-----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, QbBKcPLBmHOItAoSxcWTDZF13ejQ/Hv9qHKRMR7rJgErk7flxMxOtejR014KrVrs aBJJn3jbC2teL9XLJNuMFg== 0000018808-99-000026.txt : 19990416 0000018808-99-000026.hdr.sgml : 19990416 ACCESSION NUMBER: 0000018808-99-000026 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRAL VERMONT PUBLIC SERVICE CORP CENTRAL INDEX KEY: 0000018808 STANDARD INDUSTRIAL CLASSIFICATION: 4911 IRS NUMBER: 030111290 STATE OF INCORPORATION: VT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08222 FILM NUMBER: 99576690 BUSINESS ADDRESS: STREET 1: 77 GROVE ST CITY: RUTLAND STATE: VT ZIP: 05701 BUSINESS PHONE: 8027732711 10-K 1 FORM 10-K FYE 12/31/98 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________ FORM 10-K (Mark One) [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 1-8222 Central Vermont Public Service Corporation (Exact name of registrant as specified in its charter) Vermont 03-0111290 (State or other jurisdiction (IRS Employer incorporation or organization) Identification No.) 77 Grove Street, Rutland, Vermont 05701 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (802) 773-2711 __________________________________________________________________________ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on which Title of each class registered Common Stock $6 Par Value New York Stock Exchange 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. [ ] Cover page State the aggregate market value of the voting stock held by non- affiliates of the registrant: $143,980,458 based upon the closing price as of January 29, 1999 of Common Stock, $6 Par Value, on the New York Stock Exchange as reported in the Eastern Edition of the Wall Street Journal. Indicate the number of shares outstanding of each of the registrant's classes of Common Stock: As of January 31, 1999, there were outstanding 11,461,131 shares of Common Stock, $6 Par Value. DOCUMENTS INCORPORATED BY REFERENCE The Company's Definitive Proxy Statement relating to its Annual Meeting of Stockholders to be held on May 4, 1999, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Act of 1934, is incorporated by reference in Items 10, 11, 12 and 13 of Part III of this Form 10-K. Cover page continued Form 10-K - 1998 TABLE OF CONTENTS Page PART I Item 1. Business................................................ 2 Item 2. Properties.............................................. 20 Item 3. Legal Proceedings....................................... 21 Item 4. Submission of Matters to a Vote of Security Holders..... 21 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................................... 22 Item 6. Selected Financial Data................................. 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 24 Item 8. Financial Statements and Supplementary Data............. 46 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................... 79 PART III Item 10. Directors and Executive Officers of the Registrant...... 79 Item 11. Executive Compensation.................................. 79 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................. 79 Item 13. Certain Relationships and Related Transactions.......... 79 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................ 80 Signatures........................................................ 102 PART I Item 1. Business. Overview. Central Vermont Public Service Corporation (the "Company"), incorporated under the laws of Vermont on August 20, 1929, is engaged in the purchase, production, transmission, distribution and sale of electricity. The Company has various wholly and partially owned subsidiaries. These subsidiaries are described below. The Company is the largest electric utility in Vermont and serves 139,543 customers in nearly three-quarters of the towns, villages and cities in Vermont. This represents about 50% of the Vermont population. In addition, the Company supplies electricity to one municipal, one rural cooperative, and one private utility. The Company's sales are derived from a diversified customer mix. The Company's sales to residential, commercial and industrial customers accounted for 59% of total MWH sales for the year 1998. Sales to the five largest retail customers receiving electric service from the Company during the same period aggregated about 5% of the Company's total electric revenues for the year. The Company's requirements resale sales accounted for approximately 4%, entitlement sales accounted for 9% and other resale sales which include contract sales, opportunity sales, sales to NEPOOL and short-term system capacity sales accounted for approximately 28% of total MWH sales for the year 1998. Connecticut Valley Electric Company Inc. (Connecticut Valley), a wholly owned subsidiary of the Company, incorporated under the laws of New Hampshire on December 9, 1948, distributes and sells electricity in parts of New Hampshire bordering the Connecticut River. It serves 10,390 customers in 13 communities in New Hampshire. About 2% of the New Hampshire population resides in its service area. Connecticut Valley's sales are also derived from a diversified customer mix. Connecticut Valley's sales to residential, commercial and industrial customers accounted for 99.5% of total MWH sales for the year 1998. Sales to its five largest retail customers during the same period aggregated about 21% of Connecticut Valley's total electric revenues for the year 1998. The Company also owns 56.8% of the common stock and 46.6% of the preferred stock of Vermont Electric Power Company, Inc. (VELCO). VELCO owns the high voltage transmission system in Vermont. VELCO created a wholly owned subsidiary, Vermont Electric Transmission Company, Inc. (VETCO), to finance, construct and operate the Vermont portion of the 450 KV DC transmission line connecting the Province of Quebec with Vermont and New England. In addition, the Company owns 31.3% of the common stock of Vermont Yankee Nuclear Power Corporation (Vermont Yankee), a nuclear generating company. The Company also owns 2% of the outstanding common stock of Maine Yankee Atomic Power Company, 2% of the outstanding common stock of Connecticut Yankee Atomic Power Company and 3.5% of the outstanding common stock of Yankee Atomic Electric Company. The Company also owns a real estate company, C.V. Realty, Inc. and one wholly owned subsidiary created for the purpose of financing and constructing a hydroelectric facility in Vermont. This hydroelectric facility, owned by Central Vermont Public Service Corporation - East Barnet Hydroelectric, Inc. became operational September 1, 1984 and has been leased and operated by the Company since its in-service date. In addition, the Company has a wholly owned non-utility subsidiary, Catamount Investment Corporation, which was formed for the purpose of holding the Company's subsidiaries that invest in unregulated business opportunities. For additional information of the Company's unregulated activities, see PART II, Item 8 herein. For Financial Information About Segments for the last three fiscal years, See Part II, Item 8, Note 16-Segment Reporting. REGULATION AND COMPETITION State Commissions. The Company is subject to the regulatory authority of the Vermont Public Service Board (PSB) with respect to rates, and the Company and VELCO are subject to PSB jurisdiction respecting securities issues, construction of major generation and transmission facilities and various other matters. The Company is subject to the regulatory authority of the New Hampshire Public Utilities Commission as to matters pertaining to construction and transfers of utility property in New Hampshire. Additionally, the Public Utilities Commission of Maine and the Connecticut Department of Public Utility Control exercise limited jurisdiction over the Company based on its joint-ownership interest as a tenant-in-common of Wyman #4, a 619 MW generating plant and Millstone #3, an 1149 MW nuclear generating facility, respectively. Connecticut Valley is subject to the regulatory authority of the New Hampshire Public Utilities Commission (NHPUC) with respect to rates, securities issues and various other matters. Federal Power Act. Certain phases of the businesses of the Company and VELCO, including certain rates, are subject to the jurisdiction of the Federal Energy Regulatory Commission (FERC) as follows: the Company as a licensee of hydroelectric developments under PART I, and the Company and VELCO as interstate public utilities under Parts II and III of the Federal Power Act, as amended and supplemented by the National Energy Act. The Company has licenses expiring at various times under PART I of the Federal Power Act for twelve of its hydroelectric plants. The Company has obtained an exemption from licensing for the Bradford and East Barnet projects. Public Utility Holding Company Act of 1935. Although the Company, by reason of its ownership of a utility subsidiary, is a holding company, as defined in the Public Utility Holding Company Act of 1935, it is presently exempt, pursuant to Rule 2, promulgated by the Commission under said Act, from all the provisions of said Act except Section 9(a)(2) thereof relating to the acquisition of securities of public utility affiliates. Environmental Matters. In recent years, public concern for the physical environment has resulted in increased governmental regulation of environmental matters. The Company is subject to these regulations in the licensing and operation of the generation, transmission, and distribution facilities in which it has interest, as well as the licensing and operation of the facilities in which it is a co-licensee. These environmental regulations are administered by local, state and Federal regulatory authorities and concern the impact of the Company's generation, transmission, distribution, transportation and waste handling facilities on air, water, land and aesthetic qualities. The Company cannot presently forecast the costs or other effects which environmental regulation may ultimately have upon its existing and proposed facilities and operations. The Company believes that any such costs related to its utility operations would be recoverable through the rate-making process. For additional information relating to Electric Industry Restructuring see Item 7 herein and refer to Item 8 herein for disclosures relating to environmental contingencies, hazardous substance releases and the control measures related thereto. Nuclear Matters. The nuclear generating facilities of Vermont Yankee and the other nuclear facilities in which the Company has an interest are subject to extensive regulations by the Nuclear Regulatory Commission (NRC). The NRC is empowered to regulate the siting, construction and operation of nuclear reactors with respect to public health, safety, environmental and antitrust matters. Under its continuing jurisdiction, the NRC may, after appropriate proceedings, require modification of units for which operating licenses have already been issued, or impose new conditions on such licenses, and may require that the operation of a unit cease or that the level of operation of a unit be temporarily or permanently reduced. Refer to Item 8 herein for disclosures relating to the shut down of the Maine Yankee, Connecticut Yankee and Yankee Atomic Nuclear Power plants. Competition. Competition now takes several forms. At the wholesale level, other electric power providers compete as suppliers to resale customers. Another competitive threat is the potential for customers to form municipally owned utilities in the Company's service territory. At the retail level, customers have long had energy options such as propane, natural gas or oil for heating, cooling and water heating, and self-generation for larger customers. Changes anticipated as a result of the National Energy Policy Act of 1992 and potential future change in state regulatory policy may result in retail customers being able to purchase electric power generated by competing suppliers for delivery over the Company's transmission and distribution facilities. Pursuant to Vermont statutes (30 V.S.A. Section 249), the PSB has established as the service area for the Company the area it now serves. Under 30 V.S.A. Section 251(b) no other company is legally entitled to serve any retail customers in the Company's established service area except as described below. An amendment to 30 V.S.A. Section 212(a) enacted May 28, 1987 authorizes the Vermont Department of Public Service (Department) to purchase and distribute power at retail to all customers of electricity in Vermont, subject to certain preconditions specified in new sections 212(b) and 212(c). Section 212(b) provides that a review board consisting of the Governor and certain other designated legislative officers review and approve any retail proposal by the Department if they are satisfied that the benefits outweigh any potential risk to the State. However, the Department may proceed to file the retail proposal with the PSB either upon approval by the review board or the failure of the board to act within sixty (60) days of the submission. Section 212(c) provides that the Department shall not enter into any retail sales arrangement before the PSB determines and approves certain findings. Those findings are (1) the need for the sale, (2) the rates are just and reasonable, (3) the sale will result in economic benefit, (4) the sale will not adversely affect system stability and reliability and (5) the sale will be in the best interest of ratepayers. Section 212(d) provides that upon PSB approval of a Department retail sales request, Vermont utilities shall make arrangements for distributing such electricity on terms and conditions that are negotiated. Failing such negotiation, the PSB is directed to determine such terms as will compensate the utility for all costs reasonably and necessarily incurred to provide such arrangements. Such sales have not been made in the Company's service area since 1993. In addition, Chapter 79 of Title 30 authorizes municipalities to acquire the electric distribution facilities located within their boundaries. The exercise of such authority is conditioned upon an affirmative three-fifths vote of the legal voters in an election and upon the payment of just compensation including severance damages. Just compensation is determined either by negotiation between the municipality and the utility or, in the event the parties fail to reach an agreement, by the Public Service Board after a hearing. If either party is dissatisfied, the statute allows them to appeal the Board's determination to the Vermont Supreme Court. Once the price is determined, whether by agreement of the parties or by the PSB, a second affirmative three-fifths vote of the legal voters is required. There has been only one instance where Chapter 79 of Title 30 has been invoked; the Town of Springfield acted to acquire the Company's distribution facilities in that community pursuant to a vote in 1977. This action was subsequently discontinued by agreement between Springfield and the Company in 1985. In addition, in late 1994 the Select Board of the Town of Bennington considered whether to publicly warn a vote to acquire the Company's facilities located in Bennington pursuant to Chapter 79 of Title 30. By vote of the Selectors taken on January 9, 1995, the Town decided not to pursue the vote at this time. In the summer of 1997, the City of Claremont (Claremont), New Hampshire engaged a consulting firm to conduct a study to determine Claremont's options under New Hampshire law including the possible municipalization of Connecticut Valley's service area located within its jurisdiction. The City Council has appropriated approximately $75,000 for purposes of the study which has been completed. Claremont continues to consider the study, but has taken no action on it. No other municipality served by the Company, so far as is known to the Company, has taken any formal steps in an attempt to establish a municipal electric distribution system. Competition in the energy services market exists between electricity and fossil fuels. In the residential and small commercial sectors this competition is primarily for electric space and water heating from propane and oil dealers. Competitive issues are price, service, convenience, cleanliness and safety. In the large commercial and industrial sectors, cogeneration and self- generation are the major competitive threats to electric sales. Competitive risks in these market segments are primarily related to seasonal, one-shift operations that can tolerate periodic power outages, and for industrial customers with steady heat loads where the generator's waste heat can be used in their manufacturing process. Competitive advantages for electricity in those segments are the cost of back up power sources, space requirements, noise problems, and maintenance requirements. In Docket DE 94-163, Order No. 21,683 (reh'g denied, Order No. 21,776), the New Hampshire Public Utilities Commission (NHPUC) ruled that Public Service Company of New Hampshire's (PSNH) rights to its franchise territory are not exclusive as a matter of law. Connecticut Valley was an intervenor in that docket. PSNH appealed the NHPUC's decision to the State of New Hampshire Supreme Court, and Connecticut Valley has filed a brief with the New Hampshire Supreme Court in favor of PSNH's position. The New Hampshire Supreme Court upheld the NHPUC's position, but did not rule on just compensation issues. The NHPUC ordered the petitioner to seek a ruling from the FERC that its proposed operations were not a "sham transaction." The petitioner failed to seek such a ruling, therefore, the NHPUC closed this docket. For a discussion relating to Electric Industry Restructuring in Vermont and New Hampshire see PART II, Item 7 herein. For a discussion relating to the Company's wholesale electric business see Wholesale Rates below. RATE DEVELOPMENTS Vermont Retail Rates. On September 22, 1997, the Company filed for a 6.6% or $15.4 million per annum, general rate increase to become effective June 6, 1998 (Order No. 6018). Also on September 22, 1997, the Company filed a retail rate redesign whose primary purpose was to eliminate seasonal rates. The Vermont Public Service Board (PSB) has not yet acted on this request. On June 12, 1998, the Company filed with the PSB a request for a 10.7% retail rate increase ($24.9 million of annualized revenues) to become effective March 1, 1999 to cover primarily the higher power costs that the Company will incur under the Vermont Joint Owners contract with Hydro-Quebec. In this proceeding the PSB delayed the examination of the prudence and used- and-usefulness of the Hydro-Quebec Contract pending the Vermont Supreme Court's decision in the appeal of Docket No. 6018. After extensive negotiation, on October 28, 1998 the DPS filed a Memorandum of Understanding (MOU) between it and the Company which proposed a resolution of the issues other than power costs under the Hydro-Quebec Contract. The proposed resolution included, among other provisions, a final determination of the Company's rate request except for issues of prudence and used-and-usefulness of the Hydro-Quebec Contract, and a temporary, pro forma Hydro-Quebec prudence and used-and-usefulness disallowance modeled on the Hydro-Quebec disallowance which the PSB applied to Green Mountain Power Corporation in its February 1998 rate order. To reflect both the final and the temporary cost of service determinations, the MOU proposed a "temporary rate increase" of 4.7% or $10.9 million on an annualized basis effective with service rendered January 1, 1999. By order dated December 11, 1998, the PSB approved the MOU in its entirety. For additional information regarding recent rate increase requests see PART II, Item 7 "Rates and Regulation" and Item 8 "Retail Rates" herein. New Hampshire Retail Rates. Connecticut Valley's retail rate tariffs, approved by the New Hampshire Public Utilities Commission (NHPUC), contain a Fuel Adjustment Clause (FAC) and a Purchased Power Cost Adjustment (PPCA). Under these clauses, Connecticut Valley recovers its estimated annual costs for purchased energy and capacity which are reconciled when actual data is available. On the basis of estimates of costs for 1998 and reconciliations from 1997, the combined 1998 FAC and PPCA would have resulted in an increase in revenues of approximately $2.1 million for 1998. Based on a motion by the City of Claremont, an intervenor, the NHPUC, in its order dated December 31, 1997, found that Connecticut Valley was imprudent not to have terminated its wholesale power contract with the Company and froze Connecticut Valley's FAC and PPCA rates. Subsequently, the NHPUC, in deference to a temporary restraining order issued by a federal district court, allowed FAC and PPCA rates effective May 1, 1998 that would make the Company whole for 1997 undercollections, the 1998 undercollections incurred through April 30, 1998, and the increase in 1998 power costs. On the basis of estimates of costs for 1999 and reconciliations from 1998, the combined 1999 FAC and PPCA rates would have resulted in a decrease in revenues of approximately $2.3 million for 1999. The decrease was primarily caused by the elimination of the various undercollections from prior periods mentioned above. The City of Claremont filed a motion to determine the prudence of the 1999 power costs. However, by agreement of the parties, including the NHPUC, the hearing was limited to the mathematical calculation of the FAC and PPCA. An NHPUC order allowed the decrease. See PART II, Item 7 herein for additional information regarding New Hampshire Electric Industry Restructuring and Item 8 Note 13 herein for information regarding Retail Rates-New Hampshire. Connecticut Valley's retail rate tariffs, approved by the NHPUC, also provide for a Conservation and Load Management Percentage Adjustment (C&LMPA) for residential and commercial/industrial customers in order to collect forecast C&LM costs. The forecast costs are updated effective January 1 of each year and are reconciled when actual data are available. In addition, Connecticut Valley's earnings reflect the recovery of lost revenues related to fixed costs which Connecticut Valley fails to otherwise recover as a result of C&LM activities. The C&LMPA further provides for the future recovery of shareholder incentives related to past C&LM activities. Connecticut Valley also purchases power from several small power producers who own qualifying facilities as defined by the Public Utility Regulatory Policies Act of 1978. In 1998, under long-term contracts with these qualifying facilities, Connecticut Valley purchased 41,477 MWH, of which 38,283 MWH were purchased from Wheelabrator Claremont Company, L.P., (Wheelabrator) who owns a solid waste plant. Connecticut Valley had filed a complaint with FERC stating its concern that Wheelabrator has not been a qualifying facility since the plant began operation. On February 11, 1998, the FERC issued an Order denying Connecticut Valley's request of a refund of past purchased power costs and lower future costs. The Company filed a request for rehearing with the FERC on March 13, 1998 which was denied. Subsequently, Connecticut Valley appealed to the D.C. Circuit Court of Appeals which has yet to result in a decision. See PART II, Item 7 herein for detailed information regarding New Hampshire Electric Industry Restructuring. Wholesale Rates. The Company sells firm power to Connecticut Valley under a wholesale rate schedule based on forecast data for each calendar year which is reconciled to actual data annually. The rate schedule provides for an automatic update of annual rates, as well as a subsequent reconciliation to actual data. The Company filed and the FERC approved (1) a revenue increase of $281,000 or 2.4% for 1998 power costs., (2) a reconciliation of 1997 revenues to actual costs which resulted in an additional billing of $379,000, including interest, and (3) a revenue decrease of $226,000 or 1.9% for 1999 power costs. The NHPUC order dated February 28, 1997 regarding New Hampshire Electric Industry Restructuring ordered, among other things, Connecticut Valley to terminate the wholesale rate schedule with the Company. On June 25, 1997, the Company filed with the FERC an application for recovery of stranded costs and a notice of cancellation of the rate schedule under which the Company sells firm power to Connecticut Valley contingent upon the recovery of stranded costs. The stranded cost obligation, expressed on a net present value basis as of January 1, 1998, is $44,925,000, would be authorized by the Company's open access Transmission Service Tariff No. 7, and collected as a surcharge to the transmission charges of any customer that uses the Company's transmission system to wheel power for ultimate delivery within Connecticut Valley service area. The surcharge is expected to recover the stranded costs over a ten-year period. By order dated December 18, 1997, the FERC rejected the Company's filing on the grounds that the transmission tariff was an inappropriate vehicle for recovery. Pursuant to the FERC request in that order, the Company filed a letter stating its intention to refile the stranded cost recovery as an exit fee to the rate schedule under which the Company sells firm power to Connecticut Valley. The Company did so on January 12, 1998. The FERC accepted the filing and bifurcated the proceeding, first, to determine whether Connecticut Valley would become an unbundled transmission customer of the Company and, second, to determine the Company's expectation period for serving Connecticut Valley and the allowable amount of the exit fee. On April 28, 1998, the Company filed its case-in-chief before the FERC updating the amount of the exit fee to $54.9 million which was subsequently amended to $50.0 million in a lump sum, describing all of the ways Connecticut Valley will become an unbundled transmission customer of the Company subsequent to termination, and establishing the expected period of service based upon the date of termination, whenever that occurs, and the weighted average service life of its commitments to power resources to serve Connecticut Valley. Had termination taken effect on January 1, 1998 this expectation period would have equaled nineteen years. For additional information regarding legal and regulatory proceedings, see PART II, Item 7, Electric Industry Restructuring and Item 8, Note 13, Retail Rates. On March 1, 1995, the Company filed a comprehensive, open access transmission tariff (Tariff) with the FERC. The Tariff is designed to provide firm and non-firm network transmission service, as well as firm point-to-point service over the transmission systems of the Company and Connecticut Valley. In addition, the Tariff would permit customers to make use of the Company's contract rights to the transmission facilities of the Vermont Electric Power Company, Inc. and New England Power Company. The Tariff would provide transmission service that is comparable to that provided to native load customers. Charges for such service would be based upon the Company's cost of service for transmission. The Company prepared and filed the Tariff in anticipation of developing business opportunities in the area of electric transmission service. In addition, recent FERC orders led the Company to believe that all electric utilities owning transmission facilities would be required to prepare and file such a Tariff in the near future. FERC issued a Notice Of Proposed Rulemaking (NOPR) dated March 29, 1995, promoting wholesale competition in the electric utility industry. The Company's Tariff complies with many requirements proposed by the FERC in its NOPR. Nine parties intervened in the Company's Tariff filing. On April 28, 1995, the FERC issued a deficiency letter asking for more information in a number of areas. The Company filed a timely response to the deficiency letter on June 14, 1995. Three parties filed protests in response to the Company filing, and one additional party filed a request for late intervention. The FERC accepted the Tariff for filing on August 14, 1995, suspended it and set it for hearing. The order allowed the Tariff to become effective August 15, 1995, subject to refund and subject to the outcome of the Open Access NOPR proceeding. The New Hampshire Electric Cooperative began taking transmission service under the Tariff as of its effective date. The Company entered into negotiations with FERC Staff and intervenors and reached a settlement in principle in January 1996 on all rate issues contained in the Tariff filing but one which was settled in August 1996. The settlement provided for a fixed rate effective from August 15, 1995 through July 8, 1996. The FERC has not taken action on the settlement. On July 9, 1996 the Tariff was replaced by a pro forma transmission tariff (Transmission Tariff) filed by the Company pursuant to FERC Order No. 888. The Transmission Tariff, which was approved by the FERC, embodied not only the open access principles set forth in the FERC pro forma transmission tariff, but also continued to embody the ratemaking and other Vermont and New England specific non-rate terms and conditions. The Company has made a number of filings to modify the Transmission Tariff in response to FERC orders related to transmission tariffs of other utilities. All FERC orders received have approved such modifications. POWER RESOURCES Overview. The Company's and Connecticut Valley's energy generation and purchased power required to serve their retail and firm wholesale customers was 2,488,581 MWH for the year ended December 31, 1998. The maximum one-hour integrated demand during that period was 420.6 MW, which occurred on December 30, 1998. The Company's and Connecticut Valley's total energy generation and purchased power in 1998, including that related to all resale customers, was 3,829,373 MWH. The following tabulation shows the sources of such energy and capacity available to the Company and Connecticut Valley for the year ended December 31, 1998 and at the time of the Company's own peak. For additional information related to purchased power costs, refer to PART II, Item 7 herein.
Year Ended December 31, 1998 Net Effective Generated and Capability Purchased at 12 Month Generated Time of the Average and Purchased Company's Peak MW MWH % MW % WHOLLY-OWNED PLANTS: Hydro....................... 40.7 221,763 5.8 17.9 4.3 Diesel and Gas Turbine..... 28.9 1,258 - - - JOINTLY OWNED PLANTS: Millstone #3................ 8.2 59,291 1.6 - - Wyman #4.................... 10.9 19,126 0.5 9.1 2.2 McNeil...................... 10.5 31,396 0.8 10.1 2.4 EQUITY OWNERSHIP IN PLANTS: (Purchased) Vermont Yankee.............. 158.7 1,045,930 27.3 137.6 32.7 MAJOR LONG-TERM PURCHASES: Hydro-Quebec................ 195.3 1,073,448 28.0 161.4 38.4 Merrimack #2................ 15.7 73,116 1.9 - - OTHER PURCHASES: System and other purchases.. 127.4 396,279 10.4 173.2 41.2 Small power producers....... 33.7 212,645 5.6 17.7 4.2 Unit purchases.............. 55.4 237,378 6.2 59.8 14.2 Entitlement purchases....... 21.4 92,503 2.4 40.4 9.6 Pumped storage hydro........ 2.8 1,328 - - - NEPEX......................... - 363,912 9.5 52.3 12.4 NET WHOLESALE SALES and miscellaneous at time of peak - - - (258.9) (61.6) _____ _________ _____ _____ _____ TOTAL.................... 709.6 3,829,373 100.0 420.6 100.0 ===== ========= ===== ===== =====
Wholly Owned Plants. The Company owns and operates 20 hydroelectric generating facilities in Vermont which have an aggregate nameplate capability of 41.2 MW and two gas-fired and one diesel-peaking units with a combined nameplate capability of 28.9 MW. Jointly Owned Plants. The Company has a joint-ownership interest in the following generating and transmission plants:
Net 1998 Fuel MW Generation Load Net Plant Name Location Type Ownership Entitlement MWH Factor Investment Millstone #3 Waterford, Nuclear 1.73% 20 59,291 34% $51,713,362 Connecticut Wyman #4 Yarmouth, Oil 1.78% 11 19,126 20% $ 1,380,143 Maine Joseph C. McNeil Burlington, Various 20.00% 10.6 31,396 34% $ 7,625,528 Vermont Highgate Trans- Highgate Springs, 47.35% N/A N/A N/A $ 9,161,002 mission Facility Vermont
The Company receives its share of the output and capacity of Millstone Unit #3 (Unit #3), an 1149 MW nuclear generating facility (see discussion below); Wyman #4, a 619 MW generating facility and Joseph C. McNeil, a 53 MW generating facility. The Highgate Convertor, a 225 MW facility is directly connected to the Hydro-Quebec System to the north of the Convertor and to the VELCO System for delivery of power to Vermont Utilities. This facility can deliver power either direction, but normally delivers power from Hydro-Quebec to Vermont. The Company is responsible for its share of the operating expenses of these facilities. Equity Ownership in Plants. In 1966 the Company purchased 35% of the Vermont Yankee common stock and was entitled to receive a like percentage of the output of the unit. In late 1969 and early 1970, the Company sold at cost a combined total of 3.7% of its original equity investment and currently resells at cost 3.9% of its entitlement. The Company's current equity ownership and net entitlement percentages are 31.3 and 31.1, respectively. The Atomic Energy Commission, now the NRC, granted a full-term (40-year), full power operating license for the Vermont Yankee plant, which was to expire in December 2007. On December 17, 1990 the NRC issued an amendment of the operating license extending its term to March 2012. Vermont Yankee's net capability is 514 MW of which about 160 MW (See Note 1) is the Company's net entitlement. Vermont Yankee's plant performance for the past five years is shown below: Availability Capacity Factor Factor (See Note 2) (See Note 3) 1994......................... 98.2 95.8 1995......................... 86.3 84.8 1996......................... 84.5 82.8 1997......................... 95.4 93.3 1998......................... 76.4 73.5 Vermont Yankee was shut down for scheduled refueling outages in 1993, 1995, 1996, and 1998. As described in the overview section above, the Company is also a stockholder, together with other New England electric utilities, in the following three nuclear generating companies: Maine Yankee Atomic Power Company, Connecticut Yankee Atomic Power Company and Yankee Atomic Electric Company. Net Company's Company Capability Entitlement Maine Yankee.................. (See Note 4) (See Note 4) Connecticut Yankee............ (See Note 4) (See Note 4) Yankee Atomic................. (See Note 4) (See Note 4) The Company is obligated to pay its entitlement percentage of the operating expenses of Vermont Yankee and the other Yankee companies, including depreciation and a return on invested capital, whether or not the plant is operating. The Company is obligated to contribute its entitlement percentage of the capital requirements of Vermont Yankee and Maine Yankee and has a similar, but more limited obligation to Connecticut Yankee. The Company's entitlement percentages are identical to the ownership percentages except that Vermont Yankee's entitlement percentage is 35%. For additional information regarding Equity Ownership in Plants, refer to PART II, Item 8 herein. _______________ Notes: (1) Currently, the Company resells at cost, through VELCO, about 20 MW of its original entitlement to other Vermont utilities. (2) "Availability Factor" means the hours that the plant is capable of producing electricity divided by the total hours in the period. (3) "Capacity Factor" means the total net electrical generation divided by the product of the maximum design electrical rating capacity of 514 through April 30, 1995 and 522 effective May 1, 1995, multiplied by the total hours in the period. (4) Maine Yankee, Connecticut Yankee and Yankee Atomic permanently ceased power operations of their Nuclear Power Plants. See Decommissioning Expense discussion below. Decommissioning Expense. Each of the Yankee companies and Unit #3 has developed its own estimate of the cost of decommissioning its nuclear generating unit. These estimates vary depending upon the method of decommissioning, economic assumptions, site and unit specific variables, and other factors. Each of the Yankee Companies includes charges for decommissioning costs in the cost of capacity, as approved by the FERC. Decommissioning costs for Unit #3 are included in depreciation expenses. The Company's entitlement percentage of decommissioning costs for Vermont Yankee, Maine Yankee, Connecticut Yankee, Yankee Atomic and Unit #3 is as follows (dollars in millions): CVPS's Total Share of Date of Estimated CVPS's Funded Study Obligation Obligation Obligation Nuclear generating companies: Vermont Yankee 1993 $312.7 $109.4 $66.7 Maine Yankee 1998 $343.9 $6.9 $4.3 Connecticut Yankee 1996 $426.7 $8.5 $5.0 Yankee Atomic 1991 $370.0 $13.0 $4.8 Millstone Unit #3 1997 $559.6 $9.7 $3.2 Vermont Yankee is in the process of preparing an updated site decommissioning cost study. Preliminary results indicate that the new decommissioning estimate could exceed $500 million in 1998 dollars. Vermont Yankee expects to file results of the new decommissioning study with the FERC during the first quarter of 1999, and expects that any resulting change in rates will be effective January 1, 2000. The Design Basis Documentation project (Project) initiated by Vermont Yankee during 1996 is expected to be complete by the end of year 2000. The Company's 35% share of the total cost for this Project is expected to be about $6.2 million. Such costs will be deferred by Vermont Yankee and amortized over the remaining license life of the plant. On February 25, 1999, the Board of Directors of Vermont Yankee granted an exclusive right to AmerGen Energy Company to conduct due diligence and negotiate a possible agreement to purchase the assets of Vermont Yankee. The Company owns interests in two of the five nuclear plants operated by Northeast Utilities (NU): 1) a 2% equity interest in the Connecticut Yankee Atomic Power Company (Haddam Neck Plant), and 2) a 1.7303% joint-ownership interest in the Unit #3 of the Millstone Nuclear Power Station. Millstone Unit #3 (Unit #3) received approval from the Nuclear Regulatory Commission (NRC) commissioners and NRC staff on June 15, 1998 and June 29, 1998, respectively, to restart Unit #3 which was shut down on March 30, 1996, due to numerous technical and non-technical problems. Unit #3 reached full power operation on July 14, 1998. The Company's share of the total incremental operating and maintenance costs for Unit #3 is estimated to be $1.1 million, $2.6 million and $.9 million for 1996, 1997 and 1998, respectively. The Company's share of incremental replacement power costs is estimated to be $2.8 million, $3.5 million and $3.2 million for 1996, 1997 and 1998, respectively. The Company remains actively involved with the other non-operating minority joint-owners of Unit #3. This group is engaged in various activities to monitor and evaluate NU's and Northeast Utilities Service Co.'s efforts relating to Unit #3. On August 7, 1997, the Company and eight other non- operating owners of Unit #3 filed a demand for arbitration with Connecticut Light and Power Company and Western Massachusetts Electric Company and lawsuits against NU and its trustees. The arbitration and lawsuits seek to recover costs associated with replacement power, operation and maintenance costs and other costs resulting from the shutdown of Unit #3. The non- operating owners claim that NU and two of its wholly owned subsidiaries failed to comply with NRC's regulations, failed to operate the facility in accordance with good operating practice and attempted to conceal their activities from the non-operating owners and the NRC. Although the estimated costs of decommissioning are subject to change due to changing technologies and regulations, the Company expects that the nuclear generating companies' liability for decommissioning, including any future changes in the liability, will be recovered in their rates over their operating or license lives. See PART II, Item 8 for information regarding the premature shutdown of the Maine Yankee, Connecticut Yankee and Yankee Atomic nuclear power plants. In 1982 the State of Maine enacted legislation that requires the development of a decommissioning trust fund for the Maine Yankee nuclear plant. This statute also provides that, if the trust has insufficient funds to decommission the plant, the licensee, Maine Yankee, is responsible for the deficiency and, if the licensee is unable to provide the entire amount, the owners of the licensee are jointly and severally responsible for the remainder. The definition of owner under the statute includes the Company. It is expected that any payments required by the Company under these provisions would be recovered through rates. Nuclear Fuel. Vermont Yankee has several "requirements based" contracts for the four components (uranium, conversion, enrichment and fabrication) used to produce nuclear fuel. These contracts are executed only if the need or requirement for fuel arises. Under these contracts, any disruption of operating activity would allow Vermont Yankee to cancel or postpone deliveries until actually required. The contracts extend through various time periods and contain clauses to allow the option to extend the agreements. Negotiation of new contracts or renegotiation of existing contracts routinely occurs, often focusing on one of the four components at a time. The price of the 1998 refueling was approximately $22 million and the 1999 refueling will also cost approximately $22 million. Future refueling costs will depend on market and contract prices. On January 20, 1997, Vermont Yankee entered into an agreement with a former uranium supplier whereby the supplier could opt to terminate a production purchase agreement dated August 4, 1978. Although there had been no transactions under the production purchase agreement for several years, Vermont Yankee maintained certain financial rights. In consideration for the option to terminate the production purchase agreement and the subsequent exercise of the option, Vermont Yankee received $0.6 million in 1997 which was recorded as an offset to nuclear fuel expense. The potential future payments that Vermont Yankee could receive over a ten year period, range from $0.0 million to $2.4 million. No payments were received in 1998 by Vermont Yankee under this agreement. Due to the uncertainty of this transaction, the potential benefits will be recorded on a cash basis. Under the Nuclear Waste Policy Act of 1982, the United States Department of Energy (DOE) is responsible for the selection and development of repositories for and the disposal of spent nuclear fuel and high-level radioactive waste. Vermont Yankee, as required by that Act, has signed a contract with the DOE to provide for the disposal of spent nuclear fuel and high-level radioactive waste from its nuclear generation station beginning no later than January 31, 1998; however, this delivery schedule has not been met and is expected to be delayed significantly. It is not certain when the DOE will accept spent nuclear fuel and high-level radioactive waste from Vermont Yankee and other owners of nuclear power plants. Continued delays or a default by the DOE would lead to consideration of costly alternatives involving significant siting and environmental issues. The DOE contract obligates Vermont Yankee to pay a one-time fee of approximately $39.3 million for disposal costs for all spent fuel discharged through April 6, 1983, and a fee payable quarterly equal to one mill per kilowatt-hour of nuclear generated and sold electricity after April 6, 1983. Although the $39.3 million for the one-time fee has been collected from the Sponsors in rates, Vermont Yankee has elected to defer payment to the DOE as permitted by the DOE contract. The fee plus accrued interest must be paid no later than the first delivery of spent fuel to the DOE repository. Interest accrues on the unpaid obligation based on the thirteen-week Treasury Bill rate and is compounded quarterly. Through 1998, Vermont Yankee accumulated $98.1 million in an irrevocable trust to be used exclusively for defeasing this obligation ($103.8 million including accrued interest) at some future date, provided the DOE complies with the terms of the aforementioned contract. Vermont Yankee has primary responsibliity for the interim storage of its spent nuclear fuel. The plant is currently able to operate with the ability to discharge the entire reactor core to the spent fuel storage pool through the 2001 refueling outage. Full core discharge capability through year 2008 refueling outage could be achieved with the installation of additional storage racks in the spent fuel pool, subject to an NRC license amendment. A request for this amendment was submitted in September 1998. Vermont Yankee is investigating other options for additional storage capacity beyond the year 2001. In November 1997, the U.S. District Court of Appeals for the D.C. 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. The ruling said, however, that the 1982 federal law could not require the DOE to accept waste when it did not have a suitable storage facility. The court directed the plaintiffs to pursue relief under terms of their contracts with the DOE. Based on this ruling, since the DOE did not take the spent nuclear fuel as scheduled, it may have to pay contract damages. In May 1998, the same court denied petitions from 60 states and state agencies and 41 utilities, including Vermont Yankee, asking the court to compel the DOE to submit a program, beginning immediately, for disposing of spent nuclear fuel. The petitions were filed after the DOE defaulted on its January 31, 1998 obligation to begin accepting the fuel. The court directed Vermont Yankee and other plaintiffs to pursue relief under the terms of their contracts with the DOE. In a petition filed in August 1998, the court's May 1998 decision was appealed to the U.S. Supreme Court. In November 1998, the Supreme Court declined to review the lower court ruling that said utilities should go to court and seek monetary damages from the DOE. In December 1998, the U.S. Court of Claims ruled that three petitioning companies were entitled to monetary damages from the DOE for failure to perform under the standard contract. Although the Court did not award specific damages, leaving this for subsequent litigation, it did establish the DOE's responsibility and liability for spent fuel. The ultimate outcome of this legal proceeding is uncertain at this time. The average energy and capacity costs to the Company of energy generated at the Vermont Yankee plant was 3.77, 4.68, 4.78, 4.06 and 5.81 cents per KWH for the years 1994 through 1998, respectively. The Company has been advised by the companies operating other nuclear generating stations in which the Company has an interest that they have contracted for certain segments of the nuclear fuel production cycle through various dates. Contracts for the remainder of the fuel cycle will be required but their availability, prices and terms cannot be predicted. Nuclear Liability and Insurance. The Price-Anderson Act currently limits public liability from a single incident at a nuclear power plant to $9.8 billion. Beyond that a licensee maintains an indemnity agreement with the NRC, but subject to Congressional approval. The first $200 million of liability coverage is the maximum provided by private insurance. The Secondary Financial Protection Program is a retrospective insurance plan providing additional coverage up to $9.6 billion per incident by assessing $88.1 million against each of the 109 reactor units that are currently subject to the Program in the United States, limited to a maximum assessment of $10 million per incident per nuclear unit in any one year. The maximum assessment is adjusted at least every five years to reflect inflationary changes. The Company's interests in the nuclear power units are such that it could become liable for an aggregate of approximately $3.7 million of such maximum assessment per incident per year. Major long-term purchases. Canadian Purchases - Under various contracts, the Company purchases from Hydro-Quebec capacity and associated energy. Under the terms of these contracts, the Company is required to pay certain fixed capacity costs whether or not energy purchases above a minimum level described in the contracts are made. Such minimum energy purchases must be made whether or not other less expensive energy sources might be available. The company will receive varying amounts of capacity and energy from Hydro-Quebec under the Vermont Joint Owners (VJO) contract during the 1999 to 2016 period. Related contracts were negotiated between the Company and Hydro-Quebec which in effect alter the terms and conditions contained in the VJO contract, reducing the overall power requirements and cost of the original contract. The average annual amount of capacity that the Company will purchase through October 31, 2016 is 132 MW. The total commitment to purchase power under these contracts on a nominal basis is approximately $1.0 billion net of power sellbacks over the contract term. In February 1996, the Company reached an agreement with Hydro-Quebec which lowered the 1997 cost of power by approximately $5.8 million. As part of this agreement, the Company delivers to NEPOOL under existing firm energy contracts or joint marketing activities 54 MW of Phase II transmission capacity for a five-year period which began July 1, 1996 through June 30, 2001. In the early phase of the VJO contract, two sellback contracts were negotiated, the first delaying the purchase of about 25 MW of capacity and associated energy, the second reducing the net purchase of Hydro-Quebec power. In 1994, the company negotiated a third sellback arrangement whereby the Company receives an effective discount on up to 70 MW of capacity starting in November 1995 for the 1996 contract year (declining to 30 MW in the 1999 contract year). In exchange for this sellback, Hydro-Quebec has the right to reduce capacity deliveries by up to 50 MW beginning as early as 2004 until 2015, including the use of a like amount of the Company's Phase I/II facility rights and the ability to reduce the amounts of energy delivered during a five-year term beginning in 2000. There are specific contractual step up provisions that provide that in the event any VJO member fails to meet its obligation under the contract with Hydro-Quebec, the balance of the VJO participants, including the Company, will "step up" to the defaulting party's share on a pro-rata basis. As of December 31, 1998 the Company's VJO obligation is approximately 46% or $1.0 billion on a nominal basis over the contract ending in 2016. The total VJO contract obligation on a nominal basis over the term of the contract is approximately $2.3 billion. During January 1998, a significant ice storm affected parts of New England and the Province of Quebec, Canada. This storm damaged major components of the Hydro-Quebec transmission system over which power is supplied to Vermont under the VJO contract with Hydro-Quebec. This resulted in an interruption of a significant portion of scheduled contractual power deliveries into Vermont. The ice storm's effect on Hydro-Quebec's transmission system caused the VJO to examine Hydro-Quebec's overall reliability and ability to deliver energy in the future. That review has prompted the VJO to initiate an arbitration proceeding, the end result of which may be the termination of the Contract. By way of the arbitration, the VJO is also seeking to recover capacity payments made during the period of non-delivery. Through Velco, the Company purchased power from Merrimack #2, a coal- fired generating plant owned by Northeast Utilities (NU), under a thirty-year contract which expired April 30, 1998. Under this contract the Company was obligated to make capacity payments which amounted to approximately $4.6 million, $4.5 million and $1.8 million for 1996 through 1998, respectively. Pursuant to the contract, as amended, Velco agreed to reimburse PSNH, in the proportion which the Velco quota bears to the demonstrated net capability of the plant, for all fixed costs of the unit and operating costs of the plant incurred by PSNH, which were reasonable and cost-effective for the remaining term of the Velco contract. In early 1998, PSNH took the Merrimack Unit #2 facility off line, shut it down and commenced a maintenance outage. In February, March and April of 1998, PSNH billed Velco for costs to complete the maintenance outage. Velco disputes the validity of a portion of the charges on grounds that the maintenance performed at the unit was to extend the life of the Merrimack plant beyond the term of the Velco contract and that the charges in connection with said investments were not reasonable and cost-effective for the remaining term of the Velco contract. The Company estimates the portion of the disputed charges allocable to the Company could be as much as $1.0 million on a pre-tax basis. Other Purchases. Cogeneration/Small Power Qualifying Facilities - A number of small producers using hydroelectric, biomass, and refuse-burning generation are currently producing energy that the Company is purchasing. For the year ended December 31, 1998, the Company received 212,702 MWH from these sources for which it paid $22,557,152. The Company, through VELCO, is a participant in NEPOOL, which has been open to all investor-owned, municipal, and cooperative utilities in New England under an agreement in effect since 1971 and amended from time to time. The Restated NEPOOL Agreement offers membership privileges to any entity which is engaged or proposes to engage in the wholesale or retail electric power business in New England. NEPOOL's function has changed in response to the growing climate of competition and the FERC requirements for open access transmission across systems. A new organization, an Independent System Operator (ISO), has been formed to operate the bulk power generation and transmission systems, to administer the regions open access transmission tariff, and to operate the electric ISO wholesale power market for New England. The bilateral market for transactions directly between NEPOOL participants will continue as an alternative to the ISO wholesale spot market. The ISO is governed by the principles put forth in the FERC Order 888 under rules defined by NEPOOL and approved by FERC. They include: to provide independent, open and fair access to the regional transmission system, to establish a non-discriminatory governance structure, to facilitate market- based wholesale electric transactions, and to ensure the efficient management and reliable operation of the regional bulk power system. The ISO has established a bidding system for the newly defined generation products; it will form the basis for the ISO's economic dispatch (based on bid prices) of the generation products. This system provides a settlement mechanism which will price the residual of a given generation product that is excess to a participant's own needs, and is offered to the ISO wholesale power market. A participant will pay as before the actual costs for its generation products used to serve its load or takes to market. A participant will submit a bid for its generation products to the ISO, and if the bid is accepted and if the participant supplies residual generation products to the ISO wholesale market, the participant will receive the market clearing price based on the highest bids accepted for the residual product. If a participant needs to purchase from the ISO wholesale market to serve its load, those purchases will be made at market clearing price. The ISO will also provide the main market place for participants to secure open access transmission for transactions delivered on the Pool Transmission Facilities (PTF). Over the next several years, the pricing differences that had existed between transmission systems within NEPOOL will disappear as a NEPOOL-wide transmission pricing arrangement for all PTF and the open access tariffs of local network providers will offer access to all other transmission facilities. The primary purposes of NEPOOL are to provide energy reliability for the region, centralized economic dispatch and coordination of generation planning and construction by the individual participants. The Company's peak demand for 1998 occurred on December 30 and equaled 420.6 MW. At the time of this peak, the Company had a reserve margin of 34%. NEPOOL's peak for the year occurred on July 22, 1998 and totaled 21,406 MW. NEPOOL had an 11% reserve margin at the time of its 1998 peak. Power Resources - Future. The Company has generally sufficient power under contract to supply its current franchise obligations for the near-term prior to any advent of Retail Wheeling. In addition, the Company will continue to utilize cost effective demand side management programs where appropriate. The Company expects to actively manage this portfolio of supply and demand side resources over the near-term, as it has in the past, to minimize net power costs for its ratepayers and shareholders. It is unclear what the Company's load responsibilities will be upon the advent of Retail Wheeling. The certainty, timing and nature of these events will be largely determined by legislative and regulatory actions at the state and national levels. TRANSMISSION Vermont Electric Power Company, Inc. VELCO engages in the operation of a high-voltage transmission system which interconnects the electric utilities in the State including the areas served by the Company. VELCO is also engaged in the business of purchasing bulk power for resale, at cost, to the Company and the other electric utilities (cooperative, municipal and investor-owned) in Vermont (the "Vermont utilities") and transmitting such power for the Vermont utilities. Refer to Item 8 herein for a discussion of the 1985 Four Party Agreement between the Company, VELCO and two other major distribution companies in Vermont. VELCO provides transmission services for the State of Vermont, acting by and through the Department, and for all of the electric distribution utilities in the State of Vermont. VELCO is reimbursed for its costs (as defined in the agreements relating thereto) for the transmission of power for such entities. The Company, as the largest electric distribution utility in Vermont, is the major user of VELCO's transmission system. The Company owns 34,083 shares (56.8%) of the Class B common stock of VELCO, the balance being owned by other Vermont utilities. Each share of Class B common stock has one vote. The Company also owns 46,624 shares (46.6%) of the Class C preferred stock of VELCO, the balance being owned by other Vermont utilities. Shares of Class C preferred stock have no voting rights except the limited right to vote VELCO's shares of common stock in Vermont Electric Transmission Company, Inc. (VETCO) if certain dividend requirements are not met. NEPOOL Arrangements. VELCO participates for itself and as agent for the Company and twenty-one other Vermont utilities in NEPOOL. Capitalization. VELCO has authorized 92,000 shares of Class B common stock, $100 par value, of which 60,000 shares were outstanding on December 31, 1998 and 125,000 shares of Class C preferred stock, of which 100,000 shares were outstanding at December 31, 1998. On that date there were authorized and outstanding three issues of First Mortgage Bonds, aggregating $33,078,000, issued under an Indenture of Mortgage dated as of September 1, 1957, as amended, between VELCO and Bankers Trust Company, as Trustee (the "VELCO Indenture"). The issuance of bonds under the VELCO Indenture is unlimited in amount but is subject to certain restrictions. New transmission and associated facilities will be required by VELCO in 1999 to transmit power to Vermont utilities. The costs of such facilities are presently estimated at $4,062,745 including allowance for funds used during construction calculated at a rate of approximately 6.5%. For a description of VELCO's properties, see "VELCO" under Item 2. Management. In 1957 VELCO entered into an agreement (the "Three-Party Agreement") whereby the Company and Green Mountain agreed that, if VELCO transmits firm power it owns (which VELCO does not now do), VELCO would have the right to purchase all such firm power not sold to others. As such, VELCO would have the obligation to pay associated operating expenses, debt service and taxes. In connection with the transfer to VELCO of entitlements of the output of the Vermont Yankee plant, the Company and Green Mountain Power Corporation entered into a Three-Party Transmission Agreement, dated November 21, 1969, as amended, whereby they have agreed to pay transmission charges thereon in an aggregate amount sufficient, with VELCO's other revenues, to pay all of VELCO's expenses including capital costs. VELCO's Bonds are secured by a first mortgage on the major part of VELCO's transmission properties and by the assignment to the Trustee of the Three-Party Agreement, the Three-Party Transmission Agreement and certain other contracts as specified in the VELCO Indenture. See Item 8 herein for information relating to the 1985 Four-Party Agreement. Vermont Electric Transmission Company, Inc. In connection with the importing of Canadian power, VELCO has created a wholly owned subsidiary, VETCO, to construct, finance, own and operate the Vermont portion of the transmission line which connects the Hydro-Quebec lines at the Canadian border to the lines of New England Electric Transmission Corporation, a subsidiary of New England Electric System, at the New Hampshire border on the Connecticut River. VETCO entered into a Capital Funds Agreement with VELCO pursuant to which VETCO may request up to $12,500,000 (of which $10,000,000 was contributed as of December 31, 1998) of capital contributions from VELCO and has entered into Transmission Line Support Agreements with 20 New England utilities, including VELCO as representative for 14 Vermont utilities, pursuant to which those utilities have agreed to pay the transmission line costs, whether or not the line is operational. VELCO, as such representative, has entered into a similar agreement with New England Electric Transmission Corporation with respect to the New Hampshire portion of the DC transmission line and the DC/AC converter station. Pursuant to a Vermont Participation Agreement and a Capital Funds Support Agreement with Velco and 14 Vermont electric distribution utilities, including the Company, assume their pro rata share (based upon 1980 sales) of the benefits and obligations of VELCO under the Support Agreements and the VETCO Capital Funds Agreement. VETCO has authorized 10 shares of common stock, $100 par value, all of which were outstanding on December 31, 1998 and owned by VELCO, with each share having one vote. During 1986 VETCO paid off its construction financing by issuing $37,000,000 of secured notes, maturing in 2006, and receiving a $9,999,000 equity contribution from VELCO. The notes are secured by a First Mortgage on the major part of VETCO's transmission properties and by the assignment of its rights under the Support Agreements. Phase I and Phase II. The Company participated with other electric utilities in the construction of the Phase I Hydro-Quebec transmission facilities in northeastern Vermont, which were completed at a total cost of approximately $140 million. Under a support agreement relating to the Company's participation in the facilities, the Company is obligated to pay its 4.56% of Phase I Hydro-Quebec capital costs over a 20 year recovery period through and including 2006. The Company also participated in the construction of Phase II Hydro-Quebec transmission facilities which began operation in November 1990. This service increased the maximum capacity of the Hydro-Quebec 450 KV DC line from 690 MW to 2000 MW and extended the Phase I line from Comerford, New Hampshire to Sandy Pond, Massachusetts. The Company uses this transmission path to deliver a portion of the Company's long-term Hydro-Quebec firm power contract. The project cost approximately $487 million. Under a similar support agreement, the Company is obligated to pay its 5.132% share of Phase II Hydro-Quebec capital costs over a 25-year recovery period through and including 2015. Under the support agreement, the Company is eligible for savings associated with certain energy transactions by NEPOOL, which will offset the Company's support cost obligations. CONSERVATION AND LOAD MANAGEMENT The primary purpose of Conservation and Load Management programs is to offset the need for long-term power supply and delivery resources that are more expensive to purchase or develop than customer-efficiency programs. The Company provides information to customers to help them use electricity more efficiently, first by ensuring that the customers are on the correct rate and have incorporated efficiency and conservation measures; secondly, by continually evaluating new energy management systems and other technologies to identify and develop programs to address new market opportunities and the competitive strengths of electricity. DIVERSIFICATION See PART II, Items 7 and 8 herein for information regarding the Company's diversification activities. The Company is continually assessing additional diversification opportunities. Any new investments will be financed primarily through a combination of debt and equity. EMPLOYEE INFORMATION A Local Union No. 300 affiliated with the International Brotherhood of Electrical Workers represents operating and maintenance employees of the Company and its wholly owned subsidiaries. At December 31, 1998 the Company and its wholly owned subsidiaries employed 532 persons, of which 209 are represented by the union. On December 30, 1998, the Company and its employees represented by the union agreed to a three-year contract, which expires on December 31, 2001. The new contract provides for a general wage increase of 2.6% effective January 1, 1999, January 2, 2000 and December 31, 2000. Under the terms of the new agreement, Company's employees represented by the union will contribute weekly pre-tax premiums for medical coverage of eight, nine and ten dollars effective July 1, 1999, January 1, 2000 and January 1, 2001, respectively. SEASONAL NATURE OF BUSINESS The Company experiences its heaviest loads in the colder months of the year. Winter recreational activities, longer hours of darkness and heating loads from cold weather usually cause the Company's peak of electric MWH sales to occur in January or late December. For additional information regarding the seasonal nature of business see PART II, Item 8 herein. OFFICERS The following sets forth the Executive Officers of the Company. There are no family relationships among the executive officers. Executive Officers of the Registrant: Name and Age Office Officer Since Robert H. Young, 51 President and Chief Executive Officer 1987 Francis J. Boyle, 53 Senior Vice President, Chief Financial Officer and Treasurer 1995 Kent R. Brown, 53 Senior Vice President-Engineering and Operations 1996 William J. Deehan, 46 Vice President-Regulatory Affairs and Strategic Analysis 1991 Joan F. Gamble, 41 Assistant Vice President, Human Resources and Strategic Planning 1998 Joseph M. Kraus, 43 Vice President, Secretary and General Counsel 1987 James M. Pennington, 43 Vice President, Controller and Principal Accounting Officer 1993 Robert E. Rogan, 39 Vice President, Public Affairs 1998 Douglas D. Sinclair, 50 Vice President and General Manager for Business Development 1997 L. Douglas Barba, 51 Senior Vice President and General Manager - Catamount Energy Corporation 1992 Mr. Young joined the Company in 1987. He was elected Director, President and Chief Executive Officer in 1995. He was elected Senior Vice President - Finance and Administration in 1988, and Executive Vice President and Chief Operating Officer in 1993. Mr. Boyle joined the Company in October, 1995, as Vice President - Finance and Administration and Chief Financial Officer. From 1993 to 1995, Mr. Boyle served as Chief Financial Officer of Westmoreland Coal Company ("Westmoreland") in Philadelphia, Pennsylvania. In November 1994, Westmoreland and several of its subsidiaries commenced Chapter 11 proceedings to confirm a so-called "prepackaged" plan of reorganization under which the court was asked to approve a sale of assets, the proceeds of which were to be used to satisfy in full certain maturing obligations of Westmoreland. In December 1994, Westmoreland's plan of reorganization was confirmed, the asset sale was consummated, the obligations in question were paid, and Westmoreland emerged from Bankruptcy. On December 23, 1996, Westmoreland and four of its subsidiaries commenced Chapter 11 proceedings. The Chapter 11 proceedings were precipitated by large liabilities Westmoreland and four of its subsidiaries have to retiree medical benefit plans for the benefit of retired mine workers. From 1985 to 1992, Mr. Boyle was Chief Financial Officer of El Paso Natural Gas Company, El Paso, Texas. Mr. Brown joined the Company in September 1996. Prior to being elected to his present position in 1997, he was elected as Vice President - Engineering and Operations in 1996. From 1992 to 1995 he served as Chairman, President and Chief Executive Officer of Kansas Gas and Electric Company ("KG&E") and Group Vice President of KG&E from 1982 to 1992. Mr. Deehan joined the Company in 1985. Prior to being elected to his present position in 1996, he was elected Assistant Vice President - Rates and Economic Analysis in 1991. Ms. Gamble joined the Company in 1989. Prior to being elected to her present position in May 1998, she was Director of Marketing Research & Planning from 1989 to 1996; Director of Strategic and Policy Planning from 1996 to September 1997 and Director of Human Resources and Strategic Planning from September 1997 to May 1998. Mr. Kraus joined the Company in 1981. Prior to being elected to his present position in 1996, he was elected as Corporate Secretary and Senior Corporate Counsel in 1987 and Corporate Secretary and General Counsel in 1994. Mr. Pennington joined the Company in 1989. Prior to being elected to his present position in 1997, he was elected Controller and named Principal Accounting Officer in 1993. Mr. Rogan joined the Company in 1998 as Vice President, Public Affairs. Prior to joining the Company, he served as Deputy Chief of Staff for the Governor of Vermont from 1994 to 1998. He served as Director of External Affairs for the Agency of Health Care Administration in Florida from 1992 to August 1994 and as Deputy Director and Lobbyist in the Florida Governor's Washington office from 1991 to 1992. Mr. Sinclair joined the Company in April 1997 as Vice President and General Manager for Business Development. Prior to joining the company, from 1994 to 1996 he served as President and Chief Executive Officer at Noma International. In 1991 he joined Novatel Communications, Ltd. as Chief Financial Officer and was President and Chief Executive Officer of Novatel Carcom, Inc. from 1992 to 1994. Mr. Barba joined Catamount Energy Corporation, a subsidiary of Catamount Investment Corporation (a wholly owned subsidiary of the Company), in August 1992 as Senior Vice President and General Manager. The term of each officer is for one year or until a successor is elected. Item 2. Properties. The Company. The Company's properties are operated as a single system which is interconnected by transmission lines of VELCO, New England Power Company and PSNH. The Company owns and operates 23 small generating stations with a total current nameplate capability of 70,070 KW, has a 1.78% joint- ownership interest in an oil generating plant in Maine, has a 20% joint- ownership interest in a wood, gas and oil-fired generating plant in Vermont, has a 1.73% joint-ownership interest in a nuclear generating plant in Connecticut and has a 47.35% joint-ownership interest in a transmission interconnection with Hydro-Quebec in Vermont. The electric transmission and distribution systems of the Company include about 614 miles of overhead transmission lines, about 7,322 miles of overhead distribution lines and about 257 miles of underground distribution lines which are located in Vermont except for about 23 miles of transmission lines which are located in New Hampshire and about two miles of transmission lines which are located in New York. Connecticut Valley. Connecticut Valley's electric properties consist of two principal systems in New Hampshire which are not interconnected with each other but each of which is connected directly with facilities of the Company. The electric systems of Connecticut Valley include about two miles of transmission lines and about 430 miles of overhead distribution lines and about 12 miles of underground distribution lines. All the principal plants and important units of the Company and its subsidiaries are held in fee. Transmission and distribution facilities which are not located in or over public highways are, with minor exceptions, located either on land owned in fee or pursuant to easements substantially all of which are perpetual. Transmission and distribution lines located in or over public highways are so located pursuant to authority conferred on public utilities by statute, subject to regulation of state or municipal authorities. VELCO. VELCO's properties consist of about 483 miles of high voltage overhead transmission lines and associated substations. The lines connect on the west at the Vermont-New York state line with the lines of Niagara Mohawk Power Corporation near Whitehall, New York, and Bennington, Vermont and with the submarine cable of NYPA near Plattsburg, New York; on the south and east with lines of New England Power Company and PSNH; on the south with the facilities of Vermont Yankee; and on the north with lines of Hydro-Quebec through a converter station and tie line jointly owned by the Company and several other Vermont utilities. VETCO. VETCO has approximately 52 miles of high voltage DC transmission line connecting at the Quebec-Vermont border in the Town of Norton, Vermont with the transmission line of Hydro-Quebec and connecting at the Vermont-New Hampshire border near New England Power Company's Moore hydro-electric generating station with the transmission line of New England Electric Transmission Corporation, a subsidiary of New England Electric System. Item 3. Legal Proceedings. On July 29, 1996, the Company filed a Declaratory Judgment action in the United States District Court for the District of Vermont. The Complaint names as defendants a number of insurance companies that issued policies to the Company dating from the mid 1940s to the late 1980s. The Company asserted that policies issued by defendants provide coverage for all defense and remediation costs associated with the Cleveland Avenue property and other sites. Settlement has been reached with all defendants. See PART II, Item 8 "Environmental" for related disclosures. On August 7, 1997, the Company and eight other non-operating owners of Unit #3 filed a demand for arbitration with Connecticut Light and Power Company and Western Massachestts Electric Company and lawsuits against NU and its trustees. The arbitration and lawsuits seek to recover costs associated with replacement power, operation and maintenance costs and other costs resulting from the shutdown of Unit #3. The non-operating owners claim that NU and two of its wholly owned subsidiaries failed to comply with NRC's regulations, failed to operate the facility in accordance with good operating practice and attempted to conceal their activities from the non-operating owners and the NRC. Except as otherwise described under Management's Discussion and Analysis of Financial Condition and Results of Operations, Item 7, there are no other material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or to which any of their property is subject. Item 4. Submission of Matters to a Vote of Security Holders. There were no matters submitted to security holders during the fourth quarter of 1998. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. (a) The Company's common stock is traded on the New York Stock Exchange (NYSE) under the trading symbol CV. Newspaper listings of stock transactions use the abbreviation CVtPS or CentlVtPS. The table below shows the high and low sales price of the Company's common stock, as reported on the NYSE composite tape by The Wall Street Journal, for each quarterly period during the last two years as follows: Market Price High Low 1998 First quarter.............. $ 15 7/16 $ 13 1/8 Second quarter............. 15 1/4 14 5/16 Third quarter.............. 14 15/16 9 3/4 Fourth quarter............. 11 1/2 9 3/4 1997 First quarter.............. $ 13 1/8 $ 10 3/8 Second quarter............. 11 3/8 10 3/8 Third quarter.............. 13 15/16 11 Fourth quarter............. 15 3/8 13 (b) As of December 31, 1998, there were 11,905 holders of the Company's common stock, $6 par value. (c) Common stock dividends have been declared quarterly. Cash dividends of $.22 per share were paid for all quarters of 1997 and 1998. So long as any Senior Preferred Stock or Second Preferred Stock is outstanding, except as otherwise authorized by vote of two-thirds of each such class, if the Common Stock Equity (as defined) is, or by the declaration of any dividend will be, less than 20% of Total Capitalization (as defined), dividends on Common Stock (including all distributions thereon and acquisitions thereof), other than dividends payable in Common Stock, during the year ending on the date of such dividend declaration, shall be limited to 50% of the Net Income Available for Dividends on Common Stock (as defined) for that year; and if the Common Stock Equity is, or by the declaration of any dividend will be, from 20% to 25% of Total Capitalization, such dividends on Common Stock during the year ending on the date of such dividend declaration shall be limited to 75% of the Net Income Available for Dividends on Common Stock for that year. The defined terms identified above are used herein in the sense as defined in subdivision 8A of the Company's Articles of Association; such definitions are based upon the unconsolidated financial statements of the Company. As of December 31, 1998, the Common Stock Equity of the unconsolidated Company was 61.4% of total capitalization. For additional information regarding dividend payment level and dividend restrictions see Item 8 herein.
