific enforcement of the provisions of this Agreement; and/or (iii) the recovery of damages except to the extent such damages are waived or limited pursuant to this Agreement. ARTICLE 12. Governing Law, Dispute Resolution (a) The interpretation and performance of this Agreement shall be in accordance with, and controlled by the law, of the Commonwealth of Massachusetts, notwithstanding its conflicts of law's principles. (b) If any dispute, disagreement, claim or controversy exists between Seller and Company arising out of or relating to this Agreement, such disputed matter shall be submitted to a committee comprised of one designated agent of each Party. Such committee shall be instructed to attempt to resolve the matter within twenty (20) days thereafter. If Company's and Seller's designees do not agree upon a decision within thirty (30) days after the submission of the matter to them, either Party may institute formal legal proceedings. ARTICLE 13. Waiver The failure of either Party to require compliance with any provision of this Agreement shall not affect that Party's right to later enforce the same. It is agreed that the waiver by either Party of performance of any of the terms of this Agreement, or of any breach thereof, shall not be held or deemed to be a waiver by that Party of any subsequent failure to perform the same, or any other term or condition of this Agreement, or of any breach thereof. ARTICLE 14. Corporate Authorization Prior to or simultaneous with the Effective Date of this Agreement, the Parties shall provide sufficient evidence to each other that each has the legal power and authority to perform this Agreement, that their respective officers executing this Agreement have been duly authorized to do so and that this Agreement, upon execution and delivery, shall be legally binding and enforceable. Page 10 of 12 577 ARTICLE 15. Notice Except as otherwise provided herein, any notice, invoice or other communication which is required or permitted by this Agreement shall be in writing and delivered by personal service, telecopy, or mailed certified or registered first class mail, postage prepaid, properly addressed as follows: a) In the case of Company to: Boston Edison Company 800 Boylston Street Boston, Massachusetts 02199 U.S.A. Attention: Manager - Power Contracts Department Telecopy No: 617-424-3407 b) In the case of Seller to: Carolyn C. Shanks, CPA Vice President, Finance and Administration Entergy Nuclear Generation Company P.O. Box 31995 Jackson, MS 39286-1995 Street Address: 1340 Echelon Parkway Jackson, MS 39213 Telecopy No: 601-368-5323 Page 11 of 12 578 Another address or addressee may be specified in a notice duly given as provided. Each notice, invoice or other communication which shall be mailed, delivered or transmitted in the manner described above shall be deemed sufficiently given and received for all purposes at such time as it is delivered to the addressee (with return receipt, the delivered receipt, the affidavit of the messenger or with respect to a telecopy, the answer back, being deemed conclusive evidence of such delivery) or at such time as delivery is refused by the addressee upon presentation. IN WITNESS WHEREOF the Parties have executed this Agreement as of the date first written above. ENTERGY NUCLEAR GENERATION COMPANY By: /s/ Donald C. Hintz --------------------------------- Name: Donald C. Hintz Title: President and Chief Executive Officer BOSTON EDISON COMPANY By: /s/ Douglas S. Horan --------------------------------- Name: Douglas S. Horan Title: Senior Vice President and General Counsel Page 12 of 12 579 POWER PURCHASE AGREEMENT WITH RESPECT TO MUNICIPAL ENTITLEMENTS BETWEEN ENTERGY NUCLEAR GENERATION COMPANY AND BOSTON EDISON COMPANY FOR PILGRIM NUCLEAR POWER STATION 580 TABLE OF CONTENTS ----------------- ARTICLE 1. Definitions .................................................... 1 ARTICLE 2. Purchase and Sale of Installed Capability, Operable Capability and Energy .......................................... 3 ARTICLE 3. Term, Termination and Company's Entitlement .................... 4 ARTICLE 4. Purchase Rate for Installed Capability, Operable Capability and Energy .......................................... 4 ARTICLE 5. Dispatch ....................................................... 5 ARTICLE 6. Billing, Meter Reading ......................................... 5 ARTICLE 7. Seller's Obligations with Respect to Power Sales Agreements with Municipals ..................................... 7 ARTICLE 8. Limitation of Liability; Indemnification; Insurance; Relationship of Parties ........................................ 7 ARTICLE 9. Miscellaneous Provisions ....................................... 8 ARTICLE 10. Assignment .................................................... 8 ARTICLE 11. Force Majeure ................................................. 9 ARTICLE 12. Default ...................................................... 10 ARTICLE 13. Governing Law, Dispute Resolution ............................ 10 ARTICLE 14. Waiver ....................................................... 10 ARTICLE 15. Corporate Authorization ...................................... 