Item 6. Selected Financial Data (Dollars in thousands, except per share amounts) 1998 1997 1996 1995 1994 For the year Operating revenues $303,835 $304,732 $290,801 $288,277 $277,158 Net income before extraordinary charge $ 3,983 $ 17,151 $ 19,442 $ 19,851 $ 14,800 Extraordinary charge net of taxes $ - $ 811 $ - $ - $ - Net income $ 3,983 $ 16,340 $ 19,442 $ 19,851 $ 14,800 Earnings available for common stock $ 2,038 $ 14,312 $ 17,414 $ 17,823 $ 12,662 Consolidated return on average common stock equity 1.1% 7.5% 9.4% 10.0% 7.2% Earnings per basic and diluted share of common stock before extraordinary charge $.18 $1.32 $1.51 $1.53 $1.08 Earnings per basic and diluted share of common stock $.18 $1.25 $1.51 $1.53 $1.08 Cash dividends paid per share of common stock $.88 $.88 $.84 $.80 $1.42 Book value per share of common stock $15.63 $16.38 $16.19 $15.51 $14.56 Net cash provided by operating activities $ 21,743 $ 41,974 $ 43,007 $ 42,583 $ 50,987 Dividends paid $ 12,006 $ 12,630 $ 11,728 $ 11,350 $ 18,845 Construction and plant expenditures $ 16,046 $ 13,841 $ 18,952 $ 21,337 $ 22,621 Conservation and load management expenditures $ 2,208 $ 1,837 $ 1,589 $ 3,899 $ 6,159 At end of year Long-term debt $ 90,077 $ 93,099 $117,374 $119,142 $120,157 Capital lease obligations $ 16,141 $ 17,223 $ 18,304 $ 19,385 $ 20,467 Redeemable preferred stock $ 18,000 $ 19,000 $ 20,000 $ 20,000 $ 20,000 Total capitalization (excluding current portion of debt) $311,454 $324,499 $350,201 $346,341 $339,462 Total assets $530,282 $531,940 $502,968 $489,213 $489,570
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Earnings Overview. The Company's 1998 net income was $4.0 million or $.18 per share of common stock, which equates to a 1.1% return on average common equity. Net income and earnings per share of common stock for 1998 compares to $16.3 million and $1.25 in 1997, and $19.4 million and $1.51 in 1996. The return on average common equity was 7.5% for 1997 and 9.4% for 1996. For 1998, net income and earnings per share of common stock for the Company's utility business reflects the negative impact of increased operating costs, predominantly purchased power, and two regulatory actions. First, during April 1998 the Company agreed to toll the statutory period of time in which the Vermont Public Service Board (PSB) must act on its pending 6.6% rate increase request filed in September 1997. At the same time, the Company asked the Vermont Supreme Court to review the PSB's denial of the Company's claim that the PSB is precluded from again trying the Company on certain Hydro- Quebec contract and demand side management decisions. The appeal and associated stay of the rate case significantly delayed the date that new rates would have otherwise taken effect. As a result, the Company's earnings for 1998 were adversely affected. Second, because of the October 27, 1998 retail rate increase settlement discussed below and in Note 13 to the Consolidated Financial Statements, net income and earnings per share of common stock for 1998 include the negative impact of an after-tax disallowance of $4.3 million, or $.38 per share of common stock for the Company's purchased power costs under the Hydro-Quebec Contract. Also, for 1998 net income and earnings per share of common stock for the Company's utility business reflects the net effect at Connecticut Valley Electric Company Inc. (Connecticut Valley) of charges taken during the fourth quarter of 1998 of $3.7 million, or $.32 per share of common stock, offset by the reversal of 1997 charges during the first quarter of 1998 of $4.5 million, or $.39 per share of common stock. These charges and reversal of charges are discussed below and in Notes 1 and 13 to the Consolidated Financial Statements. On June 12, 1998, the Company filed with the PSB a request for a 10.7% rate increase ($24.7 million of annualized revenues) effective March 1, 1999. On October 27, 1998, the Company reached an agreement with the Vermont Department of Public Service (DPS) regarding this rate increase request. The agreement, which was approved by the PSB on December 11, 1998, provides for a temporary rate increase in the Company's Vermont retail rates of 4.7% or $10.9 million on an annualized basis beginning with service rendered January 1, 1999 and sets the Company's authorized return on common equity in its Vermont retail business at 11%. The rate increase is temporary insofar as it is subject to adjustment upon future resolution of the Hydro-Quebec Contract issues presently before the Vermont Supreme Court (V.C.) discussed in Note 13 to the Consolidated Financial Statements. The Company filed for a 6.6% or $15.4 million general rate increase on September 22, 1997 to become effective June 6, 1998, which is now stayed pending a review by the V.C. as more fully discussed in Note 13 to the Consolidated Financial Statements. For 1997, net income and earnings per share of common stock for the Company's utility business reflect a net of tax extraordinary charge of approximately $.8 million and $.07, respectively, associated with the discontinued application of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation," applied to Connecticut Valley. In Addition, Connecticut Valley incurred an after-tax charge of $3.6 million and $.31 per share of common stock for disallowed power costs. For 1997, non-utility net income and earnings per share of common stock reflect a gain of $1.8 million and $.16, respectively, from the sale by Catamount of its 8.1% partnership's interest in the NW Energy Williams Lake L.P. Project. In addition, 1997 net income and earnings per share of common stock reflected an after-tax gain of approximately $1.3 million and $.12, respectively, from sale of non-utility property. Results of Operations. The major elements of the Consolidated Statement of Income are discussed below. Operating revenues and megawatt-hour (MWH) sales A summary of MWH sales and operating revenues for 1998, 1997 and 1996 is set forth below:
MWH Sales Revenues (000's) 1998 1997 1996 1998 1997 1996 Residential 930,666 945,199 957,733 $115,911 $116,314 $108,603 Commercial 937,547 916,311 900,590 103,221 104,460 98,890 Industrial 418,778 427,764 401,781 33,617 34,206 32,399 Other retail 7,123 7,138 7,229 1,943 1,937 1,856 _________ _________ ________ ________ ________ ________ Total retail sales 2,294,114 2,296,412 2,267,333 254,692 256,917 241,748 _________ _________ ________ ________ ________ ________ Resale sales: Firm 2,284 1,051 1,717 94 46 81 Entitlement 319,703 378,273 470,760 19,370 18,925 24,781 Other 1,008,635 827,818 770,542 26,861 22,265 18,705 _________ _________ ________ ________ ________ ________ Total resale sales 1,330,622 1,207,142 1,243,019 46,325 41,236 43,567 _________ _________ ________ ________ ________ ________ Other revenues - - - 2,818 6,579 5,486 _________ _________ _________ ________ ________ ________ Total 3,624,736 3,503,554 3,510,352 $303,835 $304,732 $290,801 ========= ========= ========= ======== ======== ======== Year-to-year fluctuations in total retail MWH sales are primarily affected by customer growth, Conservation and Load Management (C&LM) programs, as well as relative prices of alternate energy sources, weather patterns and conservation induced by price changes and income elasticity responses of customers. Compared to 1997, retail MWH sales for 1998 decreased 2,298 MWH and related revenues decreased $2.2 million, or .9% compared to 1997. The revenue decrease is primarily attributable to a modified rate design reflected in bills rendered since April 1, 1997. The modified rate design, which is revenue neutral on an annual basis, decreases prices charged during the winter months of December through March and increases prices during the remaining months of the year. Retail MWH sales for 1997 increased 1.3% compared to 1996 reflecting an improved Vermont economy. However, retail revenues increased $15.2 million or 6.3% over 1996 due to a $12.8 million increase in revenues resulting from the full year impact of a 5.5% retail rate increase effective June 1, 1996, 2.0% retail rate increase effective January 1, 1997, the positive impact of the modified rate design described above, and a 1.3% increase in retail MWH sales. For 1998, entitlement MWH sales decreased 15.5% compared to 1997. The decrease results primarily from the scheduled refueling and maintenance outage of the Vermont Yankee plant. The outage, which reduced the plant's 1998 output, also reduced MWH sales. However, a portion of the higher costs of the Company's share of Vermont Yankee's costs associated with the refueling and maintenance outage was passed on to entitlement customers resulting in an increase in entitlement revenues of $.4 million, or 2.4%. Entitlement MWH sales and revenues decreased for 1997 compared to 1996 primarily due to the scheduled termination of several sales agreements in late 1996. Other resale sales increased 180,817 MWH and related revenues increased $4.6 million for 1998. The increase resulted primarily from short-term system capacity sales between the Company and Virginia Power which jointly supply wholesale power in New England. This increase is partially offset by lower sales to NEPOOL. Other resale sales and revenues for 1997 increased 7.4% and 19.0%, respectively, due to increased sales to New England Power Pool (NEPOOL) partially offset by a decrease in wholly owned and jointly owned units sales. Other revenues decreased for 1998 due to a provision for rate refunds of $2.7 million related to a Fuel Adjustment Clause (FAC) and Purchased Power Cost Adjustment (PPCA) associated with the December 3, 1998 Court of Appeals' decision discussed below, and to lower revenues associated with transmission interconnection agreements partially offset by increased pole attachment rentals. The increases in other revenues for 1997 resulted primarily from an increase in transmission revenues related to various transmission interconnection agreements. The table below summarizes the components of increases or decreases in revenues compared to the prior year (dollars in thousands): 1998 1997 Revenue increase (decrease) from: Retail MWH sales $ (90) $ 2,377 Retail rates (2,135) 12,792 Changes in firm resale sales 48 (35) Changes in entitlement sales 445 (5,856) Changes in other resale sales 4,596 3,560 Changes in other revenues (3,761) 1,093 _______ _______ Net increase over prior year $ (897) $13,931 ======= ======= Purchased power The Company purchases approximately 90% of its power needs under several contracts of varying duration. Over 30% of its purchases are from affiliated companies whereby the Company receives its entitlement share of the output. The Company's purchased power portfolio assures that a diversified mix of sources and fuel types are available to meet the Company's long-term load growth while providing short and intermediate term opportunities to purchase or sell capacity and energy to reduce overall power costs. A breakdown of the Company's energy sources is shown below: Year Ended December 31 1998 1997 1996 Nuclear generating companies 33% 36% 36% Canadian imports 28 32 30 PSNH-coal 2 9 8 Company-owned hydro 6 5 6 Jointly owned units 3 1 2 Small power producers 6 6 6 Other sources 22 11 12 ___ ___ ___ 100% 100% 100% === === === The Company maintains a 1.7303% joint-ownership interest in Millstone Unit #3 (Unit #3) of the Millstone Nuclear Power Station and owns a 2% equity interest in Connecticut Yankee. These two plants are operated by Northeast Utilities (NU). The Company also maintains joint-ownership interests in Joseph C. McNeil, a 53 MW wood, gas and oil-fired unit and Wyman #4, a 619 MW oil-fired unit and owns a 31.3%, 2% and 3.5% equity interest in Vermont Yankee, Maine Yankee and Yankee Atomic, respectively. The Company's entitlement percentage for Vermont Yankee is 35%. In addition, the Company owns 20 hydroelectric generating units with a total nameplate capability of 41.2 MW and two gas-fired and one diesel-peaking units with a combined nameplate capability of 28.9 MW. Millstone Unit #3 (Unit #3) received approval by the Nuclear Regulatory Commission (NRC) commissioners and NRC staff on June 15, 1998 and June 29, 1998, respectively, to restart Unit #3 which was shut down on March 30, 1996, due to numerous technical and non-technical problems. Unit #3 reached full power operation on July 14, 1998. The Company's share of incremental operating and maintenance costs for Unit #3 is estimated to be $1.1 million , $2.6 million and $.9 million for 1996, 1997 and 1998, respectively. The Company's share of incremental replacement power costs is estimated to be $2.8 million, $3.5 million and $3.2 million for 1996, 1997 and 1998, respectively. The Company remains actively involved with the other non-operating minority joint-owners of Unit #3. This group is engaged in various activities to monitor and evaluate NU's and Northeast Utilities Service Co.'s efforts relating to Unit #3. On August 7, 1997, the Company and eight other non- operating owners of Unit #3 filed a demand for arbitration with Connecticut Light and Power Company and Western Massachusetts Electric Company and lawsuits against NU and its trustees. The arbitration and lawsuits seek to recover costs associated with replacement power, operation and maintenance costs and other costs resulting from the shutdown of Unit #3. The non- operating owners claim that NU and two of its wholly owned subsidiaries failed to comply with NRC's regulations, failed to operate the facility in accordance with good operating practice and attempted to conceal their activities from the non-operating owners and the NRC. In 1992, 1996 and 1997, the Board of Directors of Yankee Atomic, Connecticut Yankee and Maine Yankee, respectively, decided to permanently discontinue operation of the Yankee Atomic, Connecticut Yankee and Maine Yankee nuclear power plants, and to decommission the facilities. For additional information in regard to the permanent shutdown of these nuclear power plants see Note 2 to the Consolidated Financial Statements. The Vermont Yankee nuclear power plant, which provides approximately one-third of the Company's power supply, began a refueling outage on March 21, 1998 and returned to service on June 3, 1998. The refueling outage extended twenty-six days beyond the scheduled forty-nine days. Vermont Yankee had no scheduled refueling outage in 1997 and had a scheduled refueling outage from September 7 through November 5, 1996. The Design Basis Documentation project (Project) initiated by Vermont Yankee during 1996 is expected to be complete by the end of year 2000. The Company's 35% share of the total cost for this Project is expected to be about $6.2 million. Such costs will be deferred by Vermont Yankee and amortized over the remaining license life of the plant. During scheduled nuclear refueling outages, the Company purchases more costly replacement energy from other sources to satisfy energy needs. In accordance with current rate-making treatment, the Company defers and amortizes to expense over their respective fuel cycles the incremental replacement energy and maintenance costs associated with refueling outages for the Vermont Yankee nuclear power plant and Unit #3 jointly owned nuclear generating unit. During 1998, the Company incurred $3.1 million and $6.5 million for replacement energy and maintenance costs, respectively, of which $7.2 million in total was deferred. During 1996, the Company deferred $1.5 million and $6.0 million of replacement energy and maintenance costs, respectively. On February 25, 1999, the Board of Directors of Vermont Yankee granted an exclusive right to AmerGen Energy Company to conduct due diligence and negotiate a possible agreement to purchase the assets of Vermont Yankee. Under a long-term purchase power contract expiring in 2016, the Company receives varying amounts of capacity and energy from Hydro-Quebec. See Note 14 to the Consolidated Financial Statements for further details related to the Hydro-Quebec power contracts. Until its termination on April 30, 1998, the Company purchased power and energy from Merrimack Unit #2 pursuant to a contract dated July 16, 1966 entered into by and between Vermont Electric Power Company, Inc. (Velco) and Public Service Company of New Hampshire (PSNH). Pursuant to the contract, as amended, Velco agreed to reimburse PSNH, in the proportion which the Velco quota bears to the demonstrated net capability of the plant, for all fixed costs of the unit and operating costs of the unit incurred by PSNH, which are reasonable and cost-effective for the remaining term of the Velco contract. In early 1998, PSNH took the Merrimack Unit #2 facility off line, shut it down and commenced a maintenance outage. In February, March and April of 1998, PSNH billed Velco for costs to complete the maintenance outage. Velco disputes the validity of a portion of the charges on grounds that the maintenance performed at the unit was to extend the life of the Merrimack plant beyond the term of the Velco contract and that the charges in connection with said investments were not reasonable and cost-effective for the remaining term of the Velco contract. The Company estimates that the portion of the disputed charges allocable to the Company could be as much as $1.0 million on a pre-tax basis. The Company, under long-term contracts, purchases power from a number of small power producers who own qualifying facilities under the Public Utility Regulatory Policies Act of 1978. These qualifying facilities produce energy using hydroelectric, wood, biomass and refuse-burning generation. During 1998, the Company purchased 212,702 MWH of which 154,832 MWH is associated with the Vermont Electric Power Producers and 38,283 MWH with a New Hampshire/Vermont solid waste plant. The Company expects to purchase approximately 203,000 MWH of small power output in each year 1999 through 2003. Based on the forecast level of production, the total commitment in the next five years to purchase power from these qualifying facilities is estimated to be $113.7 million. The Company engages in purchases and sales with other electric utilities and with NEPOOL to take advantage of immediate pricing and other market conditions. The Company also engages in marketing activities with Virginia Power which jointly supply wholesale power in New England. These purchases are included in Other sources in the table above. The net cost components of purchased power and production fuel costs for the past three years were as follows (dollars in thousands):
1998 1997 1996 Units Amount Units Amount Units Amount Purchased and produced: Capacity (MW) 613 $104,740 527 $ 99,513 526 $ 86,431 Energy (MWH) 3,478,860 80,147 3,470,235 71,930 3,445,259 67,991 ________ ________ ________ Total purchased power costs 184,887 171,443 154,422 Production fuel (MWH) 332,835 1,996 237,064 1,820 295,802 1,570 ________ ________ ________ Total purchased power and production fuel costs 186,883 173,263 155,992 Less entitlement and other resale sales (MWH) 1,328,338 46,231 1,206,091 41,190 1,241,302 43,486 ________ ________ ________ Net purchased power and production fuel costs $140,652 $132,073 $112,506 ======== ======== ========
For 1998, purchased capacity cost increased $5.2 million over 1997. This increase is the result of a $7.4 million disallowance of Hydro-Quebec power costs discussed below, $7.2 million of higher costs primarily associated with the Hydro-Quebec contract, the Vermont Yankee extended outage and $1.6 million of disallowed power costs at Connecticut Valley. Offsetting this increase is the impact at Connecticut Valley totaling $11.0 million associated with the reversal of a $5.5 million charge-off during 1998 and charge-off during 1997 of $5.5 million. See Electric Utility Restructuring-New Hampshire discussed below and Note 13 to the Consolidated Financial Statements for additional information. The increase in purchased capacity cost of $13.1 million for 1997 over 1996 resulted from $7.4 million in higher prices, $.2 million increase in the amount of MW purchased and $5.5 million representing Connecticut Valley's estimated loss on power contracts for the twelve months following December 31, 1997 discussed below and in Note 13 to the Consolidated Financial Statements. Pursuant to a PSB Accounting Order, during the first half of 1997, the Company reduced capacity costs by $5.8 million related to the Hydro-Quebec agreement for which a payment of $5.8 million was received from Hydro-Quebec on June 30, 1997. Energy costs are directly related to the variable prices of oil, nuclear fuel and coal but, more importantly, to the proportion of the Company's purchased energy that comes from each of these fuel sources. The increase in energy costs for 1998 resulted from a 11.1% or, $8.0 million increase in cost per MWH purchased and a $.2 million increase in the amount of MWH purchased. The price increase results primarily from the higher costs under the Hydro-Quebec power contract, increased purchases from small power producers and the Vermont Yankee extended outage. The increase in energy costs for 1997 resulted from a 5.0% or $3.4 million increase in cost per MWH purchased and a .7%, or $.5 million increase in the amount of MWH purchased. The price increase results primarily from incremental replacement power costs associated with Unit #3 discussed above. For information related to recovery of costs associated with the premature retirement of the Maine Yankee and Connecticut Yankee nuclear power plants see Note 2 to the Consolidated Financial Statements. The Company is responsible for paying its entitlement percentage of decommissioning costs for Vermont Yankee, Connecticut Yankee, Maine Yankee and Yankee Atomic as well as its joint ownership percentage of decommissioning costs for Unit #3. See Notes 2 and 14 to the Consolidated Financial Statements. The staff of the Securities and Exchange Commission has questioned certain current accounting practices of the electric utility industry, including the Company, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating stations in financial statements of electric utilities. In response to these questions, the Financial Accounting Standards Board has agreed to review the industry- wide accounting for nuclear decommissioning costs. If current electric utility industry accounting practices for such decommissioning costs are changed, it is possible that annual expense provisions for decommissioning costs could increase, the total estimated costs for decommissioning could be recorded as a liability, and income from external decommissioning trusts could be reported as investment income instead of a reduction to decommissioning expense. The Company does not believe that such changes, if required, would have an adverse effect on results of operations due to its ability to recover decommissioning costs through the regulatory process. See Liquidity and Capital Resources - Competition, for related information. Millstone Unit #3 resumed operation in June 1998, accordingly, production fuel costs increased for 1998 compared to 1997. Also, due to increased generation at the Wyman #4 and the Joseph C. McNeil generating stations, production fuel costs increased for 1997 compared to 1996. In order to optimize its power mix for baseload, intermediate and peaking power, the Company engages in purchases and sales with other electric utilities, primarily in New England and with NEPOOL. The profits from these transactions are used to reduce purchased power costs. The Company also engages in marketing activities with Virginia Power which jointly supply wholesale power in New England. Based on present commitments and contracts, the Company expects that net purchased power and production fuel costs will be approximately $127.0 million, $143.0 million and $143.0 million for the period 1999 through 2001. Production and transmission Due to increased production costs, primarily related to Unit #3 and higher transmission costs, production and transmission expenses increased $1.5 million in 1997 compared to 1996. Other operation expenses Primarily due to increased legal and regulatory expenses, other operation expenses increased $3.2 million for 1998 compared to 1997. Other operation expenses, in 1997, increased $2.8 million compared to 1996 resulting primarily from increased amortization of conservation and load management costs combined with a decrease in deferral of conservation and load management costs. Maintenance expenses Maintenance expenses associated with the Company's joint ownership interest in Unit #3 decreased for 1998 compared to 1997. However, this decrease was offset by an increase in maintenance expenses associated with the Company's tree trimming program and expenses attributable to the severe ice storm in January 1998. The increase in maintenance expenses for 1997 compared to 1996 is due to increased Unit #3 maintenance costs. Income taxes Federal and state income taxes fluctuate with the level of pre-tax earnings. These taxes decreased for 1998 and 1997 as a result of lower pre-tax earnings. Other Income, net Total other income, net decreased for 1998 compared to 1997 and increased in 1997 over 1996 as the result of gains of $5.0 million from non-recurring asset sales. Also, Other income, net for 1996 and 1997 include $2.3 million and $.4 million of expenses incurred in connection with the Gauley River Power project, currently under construction, in Summersville, West Virginia. Other interest expense Other interest expense increased for 1998 due to an increase in outstanding short-term debt offset somewhat by lower interest rates. Other interest expense declined for 1997 due to a decrease in short-term debt levels. Extraordinary credit (charge) As a result of legal and regulatory actions associated with Connecticut Valley, the Company, in 1997, recorded an extraordinary charge of $.8 million. See Electric Utility Restructuring- New Hampshire below. Cash Dividends Declared Common Due to an early common dividend declaration made in December 1997 for the quarterly dividend paid on February 13, 1998, common dividends declared decreased for 1998 compared to 1997 and increased for 1997 compared to 1996. Liquidity and Capital Resources The Company's liquidity is primarily affected by the level of cash generated from operations and the funding requirements of its ongoing construction and C&LM programs. Net cash provided by operating activities generated $21.7 million in 1998, $42.0 million in 1997 and $43.0 million in 1996. The Company ended 1998 with cash and cash equivalents of $10.1 million, a decrease of $6.5 million from the beginning of the year. The decrease in cash for 1998 was the result of $21.7 million provided by operating activities, $18.4 million used for investing activities and $9.8 million used for financing activities. Operating Activities Net income, depreciation and deferred income taxes and investment tax credits provided $14.7 million. $7.0 million was provided from fluctuations in working capital and other operating activities. Investing Activities Construction and plant expenditures consumed $16.0 million while $5.3 million was used for C&LM programs and non-utility investments. $2.9 million was provided by a reduction in an escrow account to fund a non-utility investment. Financing Activities Dividends paid on common stock were $10.1 million, while preferred stock dividends were $1.9 million. Retirement of long-term debt and retirement of preferred stock required $20.5 million and $1.0 million, respectively, and reduction in capital lease obligations required $1.1 million. Short-term obligations and sale of common stock provided $24.3 million and $.5 million, respectively. Excluding allowance for funds used during construction, construction expenditures are estimated at $18.0 million, $16.0 million and $16.0 million for the years 1999 through 2001, respectively. The level of short-term borrowings fluctuates based on seasonal corporate needs, the timing of long-term financings and market conditions. The Company has a $50.0 million revolving credit facility with a group of banks maturing June 1, 1999 of which $25.0 million was outstanding at December 31, 1998. The Company expects that borrowings will be $25.0 million by June 1, 1999. The Company must rollover an aggregate of $16.3 million of letters of credit between December 1999 and May 2000. In addition, the Company has a $12.0 million accounts receivable facility which matures in November 1999. The Company's ability to extend or replace the maturing $50.0 million revolving credit facility, roll over $16.3 million of maturing letters of credit and extend the accounts receivable facility will be dependent in large part on a positive outcome of the pending Hydro-Quebec Contract issues at the VSC or progress made in power contract renegotiations. Negotiations are ongoing with the banks to extend the maturities of these financial arrangements. Connecticut Valley has outstanding long-term bank debt of $3.75 million maturing December 27, 1999. In regard to Connecticut Valley's long-term debt see Note 7 to the Consolidated Financial Statements. Also see Electric Industry Restructuring-New Hampshire for additional discussion of certain events which may lead to an acceleration of the repayment date of this loan. If the Company is unable to extend the maturities of or replace the bulk of the debt and letters of credit facilities referenced above, it would jeopardize the Company's ability to continue as a going concern. There can be no assurance that the Company will be successful in extending or replacing these credit facilities. On June 3, 1996, the Company's Board of Directors increased the quarterly dividend rate from $.20 to $.22 payable August 15, 1996. The Company, through a common stock repurchase program initiated in 1994 and subsequently suspended in order to preserve capital for use in industry restructuring and other business purposes, purchased 324,717 shares of its common stock in open market transactions during 1995, 1996 and 1997 at an average price of $13.19 per share. These transactions are recorded as treasury stock, at cost, in the Company's Consolidated Balance Sheet. The Company's capital structure ratios (including amounts of long-term debt due within one year) for the past three years were as follows: December 31 1998 1997 1996 Common stock equity 56% 54% 53% Preferred stock 8 8 8 Long-term debt 31 33 34 Capital lease obligations 5 5 5 ___ ___ ___ 100% 100% 100% === === === On February 2, 1999, Standard & Poor's Corporation (Standard & Poor's) lowered its corporate credit rating on the Company to triple-'B'-minus from triple-'B', the senior secured rating to triple-'B'-plus from single-'A'-minus, and the preferred stock rating to double-'B'-plus from triple-'B'-minus. In addition, the ratings were also placed on Credit Watch with negative implications. Standard & Poor's stated "the CreditWatch listing reflects the potentially adverse impact of pending legal and regulatory decisions that could seriously weaken the Company's credit profile. The downgrades reflect increased business risk and weakened financial measures as a result of recent regulatory decisions in Vermont and New Hampshire and an adverse ruling by the United States First Circuit Court of Appeals." Standard & Poor's also said "Resolution of the CreditWatch listing will depend on the outcome of the pending Federal Energy Regulatory Commission case and other legal proceedings at State and Federal levels, which could be resolved in 1999. Adequate rate relief and successful mitigation of high power costs through contract renegotiations or other methods are essential to stabilizing the ratings." On February 17, 1999, Duff & Phelps Credit Rating Co. (Duff & Phelps) placed the credit ratings of the Company on Rating Watch-Down due to the high level of regulatory and public policy uncertainty in Vermont and the recent unfavorable ruling by the United States Court of Appeals relating to Connecticut Valley, the Company's wholly owned New Hampshire subsidiary. Duff & Phelps stated "recent negative rulings by the PSB regarding purchased power costs and the high level of uncertainty with public policy toward electric utilities in Vermont adds risk to the Company's financial profile going forward." Current credit ratings by Duff & Phelps remain at 'BBB' (Triple-B) for first mortgage bonds and 'BBB-' (Triple-B-Minus) for preferred stock. The Company's declining credit ratings as well as continuing uncertainty raise significant doubt regarding the Company's ability to extend or replace maturing debt and letters of credit arrangements. Current credit ratings of the Company's securities by Duff & Phelps and Standard & Poor's are as follows: Duff & Standard Phelps & Poor's Corporate Credit Rating BBB- First Mortgage Bonds BBB BBB+ Preferred Stock BBB- BB+ On November 12, 1998, Catamount, a wholly owned non-utility subsidiary of the Company, replaced its $8.0 million credit facility with a $25.0 million revolving credit facility expiring November 11, 2002 which provides for up to $25.0 million in revolving credit loans and letters of credit. Catamount currently has a $1.2 million letter of credit outstanding to support certain of its obligations in connection with a debt service requirement in the Appomattox Cogeneration project and aggregated letters of credit of $11.0 million in support of construction and equity commitments for its Gauley River Power project. SmartEnergy, also a wholly owned non-utility subsidiary of the Company, maintained a $.5 million revolving line of credit with a bank to provide working capital and financing assistance for investment purposes. SmartEnergy had outstanding borrowings under this facility of $25,000 at December 31, 1997. This line of credit was cancelled on February 9, 1998. Financial obligations of the non-utility wholly owned subsidiaries are non-recourse to the Company. Hydro-Quebec Contract The Company is a party to a power contract with Hydro-Quebec through the Vermont Joint Owners (VJO), a consortium of Vermont utilities which includes the Company, Green Mountain Power Corporation (GMP), Citizen's Utilities, Rochester Electric Light & Power and Vermont Public Power Supply Authority representing municipalities and a cooperative in Vermont. Under these agreements, there are step up provisions that provide that in the event any VJO member fails to meet its obligation under the contract with Hydro-Quebec, the balance of the VJO participants, including the Company, will "step up" to the defaulting party's share on a pro-rata basis. As of December 31, 1998 the Company's VJO obligation is approximately 46% or $1.0 billion on a nominal basis over the term of the contract ending in 2016. The total VJO contract obligation on a nominal basis over the term of the contact is approximately $2.3 billion. During January 1998, a significant ice storm affected parts of New York, New England and the Province of Quebec, Canada. This storm damaged major components of the Hydro-Quebec transmission system over which power is supplied to Vermont under the VJO contract with Hydro-Quebec. This resulted in an interruption of a significant portion of scheduled contractual power deliveries into Vermont. The ice storm's effect on Hydro-Quebec's transmission system caused the VJO to examine Hydro Quebec's overall reliability and ability to deliver energy in the future. That review has prompted the VJO to initiate an arbitration proceeding, the end result of which may be the termination of the Contract. By way of the arbitration, the VJO is also seeking to recover capacity payments made during the period of non-delivery. Diversification Catamount was formed for the purpose of investing in non- regulated power plant projects. Currently, Catamount, through its wholly owned subsidiaries, has interests in five operating independent power projects located in Glenns Ferry and Rupert, Idaho; Rumford, Maine; East Ryegate, Vermont; and Hopewell, Virginia. In addition, Catamount has interests in projects under construction in Thetford, England, and in Summersville, West Virginia, and under development in Fort Dunlop, England. Catamount's after-tax earnings were $3.3 million, $4.1 million and $.5 million for 1998, 1997 and 1996, respectively. Earnings for 1997 include a net of tax gain of $1.8 million from the sale of NW Energy Williams Lake L.P. Also, results of operation for 1997 and 1996 include $.4 million and $2.3 million of pre-tax expenses related to the Gauley River project currently under construction in Summersville, West Virginia. SmartEnergy was formed to engage in the sale of or rental of electric water heaters, energy efficient products and other related goods and services. SmartEnergy incurred losses of $1.5 million and $.7 million for 1998 and 1997, respectively, and earnings of $.3 million for 1996. Rates and Regulation The Company recognizes that adequate and timely rate relief is necessary if the Company is to maintain its financial strength, particularly since Vermont regulatory rules do not allow for changes in purchased power and fuel costs to be passed on to consumers through automatic rate adjustment clauses. The Company's practice of reviewing costs periodically will continue and rate increases will be requested when warranted. 1998 Retail Rate Case: On June 12, 1998, the Company filed with the PSB for a 10.7% retail rate increase to be effective March 1, 1999. This rate case proceeding overlapped the 6.6% rate increase request referenced below that is now stayed pending a review on the so-called preclusion issue by the VSC. On October 27, 1998, the Company reached an agreement with the DPS regarding the 10.7% rate increase request. The agreement, which was approved by the PSB on December 11, 1998, provides for a temporary rate increase in the Company's Vermont retail rates of 4.7% or $10.9 million on an annualized basis beginning with service rendered January 1, 1999 and sets the Company's authorized return on equity in its Vermont retail business at 11% before disallowances in connection with the Hydro-Quebec Contract. The rate increase is temporary insofar as it is subject to adjustment upon future resolution of the Hydro-Quebec Contract issues presently before the VSC. The Company anticipates a resolution of the Hydro-Quebec issues before the VSC by the end of 1999. The agreement incorporates a disallowance of approximately $7.4 million for the Company's purchased power costs under the Hydro-Quebec Contract while the VSC reviews the PSB denial of the Company's claim that the PSB is precluded from again trying the Company on certain Hydro-Quebec Contract issues. Upon approval of the agreement by the PSB, the Company, during the fourth quarter of 1998, recorded a loss of $7.4 million on a pre-tax basis for disallowed purchased power costs, representing the Company's estimated under recovery of power costs under the Hydro-Quebec Contract. This $7.4 million disallowance was calculated using the same formula as contained in the rate order issued by the PSB in the Green Mountain Power Corporation (GMP) rate case on February 28, 1998 (see additional information below). If the Company receives an unfavorable ruling from the VSC, and the PSB issues a rate order adopting the methodology used to determine the temporary Hydro-Quebec disallowance for the duration of the Hydro-Quebec Contract, approximately $205.0 million of power costs to be incurred under that contract would not be recoverable in rates. This would result in an immediate charge to earnings of $205.0 million once such outcome became probable. Such an outcome would jeopardize the ability of the Company to continue as a going concern. 1997 Retail Rate Case: On September 22, 1997, the Company filed for a 6.6% or $15.4 million general rate increase to become effective June 6, 1998 to offset the increasing cost of providing service. $14.3 million or 92.9% of the rate increase request was to recover contractual increases in the cost of power the Company purchases from Hydro-Quebec. At the same time, the Company also filed a request to eliminate the winter-summer rate differential and price electricity the same year-round. The change would be revenue-neutral within classes of customers and overall. Over time, customers would see a leveling off of rates so they would pay the same per kilowatt-hour during the winter and summer months. The PSB decided to appoint an independent investigator to examine the Company's decision to buy power from Hydro-Quebec. The Company filed a motion with the PSB stating that the PSB already examined the Company's decision to buy power from Hydro-Quebec and, therefore, the PSB as well as other parties should be barred from reviewing its past decision on Hydro-Quebec. However, the Company does not object to the independent investigator or others looking at issues of management of the power supply since the Company's last rate case. During February 1998, the DPS filed testimony in opposition to the Company's 6.6% or $15.4 million retail rate increase request. As a result of its testimony, the DPS recommended that the PSB instead reduce the Company's current retail rates by 2.5% or $5.7 million. On February 28, 1998 the PSB issued an Order in a GMP rate case. That Order found GMP's decision to lock-in the Hydro-Quebec VJO contract in 1991 imprudent and further found that the contract was not used and useful. As such, the PSB concluded that a large portion of the contract's current costs should not be imposed on consumers and were disallowed. GMP appealed this rate order to the VSC. The Company is one of the participants in the VJO contract. If the Company were to receive an order similar to that obtained by GMP, such an order could have a material adverse effect on the Company's results of operation and financial condition. If the Company were to eventually receive a rate order that would result in disallowance of Hydro-Quebec power costs on a permanent basis similar to that contained in the GMP February 28, 1998 rate order, the Company's ability to continue as a going concern would be jeopardized. Because of these risks and because the PSB rejected the Company's claim that the PSB was precluded from again trying the Company on certain Hydro-Quebec and related demand side management issues. 1996 Retail Rate Case: The Company filed for a 14.6% or $31.0 million general rate increase on October 17, 1995 to become effective July 1, 1996. On February 13, 1996, the Company reached an agreement with the DPS regarding this rate increase request. On April 30, 1996, the Company received a rate order from the PSB generally approving the agreement. Connecticut Valley: On November 24, 1998, Connecticut Valley filed with the NHPUC its annual FAC/PPCA rates to be effective January 1, 1999. On January 4, 1999, the NHPUC issued an Order allowing Connecticut Valley to increase the proposed FAC rate of $.008 per kWh and the proposed PPCA rate of $.01000 per kWh rate on a temporary basis, effective on all bills rendered on or after January 1, 1999. In addition, the NHPUC ordered Connecticut Valley to pay refunds plus interest to its retail customers for any overcharges collected as a result of the April 9, 1998 Federal District Court Order, should it be overturned or modified. See Electric Industry Restructuring-New Hampshire for additional information related to the Court Order. On November 26, 1997, Connecticut Valley filed a request with the NHPUC to increase the FAC/PPCA and short-term energy purchase rates effective on or after January 1, 1998. The requested increase in rates resulted from higher forecast energy and capacity charges on power Connecticut Valley purchases from the Company plus removal of credit effective during 1997 to refund overcollections from 1996. In an Order dated December 31, 1997 in Connecticut Valley's FAC and PPCA docket, the NHPUC found Connecticut Valley acted imprudently by not terminating the wholesale contract between Connecticut Valley and the Company, notwithstanding the stays of its February 28, 1997 Orders. The NHPUC Order further directed Connecticut Valley to freeze its current FAC and PPCA rates (other than short term rates to be paid to certain Qualifying Facilities) effective January 1, 1998, on a temporary basis, pending a hearing to determine: 1) the appropriate proxy for a market price that Connecticut Valley could have obtained if it had terminated its wholesale contract with the Company; 2) the implications of allowing Connecticut Valley to pass on to its customers only that market price; and 3) whether the NHPUC's final determination on the FAC and PPCA rates should be reconciled back to January 1, 1998 or some other date. See Electric Industry Restructuring discussed below and Note 13 to the Consolidated Financial Statements for additional information. On July 23, 1996, Connecticut Valley filed with the NHPUC for an 8.8% or $1.6 million base rate increase to become effective September 22, 1996. The increase was to recover increased operating costs and costs of improvements to the electric system. As part of the permanent rate increase, Connecticut Valley also requested a temporary rate increase of 5.4% or $.9 million. The NHPUC granted Connecticut Valley a temporary rate increase of 5.4% effective with bills rendered October 1, 1996. On January 21, 1997, Connecticut Valley and the NHPUC Staff reached a settlement in principle regarding the permanent rate increase. The settlement, approved by the NHPUC, provided for a 6.4% permanent rate increase and sets Connecticut Valley's allowed return on common equity at 10.2%. Recoupment revenues for the period October 1, 1996 and March 30, 1997, and rate case expenses were recovered through a temporary billing surcharge of approximately 2.2% of total bill effective during the period April 1 through November 30, 1997, when off-peak rates were in effect. As approved by the NHPUC, this billing surcharge resumed on March 1, 1998 to recover expenses incurred in connection with the pilot program. Management Audit On April 17, 1997, the PSB ordered an independent forward-looking analysis of three of the Company's management policies and practices focusing on three areas: 1) Transmission of information to the Company's Board of Directors by management; 2) cost-benefit analyses for major corporate decisions; and 3) implementation of the Company's ethics and conflict of interest policy. The PSB's consultant began work on the project during the first quarter of 1998 and issued a final report during October 1998. Although the final report suggested areas where the Company could improve, it was generally very positive of the Company and as a result the PSB has terminated the proceeding. Proposed Formation of Holding Company In order to further prepare Central Vermont Public Service Corporation for deregulation, on July 24, 1998, the Company filed a petition with the PSB for permission to create a holding company that would have as subsidiaries the Company and non-utility subsidiaries, Catamount and SmartEnergy. The Company believes that a holding company structure will facilitate the Company's transition to a deregulated electricity market. The proposed holding company formation must also be approved by Federal regulators, including the Securities and Exchange Commission and the FERC, and by the Company's shareholders. Year 2000 Information Systems Modifications The Company's information systems could be affected by the date change in Year 2000 because most software application and operational programs will not properly recognize calendar dates beginning in the Year 2000. If not corrected, many computer applications could fail or create erroneous results. In order to meet current and future business needs the Company retained outside consultants to make its customer service applications Year 2000 compliant. In addition, the Company utilized both internal and external resources to make other applications, including its desk top applications, Year 2000 ready. Inventory and assessment activities are 100% complete. Overall remediation efforts are estimated to be at approximately 90% complete by the end of the first quarter of 1999. The Company expects to achieve compliance with Year 2000 requirements for all of its financial and operating systems by the end of the second quarter of 1999. The Company's operations would be adversely affected if a date-related system failure occurred with one of its major power suppliers, such as Hydro-Quebec or Vermont Yankee, or Velco, the company responsible for transmission in Vermont. Velco indicates it will be compliant by September 1999. Other delivery systems outside the state could, in the event of a date-related system failure, cause additional power supply interruptions. The Company has requested written reports from its power supply vendors regarding each Company's status relative to Year 2000 compliance and based on responses to date, these power supply vendors have indicated that they are either currently compliant or expect to be compliant by June 1999. The Company has also requested compliance information from other major vendors and suppliers. While this process is not yet complete, based upon responses to date, many of those major vendors and suppliers have indicated that they will be Year 2000 compliant in a timely manner. However, there can be no guarantee that third parties' noncompliance and their failure to remediate Year 2000 issues would not have a material adverse effect on the Company. Failure on the part of the Company to comply by December 31, 1999 could have a material adverse effect on the Company's results of operations and financial condition. Also, failures of the Company's principal power and transmission suppliers to remedy Year 2000 compliance issues, could have a material adverse effect on the Company should non-compliance result interruptions of power supply and transmission. The Company is part of the Northeast grid contingency plan that would go into effect immediately which would provide electricity to its customers on a priority basis in the event of power outages. The Company also has contingency plans developed in the event of the failure of its transmission, generation, distribution, metering, telecommunications, information and public communications systems. The Company believes it will incur approximately $3.3 million of costs associated with making the necessary modifications to its centralized and non-centralized computer systems. As of December 31, 1998, approximately $2.7 million of those costs have been incurred. During the first quarter of 1998, the Company requested an Accounting Order from the PSB to defer these operating and maintenance costs. On August 31, 1998, the PSB issued an Accounting Order authorizing the Company to defer these costs and amortize them over a five-year period beginning January 1, 2000. Per PSB Order dated December 11, 1998, the Company is authorized to recover these costs through the regulatory process. ELECTRIC INDUSTRY RESTRUCTURING The electric utility industry is in a period of transition that may result in a shift away from ratemaking based on cost of service and return on equity to more market-based rates. Many states, including Vermont and New Hampshire, where the Company does business, are exploring new mechanisms to bring greater competition, customer choice and market influence to the industry while retaining the public benefits associated with the current regulatory system. Vermont On December 31, 1996, the PSB issued a Report and Order (the Report) outlining a restructuring plan (the Plan), subject to legislative approval, for the Vermont electric utility industry. Due to uncertainty surrounding legislative schedules, the PSB, on April 18, 1997, issued an Order which suspended, pending further legislative action or future PSB Orders, certain filing deadlines for reports and plans to be completed in connection with the Plan. On April 3, 1997, Senate Bill 62 (S.62), an act relating to electric industry restructuring was passed by the Vermont Senate. Pursuant to S.62, electric utility customers would have been entitled to purchase electricity in a competitive market place and could have chosen their electricity supplier. Incumbent investor-owned electric utilities, including the Company, would have been required to separate their regulated distribution and transmission operations from the competitive generation and retail operations. S.62 provided for the recovery of a portion of investor-owned utility's "above market costs" which became stranded on account of the introduction of competition within their service area. When considering the recovery of such amounts, S.62 would have required the PSB to weigh the goal of sharing net prudently incurred, discretionary above-market costs "evenly" between utilities and customers against other goals including preserving the continuing financial integrity of the existing utility and respecting the just interests of investors. The Company believes that the unmodified provisions of S.62 would not have met the criteria for continuing application of SFAS No. 71. S.62 also created an incentive for the Company to take steps to close the Vermont Yankee Nuclear Power Station by conditioning the recovery of certain plant-related stranded costs on the decision of its owners to cease operations in 1998, unless the PSB agreed to allow the plant to run for up to two more refuelings to avoid power shortages or for other public interest reasons. To become law, S.62 would have had to be passed by the Vermont House of Representatives and signed by the Governor of the State of Vermont. Since the 1998 Legislative session concluded in April 1998 and S.62 was not enacted by the Vermont House of Representatives and subsequently signed into law by the Governor of Vermont, the bill did not become law and any efforts to pursue it in the future will require that it be re-enacted by the Vermont Senate and passed by the Vermont House of Representatives. Instead of considering S.62, the Vermont House of Representatives convened a special committee to study matters relating to the reform of Vermont's electric utility system in the summer of 1997. That committee issued recommendations in a report and legislation was proposed that would have provided for reform but not adopt the recommendations concerning customer choice and competition set forth in the PSB's Report and Order. Other legislation intended to advance a portion of the PSB Report and Order was also introduced. However, neither the House of Representatives nor Vermont Senate acted on these reforms which must be reintroduced in the next Vermont legislative biennium that began in January 1999, if they are to be considered. Therefore, at this time, it cannot be determined whether future restructuring legislation will be enacted in 1999 that would conform to the concepts developed by the Report, S.62 or the House Special Committee report. On July 22, 1998, Governor Dean issued an Executive Order establishing a Working Group on Vermont's Electricity Future (the Working Group) to lead a new effort to review the issues of potential restructuring of Vermont's electric industry. The Working Group was created to determine how restructuring the electric industry in Vermont can reduce both current and long-term electric costs for all classes of Vermont electric consumers. The Working Group was asked to provide a fact-based analysis of the options for electric industry restructuring and the impact of such industry changes on consumers and upon Vermont utilities. Further, the Working Group was directed by Governor Dean to gather information on and evaluate the possible consequences of the current financial status of Vermont electric utilities. The Working Group was asked to complete its review and report back to Governor Dean and to legislative leaders by December 15, 1998. A report was issued by the Working Group on December 18, 1998. Key conclusions of its report are: 1. Vermont should restructure its electric industry by moving rapidly to retail choice whereby consumers would purchase power directly from competing power suppliers. 2. Bankruptcy of Vermont electric utilities should not be viewed as an appropriate means to reduce Vermont utilities' above market power supply costs. 3. Vermont electric utilities should pursue power contract renegotiations through payments to buy down power contracts or buy-out power contracts. Financing for such payments should be obtained in the capital markets after a comprehensive regulatory process dealing with all of the elements of the restructuring of the Vermont electric utility industry. 4. The Vermont electric utilities should pursue auctions of their power generation assets and remaining power contracts. 5. Consolidation of existing electric utilities in Vermont (there are currently 22 utilities) should be considered in order to effect additional savings for utility customers. The Working Group noted that by March 1, 2000, most New Englanders outside Vermont will have a choice of their power supplier. While New England has the highest rates in the nation, electricity costs in Vermont have been among the lowest in the region. However, that advantage is eroding as other states in New England restructure their electric utility industries. Therefore, the Working Group recommends that it is in the interest of Vermont ratepayers to have the benefit of a restructured electric utility industry as soon as possible. The Company has signed a confidentiality and cooperation agreement with GMP and Citizens Utilities to permit an exchange of information to evaluate the possibility of consolidating the Vermont operations of the three utilities. In addition, the Washington Electric Cooperative (WEC) has recommended that consideration be given to its acquiring Vermont's investor owned utilities and converting them to a cooperative ownership structure. The Company supports the Working Group recommendations and will work with the PSB and other parties to implement the plan. However, there can be no assurance that the plan or its key elements, including consolidation, will ultimately be implemented. On August 27, 1998, the PSB hosted a workshop entitled, "Electricity Futures: Reforming Vermont's Power Supply", which was organized to facilitate power supply reform. Participants heard reports on successful power supply reforms in other states, followed by a discussion intended to identify opportunities and next steps, and to elicit proposals for reformulating Vermont's electric power supply. This workshop generated a great deal of interest with over 140 attendees, representing Vermont retail electric utilities, both large and small electricity consumers, public officials and interest groups, and several current and aspiring energy suppliers. As a follow up to the workshop, on September 15, 1998, the PSB opened a formal proceeding in Docket No. 6140 with the goal of creating a regulatory environment and a procedural framework to call forth, for disciplined review, proposals for reducing current and future power costs in Vermont. The PSB explained that it intends that this proceeding will define one or more acceptable courses for reform, and will create the framework to enable Vermont utilities and other interested parties to pursue them and to present them for regulatory approval in an open, public process. All Vermont utilities were made a party to that proceeding. Subsequent to the PSB's announcement, preliminary position papers were filed and a series of technical conferences were convened with the PSB to recommend the scope of the investigation, potential courses for reform of Vermont's power supply and other matters associated therewith including the consideration of the Working Group's recommendations as well as the WEC acquisition proposal. As of this time, the PSB has yet to act on any of the proposal or recommendations made concerning the disposition of the matters in Docket No. 6140. As a companion proceeding to its investigation in Docket No. 6140, on January 19, 1999, the PSB issued an Order opening a new contested case proceeding, Docket No. 6140-A, where it intends to issue final, binding and appealable orders concerning matters related to the reform and restructuring of Vermont's electric utility industry. Initially, the PSB noticed parties that it intended proceedings in Docket No. 6140-A to consider matters associated with the bankruptcy of one or more of the Vermont electric utilities. After an opportunity for comment, the focus of the proceeding was amended to first consider the principles, authority and proposals for reform of Vermont's electric power supply. This will include issues associated with the scope and extent of the Board's authority to approve "securitization" and other financings proposed to be entered into in connection with the buy-out or buy-down of power contracts and the criteria to be applied by the PSB when considering voluntary utility restructuring proposals. The PSB explains that this proceeding will provide utilities the maximum structural guidance on the terms and conditions it will consider in a voluntary restructuring proposal. As of this time, formal proceedings in Docket No. 6140-A are only at a preliminary status however the PSB indicates that it will proceed quickly to conclude this proceeding. New Hampshire On February 28, 1997 the NHPUC published its detailed Final Plan to restructure the electric utility industry in New Hampshire. Also on February 28, 1997, the NHPUC, in a supplemental order specific to Connecticut Valley, found that Connecticut Valley was imprudent for not terminating the FERC-authorized power contract between Connecticut Valley and the Company, required Connecticut Valley to give notice to cancel its contract with the Company and denied stranded cost recovery related to this power contract. Connecticut Valley filed for rehearing of the February 28, 1997 NHPUC Order. On April 7, 1997, the NHPUC issued an Order addressing certain threshold procedural matters raised in motions for rehearing and/or clarification filed by various parties, including Connecticut Valley, relative to the Final Plan and interim stranded cost orders. The April 7, 1997 Order stayed those aspects of the Final Plan that were the subject of rehearing or clarification requests and also stayed the interim stranded cost orders for the various parties, including Connecticut Valley. As such, those matters pertaining to the power contract between Connecticut Valley and the Company were stayed. The suspension of these orders was to remain in effect until two weeks following the issuance of any order concerning outstanding requests for rehearing and clarification. On March 20, 1998, the NHPUC issued an order which affirmed, clarified and modified various generic policy statements including the reaffirmation to establish rates on the basis of a regional average announced previously in its February 28, 1997 Final Plan. The March 20, 1998 order also addressed all outstanding motions for rehearings or clarification relative to the policies or legal positions articulated in the Final Plan and removed the stay covering the Company's interim stranded cost order of April 7, 1997. In addition, the March 20, 1998 Order imposed various compliance filing requirements. On November 17, 1997, the City of Claremont, New Hampshire (Claremont), filed with the NHPUC a petition for a reduction in Connecticut Valley's electric rates. Claremont based its request on the NHPUC's earlier finding that Connecticut Valley's failure to terminate its wholesale power contract with the Company as ordered in the NHPUC Stranded Cost Order of February 28, 1997 was imprudent. Claremont alleged that if Connecticut Valley had given written notice of termination to the Company in 1996 when legislation to restructure the electric industry was enacted in New Hampshire, Connecticut Valley's obligation to purchase power from the Company would have terminated as of January 1, 1998. On November 26, 1997, Connecticut Valley filed a request with the NHPUC to increase the FAC, PPCA and short-term energy purchase rates effective on or after January 1, 1998. The requested increase in rates resulted from higher forecast energy and capacity charges on power Connecticut Valley purchases from the Company plus removal of a credit effective during 1997 to refund overcollections from 1996. Connecticut Valley objected to the NHPUC's notice of intent to consolidate Claremont's petition into the FAC and PPCA docket, stating that Claremont's complaint should be heard as part of the NHPUC restructuring docket. Over Connecticut Valley's objection at the hearing on December 17, 1997, the NHPUC consolidated Claremont's petition with Connecticut Valley's FAC and PPCA proceeding. In an Order dated December 31, 1997 in Connecticut Valley's FAC and PPCA docket, the NHPUC found Connecticut Valley acted imprudently by not terminating the wholesale contract between Connecticut Valley and the Company, notwithstanding the stays of its February 28, 1997 Orders. The NHPUC Order further directed Connecticut Valley to freeze its current FAC and PPCA rates (other than short term rates to be paid to certain Qualifying Facilities) effective January 1, 1998, on a temporary basis, pending a hearing to determine: 1) the appropriate proxy for a market price that Connecticut Valley could have obtained if it had terminated its wholesale contract with the Company; 2) the implications of allowing Connecticut Valley to pass on to its customers only that market price; and 3) whether the NHPUC's final determination on the FAC and PPCA rates should be reconciled back to January 1, 1998 or some other date. On January 19, 1998, Connecticut Valley and the Company filed with the District Court of Rhode Island (the Court) for a temporary restraining order to maintain the status quo ante by staying the December 31, 1997 NHPUC Order and preventing the NHPUC from taking any action that (i) compromises cost- based rate making for Connecticut Valley or otherwise seeks to impose market price-based rate making on Connecticut Valley; (ii) interferes with the FERC's exclusive jurisdiction over the Company's pending application to recover wholesale stranded costs upon termination of its wholesale power contract with Connecticut Valley; or (iii) prevents Connecticut Valley from recovering through retail rates the stranded costs and purchased power costs that it incurs pursuant to its FERC-authorized wholesale rate schedule with the Company. On February 23, 1998, the NHPUC announced in a public meeting that it reaffirmed its finding of imprudence and designated a proxy market price for power at 4 cents per kWh in lieu of the actual costs incurred pursuant to the wholesale power contract with the Company. In addition, the NHPUC indicated, subject to certain conditions which were unacceptable to the companies, that it would permit Connecticut Valley to maintain its current rates pending a decision in Connecticut Valley's appeal of the NHPUC Order to the New Hampshire Supreme Court. Based on the December 31, 1997 NHPUC Order as well as the NHPUC's February 23, 1998 announcement, which resulted in the establishment of Connecticut Valley's rates on a non cost-of-service basis, Connecticut Valley no longer qualified, as of December 31, 1997, for the application of SFAS No. 71. As a result, Connecticut Valley wrote-off all of its regulatory assets associated with its New Hampshire retail business as of December 31, 1997. This write-off amounted to $1.2 million on a pre-tax basis. In addition, Connecticut Valley recorded a $5.5 million pre-tax loss in 1997 for disallowed power costs. On April 3, 1998, the Court held a hearing on the Companies' motion for a Temporary Restraining Order (TRO) and Preliminary Injunction against the NHPUC at which time both the Companies and the NHPUC presented arguments. In an oral ruling from the bench, and in a written order issued on April 9, 1998, the Court concluded that the Companies had established each of the prerequisites for preliminary injunctive relief and directed and required the NHPUC to allow Connecticut Valley to recover through retail rates all costs for wholesale power requirements service that Connecticut Valley purchases from the Company pursuant to its FERC-authorized wholesale rate schedule effective January 1, 1998 until further court order. In compliance with that order, Connecticut Valley received an order from the NHPUC authorizing retail rates to recover such costs beginning in May 1998. On April 14, 1998, the NHPUC filed a notice of appeal and a motion for a stay of the Court's preliminary injunction. The NHPUC's request for a stay was denied. At the same time, the NHPUC permitted Connecticut Valley to recover in rates the full cost of its wholesale power purchases from the Company. Also, on April 3, 1998, the Court indicated that its earlier TRO enjoining the NHPUC's restructuring orders applied to Connecticut Valley and prohibits the enforcement of the restructuring orders until the Court conducts a consolidated hearing and rules on the requests for permanent injunctive relief by plaintiff PSNH and the other utilities that have been allowed to intervene in these proceedings, including the Company and Connecticut Valley. The plaintiffs-intervenors filed a motion asking the Court to extend its stay of action by the NHPUC to implement restructuring and to make clear that the stay encompasses the NHPUC's order of March 20, 1998. As a result of these Court orders, Connecticut Valley's 1997 charges described above were reversed in the first quarter of 1998. Combined, the reversal of these charges increased first quarter 1998 net income and earnings per share of common stock by $4.5 million and $.39, respectively. On April 1, 1998, Citizens Bank of New Hampshire (Bank) notified Connecticut Valley that it was in default of the Loan Agreement between the Bank and Connecticut Valley dated December 27, 1994 and that the Bank would exercise all of its remedies from and after May 5, 1998 in the event that the violations were not cured. After reversing the 1997 write-offs described above, Connecticut Valley was in compliance with the financial covenants associated with its $3.75 million loan with the Bank. As a result, Connecticut Valley has satisfied the Bank's requirements for curing the violation. On May 11, 1998 the NHPUC issued an order requiring Connecticut Valley to show cause why it should not be held in contempt for its failure to meet the compliance filing requirements of its March 20, 1998 Order. A hearing on this matter was scheduled for June 11, 1998, which was subsequently cancelled because of the Court's June 5, 1998 Order, discussed below. On June 5, 1998, the Court issued an Order which denied NHPUC's motion for a stay of the Court's preliminary injunction. The Order clearly states that no restructuring effort in New Hampshire can move forward without the Court's approval unless all New Hampshire utilities agree to the plan. The Order suspended all involuntary restructuring efforts for all New Hampshire utilities until a hearing is conducted. The NHPUC appealed this Order to the United States First Circuit Court of Appeals (Court of Appeals). On December 3, 1998, the Court of Appeals announced its decisions on the appeals taken by the NHPUC from the preliminary injunctions issued by the Court. Those preliminary injunctions had stayed implementation of the NHPUC's plan to restructure the New Hampshire electric industry and required the NHPUC to allow Connecticut Valley to recover through its retail rates the full cost of wholesale power obtained from the Company. The Court of Appeals affirmed the preliminary injunction, issued by the Court, staying restructuring until the plaintiff utilities' claims (including those of the Company and Connecticut Valley) are fully tried. The Court of Appeals found that PSNH had sufficiently established that without the preliminary injunction against restructuring it would suffer substantial irreparable injury and that it had sufficient claims against restructuring to warrant a full trial. The Court of Appeals also affirmed the extension of the preliminary injunction to protect the other plaintiff utilities, including Connecticut Valley and the Company, although it questioned whether the other utilities had as strong of arguments against restructuring as PSNH because they did not have formal agreements with the State similar to PSNH's Rate Agreement. The NHPUC filed a petition for rehearing on December 17, 1998. The Court of Appeals denied the petition on January 13, 1999. The Court of Appeals reversed the Court's preliminary injunction requiring the NHPUC to allow Connecticut Valley to recover in retail rates the full cost of the power it buys from the Company. Although the Court of Appeals found that Connecticut Valley and the Company had made a strong showing of irreparable injury to justify the preliminary injunction, it concluded that Connecticut Valley's and the Company's claims did not have a sufficient probability of success to warrant such preliminary relief. The Court of Appeals explained that the filed-rate doctrine preserving the exclusive jurisdiction of the FERC over wholesale power rates did not prevent the NHPUC from deciding whether Connecticut Valley's power purchases from the Company were prudent given alternative available sources of wholesale power. The Court of Appeals then stated that Connecticut Valley's rates could be reduced to the level prevailing on December 31, 1997. However, the Court of Appeals also stated that if a reduction of existing rates were ordered "it will be time enough to consider whether they are precluded from the Court's injunction against the Final Plan or on other grounds." On December 17, 1998, Connecticut Valley and the Company filed a petition for rehearing on the grounds that the Court of Appeals had not given sufficient weight to the Court's factual findings and that the Court of Appeals had misapprehended both factual and legal issues. Connecticut Valley and the Company also asked that the entire Court of Appeals, rather than only the three-judge appellate panel that had issued the December 3 decision, consider their petition for rehearing. On January 13, 1999, the Court denied the petition for rehearing. Connecticut Valley and the Company then requested the Court of Appeals to stay the issuance of its mandate until the companies could file a petition for certiorari to the United States Supreme Court and the Supreme Court acts on the petition. On January 22, 1999, the Court of Appeals denied the request. However, the Court of Appeals granted a 21-day stay to enable the Company to seek a stay pending certiorari from the Circuit Justice of the Supreme Court. On February 11, 1999, the Company and Connecticut Valley filed a petition for a writ of certiorari with the United States Supreme Court and a motion to stay the effect of the Court of Appeals' decision while the case was pending in the Supreme Court. The motion for a stay was addressed to Justice Souter who is responsible for such motions pertaining to the Court of Appeals for the First Circuit. On February 18, 1999, Justice Souter denied the stay pending the petition for certiorari. No decision has been made by the Supreme Court regarding the petition for certiorari. On November 24, 1998, Connecticut Valley filed with the NHPUC its annual FAC/PPCA rates to be effective January 1, 1999. On January 4, 1999, the NHPUC issued an Order allowing Connecticut Valley to increase the proposed FAC rate of $.008 per kWh and the proposed PPCA rate of $.01000 per kWh rate on a temporary basis, effective on all bills rendered on or after January 1, 1999. In that order the NHPUC reiterated its intent that, in the event the District Court's April 9, 1998 preliminary injunction was vacated, the NHPUC would lower CVEC's rates at least to the December 31, 1997 level and require a refund for all funds collected in 1998 over that amount. As a result of legal and regulatory actions discussed above, Connecticut Valley no longer qualifies for the application of SFAS No. 71, and wrote-off all its regulatory assets associated with its New Hampshire retail business estimated at approximately $1.3 million on a pre-tax basis. In addition, Connecticut Valley recorded estimated total losses of $4.3 million pre-tax for disallowed power costs of $1.6 million and 1998 refund obligations of $2.7 million. Company management, however, continues to believe that the NHPUC's actions are illegal and unconstitutional and will present its arguments in the appropriate forums. The pre-tax losses described above resulted in Connecticut Valley violating applicable covenants in its outstanding loan, which if not waived or renegotiated, allows Connecticut Valley's lender the right to accelerate the repayment of a $3.75 million loan with Connecticut Valley. At a status conference on February 25, 1999, the Court indicated that it would not establish a trial date on the Company and Connecticut Valley's request for a permanent injunction until all pending motions, including a motion to dissolve the stay of restructuring activities filed by the NHPUC, and motions for summary judgement filed by the NHPUC, the Company and other parties were heard and decided. Such an injunction, if granted, could require the NHPUC to allow Connecticut Valley to recover the full cost of the wholesale power obtained from the Company through its retail rates. However, the Company cannot predict the outcome of this or any of the other related litigation. On June 25, 1997, the Company filed with the FERC a notice of termination of its power supply contract with Connecticut Valley, conditional upon the Company's request to impose a surcharge on the Company's transmission tariff to recover the stranded costs that would result from the termination of its contract with Connecticut Valley. The amount requested was $44.9 million plus interest at the prime rate to be recovered over a ten-year period. In its Order dated December 18, 1997 in Docket No. ER97-3435-000, the FERC rejected the Company's proposed stranded cost surcharge mechanism but indicated that it would consider an exit fee mechanism for collecting stranded costs. The FERC also rejected the Company's arguments concerning the applicability of stated FERC policies regarding retail stranded costs, multi-state regulatory gaps and the implications of state restructuring initiatives. The Company filed a motion seeking rehearing of the FERC's December 18, 1997 Order which was denied. Thereafter, the Company appealed the FERC's decision to the Court of Appeals for the District of Columbia circuit. In addition, and in accordance with the December 18, 1997 FERC Order, on January 12, 1998 the Company filed a request with the FERC for an exit fee mechanism to collect $44.9 million in a lump sum, or in installments with interest at the prime rate over a ten-year period, to cover the stranded costs resulting from the cancellation of Connecticut Valley's power contract with the Company. On March 11, 1998, the FERC issued an order accepting for filing the Company's request for an exit fee effective March 14, 1998, and set hearings to determine: whether Connecticut Valley will become an unbundled transmission customer of the Company, the Company's expectation as to the period of time it would serve Connecticut Valley, and the allowable amount of the exit fee. The FERC also rejected the Company's June 25, 1997 notice of termination indicating that the notice can be resubmitted when the power contract is proposed to be terminated. On April 28, 1998, the Company filed its case-in-chief before the FERC updating the amount of the exit fee to $54.9 million which was subsequently amended to $50.0 million in a lump sum, describing all of the ways Connecticut Valley will become an unbundled transmission customer of the Company subsequent to termination, and establishing the expected period of service based upon the date of termination, whenever that occurs, and the weighted average service life of its commitments to power resources to serve Connecticut Valley. Had termination taken effect on January 1, 1998 this expectation period would have equaled nineteen years. On August 4 and 5, 1998 Phase 1 hearings were held at the FERC on the issue of whether Connecticut Valley will become an unbundled transmission customer of the Company. Subsequent to those hearings, the parties agreed to go on to hearings on the Phase 2 issues (addressing the allowable amount of the exit fee) without a preliminary determination from the Administrative Law Judge or the FERC on the Phase 1 issues. The Company submitted supplemental testimony on Phase 2 issues on December 3, 1998. If the Company is unable to obtain an order authorizing the full recovery amount of the exit fee, or other appropriate mechanism, the Company would be required to recognize a loss under this contract totaling approximately $60.0 million on a pre-tax basis. Furthermore, the Company would be required to write-off approximately $4.0 million in regulatory assets associated with its wholesale business on a pre-tax basis. Conversely, even if the Company obtains a FERC order authorizing the updated requested exit fee, Connecticut Valley would be required to recognize a loss of approximately $50.0 million on a pre-tax basis unless Connecticut Valley has obtained an order by the NHPUC or other appropriate body directing the recovery of those costs in Connecticut Valley's retail rates. Either of these reasonably possible outcomes could occur during calendar year 1999. For further information on New Hampshire restructuring issues and other regulatory events in New Hampshire affecting the Company or Connecticut Valley and the 1997 and 1998 charges and reversals of the 1997 charges, see the Company's Current Reports on Form 8-K dated January 12, 1998, January 28, 1998 and April 1, 1998 and February 1, 1999; the Company's Form 10-Q for the quarterly periods ended March 31, June 30 and September 30, 1998; and Item 1. Business-New Hampshire Retail Rates, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Electric Industry Restructuring-New Hampshire and Item 8. Financial Statements and Supplementary Data-Note 13, Retail Rates-New Hampshire in the Company's 1997 Annual Report on Form 10-K. The Company has initiated and will continue to work for a negotiated settlement with parties to the New Hampshire restructuring proceeding and the NHPUC. On September 14 and 15, 1998 the Company participated in a settlement conference with an administrative law judge assigned for the settlement process at the FERC and the parties to the Company's exit fee filing. An adverse resolution would have a material adverse effect on the Company's results of operations, cash flows, and ability to obtain capital at competitive rates. However, the Company cannot predict the ultimate outcome of this matter. Connecticut Valley constitutes approximately 7% of the Company's total retail MWH sales. Competition-Risk Factors If retail competition is implemented in Vermont or New Hampshire, the Company is unable to predict the impact of this competition on its revenues, the Company's ability to retain existing customers and attract new customers or the margins that will be realized on retail sales of electricity. Historically, electric utility rates have been based on a utility's costs. As a result, electric utilities are subject to certain accounting standards that are not applicable to other business enterprises in general. SFAS No. 71 requires regulated entities, in appropriate circumstances, to establish regulatory assets and liabilities, and thereby defer the income statement impact of certain costs and revenues that are expected to be realized in future rates. As described in Note 1 of Notes to Consolidated Financial Statements, the Company believes it currently complies with the provisions of SFAS No. 71 for both its regulated Vermont service territory and FERC regulated wholesale businesses. In the event the Company determines that it no longer meets the criteria for following SFAS No. 71, the accounting impact would be an extraordinary, non-cash charge to operations of approximately $66.7 million on a pre-tax basis as of December 31, 1998. Criteria that give rise to the discontinuance of SFAS No. 71 include (1) increasing competition that restricts the Company's ability to establish prices to recover specific costs and (2) a significant change in the manner in which rates are set by regulators from cost-based regulation to another form of regulation. The Securities and Exchange Commission has questioned the ability of certain utility companies continuing the application of SFAS No. 71 where legislation provides for the transition to retail competition. Deregulation of the price of electricity issues related to the application of SFAS No. 71 and 101, as to when and how to discontinue the application of SFAS No. 71 by utilities during transition to competition has been referred to the Financial Accounting Standards Board's Emerging Issues Task Force (EITF). The EITF has reached a tentative consensus, and no further discussion is planned, that regulatory assets should be assigned to separable portions of the Company's business based on the source of the cash flows that will recover those regulatory assets. Therefore, if the source of the cash flows is from a separable portion of the Company's business that meets the criteria to apply SFAS No. 71, those regulatory assets should not be written off under SFAS No. 101, "Accounting for the Discontinuation of Application of SFAS No. 71," but should be assessed under paragraph 9 of SFAS No. 71 for realizability. SFAS No. 121, "Accounting for the Impairment of Long Lived Assets and for Long-Lived Assets to Be Disposed Of," which was adopted by the Company on January 1, 1996, requires that any assets, including regulatory assets, that are no longer probable of recovery through future revenues, be revalued based upon future cash flows. SFAS No. 121 requires that a rate-regulated enterprise recognize an impairment loss for the amount of costs excluded from recovery. As of December 31, 1998, based upon the regulatory environment within which the Company currently operates, SFAS No. 121 did not have an impact on the Company's financial position or results of operations. Competitive influences or regulatory developments may impact this status in the future. Because the Company is unable to predict what form possible future restructuring legislation will take, it cannot predict if or to what extent SFAS Nos. 71 and 121 will continue to be applicable in the future. In addition, if the Company is unable to mitigate or otherwise recover stranded costs that could arise from any potentially adverse legislation or regulation, the Company would have to assess the likelihood and magnitude of losses incurred under its power contract obligations. As such, the Company cannot predict whether any restructuring legislation enacted in Vermont or New Hampshire, once implemented, would have a material adverse effect on the Company's operations, financial condition or credit ratings. However, the Company's failure to recover a significant portion of its purchased power costs, would likely have a material adverse effect on the Company's results of operations, cash flows, ability to obtain capital at competitive rates and ability to exist as a going concern. It is possible that stranded cost exposure before mitigation could exceed the Company's current total common stock equity. Inflation The annual rate of inflation, as measured by the Consumer Price Index, was 1.6% for 1998, 1.7% for 1997 and 3.3% for 1996. The Company's revenues, however, are based on rate regulation that generally recognizes only historical costs. Although the rate of inflation has eased, it continues to have an impact on most aspects of the business. New Accounting Pronouncements In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, effective for fiscal years beginning after December 15, 1997. SFAS No. 130 established standards for reporting and display of comprehensive income and its components in a full set of general- purpose financial statements. It requires that an enterprise classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately in the equity section of a statement of financial position. The Company did not have any material other comprehensive income items in 1997 or 1996, however, in 1998 the Company recognized as other comprehensive income a minimum pension liability adjustment of $0.6 million on a pre-tax basis, or $0.4 million net of tax. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. This Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A company may also implement this Statement as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997 (and, at the company's election, before January 1, 1998). The Company has not yet quantified the impacts of adopting SFAS No. 133 on the financial statements and has not determined the timing of or method of the adoption of SFAS No. 133. However, the Statement could increase volatility in earnings and other comprehensive income. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, Reporting on the Costs of Start-up Activities (SOP 98-5). SOP 98-5 provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs to be expensed as incurred and is effective for financial statements for fiscal years beginning after December 15, 1998. The adoption of SOP 98-5 is not expected to have a material impact on the Company's financial position or results of operations. In December 1998, the Emerging Issues Task Force (EITF) reached consensus on Issue No. 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities. EITF Issue 98-10 is effective for fiscal years beginning after December 15, 1998. EITF Issue 98-10 requires energy trading contracts to be recorded at fair value on the balance sheet, with the changes in fair value included in earnings. The effects of initial application of EITF Issue 98-10 will be reported as a cumulative effect of a change in accounting principle. Financial statements for periods prior to initial adoption of EITF Issue 98-10 may not be restated. We have not yet quantified the impacts of this accounting change as of January 1, 1999 on the financial statements. Forward Looking Statements This document contains statements that are forward looking. These statements are based on current expectations that are subject to risks and uncertainties. Actual results will depend, among other things, upon general economic and business conditions, weather, the actions of regulators, including the outcome of the litigation involving Connecticut Valley before the FERC and the Court and the Company's pending rate case before the PSB and associated appeal to the Vermont Supreme Court, as well as other factors which are described in further detail in the Company's filings with the Securities and Exchange Commission. The Company cannot predict the outcome of any of these proceedings or other factors. Item 8. Financial Statements and Supplementary Data. Index to Financial Statements and Supplementary Data Page No. Report of Independent Public Accountants. . . . . . . . . . . 47 Financial Statements: Consolidated Statement of Income for each of the three years ended December 31, 1998 . . . . . . . . . . . 48 Consolidated Statement of Cash Flows for each of the three years ended December 31, 1998 . . . . . . . . . 49 Consolidated Balance Sheet at December 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . 50 Consolidated Statement of Capitalization at December 31, 1998 and 1997 . . . . . . . . . . . . . . . . 51 Consolidated Statement of Changes in Common Stock Equity for each of the three years ended December 31, 1998 . . . . . . . . . . . . . . . . . . . . 52 Notes to Consolidated Financial Statements . . . . . . . . 53 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Central Vermont Public Service Corporation: We have audited the accompanying consolidated balance sheet and statement of capitalization of Central Vermont Public Service Corporation and its wholly owned subsidiaries (the Company) as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in common stock equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Central Vermont Public Service Corporation and its wholly owned subsidiaries as of December 31, 1998 and 1997 and the results of their operations and cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. As discussed in Note 13, the Company has filed with the Federal Energy Regulatory Commission a request for an exit fee mechanism to cover the stranded costs resulting from the anticipated cancellation of the power contract between the Company and its wholly owned subsidiary Connecticut Valley. If the Company is unable to obtain an order authorizing the recovery of a significant portion of the exit fee, or other appropriate stranded cost mechanism, the Company would be required to recognize a loss under this contract of a material amount. The Company is also involved in related litigation in the federal courts. Additionally, on October 27, 1998, the Company reached a settlement agreement on rates with the Vermont Public Service Board (PSB). The agreement incorporates a disallowance of a portion of the Company's purchased power cost under its Hydro-Quebec contracts while the Vermont Supreme Court is reviewing the Company's claim that the PSB is precluded from again trying the Company on certain Hydro-Quebec contract issues. If the ultimate resolution of these proceedings is unfavorable to the Company, the result would have a significant adverse impact on the Company and could impact the Company's financial viability. ARTHUR ANDERSEN LLP Boston, Massachusetts February 25, 1999 (except with respect to the matter discussed in Note 18, as to which the date is March 26, 1999)
CONSOLIDATED STATEMENT OF INCOME (Dollars in thousands, except per share amounts) Year Ended December 31 1998 1997 1996 Operating Revenues $303,835 $304,732 $290,801 Operating Expenses Operation Purchased power 184,887 171,443 154,422 Production and transmission 23,383 22,417 20,941 Other operation 44,110 40,909 38,098 Maintenance 15,613 15,333 14,918 Depreciation 16,708 16,931 17,960 Other taxes, principally property taxes 11,426 11,490 10,971 Taxes on income (283) 7,573 10,216 ________ ________ ________ Total operating expenses 295,844 286,096 267,526 ________ ________ ________ Operating Income 7,991 18,636 23,275 ________ ________ ________ Other Income and Deductions Equity in earnings of affiliates 3,191 3,214 3,302 Allowance for equity funds during construction 61 75 347 Other income, net 3,826 6,522 2,447 Provision for income taxes (426) (1,590) (4) ________ ________ ________ Total other income and deductions, net 6,652 8,221 6,092 ________ ________ ________ Total Operating and Other Income 14,643 26,857 29,367 ________ ________ ________ Interest Expense Interest on long-term debt 9,868 9,337 9,473 Other interest 831 400 615 Allowance for borrowed funds during construction (39) (31) (163) ________ ________ ________ Total interest expense, net 10,660 9,706 9,925 ________ ________ ________ Net Income Before Extraordinary Charge 3,983 17,151 19,442 Extraordinary Charge Net of Taxes - 811 - ________ ________ ________ Net Income 3,983 16,340 19,442 Preferred Stock Dividends Requirements 1,945 2,028 2,028 ________ ________ ________ Earnings Available For Common Stock $ 2,038 $ 14,312 $ 17,414 ======== ======== ======== Average Shares of Common Stock Outstanding 11,439,688 11,458,735 11,543,998 Basic and Diluted Share of Common Stock: Earnings before extraordinary charge $ .18 $1.32 $1.51 Extraordinary charge - .07 - Earnings Per Basic and Diluted Share of Common Stock $ .18 $1.25 $1.51 Dividends Paid Per Share of Common Stock $ .88 $ .88 $ .84 The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands) Year Ended December 31 1998 1997 1996 Cash Flows Provided (Used) By Operating Activities Net income $ 3,983 $16,340 $19,442 Adjustments to reconcile net income to net cash provided by operating activities Equity in earnings of affiliates (3,191) (3,214) (3,302) Dividends received from affiliates 3,267 3,216 2,978 Equity in earnings from non-utility investments (6,740) (5,378) (4,251) Distribution of earnings from non-utility investments 4,744 4,403 3,813 Depreciation 16,708 16,931 17,960 Amortization of capital leases 1,081 1,081 1,081 Deferred income taxes and investment tax credits (5,989) (6,529) 464 Extraordinary charge - 1,198 - Allowance for equity funds during construction (61) (75) (347) Net deferral and amortization of nuclear replacement energy and maintenance costs (1,657) 4,913 (1,773) Amortization of conservation & load management costs 5,202 7,018 5,651 Net deferral and amortization of restructuring costs (1,075) - 327 Gain on sale of investment - (2,891) - Gain on sale of property - (2,095) (700) (Increase) decrease in accounts receivable and unbilled revenues (5,465) 855 (1,076) Increase in accounts payable 6,543 668 1,185 Increase (decrease) in accrued income taxes (3,656) 4,168 1,055 Change in other working capital items (4,094) 3,532 7,890 Change in environmental reserve 6,848 591 (2,647) Other, net 5,295 (2,758) (4,743) _______ _______ _______ Net cash provided by operating activities 21,743 41,974 43,007 _______ _______ _______ Investing Activities Construction and plant expenditures (16,046) (13,841) (18,952) Conservation and load management expenditures (2,208) (1,837) (1,589) Return of capital 233 233 233 Proceeds from sale of investment - 3,750 - Proceeds from sale of property - 2,624 1,050 Special deposit 2,946 2,283 (5,246) Non-utility investments (3,046) (1,197) (2,462) Other investments, net (251) 54 (293) _______ _______ _______ Net cash used for investing activities (18,372) (7,931) (27,259) _______ _______ _______ Financing Activities Sale (repurchase) of common stock 494 (1,072) (1,042) Short-term debt, net 24,350 (5,100) (7,740) Long-term debt, net (20,520) (3,019) 232 Retirement of Preferred stock (1,000) (1,000) - Common and preferred dividends paid (12,006) (12,630) (11,728) Reduction in capital lease obligations (1,082) (1,081) (1,081) Other (62) - 14 _______ _______ _______ Net cash used for financing activities (9,826) (23,902) (21,345) _______ _______ _______ Net Increase (Decrease) In Cash and Cash Equivalents (6,455) 10,141 (5,597) Cash and Cash Equivalents at Beginning of Year 16,506 6,365 11,962 _______ _______ _______ Cash and Cash Equivalents at End of Year $10,051 $16,506 $ 6,365 ======= ======= ======= Supplemental Cash Flow Information Cash paid during the year for: Interest (net of amounts capitalized) $10,267 $ 9,476 $ 9,920 Income taxes (net of refunds) $ 9,556 $10,654 $ 8,504 Non-cash Operating, Investing and Financing Activities Receivables purchase agreement (Note 10) Regulatory assets (Notes 1,2 and 12) Long-term lease arrangements (Note 14) The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED BALANCE SHEET (Dollars in thousands) December 31 Assets 1998 1997 Utility Plant, at original cost $469,204 $461,482 Less accumulated depreciation 160,666 151,250 ________ ________ 308,538 310,232 Construction work in progress 10,461 10,450 Nuclear fuel, net 948 964 ________ ________ Net utility plant 319,947 321,646 ________ ________ Investments and Other Assets Investments in affiliates, at equity 26,142 26,495 Non-utility investments 35,896 30,772 Non-utility property, less accumulated depreciation 2,920 2,894 ________ ________ Total investments and other assets 64,958 60,161 ________ ________ Current Assets Cash and cash equivalents 10,051 16,506 Special deposits 424 3,368 Accounts receivable, less allowance for uncollectible accounts ($2,242 in 1998 and $1,946 in 1997) 29,224 23,166 Unbilled revenues 18,677 18,951 Materials and supplies, at average cost 3,746 3,779 Prepayments 1,881 1,464 Other current assets 9,768 4,970 ________ ________ Total current assets 73,771 72,204 ________ ________ Regulatory Assets 66,719 74,130 ________ ________ Other Deferred Charges 4,887 3,799 ________ ________ Total Assets $530,282 $531,940 ======== ======== Capitalization And Liabilities Capitalization Common stock equity $179,182 $187,123 Preferred and preference stock 8,054 8,054 Preferred stock with sinking fund requirements 18,000 19,000 Long-term debt 90,077 93,099 Capital lease obligations 16,141 17,223 ________ ________ Total capitalization 311,454 324,499 ________ ________ Current Liabilities Short-term debt 37,000 12,650 Current portion of long-term debt 6,773 24,271 Accounts payable 11,589 4,609 Accounts payable - affiliates 11,784 12,441 Accrued income taxes 2,975 6,631 Dividends declared 2,521 2,513 Nuclear decommissioning costs 4,820 6,010 Disallowed purchased power costs 7,361 - Other current liabilities 17,403 21,646 ________ ________ Total current liabilities 102,226 90,771 ________ ________ Deferred Credits Deferred income taxes 47,581 53,996 Deferred investment tax credits 6,831 7,222 Nuclear decommissioning costs 23,239 28,947 Other deferred credits 38,951 26,505 ________ ________ Total deferred credits 116,602 116,670 ________ ________ Commitments and Contingencies Total Capitalization and Liabilities $530,282 $531,940 ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF CAPITALIZATION (Dollars in thousands) December 31 1998 1997 Common Stock Equity Common stock, $6 par value, authorized 19,000,000 shares; outstanding 11,785,848 shares $ 70,715 $ 70,715 Other paid-in capital 45,318 45,295 Accumulated other comprehensive income (365) - Treasury stock (324,717 shares and 362,447 shares, respectively, at cost) (4,234) (4,728) Retained earnings 67,748 75,841 ________ ________ Total common stock equity 179,182 187,123 ________ ________ Cumulative Preferred and Preference Stock Preferred stock, $100 par value, authorized 500,000 shares Outstanding: Non-redeemable 4.15 % Series; 37,856 shares 3,786 3,786 4.65 % Series; 10,000 shares 1,000 1,000 4.75 % Series; 17,682 shares 1,768 1,768 5.375% Series; 15,000 shares 1,500 1,500 Redeemable 8.30 % Series; 190,000 shares 18,000 19,000 Preferred stock, $25 par value, authorized 1,000,000 shares Outstanding - none - - Preference stock, $1 par value, authorized 1,000,000 shares Outstanding - none - - ________ ________ Total cumulative preferred and preference stock 26,054 27,054 ________ ________ Long-Term Debt First Mortgage Bonds 9.20 % Series EE, due 1998 - 7,500 9.20 % Series FF, due 2000 7,500 7,500 9.26 % Series GG, due 2002 3,000 3,000 9.97 % Series HH, due 2003 18,000 21,000 8.91 % Series JJ, due 2031 15,000 15,000 5.30 % Series KK, due 1998 - 10,000 5.54 % Series LL, due 2000 5,000 5,000 6.01 % Series MM, due 2003 7,500 7,500 6.27 % Series NN, due 2008 3,000 3,000 6.90 % Series OO, due 2023 17,500 17,500 Vermont Industrial Development Authority Bonds Variable, due 2013 (3.50% at December 31, 1998) 5,800 5,800 New Hampshire Industrial Development Authority Bonds 6.40%, due 2009 5,500 5,500 Connecticut Development Authority Bonds Variable, due 2015 (3.15% at December 31, 1998) 5,000 5,000 Other, various 4,050 4,070 ________ ________ 96,850 117,370 Less current portion 6,773 24,271 ________ ________ Total long-term debt 90,077 93,099 ________ ________ Capital Lease Obligations 16,141 17,223 ________ ________ Total Capitalization $311,454 $324,499 ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCK EQUITY (Dollars in thousands) Accumulated Other Other Common Stock Paid-in Comprehensive Treasury Retained Shares Amount Capital Income Stock Earnings Total Balance, December 31, 1995 11,590,748 70,715 45,251 (2,628) 66,422 179,760 Treasury stock at cost (71,000) (1,028) (1,028) Net income 19,442 19,442 Cash dividends on capital stock: Common stock - $.40 per share (4,630) (4,630) Common stock - $.44 per share (5,069) (5,069) Cumulative preferred stock: Non-redeemable (368) (368) Redeemable (1,660) (1,660) Amortization of preferred stock issuance expenses 22 22 __________ _______ _______ _______ _______ _______ ________ Balance, December 31, 1996 11,519,748 70,715 45,273 - (3,656) 74,137 186,469 Treasury stock at cost (96,347) (1,072) (1,072) Net income 16,340 16,340 Cash dividends on capital stock: Common stock - $.88 per share (12,608) (12,608) Cumulative preferred stock: Non-redeemable (368) (368) Redeemable (1,660) (1,660) Amortization of preferred stock issuance expenses 22 22 __________ _______ _______ _______ _______ _______ ________ Balance, December 31, 1997 11,423,401 $70,715 $45,295 - $(4,728) $ 75,841 $187,123 Treasury stock at cost 37,730 494 494 Net income 3,983 3,983 Other comprehensive income net of taxes (365) (365) Cash dividends on capital stock: Common stock - $.88 per share (10,131) (10,131) Cumulative preferred stock: Non-redeemable (368) (368) Redeemable (1,577) (1,577) Amortization of preferred stock issuance expenses 23 23 __________ _______ _______ _______ _______ _______ ________ Balance, December 31, 1998 11,461,131 $70,715 $45,318 $ (365) $(4,234) $ 67,748 $179,182 ========== ======= ======= ======= ======= ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 Summary of significant accounting policies Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Regulation The Company is subject to regulation by the Vermont Public Service Board (PSB), The New Hampshire Public Utilities Commission (NHPUC) and the Federal Energy Regulatory Commission (FERC), with respect to rates charged for service, accounting and other matters pertaining to regulated operations. As such, the Company currently prepares its financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation," for both Central Vermont Public Service Corporation's (Company) regulated Vermont service territory and FERC regulated wholesale business. In order for a company to report under SFAS No. 71, the Company's rates must be designed to recover its costs of providing service, and the Company must be able to collect those rates from customers. If rate recovery of these costs becomes unlikely or uncertain, whether due to competition or regulatory action, these accounting standards may no longer apply to the Company's regulated operations. In the event the Company determines that it no longer meets the criteria for applying SFAS No. 71, the accounting impact would be an extraordinary non-cash charge to operations of an amount that could be material. Criteria that give rise to the discontinuance of SFAS No. 71 include (1) increasing competition that restricts the Company's ability to establish prices to recover specific costs, and (2) a significant change in the manner in which rates are set by regulators from cost-based regulation to another form of regulation. Management periodically reviews these criteria to ensure the continuing application of SFAS No. 71 is appropriate. Based on a current evaluation of the various factors and conditions that are expected to impact future cost recovery, management believes that its regulatory assets are probable of future recovery in the state of Vermont for the Company's retail business. However, such recovery of regulatory assets is not probable in the state of New Hampshire for Connecticut Valley. As a result of legal and regulatory actions described in Note 13 below, management determined that the application of regulatory accounting principles applied to Connecticut Valley should be discontinued. As such, Connecticut Valley has written off regulatory assets of approximately $1.3 million on a pre-tax basis. In addition, Connecticut Valley recorded estimated total losses of $4.3 million pre-tax for disallowed power costs of $1.6 million, and 1998 refund obligations of $2.7 million. See Note 13 below. Unregulated Business The Company's two wholly owned non-regulated subsidiaries, Catamount Energy Corporation (Catamount) and SmartEnergy Services, Inc. (SmartEnergy), results of operations are included in other income, net in the Other Income and Deductions section of the Consolidated Statement of Income. Catamount's policy is to expense all screening, feasibility and development expenditures. Costs incurred subsequent to obtaining financial viability are recognized as assets subject to depreciation or amortization in accordance with industry practice. Project viability is obtained when it becomes probable that costs incurred will generate future economic benefits sufficient to recover these costs. Revenues Estimated unbilled revenues are recorded at the end of accounting periods. Unbilled revenues of approximately $18.7 million, $18.9 million, and $18.8 million for 1998, 1997 and 1996, respectively, are included in revenues on the Consolidated Statement of Income. See Note 10 below. Maintenance Maintenance and repairs, including replacements not qualifying as retirement units of property, are charged to maintenance expense. Replacements of retirement units are charged to utility plant. The original cost of units retired plus the cost of removal, less salvage, is charged to the accumulated provision for depreciation. Depreciation The Company uses the straight-line remaining life method of depreciation. Total depreciation expense was 3.55% of the cost of depreciable utility plant for each of the years 1996 through 1998. Income Taxes The Company records income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires an asset and liability approach to determine income tax liabilities. The standard recognizes tax assets and liabilities for the cumulative effect of all temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities, see Note 12. Investment tax credits associated with utility plant are deferred and amortized ratably to income over the lives of the related properties. Investment tax credits associated with non-utility plant are recognized as income in the year realized. Allowance for Funds During Construction Allowance for funds used during construction (AFDC) is the cost, during the period of construction, of debt and equity funds used to finance construction projects. The Company capitalizes AFDC as a part of the cost of major utility plant projects to the extent that costs applicable to such construction work in progress have not been included in rate base in connection with rate-making proceedings. AFDC equity represents a current non-cash credit to earnings which is recovered over the life of the property. The AFDC rates used by the Company were 9.24%, 9.38% and 8.62% for the years 1996 through 1998, respectively. Regulatory Assets Certain costs are deferred and amortized in accordance with authorized or expected rate-making treatment. The major components of regulatory assets reflected in the Consolidated Balance Sheet as of December 31, are as follows (dollars in thousands): 1998 1997 Conservation and load management $15,611 $16,236 Restructuring costs 5,087 7,677 Nuclear refueling outage costs 2,948 1,291 Income taxes 9,613 10,405 Year 2000 costs and technologies initiatives 2,204 31 Dismantling costs: Maine Yankee nuclear power plant 15,228 17,368 Connecticut Yankee nuclear power plant 9,971 12,778 Yankee Atomic nuclear power plant 2,860 4,810 Unrecovered plant and regulatory study costs 1,875 2,042 Other regulatory assets 1,322 1,492 _______ _______ $66,719 $74,130 ======= ======= During regular nuclear refueling outages, the incremental costs attributable to replacement energy purchased from NEPOOL and maintenance costs are deferred and amortized ratably to expense until the next regularly scheduled refueling shutdown. The Company earns a return on the unamortized C&LM and replacement energy and maintenance costs. The net regulatory asset related to the adoption of SFAS No. 109 is recovered through tax expense in the Company's cost of service generally over the remaining lives of the related property. Recovery for the unamortized dismantling costs for Yankee Atomic, Connecticut Yankee and Maine Yankee is provided without a return on investment through mid-2000, 2007 and 2008, respectively. See Note 2 below for discussion of the costs associated with the discontinued operations of the Yankee Atomic, Connecticut Yankee and Maine Yankee nuclear power plants. In addition, the Company is not earning a return on approximately $6.4 million of restructuring and other unamortized regulatory assets which are being recovered over periods ranging from two to 33 years. Purchased Power The Company records the annual cost of power obtained under long-term contracts as operating expenses. Since these contracts, as more fully described in Note 14, do not convey to the Company the right to use property, plant, or equipment, they are considered executory in nature. This accounting treatment is in contrast to the Company's commitment with respect to the Hydro Quebec Phase I and II transmission facilities which are considered capital leases. As such, the Company has recorded a liability for its commitment under the Phase I and II arrangements and recognized an asset for the right to use these facilities. Use of Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities and revenues and expenses. Actual results could differ from those estimates. Statement of Cash Flows The Company considers all highly liquid investments with a maturity of three months or less when acquired to be cash equivalents. Reclassifications Certain reclassifications have been made to prior year Consolidated Financial Statements to conform with the 1998 presentation. Note 2 Investments in affiliates The Company uses the equity method to account for its investments in the following companies (dollars in thousands): December 31 Ownership 1998 1997 Nuclear generating companies: Vermont Yankee Nuclear Power Corporation 31.3% $16,969 $16,866 Connecticut Yankee Atomic Power Company 2.0% 2,094 2,208 Maine Yankee Atomic Power Company 2.0% 1,578 1,560 Yankee Atomic Electric Company 3.5% 690 835 _______ _______ 21,331 21,469 Vermont Electric Power Company, Inc.: Common stock 56.8% 3,513 3,518 Preferred stock 1,298 1,508 _______ _______ $26,142 $26,495 ======= ======= Each sponsor of the nuclear generating companies is obligated to pay an amount equal to its entitlement percentage of fuel, operating expenses (including decommissioning expenses) and cost of capital and is entitled to a similar share of the power output of the plants. The Company's entitlement percentages are identical to the ownership percentages except that Vermont Yankee's entitlement percentage is 35%. The Company is obligated to contribute its entitlement percentage of the capital requirements of Vermont Yankee and Maine Yankee and has a similar, but limited, obligation to Connecticut Yankee. The Company is responsible for paying its entitlement percentage of decommissioning costs for Vermont Yankee, Connecticut Yankee, Maine Yankee and Yankee Atomic as follows (dollars in millions): CVPS's Total Share of Date of Estimated CVPS's Funded Study Obligation Obligation Obligation Nuclear generating companies: Vermont Yankee 1993 $312.7 $109.4 $66.7 Maine Yankee 1998 $343.9 $6.9 $ 4.3 Connecticut Yankee 1996 $426.7 $8.5 $ 5.0 Yankee Atomic 1994 $370.0 $13.0 $ 4.8 Vermont Yankee Vermont Yankee is in the process of preparing an updated site decommissioning cost study. Preliminary results indicate that the new decommissioning estimate could exceed $500 million in 1998 dollars. Vermont Yankee expects to file results of the new decommissioning study with the FERC during the first quarter of 1999, and expects that any resulting change in rates will be effective January 1, 2000. Maine Yankee On August 6, 1997, the Maine Yankee's nuclear power plant was prematurely retired from commercial operation. The Company relied on Maine Yankee for less than 5% of its required system capacity. Future payments for the closing, decommissioning and recovery of the remaining investment in Maine Yankee are estimated to be approximately $715.0 million in 1998 dollars including a decommissioning obligation of $344.0 million. On January 19, 1999, Maine Yankee and the active intervenors filed an Offer of Settlement with the FERC which, if approved by the FERC, would result in the settlement of all issues raised in the FERC proceeding, including recovery of anticipated future payments for closing, decommissioning and recovery of the remaining investment in Maine Yankee. Approval of the settlement would also resolve the issues raised by the secondary purchasers, who purchased Maine Yankee power through agreements with the original owners, by limiting the amounts they will pay for decommissioning the Maine Yankee plant and by settling other points of contention affecting individual secondary purchasers. As a result, it is possible that the Company would not be able to recover approximately $.5 million of these costs. Connecticut Yankee On December 4, 1996, the Connecticut Yankee Nuclear power plant was prematurely retired from commercial operation. The Company relied on Connecticut Yankee for less than 3.0% of its required system capacity. On August 31, 1998, a FERC Administrative Law Judge recommended that the owners of Connecticut Yankee, including the Company, may collect from customers $350.0 million for decommissioning the Connecticut Yankee Nuclear Power Plant rather than the $426.7 million requested. The Administrative Law Judge ruling is subject to approval by the FERC Commissioners. If approved, it is possible that the Company would not be able to recover approximately $1.5 million of decommissioning costs through the regulatory process. Yankee Atomic In 1992, the Yankee Atomic nuclear power plant was retired from commercial operation. The Company relied on Yankee Atomic for less than 1.5% of its system capacity. Presently, costs billed to the Company by Maine Yankee, Connecticut Yankee and Yankee Atomic, including a provision for ultimate decommissioning of the units, are being collected from the Company's customers through existing retail and wholesale rate tariffs. The Company's share of remaining costs with respect to Maine Yankee, Connecticut Yankee and Yankee Atomic's decisions to discontinue operation, including the costs in the table above, is estimated to be $15.2 million, $10.0 million and $2.9 million, respectively, at December 31, 1998. These amounts are subject to ongoing review and revisions and are reflected in the accompanying balance sheet both as regulatory assets and nuclear decommissioning costs (current and non-current). Although the estimated costs of decommissioning are subject to change due to changing technologies and regulations, the Company expects that the nuclear generating companies' liability for decommissioning, including any future changes in the liability, will be recovered in their rates over their operating or license lives. The decision to prematurely retire these nuclear power plants was based on economic analyses of the costs of operating them compared to the costs of closing them and incurring replacement power costs over the remaining period of the plants' operating licenses. The Company believes that based on the current regulatory process, its proportionate share of Maine Yankee, Connecticut Yankee and Yankee Atomic decommissioning costs will be recovered through the regulatory process and, therefore, the ultimate resolution of the premature retirement of the three plants has not and will not have a material adverse effect on the Company's earnings or financial condition. Nuclear Insurance The Price-Anderson Act currently limits public liability from a single incident at a nuclear power plant to $9.8 billion. Beyond that a licensee maintains an indemnity agreement with the Nuclear Regulatory Commission (NRC), but subject to Congressional approval. The first $200 million of liability coverage is the maximum provided by private insurance. The Secondary Financial Protection Program is a retrospective insurance plan providing additional coverage up to $9.6 billion per incident by assessing $88.1 million against each of the 109 reactor units that are currently subject to the Program in the United States, limited to a maximum assessment of $10 million per incident per nuclear unit in any one year. The maximum assessment is adjusted at least every five years to reflect inflationary changes. The Company's interests in the nuclear power units are such that it could become liable for an aggregate of approximately $3.7 million of such maximum assessment per incident per year. Vermont Yankee Summarized financial information for Vermont Yankee Nuclear Power Corporation is as follows (dollars in thousands): Earnings 1998 1997 1996 Operating revenues $195,249 $173,106 $181,715 Operating income $15,282 $13,961 $14,705 Net income $7,125 $6,834 $6,985 Company's equity in net income $2,218 $2,144 $2,193 December 31 Investment 1998 1997 Current assets $ 36,947 $ 43,106 Non-current assets 598,927 566,918 ________ ________ Total assets 635,874 610,024 Less: Current liabilities 32,250 34,138 Non-current liabilities 548,981 521,597 ________ ________ Net assets $ 54,643 $ 54,289 ________ ________ Company's equity in net assets $ 16,969 $ 16,866 Included in Vermont Yankee's revenues shown above are sales to the Company of $53.1 million, $58.6 million and $59.1 million for 1996 through 1998, respectively. These amounts are reflected as purchased power net of deferrals and amortization in the accompanying Consolidated Statement of Income. Velco Vermont Electric Power Company, Inc. (Velco) and its wholly owned subsidiary Vermont Electric Transmission Company, Inc. own and operate transmission systems in Vermont over which bulk power is delivered to all electric utilities in the state. Velco has entered into transmission agreements with the state of Vermont and the electric utilities and under these agreements bills all costs, including interest on debt and a fixed return on equity, to the state and others using the system. These contracts enable Velco to finance its facilities primarily through the sale of first mortgage bonds. Included in Velco's revenues shown below are transmission services to the Company (reflected as production and transmission expenses in the accompanying Consolidated Statement of Income) amounting to $7.9 million, $8.7 million and $8.8 million for 1996 through 1998, respectively. Velco operates pursuant to the terms of the 1985 Four-Party Agreement (as amended) with the Company and two other major distribution companies in Vermont. Although the Company owns 56.8% of Velco's outstanding common stock, the Four-Party Agreement effectively restricts the Company's control of Velco. Therefore, Velco's financial statements have not been consolidated. The Four- Party Agreement continues in full force and effect until May 1999 and will be extended for an additional two-year term in May 1999, and every two years thereafter, unless at least ninety (90) days prior to any two-year anniversary any party shall notify the other parties in writing that it desires to terminate the agreement as of such anniversary. No such notification has been filed by the parties. The Company also owns 46.6% of Velco's outstanding preferred stock, $100 par value. Summarized financial information for Velco is as follows (dollars in thousands): Earnings 1998 1997 1996 Transmission revenues $17,268 $18,481 $16,298 Operating income $ 2,691 $ 2,773 $2,611 Net income $ 1,153 $ 1,213 $1,216 Company's equity in net income $581 $618 $657 December 31 Investment 1998 1997 Current assets $21,678 $22,274 Non-current assets 45,980 48,281 _______ _______ Total assets 67,658 70,555 Less: Current liabilities 21,754 30,441 Non-current liabilities 36,936 30,710 _______ _______ Net assets $ 8,968 $ 9,404 ======= ======= Company's equity in net assets $ 4,811 $ 5,026 Note 3 Non-utility investments The Company's wholly owned subsidiary, Catamount, invests through its wholly owned subsidiaries, in non-regulated, energy-related projects. Catamount's earnings were $3.3 million, $4.1 million and $.5 million for 1998, 1997 and 1996, respectively. Earnings for 1997 reflect a net of tax gain of approximately $1.8 million from the sale of NW Energy Williams Lake L.P. Certain financial information for Catamount's investments is set forth in the table that follows (dollars in thousands):
Investment Generating In Service December 31 Projects Location Capacity Fuel Date Ownership 1998 1997 Rumford Cogeneration Co. L.P. Maine 85MW Coal/Wood 1990 15.1% $13,273 $11,638 Ryegate Associates Vermont 20MW Wood 1992 33.1% 6,305 6,551 Appomattox Cogeneration L.P. Virginia 41MW Coal/Biomass 1982 25.3% 4,079 4,083 Black liquor Rupert Cogeneration Partners, Ltd. Idaho 10MW Gas 1996 50.0% 1,775 1,586 Glenns Ferry Cogeneration Partners, Ltd. Idaho 10MW Gas 1996 50.0% 1,387 1,255 Fibrothetford Limited Thetford, England 38.5MW Biomass 1998 44.0% 8,556 5,238 Other 421 421 _______ _______ $35,796 $30,772 ======= ======= Catamount has entered into an option agreement granting it the right to invest, subject to certain conditions, $1.2 million to purchase a 50% interest in Heartlands Power Limited (Heartlands). Heartlands was formed by Rolls- Royce Power Ventures to develop, construct and own a 98MW natural gas-fired power station in Fort Dunlop, England. Catamount also has the right to fund a loan to the project of $3.3 million. These option agreements expire on June 30, 1999. Catamount currently has a $1.2 million letter of credit outstanding to support certain of its obligations in connection with a debt service requirement in the Appomattox Cogeneration project and aggregated letters of credit of $11.0 million in support of construction and equity commitments for its Gauley River Power project. SmartEnergy, also a wholly owned subsidiary of the Company, whose purpose is to engage in the sale of or rental of electric water heaters, energy efficient products and other related goods and services. As of December 31, 1998, SmartEnergy has investments of $.1 million and incurred losses of $1.5 million and $.7 million for 1998 and 1997, respectively, and earnings of $.3 million for 1996. Note 4 Common Stock Through a common stock repurchase program which was suspended in 1997, the Company purchased from time to time 324,717 shares of its common stock in open market transactions at an average price of $13.19 per share. These transactions are recorded as treasury stock, at cost, in the Company's Consolidated Balance Sheet. Note 5 Redeemable preferred stock The 8.30% Dividend Series Preferred Stock is redeemable at par through a mandatory sinking fund in the amount of $1.0 million per annum, and at its option, the Company may redeem at par an additional non-cumulative $1.0 million per annum. Since the Company's redeemable preferred stock was issued in a private placement, it is not practicable to estimate the fair value. Note 6 Stock Option Plans The Company has issued stock to key employees and non-employee directors under various option plans approved in 1988, 1993, 1997 and 1998 which authorize the granting of options with respect to 1,025,875 shares of the Company's common stock. Options are granted at prices not less than 100% of the fair market value at the date of the option grant. Shares available for future grants under the 1997 and 1998 stock option plans were 204,750 at December 31, 1998. No additional grants may be given under the 1988 and 1993 plans. Option activity during the past three years was as follows: Average Option Stock Price Options Options outstanding at December 31, 1995 $19.0972 248,500 Options exercised 13.6250 (1,000) Options granted 14.0375 59,975 Options expired 18.1660 (7,500) _______ Options outstanding at December 31, 1996 $18.1271 299,975 Options exercised - - Options granted 10.9900 126,750 Options expired 20.5416 (10,500) _______ Options outstanding at December 31, 1997 $15.8928 416,225 Options exercised 11.6505 (34,475) Options granted 14.6286 154,500 Options expired 24.3750 (20,250) _______ Options outstanding at December 31, 1998 $15.4649 516,000 ======= The price range of options outstanding at December 31, 1998 is $10.9375 to $24.3125. The weighted average remaining contractual life at December 31, 1998 is 6.92 years and the weighted average exercise price is $15.3437. Exercisable options at December 31,1998 total 393,000 and the weighted average exercise price is $14.4365. The Company accounts for these plans under Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized. The Company chose the Binomial model to project an estimate of appreciation of the underlying shares of the stock during the respective option term. The average assumptions used were as follows: 1998 1997 1996 Volatility .1861 .1808 .1756 Risk free rate of return 6.25% 6.50% 6.25% Dividend yield 6.57% 7.13% 6.93% Expected life in years 5-10 5-10 5-10 Under SFAS No. 123, "Accounting for Stock-Based Compensation," all awards granted must be recognized in compensation cost. Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net income and earnings per share of common stock would have been reduced to the following pro forma amounts as follows(dollars in thousands, except per share amounts): 1998 1997 1996 Net Income As reported $3,983 $16,340 $19,442 Pro forma $3,930 $16,309 $19,423 Earnings per share of common stock As reported $.18 $1.25 $1.51 Pro forma $.17 $1.25 $1.51 Note 7 Long-term debt and sinking fund requirements The Company and its subsidiaries' long-term debt contains financial and non-financial covenants. At December 31, 1998, with exception of a $3.75 million loan at Connecticut Valley, the Company and its subsidiaries were in compliance with all debt covenants related to its various debt agreements. Due to the charge-offs discussed in Note 1 above and Note 13 below, Connecticut Valley is in violation of certain covenants in its loan with an outstanding balance of $3.75 million. This loan will be in default 30 days after notice from the bank of the violation of the applicable covenants unless the default is otherwise cured or waived. The notice has not yet been tendered by the bank. There would be no cross defaults of any of the company's or its subsidiaries' loan agreements as a result of the Connecticut Valley loan default. Based on issues outstanding at December 31, 1998, the aggregate amount of long-term debt maturities and sinking fund requirements are $6.75 million, $16.5 million, $4.0 million, $7.0 million and $10.5 million for the years 1999 through 2003, respectively. Substantially all property and plant is subject to liens under the First Mortgage Bonds. Financial obligations of Connecticut Valley are non-recourse to the Company. Note 8 Short-term debt Utility The Company had $37.0 million and $12.6 million of outstanding short-term debt at December 31, 1998 and 1997, respectively, at average interest rates of 5.94% for 1998 and 6.26% for 1997. The Company has a $50.0 million revolving credit facility with a group of banks maturing on June 1, 1999, of which $25.0 million was outstanding at December 31, 1998. The Company expects that borrowings will be $25.0 million at June 1, 1999. The Company must rollover an aggregate of $16.3 million of letters of credit between December 1999 and May 2000. In addition, the Company has a $12.0 million accounts receivable facility which matures in November 1999. The $50.0 million revolving credit facility and the $16.3 million of letters of credit are subject to a second mortgage interest in the same collateral supporting the Company's first mortgage bonds. The $12.0 million accounts receivable facility is supported by a lien against the Company's Vermont utility accounts receivable. The Company's ability to extend or replace the maturing $50.0 million revolving credit facility, roll over $16.3 million of maturing letters of credit and extend the accounts receivable facility will be dependent in large part on a positive outcome of the pending Hydro-Quebec Contract issues at the Vermont Supreme Court (VSC) or progress made in power contract renegotiations. Negotiations are ongoing with the banks to extend the maturities of these financial arrangements. Connecticut Valley, the Company's wholly owned New Hampshire subsidiary, maintained an $.8 million committed line of credit for its construction program and for other corporate purposes which expired on May 31, 1998. If the Company is unable to extend the maturities of or replace the bulk of the debt and letters of credit facilities referenced above, it would jeopardize the Company's ability to continue as a going concern. There can be no assurance that the Company will be successful in extending or replacing these credit facilities. Financial obligations of Connecticut Valley are non-recourse to the Company. Non-Utility On November 12, 1998, Catamount, a wholly owned subsidiary of the Company, replaced its $8.0 million credit facility with a $25.0 million revolving credit facility expiring November 11, 2002 which provides for up to $25.0 million in revolving credit loans and letters of credit. Currently, a $1.2 million letter of credit is outstanding to support certain of Catamount's obligations in connection with a debt reserve requirement in the Appomattox Cogeneration project and aggregated letters of credit of $11.0 million in support of construction and equity commitments for its Gauley River Power project. SmartEnergy, also a wholly owned subsidiary of the Company, maintained a $.5 million revolving line of credit with a bank to provide working capital and financing assistance for investment purposes. SmartEnergy had $25,000 of outstanding short-term debt at December 31, 1997. This line of credit was canceled on February 9, 1998. Financial obligations of the Company's non-utility wholly owned subsidiaries are non-recourse to the Company. Note 9 Financial instruments The estimated fair values of the Company's financial instruments at December 31, 1998 and 1997 are as follows (dollars in thousands): 1998 1997 Carrying Fair Carrying Fair Amount Value Amount Value Note receivable, non-utility $ - $ - $ 3,686 $ 3,888 Long-term debt $96,850 $101,776 $117,370 $124,251 The carrying amount for cash and cash equivalents and short-term debt approximates fair value because of the short maturity of those instruments. The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturation. The Company believes that any excess or shortfall in the fair value relative to the carrying value of the Company's financial instruments, if they were settled at amounts approximating those above, would not result in a material impact on the Company's financial position or results of operations. Note 10 Receivables purchase agreement Pursuant to SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," the Company classifies amounts transferred under its receivable purchase agreement as secured borrowings. The facility matures on November 29, 1999, accordingly, those amounts related to the accounts receivable facility are shown at December 31, 1998 as short-term debt. If not renegotiated or extended, repayment of the facility will be made from the ongoing collections of the underlying accounts receivable and unbilled revenues immediately following the maturity date. The Company expects to renegotiate a new receivable purchase agreement in 1999. These accounts receivable and unbilled revenues were transferred with limited recourse. A pool of assets of approximately 3% of the accounts receivable and unbilled revenues sold are set aside for this potential recourse liability. Note 11 Pension and postretirement benefits The Company has a non-contributory trusteed pension plan covering all employees (union and non-union). Under the terms of the pension plan, employees are generally eligible for monthly benefit payments upon reaching the age of 65 with a minimum of five years of service. The Company's funding policy is to contribute, at least, the statutory minimum to a trust. The Company is not required by its union contract to contribute to multi-employer plans. The projected unit credit actuarial cost method was used to compute net pension costs and the accumulated and projected benefit obligations. The following table sets forth the funded status of the pension plan and amounts recognized in the Company's Balance Sheet and Statement of Income (dollars in thousands): December 31 1998 1997 Projected benefit obligation $63,095 $67,167 Fair value of plan assets (primarily equity and fixed income securities) 65,602 72,101 _______ _______ Projected benefit obligation more (less) than fair value of plan assets (2,507) (4,934) Unrecognized net transition obligation 647 1,019 Unrecognized prior service costs (2,681) (2,466) Unrecognized net gain 15,561 14,089 _______ _______ Accrued pension liability $11,020 $ 7,708 ======= ======= 1998 1997 1996 Net pension costs include the following components Service cost $ 1,802 $ 1,802 $ 2,024 Interest cost 4,459 4,307 4,221 Expected return on plan assets (4,720) (4,756) (4,285) Net amortization and deferral 778 140 140 _______ _______ _______ Pension costs 2,319 1,493 2,100 Less amount allocated to other accounts 228 249 411 _______ _______ _______ Net pension costs expensed $ 2,091 $ 1,244 $ 1,689 ======= ======= ======= Assumptions used in calculating pension cost were as follows: December 31 1998 1997 Weighted average discount rates 6.75% 7.00% Expected long-term return on assets 9.50% 9.50% Rate of increase in future compensation levels 4.00% 4.00% The Company sponsors a defined benefit postretirement medical plan that covers all employees who retire with ten years or more of service after age 45. The Company funds this obligation through a Voluntary Employees' Benefit Association and 401(h) Subaccount in its Pension Plan. The following table sets forth the plan's funded status and amounts recognized in the Company's Balance Sheet and Statement of Income in accordance with SFAS No. 106 (dollars in thousands): December 31 1998 1997 Accumulated postretirement benefit obligation $10,757 $ 9,453 Unrecognized transition obligation (3,582) (3,838) Unrecognized net loss (1,329) (862) _______ _______ Accrued postretirement benefit cost 5,846 4,753 Less regulatory asset for restructuring costs 1,954 2,536 _______ _______ Effective accrued postretirement benefit costs $ 3,892 $ 2,217 ======= ======= 1998 1997 1996 Net postretirement benefit cost includes the following components Service cost $ 194 $ 197 $ 208 Interest cost 815 716 656 Expected return on plan assets (160) (145) (112) Amortization of transition obligation over a twenty-year period and of regulatory asset 837 408 408 ______ ______ ______ Effective postretirement benefit cost 1,686 1,176 1,160 Less amount allocated to other accounts 209 192 217 ______ ______ ______ Net postretirement benefit cost expensed $1,477 $ 984 $ 943 ====== ====== ====== Assumptions used in the per capita costs of the accumulated postretirement benefit obligation were as follows: December 31 1998 1997 Per capita percent increase in health care costs: Pre-65 6.50% 6.50% Post-65 5.50% 5.50% Weighted average discount rates 6.75% 7.00% Rate of increase in future compensation levels 4.00% 4.00% Long-term return on assets 8.50% 8.50% Health care trend rates are assumed to decrease to 5.0% for pre-65 and 4.5% for post-65 for the year 2001 and thereafter. Increasing (decreasing) the assumed health care cost trend rates by one percentage point in each year would have resulted in an increase (decrease) of $631,000 and $(543,000), respectively, in the accumulated postretirement benefit obligation as of December 31, 1998, and an increase (decrease) of about $45,000 and $(39,000), respectively, in the aggregate of the service cost and interest cost components of net periodic postretirement benefit cost for 1998. The Company provides postemployment benefits consisting of long-term disability benefits. The accumulated postemployment benefit obligation at December 31, 1998 and 1997 of $.7 and $.9 million for 1998 and 1997, respectively, is reflected in the accompanying balance sheet as a liability and is offset by a corresponding regulatory asset of $.5 million for 1998 and $.6 million for 1997. The PSB in its October 31, 1994 Rate Order allowed the Company to recover the regulatory asset over a 7-1/2 year period beginning November 1, 1994 through April 30, 2002. The post-employment benefit costs charged to expense in 1998, 1997 and 1996, including