11 ARTICLE 16. Notice ....................................................... 11 581 POWER PURCHASE AGREEMENT WITH RESPECT TO MUNICIPAL ENTITLEMENTS BETWEEN ENTERGY NUCLEAR GENERATION COMPANY AND BOSTON EDISON COMPANY AGREEMENT entered into this 18th day of November 1998 by and between Entergy Nuclear Generation Company, a Delaware corporation (hereafter referred to as "Seller"), and Boston Edison Company, a Massachusetts corporation having its principal place of business at 800 Boylston Street, Boston, Massachusetts 02199, (hereafter referred to as "Company"). WHEREAS, Seller wishes to sell to Company and Company wishes to purchase from Seller, Installed Capability, Operable Capability, and Energy following the closing pursuant to the Purchase and Sale Agreement dated November 18,1998 by and between Company and Seller (the "Purchase and Sale Agreement") pursuant to which Seller shall purchase the specific generating facility known as Pilgrim Nuclear Power Station, from the Company, and Seller and Company shall enter into the Interconnection and Operation Agreement of even date herewith (the "Interconnection Agreement"; and WHEREAS, Company is a party to fourteen Power Sale Agreements ("PSAs") with the following: City of Holyoke Gas and Electric Department, City of Westfield Gas and Electric Light Department, Marblehead Municipal Light Department, Middleborough Gas and Electric Department, North Attleboro Electric Department, Peabody Municipal Light Plant, Shrewsbury's Electric Light Plant, Templeton Municipal Light Plant, Town of Boylston Municipal Light Department, Town of Hudson Light and Power Department, Littleton Electric Light Department, Town of Wakefield Municipal Light Department, Reading Municipal Light Department, and West Boylston Municipal Lighting Department (collectively, the "Municipals"); and WHEREAS, Company and Seller have entered into Partial Assignments with respect to the PSAs of each of these Municipals pursuant to which Company has assigned to Seller certain obligations under the PSAs including Company's obligation to provide capacity and energy from Pilgrim Nuclear Power Station to each of the Municipals; NOW, THEREFORE, in consideration of the mutual promises and agreements contained herein, Seller and Company hereby agree as follows: ARTICLE 1. Definitions When used with initial capitalizations, whether in the singular or in the plural, the following terms shall have the meanings set forth below. (a) Agreement: This document, including its appendices, as amended --------- from time to time. Page 1 of 12 582 (b) Capability Audit: The procedure used pursuant to the NEPOOL ---------------- Agreement to determine the Summer Net Capability and the Winter Net Capability of the Facility as currently set forth in the NEPOOL Standards. (c) Company's Entitlement: 3.73133% of the Installed Capability, --------------------- Operable Capability and Energy of the Facility, unless such percentage is decreased by Company in accordance with Article 3(a) hereof. (d) Energy: The actual hourly electricity production of the Facility ------ adjusted for station service use and transformer losses. (e) Delivery Point: The point where capacity and energy generated by -------------- the Facility is delivered to the Pool Transmission Facilities, as defined by the NEPOOL Agreement. (f) Facility: The Pilgrim Nuclear Power Station, a 670 MW nuclear -------- generating facility located in Plymouth, Massachusetts. (g) FERC: The Federal Energy Regulatory Commission. ---- (h) Installed Capability: The Winter Net Capability during the -------------------- Winter Period and the Summer Net Capability during the Summer Period. (i) ISO-NE: The Independent System Operator of New England provided ------ for in the NEPOOL Agreement, or its successor. (j) Market Price: The wholesale electricity price in a given month, ------------ which shall equal the sum of a) the applicable monthly average non-weighted hourly clearing price in the NEPOOL energy market expressed in $/MWh, b) the applicable monthly average non- weighted hourly clearing price in the NEPOOL operable capability market expressed in $/MWh, and c) the applicable monthly clearing price in the NEPOOL installed capability market converted into an equivalent $/MWh rate using a load factor of 80% in 2005 and 90% in 2006. (k) MDTE: The Massachusetts Department of Telecommunications and ---- Energy. (l) NEPOOL: The New England Power Pool, established by the NEPOOL ------ Agreement, or its successor. (m) NEPOOL Agreement: The agreement, dated September 1, 1971, as ---------------- amended from time to time, governing the operation of NEPOOL, as in full force and effect. (n) NEPOOL Standards: All Criteria, Rules and Standards (CRS), ---------------- NEPOOL Automated Billing System Procedures (NABS), Operating Procedures (OP), and Market Rules (MR) issued or adopted by NEPOOL, ISO-NE and its satellite agencies, or their successors, as amended from time to time and all successor regulations, rules and standards. Page 2 of 12 583 (o) Operable Capability: The portion of Installed Capability of the ------------------- Facility which is operating or available to respond within an appropriate period (as defined by NEPOOL) to the ISO-NE call to meet the Energy requirements of the NEPOOL operating area. (p) Party: Seller or Company and its respective successors or ----- assigns. (q) Prime Rate: That rate as announced by BankBoston (or its ---------- successor) as its prime rate in effect on the first day of the month. (r) Prudent Utility Practice: Any practices, methods and acts ------------------------ engaged in or approved by a significant portion of the electric utility industry during the relevant time period, or any of the practices, methods and acts which, in the exercise of reasonable judgment in light of facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety and expedition and giving due regard for the requirements of governmental agencies having jurisdiction. Prudent Utility Practice is not intended to be limited to the optimum practice, method, or act to the exclusion of all others, but rather to be acceptable practices, methods, or acts generally accepted in the electric utility industry. (s) Summer Net Capability (Capability): The Maximum Claimed ---------------------------------- Capability, as defined in NEPOOL CRS - 4 , of the Facility during the Summer Period, expressed in kilowatts, and as determined by Capability Audit, exclusive of the capacity required for Facility use. (t) Summer Period: Summer Period shall have the meaning set forth in ------------- the NEPOOL Agreement. (u) Winter Net Capability (Capability): The Maximum Claimed ---------------------------------- Capability, as defined in NEPOOL CRS - 4 , of the Facility during the Winter Period, expressed in kilowatts, and as determined by Capability Audit, exclusive of the capacity required for Facility use. (v) Winter Period: Winter Period shall have the meaning set forth in ------------- the NEPOOL Agreement. ARTICLE 2. Purchase and Sale of Installed Capability, Operable Capability and Energy (a) Company agrees to purchase and Seller agrees to sell and to deliver Company's Entitlement pursuant to the Partial Assignments with respect to the Municipals' PSAs. In the event that any of the Municipals refuse to accept delivery pursuant to such Partial Assignment or such Partial Assignments are no longer in effect, Company agrees to purchase and to accept delivery of the Company's Entitlement at the Delivery Point, for Company's own use and/or sale to others for the term of this Agreement. (b) Seller shall use Prudent Utility Practices in all aspects of the management and operation of the Facility. Seller shall use commercially reasonable efforts to maintain the Facility's Installed Capability at the level demonstrated by the most recent Capability Audit at the time of the Purchase and Sale Agreement and use its commercially reasonable efforts to make Energy and Operable Capability available to Company on an ongoing basis. Page 3 of 12 584 Notwithstanding the foregoing, Seller may permanently retire the Facility upon 30 days written notice to the Company, at which time this Agreement will terminate. (c) Periodically after the execution of this Agreement, Seller shall undergo Capability Audits pursuant to NEPOOL Standards to demonstrate and audit the Summer Net Capability and/or the Winter Net Capability of the Facility. The Capability Audit shall be performed pursuant to NEPOOL Standards or standards mutually agreed to by the Parties if NEPOOL ceases to establish such standards. Seller agrees to provide to Company the results of the demonstrations and audits (NX-17s and supporting material). (d) Seller shall schedule maintenance activities in accordance with NEPOOL Standards. As soon as practically possible, seller shall provide advance notice of planned maintenance activities and unplanned outages by telephone or telecopy to Company's designated agent. ARTICLE 3. Term, Termination, and Company's Entitlement (a) The obligations of the Parties under this Agreement shall commence on the Closing Date as defined in the Purchase and Sale Agreement and shall be conterminous with Company's obligation to provide capacity and energy from the Facility to the Municipals under the PSAs, provided that, in no event shall this Agreement terminate prior to December 31, 2004. Company may decrease Company's Entitlement at any time after December 31, 2004 by providing one hundred and twenty (120) days prior written notice to Seller. In no event may Company increase Company's Entitlement at any time. Notwithstanding the foregoing, applicable provisions of this Agreement shall remain in effect after termination hereof, including Articles 7 and 8 and provisions necessary to provide for final billings, billing adjustments, and payments. (b) Notwithstanding the foregoing, the obligations of the Parties under this Agreement are subject to and contingent upon receipt of an acceptable (in each Party's sole discretion) final, non- appealable order of (i) the MDTE approving this Agreement and (ii) the FERC accepting this Agreement. ARTICLE 4. Purchase Rate for Installed Capability, Operable Capability and Energy (a) Company shall pay Seller monthly (on a $/Mwh basis) for Installed Capability, Operable Capability and Energy, according to the