insurance premiums, were $118,000, $247,000 and $177,000, respectively (pre-tax). In the third quarter of 1997, the Company offered and recorded obligations related to a voluntary retirement and severance programs to employees. The estimated benefit obligation for the retirement program as of December 31, 1998 is approximately $3.8 million. This amount consists of pension benefits and post-retirement medical benefits of $1.9 million and $1.9 million, respectively. The estimated benefit obligation for the severance program which included termination pay as well as other costs, is about $1.4 million as of December 31, 1998. These obligations, deferred pursuant to a PSB Accounting Order dated September 30, 1997, are reflected in the accompanying Consolidated Balance Sheet both as regulatory assets and deferred credits. The unamortized balance of approximately $5.0 million at December 31, 1998 will be amortized through December 31, 2002. Note 12 Income taxes The components of Federal and state income tax expense are as follows (dollars in thousands): Year Ended December 31 1998 1997 1996 Federal: Current $ 5,072 $12,277 $ 7,890 Deferred (4,376) (5,420) 795 Investment tax credits, net (391) (391) (391) _______ _______ _______ 305 6,466 8,294 _______ _______ _______ State: Current 1,060 3,027 1,866 Deferred (1,222) (718) 60 _______ _______ _______ (162) 2,309 1,926 _______ _______ _______ Total Federal and state income taxes $ 143 $ 8,775 $10,220 ======= ======= ======= Federal and state income taxes charged to: Operating expenses $ (283) $ 7,573 $10,216 Other income 426 1,590 4 Extraordinary item - (388) - _______ _______ _______ $ 143 $ 8,775 $10,220 ======= ======= ======= The principal items comprising the difference between the total income tax expense and the amount calculated by applying the statutory Federal income tax rate to income before tax are as follows (dollars in thousands): Year Ended December 31 1998 1997 1996 Income before income tax $4,126 $25,115 $29,662 Federal statutory rate 35% 35% 35% Federal statutory tax expense $1,444 $8,790 $10,382 Increases (reductions) in taxes resulting from: Insurance settlement - - (470) Dividend received deduction (880) (884) (909) Deferred taxes on plant 348 283 283 State income taxes net of Federal tax benefit (105) 1,501 1,252 Investment credit amortization (391) (391) (391) Other (273) (524) 73 ______ ______ _______ Total income tax expense provided $ 143 $8,775 $10,220 ====== ====== ======= The tax effects of temporary differences and tax carry forwards that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (dollars in thousands): Year Ended December 31 1998 1997 1996 Deferred tax assets Purchased power accrual $ 3,695 $ 1,925 $ - Accruals and other reserves not currently deductible 7,575 4,818 5,212 Deferred compensation and pension 4,295 3,655 3,562 Environmental costs accrual 3,905 1,805 2,089 _______ _______ _______ Total deferred tax assets 19,470 12,203 10,863 _______ _______ _______ Deferred tax liabilities Property, plant and equipment 51,680 51,819 51,030 Net regulatory asset 3,974 4,301 3,358 Conservation and load management expenditures 6,453 6,713 8,147 Nuclear refueling costs 1,219 534 2,510 Other 3,725 2,832 3,281 _______ _______ _______ Total deferred tax liabilities 67,051 66,199 68,326 _______ _______ _______ Net deferred tax liability $47,581 $53,996 $57,463 ======= ======= ======= The Company received an accounting order from the PSB dated September 30, 1997. This accounting order authorized the Company to defer and amortize over a 20-year period beginning January 1, 1998, approximately $2.0 million to reflect the revenue requirement level of additional deferred income tax expense resulting from the enacted Vermont Corporate income tax increase from 8.25% to 9.75% in 1997. A valuation allowance has not been recorded, as the Company expects all deferred income tax assets will be utilized in the future. Note 13 Retail Rates Vermont: The Company's practice of reviewing costs periodically will continue and rate increases will be requested when warranted. The Company filed for a 6.6%, or $15.4 million per annum, general rate increase on September 22, 1997 to become effective June 6, 1998 to offset increasing costs of providing service. Approximately $14.3 million or 92.9% of the rate increase request was to recover scheduled contractual increases in the cost of power the Company purchases from Hydro-Quebec. At the same time, the Company also filed a request to eliminate the winter-summer rate differential and price electricity the same year-round. The change would be revenue-neutral within classes of customers and overall. Over time, customers would see a leveling off of rates so they would pay the same per kilowatt-hour during the winter and summer months. Several parties in the Company's rate case sought to challenge the Company's decision in 1991 to "lock-in" its participation in its power purchase agreement with Hydro-Quebec as one of 14 members of the Vermont Joint Owners (VJO) claiming that the decision of the Company to commit to the power contract in 1991 was imprudent and that power now purchased pursuant to that agreement is not "used and useful." The parties have also claimed that the Company has not met a condition of the PSB's prior approval of the contract, requiring that the Company obtain all cost effective Demand Side Management. In response, the Company filed a motion asking the PSB to rule that any prudence and used and useful issues were resolved in prior proceedings and that the PSB is precluded from again trying the Company on those issues. On April 17, 1998, the PSB issued an order generally denying the Company's motion. Given the fact that the PSB had severely penalized another Vermont Joint Owner (VJO) member, Green Mountain Power Corporation, in an Order dated February 27, 1998, after finding that its decision to lock-in the Hydro-Quebec contract was imprudent and the power purchased pursuant to that lock-in was not used and useful, the Company concluded that it was necessary to have the so-called preclusion issue reviewed by the V.C. before the PSB issues a final order in the Company's 6.6% rate increase request. As such, the Company and other parties requested that the PSB consent to the filing of an interlocutory appeal of the PSB's decision and to a stay of the rate case pending review by the V.C.. The Company further agreed to toll the statutory period of time in which the PSB must act on a rate request, while the matter is in appeal. The resolution of this matter by the V.C. is likely to involve a remand to the PSB. The appeal and associated stay of the rate case significantly delayed the date that new rates would have otherwise taken effect. As a result, the Company's earnings for 1998 were adversely affected. In an effort to mitigate eroding earnings and cash flow prospects during the V.C. review process, on June 12, 1998 the Company filed with the PSB a request for a 10.7% rate increase ($24.9 million of annualized revenues) effective March 1, 1999. This rate case proceeding supplanted the 6.6% rate increase request referenced above that is now stayed pending a review on the so-called preclusion issue by the V.C.. On October 27, 1998, the Company reached an agreement with the Vermont Department of Public Service (DPS) regarding the 10.7% rate increase request. The agreement, which was approved by the PSB on December 11, 1998, provides for a temporary rate increase in the Company's Vermont retail rates of 4.7% or $10.9 million on an annualized basis beginning with service rendered January 1, 1999 and sets the Company's authorized return on common equity in its Vermont retail business at 11% before disallowances in connection with the Hydro-Quebec Contract. The rate increase is temporary insofar as it is subject to adjustment upon future resolution of the Hydro-Quebec Contract issues presently before the V.C.. The Company anticipates a resolution of the Hydro-Quebec Contract issues before the V.C. by the end of 1999. The agreement incorporates a disallowance of approximately $7.4 million for the Company's purchased power costs under the Hydro-Quebec Contract while the V.C. reviews the PSB denial of the Company's claim that the PSB is precluded from again trying the Company on certain Hydro-Quebec Contract issues discussed above. Upon approval of the agreement by the PSB, the Company, during the fourth quarter of 1998, recorded a loss of $7.4 million on a pre-tax basis for disallowed purchased power costs representing the Company's estimated under recovery of power costs under the Hydro-Quebec Contract. This $7.4 million disallowance was calculated using the same formula as contained in the rate order issued by the PSB in the Green Mountain Power Corporation (GMP) rate case on February 28, 1998 (see additional information below). If the Company receives an unfavorable ruling from the V.C., and the PSB issues a rate order adopting the methodology used to determine the temporary Hydro-Quebec disallowance for the duration of the Hydro-Quebec Contract, approximately $205.0 million of power costs to be incurred under that contract would not be recoverable in rates. This would result in an immediate charge to earnings of $205.0 million once such outcome became probable. Such an outcome would jeopardize the ability of the Company to continue as a going concern. New Hampshire: In an Order dated December 31, 1997 in Connecticut Valley's Fuel Adjustment Clause (FAC) and Purchased Power Cost Adjustment (PPCA) docket, the NHPUC found Connecticut Valley acted imprudently by not terminating the wholesale contract between Connecticut Valley and the Company, notwithstanding the stays of its February 28, 1997 Orders. The NHPUC Order further directed Connecticut Valley to freeze its current FAC and PPCA rates (other than short term rates to be paid to certain Qualifying Facilities) effective January 1, 1998, on a temporary basis, pending a hearing to determine: 1) the appropriate proxy for a market price that Connecticut Valley could have obtained if it had terminated its wholesale contract with the Company; 2) the implications of allowing Connecticut Valley to pass on to its customers only that market price; and 3) whether the NHPUC's final determination on the FAC and PPCA rates should be reconciled back to January 1, 1998 or some other date. On January 19, 1998, Connecticut Valley and the Company filed with the Federal District Court (Court) for a temporary restraining order to maintain the status quo ante by staying the NHPUC Order of December 31, 1997 and preventing the NHPUC from taking any action that (I) compromises cost-based rate making for Connecticut Valley; (ii) interferes with the Federal Energy Regulatory Commission's (FERC) exclusive jurisdiction over the Company's pending application to recover wholesale stranded costs upon termination of its wholesale power contract with Connecticut Valley; or (iii) prevents Connecticut Valley from recovering through retail rates the stranded costs and purchased power costs that it incurs pursuant to its FERC-authorized wholesale rate schedule with the Company. On February 23, 1998, the NHPUC announced in a public meeting that it reaffirmed its finding of imprudence and designated a proxy market price for power at 4 cents per kWh in lieu of the actual costs incurred pursuant to the wholesale power contract with the Company. In addition, the NHPUC indicated, subject to certain conditions which were unacceptable to the companies, that it would permit Connecticut Valley to maintain its current rates pending a decision in Connecticut Valley's appeal of the NHPUC Order to the New Hampshire Supreme Court. Based on the December 31, 1997 NHPUC Order as well as the NHPUC's February 23, 1998 announcement, which resulted in the establishment of Connecticut Valley's rates on a non cost-of-service basis, Connecticut Valley no longer qualified, as of December 31, 1997, for the application of SFAS No. 71. As a result, Connecticut Valley wrote-off all of its regulatory assets associated with its New Hampshire retail business as of December 31, 1997. This write-off amounted to approximately $1.2 million on a pre-tax basis. In addition, Connecticut Valley recorded a $5.5 million pre-tax loss as of December 31, 1997 under this contract provision representing Connecticut Valley's estimated loss on power contracts for the twelve months following December 31, 1997. On March 20, 1998, the NHPUC issued an order which affirmed, clarified and modified various generic policy statements including the reaffirmation to establish rates on the basis of a regional average announced previously in its February 28, 1997 Final Plan. The March 20, 1998 order also addressed all outstanding motions for rehearings or clarification relative to the policies or legal positions articulated in the Final Plan and removed the stay covering the Company's interim stranded cost order of April 7, 1997. In addition, the March 20, 1998 Order imposed various compliance filing requirements. On April 3, 1998, the Court held a hearing on the companies' motion for a Temporary Restraining Order (TRO) and Preliminary Injunction against the NHPUC at which time both the companies and the NHPUC presented arguments. In an oral ruling from the bench, and in a written order issued on April 9, 1998, the Court concluded that the companies had established each of the prerequisites for preliminary injunctive relief and directed and required the NHPUC to allow Connecticut Valley to recover through retail rates all costs for wholesale power requirements service that Connecticut Valley purchases from the Company pursuant to its FERC-authorized wholesale rate schedule effective January 1, 1998 until further court order. Connecticut Valley received an order from the NHPUC authorizing retail rates to recover such costs beginning in May 1998. On April 14, 1998, the NHPUC filed a notice of appeal and a motion for a stay of the Court's preliminary injunction. The NHPUC's request for a stay was denied. At the same time, the NHPUC permitted Connecticut Valley to recover in rates the full cost of its wholesale power purchases from the Company. Also, on April 3, 1998, the Court indicated its earlier TRO enjoining the NHPUC's restructuring orders applied to Connecticut Valley and prohibits the enforcement of the restructuring orders until the Court conducts a consolidated hearing and rules on the requests for permanent injunctive relief by plaintiff Public Service Company of New Hampshire (PSNH) and the other utilities that have been allowed to intervene in these proceedings, including the Company and Connecticut Valley. The plaintiffs-intervenors thereafter filed a motion asking the Court to extend its stay of action by the NHPUC to implement restructuring and to make clear that the stay encompasses the NHPUC's order of March 20, 1998. As a result of these Court orders, Connecticut Valley's 1997 charges, described above, were reversed in the first quarter of 1998. Combined, the reversal of these charges increased 1998 net income and earnings per share of common stock by approximately $4.5 million and $.39, respectively. On April 1, 1998, Citizens Bank of New Hampshire (Bank) notified Connecticut Valley that it was in default of the Loan Agreement between the Bank and Connecticut Valley dated December 27, 1994 and that the Bank would exercise all of its remedies from and after May 5, 1998 in the event that the violations were not cured. After reversing the 1997 write-offs described above, Connecticut Valley was in compliance with the financial covenants associated with its $3.75 million loan with the Bank. As a result, Connecticut Valley satisfied the Bank's requirements for curing the violation. On May 11, 1998 the NHPUC issued an order requiring Connecticut Valley to show cause why it should not be held in contempt for its failure to meet the compliance filing requirements of its March 20, 1998 Order. A hearing on this matter was scheduled for June 11, 1998, which was subsequently canceled because of the Federal Court's June 5, 1998 Order, discussed below. On June 5, 1998, the Court issued an Order which denied the NHPUC's motion for a stay of the Court's preliminary injunction. The Order clearly stated that no restructuring effort in New Hampshire can move forward without the Court's approval unless all New Hampshire utilities agree to the plan. The Order suspended all involuntary restructuring efforts for all New Hampshire utilities until a hearing on the merits was conducted. The NHPUC appealed this Order to the Circuit Court of Appeals. These appeals have been fully briefed, and the Court of Appeals conducted oral argument on October 6, 1998 discussed below. On December 3, 1998, the United States Court of Appeals (Court of Appeals) announced its decisions on the appeals taken by the NHPUC from the preliminary injunctions issued by the Court. Those preliminary injunctions had stayed implementation of the NHPUC's plan to restructure the New Hampshire electric industry and required the NHPUC to allow Connecticut Valley to recover through its retail rates the full cost of wholesale power obtained from the Company. The Court of Appeals affirmed the preliminary injunction, issued by the Court, staying restructuring until the plaintiff utilities' claims (including those of the Company and Connecticut Valley) are fully tried. The Court of Appeals found that PSNH had sufficiently established that without the preliminary injunction against restructuring it would suffer substantial irreparable injury and that it had sufficient claims against restructuring to warrant a full trial. The Court of Appeals also affirmed the extension of the preliminary injunction to protect the other plaintiff utilities, including Connecticut Valley and the Company, although it questioned whether the other utilities had as strong of arguments against restructuring as PSNH because they did not have formal agreements with the State similar to PSNH's Rate Agreement. The Court of Appeals stated that if the Court awards the utilities permanent injunctive relief against restructuring after the case is tried, then it must explain why the other utilities are also entitled to such relief. The NHPUC filed a petition for rehearing on December 17, 1998. The Court of Appeals denied the petition on January 13, 1999. The Court of Appeals reversed the Court's preliminary injunction requiring the NHPUC to allow Connecticut Valley to recover in retail rates the full cost of the power it buys from the Company. Although the Court of Appeals found that Connecticut Valley and the Company had made a strong showing of irreparable injury to justify the preliminary injunction, it concluded that Connecticut Valley's and the Company's claims did not have a sufficient probability of success to warrant such preliminary relief. The Court of Appeals explained that the filed-rate doctrine preserving the exclusive jurisdiction of the FERC over wholesale power rates did not prevent the NHPUC from deciding whether Connecticut Valley's power purchases from the Company were prudent given alternative available sources of wholesale power. The Court of Appeals then stated that Connecticut Valley's sales could be reduced to the level prevailing on December 31, 1997. However, the Court of Appeals also stated that if a reduction of existing rates were ordered "it will be time enough to consider whether they are precluded from the Court's injunction against the Final Plan or on other grounds." On December 17, 1998, Connecticut Valley and the Company filed a petition for rehearing on the grounds that the Court of Appeals had not given sufficient weight to the Court's factual findings and that the Court of Appeals had misapprehended both factual and legal issues. Connecticut Valley and the Company also asked that the entire Court of Appeals, rather than only the three-judge appellate panel that had issued the December 3 decision, consider their petition for rehearing. On January 13, 1999, the Court of Appeals denied the petition for rehearing. Connecticut Valley and the Company then requested the Court of Appeals to stay the issuance of its mandate until the companies file a petition of certiorari to the United States Supreme Court and the Supreme Court acts on the petition. On January 22, 1999, the Court of Appeals denied the request. However, the Court of Appeals granted a 21-day stay to enable the Company to seek a stay pending certiorari from the Circuit Justice of the Supreme Court. On February 11, 1999, the Company and Connecticut Valley filed a petition for a writ of certiorari with the United States Supreme Court and a motion to stay the effect of the Court of Appeals' decision while the case was pending in the Supreme Court. The motion for a stay was addressed to Justice Souter who is responsible for such motions pertaining to the Court of Appeals for the First Circuit. On February 18, 1999, Justice Souter denied the stay pending the petition for certiorari. On November 24, 1998, Connecticut Valley filed with the NHPUC its annual FAC/PPCA rates to be effective January 1, 1999. On January 4, 1999, the NHPUC issued an Order allowing Connecticut Valley to increase the proposed FAC rate of $.008 per kWh and the proposed PPCA rate of $.01000 per kWh, on a temporary basis, effective on all bills rendered on or after January 1, 1999. In addition, the NHPUC also ordered Connecticut Valley to pay refunds plus interest to its retail customers for any overcharges collected as a result of the April 9, 1998 Court Order, which are included in the estimated total losses of $4.3 million discussed below. As a result of legal and regulatory actions discussed above, Connecticut Valley no longer qualifies for the application of SFAS No. 71, and wrote-off all its regulatory assets associated with its New Hampshire retail business estimated at approximately $1.3 million on a pre-tax basis. In addition, Connecticut Valley recorded estimated total losses of $4.3 million pre-tax for disallowed power costs of $1.6 million and 1998 refund obligations of $2.7 million. Company management, however, continues to believe that the NHPUC's actions are illegal and unconstitutional and will present its arguments in the appropriate forum. The pre-tax losses described above resulted in Connecticut Valley violating applicable covenants in its outstanding loan, which if not waived or renegotiated, allows Connecticut Valley's lender the right to accelerate the repayment of a $3.75 million loan with Connecticut Valley. At a status conference on February 25, 1999, the Court indicated that it would not establish a trial date on the Company and Connecticut Valley's request for a permanent injunction until all pending motions, including a motion to dissolve the stay of restructuring activities filed by the NHPUC, and motions for summary judgement filed by the NHPUC, the Company and other parties were heard and decided. Such an injunction, if granted, could require the NHPUC to allow Connecticut Valley to recover the full cost of the wholesale power obtained from the Company through its retail rates. However, the Company cannot predict the outcome of this or any of the other related litigation. On June 25, 1997, the Company filed with the FERC a notice of termination of its power supply contract with Connecticut Valley, conditional upon the Company's request to impose a surcharge on the Company's transmission tariff to recover the stranded costs that would result from the termination of its contract with Connecticut Valley. The amount requested was $44.9 million plus interest at the prime rate to be recovered over a ten-year period. In its Order dated December 18, 1997 in Docket No. ER97-3435-000, the FERC rejected the Company's proposed stranded cost surcharge mechanism but indicated that it would consider an exit fee mechanism for collecting stranded costs. The FERC also rejected the Company's arguments concerning the applicability of stated FERC policies regarding retail stranded costs, multi-state regulatory gaps and the implications of state restructuring initiatives. The Company filed a motion seeking rehearing of the FERC's December 18, 1997 Order which was denied. Thereafter, the Company appealed the FERC decision to the Court of Appeals for the District of Columbia circuit. In addition, and in accordance with the December 18, 1997 FERC Order, on January 12, 1998 the Company filed a request with the FERC for an exit fee mechanism to collect $44.9 million in a lump sum, or in installments with interest at the prime rate over a ten-year period, to cover the stranded costs resulting from the cancellation of Connecticut Valley's power contract with the Company. On March 11, 1998, the FERC issued an order accepting for filing the Company's request for an exit fee effective March 14, 1998, and set hearings to determine: whether Connecticut Valley will become an unbundled transmission customer of the Company, the Company's expectation as to the period of time it would serve Connecticut Valley, and the allowable amount of the exit fee. The FERC also rejected the Company's June 25, 1997 notice of termination indicating that the notice can be resubmitted when the power contract is proposed to be terminated. On April 28, 1998, the Company filed its case-in-chief before the FERC updating the amount of the exit fee to $54.9 million which was subsequently amended to $50.0 million in a lump sum, describing all of the ways Connecticut Valley will become an unbundled transmission customer of the Company subsequent to termination, and establishing the expected period of service based upon the date of termination, whenever that occurs, and the weighted average service life of its commitments to power resources to serve Connecticut Valley. Had termination taken effect on January 1, 1998 this expectation period would have equaled nineteen years. On August 4 and 5, 1998 Phase 1 hearings were held at the FERC on the issue of whether Connecticut Valley will become an unbundled transmission customer of the Company. Subsequent to those hearings, the parties agreed to go on to hearings on the Phase 2 issues (addressing the allowable amount of the exit fee) without a preliminary determination from the Administrative Law Judge or the FERC on the Phase 1 issues. The Company submitted supplemental testimony on Phase 2 issues in December 1998. The matter is scheduled for hearing later this year. If the Company is unable to obtain an order authorizing the full recovery amount of the exit fee, or other appropriate mechanism, the Company would be required to recognize a loss under this contract totaling approximately $60.0 million on a pre-tax basis. Furthermore, the Company would be required to write-off approximately $4.0 million in regulatory assets associated with its wholesale business on a pre-tax basis. Conversely, even if the Company obtains a FERC order authorizing the updated requested exit fee, Connecticut Valley would be required to recognize a loss under this contract of approximately $50.0 million on a pre-tax basis unless Connecticut Valley has obtained an order by the NHPUC or other appropriate body directing the recovery of those costs in Connecticut Valley's retail rates. Either of these reasonably possible outcomes could occur during calendar year 1999. The Company has initiated and will continue to work for a negotiated settlement with parties to the New Hampshire restructuring proceeding and the NHPUC. On September 14 and 15, 1998 the Company participated in a settlement conference with an Administrative Law Judge assigned for the settlement process at the FERC and the parties to the Company's exit fee filing. An adverse resolution would have a material adverse effect on the Company's results of operations, cash flows, and ability to obtain capital at competitive rates. However, the Company cannot predict the ultimate outcome of this matter. On July 23, 1996 Connecticut Valley filed with the NHPUC for an 8.8% or approximately $1.6 million base rate increase to become effective September 22, 1996. The increase was to recover increased operating costs and costs of improvements to the electric system. As part of the permanent rate increase, Connecticut Valley also requested a temporary rate increase of 5.4% or approximately $.9 million. The NHPUC granted Connecticut Valley a temporary rate increase of 5.4% effective with bills rendered October 1, 1996. On January 21, 1997, Connecticut Valley and the NHPUC Staff reached a settlement in principle regarding the permanent rate increase. The settlement, approved by the NHPUC, provided for a 6.4% permanent rate increase and set Connecticut Valley's allowed return on common equity at 10.2%. A 2.2% temporary billing surcharge was also approved by the NHPUC to recover recoupment revenues for the period October 1, 1996 and March 30, 1997 and to recover rate case expenses. The temporary billing surcharge was effective during the period April 1 through November 30, 1997, when off-peak rates were in effect. As approved by the NHPUC, this billing surcharge resumed on March 1, 1998 to recover expenses incurred in connection with the pilot program. Note 14 Commitments and contingencies The Company's power supply is acquired from a number of sources including its own generating units, jointly owned units, long-term contracts and short- term purchases. The cost of power obtained from sources other than wholly and jointly owned units, including payments required to be made whether or not energy is received by the Company, is reflected as Purchased power in the Consolidated Statement of Income. Through its investments in four nuclear generating companies, three of which (Maine Yankee, Connecticut Yankee and Yankee Atomic) are permanently shut down, the Company is entitled to receive power from those nuclear units. See Note 2 for a discussion of the Company's obligations related to its investment in nuclear generating companies. The Company is also a joint owner of the Millstone Unit #3 (Unit #3) nuclear generating plant. Through Velco, the Company purchased power from Merrimack #2, a coal- fired generating plant owned by Northeast Utilities (NU), under a thirty-year contract which expired April 30, 1998. Under this contract the Company was obligated to make capacity payments which amounted to approximately $4.6 million, $4.5 million and $1.8 million for 1996 through 1998, respectively. Pursuant to the contract, as amended, Velco agreed to reimburse PSNH, in the proportion which the Velco quota bears to the demonstrated net capability of the plant, for all fixed costs of the unit and operating costs of the unit incurred by PSNH, which were reasonable and cost-effective for the remaining term of the Velco contract. In early 1998, PSNH took the Merrimack Unit #2 facility off line, shut it down and commenced a maintenance outage. In February, March and April of 1998, PSNH billed Velco for costs to complete the maintenance outage. Velco disputes the validity of a portion of the charges on grounds that the maintenance performed at the unit was to extend the life of the Merrimack plant beyond the term of the Velco contract and that the charges in connection with said investments were not reasonable and cost-effective for the remaining term of the Velco contract. The Company estimates the portion of the disputed charges allocable to the Company could be as much as $1.0 million on a pre-tax basis. The Company purchases power from several small power producers who own qualifying facilities under the Public Utility Regulatory Policies Act of 1978. These qualifying facilities produce energy using hydroelectric, wood, biomass, and refuse-burning generation. Under these long-term contracts, in 1998 the Company purchased 212,702 MWH of which 154,832 MWH is associated with the Vermont Electric Power Producers and 38,283 MWH with the New Hampshire/Vermont Solid Waste Plant owned by Wheelabrator Claremont Company, L.P. The Company expects to purchase approximately 203,000 MWH of small power output in each year 1999 through 2003. Based on the forecast level of production, the total commitment in the next five years to purchase power from these qualifying facilities is estimated to be $113.7 million. The Company will receive varying amounts of capacity and energy from Hydro-Quebec under the VJO contract during the 1999 to 2016 period. Related contracts were negotiated between the Company and Hydro-Quebec which in effect alter the terms and conditions contained in the VJO contract, reducing the overall power requirements and cost of the original contract. The average annual amount of capacity that the Company will purchase through October 31, 2016 is 132 MW. The total commitment to purchase power under these contracts on a nominal basis is approximately $1.0 billion net of power sellbacks over the contract term. In February 1996, the Company reached an agreement with Hydro-Quebec which lowered the 1997 cost of power by $5.8 million. As part of this agreement, the Company delivers to NEPOOL under existing firm energy contracts or joint marketing activities 54 MW of Phase II transmission capacity for a five-year period which began July 1, 1996 through June 30, 2001. In the early phase of the VJO contract, two sellback contracts were negotiated, the first delaying the purchase of 25 MW of capacity and associated energy, the second reducing the net purchase of Hydro-Quebec power. In 1994, the Company negotiated a third sellback arrangement whereby the Company receives an effective discount on up to 70 MW of capacity starting in November 1995 for the 1996 contract year (declining to 30 MW in the 1999 contract year). In exchange for this sellback, Hydro-Quebec has the right to reduce capacity deliveries by up to 50 MW beginning as early as 2004 until 2015, including the use of a like amount of the Company's Phase I/II facility rights and the ability to reduce the amounts of energy delivered for five years during a fifteen-year term beginning in 2000. There are specific contractual step up provisions that provide that in the event any VJO member fails to meet its obligation under the contract with Hydro-Quebec, the balance of the VJO participants, including the Company, will "step up" to the defaulting party's share on a pro-rata basis. As of December 31, 1998 the Company's VJO obligation is approximately 46% or $1.0 billion on a nominal basis over the contract ending in 2016. The total VJO contract obligation in a nominal basis over the term of the contract is approximately $2.3 billion. During January 1998, a significant ice storm affected parts of New England and the Province of Quebec, Canada. This storm specifically damaged major components of the Hydro-Quebec transmission system over which power is supplied to Vermont under the VJO contract with Hydro-Quebec. This resulted in an interruption of a significant portion of scheduled contractual power deliveries into Vermont. The ice storm's effect on Hydro-Quebec's transmission system caused the VJO to examine Hydro-Quebec's overall reliability and ability to deliver energy in the future. That review has prompted the VJO to initiate an arbitration proceeding, the end result of which may be the termination of the Contract. By way of the arbitration, the VJO is also seeking to recover capacity payments made during the period of non-delivery. Joint-ownership The Company's ownership interests in jointly owned generating and transmission facilities are set forth in the table that follows and recorded in the Company's Consolidated Balance Sheet (dollars in thousands):
Fuel In Service MW December 31 Type Ownership Date Entitlement 1998 1997 Generating plants: Wyman #4 Oil 1.78% 1978 11 $ 3,347 $ 3,344 Joseph C. McNeil Various 20.00% 1984 11 15,093 15,014 Millstone Unit #3 Nuclear 1.73% 1986 20 75,444 75,365 Highgate transmission facility 47.35% 1985 13,930 12,984 ________ ________ 107,814 106,707 Accumulated depreciation 37,934 34,163 ________ ________ $ 69,880 $ 72,544 ======= =======
The Company's share of operating expenses for these facilities is included in the corresponding operating accounts on the Consolidated Statement of Income. Each participant in these facilities must provide for its own financing. The Company is responsible for paying its ownership percentage of decommissioning costs for Unit #3. Based on a 1997 study, the total estimated obligation at December 31, 1998 was approximately $559.6 million and the funded obligation was about $187.7 million. The Company's share for the total obligation and funded obligation was approximately $9.7 million and $3.2 million, respectively. Environmental The Company is engaged in various operations and activities which subject it to inspection and supervision by both federal and state regulatory authorities including the United States Environmental Protection Agency (EPA). It is Company policy to comply with all environmental laws. The Company has implemented various procedures and internal controls to assess and assure compliance. If non-compliance is discovered, corrective action is taken. Based on these efforts and the oversight of those regulatory agencies having jurisdiction, the Company believes it is in compliance, in all material respects, with all pertinent environmental laws and regulations. Company operations occasionally result in unavoidable, inadvertent releases of regulated substances or materials, for example the rupture of a pole mounted transformer, or a broken hydraulic line. Whenever the Company learns of such a release, the Company responds in a timely fashion and in a manner that complies with all federal and state requirements. Except as discussed in the following paragraphs, the Company is not aware of any instances where it has caused, permitted or suffered a release or spill on or about its properties or otherwise which is likely to result in any material environmental liabilities to the Company. The Company is an amalgamation of more than 100 predecessor companies. Those companies engaged in various operations and activities prior to being merged into the Company. At least two of these companies were involved in the production of gas from coal to sell and distribute to retail customers at three different locations. These activities were discontinued by the Company in the late 1940's or early 1950's. The coal gas manufacturers, other predecessor companies, and the Company itself may have engaged in waste disposal activities which, while legal and consistent with commercially accepted practices at the time, may not meet modern standards and thus represent potential liability. The Company continues to investigate, evaluate, monitor and, where appropriate, remediate contaminated sites related to these historic activities. The Company's policy is to accrue a liability for those sites where costs for remediation, monitoring and other future activities are probable and can be reasonably estimated. As part of that process, the Company also researches the possibility of insurance coverage that could defray any such remediation expenses. For related information see Legal Proceedings below. Cleveland Avenue Property The Company's Cleveland Avenue property located in the City of Rutland, Vermont, a site where one of its predecessors operated a coal-gasification facility and later the Company sited various operations functions. Due to the presence of coal tar deposits and Polychlorinated Biphenyl (PCB) contamination and uncertainties as to potential off-site migration of those contaminants, the Company conducted studies in the late 1980's and early 1990's to determine the magnitude and extent of the contamination. After completing its preliminary investigation, the Company engaged a consultant to assist in evaluating clean-up methodologies and provide cost estimates. Those studies indicated the cost to remediate the site would be approximately $5.0 million. This was charged to expense in the fourth quarter of 1992. Site investigation continued over the next several years. In January of 1995, the Company was formally contacted by the EPA asking for written consent to conduct a site evaluation of the Cleveland Avenue property. That evaluation has been completed. The Company does not believe the EPA's evaluation changes its potential liability so long as the State remains satisfied that reasonable progress continues to be made in remediating the site and retains oversight of the process. In 1995, as part of that process, the Company's consultant completed its risk assessment report and submitted it to the State of Vermont for review. The State generally agreed with that assessment but expressed a number of concerns and directed the Company to collect some additional data. The Company has addressed almost all of the concerns expressed by the State and continues to work with the State in a joint effort to develop a mutually acceptable solution. The Company selected a consulting/engineering firm to collect the additional data requested by the State and develop and implement a remediation plan for the site. That firm has begun work at the site. It has collected the additional data requested by the State and will use all the data gathered to date to formulate a comprehensive remediation plan. The additional data gathered to date has not caused the Company to alter its original estimate of the likely cost of remediating the site. Brattleboro Manufactured Gas Facility From the early to late 1940's, the Company owned and operated a manufactured gas facility in Brattleboro, Vermont. The Company recently received a letter from the State of New Hampshire asking the Company to conduct a scoping study in and around the site of the former facility. The Company is in the process of responding to the State's request. The Company's response will include the identification of a qualified consultant to do the scoping study and a search for other Potential Responsible Parties (PRPs). At this time the Company has not finalized an estimate of its potential liability at this site. PCB, Inc. In August 1995, the Company received an Information Request from the EPA pursuant to a Superfund investigation of two related sites, located in Kansas and in Missouri (the Sites). During the mid-1980's, these Sites, operated by PCB Treatment, Inc., received materials containing PCBs from hundreds of sources, including the Company. According to the EPA, more than 1,200 parties have been identified as PRPs. The Company has complied with the information request and will monitor EPA activities at the Sites. In December 1996, the Company received an invitation to join a PRP steering committee. The Company has not yet decided whether joining that committee would be in its best interest. That committee has estimated the Company's pro rata share of the waste sent to the Sites to be 0.42%. The committee estimates that the Sites' remediation will cost between $5 million and $40 million. Based on this information, the Company does not believe that the Sites represent the potential for a material adverse effect on its financial condition or results of operations. The Company is not subject to any pending or threatened litigation with respect to any other sites that have the potential for causing the Company to incur material remediation expenses, nor has the EPA or other federal or state agency sought contribution from the Company for the study or remediation of any such sites. In 1996, the Company filed a lawsuit in federal court against a number of insurance companies. In its complaint, the Company alleged that general liability policies issued by the insurers provide coverage for all expenses incurred or to be incurred by the Company in conjunction with, among others, the Cleveland Avenue Property. Settlements were reached with all of the defendants. The settlements varied with respect to the scope of the release granted by the Company. A reserve of $9.9 million has been established representing management's best estimate of the costs to remediate the sites. Dividend restrictions The indentures relating to long-term debt and the Articles of Association contain certain restrictions on the payment of cash dividends on capital stock. Under the most restrictive of such provisions, approximately $66.4 million of retained earnings was not subject to dividend restriction at December 31, 1998. Leases and support agreements The Company participated with other electric utilities in the construction of the Phase I Hydro-Quebec transmission facilities in northeastern Vermont, which were completed at a total cost of approximately $140 million. Under a support agreement relating to the Company's participation in the facilities, the Company is obligated to pay its 4.42% share of Phase I Hydro-Quebec capital costs over a 20-year recovery period through and including 2006. The Company also participated in the construction of Phase II Hydro-Quebec transmission facilities constructed throughout New England, which were completed at a total cost of approximately $487 million. Under a similar support agreement, the Company is obligated to pay its 5.132% share of Phase II Hydro-Quebec capital costs over a 25-year recovery period through and including 2015. All costs under these support agreements are recorded as purchased transmission expense in accordance with the Company's rate-making policies. Future minimum payments will be approximately $3.0 million for each year from 1999 through 2015 and will decline thereafter. The Company's shares of the net capital cost of these facilities, totaling approximately $17.2 million, are classified in the accompanying Consolidated Balance Sheet as "Utility Plant" and "Long-term Lease Arrangements" (current and non-current). Minimum rental commitments of the Company under non-cancelable leases as of December 31, 1998, are not material. Total rental expense entering into the determination of net income, consisting principally of vehicle and equipment rentals, was approximately $3.2 million for 1996, $3.1 million for 1997 and $3.4 million for 1998. Legal proceedings As discussed above, on July 29, 1996, the Company filed a Declaratory Judgment action in the United States District Court for the District of Vermont. The Complaint named as defendants a number of insurance companies that issued policies to the Company dating from the mid 1940s to the late 1980s. The Company asserted that policies issued by defendants provide coverage for all defense and remediation costs associated with the Cleveland Avenue property and other sites. Settlement has been reached with all defendants. See Environmental above for related disclosures. On August 7, 1997, the Company and eight other non-operating owners of Unit #3 filed a demand for arbitration with Connecticut Light and Power Company and Western Massachusetts Electric Company and lawsuits against NU and its trustees. The arbitration and lawsuits seek to recover costs associated with replacement power, operation and maintenance costs and other costs resulting from the extended shutdown of Unit #3. The non-operating owners claim that NU and two of its wholly owned subsidiaries failed to comply with NRC's regulations, failed to operate the facility in accordance with good operating practice and attempted to conceal their activities from the non- operating owners and the NRC. In addition to the proceedings described herein, the Company is involved in litigation in the normal course of business which the Company does not believe will have a material adverse effect on the financial position or results of operations. Note 15 New Accounting Pronouncements In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, effective for fiscal years beginning after December 15, 1997. SFAS No. 130 established standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. It requires that an enterprise classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately in the equity section of a statement of financial position. The Company did not have any material other comprehensive income items in 1997 or 1996, however, in 1998 the Company recognized as other comprehensive income a minimum pension liability adjustment of $0.6 million on a pre-tax basis, or $0.4 million net of tax. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. This Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A company may also implement this Statement as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997 (and, at the company's election, before January 1, 1998). The Company has not yet quantified the impacts of adopting SFAS No. 133 on the financial statements and has not determined the timing or method of the adoption of SFAS No. 133. However, the Statement could increase volatility in earnings and other comprehensive income. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, Reporting on the Costs of Start-up Activities (SOP 98-5). SOP 98-5 provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs to be expensed as incurred and is effective for financial statements for fiscal years beginning after December 15, 1998. The adoption of SOP 98-5 is not expected to have a material impact on the Company's financial position or results of operations. In December 1998, the Emerging Issues Task Force (EITF) reached consensus on Issue No. 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities. EITF Issue 98-10 is effective for fiscal years beginning after December 15, 1998. EITF Issue 98-10 requires energy trading contracts to be recorded at fair value on the balance sheet, with the changes in fair value included in earnings. The effects of initial application of EITF Issue 98-10 will be reported as a cumulative effect of a change in accounting principle. Financial statements for periods prior to initial adoption of EITF Issue 98-10 may not be restated. The Company has not yet quantified the impacts of this accounting change as of January 1, 1999 on the financial statements. Note 16 Segment Reporting The Company adopted SFAS No.131,"Disclosures about Segments of an Enterprise and Related Information," effective for financial statements for periods beginning after December 15, 1997. SFAS No. 131 establishes standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision making group is the Board of Directors, which is comprised of nine Directors including the Chairman of the Board and the Company's President and Chief Executive Officer. The operating segments are managed separately because each operating segment represents a different retail rate jurisdiction or offers different products or services. The Company's reportable operating segments include Central Vermont Public Service Corporation (Central Vermont) which engages in the purchase, production, transmission, distribution and sale of electricity in Vermont; Connecticut Valley Electric Company Inc. (Connecticut Valley) which distributes and sells electricity in parts of New Hampshire; and Catamount Energy Corporation (Catamount) which invests in non-regulated, energy-supply projects. Connecticut Valley, while managed on an integrated basis with Central Vermont, is presented separately because of its separate and distinct regulatory jurisdiction. Other operating segments include segments below the quantitative threshold for separate disclosure. These operating segments are SmartEnergy Services, Inc. which markets energy-saving products, pursues retail alliances to market energy and related products and services and engages in the sale of or rental of electric water heaters, and C. V. Realty, Inc., a real estate company whose purpose is to own, acquire, buy, sell and lease real and personal property and interests therein related to the utility business. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. Intersegment revenues include sales of purchased power to Connecticut Valley and revenues for support services to Connecticut Valley, Catamount and SmartEnergy. These intersegment sales and services for each jurisdiction are based on actual rates or current costs. The Company evaluates performance based on stand alone operating segment net income. Financial Information by industry segment for the three years ended December 31, 1998, is as follows (dollars in thousands):
Reclassifications Central Vermont Connecticut Valley & Consolidating 1998 Vermont New Hampshire Catamount All Other(1) Entries Consolidated Revenues from external customers $285,007 $18,933 $ 412 $ 7,184 $ 7,701 $303,835 Intersegment revenues 12,655 - - - 12,655 - Depreciation & other (2) 19,811 442 41 357 398 20,253 Non-Recurring Items: Reversal of estimated loss on power contracts (3) - 5,500 - - - 5,500 Estimated loss on power contracts (3) - (1,586) - - - (1,586) Purchase power disallowance (7,361) - - - - (7,361) Taxes on income (682) 399 1,914 (1,082) 832 (283) Operating income 7,015 1,107 (3,689) (1,643) (5,201) 7,991 Equity income-affiliates (4) 3,191 - - - - 3,191 Other income (expenses), net 1,343 22 490 95 (1,511) 3,461 Interest expense, net 10,024 387 276 1 28 10,660 Net income (loss) 1,525 742 3,265 (1,549) - 3,983 Investments in affiliates, at equity 26,142 - - - - 26,142 Total assets 473,879 11,803 45,616 42,089 43,105 530,282 Capital expenditures 15,497 549 - - - 16,046 1997 Revenues from external customers $285,102 $19,635 $ 348 $ 1,802 $ 2,155 $304,732 Intersegment revenues 10,818 - - - 10,818 - Depreciation & other (2) 26,733 442 49 358 407 27,175 Non-Recurring Items: Estimated loss on power contracts (3) - (5,500) - - - (5,500) Extraordinary charge, net of taxes - 811 - - - 811 Sale of Non-Utility Assets 2,118 - 2,891 - - 5,009 Taxes on income 9,177 (1,605) 2,097 (537) 1,559 7,573 Operation income (loss) 21,364 (2,597) (4,701) (821) (5,391) 18,636 Equity income-affiliates (4) 3,214 - - - - 3,214 Other income (expenses), net 1,561 8 3,453 35 50 5,007 Interest expense, net 9,259 409 76 - 38 9,706 Net income (loss) 16,880 (3,807) 4,054 (787) - 16,340 Investments in affiliates, at equity 26,495 - - - - 26,495 Total assets 481,971 11,648 41,215 2,967 5,861 531,940 Capital expenditures 13,220 621 - - - 13,841 1996 Revenues from external customers $272,201 $18,607 $ 933 $ 1,862 $ 2,802 $290,801 Intersegment revenues 10,905 - - - 10,905 - Depreciation & other (2) 21,409 429 42 377 419 21,838 Non-Recurring Items: Insurance proceeds 1,330 - - - - 1,330 Taxes on income 10,261 (45) (202) 178 (24) 10,216 Operating income (loss) 23,189 230 (3,247) 270 (2,833) 23,275 Equity income-affiliates (4) 3,302 - - - - 3,302 Other income (expenses), net 1,814 31 (443) 9 (1,379) 2,790 Interest expense, net 9,537 333 93 - 38 9,925 Net income (loss) 18,767 (72) 468 279 - 19,442 Investments in affiliates, at equity 26,630 - - - - 26,630 Total assets 453,943 12,244 37,637 2,973 3,829 502,968 Capital expenditures 18,188 764 - - - 18,952 (1) Includes segments below the quantitative threshold for separate disclosure. (2) Includes net deferral and amortization of nuclear replacement energy and maintenance costs (included in Purchased power) and amortization of conservation and load management costs (included in Other operation expenses) in the accompanying Consolidated Statement of Income. (3) Included in Purchased power in the accompanying Consolidated Statement of Income. (4) See Note 2 herein for Central Vermont's investments in affiliates.
Note 17 Unaudited Quarterly Financial Information The following quarterly financial information is unaudited and includes all adjustments consisting of normal recurring accruals which are, in the opinion of management, necessary for a fair statement of results of operations for such periods. Variations between quarters reflect the seasonal nature of the Company's business (dollars in thousands, except per share amounts): Quarter Ended 12 Months March June September December Ended 1998 Operating revenues $83,958 $66,406 $69,522 $83,949 $303,835 Operating income (loss) $10,679 $(4,079) $ 931 $ 460 $ 7,991 Net income (loss) $10,264 $(5,452) $ (229) $ (600) $ 3,983 Earnings (losses) per share of common stock $ .86 $(.52) $(.06) $(.10) $ .18 1997 Operating revenues $88,494 $65,442 $67,990 $82,806 $304,732 Operating income (loss) $14,140 $ (885) $ 1,178 $ 4,203 $ 18,636 Net income (loss) $14,319 $(1,855) $ 2,065 $ 1,811 $ 16,340 Earnings (losses) per share of common stock $1.20 $(.21) $ .14 $ .12 $1.25 Note 18 Subsequent Events Because of the charge-offs discussed in Notes 1 and 13 above, on March 12, 1999, Connecticut Valley was notified by the Bank that it would exercise appropriate remedies in connection with the violation of financial covenants associated with the $3.75 million loan agreement with the Bank unless the violation is cured by April 11, 1999. The Company is presently negotiating with the Bank to purchase Connecticut Valley's outstanding long- term note. As a result of the December 3, 1998 Court of Appeals' decision discussed in Note 13 above, on March 22, 1999, the NHPUC issued an Order which directed Connecticut Valley to file within five business days its calculation of the difference between the total FAC and the PPCA revenues that it would have collected had the 1997 FAC and PPCA rate levels been in effect the entire year. In its Order, the NHPUC also directed Connecticut Valley to calculate a rate reduction to be applied to all billings for the period April 1, 1999 through December 31, 1999 to refund the 1998 over collection relative to the 1997 rate level. The Company estimates this amount to be approximately $2.7 million on a pre-tax basis. Connecticut Valley filed the required tariff page with the NHPUC, under protest and with reservation of all rights, on March 26, 1999. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of the Registrant. The information required by this item with respect to the Company's directors is incorporated herein by this reference to "Election of Directors" in the Proxy Statement for the 1999 Annual Meeting of Stockholders. The Executive Officers information is listed under Part I, Item 1. Definitive proxy materials will be filed with the Securities and Exchange Commission pursuant to Regulation 14A on March 31, 1999. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers to file reports of ownership and changes in ownership of Company securities with the Securities and Exchange Commission (SEC) and to furnish the Company with copies of all such reports. It also requires directors, officers and persons who beneficially own more than ten percent (10%) of the Company's stock to file initial reports of ownership and subsequent reports of changes in ownership with the SEC and the New York Stock Exchange. In making this statement, the Company has relied on copies of reports that have been filed with the SEC. Based solely on a review of the copies of such reports prepared and filed with the SEC during 1998 by the Company's executive officers and directors, and on written representations that no other reports were required, the Company believes its directors and executive officers have complied with all Section 16(a) filing requirements except for Mr. Young, who inadvertently neglected to report the ownership of shares of the Company's Common Stock held by his spouse. Mr. Young disclaims any voting or investment power over the shares held by his spouse. The Company does not have a ten percent holder. Item 11. Executive Compensation. The information required by this item concerning executive compensation and directors' compensation is set forth in the sections entitled "Executive Compensation and Other Transactions", Directors' Compensation", "Report of the Compensation Committee on Executive Compensation" and "Five-Year Shareholder Return Comparison Performance Graph" in the Proxy Statement of the Company for the 1999 Annual Meeting of Stockholders, which are being incorporated herein by reference. Definitive proxy materials will be filed with the Securities and Exchange Commission pursuant to Regulation 14A on March 31, 1999. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this item concerning security ownership is set forth in the section entitled "Stock Ownership of Directors, Nominees, Executive Officers and Certain Beneficial Owners" in the Proxy Statement for the 1999 Annual Meeting of Stockholders, which is being incorporated herein by reference. Definitive proxy materials will be filed with the Securities and Exchange Commission pursuant to Regulation 14A on March 31, 1999. Item 13. Certain Relationships and Related Transactions. None Filed Herewith at Page PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)1. The following financial statements for Central Vermont Public Service Corporation and its wholly owned subsidiaries are filed as part of this report: (See Item 8) 1.1 Consolidated Statement of Income, for each of the three years ended December 31, 1998 Consolidated Statement of Cash Flows, for each of the three years ended December 31, 1998 Consolidated Balance Sheet at December 31, 1998 and 1997 Consolidated Statement of Capitalization at December 31, 1998 and 1997 Consolidated Statement of Changes in Common Stock Equity for each of the three years ended December 31, 1998 Notes to Consolidated Financial Statements (a)2. Financial Statement Schedules: 2.1 Central Vermont Public Service Corporation and its wholly owned subsidiaries: Schedule II - Reserves for each of the three years ended December 31, 1998 Schedules not included have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. Separate financial statements of the Registrant (which is primarily an operating company) have been omitted since they are consolidated only with those of totally held subsidiaries. Separate financial statements of subsidiary companies not consolidated have been omitted since, if considered in the aggregate, they would not constitute a significant subsidiary. Separate financial statements of 50% or less owned persons for which the investment is accounted for by the equity method by the Registrant have been omitted since, if considered in the aggregate, they would not constitute a significant investment. (a)3. Exhibits (* denotes filed herewith) Each document described below is incorporated by reference to the appropriate exhibit numbers and the Commission file numbers indicated in parentheses, unless the reference to the document is marked as follows: * - Filed herewith. Copies of any of the exhibits filed with the Securities and Exchange Commission in connection with this document may be obtained from the Company upon written request. Exhibit 3 Articles of Incorporation and By-Laws 3-1 By-Laws, as amended June 2, 1997. (Exhibit 3-1, Form 10-Q June 30, 1997, File No. 1-8222) 3-2 Articles of Association, as amended August 11, 1992. (Exhibit No. 3-2, 1992 10-K, File No. 1-8222) Exhibit 4 Instruments defining the rights of security holders, including Indentures Incorporated herein by reference: 4-1 Mortgage dated October 1, 1929, between the Company and Old Colony Trust Company, Trustee, securing the Company's First Mortgage Bonds. (Exhibit B-3, File No. 2-2364) 4-2 Supplemental Indenture dated as of August 1, 1936. (Exhibit B-4, File No. 2-2364) 4-3 Supplemental Indenture dated as of November 15, 1943. (Exhibit B-3, File No. 2-5250) 4-4 Supplemental Indenture dated as of December 1, 1943. (Exhibit No. B-4, File No. 2-5250) 4-5 Directors' resolutions adopted December 14, 1943, establishing the Series C Bonds and dealing with other related matters. (Exhibit B-5, File No. 2-5250) 4-6 Supplemental Indenture dated as of April 1, 1944. (Exhibit No. B-6, File No. 2-5466) 4-7 Supplemental Indenture dated as of February 1, 1945. (Exhibit 7.6, File No. 2-5615) (22-385) 4-8 Directors' resolutions adopted April 9, 1945, establishing the Series D Bonds and dealing with other matters. (Exhibit 7.8, File No. 2-5615 (22-385) 4-9 Supplemental Indenture dated as of September 2, 1947. (Exhibit 7.9, File No. 2-7489) 4-10 Supplemental Indenture dated as of July 15, 1948, and directors' resolutions establishing the Series E Bonds and dealing with other matters. (Exhibit 7.10, File No. 2-8388) 4-11 Supplemental Indenture dated as of May 1, 1950, and directors' resolutions establishing the Series F Bonds and dealing with other matters. (Exhibit 7.11, File No. 2-8388) 4-12 Supplemental Indenture dated August 1, 1951, and directors' resolutions, establishing the Series G Bonds and dealing with other matters. (Exhibit 7.12, File No. 2-9073) 4-13 Supplemental Indenture dated May 1, 1952, and directors' resolutions, establishing the Series H Bonds and dealing with other matters. (Exhibit 4.3.13, File No. 2-9613) 4-14 Supplemental Indenture dated as of July 10, 1953. (July, 1953 Form 8-K, File No. 1-8222) 4-15 Supplemental Indenture dated as of June 1, 1954, and directors' resolutions establishing the Series K Bonds and dealing with other matters. (Exhibit 4.2.16, File No. 2-10959) 4-16 Supplemental Indenture dated as of February 1, 1957, and directors' resolutions establishing the Series L Bonds and dealing with other matters. (Exhibit 4.2.16, File No. 2-13321) 4-17 Supplemental Indenture dated as of March 15, 1960. (March, 1960 Form 8-K, File No. 1-8222) 4-18 Supplemental Indenture dated as of March 1, 1962. (March, 1962 Form 8-K, File No. 1-8222) 4-19 Supplemental Indenture dated as of March 2, 1964. (March, 1964 Form 8-K, File No, 1-8222) 4-20 Supplemental Indenture dated as of March 1, 1965, and directors' resolutions establishing the Series M Bonds and dealing with other matters. (April, 1965 Form 8-K, File No. 1-8222) 4-21 Supplemental Indenture dated as of December 1, 1966, and directors' resolutions establishing the Series N Bonds and dealing with other matters. (January, 1967 Form 8-K, File No. 1-8222) 4-22 Supplemental Indenture dated as of December 1, 1967, and directors' resolutions establishing the Series O Bonds and dealing with other matters. (December, 1967 Form 8-K, File No. 1-8222) 4-23 Supplemental Indenture dated as of July 1, 1969, and directors' resolutions establishing the Series P Bonds and dealing with other matters. (Exhibit B.23, July, 1969 Form 8-K, File No. 1-8222) 4-24 Supplemental Indenture dated as of December 1, 1969, and directors' resolutions establishing the Series Q Bonds January, and dealing with other matters. (Exhibit B.24, January, 1970 Form 8-K, File No. 1-8222) 4-25 Supplemental Indenture dated as of May 15, 1971, and directors' resolutions establishing the Series R Bonds and dealing with other matters. (Exhibit B.25, May, 1971, Form 8-K, File No. 1-8222) 4-26 Supplemental Indenture dated as of April 15, 1973, and directors' resolutions establishing the Series S Bonds and dealing with other matters. (Exhibit B.26, May, 1973, Form 8-K, File No. 1-8222) 4-27 Supplemental Indenture dated as of April 1, 1975, and directors' resolutions establishing the Series T Bonds and dealing with other matters. (Exhibit B.27, April, 1975, Form 8-K, File No. 1-8222) 4-28 Supplemental Indenture dated as of April 1, 1977. (Exhibit 2.42, File No. 2-58621) 4-29 Supplemental Indenture dated as of July 29, 1977, and directors' resolutions establishing the Series U, V, W, and X Bonds and dealing with other matters. (Exhibit 2.43, File No. 2-58621) 4-30 Thirtieth Supplemental Indenture dated as of September 15, 1978, and directors' resolutions establishing the Series Y Bonds and dealing with other matters. (Exhibit B-30, 1980 Form 10-K, File No. 1-8222) 4-31 Thirty-first Supplemental Indenture dated as of September 1, 1979, and directors' resolutions establishing the Series Z Bonds and dealing with other matters. (Exhibit B-31, 1980 Form 10-K, File No. 1-8222) 4-32 Thirty-second Supplemental Indenture dated as of June 1, 1981, and directors' resolutions establishing the Series AA Bonds and dealing with other matters. (Exhibit B-32, 1981 Form 10-K, File No. 1-8222) 4-45 Thirty-third Supplemental Indenture dated as of August 15, 1983, and directors' resolutions establishing the Series BB Bonds and dealing with other matters. (Exhibit B-45, 1983 Form 10-K, File No. 1-8222) 4-46 Bond Purchase Agreement between Merrill, Lynch, Pierce, Fenner & Smith, Inc., Underwriters and The Industrial Development Authority of the State of New Hampshire, issuer and Central Vermont Public Service Corporation. (Exhibit B-46, 1984 Form 10-K, File No. 1-8222) 4-47 Thirty-Fourth Supplemental Indenture dated as of January 15, 1985, and directors' resolutions establishing the Series CC Bonds and Series DD Bonds and matters connected therewith. (Exhibit B-47, 1985 Form 10-K, File No. 1-8222) 4-48 Bond Purchase Agreement among Connecticut Development Authority and Central Vermont Public Service Corporation with E. F. Hutton & Company Inc. dated December 11, 1985. (Exhibit B-48, 1985 Form 10-K, File No. 1-8222) 4-49 Stock-Purchase Agreement between Vermont Electric Power Company, Inc. and the Company dated August 11, 1986 relative to purchase of Class C Preferred Stock. (Exhibit B-49, 1986 Form 10-K, File No. 1-8222) 4-50 Thirty-Fifth Supplemental Indenture dated as of December 15, 1989 and directors' resolutions establishing the Series EE, Series FF and Series GG Bonds and matters connected therewith. (Exhibit 4-50, 1989 Form 10-K, File No. 1-8222) 4-51 Thirty-Sixth Supplemental Indenture dated as of December 10, 1990 and directors' resolutions establishing the Series HH Bonds and matters connected therewith. (Exhibit 4-51, 1990 Form 10-K, File No. 1-8222) 4-52 Thirty-Seventh Supplemental Indenture dated December 10, 1991 and directors' resolutions establishing the Series JJ Bonds and matters connected therewith. (Exhibit 4-52, 1991 Form 10-K, File No. 1-8222) 4-53 Thirty-Eight Supplemental Indenture dated December 10, 1993 establishing Series KK, LL, MM, NN, OO. (Exhibit 4-53, 1993 Form 10-K, File No. 1-8222) 4-54 Thirty-Ninth Supplemental Indenture Dated December 29, 1997. (Exhibit 4-54, 1997 Form 10-K, File No. 1-8222) 4-55 Fortieth Supplemental Indenture Dated January 28, 1998. (Exhibit 4-55, 1997 Form 10-K, File No. 1-8222) 4-56 Credit Agreement Dated As of November 5, 1977 among Central Vermont Public Service Corporation, The Lenders Named Herein and Toronto-Dominion (Texas), Inc., as Agent. (Exhibit 10.83, 1997 Form 10-K, File No. 1-8222) 4-56.1 First Amendment to Credit Agreement Dated as of April 15, 1998 (Exhibit 10.83.1, Form 10-Q, June 30, 1998, File No. 1-8222) 4-56.2 Second Amendment to Credit Agreement Dated as of June 2, 1998 (Exhibit 10.83.2, 1997 Form 10-Q, June 30, 1998, File No. 1-8222) * 4-56.3 Third Amendment to Credit Agreement Dated as of October 5, 1998 * 4-56.4 Open-End Mortgage, Security Agreement, Assignment of Rents and Leases, Fixture Filing, and Financing Statement Dated as of October 5, 1998 between the Company, as Mortgagor, in Favor of Toronto Dominion (Texas), Inc. as Collateral Agent for the Secured Parties * 4-56.5 Security Agreement, dated as of October 5, 1998, between the Company and Toronto Dominion (Texas), Inc. Exhibit 10 Material Contracts (*Denotes filed herewith) Incorporated herein by reference: 10.l Copy of firm power Contract dated August 29, 1958, and supplements thereto dated September 19, 1958, October 7, 1958, and October 1, 1960, between the Company and the State of Vermont (the "State"). (Exhibit C-1, File No. 2-17184) 10.1.1 Agreement setting out Supplemental NEPOOL Understandings dated as of April 2, 1973. (Exhibit C-22, File No. 5-50198) 10.2 Copy of Transmission Contract dated June 13, 1957, between Velco and the State, relating to transmission of power. (Exhibit 10.2, 1993 Form 10-K, File No. 1-8222) 10.2.1 Copy of letter agreement dated August 4, 1961, between Velco and the State. (Exhibit C-3, File No. 2-26485) 10.2.2 Amendment dated September 23, 1969. (Exhibit C-4, File No. 2-38161) 10.2.3 Amendment dated March 12, 1980. (Exhibit C-92, 1982 Form 10-K, File No. 1-8222) 10.2.4 Amendment dated September 24, 1980. (Exhibit C-93, 1982 Form 10-K, File No. 1-8222) 10.3 Copy of subtransmission contract dated August 29, 1958, between Velco and the Company (there are seven similar contracts between Velco and other utilities). (Exhibit 10.3, 1993 Form 10-K, Form No. 1-8222) 10.3.1 Copies of Amendments dated September 7, 196l, November 2, 1967, March 22, 1968, and October 29, 1968. (Exhibit C-6, File No. 2-32917) 10.3.2 Amendment dated December 1, 1972. (Exhibit 10.3.2, 1993 Form 10-K, File No. 1-8222) 10.4 Copy of Three-Party Agreement dated September 25, 1957, between the Company, Green Mountain and Velco. (Exhibit C-7, File No. 2-17184) 10.4.1 Superseding Three Party Power Agreement dated January 1, 1990. (Exhibit 10-201, 1990 Form 10-K, File No. 1-8222) 10.4.2 Agreement Amending Superseding Three Party Power Agreement dated May 1, 1991. (Exhibit 10.4.2, 1991 Form 10-K, File No. 1-8222) 10.5 Copy of firm power Contract dated December 29, 1961, between the Company and the State, relating to purchase of Niagara Project power. (Exhibit C-8, File No. 2-26485) 10.5.1 Amendment effective as of January 1, 1980. (Exhibit 10.5.1, 1993 Form 10-K, File No. 1-8222) 10.6 Copy of agreement dated July 16, 1966, and letter supplement dated July 16, 1966, between Velco and Public Service Company of New Hampshire relating to purchase of single unit power from Merrimack II. (Exhibit C-9, File No. 2-26485) 10.6.1 Copy of Letter Agreement dated July 10, 1968, modifying Exhibit A. (Exhibit C-10, File No. 2-32917) 10.7 Copy of Capital Funds Agreement between the Company and Vermont Yankee dated as of February 1, 1968. (Exhibit C-11, File No. 70-4611) 10.7.1 Copy of Amendment dated March 12, 1968. (Exhibit C-12, File No. 70-4611) 10.7.2 Copy of Amendment dated September 1, 1993. (Exhibit 10.7.2, 1994 Form 10-K, File No. 1-8222) 10.8 Copy of Power Contract between the Company and Vermont Yankee dated as of February 1, 1968. (Exhibit C-13, File No. 70-4591) 10.8.1 Amendment dated April 15, 1983. (10.8.1, 1993 Form 10-K, File No. 1-8222) 10.8.2 Copy of Additional Power Contract dated February 1, 1984. (Exhibit C-123, 1984 Form 10-K, File No. 1-8222) 10.8.3 Amendment No. 3 to Vermont Yankee Power Contract, dated April 24, 1985. (Exhibit 10-144, 1986 Form 10-K, File No. 1-8222) 10.8.4 Amendment No. 4 to Vermont Yankee Power Contract, dated June 1, 1985. (Exhibit 10-145, 1986 Form 10-K, File No. 1-8222) 10.8.5 Amendment No. 5 dated May 6, 1988. (Exhibit 10-179, 1988 Form 10-K, File No. 1-8222) 10.8.6 Amendment No. 6 dated May 6, 1988. (Exhibit 10-180, 1988 Form 10-K, File No. 1-8222) 10.8.7 Amendment No. 7 dated June 15, 1989. (Exhibit 10-195, 1989 Form 10-K, File No. 1-8222) 10.9 Copy of Capital Funds Agreement between the Company and Maine Yankee dated as of May 20, 1968. (Exhibit C-14, File No. 70-4658) 10.9.1 Amendment No. 1 dated August 1, 1985. (Exhibit C-125, 1984 Form 10-K, File No. 1-8222) 10.10 Copy of Power Contract between the Company and Maine Yankee dated as of May 20, 1968. (Exhibit C-15, File No. 70-4658) 10.10.1 Amendment No. 1 dated March 1, 1984. (Exhibit C-112, 1984 Form 10-K, File No. 1-8222) 10.10.2 Amendment No. 2 effective January 1, 1984. (Exhibit C-113, 1984 Form 10-K, File No. 1-8222) 10.10.3 Amendment No. 3 dated October 1, 1984. (Exhibit C-114, 1984 Form 10-K, File No. 1-8222) 10.10.4 Additional Power Contract dated February 1, 1984. (Exhibit C-126, 1985 Form 10-K, File No. 1-8222) 10.11 Copy of Agreement dated January 17, 1968, between Velco and Public Service Company of New Hampshire relating to purchase of additional unit power from Merrimack II. (Exhibit C-16, File No. 2-32917) 10.12 Copy of Agreement dated February 10, 1968 between the Company and Velco relating to purchase by Company of Merrimack II unit power. (There are 25 similar agreements between Velco and other utilities.) (Exhibit C-17, File No. 2-32917) 10.13 Copy of Three-Party Power Agreement dated as of November 21, 1969, among the Company, Velco, and Green Mountain relating to purchase and sale of power from Vermont Yankee Nuclear Power Corporation. (Exhibit C-18, File No. 2-38161) 10.13.1 Amendment dated June 1, 1981. (Exhibit 10.13.1, 1993 Form 10-K, File No. 1-8222) 10.14 Copy of Three-Party Transmission Agreement dated as of November 21, 1969, among the Company, Velco, and Green Mountain providing for transmission of power from Vermont Yankee Nuclear Power Corporation. (Exhibit C-19, File No. 2-38161) 10.14.1 Amendment dated June 1, 1981. (Exhibit 10.14.1, 1993 Form 10-K, File No. 1-8222) 10.15 Copy of Stockholders Agreement dated September 25, 1957, between the Company, Velco, Green Mountain and Citizens Utilities Company. (Exhibit No. C-20, File No. 70-3558) 10.16 New England Power Pool Agreement dated as of September 1, 1971, as amended to November 1, 1975. (Exhibit C-21, File No. 2-55385) 10.16.1 Amendment dated December 31, 1976. (Exhibit 10.16.1 1993 Form 10-K, File No. 1-8222) 10.16.2 Amendment dated January 23, 1977. (Exhibit 10.16.2, 1993 Form 10-K, File No. 1-8222) 10.16.3 Amendment dated July 1, 1977. (Exhibit 10.16.3, 1993 Form 10-K, File No. 1-8222) 10.16.4 Amendment dated August 1, 1977. (Exhibit 10.16.4, 1993 Form 10-K, File No. 1-8222) 10.16.5 Amendment dated August 15, 1978. (Exhibit 10.16.5, 1993 Form 10-K, File No. 1-8222) 10.16.6 Amendment dated January 31, 1979. (Exhibit 10.16.6, 1993 Form 10-K, File No. 1-8222) 10.16.7 Amendment dated February 1, 1980. (Exhibit 10.16.7, 1993 Form 10-K, File No. 1-8222) 10.16.8 Amendment dated December 31, 1976. (Exhibit 10.16.8, 1993 Form 10-K, File No. 1-8222) 10.16.9 Amendment dated January 31, 1977. (Exhibit 10.16.9, 1993 Form 10-K, File No. 1-8222) 10.16.10 Amendment dated July 1, 1977. (Exhibit 10.16.10, 1993 Form 10-K, File No. 1-8222) 10.16.11 Amendment dated August 1, 1977. (Exhibit 10.16.11, 1993 Form 10-K, File No. 1-8222) 10.16.12 Amendment dated August 15, 1978. (Exhibit 10.16.12, 1993 Form 10-K, File No. 1-8222) 10.16.13 Amendment dated January 31, 1980. (Exhibit 10.16.13, 1993 Form 10-K, File No. 1-8222) 10.16.14 Amendment dated February 1, 1980. (Exhibit 10.16.14, 1993 Form 10-K, File No. 1-8222) 10.16.15 Amendment dated September 1, 1981. (Exhibit 10.16.15, 1993 Form 10-K, File No. 1-8222) 10.16.16 Amendment dated December 1, 1981. (Exhibit 10.16.16, 1993 Form 10-K, File No. 1-8222) 10.16.17 Amendment dated June 15, 1983. (Exhibit 10.16.17, 1993 Form 10-K, File No. 1-8222) 10.16.18 Amendment dated September 1, 1985. (Exhibit 10-160, 1986 Form 10-K, File No. 1-8222) 10.16.19 Amendment dated April 30, 1987. (Exhibit 10-172, 1987 Form 10-K, File No. 1-8222) 10.16.20 Amendment dated March 1, 1988. (Exhibit 10-178, 1988 Form 10-K, File No. 1-8222) 10.16.21 Amendment dated March 15, 1989. (Exhibit 10-194, 1989 Form 10-K, File No. 1-8222) 10.16.22 Amendment dated October 1, 1990. (Exhibit 10-203, 1990 Form 10-K, File No. 1-8222) 10.16.23 Amendment dated September 15, 1992. (Exhibit 10.16.23, 1992 Form 10-K, File No. 1-8222) 10.16.24 Amendment dated May 1, 1993. (Exhibit 10.16.24, 1993 Form 10-K, File No. 1-8222) 10.16.25 Amendment dated June 1, 1993. (Exhibit 10.16.25, 1993 Form 10-K, File No. 1-8222) 10.16.26 Amendment dated June 1, 1994. (Exhibit 10.16.26, 1994 Form 10-K, File No. 1-8222) 10.16.27 Thirty-Second Amendment dated September 1, 1995. (Exhibit 10.16.27, Form 10-Q dated September 30, 1995, File No. 1-8222 and Exhibit 10.16.27, 1995 Form 10-K, File No. 1-8222) 10.17 Agreement dated October 13, 1972, for Joint Ownership, Construction and Operation of Pilgrim Unit No. 2 among Boston Edison Company and other utilities, including the Company. (Exhibit C-23, File No. 2-45990) 10.17.1 Amendments dated September 20, 1973, and September 15, 1974. (Exhibit C-24, File No. 2-51999) 10.17.2 Amendment dated December 1, 1974. (Exhibit C-25, File No. 2-54449) 10.17.3 Amendment dated February 15, 1975. (Exhibit C-26, File No. 2-53819) 10.17.4 Amendment dated April 30, 1975. (Exhibit C-27, File No. 2-53819) 10.17.5 Amendment dated as of June 30, 1975. (Exhibit C-28, File No. 2-54449) 10.17.6 Instrument of Transfer dated as of October 1, 1974, assigning partial interest from the Company to Green Mountain Power Corporation. (Exhibit C-29, File No. 2-52177) 10.17.7 Instrument of Transfer dated as of January 17, 1975, assigning a partial interest from the Company to the Burlington Electric Department. (Exhibit C-30, File No. 2-55458) 10.17.8 Addendum dated as of October 1, 1974 by which Green Mountain Power Corporation became a party thereto. (Exhibit C-31, File No. 2-52177) 10.17.9 Addendum dated as of January 17, 1975 by which the Burlington Electric Department became a party thereto. (Exhibit C-32, File No. 2-55450) 10.17.10 Amendment 23 dated as of 1975. (Exhibit C-50, 1975 Form 10-K, File No. 1-8222) 10.18 Agreement for Sharing Costs Associated with Pilgrim Unit No.2 Transmission dated October 13, 1972, among Boston Edison Company and other utilities including the Company. (Exhibit C-33, File No. 2-45990) 10.18.1 Addendum dated as of October 1, 1974, by which Green Mountain Power Corporation became a party thereto. (Exhibit C-34, File No. 2-52177) 10.18.2 Addendum dated as of January 17, 1975, by which Burlington Electric Department became a party thereto. (Exhibit C-35, File No. 2-55458) 10.19 Agreement dated as of May 1, 1973, for Joint Ownership, Construction and Operation of New Hampshire Nuclear Units among Public Service Company of New Hampshire and other utilities, including Velco. (Exhibit C-36, File No. 2-48966) 10.19.1 Amendments dated May 24, 1974, June 21, 1974, September 25, 1974, October 25, 1974, and January 31, 1975. (Exhibit C-37, File No. 2-53674) 10.19.2 Instrument of Transfer dated September 27, 1974, assigning partial interest from Velco to the Company. (Exhibit C-38, File No. 2-52177) 10.19.3 Amendments dated May 24, 1974, June 21, 1974, and September 25, 1974. (Exhibit C-81, File No. 2-51999) 10.19.4 Amendments dated October 25, 1974 and January 31, 1975. (Exhibit C-82, File No. 2-54646) 10.19.5 Sixth Amendment dated as of April 18, 1979. (Exhibit C-83, File No. 2-64294) 10.19.6 Seventh Amendment dated as of April 18, 1979. (Exhibit C-84, File No. 2-64294) 10.19.7 Eighth Amendment dated as of April 25, 1979. (Exhibit C-85, File No. 2-64815) 10.19.8 Ninth Amendment dated as of June 8, 1979. (Exhibit C-86, File No. 2-64815) 10.19.9 Tenth Amendment dated as of October 10, 1979. (Exhibit C-87, File No. 2-66334 ) 10.19.10 Eleventh Amendment dated as of December 15, 1979. (Exhibit C-88, File No.2-66492) 10.19.11 Twelfth Amendment dated as of June 16, 1980. (Exhibit C-89, File No. 2-68168) 10.19.12 Thirteenth Amendment dated as of December 31, 1980. (Exhibit C-90, File No. 2-70579) 10.19.13 Fourteenth Amendment dated as of June 1, 1982.(Exhibit C-104, 1982 Form 10-K, File No. 1-8222) 10.19.14 Fifteenth Amendment dated April 27, 1984. (Exhibit 10-134, 1986 Form 10-K, File No. 1-8222) 10.19.15 Sixteenth Amendment dated June 15, 1984. (Exhibit 10-135, 1986 Form 10-K, File No. 1-8222) 10.19.16 Seventeenth Amendment dated March 8, 1985. (Exhibit 10-136, 1986 Form 10-K, File No. 1-8222) 10.19.17 Eighteenth Amendment dated March 14, 1986. (Exhibit 10-137, 1986 Form 10-K, File No. 1-8222) 10.19.18 Nineteenth Amendment dated May 1, 1986. (Exhibit 10-138, 1986 Form 10-K, File No. 1-8222) 10.19.19 Twentieth Amendment dated September 19, 1986. (Exhibit 10-139, 1986 Form 10-K, File No. 1-8222) 10.19.20 Amendment No. 22 dated January 13, 1989. (Exhibit 10-193, 1989 Form 10-K, File No. 1-8222) 10.20 Transmission Support Agreement dated as of May 1, 1973, among Public Service Company of New Hampshire and other utilities, including Velco, with respect to New Hampshire Nuclear Units. (Exhibit C-39, File No. 248966) 10.21 Sharing Agreement - 1979 Connecticut Nuclear Unit dated September 1, 1973, to which the Company is a party. (Exhibit C-40, File No. 2-50142) 10.21.1 Amendment dated as of August 1, 1974. (Exhibit C-41, File No. 2-51999) 10.21.2 Instrument of Transfer dated as of February 28, 1974, transferring partial interest from the Company to Green Mountain. (Exhibit C-42, File No. 2-52177) 10.21.3 Instrument of Transfer dated January 17, 1975, transferring a partial interest from the Company to Burlington Electric Department. (Exhibit C-43, File No. 2-55458) 10.21.4 Amendment dated May 11, 1984. (Exhibit C-110, 1984 Form 10-K, File No. 1-8222) 10.22 Preliminary Agreement dated as of July 5, 1974, with respect to 1981 Montague Nuclear Generating Units. (Exhibit C-44, File No. 2-51733) 10.22.1 Amendment dated June 30, 1975. (Exhibit C-45, File No. 2-54449) 10.23 Agreement for Joint Ownership, Construction and Operation of William F. Wyman Unit No. 4 dated November 1, 1974, among Central Maine Power Company and other utilities including the Company. (Exhibit C-46, File No. 2-52900) 10.23.1 Amendment dated as of June 30, 1975. (Exhibit C-47, File No. 2-55458) 10.23.2 Instrument of Transfer dated July 30, 1975, assigning a partial interest from Velco to the Company. (Exhibit C-48, File No. 2-55458) 10.24 Transmission Agreement dated November 1, 1974, among Central Maine Power Company and other utilities including the Company with respect to William F. Wyman Unit No. 4. (Exhibit C-49, File No. 2-54449) 10.25 Copy of Power Contract between the Company and Yankee Atomic dated as of June 30, 1959. (Exhibit C-61, 1981 Form 10-K, File No. 1-8222) 10.25.1 Revision dated April 1, 1975. (Exhibit C-61, 1981 Form 10-K, File No. 1-8222) 10.25.2 Amendment dated May 6, 1988. (Exhibit 10-181, 1988 Form 10-K, File No. 1-8222) 10.25.3 Amendment dated June 26, 1989. (Exhibit 10-196, 1989 Form 10-K, File No. 1-8222) 10.25.4 Amendment dated July 1, 1989. (Exhibit 10-197, 1989 Form 10-K, File No. 1-8222) 10.25.5 Amendment dated February 1, 1992 (Exhibit 10.25.5, 1992 Form 10-K, File No. 1-8222) 10.26 Copy of Transmission Contract between the Company and Yankee Atomic dated as of June 30, 1959. (Exhibit C-63, 1981 Form 10-K, File No. 1-8222) 10.27 Copy of Power Contract between the Company and Connecticut Yankee dated as of June 1, 1964. (Exhibit C-64, 1981 Form 10-K, File No. 1-8222) 10.27.1 Supplementary Power Contract dated March 1, 1978. (Exhibit C-94, 1982 Form 10-K, File No. 1-8222) 10.27.2 Amendment dated August 22, 1980. (Exhibit C-95, 1982 Form 10-K, File No. 1-8222) 10.27.3 Amendment dated October 15, 1982. (Exhibit C-96, 1982 Form 10-K, File No. 1-8222) 10.27.4 Second Supplementary Power Contract dated April 30, 1984. (Exhibit C-115, 1984 Form 10-K, File No. 1-8222) 10.27.5 Additional Power Contract dated April 30, 1984. (Exhibit C-116, 1984 Form 10-K, File No. 1-8222) 10.28 Copy of Transmission Contract between the Company and Connecticut Yankee dated as of July 1, 1964. (Exhibit C-65, 1981 Form 10-K, File No. 1-8222) 10.29 Copy of Capital Funds Agreement between the Company and Connecticut Yankee dated as of July 1, 1964. (Exhibit C-66, 1981 Form 10-K, File No. 1-8222) 10.29.1 Copy of Capital Funds Agreement between the Company and Connecticut Yankee dated as of September 1, 1964. (Exhibit C-67, 1981 Form 10-K, File No. 1-8222) 10.30 Copy of Five-Year Capital Contribution Agreement between the Company and Connecticut Yankee dated as of November 1, 1980. (Exhibit C-68, 1981 Form 10-K, File No. 1-8222) 10.31 Form of Guarantee Agreement dated as of November 7, 1981, among certain banks, Connecticut Yankee and the Company, relating to revolving credit notes of Connecticut Yankee. (Exhibit C-69, 1981 Form 10-K, File No. 1-8222) 10.32 Form of Guarantee Agreement dated as of November 13, 1981, between The Connecticut Bank and Trust Company, as Trustee, and the Company, relating to debentures of Connecticut Yankee. (Exhibit C-70, 1981 Form 10-K, File No. 1-8222) 10.33 Form of Guarantee Agreement dated as of November 5, 1981, between Bankers Trust Company, as Trustee of the Vernon Energy Trust, and the Company, relating to Vermont Yankee Nuclear Fuel Sale Agreement. (Exhibit C-71, 1981 Form 10-K, File No. 1-8222) 10.34 Preliminary Vermont Support Agreement re Quebec Interconnection between Velco and among seventeen Vermont Utilities dated May 1, 1981. (Exhibit C-97, 1982 Form 10-K, File No. 1-8222) 10.34.1 Amendment dated June 1, 1982. (Exhibit C-98, 1982 Form 10-K, File No. 1-8222) 10.35 Vermont Participation Agreement for Quebec Interconnection between Velco and among seventeen Vermont Utilities dated July 15, 1982. (Exhibit C-99, 1982 Form 10-K, File No. 1-8222) 10.35.1 Amendment No. 1 dated January 1, 1986. (Exhibit C-132, 1986 Form 10-K, File No. 1-8222) 10.36 Vermont Electric Transmission Company Capital Funds Support Agreement between Velco and among sixteen Vermont Utilities dated July 15, 1982. (Exhibit C-100, 1982 Form 10-K, File No. 1-8222) 10.37 Vermont Transmission Line Support Agreement, Vermont Electric Transmission Company and twenty New England Utilities dated December 1, 1981, as amended by Amendment No. 1 dated June 1, 1982, and by Amendment No. 2 dated November 1, 1982. (Exhibit C-101, 1982 Form 10-K, File No. 1-8222) 10.37.1 Amendment No. 3 dated January 1, 1986. (Exhibit 10-149, 1986 Form 10-K, File No. 1-8222) 10.38 Phase 1 Terminal Facility Support Agreement between New England Electric Transmission Corporation and twenty New England Utilities dated December 1, 1981, as amended by Amendment No. 1 dated as of June 1, 1982 and by Amendment No. 2 dated as of November 1, 1982. (Exhibit C-102, 1982 Form 10-K, File No. 1-8222) 10.39 Power Purchase Agreement between Velco and CVPS dated June 1, 1981. (Exhibit C-103, 1982 Form 10-K, File No. 1-8222) 10.40 Agreement for Joint Ownership, Construction and Operation of the Joseph C. McNeil Generating Station by and between City of Burlington Electric Department, Central Vermont Realty, Inc. and Vermont Public Power Supply Authority dated May 14, 1982. (Exhibit C-107, 1983 Form 10-K, File No. 1-8222) 10.40.1 Amendment No. 1 dated October 5, 1982. (Exhibit C-108, 1983 Form 10-K, File No. 1-8222) 10.40.2 Amendment No. 2 dated December 30, 1983. (Exhibit C-109, 1983 Form 10-K, File No. 1-8222) 10.40.3 Amendment No. 3 dated January 10, 1984. (Exhibit 10-143, 1986 Form 10-K, File No. 1-8222) 10.41 Transmission Service Contract between Central Vermont Public Service Corporation and The Vermont Electric Generation & Transmission Cooperative, Inc. dated May 14, 1984. (Exhibit C-111, 1984 Form 10-K, File No. 1-8222) 10.42 Copy of Highgate Transmission Interconnection Preliminary Support Agreement dated April 9, 1984. (Exhibit C-117, 1984 Form 10-K, File No. 1-8222) 10.43 Copy of Allocation Contract for Hydro-Quebec Firm Power dated July 25, 1984. (Exhibit C-118, 1984 Form 10-K, File No. 1-8222) 10.43.1 Tertiary Energy for Testing of the Highgate HVDC Station Agreement, dated September 20, 1985. (Exhibit C-129, 1985 Form 10-K, File No. 1-8222) 10.44 Copy of Highgate Operating and Management Agreement dated August 1, 1984. (Exhibit C-119, 1986 Form 10-K, File No. 1-8222) 10.44.1 Amendment No. 1 dated April 1, 1985. (Exhibit 10-152, 1986 Form 10-K, File No. 1-8222) 10.44.2 Amendment No. 2 dated November 13, 1986. (Exhibit 10-167, 1987 Form 10-K, File No. 1-8222) 10.44.3 Amendment No. 3 dated January 1, 1987. (Exhibit 10-168, 1987 Form 10-K, File No. 1-8222) 10.45 Copy of Highgate Construction Agreement dated August 1, 1984. (Exhibit C-120, 1984 Form 10-K, File No. 1-8222) 10.45.1 Amendment No. 1 dated April 1, 1985. (Exhibit 10-151, 1986 Form 10-K, File No. 1-8222) 10.46 Copy of Agreement for Joint Ownership, Construction and Operation of the Highgate Transmission Interconnection. (Exhibit C-121, 1984 Form 10-K, File No. 1-8222) 10.46.1 Amendment No. 1 dated April 1, 1985. (Exhibit 10-153, 1986 Form 10-K, File No. 1-8222) 10.46.2 Amendment No. 2 dated April 18, 1985. (Exhibit 10-154, 1986 Form 10-K, File No. 1-8222) 10.46.3 Amendment No. 3 dated February 12, 1986. (Exhibit 10-155, 1986 Form 10-K, File No. 1-8222) 10.46.4 Amendment No. 4 dated November 13, 1986. (Exhibit 10-169, 1987 Form 10-K, File No. 1-8222) 10.46.5 Amendment No. 5 and Restatement of Agreement dated January 1, 1987. (Exhibit 10-170, 1987 Form 10-K, File No. 1-8222) 10.47 Copy of the Highgate Transmission Agreement dated August 1, 1984. (Exhibit C-122, 1984 Form 10-K, File No. 1-8222) 10.48 Copy of Preliminary Vermont Support Agreement Re: Quebec Interconnection - Phase II dated September 1, 1984. (Exhibit C-124, 1984 Form 10-K, File No. 1-8222) 10.48.1 First Amendment dated March 1, 1985. (Exhibit C-127, 1985 Form 10-K, File No. 1-8222) 10.49 Vermont Transmission and Interconnection Agreement between New England Power Company and Central Vermont Public Service Corporation and Green Mountain Power Corporation with the consent of Vermont Electric Power Company, Inc., dated May 1, 1985. (Exhibit C-128, 1985 Form 10-K, File No. 1-8222) 10.50 Service Contract Agreement between the Company and the State of Vermont for distribution and sale of energy from St. Lawrence power projects ("NYPA Power") dated as of June 25, 1985. (Exhibit C-130, 1985 Form 10-K, File No. 1-8222) 10.50.1 Lease and Operating Agreement between the Company and the State of Vermont dated as of June 25, 1985. (Exhibit C-131, 1985 Form 10-K, File No. 1-8222) 10.51 System Sales & Exchange Agreement Between Niagara Mohawk Power Corporation and Central Vermont Public Service Corporation dated October 1, 1986. (Exhibit C-133, 1986 Form 10-K, File No. 1-8222) 10.54 Transmission Agreement between Vermont Electric Power Company, Inc. and Central Vermont Public Service Corporation dated January 1, 1986. (Exhibit 10-146, 1986 Form 10-K, File No. 1-8222) 10.55 1985 Four-Party Agreement between Vermont Electric Power Company, Central Vermont Public Service Corporation, Green Mountain Power Corporation and Citizens Utilities dated July 1, 1985. (Exhibit 10-147, 1986 Form 10-K, File No. 1-8222) 10.55.1 Amendment dated February 1, 1987. (Exhibit 10-171, 1987 Form 10-K, File No. 1-8222) 10.56 1985 Option Agreement between Vermont Electric Power Company, Central Vermont Public Service Corporation, Green Mountain Power Corporation and Citizens Utilities dated December 27, 1985. (Exhibit 10-148, 1986 Form 10-K, File No. 1-8222) 10.56.1 Amendment No. 1 dated September 28, 1988. (Exhibit 10-182, 1988 Form 10-K, File No. 1-8222) 10.56.2 Amendment No. 2 dated October 1, 1991. (Exhibit 10.56.2, 1991 Form 10-K, File No. 1-8222) 10.56.3 Amendment No. 3 dated December 31, 1994. (Exhibit 10.56.3, 1994 Form 10-K, File No. 1-8222) 10.56.4 Amendment No. 4 dated December 31, 1996. (Exhibit 10.56.4, 1996 Form 10-K, file No. 1-8222) 10.57 Highgate Transmission Agreement dated August 1, 1984 by and between the owners of the project and the Vermont electric distribution companies. (Exhibit 10-156, 1986 Form 10-K, File No. 1-8222) 10.57.1 Amendment No. 1 dated September 22, 1985. (Exhibit 10-157, 1986 Form 10-K, File No. 1-8222) 10.58 Vermont Support Agency Agreement re: Quebec Interconnection - Phase II between Vermont Electric Power Company, Inc. and participating Vermont electric utilities dated June 1, 1985. (Exhibit 10-158, 1986 Form 10K, File No. 1-8222) 10.58.1 Amendment No. 1 dated June 20, 1986. (Exhibit 10-159, 1986 Form 10-K, File No. 1-8222) 10.59 Indemnity Agreement B-39 dated May 9, 1969 with amendments 1-16 dated April 17, 1970 thru April 16, 1985 between licensees of Millstone Unit No. 3 and the Nuclear Regulatory Commission. (Exhibit 10-161, 1986 Form 10-K, File No. 1-8222) 10.59.1 Amendment No. 17 dated November 25, 1985. (Exhibit 10-162, 1986 Form 10-K, File No. 1-8222) 10.62 Contract for the Sale of 50MW of firm power between Hydro-Quebec and Vermont Joint Owners of Highgate Facilities dated February 23, 1987. (Exhibit 10-173, 1987 Form 10-K, File No. 1-8222) 10.63 Interconnection Agreement between Hydro-Quebec and Vermont Joint Owners of Highgate facilities dated February 23, 1987. (Exhibit 10-174, 1987 Form 10-K, File No. 1-8222) 10.63.1 Amendment dated September 1, 1993 (Exhibit 10.63.1, 1993 Form 10-K, File No. 1-8222) 10.64 Firm Power and Energy Contract by and between Hydro-Quebec and Vermont Joint Owners of Highgate for 500MW dated December 4, 1987. (Exhibit 10-175, 1987 Form 10-K, File No. 1-8222) 10.64.1 Amendment No. 1 dated August 31, 1988. (Exhibit 10-191, 1988 Form 10-K, File No. 1-8222) 10.64.2 Amendment No. 2 dated September 19, 1990. (Exhibit 10-202, 1990 Form 10-K, File No. 1-8222) 10.64.3 Firm Power & Energy Contract dated January 21, 1993 by and between Hydro-Quebec and Central Vermont Public Service Corporation for the sale back of 25 MW of power. (Exhibit 10.64.3, 1992 Form 10-K, File No. 1-8222) 10.64.4 Firm Power & Energy Contract dated January 21, 1993 by and between Hydro-Quebec and Central Vermont Public Service Corporation for the sale back of 50 MW of power. (Exhibit 10.64.4, 1992 Form 10-K, File No. 1-8222) 10.66 Hydro-Quebec Participation Agreement dated April 1, 1988 for 600 MW between Hydro-Quebec and Vermont Joint Owners of Highgate. (Exhibit 10-177, 1988 Form 10-K, File No. 1-8222) 10.66.1 Hydro-Quebec Participation Agreement dated April 1, 1988 as amended and restated by Amendment No. 5 thereto dated October 21, 1993, among Vermont utilities participating in the purchase of electricity under the Firm Power and Energy Contract by and between Hydro-Quebec and Vermont Joint Owners of Highgate. (Exhibit 10.66.1, 1997 Form 10-Q, March 31, 1997, File. No. 1-8222) 10.67 Sale of firm power and energy (54MW) between Hydro-Quebec and Vermont Utilities dated December 29, 1988. (Exhibit 10-183, 1988 Form 10-K, File No. 1-8222) 10.75 Receivables Purchase Agreement between Central Vermont Public Service Corporation, Central Vermont Public Service Corporation as Service Agent and The First National Bank of Boston dated November 29, 1988. (Exhibit 10-192, 1988 Form 10-K) 10.75.1 Agreement Amendment No. 1 dated December 21, 1988 (Exhibit 10.75.1, 1993 Form 10-K, File No. 1-8222) 10.75.2 Letter Agreement dated December 4, 1989 (Exhibit 10.75.2, 1993 Form 10-K, File No. 1-8222) 10.75.3 Agreement Amendment No. 2 dated November 29, 1990 (Exhibit 10.75.3, 1993 Form 10-K, File No. 1-8222) 10.75.4 Agreement Amendment No. 3 dated November 29, 1991 (Exhibit 10.75.4, 1993 Form 10-K, File No. 1-8222) 10.75.5 Agreement Amendment No. 4 dated November 29, 1992 (Exhibit 10.75.5, 1993 Form 10-K, File No. 1-8222) 10.75.6 Agreement Amendment No. 5 dated November 29, 1993 (Exhibit 10.75.6, 1997 Form 10-K, File No. 1-8222) 10.75.7 Agreement Amendment No. 6 dated November 29, 1994 (Exhibit 10.75.7, 1997 Form 10-K, File No. 1-8222) 10.75.8 Agreement Amendment No. 7 dated November 29, 1995 (Exhibit 10.75.8, 1997 Form 10-K, File No. 1-8222) 10.75.9 Agreement Amendment No. 8 dated February 5, 1997 (Exhibit 10.75.9, 1997 Form 10-K, File No. 1-8222) 10.75.10 Agreement Amendment No. 9 dated February 2, 1998 (Exhibit 10.75.10, 1997 Form 10-K, File No. 1-8222) 10.83 Credit Agreement Dated As of November 5, 1997, see exhibit 4-56; 10.83.1 and 10.83.2, see exhibit 4-56.1 and 4-56.2. EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS A 10.68 Stock Option Plan for Non-Employee Directors dated July 18, 1988. (Exhibit 10-184, 1988 Form 10-K, File No. 1-8222) A 10.69 Stock Option Plan for Key Employees dated July 18, 1988. (Exhibit 10-185, 1988 Form 10-K, File No. 1-8222) A 10.70 Officers Supplemental Insurance Plan authorized July 9, 1984. (Exhibit 10-186, 1988 Form 10-K, File No. 1-8222) A 10.71 Officers Supplemental Deferred Compensation Plan dated November 4, 1985. (Exhibit 10-187, 1988 Form 10-K, File No. 1-8222) A 10.71.1 Amendment dated October 2, 1995. (Exhibit 10.71.1, 1995 Form 10-K, File No. 1-8222) A 10.72 Directors' Supplemental Deferred Compensation Plan dated November 4, 1985. (Exhibit 10-188, 1988 Form 10-K, File No. 1-8222) A 10.72.1 Amendment dated October 2, 1995. (Exhibit 10.72.1, 1995 Form 10-K, File No. 1-8222) A 10.73 Management Incentive Compensation Plan as adopted September 9, 1985. (Exhibit 10-189, 1988 Form 10-K, File No. 1-8222) A 10.73.1 Revised Management Incentive Plan as adopted February 5, 1990. (Exhibit 10-200, 1989 Form 10-K, File No. 1-8222) A 10.73.2 Revised Management Incentive Plan dated May 2, 1995. (Exhibit 10.73.2, 1995 Form 10-K, File No. 1-8222) A 10.74 Officers' Change of Control Agreements as approved October 3, 1988. (Exhibit 10-190, 1988 Form 10-K, File No. 1-8222) A 10.78 Stock Option Plan for Non-Employee Directors dated April 30, 1993 (Exhibit 10.78, 1993 Form 10-K, File No. 1-8222) A 10.79 Officers Insurance Plan dated November 15, 1993 (Exhibit 10.79, 1993 Form 10-K, File No. 1-8222) A 10.79.1 Amendment dated October 2, 1995. (Exhibit No. 10.79.1, 1995 Form 10-K, File No. 1-8222) A 10.80 Directors' Supplemental Deferred Compensation Plan dated January 1, 1990 (Exhibit 10.80, 1993 Form 10-K, File No. 1-8222) A 10.80.1 Amendment dated October 2, 1995. (Exhibit No. 10.80.1, 1995 Form 10-K, File No. 1-8222) A 10.81 Officers' Supplemental Deferred Compensation Plan dated January 1, 1990 (Exhibit 10.81, 1993 Form 10-K, File No. 1-8222) A 10.82 Management Incentive Plan for Executive Officers dated January 1, 1997. (Exhibit 10.82, 1996 Form 10-K, File No. 1-8222) A 10.83 Management Incentive Plan for Executive Officers dated January 1, 1998 (Exhibit A10.83, Form 10-Q, March 31, 1998, File No. 1-8222) *A 10.84 Officers' Change of Control Agreement dated January 1, 1998 *A 10.85 Officers' Supplemental Retirement and Deferred Compensation Plan as Amended and Restated Effective January 1, 1998 A 10.86 1993 Stock Option Plan for Non-employee Directors (Exhibit 28 to Registration Statement, Registration 33-62100) A 10.87 1997 Stock Option Plan for Key Employees (Exhibit 4.3 to Registration Statement, Registration 333-57001) A 10.88 1997 Restricted Stock Plan for Non-employee Directors and Key Employees (Exhibit 4.3 to Registration Statement, Registration 333-57005) A - Compensation related plan, contract, or arrangement. 21. Subsidiaries of the Registrant * 21.1 List of Subsidiaries of Registrant 23. Consents of Experts and Counsel * 23.1 Consent of Independent Public Accountants 27. Financial Data Schedule (filed electronically only) (b) Reports on Form 8-K: The Company filed the following reports on Form 8-K during the quarter ended December 31, 1998: 1. Item 5. Other Events, dated October 27, 1998 re: (a) Vermont Retail Rate Settlement (b) Change in Board of Directors (c) Revolving Credit and Competitive Advance Facility 2. Item 5. Other Events, dated December 3, 1998 re: (a) Report of the Working Group on Vermont's Electricity Future (b) Vermont Retail Rate Increase (c) Fuel Adjustment Clause and Purchased Power Cost Adjustment (FAC/PPCA) for Connecticut Valley Electric Company Inc. (d) First Circuit Decision (e) Other - Carl E. Horton, Sr. choosing not to be a candidate for directorship REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Central Vermont Public Service Corporation: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in Central Vermont Public Service Corporation's annual report to shareholders, included in this Form 10-K, and have issued our report thereon dated February 25, 1999 (except with respect to the matter discussed in Note 18, as to which the date is March 26, 1999). Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index above is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states, in all material respects, the consolidated financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Boston, Massachusetts March 26, 1999
Schedule II CENTRAL VERMONT PUBLIC SERVICE CORPORATION AND ITS WHOLLY OWNED SUBSIDIARIES Reserves Year ended December 31, 1998 Additions Balance at Charged to Charged Balance at beginning costs and to other end of of year expenses accounts Deductions year Reserves deducted from assets to which they apply: $ 77,925(1) 354,950(2) __________ Reserve for uncollectible accounts receivable $1,945,893 $1,126,136 $ 432,875 $1,263,108(3) $2,241,796 ========== ========== ========== ========== ========== Accumulated depreciation of miscellaneous properties: Rental water heater program $3,629,089 $ 360,158 - $ 271,172(4) $3,718,075 Other 24,918(5) 365,134 242,677 - 9,985(6) 572,908 __________ __________ _________ _________ __________ $3,994,223 $ 602,835 $ 306,075 $4,290,983 ========== ========== ========= ========= ========== Reserves shown separately: Injuries and damages reserve $ 225,580 - - - $ 225,580 ========== ========== Environmental Reserve $4,367,151 $ 500,000 $5,532,871(7) $ 452,918(8) $9,947,104 ========== ========== ========== ========== ========== Accumulated provision for rate refunds - $2,737,345 - - $2,737,345 ========== ========== (1) Amount due from collection agency. (2) Collections of accounts previously written off. (3) Uncollectible accounts written off. (4) Retirement/Sale of rental water heaters. (5) Write down of computers. (6) Retirement of equipment. (7) Additional reserve. (8) Expenses charged against reserve.
Schedule II CENTRAL VERMONT PUBLIC SERVICE CORPORATION AND ITS WHOLLY OWNED SUBSIDIARIES Reserves Year ended December 31, 1997 Additions Balance at Charged to Charged Balance at beginning costs and to other end of of year expenses Accounts Deductions year Reserves deducted from assets to which they apply: $ 91,909(1) 415,992(2) Reserve for uncollectible 770,496(3) __________ accounts receivable $1,132,195 $751,530 $1,278,397 $1,216,229(4) $1,945,893 ========== ======== ========== ========== ========== Accumulated depreciation of miscellaneous properties: Rental water heater program $3,553,149 $357,961 - $ 282,021(5) $3,629,089 320,811(6) Other 731,892 106,248 - 152,195(7) 365,134 __________ ________ __________ __________ $4,285,041 $464,209 $ 755,027 $3,994,223 ========== ======== ========== ========== Reserves shown separately: Injuries and damages reserve $ 225,580 - - - $ 225,580 ========== ========== Environmental Reserve $5,176,725 - - $ 809,574(8) $4,367,151 ========== ========== ========== (1) Amount due from collection agency. (2) Collections of accounts previously written off. (3) Transferred from miscellaneous receivables. (4) Uncollectible accounts written off. (5) Retirement/Sale of rental water heaters. (6) Sale of non-utility Property. (7) Amortization of Customer Information Systems. (8) Expenses charged against reserve.
Schedule II CENTRAL VERMONT PUBLIC SERVICE CORPORATION AND ITS WHOLLY OWNED SUBSIDIARIES Reserves Year ended December 31, 1996 Additions Balance at Charged to Charged Balance at beginning costs and to other end of of year expenses accounts Deductions year Reserves deducted from assets to which they apply: $ 81,367(1) Reserve for uncollectible 299,244(2) ________ accounts receivable $1,551,606 $670,083 $380,611 $1,470,105(3) $1,132,195 ========== ======== ======== ========== ========== Accumulated depreciation of miscellaneous properties: Rental water heater program $3,508,493 $356,274 - $ 311,618(4) $3,553,149 Other 295,765 436,127 - - 731,892 __________ ________ __________ __________ $3,804,258 $792,401 $ 311,618 $4,285,041 ========== ======== ========== ========== Reserves shown separately: Injuries and damages reserve $ 225,580 - - - $ 225,580 ========== ========== Environmental Reserve $5,464,059 - - $ 287,334(5) $5,176,725 ========== ========== ========== (1) Amount due from collection agency. (2) Collections of accounts previously written off. (3) Uncollectible accounts written off. (4) Retirements of rental water heaters. (5) Expenses charged against reserve.
SIGNATURES 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. CENTRAL VERMONT PUBLIC SERVICE CORPORATION By /s/ Robert H. Young __________________________________________ Robert H. Young, President and Chief Executive Officer March 29, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. DATE NAME AND TITLE March 29, 1999 /s/ Robert H. Young __________________________________________ Robert H. Young President and Chief Executive Officer and Director March 29, 1999 /s/ Francis J. Boyle __________________________________________ Francis J. Boyle, Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) March 29, 1999 /s/ James M. Pennington __________________________________________ James M. Pennington, Vice President, Controller (Principal Accounting Officer) March 29, 1999 /s/ Frederic H. Bertrand __________________________________________ Frederic H. Bertrand Chairman of the Board and Director March 29, 1999 /s/ Robert L. Barnett __________________________________________ Robert L. Barnett Director March 29, 1999 /s/ Rhonda L. Brooks __________________________________________ Rhonda L. Brooks Director March 29, 1999 /s/ Robert G. Clarke __________________________________________ Robert G. Clarke Director March 29, 1999 /s/ Luther F. Hackett __________________________________________ Luther F. Hackett Director March 29, 1999 /s/ Patrick J. Martin __________________________________________ Patrick J. Martin Director March 29, 1999 /s/ Mary Alice McKenzie __________________________________________ Mary Alice McKenzie Director March 29, 1999 /s/ Janice L. Scites __________________________________________ Janice L. Scites Director EX-10 2 EXHIBIT A10.84 FOR FORM 10-K CHANGE OF CONTROL AGREEMENT ( Officer Name ) ============================================================== This Agreement, entered into as of ____________ between Central Vermont Public Service Corporation (hereinafter "Company") and the undersigned Executive executing this Agreement (hereinafter "Executive"). WHEREAS, the Executive is providing valuable services to the Company, and WHEREAS, the Company wishes to assure continued availability of the Executive's services and to create an environment which will promote the Executive's giving impartial and objective advice in the face of potentially disturbing circumstances arising from the possibility of a Change of Control of the Company (as herein defined); NOW THEREFORE, the Company and the Executive in consideration of the terms and conditions set forth hereby mutually covenant and agree as follows: 1. General Conditions No benefit shall be payable hereunder pursuant to Section 4 of this Agreement unless there shall have been both a Change of Control of the Company, as set forth in Section 3 below, and a Termination Event, as set forth in Section 4 below. In construing the terms of the Agreement, it is the intent of the parties to this Agreement to provide the Executive with financial protection in the event significant changes in his employment status occur following a Change of Control of the Company, and it is agreed that provisions of the Agreement are therefore to be construed using a reasonable man standard and not on narrow technical grounds. 2. Term of Agreement This Agreement shall commence on the date hereof and shall continue in effect until the earlier of (i) the fifth anniversary of such date or (ii) the Executive's normal retirement date under the PENSION PLAN OF CENTRAL VERMONT PUBLIC SERVICE CORPORATION AND ITS SUBSIDIARIES or any successor retirement plan ("Normal Retirement Date"); provided, however, that commencing on the date three years after the date hereof, and on each annual anniversary of such date (the "Renewal Date"), the term of the Agreement shall automatically be extended so as to terminate on the earlier of (x) three years from such Renewal Date or (y) the Executive's Normal Retirement Date, unless at least sixty days prior to the Renewal Date the Company shall give written notice that the Agreement shall not be so extended. 3. Change of Control For purposes of this Agreement, a Change of Control of the company shall mean (a), (b), or (c) below: (a) The acquisition, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities by any third person including a "Group" as that term is used in Section 13 (d)(3) of the Securities Exchange Act of 1934 (the Exchange Act); or (b) A change in the membership of the Board of Directors over a period of two consecutive years in which the members of the Board at the beginning of the period cease for any reason to be at least two-thirds of the Board at the end of the period provided, however, that this section does not apply if the nomination of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period; or (c) The acquisition by a third person either directly or indirectly, of the right to own, control or hold with power to vote 10% or more of the outstanding voting securities of the Company, if immediately subsequent to the acquisition of the Company's voting securities by such third person: (A) such third person shall be a "public utility holding company" within the meaning of the 1935 Act, whether or not exempt from registration thereunder, or (B) the Company shall be in danger of losing its exemption under the 1935 Act or shall otherwise be required to register under the 1935 Act. 4. Termination Event A. Definition of Termination Event A Termination Event shall mean any of the following within the thirty-six month period following a Change in Control: (1) the loss by the Executive of his position by reason of discharge or demotion, or the withholding, adverse alteration or reduction of responsibility, authority, or compensation (including any compensation or benefit plan in which the Executive participates or substitute plans adopted prior to the Change in Control) to which the Executive was entitled immediately prior to a Change in control of the Company or to which he would normally be entitled from time to time by reason of his office; (2) the relocation of the Company's principal executive offices more than 25 miles away from the current offices or the Company requiring the executive to be based anywhere other than within 25 miles of the Company's principal executive offices except for the required travel on the Company's business to an extent substantially consistent with his present business travel obligations; (3) the failure of any other company, business, corporation, partnership, individual, or group which succeeds substantially to the interest of the Company or into which it is merged or consolidated, to expressly assume all rights, duties, privileges and obligations set forth in this Agreement. B. Other Terminations Provided no preceding or coincident Termination Event has occurred, no payments hereunder shall be made on account of the Executive's termination because of (1) the Executive's death, disability or retirement; or (2) by the Company for Cause; or (3) the Executive's voluntary termination. (1) Disability; Retirement If the Executive shall have been absent from the full-time performance of his duties with the Company for six consecutive months as the result of the Executive's incapacity due to physical or mental illness, and the Executive shall not have returned to the full-time performance of his duties within thirty days after written notice of termination, the Executive's employment may be terminated for disability. Termination of the Executive's employment based on retirement shall mean termination in accordance with the Company's generally applicable retirement policy or with any retirement arrangement established with the Executive's consent. (2) Cause Cause means termination based on the willful and continued failure by the Executive to perform his duties for the Company or a subsidiary (other than any such failure resulting from the Executive's incapacity due to physical or mental illness), after a written demand for performance is delivered to the Executive by the Chief Executive Officer of the Company which specifically identifies the manner in which the CEO believes the Executive has not performed his duties; or an act or acts of dishonesty taken by the Executive and intended to result in his personal enrichment at the expense of the Company or a subsidiary. 5. Severance Compensation A. If both a Change of Control and a subsequent Termination Event shall have occurred, the Company agrees to make payment in a lump sum ("Severance Compensation") to the Executive of an amount equal to (1) times (2), where: (1) Equals 2.999, and (2) Equals the Executive's average annualized compensation paid by the Company or an affiliate and includible in the Executive's gross income for federal income tax purposes during the most recent five taxable years (or, if fewer, the period of time during which the Executive actually received compensation from the Company or an affiliate) before the date on which a Change in Control occurred. B. The Company shall also pay the Executive all legal fees and expenses incurred by the Executive as a result of such termination, including all such fees and expenses, if any, incurred in investigating the merits, contesting, (including the cost of alternate dispute resolution procedures to which the parties may agree), or disputing any such termination or in seeking to determine, obtain or enforce any right or benefit provided by this Agreement. C. If the amounts of such payments cannot be finally determined when due, the Company shall pay the Executive an estimate, as determined in good faith by the Company, of the minimum amount of such payments and shall pay the remainder of such payments together with interest at the prime rate, plus 2% in effect at the First National Bank of Boston, as soon as the amount thereof can be determined. D. The Executive shall not be required to mitigate the amount of any payment provided for in this Section 5 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 5 be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement insurance or similar benefits, by offset against any amount claimed to be owing by the Executive to the Company, or otherwise. 6. Termination Date; Payment of Severance Benefits A. Payment of Compensation to Termination Date The Company shall pay the Executive full compensation and all other amounts and benefits to which the Executive is entitled through the Termination Date, including the payment of such compensation, amounts and benefits during the time of any extension of the Termination Date pursuant to Section 6C.(4) hereof. B. Date of Payment of Severance Benefits The Company shall pay to the Executive Severance Compensation provided in Section 5 hereof within thirty days of the Termination Date. C. Definition of Termination Date Termination Date means: (1) For Disability, that date thirty days after written notice of termination if the Executive shall not have returned to the full time performance of his duties, as described in Section 4B.(1) hereof. (2) For Cause, (i) due to performance, that date following the notice to the Executive of performance failure, which ends the period within which the Executive is given to correct his performance as described in Section 4B.(2); or (ii) regarding acts of dishonesty, thirty days after the Company's written notification as described in Section 4B.(2) hereof. (3) For a Termination Event, the date on which the Executive notifies the Company a Termination Event as described in Section 4A. has occurred. If within thirty days following the Termination Date described above, a party notifies the other party that a dispute exists concerning the Termination Event, the Termination Date shall be extended to the date the dispute is fully determined; provided however, that such notice must be given in good faith and the party giving such notice pursues the resolution of the dispute with reasonable diligence. The amount of compensation and benefits paid the Executive during such period of dispute shall be subject to recovery if the Company prevails on the dispute. 7. Future Services and Compensation A. If both a Change of Control and a subsequent Termination Event have occurred, and after which Severance Compensation has been paid in accordance with Section 5 hereof, the Executive agrees: (1) To refrain from entering into competition with the Company or from working for a competitor of the Company for a period of one year following the date he gives notice of the Termination Event, and (2) To provide such consulting services as may be requested by the Company for a period of one year reasonably following the date he gives notice of the Termination Event. B. As compensation to the Executive for his promises in Section 7(A) hereof, the Company agrees to cause the following actions to be carried out: (1) As respects the status of the Executive as a participant in the Company's Officers' Supplemental Retirement Plan, see the Officers' Supplemental Retirement and Deferred Compensation Plan as amended and restated effective August 1, 1984 signed December 1998. (2) As respects the status of the Executive as a participant in the Company's Officers Insurance Agreement: (i) Cause such coverage to remain in force until the Executive obtains life insurance coverage from a subsequent employer, or for a period of three years from the termination date, which ever comes first. (3) If the Executive has less than ten years of service as of the Termination Date, the Company shall also pay to the Executive a lump sum amount actuarially equivalent to benefits the Executive would have received at his 65th birthday under the Pension Plan of Central Vermont Public Service Corporation and its subsidiaries in effect at the Termination Date minus any benefit paid under the Company's Pension Plan, based on crediting the Executive with ten years service. (4) As respects the status of the Executive as a participant in any health or disability insurance plan in which the Executive was participating as of the Termination Date, grant the Executive a leave of absence for three years and cause the Executive's participation in said health or disability insurance plan or plans to continue during his leave of absence. C. It is agreed that this Agreement will supersede any other separation plan or practice maintained by the Company for its officers to the extent there is any conflict. Compensation earned but deferred under terms of its Management Incentive Plan or any other executive compensation plan which the Company may institute hereafter shall specifically be paid to the Executive. 8. Excise Tax Gross-Up Payment In the event the Executive becomes entitled to any payments hereunder or any other payments (whether paid by the Company or otherwise) in connection with a Change in Control of the Company and a subsequent Termination Event (the "Termination Payments"), and in the opinion of independent tax counsel selected by the Executive and reasonably acceptable to the Company any such payments will be subject to the tax imposed by section 4999 of the Internal Revenue Code (the "Excise Tax"), the Company shall pay to the Executive an additional amount such that the net amount retained by the Executive, after deduction of any Excise Tax on the Termination Payments and any federal, state and local income tax (determined at the highest marginal rate applicable) and Excise Tax upon the payment provided for by this Section 8, shall be equal to the Termination Payments that would have been retained by the Executive if the Excise Tax was not applicable, but after deduction of any federal, state and local income tax (determined at the highest marginal tax rate applicable). 9. Arbitration In the event of any dispute arising between the parties to this Agreement, the parties agree that such controversy shall be settled by arbitration, in accordance with the rules of the American Arbitration Association applicable to employee benefit cases. If the parties are unable to agree upon a mutually acceptable arbitrator, then one arbitrator shall be named by each party involved in the dispute, with an additional arbitrator to be chosen by the other named arbitrators. In the event the arbitrator finds that either party has breached its obligation under this Agreement, the arbitrator may award such amount as is necessary to remedy such breach. 10. Withholding Distribution of any benefit payments under this Agreement will be reduced for the amounts required to be withheld pursuant to any government law or regulation with respect to taxes or similar provisions. 11. State Law This Agreement shall be construed under the laws of the State of Vermont. 12. Revocability This Agreement may be revoked or amended in whole or in part only by a writing signed by both parties hereto. 13. Validity The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. ACKNOWLEDGEMENT OF ARBITRATION The parties to this Agreement acknowledge the arbitration provision of this Agreement, and acknowledge that no lawsuit may be brought by either party concerning any dispute that may arise which is covered by the arbitration provision, unless it involves a question of constitutional or civil rights, and that such dispute shall be submitted to arbitration in accordance with the arbitration provision as set forth in Paragraph 9. DATED at Rutland, Vermont this ____ day of ___________, . IN PRESENCE OF: ________________________ ______________________________ Witness Central Vermont Executive CENTRAL VERMONT PUBLIC SERVICE CORPORATION ________________________ ______________________________ Witness Frederic H. Bertrand Chairman of the Board EX-10 3 EXHIBIT A10.85 FOR FORM 10-K CENTRAL VERMONT PUBLIC SERVICE CORPORATION OFFICERS' SUPPLEMENTAL RETIREMENT AND DEFERRED COMPENSATION PLAN Amended and Restated Effective January 1, 1998 Execution Copy December, 1998 CENTRAL VERMONT PUBLIC SERVICE CORPORATION OFFICERS' SUPPLEMENTAL RETIREMENT AND DEFERRED COMPENSATION PLAN TABLE OF CONTENTS Page PREAMBLE 1 ARTICLE I DEFINITIONS 1.1 "Actuarial Equivalent" 2 1.2 "Affiliated Employer" 2 1.3 "Basic Plan" 2 1.4 "Beneficiary" 2 1.5 "Board" 2 1.6 "Change of Control" 3 1.7 "Change of Control Agreement" 4 1.8 "Code" 4 1.9 "Compensation" 4 1.10 "Effective Date" 4 1.11 "Employee" 4 1.12 "Employer" 4 1.13 "Participant" 4 1.14 "Participating Employer" 5 1.15 "Pension Committee" 5 1.16 "Plan" 5 1.17 "Plan Year" 5 1.18 "Retirement Benefit" 5 1.19 "Spouse" 5 1.20 "Termination Event" 6 ARTICLE II PLAN ELIGIBILITY 8 ARTICLE III AMOUNT OF AND ELIGIBILITY FOR BENEFIT 3.1 Retirement Benefit 9 3.2 Eligibility for Benefits 10 3.3 Death Benefits 10 3.4 Benefits Upon a Change of Control 12 ARTICLE IV FORM AND TIMING OF BENEFITS 4.1 Automatic Form of Payment 14 4.2 Timing of Benefits 14 ARTICLE V VESTING 15 ARTICLE VI ADMINISTRATION 16 ARTICLE VII FUNDING 18 ARTICLE VIII AMENDMENT AND TERMINATION 19 ARTICLE IX GENERAL PROVISIONS 9.1 Payment to Minors and Incompetents 20 9.2 No Contract 20 9.3 Use of Masculine and Feminine; Singular and Plural 20 9.4 Non-Alienation of Benefits 20 9.5 Income Tax Withholding 21 9.6 Governing Law 21 9.7 Captions 21 9.8 Severability 21 APPENDIX A MINIMUM BENEFITS FOR ACTIVE EMPLOYEES AS OF DECEMBER 31, 1997 23 APPENDIX B PREDECESSOR PLAN BENEFITS BAA Deferred Compensation Plan 26 1986 Deferred Compensation Plan 27 1990 Deferred Compensation Plan 28 Pension Restoration under Deferred Compensation Plans 29 Officers' Supplemental Retirement Plan 30 PREAMBLE Effective August 1, 1984, Central Vermont Public Service Corporation (the "Employer") established a non-qualified defined benefit pension plan referred to as the Central Vermont Public Service Corporation Officers' Supplemental Retirement Plan (the "Plan") for the benefit of certain employees and their beneficiaries. This document represents an amendment and restatement of the Plan in its entirety, effective January 1, 1998. This plan amendment and restatement also includes a consolidation of certain predecessor supplemental retirement and deferred compensation plans of the Employer, as documented in Appendix B attached hereto. As such, effective January 1, 1998, the Plan is renamed the Central Vermont Public Service Corporation Officers' Supplemental Retirement and Deferred Compensation Plan. The Plan is intended to provide selected employees with the portion of the benefit which cannot accrue under the Pension Plan of Central Vermont Public Service Corporation and Its Subsidiaries because of the compensation limitations of Section 401(a)(17) of the Internal Revenue Code of 1986 (the "Code") and/or the maximum benefit limitations of Section 415 of the Code. The Plan is intended to constitute an unfunded, non-qualified pension plan that is maintained primarily for the purpose of providing deferred compensation for a select group of management and highly compensated employees under Section 201(2) of the Employee Retirement Security Act of 1974 (ERISA), as amended. ARTICLE I DEFINITIONS The following words and phrases when used in the Plan shall have the meanings indicated in this Article I unless a different meaning is plainly required by the context: 1.1 "Actuarial Equivalent" means a benefit of equivalent value to another benefit, determined on the basis of the interest and mortality assumptions utilized for determining actuarial equivalence under the Basic Plan. 1.2 "Affiliated Employer" means any corporation which is a member of a controlled group of corporations (as defined in Code Section 414(b)) which includes the Employer; any trade or business (whether or not incorporated) which is under common control (as defined in Code Section 414(c)) with the Employer; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Employer; and any other entity required to be aggregated with the Employer pursuant to regulations under Code Section 414(o). 1.3 "Basic Plan" means the Pension Plan of Central Vermont Public Service Corporation and Its Subsidiaries, as in effect from time to time. 1.4 "Beneficiary" means the Participant's Spouse or Beneficiary (as defined in the Basic Plan) who is eligible to receive payments under the Basic Plan upon the death of the Participant. 1.5 "Board" means the Board of Directors of Central Vermont Public Service Corporation. 1.6 "Change of Control" means (a), (b) or (c) below: (a) The acquisition, directly or indirectly, of securities of the Employer representing 20% or more of the combined voting power of the Employer's then outstanding securities by any third person including a "Group" as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934 (the Exchange Act); or (b) A change in the membership of the Board over a period of two consecutive years in which the members of the Board at the beginning of the period cease for any reason to be at least two-thirds of the Board at the end of the period provided, however, that this section does not apply if the nomination of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period; or (c) The acquisition by a third person either directly or indirectly, of the right to own, control or hold with power to vote 10% or more of the outstanding voting securities of the Employer, if immediately subsequent to the acquisition of the Employer's voting securities by such third person: (i) such third person shall be a "public utility holding company" within the meaning of the 1935 Act, whether or not exempt from registration thereunder, or (ii) the Employer shall be in danger of losing its exemption under the 1935 Act or shall otherwise be required to register under the 1935 Act. 1.7 "Change of Control Agreement" means the agreement entered into between the Participant and the Employer which provides the Participant certain benefits in the event of a Change of Control and subsequent Termination Event. 1.8 "Code" means the Internal Revenue Code of 1986, as amended from time to time, and pertinent regulations issued thereunder. Reference to any section of the Code shall include any successor provision thereto. 1.9 "Compensation" means the annual compensation of a Participant that would otherwise be recognized under the Basic Plan for benefit accrual purposes without regard to the limit on pensionable compensation under Code Section 401(a)(17). 1.10 "Effective Date" means January 1, 1998, the effective date of the amendment and restatement of this Plan. 1.11 "Employee" means any person who is employed by the Employer or an Affiliated Employer. 1.12 "Employer" means Central Vermont Public Service Corporation or its successor or successors. 1.13 "Participant" means an individual who is a participant of the Basic Plan and who meets the eligibility requirements of Article II herein. The term Participant shall include any Employee who has retired or terminated employment and who is entitled to a benefit under this Plan. 1.14 "Participating Employer" means the Employer and any other Affiliated Employer (or a division or branch of either) which has adopted this Plan and which has been authorized by the Board to participate in this Plan. 1.15 "Pension Committee" means the committee appointed by the Board to administer the Basic Plan. 1.16 "Plan" means the Central Vermont Public Service Corporation Officers' Supplemental Retirement and Deferred Compensation Plan as set forth in this document and as it may be amended from time to time. 1.17 "Plan Year" means the 12-month period commencing each January 1 and ending on the immediately following December 31. 1.18 "Retirement Benefit" means either: (a) a lump sum payment, or (b) an annual pension paid in monthly installments. 1.19 "Spouse" means the individual who is the legal spouse of a Participant in accordance with the Basic Plan provisions. 1.20 "Termination Event" means any of the following within the thirty-six month period following a Change of Control: (a) the loss by the Participant of his position by reason of discharge or demotion, or the withholding, adverse alteration or reduction of responsibility, authority, or compensation (including any compensation or benefit plan in which the Participant participates or substitute plans adopted prior to the Change of Control) to which the Executive was entitled immediately prior to a Change of Control of the Employer or to which he would normally be entitled from time to time by reason of his office; (b) the relocation of the Employer's principal executive offices more than 25 miles away from the current offices or the Employer requiring the Participant to be based anywhere other than within 25 miles of the Employer's principal executive offices except for the required travel on the Employer's business to an extent substantially consistent with his present business travel obligations; (c) the failure of any other company, business, corporation, partnership, individual, or group which succeeds substantially to the interest of the Employer or into which it is merged or consolidated, to expressly assume all rights, duties, privileges and obligations set forth in a valid and enforceable Change of Control Agreement between the Employer and Participant. A Termination Event shall not include a Participant's termination in the following circumstances, as further defined in the Change of Control Agreement: (1) termination due to death, disability or retirement; or (2) termination by the Employer for cause; or (3) voluntary termination by the Participant. ARTICLE II PLAN ELIGIBILITY An Employee shall become a Participant hereunder if such Employee is a participant under the Basic Plan and: (a) such Employee's Compensation is not fully recognized under the Basic Plan because of the compensation limitations imposed by Code Section 401(a)(17); or (b) such employee's Basic Plan Retirement Benefit is restricted or reduced by the Code Section 415 limitations on maximum pension benefits.; or (c) such employee is an officer of the Employer and holds one of the following job titles: (i) Assistant Vice President; (ii) Vice-President; (iii) Senior Vice President; or (iv) Chief Executive Officer A Participant's Beneficiary or Spouse who is entitled to receive or is receiving a benefit from the Basic Plan which is limited, directly or indirectly, by the same provisions described above shall also be entitled to receive a benefit from this Plan. ARTICLE III AMOUNT OF AND ELIGIBILITY FOR BENEFIT 3.1 Retirement Benefit. (a) Subject to the further provisions of this Article III, the benefit payable under this Plan to a Participant shall equal the excess, if any, of (i) over (ii) where: (i) is the benefit which would have been paid to such Participant as a single life annuity under the Basic Plan, if the provisions of the Basic Plan were administered without regard to the benefit limitations of Code Section 415 and regulations thereunder and without regard to the compensation limits of Code Section 401(a)(17) and regulations thereunder; and (ii) is the benefit which is payable to such Participant as a single life annuity under the Basic Plan. If a Participant elects to retire under the early retirement provisions of the Basic Plan, his retirement benefit hereunder shall be subject to the same early retirement reduction factors as are applicable to his benefit payable under the Basic Plan. (b) Notwithstanding the foregoing, if an individual was a Participant on December 31, 1997, under the terms of the Plan as in effect on such date, such Participant shall be entitled to a minimum benefit equal to (i) plus (ii) minus (iii) where: (i) is the Actuarial Equivalent single life annuity of the benefits described in Appendix A; (ii) is the benefit which would be payable to such Participant as a single life annuity under the Basic Plan if amounts paid under the Management Incentive Plan for Officers were excluded from compensation under the Basic Plan; and (iii) is the benefit which is actually payable to such Participant as a single life annuity under the Basic Plan. (c) If a benefit is paid in a form other than a single life annuity, the benefit described above shall be the Actuarial Equivalent of a single life annuity form of payment. 3.2 Eligibility for Benefits. Subject to the provisions of Sections 3.4 and 4.2, a Participant is eligible to retire and receive a benefit under this Plan beginning on the date he is eligible to receive benefits under the Basic Plan. 3.3 Death Benefits. (a) A Participant's Spouse who is entitled to a pre-retirement survivor annuity under the Basic Plan, shall also be entitled to receive a pre-retirement survivor annuity from this Plan. The pre-retirement survivor annuity payable under this Plan to a Spouse shall equal the excess, if any, of (i) over (ii) where: (i) is the pre-retirement survivor annuity which would have been paid to such Spouse under the Basic Plan, if the provisions of the Basic Plan were administered without regard to the benefit limitations of Code Section 415 and regulations thereunder and without regard to the compensation limits of Code Section 401(a)(17) and regulations thereunder; and (ii) is the pre-retirement survivor annuity which is payable to such Spouse under the Basic Plan. (b) Notwithstanding the foregoing, the minimum death benefit payable under this Section 3.3 to a Spouse or Beneficiary of an individual who was a Participant on December 31, 1997, under the terms of the Plan as in effect on such date, is equal to (i) plus (ii) minus (iii) where: (i) is the Actuarial Equivalent single life annuity of the benefits payable to the Participant's Spouse or Beneficiary as described in Appendix A attached hereto; (ii) is the benefit which would be payable to the Participant's Spouse as a pre-retirement survivor annuity under the Basic Plan if amounts paid under the Management Incentive Plan for Officers were excluded from compensation under the Basic Plan; and (iii) is the benefit which is actually payable to the Participant's Spouse as a pre-retirement survivor annuity under the Basic Plan. (c) If a Participant dies at any time after Retirement Benefits have begun, no death benefit shall be payable to anyone unless the form in which the Retirement Benefit was being paid provided for a continuing payment. If the Retirement Benefit form of payment provided for a continuing payment, the death benefit shall be the amount payable under the terms of such form of payment. (d) In the event a Participant, whose benefit is determined under Section 3.4 as a result of a Change of Control, dies prior to payment of such benefit, the death benefits described in paragraphs (a) or (b) of this Section 3.3, shall be determined on the basis of the enhanced benefits described in Section 3.4(a)(i) or 3.4(a)(ii), as applicable. 