following formula: TMA = P x U t t t where: TMA = Total monthly amount due in month (t) t P = The Purchase price expressed in $/Mwh t = 35.00 $/Mwh for all the months in the year 1999 Page 4 of 12 585 = 38.00 $/Mwh for all the months in the year 2000 = 35.19 $/Mwh for all the months in the year 2001 = 38.89 $/Mwh for all the months in the year 2002 = 43.52 $/Mwh for all the months in the year 2003 = 47.22 $/Mwh for all the months in the year 2004 = Market Price for each month, commencing January 2005 U = The Energy portion of the Company's Entitlement t delivered to Company in month (t) expressed in megawatthours. ARTICLE 5. Dispatch (a) Seller shall make the Facility available for dispatch by ISO-NE. (b) Seller shall comply with all NEPOOL Standards applicable to Seller. (c) Seller shall submit all forms to ISO-NE with a copy to Company. (d) Seller's and Company's designated agent shall mutually agree to any revision to the existing ISO-NE NX-12B Forms to be submitted to ISO-NE in accordance with the provisions of the NEPOOL Agreement and NEPOOL Standards. (e) Whenever Company's system or the systems with which it is directly interconnected experience an emergency, as designated by the affected utility, or whenever it is necessary to aid in the restoration of service on Company's system or on the systems with which it is directly or indirectly interconnected, or, whenever requested by ISO-NE, Seller or its designee shall curtail or interrupt the delivery of all or a portion of the production of electricity at the Facility provided such curtailment or interruption shall continue only for as long as reasonably necessary to deal with the emergency. (f) Whenever Seller's Facility experiences an emergency, Seller or its designee shall have the right to curtail or interrupt all or a portion of Seller's obligation hereunder, provided such curtailment or interruption shall continue only for so long as reasonably necessary to deal with the emergency, and provided Seller promptly notifies Company of the occurrence of such an emergency. ARTICLE 6. Billing, Meter Reading (a) Seller shall deliver Company's Entitlement to the Delivery Point. Seller is responsible for maintaining metering and telemetering equipment at the Facility. The metering equipment shall be capable of registering and recording instantaneous, and time- differentiated electric energy and other related data from the Facility, and shall comply with the requirements of NEPOOL's Standards as may be issued or revised from time to time. The telemetering shall be capable of transmitting such data to location(s) specified by Company. Page 5 of 12 586 (b) Each day, Seller shall be required to provide Company with hourly integrated megawatt hour readings for each hour of the previous day. Seller shall record hourly meter readings and log sheets and, upon Company's request, provide copies of daily meter recordings and log sheets by electronic means with hard copy back-up. All metering equipment installed shall be routinely tested in accordance with Prudent Utility Practice. Any meter tested and found to register within one-half of one percent (0.5%) of the recognized comparative standard shall be considered correct and accurate. If at any time, any metering equipment is found to be defective or inaccurate, Seller shall cause such metering equipment to be made accurate or replaced at Seller's expense. Notwithstanding subarticle (e) below, in such event, a billing adjustment shall be made by Seller correcting all measurements made by the defective meter for either: (i) the actual period during which inaccurate measurements were made, if such period is determinable to the mutual satisfaction of the Company and Seller; or (ii) if such period is not determinable, for a period equal to one-half the time elapsed since the prior test, but in no event greater than six months. (c) Seller shall submit, by telecopy or other agreeable same day delivery mechanism, an invoice for all applicable Article 4 charges to Company as soon as practicable after the end of each calendar month, that shall include the time and date of the meter readings. This invoice shall include such reasonable detail to enable the Company to determine the basis for the charges of such month. Seller and Company agree to provide additional information reasonably requested by the other Party as necessary for billing purposes or data verification. Invoices may be rendered on an estimated basis. Each invoice shall be subject to adjustment for any errors in arithmetic, computing, estimating or otherwise. Seller and Company shall include any such invoicing adjustments as promptly as practicable. (d) All payments shown to be due on such invoice, except amounts in dispute, shall be due and payable as shown on the invoice. Company shall pay by wire transfer per instructions on the invoice on or before ten (10) days after receipt of the invoice. (e) Any undisputed amounts unpaid after the Due Date shall bear interest at a rate equal to the Prime Rate then in effect on the Due Date, compounded on a monthly basis. Company may dispute all or any part of any invoice by written notification to Seller within 30 days of receipt of such invoice. All amounts paid by the Company which are subsequently determined to have been improperly invoiced by Seller under this Agreement shall be subject to refund with interest at a rate equal to the Prime Rate then in effect on the Due Date, compounded on a monthly basis. (f) Seller shall keep complete and accurate records and meter readings of its operations and shall maintain such data for a period of at least one (1) year after invoice for the final billing is rendered. Company shall have the right, upon five (5) business days prior notice, during normal business hours, to examine and inspect all such records and meter readings in so far as may be necessary for the purpose of ascertaining the reasonableness and accuracy of all relevant data, estimates or statements of charges submitted to it hereunder but shall not impair or interfere with the operation of the Facility owned by Seller. Page 6 of 12 587 ARTICLE 7. Sellers Obligations with Respect to Power Sales Agreements with Municipals (a) Seller agrees to maintain its books and records regarding the Facility in compliance with the FERC Uniform System of Accounts, codified at C.F.R. Part 101. Seller agrees to a reasonable audit of such books and records by Company and/or the Municipals, at Company's expense, on thirty days' notice. If Company requests more than one such audit in a calendar year, Seller's reasonable costs in responding to such additional audits shall be reimbursed by Company. (b) Each of Company's PSAs with the Municipals, as amended, obligates Company to provide certain information and documents to and conduct consultations with the Municipals or their representative. Seller agrees to provide the said information and documents to and conduct consultations with Company and the Municipals, as described in each PSA, in order to ensure fulfillment of said obligations. (c) Seller shall cooperate with Company and provide information or such other assistance, without cost to Seller, as may be reasonably necessary for Company to satisfy its contractual obligations to the Municipals under the PSAs. ARTICLE 8. Limitation of Liability; Indemnification; Insurance; Relationship of Parties (a) Notwithstanding subarticle (b) hereof or any other provision of this Agreement to the contrary, neither Company nor Seller nor their respective officers, directors, agents, employees, parent, subsidiaries or affiliates or their officers, directors, agents or employees shall be liable or responsible to the other Party or its parent, subsidiaries, affiliates, officers, directors, agents, employees, successors or assigns, or their respective insurers, for incidental, indirect, exemplary, punitive or consequential damages, connected with or resulting from performance or non-performance of this Agreement, or anything done in connection therewith including, without limitation, claims in the nature of lost revenues, income or profits (other than payments expressly required and properly due under this Agreement), and increased expense of, reduction in or loss of power generation production or equipment used therefor, irrespective of whether such claims are based upon breach of warranty, tort (including negligence, whether of Seller, Company or others), strict liability, contract, operation of law or otherwise, but excluding acts of gross negligence or willful misconduct. (b) Each Party (the "Indemnifying Party") shall defend, indemnify and save the other Party (the "Indemnified Party"), its officers, directors, agents, employees and affiliates and their respective officers, directors, agents and employees harmless from and against any and all claims, liabilities, demands, judgments, losses, costs, expenses (including reasonable attorneys' fees), suits, or damages arising by reason of bodily injury, death or damage to third party property sustained by any person or entity (whether or not a party to this Agreement) caused by or attributable to a breach of this Agreement by the Indemnifying Party or an action of gross negligence or willful misconduct of the Indemnifying Party or an officer, director, agent or employee of Indemnifying Party. (c) Seller shall maintain insurance coverage at its sole expense. Page 7 of 12 588 ARTICLE 7. Sellers Obligations with Respect to Power Sales Agreements with Municipals (a) Seller agrees to maintain its books and records regarding the Facility in compliance with the FERC Uniform System of Accounts, codified at C.F.R. Part 101. Seller agrees to a reasonable audit of such books and records by Company and/or the Municipals, at Company's expense, on thirty days' notice. If Company requests more than one such audit in a calendar year, Seller's reasonable costs in responding to such additional audits shall be reimbursed by Company. (b) Each of Company's PSAs with the Municipals, as amended, obligates Company to provide certain information and documents to and conduct consultations with the Municipals or their representative. Seller agrees to provide the said information and documents to and conduct consultations with Company and the Municipals, as described in each PSA, in order to ensure fulfillment of said obligations. (c) Seller