3.4 Benefits Upon a Change of Control. (a) Upon a Change of Control and subsequent Termination Event, a Participant who has executed a valid and enforceable Change of Control Agreement with the Employer, and who further satisfies the requirements described in paragraph (c) below, shall be entitled to the greater of the benefits described in paragraph (i) or (ii) below in accordance with the further provisions of this Section 3.4: (i) The benefit described in Section 3.1(a), with such benefit being determined as if the Participant had earned three additional years of benefit accruals under the Basic Plan for purposes of 3.1(a)(i), assuming his compensation under the Basic Plan for such three year period is equal to such compensation for the Plan Year immediately preceding the Plan Year in which the Change of Control occurs. Benefits under this Section 3.4(a) shall be nonforfeitable at all times. (ii) If the individual was a Participant of the Plan on December 31, 1997, and is age 50 or older upon the Change of Control, the benefit described in Section 3.1(b), without regard to the age and service requirements of Section III(a) of Appendix A or the early retirement reduction specified in III(b) of Appendix A. Benefits payable under this Section 3.4(b) shall be subject to an Actuarial Equivalent reduction for commencement prior to the Participant's attainment of age 60. (b) Benefits determined under this Section 3.4, shall be payable at the later of the date the Participant attains age 55 and the date on which severance compensation benefits become payable under the Participant's Change of Control Agreement. A Participant may elect to have such benefits paid on an Actuarial Equivalent basis in one of the optional forms of payment available under the Basic Plan. Notwithstanding the foregoing, the Board may, at its discretion, instruct the Pension Committee to pay the Actuarial Equivalent single lump sum of such benefits under this Section 3.4, at such earlier date as it determines. (c) No benefits are payable under this Section 3.4 unless the Participant agrees: (i) to refrain from entering into competition with the Employer or from working for a competitor of the Employer within the Employer's principal retail marketing area for a period of one year following the date he gives notice of the Termination Event, and (ii) to provide such consulting services as may be requested by the Employer for a period of one year reasonably following the date he gives notice of the Termination Event. ARTICLE IV FORM AND TIMING OF BENEFITS 4.1 Automatic Form of Payment. Payment of Retirement Benefits under this Plan shall be made in the same form as the benefit paid to, or on behalf of, the Participant under the Basic Plan. If a Participant, Beneficiary or Spouse elects an optional form of payment under the Basic Plan, the same form of payment shall automatically apply hereunder and the actuarial equivalent adjustment factors under the Basic Plan shall apply to the benefit payable under this Plan. 4.2 Timing of Benefits. Subject to the provisions of Section 3.4, a Participant, his Beneficiary or Spouse shall be eligible for benefits under this Plan if and when such individual begins receiving benefits under the Basic Plan. Benefits under this Plan shall commence on the same date on which the Participant or his Beneficiary or Spouse commences benefits under the Basic Plan. In the event that a Participant commences receiving benefits under this Plan and is subsequently reemployed by the Employer or an Affiliated Employer, payment of benefits under this Plan shall be suspended and then shall resume if and when the benefits payable to the Participant under the Basic Plan are suspended and resumed. Retirement Benefits hereunder shall always be suspended and resumed when benefits under the Basic Plan are suspended and resumed. ARTICLE V VESTING Subject to Article VIII and except as otherwise provided in Section 3.4 and Appendix A, a Participant has a nonforfeitable interest in Retirement Benefits under this Plan beginning at the same time and under the same conditions as applicable to his retirement benefits under the Basic Plan. ARTICLE VI ADMINISTRATION 6.1 This Plan shall be administered by the Employer through the Pension Committee in a manner consistent with the administration of the Basic Plan as set forth in the Basic Plan, except as specifically provided herein. The Pension Committee shall have full discretion to interpret and administer this Plan and its decision in any matter involving the interpretation and application of this Plan shall be final and binding on all parties. 6.2 All claims for benefits under this Plan shall be made in writing to the Pension Committee. Such claims for benefits, responses by the Pension Committee, and any appeals thereof shall be made in accordance with the provisions for claims procedures, as set forth in the Basic Plan. 6.3 The members of the Pension Committee may authorize one or more of their number to execute or deliver any instrument, make any payment or perform any other act which the Plan authorizes or requires the Pension Committee to do. 6.4 The Pension Committee may employ counsel and other agents and may procure such clerical, accounting, actuarial, consulting and other services as it may require in carrying out the provisions of the Plan. 6.5 The Employer shall indemnify and save harmless each member of the Pension Committee against all expenses and liabilities arising out of membership on such Pension Committee, provided such indemnification would not be contrary to law or the by-laws of the Employer. No bond or other security shall be required by the Pension Committee members for the faithful performance of their duties hereunder. 6.6 Any responsibility or authority assigned to the Pension Committee under the Plan may be delegated to any other person or persons, by name or in the case of a delegation to an employee of the Employer by title or position with the Employer, provided such delegation is in writing, identifies the responsibility or authority delegated, is revocable by the Pension Committee at any time in its discretion and becomes effective only upon the written acceptance of the person or persons to whom the responsibility or authority is delegated. 6.7 The Pension Committee shall hold meetings upon such notice, at such place or places, and at such times as its members may from time to time determine. A majority of the members of the Pension Committee at the time in office shall constitute a quorum for the transaction of business. All actions taken by the Pension Committee at any meeting shall be by vote of the majority of its members present at such meeting, but the Pension Committee may act without a meeting by unanimous action of its members evidenced by a resolution signed by all such members. Subject to the terms of the Plan, the Pension Committee may from time to time adopt by-laws, rules and regulations for the administration of the Plan and the conduct and transaction of its business and affairs. ARTICLE VII FUNDING The Employer may set aside assets in a trust or other funding arrangement as it, or its delegate, deems appropriate to anticipate benefit liabilities accumulating under the Plan; provided such arrangement is not considered "funded" for purposes of the Code and the Employee Retirement Income Security Act of 1974. Accordingly, the assets of any such arrangement shall be subject to the claims of the Participating Employer's creditors in the event of the Participating Employer's insolvency. No portion of any funds set apart for a Participant, Beneficiary, or Spouse pursuant to this Article shall be the property of such Participant, Beneficiary or Spouse until distribution thereof has been made to such individual. Further, the rights of a Participant, Beneficiary or Spouse shall be limited to those of a general, unsecured creditor of the Participating Employer who has a claim equal to the value of the Participant's Retirement Benefit hereunder. Benefits under this Plan will be payable from the general assets of the Participating Employer, or from such other funding vehicle established for such purpose as described above, or both. Except as may be otherwise determined by the Board in its sole discretion pursuant to this Article, neither the Participating Employer, the Pension Committee nor any other person shall have any duty to set apart or invest any funds for the purpose of providing benefits pursuant to the terms of the Plan. ARTICLE VIII AMENDMENT AND TERMINATION The Employer, reserves the right to amend, modify, suspend or terminate this Plan in whole or in part at anytime by action of the Board or the Board's duly appointed delegate. No amendment or suspension of the Plan, however, shall reduce the Retirement Benefit accrued under this Plan as in effect on the date of any amendment, suspension or termination, except to the extent that the Participant agrees in writing to such reduction. ARTICLE IX GENERAL PROVISIONS 9.1 Payments to Minors and Incompetents. If any Participant, Spouse or Beneficiary entitled to receive any benefits hereunder is a minor or is deemed by the Pension Committee or is adjudged to be legally incapable of giving valid receipt and discharge for such benefits, they will be paid to such person or institution as the Pension Committee may designate or to the duly appointed guardian. Such payment shall, to the extent made, be deemed a complete discharge of any such payment under the Plan. 9.2 No Contract. This Plan shall not be deemed a contract of employment with any Participant, nor shall any provision hereof affect the right of the Employer or any Affiliated Employer to terminate a Participant's employment. 9.3 Use of Masculine and Feminine; Singular and Plural. Wherever used in this Plan, the masculine gender will include the feminine gender and the singular will include the plural, unless the context indicates otherwise. 9.4 Non-Alienation of Benefits. No amount payable to, or held under the Plan for the account of, any Participant, Spouse or Beneficiary shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to so anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge the same shall be void; nor shall any amount payable to, or held under the Plan for the account of, any Participant be in any manner liable for such Participant's debts, contracts, liabilities, engagements, or torts, or be subject to any legal process to levy upon or attach. 9.5 Income Tax Withholding. The Participating Employer may withhold from any payments hereunder such amount as it may be required to withhold under applicable Federal, state, or other law, and transmit such withheld amounts to the appropriate taxing authority. 9.6 Governing Law. The provisions of the Plan shall be interpreted, construed, and administered in accordance with the Code, the Employee Retirement Income Security Act of 1974, and the laws of the State of Vermont, to the extent each such law is applicable. 9.7 Captions. The captions contained in the Plan are inserted only as a matter of convenience and for reference and in no way define, limit, enlarge, or describe the scope or intent of the Plan nor in any way affect the construction of any provision of the Plan. 9.8 Severability. If any provision of the Plan is held invalid or unenforceable, its invalidity or unenforceability will not affect any other provision of the Plan, and the Plan will be construed and enforced as if such provision had not been included. IN WITNESS WHEREOF, the Employer has caused this instrument to be executed by its duly authorized officer as of the 15th day of December, 1998. CENTRAL VERMONT PUBLIC SERVICE CORPORATION By: /s/ Robert H. Young Robert H. Young Attest: By: /s/ Carole L. Root Carole L. Root (Corporate Seal) APPENDIX A ---------- MINIMUM BENEFITS FOR ACTIVE EMPLOYEES AS OF DECEMBER 31, 1997 - - ------------------------------------------------------------- I. Schedule of Minimum Benefits for Active Employees as of December 31, 1997: Name Percentage of Earnings at Retirement* - - ---- ------------------------------------- Douglas Barba 33% Jonathan Booraem 33% Frank Boyle 33% Kent Brown 33% William Deehan 33% Thomas Hurcomb 33% Joseph Kraus 33% James Pennington 33% Douglas Sinclair 33% Robert Young 44% * Earnings is defined as base salary paid during the Participant's final year of employment, without regard to the compensation limitations of Code Section 401(a)(17) and regulations thereunder. II. A Participant shall be entitled to the minimum benefit under this Appendix A upon his retirement from active employment with the Employer or Affiliated Employer on or after attainment of age 65. III. (a) A Participant may retire from active employment with the Employer or Affiliated at any time between his attainment of age 55 and 65, provided he has completed at least 10 years of service, as defined under the terms of the Basic Plan for vesting purposes. (b) A Participant who has satisfied the requirements for early retirement set forth in paragraph III(a), shall be entitled to commence receipt of his benefit as of any date on or after his attainment of age 60. The Participant's retirement benefit shall be subject to a reduction of 5/12 of 1% for each full month by which payment of his benefit precedes his 65th birthday. IV. In the event that a Participant terminates employment or dies prior to becoming eligible for retirement, as set forth in II or III(a) above, no benefits shall be payable under this Appendix A. V. In the event that a Participant dies on or after becoming eligible for retirement as set forth in II or III(a) above, the benefit under this Appendix A shall be payable to the Participant's designated Beneficiary. In addition, the Participant's Beneficiary shall be entitled to a death benefit of $166,667, payable in a single lump sum. VI. Benefits under this Appendix A shall be payable on a monthly basis, in the form of a 180-month guaranteed annuity. If the Participant dies before payment of the guaranteed 180 monthly installments, payment of any remaining installments shall be made to his designated Beneficiary. If the designated Beneficiary dies before the guaranteed total of 180 monthly payments are made, any remaining payments shall be paid to the Beneficiary's estate. APPENDIX B PREDECESSOR PLAN BENEFITS ------------------------- The following tables identify benefits of certain retired officers that were earned under predecessor supplemental retirement and deferred compensation plans of the Employer prior to December 1, 1998. Baa Deferred Compensation Plan ------------------------------ Payment Period (1) Name Monthly Benefit (2) First Final - - ---- --------------- ----- ----- Jonathan Booraem $ 12/1/98 11/1/03 Darrow McLeod $ 1/1/90 12/1/04 (1) Benefits are payable monthly installments in the form of a certain annuity. (2) Benefits shown as of 12/1/98. Benefits will be increased each month to reflect interest earned on the remaining deferred compensation balance based on Moody Baa bond yields. Appendix B (Cont'd) 1986 Deferred Compensation Plan ------------------------------- Payment Period (1) Name Annual Benefit (2) First Final - - ---- --------------- ----- ----- Jonathan Booraem $ 12/1/98 11/1/03 Edwin Calcagni (beneficiary) $ 3/1/90 2/1/05 Clifford Giffin $ 1/1/91 12/1/05 James Griffin $ 10/1/86 9/1/01 Thomas Hurcomb $ 3/1/98 2/1/13 Olga Laird $ 3/1/88 2/1/03 Darrow McLeod $ 1/1/90 12/1/04 Donald Rushford $ 1/1/94 12/1/08 Thomas Webb $ 1/1/96 12/1/10 (1) Benefits are payable in monthly installments in the form of a 15-year certain annuity. Appendix B (Cont'd) 1990 Deferred Compensation Plan ------------------------------- Payment Period (1) Name Annual Benefit (2) First Final - - ---- --------------- ----- ----- Jacquel-Anne Chouinard $ 9/1/04 8/1/19 Thomas Hurcomb $ 3/1/98 2/1/13 Donald Rushford $ 1/1/94 12/1/08 (1) Benefits are payable in monthly installments in the form of a 15-year certain annuity. Appendix B (Cont'd) Pension Restoration under Deferred Compensation Plans ----------------------------------------------------- Date of First Form of Name Annual Benefit Payment Payment (1) Edwin Calcagni (2) $ 3/1/90 Life annuity Clifford Giffin $ 1/1/91 Contingent annuity (50%) James Griffin $ 10/1/86 Life annuity Thomas Hurcomb $ 3/1/98 Contingent annuity (100%) Olga Laird $ 3/1/88 Life annuity Darrow McLeod $ 1/1/90 Contingent annuity (100%) Donald Rushford $ 1/1/94 Contingent annuity (50%) (1) Benefits are payable monthly installments. (2) Mr. Calcagni died in 1995. The remaining benefit is payable to his spouse for the remainder of her life. Appendix B (Cont'd) Officer's Supplemental Retirement Plan -------------------------------------- Payment Period (2) Name Annual Benefit (1) First Final - - ---- ------------------ ------------------- Jonathan Booraem $ 2/1/98 11/1/13 Edwin Calcagni $ 3/1/90 2/1/05 Jacquel-Anne Chouinard $ (3) 9/1/04 8/1/19 Clifford Giffin $ 1/1/91 12/1/05 James Griffin $ (4) 10/1/86 9/1/01 Thomas Hurcomb $ 3/1/98 2/1/13 Olga Laird $ 3/1/88 2/1/03 Darrow McLeod $ 1/1/90 12/1/04 Beverly Merritt $ 7/1/93 6/1/08 Donald Rushford $ 1/1/94 12/1/08 Warren Stevens $ 9/1/85 8/1/00 Thomas Webb $ 1/1/96 12/1/10 (1) In addition, upon the death of the Participant, the Participant's Beneficiary shall be entitled to a death benefit of $100,000, payable in a single sum. (2) Except as noted for Mr. Griffin, benefits are payable in monthly installments in the form of a 15-year certain annuity. (3) This is the deferred benefit available at age 65. Reduced benefits are available as early as age 60. The applicable reduction is 5/12 of 1% for each full month by which payment of the benefit precedes age 65. (4) $34,755 is payable as a life annuity; the remainder is payable as a 15-year certain annuity. EX-21 4 EXHIBIT 21.1 FOR FORM 10-K EXHIBIT 21.1 ----------- Subsidiaries of the Registrant ---------------------------------- State in Which Incorporated --------------- Connecticut Valley Electric Company Inc. (a) (F1) New Hampshire Vermont Electric Power Company, Inc. (b) (F2) Vermont C.V. Realty, Inc. (a) (F1) Vermont *Catamount Investment Corporation Vermont Central Vermont Public Service Corporation - Bradford Hydroelectric, Inc. (a) (F1) Vermont Catamount Energy Corporation (a) (F1) Vermont SmartEnergy Services, Inc. (a) (F1) Vermont - - - - - - - - - - - - - - - - - - - - - - - - - - - - * Dissolved in February, 1998. (FN) (F1) (a) Included in consolidated financial statements (F2) (b) Separate financial statements do not need to be filed under Regulation S-X, Rule 1-02 (v) defining a "significant subsidiary", and Rule 3-09, which sets forth the requirement for filing separate financial statements of subsidiaries not consolidated. EX-23 5 EXHIBIT 23.1 FOR FORM 10-K EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports dated February 25, 1999 (except with respect to the matter discussed in Note 18, as to which the date is March 26, 1999) included in this Form 10-K, into Central Vermont Public Service Corporation's previously filed Registration Statement on Form S-3, File No. 33-39691 and Form S-8 Registration Statements, No. 33-22741, No. 33-22742, No. 33-58102, No. 33-62100, No. 333-57001 and No. 333-57005. ARTHUR ANDERSEN LLP Boston, Massachusetts March 26, 1999 EX-27 6 EXHIBIT 27 FOR FORM 10-K
UT This Financial Data Schedule contains summary financial information extracted from the Consolidated Financial Statements included herein and is qualified in its entirety by reference to such financial statements (dollars in thousands, except per share amounts). 1,000 YEAR DEC-31-1998 DEC-31-1998 PER-BOOK 319,947 64,958 73,771 71,606 0 530,282 66,481 45,318 67,748 179,182 18,000 8,054 90,077 0 0 0 6,773 0 16,141 1,094 210,961 530,282 303,835 (283) 296,127 295,844 7,991 6,652 14,643 10,660 3,983 1,945 2,038 10,131 7,720 21,743 .18 .18
EX-4 7 EXHIBIT 4-56.3 FOR FORM 10-K THIRD AMENDMENT TO CREDIT AGREEMENT THIRD AMENDMENT, dated as of October 5, 1998 (this "Amendment"), to the Credit Agreement referred to below by and among CENTRAL VERMONT PUBLIC SERVICE CORPORATION, a Vermont corporation ("Borrower"), each of the lenders that is a signatory to the Credit Agreement or which, pursuant to Section 10.6 thereof shall become a "Lender" thereunder (the "Lenders"), FLEET NATIONAL BANK, as syndication agent (the "Syndication Agent"), and TORONTO DOMINION (TEXAS), INC., as agent for the Lenders hereunder (the "Agent"; Lenders, Syndication Agent and Agent are sometimes collectively referred to herein as the "Lending Group"). WITNESSETH WHEREAS, the Borrower and the Lending Group are parties to that certain Credit Agreement, dated as of November 5, 1997 (as heretofore amended, supplemented or otherwise modified, the "Credit Agreement"); and WHEREAS, the Borrower and the Lending Group have agreed to amend the Credit Agreement in the manner, and on the terms and conditions, provided for herein. NOW THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the Borrower and the Lending Group hereby agree as follows: 1. Definitions. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement, as amended hereby (the "Amended Credit Agreement"). 2. Amendments to the Credit Agreement. (a) Section 1.1 of the Credit Agreement is hereby amended as of the Amendment Effective Date (as hereinafter defined) by deleting in its entirety the definition of "Existing Letter of Credit Agreements" appearing therein and inserting in lieu thereof a new definition to read as follows: '"Existing Letter of Credit Agreements" shall mean (i) that certain Letter of Credit and Reimbursement Agreement dated as of November 1, 1994 between the Borrower and The Toronto-Dominion Bank, Houston Agency, as amended; (ii) that certain Amended and Restated Reimbursement Agreement, dated as of September 24, 1992 between the Borrower and The Toronto-Dominion Bank, Houston Agency, as amended; and (iii) that certain Reimbursement Agreement dated as of April 29, 1993 between East Barnet and The Toronto-Dominion Bank, Houston Agency, as amended." (b) Section 1.1 of the Credit Agreement is hereby further amended as of the Amendment Effective Date by deleting in its entirety the definition of "Loan Documents" appearing therein and inserting in lieu thereof a new definition to read as follows: '"Loan Documents" shall mean this Agreement, the Notes, the Loan Borrowing Certificates, the Fee Letter, the Security Agreement, the Mortgage, the Collateral Agency Agreement and any other document or agreement executed in connection herewith or contemplated hereby." (c) Section 1.1 of the Credit Agreement is hereby further amended as of the Amendment Effective Date by deleting in its entirety paragraph (f) of the definition of "Permitted Liens" appearing therein and inserting in lieu thereof a new paragraph (f) to read as follows: "(f) Liens granted in favor of the Collateral Agent pursuant to the Security Agreement and the Mortgage." (d) Section 1.1 of the Credit Agreement is hereby further amended as of the Amendment Effective Date by inserting in appropriate alphabetical order new definitions to read as follows: '"Collateral Agency Agreement" shall mean that certain Collateral Agency Agreement, dated as of October 5, 1998, among the Borrower, the Agent, The Toronto-Dominion Bank, Houston Agency, and the Collateral Agent. "Collateral Agent" shall mean Toronto Dominion (Texas), Inc., as collateral agent for the Secured Parties. "East Barnet" shall mean Central Vermont Service Corporation - East Barnet Hydroelectric, Inc., a wholly- owned Subsidiary of the Borrower. "Indenture" shall mean the Indenture, dated as of October 1, 1929, as amended, supplemented or otherwise modified from time to time, between the Borrower and the Indenture Trustee. "Indenture Trustee" shall mean State Street Bank and Trust Company, as successor trustee to The First National Bank of Boston, as successor trustee to Old Colony Trust Company, and its successors and assigns. "Mortgage" shall mean that certain Open-End Mortgage, Security Agreement, Assignment of Rents and Leases, Fixture Filing and Financing Statement, dated as of October 5, 1998, made by the Borrower in favor of the Collateral Agent. "Secured Obligations" shall mean all loans, advances, debts, liabilities and obligations for the performance of covenants, tasks or duties or for payment of monetary amounts (whether or not such performance is then required or contingent, or such amounts are liquidated or determinable) owing by the Borrower or East Barnet to any Secured Party, and all covenants and duties regarding such amounts, of any kind or nature, present or future, whether evidenced by any note, agreement or other instrument, arising under the Transaction Documents. This term includes all principal, interest (including all interest which accrues after the commencement of any case or proceeding in bankruptcy after the insolvency of, or for the reorganization, of the Borrower or East Barnet, whether or not allowed in such proceeding), Fees, charges, expenses, attorneys' fees and any sum chargeable to the Borrower or East Barnet under the Transaction Documents. "Secured Parties" shall mean the Collateral Agent, the Agent, the Syndication Agent, the Lenders, The Toronto-Dominion Bank, Houston Agency, and their respective successors and assigns. "Security Agreement" shall mean that certain Security Agreement, dated as of October 5, 1998, between the Collateral Agent and the Borrower. "Transaction Documents" shall mean the Loan Documents, the Existing Letter of Credit Agreements and the Guaranty, dated April 29, 1993, made by the Borrower in favor of The Toronto-Dominion Bank, Houston Agency." (e) Article II of the Credit Agreement is hereby amended as of the Amendment Effective Date by inserting immediately following Section 2.9 thereof a new Section 2.9A to read as follows: "SECTION 2.9A Mandatory Prepayments. (a) If the Borrower issues First Mortgage Bonds at any time after October 5, 1998, no later than the Business Day following the date of receipt of the proceeds thereof, the Borrower shall prepay the Loans in an amount equal to all such proceeds, net of commissions and other reasonable costs paid in connection therewith. In addition, each Lender's Commitment shall be reduced permanently by an amount equal to its Commitment Percentage multiplied by the amount of such net proceeds. (b) Any prepayments made by the Borrower pursuant to Section 2.9A(a) above shall be applied as follows: first, to Fees, reimbursable expenses of the Agent and any indemnity amounts to which any Secured Party is entitled then due and payable by the Borrower pursuant to any of the Loan Documents; second, to all interest then due and payable on any outstanding Loans; and third, to the principal balance of any outstanding Loans; provided that outstanding ABR Loans shall be prepaid in full prior to the prepayment of any outstanding Eurodollar Loans. (c) Notwithstanding the foregoing provisions of this Section 2.9A, if at any time the mandatory prepayment of Loans required above would result in the Borrower incurring breakage costs under Section 2.15 as a result of Eurodollar Loans or Auction Advances being prepaid other than on the last day of an Interest Period applicable thereto (the "Affected Loans"), then the Borrower may in its sole discretion initially deposit a portion (up to 100%) of the amounts that otherwise would have been paid in respect of the Affected Loans with the Agent (which deposit, after giving effect to interest to be earned on such deposit prior to the last day of the relevant Interest Periods, must be equal in an amount to the amount of Affected Loans not immediately prepaid) to be held as security for the obligations of the Borrower hereunder pursuant to a cash collateral agreement to be entered into in form and substance reasonably satisfactory to the Agent, with such cash collateral to be directly applied upon the first occurrence (or occurrences) thereafter of the last day of an Interest Period applicable to the relevant Loans that are Eurodollar Loans or Auction Advances (or such earlier date or dates as shall be requested by the Borrower), to repay an aggregate principal amount of such Loans equal to the Affected Loan not initially repaid pursuant to this sentence. Notwithstanding anything to the contrary contained in the immediately preceding sentence, all amounts deposited as cash collateral pursuant to the immediately preceding sentence shall be held for the sole benefit of the Lenders whose Loans would have been immediately repaid with the amounts deposited and upon the taking of any action by the Agent or the Lenders pursuant to the remedial provisions of Section 8.1, any amounts held as cash collateral pursuant to this Section 2.9A(c) shall, subject to the requirements of applicable law, be immediately applied to the relevant Loans. Following repayment of the relevant Loans, any remaining cash collateral will be returned to the Borrower." (f) Section 6.2 of the Credit Agreement is hereby amended as of the Amendment Effective Date by inserting at the end of Section 6.2 the following: "The Borrower shall deliver to the Collateral Agent endorsements to all of its (i) "All Risk", fire, casualty and other hazard insurance policies on its real and personal property naming the Collateral Agent as loss payee. All policies of insurance on real and personal property will contain an endorsement, in form and substance acceptable to the Collateral Agent, showing, subject to the rights of the Indenture Trustee, loss payable to the Collateral Agent (Form 438 BFU or equivalent). Such endorsement, or an independent instrument furnished to the Collateral Agent, will provide that the insurance companies will give the Collateral Agent at least 30 days' prior written notice before any such policy or policies of insurance shall be altered or canceled and that no act or default of the Borrower or any other Person shall affect the right of the Collateral Agent to recover under such policy or policies of insurance in case of loss or damage." (g) Article VI of the Credit Agreement is hereby amended as of the Amendment Effective Date by inserting immediately following Section 6.8 thereof a new Section 6.9 to read as follows: "SECTION 6.9 Additional Collateral. The Borrower shall promptly advise the Collateral Agent of any amendment, supplement or modification of the Indenture and shall provide the Collateral Agent with a copy of all agreements, instruments or other documents executed in connection therewith. With respect to any property, real, personal or mixed, in which the Borrower now has or hereafter acquires ownership rights and which becomes subject to the Lien in favor of the Indenture Trustee, the Borrower shall, upon the Collateral Agent's request, execute and deliver any and all such instruments and documents and take such actions as the Collateral Agent may deem desirable to obtain the full benefits of the Security Agreement and the Mortgage." (h) Section 8.1(d) of the Credit Agreement is hereby amended as of the Amendment Effective Date by inserting the text "or the other Loan Documents" after the word "Agreement" where it appears therein. (i) Section 10.1 of the Credit Agreement is hereby amended as of the Amendment Effective Date by deleting the text "or Majority Lenders" appearing in clause (ii) thereof. (j) Article X of the Credit Agreement is hereby amended as of the Amendment Effective Date by inserting immediately following Section 10.14 thereof a new Section 10.15 and Section 10.16 to read as follows: "SECTION 10.15 Collateral Agency Agreement. Each Lender hereby authorizes the Agent to execute, deliver and perform the Collateral Agency Agreement for all purposes thereof, and, without limiting the foregoing, each Lender hereby acknowledges and agrees that (a) pursuant to the terms thereof the Agent shall, on behalf of the Lenders, appoint Toronto Dominion (Texas), Inc. as Collateral Agent for all purposes thereof, the Security Agreement and the Mortgage and (b) such Lender, to the extent set forth in the Collateral Agency Agreement, shall be bound and obligated (including with respect to indemnity obligations) by the terms thereof as if such Lender were directly a party thereto. SECTION 10.16 Mortgage Encumbering New York Real Property. Notwithstanding anything to the contrary contained in this Agreement or any other Loan Document (including, without limitation, the Mortgage), the parties agree as follows with respect to the Mortgage solely to the extent it encumbers real property and fixtures located in the State of New York (the "NY Real Property"): (a) The maximum aggregate principal amount of indebtedness that is, or under any contingency may be, secured by the NY Real Property pursuant to the Mortgage, either at execution or at any time thereafter (the "NY Secured Amount"), is $906,266.25, plus amounts that the Collateral Agent expends after a declaration of default under the Mortgage to the extent that any such amounts shall constitute payment of (i) taxes, charges or assessments that may be imposed by law upon any NY Real Property; (ii) premiums on insurance policies covering any NY Real Property; (iii) expenses incurred in upholding the lien of the Mortgage on the NY Real Property, including the expenses of any litigation to prosecute or defend the rights and lien created by the Mortgage on the NY Real Property; or (iv) any amount, cost or charge to which the Collateral Agent becomes subrogated, upon payment, whether under recognized principles of law or equity, or under express statutory authority; then, and in each such event, such amounts or costs, together with interest thereon, shall be added to the indebtedness secured by the Mortgage and shall be secured by, among other things, the NY Real Property pursuant to the Mortgage. (b) Pursuant to the terms of this Agreement and the Existing Letter of Credit Agreements, the amount of the Secured Obligations may increase and decrease from time to time as the Lenders make advances under this Agreement or drawings are made under the Letters of Credit (as defined in the Existing Letter of Credit Agreements), the Borrower repays, and the Lenders readvance sums on account of the Loans or additional drawings are made under the Letters of Credit, all in accordance with the terms of this Agreement or the Existing Letter of Credit Agreements, as the case may be. Solely for purposes of the NY Real Property, so long as the balance of the Loans and the Letter of Credit Obligations (as hereinafter defined) equals or exceeds the NY Secured Amount, the amount of the Loans and the Letter of Credit Obligations secured by the NY Real Property shall at all times equal only the NY Secured Amount, subject to and as more fully described in Section 10.16(a) hereof. Such NY Secured Amount represents only a portion of the first sums advanced by the Lenders with respect to the Loans and the first sums drawn under the Letters of Credit. For purposes of this Section 10.16, "Letter of Credit Obligations" shall mean all outstanding obligations incurred by The Toronto- Dominion Bank, Houston Agency, whether direct or indirect, contingent or otherwise, due or not due, with respect to any Letter of Credit. (c) The NY Secured Amount shall be reduced only by the last and final sums that the Borrower or East Barnet repays with respect to the Loans and the Letter of Credit Obligations and shall not be reduced by any intervening repayments of the Loans or the Letter of Credit Obligations by the Borrower or East Barnet. As of October 5, 1998, the total amount of the Loans and the Letter of Credit Obligations exceeds the NY Secured Amount, so that the NY Secured Amount represents only a portion of the Secured Obligations actually outstanding. (d) So long as the balance of the Loans and the Letter of Credit Obligations exceeds the NY Secured Amount, any payments and repayments of the Loans and the Letter of Credit Obligations by the Borrower or East Barnet shall not be deemed to be applied against, or to reduce, the portion of the Secured Obligations secured by the NY Real Property, as more fully described in Section 10.16(a) hereof. Such payments shall instead be deemed to reduce only such portion of the Secured Obligations as are secured by the Mortgage solely to the extent it encumbers real property and fixtures located outside the State of New York, which real property and fixtures secure the entire Secured Obligations." (k) Schedule 2 and Schedule 7 to the Credit Agreement are hereby amended as of the Amendment Effective Date by deleting such schedules in their entirety and inserting in lieu thereof new schedules in the forms attached hereto as Exhibit A and B, respectively. 3. Representations and Warranties. To induce the Lending Group to enter into this Amendment, the Borrower hereby represents and warrants that: (a) The execution, delivery and performance by the Borrower of this Amendment, the amended notes referred to in Section 5(c) hereof (the "Amended Notes"), the Collateral Agency Agreement, the Security Agreement and the Mortgage, and the performance of the Amended Credit Agreement hereby have been duly authorized by all necessary corporate and shareholder action and (i) do not violate any Requirement of Law, (ii) do not breach or result in an event of default under, or otherwise violate the terms of, any indenture (including, without limitation, the Indenture) or material agreement to which the Borrower is a party or by which it or its property is bound, (iii) will not result in or require the creation of any Lien upon or with respect to any of its properties (other than as expressly contemplated by the Security Agreement and the Mortgage), and (iv) do not require any consent or approval of any creditor of the Borrower (including, without limitation, the Indenture Trustee and the holders of the First Mortgage Bonds). (b) Each of this Amendment, the Amended Notes, the Security Agreement, the Mortgage and the Collateral Agency Agreement has been duly executed and delivered by the Borrower. (c) Each of this Amendment, the Amended Credit Agreement, the Amended Notes, the Security Agreement, the Mortgage and the Collateral Agency Agreement are legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms, subject to (i) the effect of applicable bankruptcy, insolvency, reorganization or moratorium or other similar laws affecting the enforcement of creditors' rights generally, and (ii) the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law). (d) No Governmental Approvals are required for the due execution, delivery and performance by the Borrower of this Amendment, the Amended Credit Agreement, the Amended Notes, the Security Agreement, the Mortgage or the Collateral Agency Agreement other than the approval or consent of the Vermont Public Service Board and the approval of or waiver by the Connecticut Department of Public Utility Control with respect to the granting by the Borrower of the Lien of the Security Agreement and the Mortgage. (e) There is no pending, or to the best of the Borrower's knowledge, threatened action or proceeding against the Borrower before any court, governmental agency or arbitrator, which if adversely determined, could reasonably be expected to materially adversely affect the financial condition or results of operations of the Borrower or that could otherwise materially adversely affect the Borrower's ability to perform its obligations under any of this Amendment, the Amended Credit Agreement, the Amended Notes, the Security Agreement, the Mortgage or the Collateral Agency Agreement other than as described in the Borrower's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and Form 10-Qs for the fiscal quarters ended March 31, 1998 and June 30, 1998. (f) No Default or Event of Default has occurred and is continuing, both before and after giving effect to the execution and delivery of this Amendment, the Amended Notes, the Security Agreement, the Mortgage and the Collateral Agency Agreement. 4. No Other Amendments. Except as expressly amended herein, each of the Credit Agreement and the other Loan Documents shall be unmodified and shall continue to be in full force and effect in accordance with its terms. 5. Effectiveness. This Amendment shall become effective as of the date (the "Amendment Effective Date") upon which the Agent confirms to the Borrower that each of the following conditions, in the judgment of the Agent, has been satisfied in full: (a) Amendment. The Agent shall have received four (4) original copies of this Amendment duly executed and delivered by the Borrower, the Agent, the Syndication Agent and the Lenders. (b) Security Documents. The Agent shall have received duly executed copies of the Security Agreement, the Mortgage, the Collateral Agency Agreement and all additional documents or instruments, including, without limitation, UCC-1 financing statements, necessary to provide the Collateral Agent with a duly perfected second priority security interest in all the properties and other assets that secure the First Mortgage Bonds. Additionally, the Agent shall have received evidence satisfactory to it and its counsel that all other actions necessary or, in the opinion of the Agent and its counsel, desirable to perfect and protect the security interest purported to be created by the Security Agreement and the Mortgage have been taken. (c) Notes. Each Lender shall have received an original Amended and Restated Revolving Loan Note and Amended and Restated Auction Note, payable to such Lender, duly executed by the Borrower, substantially in the form of Schedule 2 and Schedule 7, respectively, to the Amended Credit Agreement and duly completed in accordance with the Amended Credit Agreement. (d) Legal Opinions. The Agent shall have received such legal opinions addressed to each of the Secured Creditors and other certificates as the Agent may reasonably request relating to this Amendment, the Amended Credit Agreement, the Collateral Agency Agreement, the Security Agreement and the Mortgage, including, without limitation, legal opinions, in form and substance, and from counsel, reasonably acceptable to the Agent and its counsel, to the effect that the execution and delivery by the Borrower of this Amendment, the Collateral Agency Agreement, the Security Agreement and the Mortgage, and the performance by the Borrower of its obligations thereunder, under the Amended Credit Agreement and under the Existing Letter of Credit Agreements, do not contravene any provision of the Indenture. (e) Approval. The Agent shall have received evidence satisfactory to it and its counsel that the Borrower has received the approval or consent of the Vermont Public Service Board and the approval of or waiver by any other state regulatory body with jurisdiction, in each case required for (x) (A) the 0.25% increase in the ABR and the Applicable Margin and (B) the extensions of the Maturity Date, in each case effected by the Second Amendment to Credit Agreement, dated as of June 2, 1998, among the Borrower and the Lending Group, and (y) the grant of the security interest to the Collateral Agent pursuant to the Security Agreement and the Mortgage in all the properties and other assets of the Borrower that secure the First Mortgage Bonds. (f) Representations and Warranties. All representations and warranties of the Borrower in this Amendment and all the other Loan Documents shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date hereof and on and as of the date that the other conditions precedent in this Section 5 have been satisfied. 6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 7. Counterparts. This Amendment may be executed by the parties hereto on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. (SIGNATURE PAGE FOLLOWS) IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first above written. Borrower: CENTRAL VERMONT PUBLIC SERVICE CORPORATION By: /s/ Francis J. Boyle Name: Francis J. Boyle Title: Senior Vice President, Chief Financial Officer and Treasurer Agent: TORONTO DOMINION (TEXAS), INC. By: /s/ Kimberly Burleson Name: Kimberly Burleson Title: Vice President Lenders: TORONTO DOMINION (NEW YORK), INC. By: /s/ Debbie A. Greene Name: Debbie A. Greene Title: Vice President BANKBOSTON, N.A. By: /s/ Virginia Ryan Name: Virginia Ryan Title: Vice President FLEET NATIONAL BANK By: /s/ Robert D. Lanigan Name: Robert D. Lanigan Title: Senior Vice President CITIZENS BANK NEW HAMPSHIRE By: /s/ Vernon T. Studer Name: Vernon T. Studer Title: Vice President EX-4 8 EXHIBIT 4-56.4 FOR FORM 10-K OPEN-END MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF RENTS AND LEASES, FIXTURE FILING, AND FINANCING STATEMENT Dated as of October 5, 1998 CENTRAL VERMONT PUBLIC SERVICE CORPORATION, as Mortgagor, In Favor Of TORONTO DOMINION (TEXAS), INC., as Collateral Agent for the Secured Parties as defined in the Credit Agreement, as Mortgagee, Prepared by and when Recorded Return to: Paul, Hastings, Janofsky & Walker LLP 1055 Washington Boulevard Stamford, Connecticut 06901 Attention: Jonathan Birenbaum, Esq. TABLE OF CONTENTS Section Page ARTICLE I. COVENANTS OF MORTGAGOR...............................6 1.1. Payment and Performance of Secured Obligations..6 1.2. Incorporation of Documents......................6 1.3. General Representations, Covenants and Warranties..7 1.4. Additional Covenants, Representations and Warranties Regarding Environmental Matters.........................8 1.5. Use of Property...................................9 1.6. Taxes, Assessments and Other Charges............10 1.7. Defense of Title and Litigation.................10 1.8. Zoning and Title Matters........................11 1.9. Insurance and Risk of Loss......................11 1.10. Effect of Changes in Laws Regarding Taxation....12 1.11. Changes to Mortgage or Related Documents........12 1.12. Eminent Domain and Casualty.....................12 1.13. Mortgagee's Performance of Defaulted Acts; Subrogation...........................................13 1.14. Ownership of Property and Mortgagor's Interest..13 1.15. Assignment of Leases and Rents..................14 1.16. Security Agreement and Financing Statements.....15 1.17. After Acquired Property.........................16 1.18. Collateral Protection...........................16 ARTICLE II. DEFAULTS AND REMEDIES.................................17 2.1. Event of Default................................17 2.2. Mortgagee's Power of Enforcement................17 2.3. Mortgagee's Right To Enter and Take Possession..18 2.4. Appointment of Receiver.........................21 2.5. Waiver of Certain Rights........................21 2.6. Leases..........................................22 2.7. Suits To Protect Property.......................22 2.8. No Waiver.......................................22 2.9. Remedies Cumulative.............................23 2.10. Discontinuance of Proceedings...................23 2.11. Additional Security.............................23 ARTICLE III.MISCELLANEOUS.........................................24 3.1. Use of Certain Terms............................24 3.2. Headings........................................24 3.3. Notices.........................................24 3.4. Binding Effect..................................25 3.5. Provisions Subject to Applicable Laws; Invalid Provisions To Affect No Others........................25 3.6. Changes.........................................25 3.7. No Benefit to Third Parties.....................25 3.8. Exercise of Discretion..........................25 3.9. Representatives of Mortgagee....................26 3.10. Receipt of Copy Acknowledged....................26 3.11. Waiver of Jury Trial; Submission to Jurisdiction; Waiver of Service and Venue...........................26 3.12. Estoppel Certificates...........................26 3.13. Mortgagee's Lien................................26 3.14. Required Notices................................26 3.15. Governing Law...................................26 3.16. Site Visits, Observation and Testing............27 3.17. Credit Bids.....................................27 3.18. No Waiver or Cure...............................27 3.19. Partial Release Conditions......................27 ARTICLE IV.ADDITIONAL COLLATERAL.................................28 ARTICLE V.CERTAIN MATTERS RELATING TO THE PROPERTY LOCATED IN THE STATE OF CONNECTICUT...................30 5.1. Open-End Mortgage...............................30 5.2. Open-End Mortgage Securing Guaranty.............30 5.3. Prejudgment Remedy Waiver.......................30 5.4. UCC.............................................31 ARTICLE VI.CERTAIN MATTERS RELATING TO THE PROPERTY LOCATED IN THE STATE OF MAINE.........................31 6.1. Statutory Power of Sale.........................31 6.2. Future Advances.................................31 6.3. Sealed Instrument...............................32 6.4. No Oral Modifications...........................32 6.5. UCC.............................................32 ARTICLE VII.CERTAIN MATTERS RELATING TO THE PROPERTY LOCATED IN THE STATE OF NEW HAMPSHIRE.................32 7.1. Statutory Power of Sale.........................32 7.2. UCC.............................................32 ARTICLE VIII.CERTAIN MATTERS RELATING TO THE PROPERTY LOCATED IN THE STATE OF NEW YORK......................33 8.1. Section 254 of the RPL..........................33 8.2. Section 291-f of the RPL........................33 8.3. Trust Fund......................................33 8.4. Commercial Property.............................33 8.5. Transfer Tax....................................33 8.6. Maximum Principal Amount........................33 8.7. Covenants in Addition to RPL....................34 ARTICLE IX.CERTAIN MATTERS RELATING TO THE PROPERTY LOCATED IN THE STATE OF VERMONT.......................34 9.1. Non-Judicial Power of Sale......................34 9.2. Limitation on Attorneys' Fees in Foreclosure....34 9.3. Future Advances and Subsequent Indebtedness.....34 9.4. UCC.............................................35 LIST OF EXHIBITS Exhibit A - Description of Property OPEN-END MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF RENTS, FIXTURE FILING AND FINANCING STATEMENT THIS OPEN-END MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF RENTS, FIXTURE FILING AND FINANCING STATEMENT ("Mortgage") dated as of the 5th day of October, 1998, is made by CENTRAL VERMONT PUBLIC SERVICE CORPORATION, a Vermont corporation (together with its successors and assigns, "Mortgagor"), having an office at 77 Grove Street, Rutland, Vermont 05701, in favor of TORONTO DOMINION (TEXAS), INC., a Delaware corporation, having its principal office address at 909 Fanin Street, Suite 1700, Houston, Texas 77010, not personally but acting in its capacity as collateral agent for the Secured Parties as defined in the Credit Agreement (hereinafter defined) (the "Secured Parties") (in such capacity, together with its successors, assigns, agents and nominees, "Mortgagee"). Unless otherwise expressly defined herein, initially capitalized terms used herein shall have the meanings ascribed to them in the Credit Agreement (defined below). WITNESETH: WHEREAS, pursuant to the Credit Agreement dated as of November 5, 1997 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), by and among Mortgagor, the lenders signatory thereto from time to time (the "Lenders") and Mortgagee, as agent for the Lenders, Mortgagee and the Lenders agreed to extend a revolving credit facility to Mortgagor of up to Fifty Million and 00/100 Dollars ($50,000,000.00) to be evidenced by certain revolving loan notes of Mortgagor issued from time to time (the "Revolving Loan Notes") and/or certain auction notes of Mortgagor issued from time to time (the "Auction Notes"), upon the terms and conditions set forth in the Credit Agreement (the Revolving Loan Notes, the Auction Notes, the Credit Agreement and all other documents, instruments and agreements entered into in connection therewith including without limitation, the "Transaction Documents" as defined in the Credit Agreement, are sometimes jointly referred to herein as the "Loan Documents"); WHEREAS, pursuant to (i) the Amended and Restated Reimbursement Agreement, dated as of September 24, 1992, between Mortgagor and The Toronto-Dominion Bank, Houston Agency ("TD"), (ii) the Reimbursement Agreement, dated as of April 29, 1993, between Central Vermont Public Service Corporation - East Barnet Hydroelectric, Inc. ("East Barnet") and TD (the "East Barnet Letter of Credit Agreement"), together with Mortgagor's guaranty thereof dated as of April 29, 1993 (the "Guaranty"), and (iii) the Letter of Credit and Reimbursement Agreement, dated as of November 1, 1994, between Mortgagor and TD (collectively, as amended, supplemented or otherwise modified from time to time, the "Existing Letter of Credit Agreements"), TD has agreed to incur letter of credit obligations on behalf of Mortgagor and East Barnet, as applicable; WHEREAS, in order to induce (i) the Lenders to enter into the Third Amendment to Credit Agreement, dated as of the date hereof, among Mortgagor, the Lenders, Mortgagee and Fleet National Bank, as syndication agent, (ii) the Lenders to continue to make the Loans as provided in the Credit Agreement and (iii) TD to continue to incur letter of credit obligations as provided in the Reimbursement Agreements, Mortgagor has agreed to execute and deliver this Mortgage to Mortgagee to secure payment and performance by Mortgagor of: (a) all of the Secured Obligations as defined in the Credit Agreement including, without limitation, all of Mortgagor's obligations under this Mortgage, the Revolving Loan Notes and the Auction Notes; (b) all of the reimbursement obligations of Mortgagor pursuant to the Existing Letter of Credit Agreements ("LOC Reimbursement Obligations"); and (c) the Guaranty (all of such obligations are collectively referred to herein as the "Secured Obligations"); WHEREAS, the Secured Obligations mature on or before December 1, 2015; and WHEREAS, Mortgagor has previously executed and delivered the Indenture (hereinafter defined) which constitutes a first priority lien on the Property (hereinafter defined). NOW THEREFORE, in consideration of Ten ($10.00) Dollars, in hand paid, and other good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, and to secure all obligations, liabilities or sums due or to become due under this Mortgage, the Revolving Loan Notes, the Auction Notes, the Guaranty, the Existing Letter of Credit Agreements or any other Loan Document, including, without limitation, the payment of all principal, prepayment premium (if any) and interest due under the Revolving Loan Notes, Auction Notes and LOC Reimbursement Obligations; and any further or subsequent advances made pursuant to this Mortgage, the Revolving Loan Notes, the Auction Notes, the Existing Letter of Credit Agreements or any other Loan Document to protect or preserve the Property (hereinafter defined) or the lien or security created hereby; and for the Secured Obligations, Mortgagor has executed and delivered this Mortgage, and Mortgagor has irrevocably granted, and by these presents and by the execution and delivery hereof does hereby irrevocably grant, bargain, sell, alien, demise, release, convey, assign, transfer, mortgage, hypothecate, pledge, set over, warrant and confirm to Mortgagee and to its successors and assigns forever (to the extent legally permitted), with power of sale, all right, title and interest of Mortgagor in and to all of the following property, rights, interests and estates whether now owned or hereafter acquired. THE PROPERTY (A) The real property more particularly described herein and in Exhibit A attached hereto, incorporated herein and made a part hereof (the "Land"), and all trees, shrubbery, crops and other plantings now or hereafter grown on the Land; (B) TOGETHER WITH all and singular the plants, rights, permits, franchises, privileges, easements and property, real, personal and mixed, all as more particularly described in that certain Indenture of Mortgage (the "Original Indenture") dated as of October 1, 1929, but actually executed on October 24, 1929 (the Original Indenture, with all indentures supplemental thereto (the "Supplemental Indentures") as therein provided, being hereinafter generally referred to as the "Indenture"), recorded in Liber 150 of Mortgages, Page 51, Grafton County (New Hampshire) Registry of Deeds, Liber 616, Folio 484, Sullivan County (New Hampshire) Records, Vol. 234, Page 531, in the Office of the Secretary of State of Connecticut at Volume 51:M of the Railroad Mortgages, in the Office of the City Clerk of Rutland, Vermont at Book 51A, in the Office of the Secretary of State of the States of Vermont, Maine and New York, and in the offices of the clerks of certain other towns and cities in such states, and forty (40) duly recorded (where necessary) Supplemental Indentures thereto and in modification and confirmation thereof, and thereby or otherwise thereunder conveyed, pledged, assigned, transferred and mortgaged, or intended so to be (said descriptions in the Indenture being hereby made a part hereof to the same extent as if set forth herein at length), whether then or now owned or thereafter or hereafter acquired, except such of said properties or interests therein as may have been released or sold or disposed of in whole or in part as permitted by the provisions of the Indenture as heretofore supplemented and amended; (C) TOGETHER WITH all right, title and interest, if any, which Mortgagor may now have or hereafter acquire of whatever character whether as owner, lessee or otherwise, whether vested or contingent, in and to (1) the Land and all buildings, structures and improvements of every nature whatsoever now or hereafter situated on the Land (collectively, the "Buildings"), (2) all building materials, supplies and other property now or hereafter stored at or delivered to the Land or any other location for installation in or on the Land or any of the Buildings, and all fixtures, fittings, machinery, appliances, equipment, apparatus, furnishings and personal property of every nature whatsoever now or hereafter located in or on, or attached to, and used or intended to be used in connection with the Land, any of the Buildings or any business or other operations now or hereafter conducted in or on the Land or any of the Buildings or in connection with any construction or other work now or hereafter conducted in or on the Land or any of the Buildings, and all extensions, additions, improvements, betterments, renewals, substitutions and replacements to or of any of the foregoing, (all of the property described in this clause (2), being collectively referred to herein as the "Equipment"; the Buildings and the Equipment being collectively referred to herein as the "Improvements"), (3) any and all oil, gas and other minerals now or hereafter produced from or allocated to the Land and any and all products now or hereafter processed or obtained from any such oil, gas or other minerals, and (4) any and all plans, specifications, drawings, books, records and similar items now or hereafter relating to the Land or the Improvements, the operation thereof, any rights thereto or any interest therein; (D) TOGETHER WITH all proceeds, products, extensions, additions, improvements, betterments, renewals, substitutions, replacements, accessions, accretions and relictions of and to all or any part of the Premises (as herein defined) or any other property encumbered by this Mortgage; (E) TOGETHER WITH all right, title and interest of Mortgagor, of whatever character (whether vested or contingent and whether now owned or hereafter acquired), in and to (1) all streets, roads and public places (whether open or proposed) now or hereafter adjoining or otherwise providing access to the Land, (2) the land lying in the bed of such streets, roads and public places, and (3) all other sidewalks, alleys, ways, passages, vaults, water courses, strips and gores of land now or hereafter adjoining or used or intended to be used in connection with all or any part of the property described in paragraphs (A), (B), (C) and (D) hereof; (F) TOGEHTER WITH all easements, rights-of-way and rights of use or passage (whether public or private), estates, interests, benefits, powers, rights (including, without limitation, any and all lateral support, drainage, slope, riparian, littoral, sewer, water, air, oil, gas, mineral and subsurface rights), privileges, claims, franchises, licenses, profits, rents, royalties, tenements, hereditaments, reversions, remainders and appurtenances of every nature whatsoever in any way now or hereafter belonging, relating or appertaining to all or any part of the property described in paragraphs (A), (B), (C), (D) and (E) hereof (all rights and interests described in clauses (A), (B), (C), (D), (E) and (F) being collectively referred to herein as the "Premises"); (G) TOGETHER WITH (1) any and all judgments, settlements, claims, awards, insurance proceeds and other proceeds and compensation, and any interest thereon (collectively, "Compensation"), now or hereafter made or payable in connection with (a) any casualty or other damage to all or any part of the property described in paragraphs (A), (B), (C), (D), (E) and (F) hereof, (b) any condemnation proceedings affecting any such property or any rights thereto or any interest therein, (c) any damage to or taking of any such property or any rights thereto or any interest therein arising from or otherwise relating to any exercise of the power of eminent domain (including, without limitation, any and all Compensation for change of grade of streets or any other injury to or decrease in the value of any such property), or (d) any conveyance in lieu of or under threat of any such taking, (2) any and all proceeds of any sale, assignment or other disposition of any such property or any rights thereto or any interest therein, (3) any and all proceeds of any other conversion (whether voluntary or involuntary) of any such property or any rights thereto or any interest therein into cash or any liquidated claim, and (4) any and all option rights, contract rights, permits, licenses, approvals, actions and rights in action now or hereafter arising from or relating to any such property (including, without limitation, all rights of Mortgagor in and to insurance proceeds and any and all contracts and bonds relating to operation, maintenance, construction, renovation, restoration, repair, management or security of any such property); (H) TOGETHER WITH all leasehold estates, right, title and interest of Mortgagor in any and all leases, subleases, management agreements, arrangements, concessions or agreements relating to the use or occupancy of the Premises or any portion thereof and all rents of and from all or any part of the foregoing whether now or hereafter payable or accruing (including, without limitation, any and all money and other consideration paid or payable from time to time by any and all tenants, licensees, occupants or other users of any such property), and all rights of Mortgagor or any other person to collect and receive the same; provided, however, that permission is hereby given to Mortgagor, so long as no Event of Default (as hereinafter defined) shall have occurred, to collect and use such rents as, but not before, they become due and payable, which permission shall terminate immediately, without the necessity of any action by Mortgagee, upon the occurrence of any Event of Default; (I) TOGETHER WITH (1) all right, title and interest of Mortgagor (whether as seller, purchaser or otherwise) in and to any and all agreements now or hereafter relating to any purchase, sale, occupancy or other transfer of all or any part of the property described in paragraphs (A), (B), (C), (D), (E), (F), (G) and (H) hereof (whether or not such purchase, sale, occupancy or other transfer shall be completed), and (2) all right, title and interest of Mortgagor (whether as lessor, lessee or otherwise) in and to any and all leases, subleases, use, occupancy and similar agreements (including, without limitation, oil, gas and mining leases) now or hereafter relating to all or any part of the property described in paragraphs (A), (B), (C), (D), (E) and (F) hereof (each being referred to in this paragraph as a "lease"), together with any and all guaranties and security of, for or otherwise relating to any such lease (including, without limitation, any and all right, title and interest of Mortgagor in and to property of any tenant or other person, whether such right, title and interest shall have arisen under applicable law or under any such lease or other arrangement) and together with all rent and other consideration (whether monetary or otherwise) now or hereafter payable or accruing under or in connection with any such lease (including, without limitation, any and all cancellation or termination payments and any and all damages payable in connection with any default), subject, however, to the conditional permission given to Mortgagor to collect and use the rents, royalties, issues, profits, revenues, income and other benefits arising under any such lease as provided above and, so long as no Event of Default has occurred, to possess, control, manage, operate and otherwise deal with the property described in paragraphs (A), (B), (C), (D), (E), (F), (G) and (H) hereof; (J) TOGETHER WITH any and all right, title and interest of Mortgagor in all reciprocal easement agreements, operating agreements and any other agreements affecting the Land and Improvements; and (K) TOGETHER WITH any and all further or greater estate, right, title, interest, claim and demand of Mortgagor, of whatever character (whether vested or contingent and whether now owned or hereafter acquired), in and to any of the property described in the foregoing paragraphs or any rights or interests appurtenant thereto. SUBJECT, HOWEVER, as to all of the foregoing, to the specific rights, privileges, liens, encumbrances, restrictions, conditions, limitations, covenants, interests, reservations, exceptions and otherwise as provided in the Indenture, and in the descriptions in the schedules thereto and in the deeds or grants in said schedules referred to. BUT SPECIFICALLY RESERVING AND EXCEPTING (as the same were reserved and excepted from the lien of the Indenture) from this Mortgage and the grant, conveyance, mortgage, transfer and assignment herein (a) all lamps and supplies, machinery, appliances, goods, wares, and other removable property now or at any time handled by Mortgagor for sale as merchandise or not in use or connected as fixtures with its own plants, and consumable supplies, (b) all cash and all bonds, stocks and other securities now owned or which may hereafter be owned by Mortgagor and which are not deposited under the Indenture, (c) the last day of each of the demised terms created by any lease of property now leased to Mortgagor, and the last day of any demised term under each and every lease hereafter acquired by Mortgagor and under each and every renewal of any lease, the last day of each and every such demised term being hereby expressly reserved to and by Mortgagor, (d) all telephone properties, whether now owned or hereafter acquired by Mortgagor, and (e) any and all other property, real, personal or mixed, in which a lien is not purported to be granted under the Indenture (other than due to a release by the Indenture Trustee of such property where pursuant to the terms contemplated by Section 3.20 hereof, Mortgagee would not be required to release such property). All of the property described in the paragraphs (A), (B), (C), (D), (E), (F), (G), (H), (I), (J) and (K) above, and each item of property therein described is collectively referred to in this Mortgage as the "Property"). TO HAVE AND TO HOLD the Property, rights and privileges and appurtenances hereby conveyed or assigned, or intended so to be, unto Mortgagee, its successors and assigns, to its and their own proper use and benefit forever, upon and subject to the terms and conditions set forth in this Mortgage and subject to the Indenture; PROVIDED, HOWEVER, that if all of the Secured Obligations shall be fully, finally, and indefeasibly paid at the times, in the amounts and in the manner specified in the Loan Documents to which Mortgagor is a party, all without any deduction or credit for any Impositions (as hereinafter defined) or other charges or expenses paid or payable by or on behalf of Mortgagor and fully kept, performed, observed and complied with in accordance with the Loan Documents to which Mortgagor is a party (collectively, the "Release Conditions") and there is no further obligation to extend credit to Mortgagor under the Loan Documents, then this Mortgage and the rights and interests hereby granted and assigned to Mortgagee shall be null and void and of no further force and effect and shall be released of record upon the written request and at the expense of Mortgagor, but otherwise shall remain in full force and effect; provided, however, that the release of this Mortgage shall not affect Mortgagor's obligation to perform those Secured Obligations which are expressly stated to survive repayment of the Secured Obligations pursuant to the terms of the Loan Documents to which Mortgagor is a party. AND PROVIDED FURTHER, notwithstanding anything to the contrary herein, that the maximum principal amount which at any time may be secured hereby is limited to and shall not in any event exceed the sum of $66,300,000. Mortgagor warrants, represents, covenants and agrees to and with Mortgagee as follows: ARTICLE I COVENANTS OF MORTGAGOR Section 1.1. Payment and Performance of Secured Obligations. Mortgagor shall pay, keep, perform, observe and comply with, or shall cause to be paid, kept, performed, observed and complied with all of the Secured Obligations. Mortgagor acknowledges and agrees that all security of any kind pursuant to the Loan Documents to which Mortgagor is a party, is security for the Secured Obligations without allocation of any part or portion thereof to any portion of the Secured Obligations other than the whole thereof. Section 1.2. Incorporation of Documents. Mortgagor acknowledges that the proceeds of the Revolving Loan Notes and the Auction Notes are to be disbursed in accordance with the provisions in the Credit Agreement and the letters of credit are to be issued in accordance with the provisions of the Existing Letter of Credit Agreements. Subject to the final proviso preceding Article I hereof, all advances and indebtedness arising and accruing under this Mortgage, whether or not the resulting indebtedness secured hereby may exceed the aggregate face amount of any document evidencing such indebtedness, shall be secured hereby to the same extent as though said Credit Agreement and Existing Letter of Credit Agreements were fully incorporated in this Mortgage. Subject to the final proviso preceding Article I hereof, in the event of any conflict or inconsistency between the terms of this Mortgage, the Credit Agreement and the Existing Letter of Credit Agreements, the terms and provisions of the Credit Agreement and the Existing Letter of Credit Agreements, as the case may be, shall in each instance govern and control. Notwithstanding the foregoing, if Mortgagor shall have a greater obligation under this Mortgage than under the Credit Agreement, such greater obligation shall not be considered a conflict or inconsistency between them, Mortgagor in each instance being bound by such greater obligation. Each and every term and provision of the Loan Documents to which Mortgagor is a party, including the rights, remedies, obligations, covenants, conditions, agreements, indemnities, representations and warranties of Mortgagor contained therein, shall be considered as if a part of this Mortgage, and payment, fulfillment and performance thereof is secured hereby, and, in accordance with the Loan Documents to which Mortgagor is a party. Any Event of Default under the Credit Agreement or the Existing Letter of Credit Agreements shall constitute an Event of Default under this Mortgage entitling Mortgagee to all the remedies provided in this Mortgage, under the other Loan Documents to which Mortgagor is a party, and by law. Section 1.3. General Representations, Covenants and Warranties. Mortgagor warrants, represents and covenants that: (a) Mortgagor fully warrants and will forever defend the title to the Property and the validity as a lien, second in priority only to the Indenture, and security interest, enforceability and priority of the lien and security interest created hereby against the claims of all persons whomsoever claiming or who may claim the same or any part thereof, subject only to those matters described in the Indenture ("Permitted Exceptions") and Permitted Liens (as defined in the Credit Agreement); (b) Mortgagor is seized of an indefeasible estate in fee simple in and to the land, buildings and all other parts of the Property constituting real property; (c) Except for Permitted Liens and Permitted Exceptions, Mortgagor has good and marketable title to the equipment and all other parts of the Property constituting personal property; (d) Mortgagor has good right, full power and lawful authority, without the joinder or consent of any person (other than the approval or consent of the Vermont Public Service Board and the approval of or waiver by the Connecticut Department of Public Utility Control), to mortgage, pledge, assign and grant a security in the Property pursuant to and as provided in this Mortgage; (e) Mortgagor may at all times peaceably and quietly enter upon, hold, occupy and enjoy the Property in accordance with this Mortgage; (f) The Property is free and clear of any and all liens, security interests, charges, encumbrances and claims of other persons, of any kind whatsoever, other than Permitted Exceptions and Permitted Liens (including, without limitation, the Indenture); (g) Except for the recording of this Mortgage and the filing of financing statements or certificates of mortgage, as the case may be, no registrations, recordings or filings are required to create a valid lien on and perfected security interest in the Property second in priority only to the Indenture; (h) Mortgagor will maintain and preserve the Lien of this Mortgage until all of the Release Conditions (subject to certain partial releases approved by Mortgagee pursuant to Section 3.20 hereof) are satisfied; (i) Mortgagor shall not make or enter into any lease of all or any part of the Property for rent or other consideration valued (as reasonably determined by Mortgagor) below the fair market rental value of the Property at the time such lease is executed; and (j) All costs incurred and which have become due and payable prior to the date hereof in connection with any construction of, in or on any improvements or in connection with the purchase of any improvements have been paid or will be paid promptly when due or will be paid promptly following resolution of any good faith dispute or protest relating thereto. Section 1.4. Additional Covenants, Representations and Warranties Regarding Environmental Matters. Mortgagor represents, covenants and warrants to Mortgagee as follows: (a) Other than as described in the Mortgagor's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and Form 10-Qs for the fiscal quarters ended March 31, 1998 and June 30, 1998 (collectively, the "SEC Reports"), neither Mortgagor nor the Property are in violation of or subject to any existing, pending or threatened investigation or inquiry by any governmental authority, federal or state, or to any remedial obligations under any federal or state laws pertaining to health or the environment (hereinafter sometimes collectively called "Applicable Environmental Laws"), including without limitation the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (as amended, "CERCLA"), the Resource Conservation and Recovery Act of 1976 ("RCRA"), and any and all applicable state environmental laws (together the "State Environmental Laws"), and this representation and warranty would continue to be true and correct following disclosure to the applicable governmental authorities of all relevant facts, conditions and circumstances, if any, pertaining to the Premises. (b) Except as described in the SEC Reports, Mortgagor will not cause or permit the Property to be in violation of, or do anything or permit anything to be done which will subject the Property to any remedial obligations under, any Applicable Environmental Laws, and will promptly notify Mortgagee, in writing, of any existing, pending or, to the best of Mortgagor's knowledge, threatened investigation or inquiry by any governmental authority in connection with any Applicable Environmental Laws, in each case which could be reasonably be expected to have a material adverse effect on the business, operations, assets, liabilities, financial condition, results of operations or business prospects of Mortgagor ("Material Adverse Effect"). (c) Mortgagor has not obtained and is not required to obtain any permits, licenses or similar authorizations to construct, occupy, operate or use any buildings, improvements, fixtures and equipment forming a part of the Property by reason of any Applicable Environmental Laws except as described in the SEC Reports or where the failure to do so could reasonably be expected to have a Material Adverse Effect. (d) Except as described in the SEC Reports, Mortgagor has taken all steps necessary to determine and has determined that no hazardous substances or solid wastes have been disposed of or otherwise released or discharged on or to the Property; and that the use which Mortgagor makes and intends to make of the Property will not result in the disposal or other release or discharge of any hazardous substance or solid waste on or to the Property, in each case which could reasonably be expected to have a Material Adverse Effect (the terms "hazardous substance," "discharge," "solid waste" "disposal" and "release" as used herein shall have the meanings specified in CERCLA, RCRA and the State Environmental Laws, as applicable; provided, in the event either CERCLA, RCRA or the State Environmental Laws is amended so as to broaden the meaning of any term defined thereby, such broader meaning shall apply subsequent to the effective date of such amendment and provided further, to the extent that the laws of the States of Connecticut, Maine, New Hampshire, New York or Vermont, as applicable, establish a meaning, either by express definition or by construction or implication, for "hazardous substance," "release," "discharge," "solid waste," or "disposal" which is broader than that specified in either CERCLA, RCRA or the State Environmental Laws such broader meaning shall apply. (e) Mortgagor grants to Mortgagee and its agents and employees access to the Property and the license to remove any hazardous waste and/or substances containing asbestos, in each case where the failure to do so could reasonably be expected to have a Material Adverse Effect, and agrees to indemnify Mortgagee and Lenders from all costs and expenses and all claims (including consequential damage) asserted or proven against Mortgagee by any party in connection therewith. In the event Mortgagor fails to do so, after notice to Mortgagor, Mortgagee may either declare a default under this Mortgage and foreclose the same or cause the Property to be freed from the asbestos, substances containing asbestos or hazardous wastes with the cost of the removal to be added to the indebtedness evidenced by the Revolving Loan Notes and/or the Auction Notes, at Mortgagee's election, and secured by this Mortgage. (f) Upon Mortgagee's reasonable request, at any time and from time to time during the existence of this Mortgage (but only after the occurrence of an Event of Default), Mortgagor shall provide, at Mortgagor's sole expense, an inspection or audit of the Property from an engineering or consulting firm approved by Mortgagee, indicating the presence or absence of such substances on the Property. If Mortgagor fails to provide same after twenty (20) days' notice, Mortgagee may order same, and Mortgagor grants to Mortgagee and its employees and agents such access to the Property and a license to undertake the testing. The cost of such tests shall be added to the indebtedness evidenced by the Revolving Loan Notes and/or the Auction Notes, at Mortgagee's election, and secured by this Mortgage. Section 1.5. Use of Property. Mortgagor represents, covenants and warrants to Mortgagee as follows: (a) No portion of the Property is located in an area identified by the Secretary of Housing and Urban Development or any successor thereto as an area having special flood hazards pursuant to the National Flood Insurance Act of 1968 or the Flood Disaster Protection Act of 1973, as amended, or any successor law, except where the location in such an area could not reasonably be expected to have a Material Adverse Effect. (b) The Property and the present and contemplated uses and occupancies thereof are in compliance in all respects with all applicable federal, state, county and local laws, ordinances, building codes, orders, rules and regulations pertaining to zoning, parking, construction, building, land use and environmental matters, except where non-compliance could not reasonably be expected to have a Material Adverse Effect. (c) Other than as permitted under the Indenture, no portion of the Property has been the subject of a Taking (as hereinafter defined). (d) Mortgagor and its agents have not entered into any leases or other arrangements for occupancy of space within the Property other than those leases made available to Mortgagee. Other than to the extent not prohibited by the Indenture (as currently in effect and irrespective of whether the Indenture is subsequently terminated), there are no agreements, contracts or lease provisions, written or oral, providing any tenant of the Property or any other third party the option to purchase all or any part of the Property. (e) Each identifiable portion of the Property is taxed separately without regard to any other property and for all purposes each such portion may be mortgaged, conveyed, and otherwise dealt with as an independent parcel. (f) Mortgagor covenants that the representations set forth in this Section shall be true until the Secured Obligations have been fully and finally paid and there is no further obligation to extend credit to Mortgagor under the Loan Documents. (g) The Property complies in all material respects with all federal, state, county, municipal and local laws, ordinances and regulations relating to subdivision and may be lawfully conveyed by the legal description attached hereto. Section 1.6. Taxes, Assessments and Other Charges. Mortgagor shall pay, before the same become delinquent, all taxes (including, without limitation, any registration or recording taxes incurred in connection with this Mortgage, if applicable), insurance premiums, assessments, dues, fines, impositions, and public charges, general and special, ordinary and extraordinary, of every character (including penalties and interest), all charges made by utility companies, public or private, for services furnished or used in connection with the Property, all common area utility and maintenance charges, and all other impositions attributable to the Property ("Impositions"). Mortgagor may protest or contest Impositions in accordance with the provisions of the Credit Agreement. Section 1.7. Defense of Title and Litigation. Mortgagor will not allow or permit any Lien other than Permitted Liens and Permitted Encumbrances to be asserted against the Property. If the Lien created by this Mortgage, or the validity, enforceability or priority thereof or of this Mortgage, or if title or any of the rights of Mortgagor or Mortgagee in or to any material (as determined in the sole discretion of Mortgagee) portion of the Property, shall be endangered or questioned, or shall be attacked directly or indirectly, or if any action or proceeding is instituted against Mortgagor or Mortgagee with respect thereto, Mortgagor will promptly notify Mortgagee thereof and will diligently endeavor to cure any defect which may be developed or claimed and/or will take all necessary and proper steps for the defense of such action or proceeding, including the employment of counsel, the prosecution or defense of litigation and, subject to Mortgagee's reasonable approval, the compromise, release or discharge of any and all adverse claims. Mortgagee (whether or not named as a party to such actions or proceedings) is hereby authorized and empowered (but shall not be obligated) to take such additional steps as it may deem necessary or proper for the defense of any such action or proceeding or the protection of the lien, security interest, validity, enforceability or priority of this Mortgage or of such title or rights, including the employment of counsel, the prosecution or defense of litigation, the compromise, release or discharge of such adverse claims, the purchase of any tax title and the removal of such prior liens and security interests. Mortgagor shall, on demand, reimburse Mortgagee and Lenders for all expenses (including reasonable attorneys' fees and disbursements) incurred by Mortgagee and Lenders in connection with the foregoing matters. All such costs and expenses of Mortgagee and Lenders, until reimbursed by Mortgagor, shall be part of the Secured Obligations and shall be deemed to be secured by this Mortgage. Section 1.8. Zoning and Title Matters. Mortgagor will not, without the prior written consent of Mortgagee, initiate or support any zoning reclassification of the Property or seek any variance under existing zoning ordinances applicable to the Property, use or permit the use of the Property in a manner which would result in such use becoming a nonconforming use under applicable zoning ordinances, modify, amend or supplement any of the Permitted Exceptions where such modification, amendment or supplement is materially adverse to the rights and interests of Mortgagee or Lenders or permit or allow the Property to be used by the public or any person in such manner as might make possible a claim of adverse usage or possession or of any implied dedication or easement by prescription; provided, however, that the prohibitions set forth in clauses (a), (b) and (d) hereof shall be inapplicable so long as Mortgagor's actions, individually or in the aggregate, do not have or could not be reasonably expected to have a Material Adverse Effect. Section 1.9. Insurance and Risk of Loss. (a) Mortgagor shall keep or cause to be kept such casualty and liability insurance concerning the Property as is, or from time to time may be, required in accordance with the Credit Agreement with companies, in amounts and against insurable hazards as set forth therein. Such insurance shall be maintained in effect as long as all of the Release Conditions have not been satisfied. (b) Mortgagor shall not obtain or carry separate insurance concurrent in form or contributing in the event of loss with that required hereunder or under the Credit Agreement. Except for the Indenture Trustee, Mortgagee shall be named as sole loss payee on each property insurance policy relating to the Property pursuant to a standard non- contributory mortgagee endorsement. Upon the reasonable request of Mortgagee, Mortgagor shall provide to Mortgagee a copy of all policies evidencing insurance in compliance with the terms of the Credit Agreement. Section 1.10. Effect of Changes in Laws Regarding Taxation. In the event of the enactment after the date of this Mortgage of any law of any state in which the Property is located or any political subdivision thereof deducting from the value of land for the purpose of taxation any lien thereon, or imposing upon Mortgagee the payment of the whole or any part of the taxes or assessments or charges or liens herein required to be paid by Mortgagor, or changing in any way the laws relating to the taxation of mortgages or debts secured by mortgages or deeds of trust or similar instruments, or Mortgagee's interest in the Property, or the manner of collection of taxes, so as to adversely affect the lien of this Mortgage or the Secured Obligations or the then holders thereof (each, a "Mortgage Tax Event"), then, and in any such event, Mortgagor, upon demand by Mortgagee, shall pay such taxes or assessments, or reimburse Mortgagee therefore; provided, however, that if the Mortgage Tax Event could reasonably be expected to have a Material Adverse Effect and in the opinion of counsel for Mortgagee it might be unlawful to require Mortgagor to make such payment or the making of such payment might result in the imposition of interest beyond the maximum amount permitted by law, (each Mortgage Tax Event subject to such determination is hereinafter referred to as a "Nonreimbursable Mortgage Tax Event") then and in such event, Mortgagee may elect, by notice in writing given to Mortgagor, to declare all of the Secured Obligations to be and become due and payable sixty (60) days from the giving of such notice. The foregoing shall not, however, impose upon Mortgagor, the obligation to pay or reimburse Mortgagee for any tax in the nature of an income tax. Section 1.11. Changes to Mortgage or Related Documents. If the Secured Obligations or any part thereof are extended or varied or if any part of the security is released, all persons now or at any time hereafter liable therefor, or whose consent to this Mortgage was obtained, shall be held to assent to such extension, variation or release, and their liability and the lien and all provisions hereof shall continue in full force, the right of recourse, if any, against all such persons being expressly reserved by Mortgagee, notwithstanding such extension, variation or release. Any person or entity taking a junior mortgage or other lien upon the Property or any interest therein, shall take said lien subject to the rights of Mortgagee to amend, modify, and supplement, restate and consolidate this Mortgage and the Loan Documents to which Mortgagor is a party and to vary the rate of interest and the method of computing the same, and to increase the principal amount thereof, and to impose additional fees and other charges, and to extend the maturity of said indebtedness, and to grant partial releases of the lien of this Mortgage, in each and every case without obtaining the consent of the holder of such lien and without the lien of this Mortgage losing its priority over the rights of any such junior lien. Nothing in this Section shall be construed as waiving any provision contained herein which provides, among other things, that it shall constitute an Event of Default if the Property be sold, conveyed, or encumbered unless permitted by the Loan Documents to which Mortgagor is a party. Section 1.12. Eminent Domain and Casualty. (a) In the event that title to, or the use of the Property or any part thereof shall be taken pursuant to eminent domain or condemnation proceedings, or by any settlement or compromise of such proceedings (each a "Taking"), Mortgagor shall give prompt written notice thereof to Mortgagee. All compensation received as a result of any Taking shall be paid to the Indenture Trustee to the extent required by the provisions of the Indenture and then, subject to the provisions of paragraph (c) hereof, to Mortgagee. (b) Mortgagor shall give prompt written notice to Mortgagee of the occurrence of any material casualty and such occurrence shall not relieve Mortgagor of any of its obligations specified in the Loan Documents to which Mortgagor is a party. All compensation received as a result of any casualty shall be paid to the Indenture Trustee to the extent required by the provisions of the Indenture and then, subject to the provisions of paragraph (c) hereof, to Mortgagee. (c) Upon the expiration or termination of the Indenture and continuing until the Maturity Date, Mortgagor shall enter into arrangements with Mortgagee which are substantially similar (as determined by Mortgagee) to those set forth in Section 6 of Article III, Section 3 of Article VIII and Article IX of the Indenture, as in effect on the date hereof. Section 1.13. Mortgagee's Performance of Defaulted Acts; Subrogation. (a) If an Event of Default shall have occurred, Mortgagee may, but need not, pay or perform any Secured Obligation which Mortgagor has failed to pay or perform, in any form and manner deemed expedient, and may, but need not, make full or partial payments of principal or interest on prior encumbrances, if any, and purchase, discharge, compromise or settle any tax lien or other prior lien or title or claim thereof, or redeem from any tax sale or forfeiture or contest any tax or assessment, including without limitation the payment of principal, premium and/or interest on the Secured Obligations, whether at maturity, upon acceleration or otherwise. Mortgagee and any person designated by Mortgagee shall have the right, and is hereby granted the right, to enter upon the Property for the foregoing purposes. All moneys paid for any of the purposes herein authorized and all expenses paid or incurred in connection therewith, including reasonable attorneys' fees, and any other moneys advanced by Mortgagee to protect the Property and the lien hereof, shall be so much additional indebtedness secured hereby, and shall become immediately due and payable without notice and with interest thereon at the rate of interest payable after an Event of Default. Inaction of Mortgagee shall never be considered a waiver of any right accruing to it on account of any default on the part of Mortgagor. No payment by Mortgagee shall relieve Mortgagor from any default hereunder or impair any right or remedy of Mortgagee. (b) Should any amount paid out, advanced or incurred hereunder by Mortgagee be used directly or indirectly to pay off, discharge or satisfy, in whole or in part, any lien or encumbrance upon the Property or any part thereof on a parity with or prior or superior to the lien hereof, then as additional security hereunder, Mortgagee shall be subrogated to any and all rights, equal or superior titles, liens and equities, owned or claimed by any owner or holder of said outstanding liens, charges and indebtedness, however remote, regardless of whether said liens, charges and indebtedness are acquired by assignment or have been released of record by the holder thereof upon payment. Section 1.14. Ownership of Property and Mortgagor's Interest. Except as otherwise provided in Article VIII of the Indenture (as in effect on the date hereof), Mortgagor shall not, directly or indirectly, transfer, pledge, encumber, suffer to exist any Lien (except for the Permitted Exceptions and the Permitted Liens), on, or, except as provided in the Credit Agreement, assign, lease or sublease all or any portion of any interest in, the Property. Mortgagor shall provide Mortgagee with copies of any agreements, instruments or other documents delivered to the Indenture Trustee pursuant to Article VIII of the Indenture. If the Indenture expires or terminates prior to the Maturity Date, Mortgagor shall enter into arrangements with Mortgagee which are substantially similar (as determined by Mortgagee) to those set forth in Article VIII of the Indenture. Section 1.15. Assignment of Leases and Rents. (a) The assignment set forth in paragraph (H) of the section of this Mortgage entitled "The Property" ("Paragraph (H)") shall, to the extent permitted by law and the terms of the leases and other documents related to such assignment, constitute an absolute and present assignment of the leases, rents, royalties, issues, profits, revenues, income and other benefits described in said paragraph, subject, however, to the rights of the Indenture Trustee under the Indenture and to the conditional permission given to Mortgagor to collect and use the same as provided in said paragraph. Neither the existence nor the exercise of such conditional permission shall subordinate such assignment to any subsequent assignment by Mortgagor, and all such subsequent assignments shall be subject to the rights of Mortgagee under this Mortgage. Subject to the rights of the Indenture Trustee under the Indenture, the assignment set forth in Paragraph (H) shall be fully operative without any further action by Mortgagor or Mortgagee. Subject to the rights of the Indenture Trustee under the Indenture, Mortgagee is hereby irrevocably authorized and empowered, at its option, to demand, collect, receive and enforce payment of any and all such rents, royalties, issues, profits, revenues, income and other benefits at any time during the continuance of any Event of Default, and to give receipts, releases and satisfactions therefor, whether or not Mortgagee shall have taken, or at any time shall take, possession of the Land, the Buildings or any other part of the Property. Mortgagee is hereby irrevocably authorized to notify all tenants, licensees, occupants and other users of all or any part of the Property of Mortgagee's rights under this Section and under Paragraph (H). (b) Subject to the rights of the Indenture Trustee under the Indenture, Mortgagor hereby grants to Mortgagee the right, at Mortgagee's option at any time after the occurrence of any Event of Default, to take all actions with respect to any and all such rents, royalties, issues, profits, revenues, income and other benefits as are contemplated by Section 2.3 of this Mortgage. Mortgagor hereby irrevocably authorizes and appoints Mortgagee the agent and attorney-in-fact of Mortgagor, at Mortgagee's option, subject to the rights of the Indenture Trustee under the Indenture, to manage said property and demand, collect, receive and enforce payment of any and all such rents, royalties, issues, profits, revenues, income and other benefits after the occurrence of any Event of Default, to give receipts, releases and satisfactions therefor and to apply such collections in the manner provided in Section 2.3, which appointment shall be deemed to be coupled with an interest. Such assignment, grant and appointment shall continue in effect until all of the Release Conditions have been satisfied. Mortgagor hereby further grants to Mortgagee, subject to the rights of the Indenture Trustee under the Indenture, the right (i) to enter upon and take possession of the Property for the purpose of collecting such rents, issues and profits; (ii) to dispossess by the usual summary proceeding any tenant defaulting in the payment thereof to Mortgagee; (iii) to let the Property, or any part thereof; and (iv) to apply said rents, issues and profits, after payment of all necessary charges and expenses, on account of said Secured Obligations. Mortgagor hereby irrevocably consents to the entry upon and taking possession of the Property by Mortgagee pursuant to such grant and appointment, whether or not foreclosure proceedings shall have been commenced and without applying for a receiver. Neither the exercise by Mortgagee of any rights under this Section or Paragraph (H), nor the application of any such rents, royalties, issues, profits, revenues, income or other benefits to the Secured Obligations, shall cure or waive any Event of Default or any notice of any Event of Default or invalidate any such notice or any act done pursuant to this Mortgage or pursuant to any such notice. (c) Upon request by Mortgagee, Mortgagor shall confirm its assignment to the extent provided above to Mortgagee, as additional security for the Secured Obligations, by a written document approved by Mortgagee, of all right, title and interest of Mortgagor in and to any and all leases now or hereafter affecting all or any part of the Property, together with any and all guaranties and security of, for or otherwise relating to such leases and all rent and other money payable or accruing under or in connection with such leases, subject to the rights of the Indenture Trustee under the Indenture and the conditional permission given to Mortgagor to collect and use the rents, royalties, issues, profits, revenues, income and other benefits arising under such leases as provided above. (d) Nothing herein contained shall be construed as constituting Mortgagee a mortgagee in possession in the absence of the taking of actual possession of the Property by Mortgagee pursuant to the terms hereof. Nothing contained in this Mortgage shall be construed as imposing on Mortgagee any of the obligations of the lessor under any lease of the Property in the absence of an explicit assumption thereof by Mortgagee. If, in the exercise of the powers herein granted to Mortgagee, liability shall be asserted or enforced against Mortgagee, all such liability is expressly waived and released by Mortgagor. (e) Although it is the intention of the parties that the assignment contained in this Section shall be a present absolute assignment, subject to the rights of the Indenture Trustee under the Indenture and to the extent permitted by law and the terms of the leases and any other documents related to such assignment, it is expressly understood and agreed, anything herein contained to the contrary notwithstanding, that Mortgagee shall not exercise any of the rights or powers conferred upon it by this Section unless and until an Event of Default shall have occurred hereunder or under any of the Loan Documents. Section 1.16. Security Agreement and Financing Statements. (a) Mortgagor and Mortgagee agree: that this Mortgage shall constitute a Security Agreement within the meaning of the Uniform Commercial Code (the "Code") as the same may, from time to time be in effect in the State of New York; provided, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of the Lenders' security interest in any Property is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, the term "Code" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions of this Mortgage relating to such attachment, perfection or priority and for purposes of definitions related to such provisions, with respect to any property included in the definition herein of the word "Property," which property may not be deemed to form a part of the Land or may not constitute a "fixture" (within the meaning of the applicable section of the Code) and any fixture which constitutes a part of the Property, and all replacements of such property, substitutions for such property, additions to such property, and the proceeds thereof (subsections (1) and (2) are collectively referred to herein as the "Collateral"); (ii) that a security interest in and to the Collateral is hereby granted to Mortgagee and that, upon recordation in the real estate records of the proper office this instrument shall constitute a "fixture filing" within the meaning of the applicable section of the Code; and (iii) that all of Mortgagor's right, title and interest to the Collateral are hereby assigned to Mortgagee; all to secure payment of the Secured Obligations. Without limiting the foregoing, Mortgagor agrees that it will execute and cause to be properly filed and/or recorded such further Financing Statements and Continuation Statements as Mortgagee may request in order to perfect and preserve the security interest of Mortgagor in the Collateral. (b) If any Event of Default occurs hereunder, Mortgagee, pursuant to the appropriate provisions of the Code, shall have an option to proceed with respect to both the real property and the Collateral in accordance with its rights, powers and remedies with respect to the real property, in which event the default provisions of the Code shall not apply. The parties agree that if Mortgagee shall elect to proceed with respect to the Collateral separately from the real property, Mortgagee shall have all remedies available to a secured party under the Code and ten (10) days' notice of the sale shall be reasonable notice. The reasonable expenses of retaking, holding, preparing for sale, selling and the like incurred by Mortgagee shall include, but not be limited to, reasonable attorneys' fees and legal expenses incurred by Mortgagee. (c) Except as otherwise permitted by the Credit Agreement or the Indenture as in effect on the date hereof, Mortgagor agrees that, without the written consent of Mortgagee, Mortgagor will not remove or permit the removal of any Collateral. Section 1.17. After Acquired Property. To the extent permitted by law and subject to the rights of the Indenture Trustee under the Indenture, the lien of this Mortgage shall attach automatically, without the necessity of any action by Mortgagor or any other person, to all right, title and interest of Mortgagor in and to any and all after-acquired property of the character or type described in the section of this Mortgage entitled "The Property". Mortgagor shall promptly execute and deliver to Mortgagee such documents and instruments as may be necessary or as reasonably requested by Mortgagee to confirm and perfect such lien. Mortgagor hereby irrevocably authorizes and appoints Mortgagee the agent and attorney-in-fact of Mortgagor to execute all such documents and instruments on behalf of Mortgagor, which appointment shall be deemed to be coupled with an interest. Section 1.18. Collateral Protection. UNLESS MORTGAGOR PROVIDES MORTGAGEE WITH EVIDENCE OF INSURANCE COVERAGE REQUIRED BY THE LOAN DOCUMENTS, MORTGAGEE MAY PURCHASE INSURANCE AT MORTGAGOR'S EXPENSE TO PROTECT MORTGAGEE'S INTEREST IN THE PROPERTY. THIS INSURANCE MAY, BUT NEED NOT, PROTECT MORTGAGOR'S INTEREST. THE COVERAGE THAT MORTGAGEE MAY PURCHASE MAY NOT PAY ANY CLAIM THAT MORTGAGEE MAKES OR ANY CLAIM THAT IT MIGHT MAKE AGAINST MORTGAGOR IN CONNECTION WITH THE PROPERTY. MORTGAGOR MAY LATER CANCEL ANY INSURANCE PURCHASED BY MORTGAGEE BUT ONLY AFTER PROVIDING MORTGAGEE WITH EVIDENCE THAT MORTGAGOR HAS OBTAINED INSURANCE AS REQUIRED BY THE LOAN DOCUMENTS. IF MORTGAGEE PURCHASES INSURANCE FOR THE PROPERTY, MORTGAGOR WILL BE RESPONSIBLE FOR THE COST OF THAT INSURANCE, INCLUDING INTEREST AND OTHER CHARGES MORTGAGEE MAY IMPOSE IN CONNECTION WITH THE PLACEMENT OF THE INSURANCE, UNTIL THE EFFECTIVE DATE OF THE CANCELLATION OR EXPIRATION OF THE INSURANCE. THE COST OF THE INSURANCE MAY BE ADDED TO MORTGAGOR'S TOTAL SECURED OBLIGATIONS. THE COST OF THE INSURANCE MAY BE MORE THAN THE COST OF INSURANCE MORTGAGOR MAY BE ABLE TO OBTAIN ON ITS OWN. BY EXECUTING THIS DOCUMENT, MORTGAGOR ACKNOWLEDGES THE FOREGOING. ARTICLE II DEFAULTS AND REMEDIES Section 2.1 Event of Default. As used in this Mortgage, the term "Event of Default" shall mean and refer to each and all of the following: (a) an "Event of Default" under and as defined in the Credit Agreement and the Existing Letter of Credit Agreements; and (b) the occurrence of a Nonreimbursable Mortgage Tax Event. Upon the occurrence of any Event of Default hereunder, the Secured Obligations may be accelerated as provided in the Credit Agreement and Mortgagor shall be entitled to exercise any remedies provided for in this Mortgage, in the Loan Documents, or under any applicable law. Section 2.2. Mortgagee's Power of Enforcement. Subject to the rights of the Indenture Trustee under the Indenture, the terms of the Existing Letter of Credit Agreements and the terms of the Credit Agreement, at any time after the occurrence of any Event of Default, Mortgagee may proceed by any appropriate judicial or non-judicial action or proceeding to (a) enforce payment of all or any part of the Secured Obligations in accordance with the Loan Documents to which Mortgagor is a party, (b) declare the entire balance of any or all of the Secured Obligations to be immediately due and payable without presentment, demand, protest or notice of any kind (all of which are hereby expressly waived by Mortgagor), (c) enforce performance of any term of this Mortgage or any of the other Loan Documents to which Mortgagor is a party, (d) enforce any other rights of Mortgagee with respect to the Secured Obligations, the Property or any other security for the Secured Obligations, (e) foreclose this Mortgage and sell, or cause the sale of, the Property, as an entirety or in separate parts, pursuant to any power of sale now or hereafter permitted by law, or pursuant to the judgment, order or decree of any court of competent jurisdiction, (f) to the extent permitted by law, pursue the partial foreclosure of this Mortgage for any part of the Secured Obligations then due and payable, subject to the continuing encumbrance of this Mortgage as security for the balance of the Secured Obligations not then due, (g) advance sums, in an amount to be determined by Mortgagee in its sole discretion, to satisfy any or all of Mortgagor's obligations under the Loan Documents to which Mortgagor is a party, or (h) pursue any other rights, powers and remedies available to Mortgagee, at law or in equity, in connection with the Secured Obligations, the Property or any other security for the Secured Obligations. Mortgagee shall be entitled to collect from Mortgagor all costs, charges and expenses, including reasonable attorneys' fees and expenses, incurred in connection with the exercise of any of the foregoing remedies, even if redemption is had by Mortgagor after foreclosure proceedings have begun. After the occurrence of any Event of Default, Mortgagee may pursue any or all such actions or proceedings, at Mortgagee's option, separately or concurrently and in such order as Mortgagee may desire, either with or without entry or taking possession and whether or not all or any part of the Secured Obligations shall have been declared to be immediately due and payable or shall otherwise be due. After the occurrence of any Event of Default, Mortgagee may pursue any and all such actions or proceedings without prejudice to Mortgagee's right thereafter to foreclose this Mortgage and without prejudice to any right of Mortgagee thereafter to proceed by any other action or proceeding to enforce any or all rights, powers and remedies of Mortgagee with respect to the Secured Obligations, the Property or any other security for the Secured Obligations, even if the basis for any such subsequent action or proceeding is an Event of Default which existed at the time such earlier action or proceeding was commenced. Lenders have granted to Mortgagee the express and exclusive authority to enforce this Mortgage. Lenders agree to cooperate with, and give their full assistance to, Mortgagee in connection with its enforcement of the Mortgage pursuant to this Section 2.2 including, without limitation, assigning any Revolving Loan Notes or Auction Notes then held by such Lenders to the Mortgagee in connection with the foreclosure of the Mortgage. Section 2.3. Mortgagee's Right To Enter and Take Possession. (a) Subject to the rights of the Indenture Trustee under the Indenture, at any time after the occurrence of any Event of Default, whether or not foreclosure proceedings shall have been instituted or whether before or after the whole principal sum secured hereby is accelerated, Mortgagee, to the extent and in the manner permitted by law, may enter and take possession of all or any part of the Property, may exclude Mortgagor and its officers, employees, agents, contractors, attorneys and other representatives therefrom and may have access to the books, papers and accounts of Mortgagor and of any manager of the Property to the fullest extent permitted by law. Subject to the rights of the Indenture Trustee, upon request by Mortgagee at any time during the continuance of any Event of Default, Mortgagor shall peaceably and quietly vacate, surrender and deliver possession of the Property (or any part of the Property that may be designated by Mortgagee) to Mortgagee, and, if the Property is leased or subleased, deliver to Mortgagee the rent security deposits and all of the leases and subleases, with such additional assignments thereof as Mortgagee may request. Subject to the rights of the Indenture Trustee under the Indenture, Mortgagor further agrees that Mortgagee may assume the management of the Real Property, enter into new leases and subleases and collect the rents, applying the same upon the Secured Obligations in the manner provided in the Collateral Agency Agreement. If Mortgagor shall not vacate, surrender and deliver possession of the Property (or such part of the Property) to Mortgagee as provided above, then, without limiting any other right to enter and take possession of the Property (or such part of the Property), Mortgagee, subject to the rights of the Indenture Trustee under the Indenture, may resort to any and all legal and equitable remedies required to evict and dispossess Mortgagor therefrom including, without limitation, one or more summary proceedings or actions for forcible entry and detainer, trespass to try title or restitution), and Mortgagee may obtain a judgment, order or decree of any court of competent jurisdiction conferring on Mortgagee the right to immediate possession and requiring Mortgagor to immediately vacate, surrender and deliver possession of the Property (or such part of the Property) to Mortgagee. Mortgagor hereby specifically and irrevocably consents to the entry of any such judgment, order or decree. Upon request by Mortgagee, Mortgagor shall pay to Mortgagee, or to any other person that Mortgagee may designate, all costs, expenses and liabilities (including, without limitation, reasonable attorneys' fees) incurred by Mortgagee in connection with any such failure to vacate, surrender and deliver possession or in connection with any such judgment, order or decree or the exercise of any such remedies, together with interest thereon at the rate of interest payable after an Event of Default, from the date incurred by Mortgagee until the date so paid to, or as directed by, Mortgagee. (b) After any such entry into possession, and to the fullest extent permitted by law, Mortgagee, acting in Mortgagor's name or otherwise, may hold, store, use, operate, manage and control the Property (or any part of the Property which then is in the possession of Mortgagee) and may conduct the business and operations thereof in its own name or in the name of Mortgagor. In doing so, Mortgagee may, but shall not be obligated to: (i) carry out any and all necessary and desirable maintenance, repairs, renewals, replacements, alterations, additions, betterments and improvements of or to the Property (or such part of the Property); (ii) purchase or otherwise acquire and install in or on the Property (or such part of the Property) additional fixtures, personal property and other property of the type encumbered by this Mortgage; (iii) insure the Property or keep the Property insured; (iv) manage, operate and exercise all rights and powers of Mortgagor with respect to the Property (or such part of the Property) and the management and operation thereof (including, without limitation, the right to enter into or cancel, enforce or modify leases and subleases, to evict tenants by summary proceedings or otherwise and to take other appropriate steps to enforce leases and subleases); (v) enter into agreements with others to exercise the rights and powers of Mortgagee under this Mortgage; and (vi) collect and receive all rents, royalties, issues, profits, revenues, income and other benefits of and from the Property (or such part of the Property) and any business or other operations conducted therein or thereon by or on behalf of or for the benefit of Mortgagor (including those past due as well as those accruing thereafter). (c) In the event of any such entry into possession, Mortgagee shall be liable to account only for rents, royalties, issues, profits, revenues, income and benefits actually received by Mortgagee while in possession of the Property. In the event of any foreclosure, Mortgagee may remain in possession of all or any part of the Property until the foreclosure sale and thereafter during any period of redemption. In the absence of any foreclosure, Mortgagee may remain in possession of all or any part of the Property as long as there exists an Event of Default. The same right of taking possession shall exist during the continuance of any subsequent Event of Default. Mortgagee shall not be obligated, by virtue of this Section or by virtue of any actions contemplated by this Mortgage or by any of the other Loan Documents to which Mortgagor is a party, to perform or discharge any obligation, duty or liability of Mortgagor under any lease or other agreement relating to all or any part of the Property or under any law, ordinance, rule, regulation, order, judgment, injunction or decree relating to all or any part of the Property. Mortgagee shall not incur any liability for, nor shall Mortgagor assert any claim or set off as a result of, any acts or omissions of Mortgagee or any of Mortgagee's officers, employees, agents, contractors, attorneys or other representatives, while in possession of all or any part of the Property (except for damages directly caused by Mortgagee's own gross negligence). Mortgagor hereby expressly and irrevocably waives, releases, discharges and relinquishes all such liabilities, claims and rights of set off, except as provided above. (d) Upon request by Mortgagee, Mortgagor shall pay to Mortgagee, or to any other person that Mortgagee may designate, all costs, expenses and liabilities incurred by Mortgagee including, without limitation, reasonable attorneys' fees and costs, appraisers' fees and costs, outlays for documentary and expert evidence, stenographers' charges, publication costs, transfer taxes on any deed or conveyance and costs which may be estimated as to items to be expended after entry of the decree of procuring all such abstracts of title, title searches and examinations, title insurance policies, Torrens certificates, and similar data and assurances with respect to title and value as Mortgagee may deem reasonably necessary either to prosecute any suit or proceeding or to evidence to bidders at any sale which may be had pursuant to such decree or statutory power of sale the true condition of the title to or the value of the Property or any other costs, expenses or liabilities incurred in connection with the holding, storage, use, operation, management, control, maintenance, repair, alteration or improvement of all or any part of the Property (except to the extent such costs, expenses and liabilities shall have been paid out of collections from the Property as provided above), together with interest on such amounts as are incurred by Mortgagee at the rate of interest payable after an Event of Default, from the date incurred by Mortgagee, until the date so paid to Mortgagee. (e) Without limiting the liability of Mortgagor set forth above, Mortgagor shall indemnify Mortgagee, Lenders and their respective officers, directors, employees and agents (each, an "Indemnified Person"), and hold them harmless from and against all claims, injury, damage, loss and liability of any and every kind to any persons or property by reason of the ownership, operation or maintenance of the Property or any other action or inaction by or matter which is the responsibility of Mortgagor (collectively, "Indemnified Liabilities"), except to the extent that any such Indemnified Liability is finally determined by a court of competent jurisdiction to have resulted from such Indemnified Person's gross negligence or willful misconduct. Section 2.4. Appointment of Receiver. (a) At any time after the occurrence of any Event of Default, Mortgagee, to the extent permitted by law, subject to the rights of the Indenture Trustee under the Indenture, and without regard to the value, adequacy or occupancy of the Property or the solvency of Mortgagor, shall be entitled as a matter of right and without notice or the requirement of bond (notice and bond being hereby waived), if it so elects, to the appointment of a receiver either before or after sale, without regard to the solvency or insolvency of Mortgagor at the time of application to enter upon and take possession of the Property, collect all rents, royalties, issues, profits, revenues, income and other benefits of and from the Property and any business or other operations conducted in or on the Property by or on behalf of or for the benefit of Mortgagor and apply the same as the court may direct or otherwise as may be permitted by law. Mortgagor hereby specifically and irrevocably consents to such appointment. Without limiting the generality of the foregoing or of any other provision of this Mortgage, Mortgagor agrees that any failure of Mortgagor to pay any real estate or other taxes, insurance premiums required pursuant to the terms of this Mortgage or any Impositions, other than real estate or other taxes, which are necessary to preserve the Property or protect the Property from waste or to maintain any insurance required pursuant to the terms of this Mortgage shall constitute waste, justifying the appointment of a receiver after the expiration of the applicable cure period, except where the failure to do so could not reasonably be expected to have a Material Adverse Effect. The receiver shall be entitled to hold, store, use, operate, manage and control the Property and conduct the business and operations thereof as would Mortgagee pursuant to the immediately preceding Section and shall have all rights and powers permitted by law and such other rights and powers as the court making such appointment shall confer. The receiver shall be liable to account only for rents, royalties, issues, profits, revenues, income and other benefits actually received by such receiver. Notwithstanding the appointment of any receiver or other custodian, Mortgagee, as pledgee or depository, shall be entitled to the possession and control of any cash, deposits or instruments held by Mortgagee at the time of such appointment or payable or deliverable to Mortgagee from time to time pursuant to this Mortgage or any of the other Loan Documents to which Mortgagor is a party. (b) Upon request by Mortgagee, Mortgagor shall pay to Mortgagee, or to any other person that Mortgagee may designate, or to any such receiver, all costs, expenses and liabilities (including, without limitation, reasonable attorneys' fees, receivers' fees, agents' compensation and the fees of any manager retained by such receiver) incurred by Mortgagee, or by such receiver in connection with the appointment of such receiver and the exercise of the rights and powers of such receiver, except to the extent such costs, expenses and liabilities shall have been paid out of collections from the Property from the date incurred by Mortgagee or by such receiver until the date so paid to Mortgagee or to such receiver. Section 2.5. Waiver of Certain Rights. Mortgagor agrees, to the extent permitted by law, that neither Mortgagor nor any person at any time claiming through or under Mortgagor shall set up, claim or seek to take advantage of any law now or hereafter in force pertaining to the rights of sureties or providing for any appraisement, valuation, stay, notice of election to accelerate maturity or to declare the Secured Obligations due, extension, redemption, moratorium, homestead or exemption from execution or sale, in order to prevent or hinder the foreclosure of this Mortgage after the occurrence of any Event of Default, the final and absolute sale of all or any part of the Property or the final and absolute putting into possession thereof, immediately after any such sale, of the purchaser or purchasers at such sale or the enforcement of any other rights or remedies of Mortgagee under this Mortgage or under any of the other Loan Documents to which Mortgagor is a party. After the occurrence of any Event of Default, Mortgagee, subject to the rights of the Indenture Trustee under the Indenture, or any court having jurisdiction to foreclose this Mortgage may sell the Property in part or as an entirety. Mortgagee shall not be required to accept the Property, any part or parts thereof or any other security for the Secured Obligations in satisfaction of all or any part of the Secured Obligations. Mortgagee shall not be required to accept any apportionment of the Secured Obligations to or among any part or parts of the Property or any other security for the Secured Obligations. If any law now in force of which Mortgagor might take advantage despite this Section shall be repealed or shall cease to be in force after the date hereof, then such law shall not thereafter be deemed to preclude the application of this Section. Section 2.6. Leases. Any foreclosure of this Mortgage and any other transfer of all or any part of the Property in extinguishment of all or any part of the Secured Obligations may, at Mortgagee's option, be subject to any or all leases of all or any part of the Property and the rights of tenants under such leases. No failure to make any such tenant a defendant in any foreclosure proceedings or to foreclose or otherwise terminate any such lease and the rights of any such tenant in connection with any such foreclosure or transfer shall be, or be asserted to be, a defense or hindrance to any such foreclosure or transfer or to any proceedings seeking collection of all or any part of the Secured Obligations (including, without limitation, any deficiency remaining unpaid after completion of any such foreclosure or transfer). Section 2.7. Suits To Protect Property. Mortgagee is hereby irrevocably authorized, at Mortgagee's option, to initiate and maintain any and all suits and proceedings that Mortgagee may deem advisable, at Mortgagor's expense (a) to prevent any impairment of the Property or of the security of this Mortgage by any unlawful acts or omissions, (b) to prevent the occurrence or continuance of any violation of this Mortgage or of any of the other Loan Documents, (c) to foreclose this Mortgage, (d) to preserve and protect Mortgagee's interest in the Property and (e) to restrain the enforcement of, or compliance with, any law, ordinance, rule, regulation, order, judgment, injunction or decree that may be unconstitutional or otherwise invalid, if such enforcement or compliance might in Mortgagee's judgment impair the Property or the security of this Mortgage or be prejudicial to the interests of Mortgagee. Section 2.8. No Waiver. (a) No delay or omission of Mortgagee to insist upon strict performance of any obligation of Mortgagor under or in connection with this Mortgage or any of the other Loan Documents to which Mortgagor is a party or to exercise any right, power or remedy available after the occurrence of any Event of Default shall waive, exhaust or impair any such obligation or any such right, power or remedy, nor shall any such delay or omission be construed to be a waiver of, or acquiescence in or to, any such Event of Default. Notwithstanding any such delay or omission, Mortgagee thereafter shall have the right, from time to time and as often as may be deemed advisable by Mortgagee, to insist upon and enforce strict performance of any and all obligations of Mortgagor under or in connection with this Mortgage or any of the other Loan Documents to which Mortgagor is a party. Each and every right, power and remedy available to Mortgagee after the occurrence of any Event of Default may be exercised from time to time and as often as may be deemed advisable by Mortgagee. (b) No waiver of any Event of Default shall extend to or affect any subsequent Event of Default or any other Event of Default then existing, nor shall any such waiver impair any rights, powers or remedies available to Mortgagee after the occurrence of any Event of Default. After the occurrence of any Event of Default (whether or not the Secured Obligations or any part thereof shall have been declared to be immediately due and payable), Mortgagee may accept payments of amounts owing in respect of the Secured Obligations, and no such acceptance shall waive any such Event of Default or result in any declaration of maturity or in any Secured Obligations which shall have been declared to be due and payable no longer being due and payable, unless Mortgagee expressly and specifically agrees in writing to any such waiver or declaration or that such Secured Obligations are no longer due and payable. Section 2.9. Remedies Cumulative. No right, power or remedy now or hereafter available to Mortgagee or any receiver pursuant to any of the Loan Documents to which Mortgagor is a party or pursuant to any law or judicial decision, is or shall be exclusive of any other right, power or remedy, and each and every such right, power and remedy shall be cumulative and concurrent and shall be in addition to each and every other right, power and remedy now or hereafter available pursuant to any of the Loan Documents to which Mortgagor is a party or pursuant to any law or judicial decision. Notwithstanding anything to the contrary set forth in this Mortgage or in any of the other Loan Documents to which Mortgagor is a party, no act of Mortgagee shall be construed as an election to proceed under any one provision of this Mortgage or of any applicable statute or other law to the exclusion of any other such provision, statute or other law. Section 2.10. Discontinuance of Proceedings. If Mortgagee shall exercise any right, power or remedy available pursuant to this Mortgage or any of the other Loan Documents to which Mortgagor is a party or pursuant to any law or judicial decision, and if such exercise and any related proceedings shall be discontinued or abandoned for any reason then, to the extent permitted by law and at the sole option of Mortgagee, Mortgagor and Mortgagee thereafter shall be restored to their respective former positions and to their respective rights, powers and remedies under the Loan Documents to which Mortgagor is a party or otherwise relating to the Secured Obligations, the Property or any other security for the Secured Obligations, and all rights, powers and remedies of Mortgagee shall continue to be available as if no such exercise and no such proceedings had occurred unless otherwise directed by a court of competent jurisdiction. Section 2.11. Additional Security. If Mortgagee at any time holds additional security for, or any guaranty of, all or any part of the Secured Obligations, then Mortgagee may foreclose such security or otherwise enforce its rights, powers and remedies with respect to, and realize upon, such security or such guaranty (as the case may be), either before or concurrently with or after a foreclosure or other enforcement of this Mortgage or of any of the other Loan Documents to which Mortgagor is a party, without being deemed to have waived any rights, benefits, liens or security interests evidenced by or arising under or in connection with this Mortgage or any of the other Loan Documents to which Mortgagor is a party and without being deemed to have made an election thereby or to have accepted the benefits of such guaranty or such additional security (or the proceeds thereof) in full settlement of the Secured Obligations and of its rights with respect thereto. No judgment, order or decree with respect to any of the Revolving Loan Notes, Auction Notes, Guaranty, Existing Letter of Credit Agreements or with respect to any such guaranty or security, wherever rendered, shall in any manner affect the security of this Mortgage, and any deficiency or other debt represented by any such judgment, order or decree shall, to the extent permitted by law, be secured by this Mortgage to the same extent that the Secured Obligations shall have been secured by this Mortgage prior to the rendering of such judgment, order or decree. Mortgagor, for itself and for any and all persons who may at any time claim through or under Mortgagor or who hereafter may otherwise acquire any interest in or title to all or any part of the Property or any other security for the Secured Obligations, hereby irrevocably waives and releases, to the extent permitted by law, all benefit of any and all laws that would limit or prohibit the effectiveness of anything set forth in this Section. ARTICLE III MISCELLANEOUS Section 3.1. Use of Certain Terms. Each reference in this Mortgage to Mortgagor or Mortgagee shall be deemed also to include Lenders and the respective legal representatives and successors and assigns of such persons. Each reference in this Mortgage to any gender shall be deemed also to include any other gender, and the use in this Mortgage of the singular shall be deemed also to include the plural and vice versa, unless the context requires otherwise. As used in this Mortgage, the term "person" shall mean and refer to any and all individuals, sole proprietorships, partnerships, joint ventures, associations, trusts, estates, business trusts, corporations (non-profit or otherwise), financial institutions, governments (and agencies, instrumentalities and political subdivisions thereof), and other entities and organizations. Each reference in this Mortgage to the fees or other compensation of any agents, contractors, attorneys or other representatives of Mortgagee shall be deemed also to include expenses and disbursements, as well as fees of paraprofessionals and similar personnel (such as paralegals and legal assistants). The word "include(s)" means "include(s), without limitation," and the word "including" means "including, but not limited to." Section 3.2. Headings. The headings of the Articles, Sections, paragraphs and other subdivisions of this Mortgage are for convenience of reference only, are not to be considered a part of this Mortgage and shall not limit, expand or otherwise affect any of the terms of this Mortgage. Section 3.3. Notices. All notices hereunder shall be given in the manner, and deemed received, as provided for in the Credit Agreement (it being understood that, for purposes of this Section 3.3 only, Mortgagee shall be deemed to be Agent under the Credit Agreement). Section 3.4. Binding Effect. All covenants, agreements conditions and other provisions of this Mortgage shall run with the Land and shall bind and inure to the benefit of Mortgagor, Mortgagee, and their respective successors and assigns, whether so expressed or not. If there is more than one Mortgagor at any time, all undertakings of Mortgagor under this Mortgage shall be deemed to be joint and several. Section 3.5. Provisions Subject to Applicable Laws; Invalid Provisions To Affect No Others. All rights, powers and remedies provided in this Mortgage may be exercised only to the extent that the exercise thereof does not violate any law and are intended to be limited to the extent necessary so that they will not render this Mortgage invalid, illegal or unenforceable. In the event that any of the covenants, agreements, conditions or other provisions of this Mortgage shall be deemed invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining covenants, agreements, conditions and other provisions of this Mortgage shall in no way be affected, prejudiced or disturbed thereby. Section 3.6. Changes. Neither this Mortgage nor any covenant, agreement, condition or other provision of this Mortgage may be changed, waived, released, discharged, withdrawn, revoked or terminated orally, or by any action or inaction. In order to be effective and enforceable, any such change, waiver, release, discharge, withdrawal, revocation or termination must be evidenced by a written document or instrument signed by the party against which enforcement of such change, waiver, release, discharge, withdrawal, revocation or termination is sought, and then shall be effective and enforceable only to the extent specifically provided in such document or instrument. Any agreement hereafter made by Mortgagor or Mortgagee relating to this Mortgage or to any of the other Loan Documents to which Mortgagor is a party shall be superior to the rights of the holder, owner or beneficiary of any intervening lien or encumbrance, subject to applicable law. Neither the modification of this Mortgage or any of the other Loan Documents to which Mortgagor is a party nor the release of any part of the Property from the lien of this Mortgage shall impair the priority of such lien, subject to applicable law. Section 3.7. No Benefit to Third Parties. Each covenant, agreement, condition and other provision of this Mortgage and of the other Loan Documents to which Mortgagor is a party, is and at all times shall be deemed to be for the exclusive benefit of Mortgagor and Mortgagee. Nothing set forth in this Mortgage or in any of the other Loan Documents to which Mortgagor is a party shall be deemed to be for the benefit of any other person (including, without limitation, the holder, owner or beneficiary of any other lien or interest in or on all or any part of the Property or the owner of any interest in Mortgagor). Section 3.8. Exercise of Discretion. Each and every decision, determination, estimate, request, consent or similar matter to be made or given by Mortgagee from time to time pursuant to or in connection with this Mortgage shall be within Mortgagee's sole, absolute and unlimited discretion, except to the extent expressly and specifically provided to the contrary in this Mortgage or in any of the other Loan Documents to which Mortgagor is a party. Section 3.9. Representatives of Mortgagee. All rights, powers and remedies of Mortgagee under this Mortgage may be exercised by Mortgagee itself or by its officers, employees, agents, contractors, attorneys or other representatives. Section 3.10. Receipt of Copy Acknowledged. Each of Mortgagor and Mortgagee hereby acknowledges that it has received an accurate and complete copy of this instrument as executed by Mortgagor. Section 3.11. Waiver of Jury Trial; Submission to Jurisdiction; Waiver of Service and Venue. Mortgagor reaffirms and incorporates herein the provisions of the Credit Agreement (a) waiving jury trial and service of process and (b) submitting to jurisdiction and venue. Section 3.12. Estoppel Certificates. Mortgagor, within (10) days after written request therefor by or on behalf of Mortgagee, shall furnish to Mortgagee a written statement, duly acknowledged, setting forth the unpaid principal of, and to the extent of Mortgagor's knowledge, interest, and indebtedness secured hereby and whether or not any offsets or defense exists against such indebtedness, and covering such other matters as may reasonably be requested. Section 3.13. Mortgagee's Lien. This Mortgage secures the Secured Obligations, all other amounts secured hereby, and the payment of any and all commissions, service charges, liquidated damages, expenses and advances due to or incurred by Mortgagee in accordance with the terms and conditions of the Credit Agreement, the Existing Letter of Credit Agreements, the Guaranty and the other Transaction Documents, in connection with the Property or Secured Obligations. Section 3.14. Required Notices. Mortgagor shall notify Mortgagee promptly of the receipt of any notice of default from any tenant or subtenant leasing all or any portion of the Property. SECTION 3.15. Governing Law. THE GRANT OF THIS MORTGAGE, THE CREATION OF MORTGAGEE'S RIGHTS AND INTERESTS HEREUNDER, THE PUBLICATION AND PERFECTION OF THE LIEN, SECURITY INTEREST AND OTHER RIGHTS AND INTERESTS GRANTED OR OTHERWISE ARISING HEREUNDER AND THE EXERCISE OF MORTGAGEE'S RIGHTS, POWERS AND REMEDIES RELATING TO THE PROPERTY (WHETHER SPECIFICALLY PROVIDED IN THIS MORTGAGE OR PROVIDED BY APPLICABLE LAW) SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. OTHERWISE, TO THE EXTENT PERMITTED BY APPLICABLE LAW, THIS MORTGAGE AND THE LOAN DOCUMENTS TO WHICH MORTGAGOR IS A PARTY (INCLUDING, WITHOUT LIMITATION, TERMS RELATING TO USURY CONSIDERATIONS AND TERMS RELATING TO MORTGAGOR'S LIABILITY FOR ANY DEFICIENCY FOLLOWING ANY FORECLOSURE OF THIS MORTGAGE OR ANY OTHER TRANSFER OF ALL OR ANY PART OF THE PROPERTY IN EXTINGUISHMENT OF ANY PART OF THE SECURED OBLIGATIONS) SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. Section 3.16. Site Visits, Observation and Testing. Mortgagee and its agents and representatives shall have the right to enter and visit the Property at any reasonable time during normal business hours for the purposes of observing it, performing appraisals, taking and removing soil or groundwater samples, and conducting tests on any part of it. Mortgagee is under no duty, however, to visit or observe the Property or to conduct tests, and any such acts by Mortgagee shall be solely for the purposes of protecting Mortgagee's security and preserving Mortgagee's and Trustee's rights under the Loan Documents. In no event shall any site visit, observation or testing by Mortgagee be a representation that Hazardous Materials are or are not present in, on, or under the Land or Improvements, or that any construction is free from defective materials or workmanship. Neither Mortgagor nor any other party