shall cooperate with Company and provide information or such other assistance, without cost to Seller, as may be reasonably necessary for Company to satisfy its contractual obligations to the Municipals under the PSAs. ARTICLE 8. Limitation of Liability; Indemnification; Insurance; Relationship of Parties (a) Notwithstanding subarticle (b) hereof or any other provision of this Agreement to the contrary, neither Company nor Seller nor their respective officers, directors, agents, employees, parent, subsidiaries or affiliates or their officers, directors, agents or employees shall be liable or responsible to the other Party or its parent, subsidiaries, affiliates, officers, directors, agents, employees, successors or assigns, or their respective insurers, for incidental, indirect, exemplary, punitive or consequential damages, connected with or resulting from performance or non-performance of this Agreement, or anything done in connection therewith including, without limitation, claims in the nature of lost revenues, income or profits (other than payments expressly required and properly due under this Agreement), and increased expense of, reduction in or loss of power generation production or equipment used therefor, irrespective of whether such claims are based upon breach of warranty, tort (including negligence, whether of Seller, Company or others), strict liability, contract, operation of law or otherwise, but excluding acts of gross negligence or willful misconduct. (b) Each Party (the "Indemnifying Party") shall defend, indemnify and save the other Party (the "Indemnified Party"), its officers, directors, agents, employees and affiliates and their respective officers, directors, agents and employees harmless from and against any and all claims, liabilities, demands, judgments, losses, costs, expenses (including reasonable attorneys' fees), suits, or damages arising by reason of bodily injury, death or damage to third party property sustained by any person or entity (whether or not a party to this Agreement) caused by or attributable to a breach of this Agreement by the Indemnifying Party or an action of gross negligence or willful misconduct of the Indemnifying Party or an officer, director, agent or employee of Indemnifying Party. (c) Seller shall maintain insurance coverage at its sole expense. Page 7 of 12 589 (d) The rights, obligations and protections afforded by subarticles (a) and (b) above shall survive the termination, expiration or cancellation of this Agreement, and shall apply to the full extent permitted by law. (d) Nothing in this Agreement shall be construed as creating any relationship between the Parties other than that of independent contractors for the sale and purchase of Installed Capability, Operable Capability, and Energy generated at the Facility. The Parties do not intend to create any rights, or grant any remedies to, any third party beneficiary of this Agreement. ARTICLE 9. Miscellaneous Provisions (a) The Parties hereto agree that time shall be of the essence of this Agreement. (b) This Agreement may not be modified or amended except in writing signed by or on behalf of both Parties by their duly authorized officers, and if applicable, after obtaining any required regulatory approvals. (c) It shall be the responsibility of Seller to take all necessary actions to satisfy any regulatory requirements which may be imposed on Seller by any statute, rule or regulation concerning the sale of Installed Capability, Operable Capability and Energy. Company shall cooperate with Seller and provide information or such other assistance, without cost to Company, as may be reasonably necessary for Seller to satisfy regulatory requirements relating specifically and only to the sale of Installed Capability, Operable Capability and Energy from the Facility. Seller shall cooperate with Company and provide information or such other assistance, without cost to Seller, as may be reasonably necessary for Company to satisfy regulatory requirements relating specifically and only to the purchase of Installed Capability, Operable Capability and Energy from the Facility. (d) Notwithstanding subarticle (c) above, Seller agrees to provide, at no cost to Company, all necessary forms, data, and other information reasonably requested of Company by ISO-NE, NEPOOL, or any governmental or regulatory agency or authority having jurisdiction. ARTICLE 10. Assignment (a) Neither Party shall have the right to assign this Agreement or its rights or obligations hereunder without the express written consent of the other Party. Such consent shall not be unreasonably withheld. No assignment shall be effective until any and all necessary regulatory approvals of the assignment have been obtained. (b) Notwithstanding the provisions in Section 10(a) above: (i) Seller may assign this Agreement to any affiliate to whom the Facility is transferred, without the Company's prior consent; provided that Seller shall not be released from liability hereunder without the Company's prior written consent. Page 8 of 12 590 (ii) Seller may collaterally assign its rights in this Agreement to its lenders. (iii) The Company has the right to assign or transfer all of its rights and obligations under this Agreement without the consent of Seller provided that Company shall first provide Seller with thirty (30) days prior written notice of the proposed assignment or transfer and documentary evidence of the assignee's or transferee's financial capacity to satisfy any and all obligations so assigned; and provided further that such assignee or transferee has a current agency report indicating an investment grade rating from any two of the following: Standard & Poor's, Moody's, Duff & Phelps, or Fitch. Any assignment or transfer by the Company shall include an explicit requirement that the assignee or transferee agrees to undertake each and every obligation that the Company has under this Agreement. The Seller understands and acknowledges that the Company intends to assign or transfer all of its rights and obligations under this Agreement. ARTICLE 11. Force Majeure (a) If either Party is rendered wholly or partly unable to perform its obligations under this Agreement because of a Force Majeure event, that Party shall be excused from whatever performance is affected by the Force Majeure event to the extent so affected, provided that the non-performing Party shall: (i) provide prompt notice to the other Party of the occurrence of the Force Majeure event giving an estimation of its expected duration and the probable impact on the performance of its obligations hereunder and submitting good and satisfactory evidence of the existence of the Force Majeure event; (ii) exercise all reasonable efforts to continue to perform its obligations hereunder; (iii) expeditiously take action to correct or cure the Force Majeure event and submit good and satisfactory evidence that it is making all reasonable efforts to correct or cure the Force Majeure event; (iv) exercise all reasonable efforts to mitigate or limit damages to the other Party to the extent such action shall not adversely effect its own interests; and (v) provide prompt notice to the other Party of the cessation of the Force Majeure event; provided further that any obligations of either Party which arose before the occurrence of the Force Majeure event causing non-performance shall not be excused as a result of the occurrence of a Force Majeure event. (b) "Force Majeure" means the failure or imminent threat of failure of facilities or equipment, flood, freeze, earthquake, storm, fire, lighting, other acts of God, epidemic, war, acts of a public enemy, riot, civil disturbance or disobedience, strike, lockout, work stoppages, other industrial disturbance or dispute, sabotage, restraint by court order or other public authority, and action or non-action by, or failure or inability to obtain the necessary authorizations or approvals from, any governmental agency or authority, which by the exercise of due diligence such Party could not reasonably have been expected to avoid and by exercise of due diligence its effect can not be overcome. Nothing contained herein shall be construed so as to require the Parties to settle any strike, lockout, work stoppage or any industrial disturbance or dispute in which it may be involved, or to seek review of or take an appeal from any administrative or judicial action. In no event shall the lack of funds or an inability to obtain funds or any action by any governmental authority that disallows, Page 9 of 12 591 prevents or limits the recovery through rates of all or any portion of the charges imposed by this Agreement be a Force Majeure event. ARTICLE 12. Default (a) "Event of Default" shall mean, in relation to a Party (the "Defaulting Party"): (i) the Defaulting Party fails to perform any of its material obligations hereunder, and such failure is not excused by Force Majeure and continues for thirty (30) days after the Defaulting Party receives written notice from the Non-Defaulting Party of such failure; provided, however, if a period in excess of thirty (30) days is required to cure such failure, the Defaulting Party shall have additional amount of time, not to exceed 180 days, as may be necessary to cure such failure provided that the Defaulting Party uses reasonable diligence to remedy such failure and provided further that, the foregoing "cure" provisions shall not apply to: y) failure by Company to make payments to Seller pursuant to Article 6, or z) failure by Seller to make available and deliver Company's Entitlement; or (ii) the Defaulting Party makes an assignment or general arrangement for the benefit of creditors, files a petition, or otherwise commences any proceeding, in bankruptcy or under similar law, otherwise becomes bankrupt (however evidenced) or is unable to pay its debts as they fall due. (b) Upon an Event of Default, the Non-Defaulting Party may resort to all remedies available at law or in equity, including, without limitation: (i) the termination of service; (ii) specific enforcement of the provisions of this Agreement; and/or (iii) the recovery of damages except to the extent such damages are waived or limited pursuant to this Agreement. ARTICLE 13. Governing Law, Dispute Resolution (a) The interpretation and performance of this Agreement shall be in accordance