is entitled to rely on any site visit, observation or testing by Mortgagee. Mortgagee owes no duty of care to protect Mortgagor or any other party against, or to inform Mortgagor or any other party of, any Hazardous Materials, any negligent or defective design or construction of the Improvements, or any other adverse condition affecting the Property. Mortgagee shall disclose to Mortgagor, at Mortgagor's request, any written report or findings prepared by any third party (the cost of which is borne by Mortgagor) as a result of, or in connection with, any site visit, observation or testing made at the request of Mortgagee, unless such third party reasonably objects to such disclosure. Prior to entering the Property under this Section, Mortgagee shall give Mortgagor reasonable notice of its intent to enter. Mortgagee shall exercise reasonable efforts to avoid interfering with use of the Property in connection with the activities permitted under this Section. Section 3.17. Credit Bids. At any foreclosure sale, any person, including Mortgagor or Mortgagee, may bid for and acquire the Property or any part of it to the extent permitted by then applicable law. Subject to the rights of the Indenture Trustee under the Indenture, instead of paying cash for that property, Mortgagee may settle for the purchase price by crediting all or any portion of outstanding sums constituting Secured Obligations, including, without limitation, Secured Obligations attributable to the expense of sale, costs of any action and any other sums for which Mortgagor is obligated to pay or reimburse Mortgagee against the sale price of the Property or any portion thereof. Section 3.18. No Waiver or Cure. Each waiver by Mortgagee must be in writing, and no waiver shall be construed as a continuing waiver. No waiver shall be implied from any delay to failure by Mortgagee to take action on account of any default of Mortgagor. Consent by Mortgagee to any act or omission by Mortgagor shall not be construed as a consent to any other or subsequent act or omission or to waive the requirement for Mortgagee's consent to be obtained in any future or other instance. No election of remedies or waiver of the right to a deficiency judgment shall be implied from any language contained in this Mortgage or any of the Loan Documents. Section 3.19. Partial Release Conditions. (a) In the event Mortgagor requests that Mortgagee release a portion of the Property (the "Release Parcel") from the lien of this Mortgage, Mortgagee shall approve such request provided Mortgagor has satisfied the requirements under the Indenture to release a portion of the Property from the lien of such Indenture and the Indenture Trustee has released the lien of the Indenture with respect to such Release Parcel, provided, however, if the First Mortgage Bonds have been paid in full or an Event of Default has occurred and is continuing, then the Release Parcel shall not be deemed to be released hereunder. In addition to the foregoing, no Release Parcel shall be released if (i) such Release Parcel has not been formally designated as a distinct tax lot separate from the remainder of the Property or (ii) such release materially restricts Mortgagee's rights of access or use of the remaining Property, as determined in the reasonable discretion of Mortgagee. (b) Upon the satisfaction of the conditions set forth in subparagraph (a) above for the release of the Release Parcel, the security interests and liens of Mortgagee under this Mortgage and the other Loan Documents shall be released from the Release Parcel, and Mortgagee will execute and deliver any agreements reasonably requested by Mortgagor to release and terminate the lien of this Mortgage as to the Release Parcel; provided, however, that such release and termination shall be without recourse to Mortgagee and made without any representation or warranty. Upon the release and termination of Mortgagee's security interests and liens under this Mortgage and the other Loan Documents relating to the Release Parcel, all references in this Mortgage and the other Loan Documents relating to the Release Parcel shall be deemed deleted, except as otherwise provided herein with respect to indemnities or except as otherwise provided in any of the other Loan Documents. ARTICLE IV. ADDITIONAL COLLATERAL Mortgagor acknowledges and agrees that the Secured Obligations are secured by the Property and various other collateral including, without limitation, at the time of execution of this Mortgage certain personal property of Mortgagor and other parties described in the Loan Documents to which Mortgagor is a party. Mortgagor specifically acknowledges and agrees that the Property, in and of itself, if foreclosed or realized upon may not be sufficient to satisfy the outstanding amount of the Secured Obligations. Accordingly, Mortgagor acknowledges that it is in Mortgagor's contemplation that the other collateral pledged to secure the Secured Obligations may be pursued by Mortgagee in separate proceedings in the various states and counties where such collateral may be located and additionally that Mortgagor and other parties liable for payment of the Secured Obligations will remain liable for any deficiency judgments in addition to any amounts Mortgagee may realize on sales of other property or any other collateral given as security for the Secured Obligations. Specifically, and without limitation of the foregoing, it is agreed that it is the intent of the parties hereto that in the event of a foreclosure of this Mortgage, that the Revolving Loan Notes, Auction Notes and letters of credit evidencing the Secured Obligations shall not be deemed merged into any judgment of foreclosure, but shall rather remain outstanding. It is the further intent and understanding of the parties that Mortgagee, following an Event of Default, may pursue all of its collateral with the Revolving Loan Notes, Auction Notes and letters of credit remaining outstanding and in full force and effect notwithstanding any judgment of foreclosure or any other judgment which Mortgagee may obtain. Mortgagee shall be entitled to enforce payment and performance of the Secured Obligations and to exercise all rights and powers under this Mortgage or under any Loan Document to which Mortgagor is a party or other agreement or any laws now or hereafter in force, notwithstanding that some or all of the Secured Obligations may now or hereafter be otherwise secured, whether by mortgage, deed of trust, pledge, lien, assignment or otherwise. Neither the acceptance of this Mortgage nor its enforcement, whether by court action or pursuant to power of sale, shall prejudice or in any manner affect Mortgagee's right to realize upon or enforce any other security now or hereafter held by Mortgagee, it being agreed that Mortgagee shall be entitled to enforce this Mortgage and any other security now or hereafter held by Mortgagee in such order and manner as it may in its absolute discretion determine. No right or remedy herein conferred upon or reserved to Mortgagee is intended to be exclusive of any other remedy herein or by law provided or permitted, but each shall be cumulative and shall be in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or by statute. Every power or remedy given by any of the Loan Documents to which Mortgagor is a party, to Mortgagee, or to which Mortgagee may be otherwise entitled, may be exercised concurrently or independently, from time to time and as often as may be deemed expedient by Mortgagee, and Mortgagee may pursue inconsistent remedies. Mortgagor acknowledges and agrees that the Property and any additional Property which may from time to time be pledged as security for the Secured Obligations may be located in more than one state and therefor Mortgagor waives and relinquishes any and all rights it may have, whether at law or equity, to require Mortgagee to proceed to enforce or exercise any right, powers and remedies it may have under the Loan Documents to which Mortgagor is a party, in any particular manner, in any particular order, or in any particular State or other jurisdiction. Furthermore, Mortgagor acknowledges and agrees that Mortgagee shall be allowed to enforce payment and performance of the Secured Obligations and to exercise all rights and powers provided under this Mortgage and the other Loan Documents to which Mortgagor is a party, or any of them, or under any provision of law, by one or more proceedings, whether contemporaneous, consecutive or both in any one or more States in which the security may be located. Neither the acceptance of this Mortgage, or of any other Loan Document to which Mortgagor is a party, nor its enforcement in one State, whether by court action, power of sale, or otherwise, shall prejudice or in any way limit or preclude enforcement of the Loan Documents to which Mortgagor is a party, or any of them, through one or more additional proceedings, in that state or in any other State. Mortgagor further agrees that any particular proceeding, including without limitation, foreclosure through court action (in a state or federal court) or power of sale, may be brought and prosecuted in the local or federal courts of any one or more States as to all or any part of the Property or other collateral pledged to secure the Secured Obligations, wherever located, without regard to the fact that any one or more prior or contemporaneous proceedings have been situated elsewhere with respect to the same or any other part of the Property and such other collateral. Notwithstanding anything contained herein to the contrary, Mortgagee shall be under no duty to Mortgagor or others, including, without limitation, the holder of any junior, senior or subordinate mortgage on the Property or any part thereof or on any other security held by Mortgagee, to exercise or exhaust all or any of the rights, powers and remedies available to Mortgagee. ARTICLE V. CERTAIN MATTERS RELATING TO THE PROPERTY LOCATED IN THE STATE OF CONNECTICUT Notwithstanding any provision hereof or of any other Loan Document to the contrary, with respect to any Property now or hereafter located in the State of Connecticut and encumbered by this Mortgage, the following provisions shall apply: Section 5.1. Open-End Mortgage. This is an "open- end mortgage" as provided for by Connecticut General Statutes Section 49-2(c), and Mortgagee shall have all the rights, powers, privileges and protections afforded to the holder of an open-end mortgage by such statute or any other applicable law. For purposes of such statute, the full principal amount of the loan and letters of credit authorized is $66,300,000. It is understood and agreed that Mortgagee may, but shall not be obligated to, at any time and from time to time, make future advances secured by this Mortgage. Except for advances for the payment of taxes, assessments, insurance premiums, repairs, alterations, improvements or costs incurred for the protection of the Property or otherwise permitted elsewhere by this Mortgage or under applicable law, all future advances shall be evidenced as provided in the Credit Agreement. Nothing set forth in this Section 5.1 shall affect the validity or enforceability of any obligation of Mortgagor to Mortgagee under this Mortgage or any other agreement between Mortgagee and Mortgagor that would be valid and enforceable without the provisions of this Section 5.1. Section 5.2. Open-End Mortgage Securing Guaranty. In addition to the provisions of Section 5.1, and not in limitation thereof, this is an "open-end mortgage" as provided for by Connecticut General Statutes Section 49-4b, and Mortgagee shall have all the rights, powers, privileges and protections afforded to the holder of an open-end mortgage by such statute or any other applicable law. This Mortgage is given by Mortgagor as security for, among other things, its obligations under the Guaranty, including its obligation to repay advances made pursuant to that certain letter of credit issued pursuant to the terms of the East Barnet Letter of Credit Agreement. Nothing set forth in this Section 5.2 shall affect the validity or enforceability of any obligation of Mortgagor to Mortgagee under this Mortgage or any other agreement between Mortgagee and Mortgagor that would be valid and enforceable without the provisions of this Section 5.2. Section 5.3. Prejudgment Remedy Waiver. MORTGAGOR ACKNOWLEDGES THAT THE LOAN IS A "COMMERCIAL TRANSACTION" AS DEFINED BY CHAPTER 903a OF THE CONNECTICUT GENERAL STATUTES AND, PURSUANT TO SECTION 52-278f OF SAID CONNECTICUT GENERAL STATUTES, WAIVES ANY RIGHT TO NOTICE AND HEARING UNDER SECTIONS 52-278a THROUGH 52-278g OF THE CONNECTICUT GENERAL STATUTES, AS NOW OR HEREAFTER AMENDED, OR UNDER ANY OTHER STATE OR FEDERAL LAW WITH RESPECT TO ANY AND ALL PREJUDGMENT REMEDIES MORTGAGEE MAY EMPLOY TO ENFORCE ITS RIGHTS AND REMEDIES IN CONNECTION WITH THE REVOLVING LOAN NOTES, THIS MORTGAGE OR ANY OTHER LOAN DOCUMENTS SECURING THE REVOLVING LOAN NOTES. MORTGAGOR AUTHORIZES MORTGAGEE'S ATTORNEY TO ISSUE A WRIT FOR A PREJUDGMENT REMEDY WITHOUT SECURING A COURT ORDER. MORTGAGOR ACKNOWLEDGES IT MAKES THIS WAIVER KNOWINGLY, VOLUNTARILY AND ONLY AFTER EXTENSIVE CONSIDERATION OF THE RAMIFICATIONS OF THIS WAIVER WITH ITS COUNSEL. Section 5.4. UCC. Notwithstanding anything to the contrary contained herein, the references to the Code in this Article V shall be deemed to be references to the Uniform Commercial Code in Connecticut General Statutes Section 42a-1-101, et seq. ARTICLE VI. CERTAIN MATTERS RELATING TO THE PROPERTY LOCATED IN THE STATE OF MAINE Notwithstanding any provision hereof or of any other Loan Documents to the contrary, with respect to any Property now or hereafter located in the State of Maine and encumbered by this Mortgage, the following provisions shall apply: Section 6.1. Statutory Power of Sale. In addition to the remedies set forth herein, Mortgagee shall have, to the fullest extent now or hereafter available, the Statutory Power of Sale pursuant to the applicable provisions of Titles 14 and 33 of the Maine Revised Statutes of 1964, as the same have been and shall be amended. Mortgagor acknowledges that this Mortgage is given to secure a loan for business and commercial purposes and not personal, family or household purposes. A sale conducted pursuant to the Statutory Power of Sale may occur at or near the Property or, in Mortgagee's discretion, at any existing office of Mortgagee or its attorney located in the same county as the Property. Section 6.2. Future Advances. This Mortgage is an open-end mortgage which secures existing indebtedness, "future advances," "protective advances", and "contingent obligations" as such terms are defined in 33 M.R.S.A. 505, as the same may be amended, and all of such advances, and obligations shall constitute a part of the Secured Obligations secured hereby. The maximum aggregate principal amount of the Secured Obligations secured by this Mortgage, including future advances, but excluding protective advances, shall not at any time exceed the total amount of $66,300,000. The future advances secured hereby shall be made to or for the account of Mortgagor and may be made under the Revolving Loan Notes, Auction Notes or any of the other Loan Documents, as the same may be amended, or may be made pursuant to promissory notes, lines of credit agreements or other instruments evidencing such future advances which may be hereafter executed and delivered by Mortgagor to Mortgagee. In the event that any notice described in subsection 5(A) or (B) of 33 M.R.S.A. 505 (or any similar provision) is recorded or is received by Mortgagee, any commitment, agreement, or obligation to make future advances to or for the benefit of Mortgagor shall immediately cease and, at Mortgagee's option, any such notice shall constitute an Event of Default hereunder. Section 6.3. Sealed Instrument. This Mortgage is intended to take effect as a sealed instrument. Section 6.4. No Oral Modifications. Mortgagor confirms and acknowledges its understanding that, pursuant to 10 M.R.S.A. 1146(2), to the extent applicable, no promise, contract, or agreement to lend money, extend credit, forbear from collection of a debt or make any other accommodation for the repayment of a debt for more than $250,000 may be enforced in court against Mortgagee unless the promise, contract or agreement is in writing and signed by Mortgagee. Section 6.5. UCC. Notwithstanding anything to the contrary contained herein, the references to the Code in this Article VI shall be deemed to be references to the Uniform Commercial Code in Maine Revised Statutes Title 11, Section 1-101, et seq. ARTICLE VII. CERTAIN MATTERS RELATING TO THE PROPERTY LOCATED IN THE STATE OF NEW HAMPSHIRE Notwithstanding any provision hereof or of any other Loan Document to the contrary, with respect to any Property now or hereafter located in the State of New Hampshire and encumbered by this Mortgage, the following provisions shall apply: Section 7.1. Statutory Power of Sale. Upon the occurrence and during the continuance of any Event of Default, Mortgagee may, in addition to any other rights or remedies available to it in this Mortgage, at law or in equity, take such action, without notice or demand, as it deems advisable to protect and enforce its rights against Mortgagor and in and to the Property or any one or more of them, including, but not limited to, the following action, which may be pursued singly, concurrently or otherwise, at such time and in such order as Mortgagee may determine, in its sole discretion, without impairing or otherwise affecting any other rights and remedies of Mortgagee hereunder, at law or in equity: sell the Property or any part thereof and any or all estate, claim, demand, right, title and interest of Mortgagor therein and rights of redemption thereof, pursuant to the STATUTORY POWER OF SALE in some place in any municipality in which any of the Property is located, at one or more sales, in whole or in parcels, in any order or manner, at such time and place, upon such terms and after such notice thereof as may be required or permitted by law, at the discretion of Mortgagee, and in the event of a sale, by foreclosure or otherwise, of less than all of the Property, this Mortgage shall continue as a lien on the remaining portion of the Property. Section 7.2. UCC. Notwithstanding anything to the contrary contained herein, the references to the Code in this Article VII shall be deemed to be references to the Uniform Commercial Code in New Hampshire Revised Statutes Annotated Section 382-A:1-101, et seq. ARTICLE VIII. CERTAIN MATTERS RELATING TO THE PROPERTY LOCATED IN THE STATE OF NEW YORK Notwithstanding any provision hereof or of any other Loan Document to the contrary, with respect to any Property now or hereafter located in the State of New York and encumbered by this Mortgage, the following provisions shall apply: Section 8.1. Section 254 of the RPL. In the event of any conflict, inconsistency or ambiguity between the provisions of the Loan Documents and the provisions of subsection 4 of Section 254 of the Real Property Law of New York, the provisions of the Loan Documents shall control. Section 8.2. Section 291-f of the RPL. In addition to any other right or remedy contained herein or in any other Loan Document, Mortgagee shall have all of the rights against lessees of the Property or any part thereof as are set forth in Section 291-f of the Real Property Law of New York. Section 8.3. Trust Fund. This instrument is subject to the Trust Fund provisions of Section 13 of the Lien Law of New York. Section 8.4. Commercial Property. Mortgagor represents and warrants that this Mortgage does not encumber real property principally improved or to be improved by one or more structures containing in the aggregate not more than six (6) residential dwelling units having their own separate cooking facilities. Section 8.5. Transfer Tax. (a) Mortgagor covenants and agrees that, in the event of a sale of the Property or other Transfer, it will duly complete, execute and deliver to Mortgagee contemporaneously with the submission to the applicable taxing authority or recording officer, all forms and supporting documentation required by such taxing authority or recording officer to estimate and fix any and all applicable state and local real estate transfer taxes, including, without limitation, any real estate transfer taxes payable under Article 31 of the New York State Tax Law or under Title 11, Chapter 21 of the Administrative Code of the City of New York, if applicable, or any successor provisions thereto (collectively, "Transfer Taxes") by reason of such sale or other Transfer or recording of the deed evidencing such sale or other Transfer. This Section 8.5(b) shall apply only if this Mortgage remains outstanding after any such sale or Transfer. (b) Mortgagor shall pay all Transfer Taxes that may hereafter become due and payable with respect to any Transfer, and in default thereof Mortgagee may pay the same and the amount of such payment shall be added to the Secured Obligations and, unless incurred in connection with a foreclosure of this Mortgage, be secured by this Mortgage. The provisions of this Section 8.5 shall survive any Transfer and the delivery of the deed in connection with any Transfer. Section 8.6. Maximum Principal Amount. NOTWITHSTANDING ANY PROVISION SET FORTH HEREIN TO THE CONTRARY, THE MAXIMUM AMOUNT OF PRINCIPAL INDEBTEDNESS SECURED BY THIS MORTGAGE AT EXECUTION, OR WHICH UNDER ANY CONTINGENCY MAY BECOME SECURED HEREBY AT ANY TIME HEREAFTER, IS U.S. $66,300,000 PLUS ALL INTEREST PAYABLE UNDER THE REVOLVING CREDIT NOTE AND ALL AMOUNTS EXPENDED BY MORTGAGEE AFTER DEFAULT BY MORTGAGOR (A) FOR THE PAYMENT OF TAXES, CHARGES OR ASSESSMENTS WHICH MAY BE IMPOSED BY LEGAL REQUIREMENTS UPON THE PROPERTY; (B) TO MAINTAIN THE INSURANCE REQUIRED UNDER THIS MORTGAGE; (C) FOR ANY EXPENSES INCURRED IN MAINTAINING THE PROPERTY AND UPHOLDING THE LIEN OF THIS MORTGAGE, INCLUDING, BUT NOT LIMITED TO, THE EXPENSE OF ANY LITIGATION TO PROSECUTE OR DEFEND THE RIGHTS AND LIEN CREATED BY THIS MORTGAGE, AND (D) FOR ANY AMOUNT, COST OR CHARGE TO WHICH MORTGAGEE BECOMES SUBROGATED, UPON PAYMENT, WHETHER UNDER RECOGNIZED PRINCIPLES OF LAW OR EQUITY, OR UNDER EXPRESS STATUTORY AUTHORITY. Section 8.7. Covenants in Addition to RPL. All covenants hereof shall be construed as affording to Mortgagee rights in addition to and not exclusive of the rights conferred under the provisions of Sections 254, 271, 272 and 291-f of the Real Property Law of the State of New York or any other applicable Legal Requirement. ARTICLE IX. CERTAIN MATTERS RELATING TO THE PROPERTY LOCATED IN THE STATE OF VERMONT Notwithstanding any provision hereof or of any other Loan Documents to the contrary, with respect to any Property now or hereafter located in the state of Vermont and encumbered by this Mortgage, the following provisions shall apply: Section 9.1. Non-Judicial Power of Sale. Mortgagor hereby grants to Mortgagee a power of sale and, accordingly, Mortgagee shall have all rights and powers granted by Vermont law to the holder of a mortgage containing a power of sale, including, without limitation, the right, to the extent permitted by Vermont law, to foreclose Mortgagor's equity of redemption upon a default under this mortgage, by exercising the power of sale without first commencing a foreclosure action or obtaining a foreclosure decree, and to give such notices and to do all other acts, including the giving of a foreclosure deed upon completion of the foreclosure sale, as permitted or required by Vermont law to foreclose a mortgage without judicial action. Section 9.2. Limitation on Attorneys' Fees in Foreclosure. Mortgagor agrees that Mortgagee's award of reasonable attorney's fees resulting from an enforcement, foreclosure, collection, or other proceeding in connection with Mortgagee's rights or remedies, or otherwise in connection with this loan, may exceed two percent of the total principal, interest, and costs due. Section 9.3. Future Advances and Subsequent Indebtedness. In addition to all other indebtedness and obligations described in this Mortgage, this Mortgage shall secure to Mortgagee the prompt payment and performance of any and all obligations of Mortgagor to Mortgagee under or in connection with the Transaction Documents, whether direct or indirect, absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising or acquired. Section 9.4. UCC. Notwithstanding anything to the contrary contained herein, the references to the Code in this Article IX shall be deemed to be references to the Uniform Commercial Code in Vermont Statutes Annotated Title 9A, Section 1-101, et seq. IN WITNESS WHEREOF, Mortgagor has caused this Mortgage to be executed as of the day and year first above written. MORTGAGOR: CENTRAL VERMONT PUBLIC SERVICE CORPORATION, a Vermont corporation By: /s/ Francis J. Boyle Francis J. Boyle, Vice President, Chief Financial Officer, Treasurer, and agent duly authorized Signed, sealed and delivered on behalf of Central Vermont Public Service Corporation in the presence of: /s/ Anne M. Miserocchi Anne M. Miserocchi /s/ Patricia C. Mitiguy Patricia C. Mitiguy Witnesses: Attest: /s/ Carole L. Root Carole L. Root Assistant Corporate Secretary STATE OF VERMONT ) ) ss. COUNTY OF ) On the 6th day of October, in the year 1998, before me personally came Francis J. Boyle, to me known, who, being by me duly sworn, did depose and say that he resides at R.R.1, Box 3535, Curtis Brook Road, in Rutland, Vermont; that he is the Vice President, Chief Financial Officer and Treasurer, and agent duly authorized, of the CENTRAL VERMONT PUBLIC SERVICE CORPORATION, a Vermont corporation and the corporation described in and which executed the above instrument; that he signed his name thereto by authority of the board of directors of said corporation; and that he acknowledged the same to be his free act and deed and the free act and deed of said corporation. /s/ Bonnie L. O'Rourke Bonnie L. O'Rourke, Notary Public My commission expires February 10, 1999 EXHIBIT A: DESCRIPTION OF PROPERTIES All land and premises, rights, privileges and easements of the Mortgagor, Central Vermont Public Service Corporation, as conveyed or puported to be conveyed in the deeds and records thereof more particularly described in the Indenture of Mortgage, between the Mortgagor and The State Street Bank and Trust Company, Trustee and successor trustee to The First National Bank of Boston, successor trustee to Old Colony Bank and Trust Company, as supplemented, and as recorded in the land records as provided in the schedule of recording information set forth below, which deeds and the records thereof are hereby incorporated herein by reference. Also, all property of every kind whatsoever, including land and premises, rights, privileges, easements, transmission lines, substations and distribution lines, in the following towns: IN NEW LONDON COUNTY, STATE OF CONNECTICUT: Waterford IN HARTFORD COUNTY, STATE OF CONNECTICUT: Berlin IN CUMBERLAND COUNTY, STATE OF MAINE: Yarmouth IN SULLIVAN COUNTY, STATE OF NEW HAMPSHIRE: Charleston, Cornish, Plainfield, Claremont, Newport, Unity IN CHESHIRE COUNTY, STATE OF NEW HAMPSHIRE: Chesterfield, Hinsdale IN GRAFTON COUNTY, STATE OF NEW HAMPSHIRE: Bath, Lyman, Orford, Haverhill, Lyme, Piermont IN WASHINGTON COUNTY, STATE OF NEW YORK: Granville, Hampton IN RENSSELAER COUNTY, STATE OF NEW YORK: Hoosick IN ADDISON COUNTY, STATE OF VERMONT: Addison, Leicester, Ripton, Bridport, Lincoln, Salisbury, Bristol, Middlebury, Shoreham, Cornwall, Monkton, Starksboro, Ferrisburg, New Haven, Vergennes, Goshen, Orwell, Weybridge, Granville, Panton, Whiting, Hancock IN BENNINGTON COUNTY, STATE OF VERMONT: Arlington, Manchester, Searsburg, Bennington, Peru, Shaftsbury, Dorset, Pownal, Sunderland, Glastenbury, Rupert, Winhall, Landgrove, Sandgate, Woodford IN CALEDONIA COUNTY, STATE OF VERMONT: Barnet, Lyndon, Walden, Danville, Ryegate, Waterford, Kirby, St. Johnsbury, Wheelock IN CHITTENDEN COUNTY, STATE OF VERMONT: Buels Gore, Essex, Milton, Burlington, Huntington, Underhill, Colchester, Jericho, Westford IN ESSEX COUNTY, STATE OF VERMONT: Concord, Guildhall, Victory, Granby, Lunenburg IN FRANKLIN COUNTY, STATE OF VERMONT: Bakersfield, Fletcher, Richford, Berkshire, Franklin, Sheldon, Enosburg, Georgia, St. Albans City, Fairfax, Highgate, St. Albans Town, Fairfield, Montgomery, Swanton IN LAMOILLE COUNTY, STATE OF VERMONT: Belvidere, Eden, Johnson, Cambridge, Hyde Park IN ORANGE COUNTY, STATE OF VERMONT: Bradford, Fairlee, Thetford, Braintree, Newbury, Tunbridge, Brookfield, Randolph, Vershire, Chelsea, Strafford, West Fairlee IN ORLEANS COUNTY, STATE OF VERMONT: Lowell, Irasburg IN RUTLAND COUNTY, STATE OF VERMONT: Benson, Middletown Springs, Sherburne, Brandon, Mt. Holly, Shrewsbury, Castleton, Mt. Tabor, Sudbury, Chittenden, Pawlet, Tinmouth, Clarendon, Pittsfield, Wallingford, Danby, Pittsford, Wells, Fair Haven, Poultney, West Haven, Hubbardton, Proctor, West Rutland, Ira, Rutland City, Mendon, Rutland Town IN WASHINGTON COUNTY, STATE OF VERMONT: Northfield, Roxbury IN WINDHAM COUNTY, STATE OF VERMONT: Athens, Guilford, Stratton, Brattleboro, Jamaica, Townshend, Brookline, Londonderry, Vernon, Dover, Marlboro, Wardsboro, Dummerston, Newfane, Westminster, Grafton, Rockingham, Windham IN WINDSOR COUNTY, STATE OF VERMONT: Andover, Hartland, Sharon, Baltimore, Ludlow, Springfield, Barnard, Norwich, Stockbridge, Bethel, Plymouth, Weathersfield, Bridgewater, Pomfret, Weston, Cavendish, Reading, West Windsor, Chester, Rochester, Windsor, Hartford, Royalton, Woodstock Exhibit A includes the schedule of recording information which follows. TABLE OF CONTENTS Section Page ARTICLE I.COVENANTS OF MORTGAGOR .6 1.1. Payment and Performance of Secured Obligations. . . .6 1.2. Incorporation of Documents. . . . . . . . . . . . . .6 1.3. General Representations, Covenants and Warranties . .7 1.4. Additional Covenants, Representations and Warranties Regarding Environmental Matters . . . . . . . . . . . . . . . .8 1.5. Use of Property . . . . . . . . . . . . . . . . . . .9 1.6. Taxes, Assessments and Other Charges. . . . . . . . 10 1.7. Defense of Title and Litigation . . . . . . . . . . 10 1.8. Zoning and Title Matters. . . . . . . . . . . . . . 11 1.9. Insurance and Risk of Loss. . . . . . . . . . . . . 11 1.10. Effect of Changes in Laws Regarding Taxation. . . 12 1.11. Changes to Mortgage or Related Documents. . . . . 12 1.12. Eminent Domain and Casualty . . . . . . . . . . . 12 1.13. Mortgagee's Performance of Defaulted Acts; Subrogation13 1.14. Ownership of Property and Mortgagor's Interest. . 13 1.15. Assignment of Leases and Rents. . . . . . . . . . 14 1.16. Security Agreement and Financing Statements . . . 15 1.17. After Acquired Property . . . . . . . . . . . . . 16 1.18. Collateral Protection . . . . . . . . . . . . . . 16 ARTICLE II. DEFAULTS AND REMEDIES. . . . . . . . . 17 2.1. Event of Default. . . . . . . . . . . . . . . . . . 17 2.2. Mortgagee's Power of Enforcement. . . . . . . . . . 17 2.3. Mortgagee's Right To Enter and Take Possession. . . 18 2.4. Appointment of Receiver . . . . . . . . . . . . . . 21 2.5. Waiver of Certain Rights. . . . . . . . . . . . . . 21 2.6. Leases. . . . . . . . . . . . . . . . . . . . . . . 22 2.7. Suits To Protect Property . . . . . . . . . . . . . 22 2.8. No Waiver . . . . . . . . . . . . . . . . . . . . . 22 2.9. Remedies Cumulative . . . . . . . . . . . . . . . . 23 2.10. Discontinuance of Proceedings . . . . . . . . . . 23 2.11. Additional Security . . . . . . . . . . . . . . . 23 ARTICLE III.MISCELLANEOUS . . . . 24 3.1. Use of Certain Terms. . . . . . . . . . . . . . . . 24 3.2. Headings. . . . . . . . . . . . . . . . . . . . . . 24 3.3. Notices . . . . . . . . . . . . . . . . . . . . . . 24 3.4. Binding Effect. . . . . . . . . . . . . . . . . . . 25 3.5. Provisions Subject to Applicable Laws; Invalid Provisions To Affect No Others. . . . . . . . . . . . . . . . . . 25 3.6. Changes . . . . . . . . . . . . . . . . . . . . . . 25 3.7. No Benefit to Third Parties . . . . . . . . . . . . 25 3.8. Exercise of Discretion. . . . . . . . . . . . . . . 25 3.9. Representatives of Mortgagee. . . . . . . . . . . . 26 3.10. Receipt of Copy Acknowledged. . . . . . . . . . . 26 3.11. Waiver of Jury Trial; Submission to Jurisdiction; Waiver of Service and Venue . . . . . . . . . . . . . . . . . . . . . 26 3.12. Estoppel Certificates . . . . . . . . . . . . . . 26 3.13. Mortgagee's Lien. . . . . . . . . . . . . . . . . 26 3.14. Required Notices. . . . . . . . . . . . . . . . . 26 3.15. Governing Law . . . . . . . . . . . . . . . . . . 26 3.16. Site Visits, Observation and Testing. . . . . . . 27 3.17. Credit Bids . . . . . . . . . . . . . . . . . . . 27 3.18. No Waiver or Cure . . . . . . . . . . . . . . . . 27 3.19. Partial Release Conditions. . . . . . . . . . . . 27 ARTICLE IV.ADDITIONAL COLLATERAL. 28 ARTICLE V.CERTAIN MATTERS RELATING TO THE PROPERTYLOCATED IN THE STATE OF CONNECTICUT30 5.1. Open-End Mortgage . . . . . . . . . . . . . . . . . 30 5.2. Open-End Mortgage Securing Guaranty . . . . . . . . 30 5.3. Prejudgment Remedy Waiver . . . . . . . . . . . . . 30 5.4. UCC . . . . . . . . . . . . . . . . . . . . . . . . 31 ARTICLE VI.CERTAIN MATTERS RELATING TO THE PROPERTYLOCATED IN THE STATE OF MAINE31 6.1. Statutory Power of Sale . . . . . . . . . . . . . . 31 6.2. Future Advances . . . . . . . . . . . . . . . . . . 31 6.3. Sealed Instrument . . . . . . . . . . . . . . . . . 32 6.4. No Oral Modifications . . . . . . . . . . . . . . . 32 6.5. UCC . . . . . . . . . . . . . . . . . . . . . . . . 32 ARTICLE VII.CERTAIN MATTERS RELATING TO THE PROPERTYLOCATED IN THE STATE OF NEW HAMPSHIRE32 7.1. Statutory Power of Sale . . . . . . . . . . . . . . 32 7.2. UCC . . . . . . . . . . . . . . . . . . . . . . . . 32 ARTICLE VIII.CERTAIN MATTERS RELATING TO THE PROPERTYLOCATED IN THE STATE OF NEW YORK33 8.1. Section 254 of the RPL. . . . . . . . . . . . . . . 33 8.2. Section 291-f of the RPL. . . . . . . . . . . . . . 33 8.3. Trust Fund. . . . . . . . . . . . . . . . . . . . . 33 8.4. Commercial Property . . . . . . . . . . . . . . . . 33 8.5. Transfer Tax. . . . . . . . . . . . . . . . . . . . 33 8.6. Maximum Principal Amount. . . . . . . . . . . . . . 33 8.7. Covenants in Addition to RPL. . . . . . . . . . . . 34 ARTICLE IX.CERTAIN MATTERS RELATING TO THE PROPERTYLOCATED IN THE STATE OF VERMONT34 9.1. Non-Judicial Power of Sale. . . . . . . . . . . . . 34 9.2. Limitation on Attorneys' Fees in Foreclosure. . . . 34 9.3. Future Advances and Subsequent Indebtedness . . . . 34 9.4. UCC . . . . . . . . . . . . . . . . . . . . . . . . 35 LIST OF EXHIBITS Exhibit A - Description of Property EX-4 9 EXHIBIT 4-46.5 FOR FORM 10-K SECURITY AGREEMENT SECURITY AGREEMENT, dated as of October 5, 1998, between CENTRAL VERMONT PUBLIC SERVICE CORPORATION, a Vermont corporation ("Grantor"), and TORONTO DOMINION (TEXAS), INC. ("TD-Texas"), as collateral agent (in such capacity, "Collateral Agent") for the Secured Parties (as defined in the Credit Agreement referred to below). W I T N E S S E T H: WHEREAS, pursuant to that certain Credit Agreement, dated as of November 5, 1997 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), by and among Grantor, the lenders signatory thereto from time to time ("Lenders") and TD-Texas, as agent for Lenders (in such capacity, "Agent"), Lenders have agreed to make Loans to the Grantor; WHEREAS, pursuant to (i) the Amended and Restated Reimbursement Agreement, dated as of September 24, 1992, between Grantor and The Toronto-Dominion Bank, Houston Agency ("TD"), (ii) the Reimbursement Agreement, dated as of April 29, 1993, between Central Vermont Public Service Corporation - East Barnet Hydroelectric, Inc. ("East Barnet") and TD, together with Grantor's guaranty thereof, and (iii) the Letter of Credit and Reimbursement Agreement, dated as of November 1, 1994, between Grantor and TD (collectively, as amended, supplemented or otherwise modified from time to time, the "Existing Letter of Credit Agreements"), TD has agreed to incur letter of credit obligations on behalf of Grantor and East Barnet, as applicable; and WHEREAS, in order to induce (i) Lenders to enter into the Third Amendment (as hereinafter defined), (ii) Lenders to continue to make the Loans as provided in the Credit Agreement and (iii) TD to continue to incur letter of credit obligations as provided in the Reimbursement Agreements, Grantor has agreed to grant Collateral Agent a continuing Lien on the Collateral (as hereinafter defined) to secure the Secured Obligations (as defined in the Credit Agreement); NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. DEFINED TERMS. (a) All capitalized terms used but not otherwise defined herein have the meanings given to them in the Credit Agreement. All other undefined terms contained in this Security Agreement, unless the context indicates otherwise, have the meanings provided for by Article 9 of the Code to the extent the same are used or defined therein. (b) In addition, the following terms shall have the following definitions: "Code" shall mean the Uniform Commercial Code as the same may, from time to time, be in effect in the State of New York; provided, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of Collateral Agent's security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, the term "Code" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions of this Agreement relating to such attachment, perfection or priority and for purposes of definitions related to such provisions. "Collateral" shall have the meaning assigned to such term in Section 2 hereof. "Default" shall mean any condition or event that constitutes an Event of Default under any Transaction Document or that with notice or lapse of time or both would, unless cured or waived, constitute an Event of Default thereunder. "Equipment" shall have the meaning assigned to such term in the Code and shall include in any event, without limitation, all electrical plants and systems and gas plants of Grantor and all equipment, structures, buildings, dams, canals, pen-stocks, engines, boilers, benches, holders, condensers, pumps, machinery, transformers, tools, mains, pipes, conduits, insulators, dynamos, meters, wires, transmission lines, towers, poles, electrical conductors, motors, leases and contracts in any way pertaining to such plants and systems and/or the operation thereof. "Event of Default" shall mean an Event of Default as defined in each of the Transaction Documents. "Proceeds" shall mean "proceeds," as such term is defined in the Code and, in any event, shall include: (i) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to Grantor from time to time with respect to any Collateral; (ii) any and all payments (in any form whatsoever) made or due and payable to Grantor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of any Collateral by any governmental body, authority, bureau or agency (or any Person acting under color of governmental authority); (iii) any recoveries by Grantor against third parties with respect to any litigation or dispute concerning any Collateral; and (iv) any and all other amounts from time to time paid or payable under or in connection with any Collateral, upon disposition or otherwise. "Termination Date" shall mean the date on which the Secured Obligations have been indefeasibly repaid in full and the Secured Parties shall not have any obligations under the Transaction Documents to make any further financial accommodations to Grantor or East Barnet. "Third Amendment" shall mean the Third Amendment to Credit Agreement, dated as of the date hereof, among Grantor, Lenders, Agent and Fleet National Bank, as syndication agent. 2. GRANT OF LIEN. (a) To secure the prompt and complete payment, performance and observance of all of the Secured Obligations, Grantor hereby grants, assigns, conveys, mortgages, pledges, hypothecates and transfers to Collateral Agent, for itself and the benefit of Secured Parties, a Lien upon all of its right, title and interest in, to and under the following property, whether now owned by or owing to, or hereafter acquired by or arising in favor of Grantor (including under any trade names, styles or derivations thereof), and whether owned or consigned by or to, or leased from or to, Grantor, and regardless of where located (all of which being hereinafter collectively referred to as the "Collateral"): (i) all Equipment; (ii) all Fixtures; (iii) all Instruments which are now or may hereafter be deposited with the Indenture Trustee in accordance with the Indenture or the Collateral Agent in accordance with the Transaction Documents, as the case may be, or, without limiting the foregoing, any such Collateral which has been released by the Indenture Trustee but which pursuant to the proviso in Section 14 hereof would not be required to be released by the Collateral Agent; (iv) all stock which is now or may hereafter be deposited with the Indenture Trustee in accordance with the Indenture or the Collateral Agent in accordance with the Transaction Documents, as the case may be, or, without limiting the foregoing, any such Collateral which has been released by the Indenture Trustee but which pursuant to the proviso in Section 14 hereof would not be required to be released by the Collateral Agent; (v) all money, cash or cash equivalents of Grantor which is now or may hereafter be deposited with the Indenture Trustee in accordance with the Indenture or the Collateral Agent in accordance with the Transaction Documents, as the case may be, or, without limiting the foregoing, any such Collateral which has been released by the Indenture Trustee but which pursuant to the proviso in Section 14 hereof would not be required to be released by the Collateral Agent; and (vi) to the extent not otherwise included, all Proceeds and products of the foregoing and all accessions to, substitutions and replacements for, and rents and profits of, each of the foregoing. (b) Notwithstanding anything to the contrary contained herein, each of Grantor and Collateral Agent acknowledges and agrees that "Collateral" shall not include (i) lamps and supplies, machinery, appliances, goods, wares and other removable property now or at any time handled by Grantor for sale as merchandise or not in use or connected as fixtures with its own plants, and consumable supplies, (ii) all money, cash, cash equivalents, stock and Instruments not deposited with either the Indenture Trustee under the Indenture (other than due to a release by the Indenture Trustee of any stock or Instrument where pursuant to the terms contemplated by the proviso in Section 14 hereof Collateral Agent would not be required to release such Collateral) or the Collateral Agent under the Transaction Documents, (iii) all telephone properties at any time owned or acquired by Grantor and (iv) any and all other property, real, personal or mixed, in which a Lien is not purported to be granted under the Indenture (other than due to a release by the Indenture Trustee of such property where pursuant to the terms contemplated by the proviso in Section 14 hereof Collateral Agent would not be required to release such property). (c) Notwithstanding anything to the contrary contained herein, the security interest of the Collateral Agent in the Collateral is subject to the specific rights, privileges, liens, encumbrances, restrictions, conditions, limitations, covenants, interests, reservations, exceptions and otherwise as provided in the Indenture, and in the descriptions in the schedules thereto and in the deeds or grants in said schedules referred to therein. (d) In addition, to secure the prompt and complete payment, performance and observance of the Secured Obligations and in order to induce Collateral Agent and Secured Parties as aforesaid, Grantor hereby grants to Collateral Agent, for itself and the benefit of Secured Parties, a right of setoff against the property of Grantor held by Collateral Agent or any Secured Party, consisting of property described above in Section 2(a) now or hereafter in the possession or custody of or in transit to Collateral Agent or any Secured Party, for any purpose, including safekeeping, collection or pledge, for the account of Grantor, or as to which Grantor may have any right or power. 3. REPRESENTATIONS AND WARRANTIES. Grantor represents and warrants that: (a) Grantor is the sole owner of each item of the Collateral upon which it purports to grant a Lien hereunder, and has good and marketable title thereto free and clear of any and all Liens other than Permitted Liens. (b) No effective security agreement, financing statement, equivalent security or Lien instrument or continuation statement covering all or any part of the Collateral is on file or of record in any public office, except such as may have been filed (i) by Grantor in favor of Collateral Agent pursuant to this Security Agreement or the Mortgage, and (ii) in connection with any other Permitted Liens. (c) This Security Agreement is effective to create a valid and continuing Lien on and, upon the filing of the appropriate financing statements listed on Schedule I hereto, a perfected Lien in favor of Collateral Agent, for itself and the benefit of Secured Parties, on the Collateral with respect to which a Lien may be perfected by filing pursuant to the Code. Such Lien is prior to all other Liens, except Permitted Liens and Permitted Exceptions (as defined in the Mortgage) relating to the Mortgage and other Permitted Liens that would be prior to Liens in favor of Collateral Agent for the benefit of Collateral Agent and Secured Parties as a matter of law, and is enforceable as such as against any and all creditors of and purchasers from Grantor. All action by Grantor necessary or desirable to protect and perfect such Lien on each item of the Collateral has been duly taken. (d) Grantor's chief executive office, principal place of business, corporate offices, all warehouses and premises where Collateral is stored or located, and the locations of all of its books and records concerning the Collateral are set forth on Schedule II hereto. 4. COVENANTS. Grantor covenants and agrees with Collateral Agent, for the benefit of Collateral Agent and Secured Parties, that from and after the date of this Security Agreement and until the Termination Date: (a) Further Assurances. At any time and from time to time, upon the written request of Collateral Agent and at the sole expense of Grantor, Grantor shall promptly and duly execute and deliver any and all such further instruments and documents and take such further actions as Collateral Agent may deem desirable to obtain the full benefits of this Security Agreement and of the rights and powers herein granted, including (i) using its best efforts to secure all Governmental Approvals necessary or appropriate to give full effect to the grant of the Liens hereunder; (ii) filing any financing or continuation statements under the Code with respect to the Liens granted hereunder or under any other Loan Document and (iii) transferring Collateral to Collateral Agent's possession (for the benefit of Collateral Agent and Secured Parties) if requested by Collateral Agent (but only if such Collateral consists of Instruments, stock, money, cash or cash equivalents, which was at one time in the possession of the Indenture Trustee and has since been released). Grantor also hereby authorizes Collateral Agent, for the benefit of Collateral Agent and Secured Parties, to file any such financing or continuation statements without the signature of Grantor to the extent permitted by applicable law. (b) Maintenance of Records. Grantor shall keep and maintain, at its own cost and expense, satisfactory and complete records of the Collateral, including a record of any and all payments received and any and all credits granted with respect to the Collateral and all other dealings with the Collateral. Grantor shall mark its books and records pertaining to the Collateral to evidence this Security Agreement and the Liens granted hereby. (c) Indemnification. In any suit, proceeding or action brought by Collateral Agent or any Secured Party relating to any Instrument for any sum owing thereunder or to enforce any provision of any Instrument, Grantor will save, indemnify and keep Collateral Agent and Secured Parties harmless from and against all expense (including reasonable attorneys' fees and expenses), loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment or reduction of liability whatsoever of the obligor thereunder, arising out of a breach by Grantor of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to, or in favor of, such obligor or its successors from Grantor, except in the case of Collateral Agent or any Secured Party, to the extent such expense, loss, or damage is attributable solely to the gross negligence or willful misconduct of Collateral Agent or such Secured Party as finally determined by a court of competent jurisdiction. All such obligations of Grantor shall be and remain enforceable against and only against Grantor and shall not be enforceable against Collateral Agent or any Secured Party. (d) Limitation on Liens on Collateral. Grantor will not create, permit or suffer to exist, and will defend the Collateral against, and take such other action as is necessary to remove, any Lien on the Collateral except Permitted Liens, and will defend the right, title and interest of Collateral Agent and Secured Parties in and to any of Grantor's rights under the Collateral against the claims and demands of all Persons whomsoever. (e) Limitations on Disposition. Grantor will not sell, lease, transfer or otherwise dispose of any of the Collateral, or attempt or contract to do so except as permitted by the Credit Agreement. (f) Further Identification of Collateral. Grantor will, if so requested by Collateral Agent, furnish to Collateral Agent, as often as Collateral Agent requests, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Collateral Agent may reasonably request, all in such detail as Collateral Agent may specify. (g) Notices. Grantor will advise Collateral Agent promptly, in reasonable detail, (i) of any Lien (other than Permitted Liens) or claim made or asserted against any of the Collateral, and (ii) of the occurrence of any other event which would have a material adverse effect on the aggregate value of the Collateral or on the Liens created hereunder or under any other Transaction Document. 5. COLLATERAL AGENT'S APPOINTMENT AS ATTORNEY-IN-FACT. Until all of the Secured Obligations have been paid in full, Grantor hereby absolutely and irrevocably constitutes and appoints Collateral Agent as Grantor's true and lawful agent and attorney-in-fact, with full power of substitution, in the name of Grantor: (a) to execute and do all such assurances, acts and things which Grantor is required to do but has failed to do under the covenants and provisions contained in this Security Agreement; (b) to take any and all such action as Collateral Agent or any of its agents, nominees or attorneys may determine as necessary or advisable for the purpose of maintaining, preserving or protecting the security constituted by this Security Agreement or any of the rights, remedies, powers or privileges of Collateral Agent under this Security Agreement; and (c) generally, in the name of Grantor, exercise all or any of the powers, authorities and discretions, conferred on or reserved to Collateral Agent by or pursuant to this Security Agreement, and (without prejudice to the generality of any of the foregoing) to seal and deliver or otherwise perfect any deed, assurance, agreement, instrument or act as Collateral Agent may deem proper in or for the purpose of exercising any of such powers, authorities or discretions, in each case. NONE OF COLLATERAL AGENT, SECURED PARTIES OR THEIR RESPECTIVE AFFILIATES, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR REPRESENTATIVES SHALL BE RESPONSIBLE TO GRANTOR FOR ANY ACT OR FAILURE TO ACT UNDER THIS POWER OF ATTORNEY OR OTHERWISE, EXCEPT IN RESPECT OF DAMAGES ATTRIBUTABLE SOLELY TO THEIR OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT AS FINALLY DETERMINED BY A COURT OF COMPETENT JURISDICTION, NOR FOR ANY PUNITIVE, EXEMPLARY, INDIRECT OR CONSEQUENTIAL DAMAGES. 6. STOCK COLLATERAL; INSTRUMENTS. (a) As long as no Default shall have occurred and be continuing and until written notice shall be given to Grantor by Collateral Agent: (i) Grantor shall have the right, from time to time, to vote and give consents with respect to all stock pledged hereunder, or any part thereof for all purposes not inconsistent with the provisions of this Security Agreement, or any other Transaction Document; provided, however, that no vote shall be cast, and no consent shall be given or action taken, which would have the effect of impairing the position or interest of Collateral Agent or any Secured Party in respect of such stock or which would be prohibited by this Security Agreement or any other Transaction Document, and (ii) Grantor shall be entitled, from time to time, to collect and receive for its own use all cash dividends and cash interest paid in respect of such stock or pledged Instruments to the extent not in violation of this Security Agreement. (b) Notwithstanding the foregoing, in the event a Default has occurred and is continuing, Collateral Agent shall have the right, subject to the rights of the Indenture Trustee, to exercise all voting rights in respect of stock pledged hereunder and to receive all dividends, interest and distributions, if any, made in respect of the stock and Instruments pledged hereunder. 7. REMEDIES; RIGHTS UPON DEFAULT. (a) In addition to all other rights and remedies granted to it under this Security Agreement, the Credit Agreement, the other Transaction Documents and under any other instrument or agreement securing, evidencing or relating to any of the Secured Obligations, if any Event of Default shall have occurred and be continuing, Collateral Agent, subject to the rights of the Indenture Trustee, may exercise all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, Grantor expressly agrees that in any such event Collateral Agent, without demand of performance or other demand, advertisement or notice of any kind (except the notice specified below of time and place of public or private sale) to or upon Grantor or any other Person (all and each of which demands, advertisements and notices are hereby expressly waived to the maximum extent permitted by the Code and other applicable law), may, subject to the rights of the Indenture Trustee, forthwith enter upon the premises of Grantor where any Collateral is located through self-help, without judicial process, without first obtaining a final judgment or giving Grantor or any other Person notice and opportunity for a hearing on Collateral Agent's claim or action and may collect, receive, assemble, process, appropriate and realize upon the Collateral, or any part thereof, and may, subject to the rights of the Indenture Trustee, forthwith sell, lease, assign, give an option or options to purchase, or sell or otherwise dispose of and deliver said Collateral (or contract to do so), or any part thereof, in one or more parcels at a public or private sale or sales, at any exchange at such prices as it may deem acceptable, for cash or on credit or for future delivery without assumption of any credit risk. Collateral Agent or any Secured Party shall have the right upon any such public sale or sales and, to the extent permitted by law, upon any such private sale or sales, to purchase for the benefit of Collateral Agent and Secured Parties, the whole or any part of said Collateral so sold, free of any right or equity of redemption, which equity of redemption Grantor hereby releases. Such sales may be adjourned and continued from time to time with or without notice. Collateral Agent shall have the right to conduct such sales on Grantor's premises or elsewhere and shall have the right to use Grantor's premises without charge for such time or times as Collateral Agent deems necessary or advisable. Subject to the rights of the Indenture Trustee, Grantor further agrees, at Collateral Agent's request, to assemble the Collateral and make it available to Collateral Agent at places which Collateral Agent shall select, whether at Grantor's premises or elsewhere. Until Collateral Agent is able to effect a sale, lease, or other disposition of Collateral, Collateral Agent, subject to the rights of the Indenture Trustee, shall have the right to hold or use Collateral, or any part thereof, to the extent that it deems appropriate for the purpose of preserving Collateral or its value or for any other purpose deemed appropriate by Collateral Agent. Collateral Agent shall have no obligation to Grantor to maintain or preserve the rights of Grantor as against third parties with respect to Collateral while Collateral is in the possession of Collateral Agent, subject to the rights of the Indenture Trustee. Collateral Agent may, if it so elects, seek the appointment of a receiver or keeper to take possession of Collateral and to enforce any of Collateral Agent's remedies (for the benefit of Collateral Agent and Secured Parties), with respect to such appointment without prior notice or hearing as to such appointment. Subject to the rights of the Indenture Trustee, Collateral Agent shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale to the Secured Obligations as provided in the Collateral Agency Agreement, and only after so paying over such net proceeds, and after the payment by Collateral Agent of any other amount required by any provision of law, need Collateral Agent account for the surplus, if any, to Grantor. To the maximum extent permitted by applicable law, Grantor waives all claims, damages, and demands against Collateral Agent or any Secured Party arising out of the repossession, retention or sale of the Collateral except such as arise solely out of the gross negligence or willful misconduct of Collateral Agent or such Secured Party as finally determined by a court of competent jurisdiction. Grantor agrees that ten (10) days prior notice by Collateral Agent of the time and place of any public sale or of the time after which a private sale may take place is reasonable notification of such matters. Grantor shall remain liable for any deficiency if the proceeds of any sale or disposition of the Collateral are insufficient to pay all Secured Obligations, including any attorneys' fees or other expenses incurred by Collateral Agent or any Secured Party to collect such deficiency. (b) Except as otherwise specifically provided herein, Grantor hereby waives presentment, demand, protest or any notice (to the maximum extent permitted by applicable law) of any kind in connection with this Security Agreement or any Collateral. 8. LIMITATION ON COLLATERAL AGENT'S AND SECURED PARTIES' DUTY IN RESPECT OF COLLATERAL. Collateral Agent and each Secured Party shall use reasonable care with respect to the Collateral in its possession or under its control. Neither Collateral Agent nor any Secured Party shall have any other duty as to any Collateral in its possession or control or in the possession or control of any agent or nominee of Collateral Agent or such Secured Party, or any income thereon or as to the preservation of rights against prior parties or any other rights pertaining thereto. 9. REINSTATEMENT. This Security Agreement shall remain in full force and effect and continue to be effective should any petition be filed by or against Grantor for liquidation or reorganization, should Grantor become insolvent or make an assignment for the benefit of any creditor or creditors or should a receiver or trustee be appointed for all or any significant part of Grantor's assets, and shall continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the Secured Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by any obligee of the Secured Obligations, whether as a "voidable preference," "fraudulent conveyance," or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned, the Secured Obligations shall be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned. 10. NOTICES. Except as otherwise provided herein, whenever it is provided herein that any notice, demand, request, consent, approval, declaration or other communication shall or may be given to or served upon any of the parties by any other party, or whenever any of the parties desires to give and serve upon any other party any communication with respect to this Security Agreement, each such notice, demand, request, consent, approval, declaration or other communication shall be in writing and shall be given in the manner, and deemed received, as provided for in the Credit Agreement (it being understood that, for purposes of this Section 10 only, Collateral Agent shall be deemed to be Agent under the Credit Agreement). 11. SEVERABILITY. Whenever possible, each provision of this Security Agreement shall be interpreted in a manner as to be effective and valid under applicable law, but if any provision of this Security Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Security Agreement. This Security Agreement is to be read, construed and applied together with the Transaction Documents which, taken together, set forth the complete understanding and agreement of Collateral Agent, Secured Parties and Grantor with respect to the matters referred to herein and therein. 12. NO WAIVER; CUMULATIVE REMEDIES. Neither Collateral Agent nor any Secured Party shall by any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies hereunder, and no waiver shall be valid unless in writing, signed by Collateral Agent and then only to the extent therein set forth. A waiver by Collateral Agent of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which Collateral Agent would otherwise have had on any future occasion. No failure to exercise nor any delay in exercising on the part of Collateral Agent or any Secured Party, any right, power or privilege hereunder, shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or future exercise thereof or the exercise of any other right, power or privilege. The rights and remedies hereunder provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights and remedies provided by law. None of the terms or provisions of this Security Agreement may be waived, altered, modified or amended except by an instrument in writing, duly executed by Collateral Agent and Grantor. 13. LIMITATION BY LAW. All rights, remedies and powers provided in this Security Agreement may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law, and all the provisions of this Security Agreement are intended to be subject to all applicable mandatory provisions of law that may be controlling and to be limited to the extent necessary so that they shall not render this Security Agreement invalid, unenforceable, in whole or in part, or not entitled to be recorded, registered or filed under the provisions of any applicable law. 14. TERMINATION OF THIS SECURITY AGREEMENT; PRIOR RELEASE OF LIENS. Subject to Section 9 hereof, this Security Agreement shall terminate upon the Termination Date. If, however, prior to the Termination Date the Indenture Trustee shall release its Lien on all or any portion of the Collateral, the Lien granted hereunder with respect to such Collateral shall be automatically without further act, unconditionally and simultaneously released and terminated; provided, however, that if such release is in connection with the repayment in full of the First Mortgage Bonds or if an Event of Default has occurred and is continuing, then notwithstanding the release of any Collateral from the Lien of the Indenture Trustee under the Indenture (i) no Collateral shall be deemed to be released hereunder and (ii) Grantor shall cause the Indenture Trustee to immediately deliver to Collateral Agent all Collateral then in the possession of the Indenture Trustee, including all stock, Chattel Paper and Instruments. At any time and from time to time, upon the written request of Grantor and at the sole expense of Grantor, Collateral Agent shall promptly and duly execute and deliver UCC-3 termination statements and any and all such further instruments and documents and take such further actions reasonably necessary to evidence any release hereunder. 15. SUCCESSORS AND ASSIGNS. This Security Agreement and all obligations of Grantor hereunder shall be binding upon the successors and assigns of Grantor (including any debtor-in-possession on behalf of Grantor) and shall, together with the rights and remedies of Collateral Agent, for the benefit of Collateral Agent and Secured Parties, hereunder, inure to the benefit of Collateral Agent and Secured Parties, all future holders of any instrument evidencing any of the Secured Obligations and their respective successors and assigns. No sales of participations, other sales, assignments, transfers or other dispositions of any agreement governing or instrument evidencing the Secured Obligations or any portion thereof or interest therein shall in any manner affect the Lien granted to Collateral Agent, for the benefit of Collateral Agent and Secured Parties, hereunder. Grantor may not assign, sell, hypothecate or otherwise transfer any interest in or obligation under this Security Agreement. 16. COUNTERPARTS. This Security Agreement may be executed by the parties hereto on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 17. GOVERNING LAW. THIS SECURITY AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 18. WAIVER OF JURY TRIAL. GRANTOR AND COLLATERAL AGENT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS SECURITY AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. 19. SUBMISSION TO JURISDICTION. Grantor hereby irrevocably and unconditionally: (i) submits for itself and its property in any legal action or proceeding relating to this Security Agreement, or for recognition and enforcement of any judgement in respect thereof, to the non-exclusive general jurisdiction of the federal and state courts sitting in the State of New York, and the appellate courts from any thereof; (ii) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (iii) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to Grantor at its address set forth in Section 10.2 of the Credit Agreement or at such other address of which Collateral Agent shall have been notified pursuant thereto; and (iv) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction. 20. SECTION TITLES. The Section titles contained in this Security Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. 21. NO STRICT CONSTRUCTION. The parties hereto have participated jointly in the negotiation and drafting of this Security Agreement. In the event an ambiguity or question of intent or interpretation arises, this Security Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Security Agreement. 22. ADVICE OF COUNSEL. Each of the parties represents to each other party hereto that it has discussed this Security Agreement and, specifically, the provisions of Section 18 and Section 19, with its counsel. 23. BENEFIT OF SECURED PARTIES. All Liens granted or contemplated hereby shall be for the benefit of Collateral Agent and Secured Parties, and, subject to the rights of the Indenture Trustee, all proceeds or payments realized from Collateral in accordance herewith shall be applied to the Secured Obligations in accordance with the terms of the Collateral Agency Agreement and the Transaction Documents. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, each of the parties hereto has caused this Security Agreement to be executed and delivered by its duly authorized officer as of the date first set forth above. CENTRAL VERMONT PUBLIC SERVICE CORPORATION By: /s/ Francis J. Boyle Name: Francis J. Boyle Title: Senior Vice President, Chief Financial Officer and Treasurer TORONTO DOMINION (TEXAS), INC., as Collateral Agent By: /s/ Kimberly Burleson Name: Kimberly Burleson Title: Vice President SCHEDULE I to SECURITY AGREEMENT FILING JURISDICTIONS Secretary of State, Connecticut Secretary of State, Maine Secretary of State, New Hampshire Secretary of State, New York Secretary of State, Vermont SCHEDULE II to SECURITY AGREEMENT SCHEDULE OF OFFICES, LOCATIONS OF COLLATERAL AND RECORDS CONCERNING COLLATERAL I. Chief Executive Office and principal place of business of Grantor: General Office 77 Grove Street Rutland, VT 05701 II. Corporate Offices of Grantor: General Office 77 Grove Street Rutland, VT 05701 III. Warehouses: None; Collateral stored at locations listed in IV below. IV. Other Premises at which Collateral is Stored or Located: Ascutney Service Center Route 131, P.O. Box 1 Ascutney, VT 05030 St. Albans Service Center Lower Welden St. St. Albans, VT 05478 Bradford Service Center Route 25, RR1 Bradford, VT 05033 St. Johnsbury Service Center Box 75 Route 5 St. Johnsbury, VT 05819 Brattleboro Service Center West River Road, Route 30 Brattleboro, VT 05301 Sunderland Service Center RR 3, Box 100 East Arlington, VT 05252 Electrical Maint. Facility Green Hills Lane Rutland, VT 05701 Systems Building Post Road Rutland, VT 05701 Engineering Building 25 Evelyn Street Rutland, VT 05701 Wales Street 108 Wales Street Rutland, VT 05701 General Office 77 Grove Street Rutland, VT 05701 Post Street Pole Yard Rutland, VT 05701 Middlebury Service Center 14 Seminary Street P.O. Box 191 Middlebury, VT 05753 Royalton Service Center RR 1, Box 172C Bethel, VT 05032-9607 Poultney Service Center York Street, P.O. Box 193 Poultney, VT 05764 Springfield Service Center Precision Drive P.O. Box 380 N. Springfield, VT 05156 Rutland District Service Center Route 7 North Rutland, VT 05701 St. Albans Commercial Office 38 Kingman Street St. Albans, VT 05478 V. Locations of Records Concerning Collateral: General Office 77 Grove Street Rutland, VT 05701 Engineering Building 25 Evelyn Street Rutland, VT 05701 Systems Building Post Road Rutland, VT 05701 Rutland District Service Center Route 7 North Rutland, VT 05701 -----END PRIVACY-ENHANCED MESSAGE-----