with, and controlled by the law, of the Commonwealth of Massachusetts, notwithstanding its conflicts of law's principles. (b) If any dispute, disagreement, claim or controversy exists between Seller and Company arising out of or relating to this Agreement, such disputed matter shall be submitted to a committee comprised of one designated agent of each Party. Such committee shall be instructed to attempt to resolve the matter within twenty (20) days thereafter. If Company's and Seller's designees do not agree upon a decision within thirty (30) days after the submission of the matter to them, either Party may institute formal legal proceedings. ARTICLE 14. Waiver The failure of either Party to require compliance with any provision of this Agreement shall not affect that Party's right to later enforce the same. It is agreed that the waiver by either Party of Page 10 of 12 592 performance of any of the terms of this Agreement, or of any breach thereof, shall not be held or deemed to be a waiver by that Party of any subsequent failure to perform the same, or any other term or condition of this Agreement, or of any breach thereof. ARTICLE 15. Corporate Authorization Prior to or simultaneous with the Effective Date of this Agreement, the Parties shall provide sufficient evidence to each other that each has the legal power and authority to perform this Agreement, that their respective officers executing this Agreement have been duly authorized to do so and that this Agreement, upon execution and delivery, shall be legally binding and enforceable. ARTICLE 16. Notice Except as otherwise provided herein, any notice, invoice or other communication which is required or permitted by this Agreement shall be in writing and delivered by personal service, telecopy, or mailed certified or registered first class mail, postage prepaid, properly addressed as follows: a) In the case of Company to: Boston Edison Company 800 Boylston Street Boston, Massachusetts 02199 U.S.A. Attention: Manager - Power Contracts Department Telecopy No: 617-424-3407 b) In the case of Seller to: Carolyn C. Shanks, CPA Vice President, Finance and Administration Entergy Nuclear Generation Company P.O. Box 31995 Jackson, MS 39286-1995 Street Address: 1340 Echelon Parkway Jackson, MS 39213 Telecopy No: 601-368-5323 Page 11 of 12 593 Another address or addressee may be specified in a notice duly given as provided. Each notice, invoice or other communication which shall be mailed, delivered or transmitted in the manner described above shall be deemed sufficiently given and received for all purposes at such time as it is delivered to the addressee (with return receipt, the delivered receipt, the affidavit of the messenger or with respect to a telecopy, the answer back, being deemed conclusive evidence of such delivery) or at such time as delivery is refused by the addressee upon presentation. IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first written above. ENTERGY NUCLEAR GENERATION COMPANY By: /s/ Donald C. Hintz --------------------------------- Name: Donald C. Hintz Title: President and Chief Executive Officer BOSTON EDISON COMPANY By: /s/ Douglas S. Horan --------------------------------- Name: Douglas S. Horan Title: Senior Vice President and General Counsel Page 12 of 12 EX-12.1 4 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12.1 Boston Edison Company Computation of Ratio of Earnings to Fixed Charges Year ended December 31, 1998 (in thousands) Net income from continuing operations $157,337 Income taxes 82,639 Fixed charges 100,898 -------- Total $340,874 ======== Interest expense $ 91,114 Interest component of rentals 9,784 -------- Total $100,898 ======== Ratio of earnings to fixed charges 3.38 ====
EX-12.2 5 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS Exhibit 12.2 Boston Edison Company Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements Year ended December 31, 1998 (in thousands) Net income from continuing operations $157,337 Income taxes 82,639 Fixed charges 100,898 -------- Total $340,874 ======== Interest expense $ 91,114 Interest component of rentals 9,784 -------- Subtotal $100,898 -------- Preferred stock dividend requirements 13,361 -------- Total $114,259 ======== Ratio of earnings to fixed charges and preferred stock dividend requirements 2.98 ====
EX-23.1 6 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Boston Edison Company on Form S-3 (File No. 33-57840) of our report dated January 28, 1999 on our audits of the consolidated financial statements of Boston Edison Company as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998, which report is included in this Annual Report on Form 10-K/A. By: /s/ PricewaterhouseCoopers LLP ---------------------------------------- PricewaterhouseCoopers LLP Boston, Massachusetts July 12, 1999 EX-27 7 FINANCIAL DATA SCHEDULE
UT 1,000 12-MOS DEC-31-1998 DEC-31-1998 PER-BOOK 2,270,668 203,706 430,322 199,782 0 3,104,478 0 742,544 297,347 1,039,891 49,040 43,000 955,563 0 0 0 667 0 0 0 1,016,317 3,104,478 1,622,972 100,492 1,272,756 1,373,248 249,724 (2,941) 246,783 89,446 157,337 8,765 0 22,802 3,166 278,694 0 0
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