-----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, SU+98Bj9NDwuP8+LacZf5KcWrIHyAD8Gjgp9SC+Cpyp+Z5hkPQQQP4S4B7X25TGK jGsjklp2ln5YZK0CaH1+lg== 0000072741-98-000076.txt : 19980323 0000072741-98-000076.hdr.sgml : 19980323 ACCESSION NUMBER: 0000072741-98-000076 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 36 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980319 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHEAST UTILITIES SYSTEM CENTRAL INDEX KEY: 0000072741 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 042147929 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-05324 FILM NUMBER: 98569115 BUSINESS ADDRESS: STREET 1: 174 BRUSH HILL AVE CITY: WEST SPRINGFIELD STATE: MA ZIP: 01090-0010 BUSINESS PHONE: 4137855871 MAIL ADDRESS: STREET 1: 107 SELDON ST CITY: BERLIN STATE: CT ZIP: 06037-1616 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONNECTICUT LIGHT & POWER CO CENTRAL INDEX KEY: 0000023426 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 060303850 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-00404 FILM NUMBER: 98569116 BUSINESS ADDRESS: STREET 1: SELDEN STREET CITY: BERLIN STATE: CT ZIP: 06037-1616 BUSINESS PHONE: 2036655000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTERN MASSACHUSETTS ELECTRIC CO CENTRAL INDEX KEY: 0000106170 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 041961130 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-07624 FILM NUMBER: 98569117 BUSINESS ADDRESS: STREET 1: 174 BRUSH HILL AVE CITY: WEST SPRINGFIELD STATE: MA ZIP: 01090-0010 BUSINESS PHONE: 4137855871 MAIL ADDRESS: STREET 1: 107 SELDON ST CITY: BERLIN STATE: CT ZIP: 06037-1616 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUBLIC SERVICE CO OF NEW HAMPSHIRE CENTRAL INDEX KEY: 0000315256 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 020181050 STATE OF INCORPORATION: NH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06392 FILM NUMBER: 98569118 BUSINESS ADDRESS: STREET 1: 1000 ELM ST CITY: MANCHESTER STATE: NH ZIP: 03105 BUSINESS PHONE: 6036694000 MAIL ADDRESS: STREET 1: 107 SELDON ST CITY: BERLIN STATE: CT ZIP: 06037-1616 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTH ATLANTIC ENERGY CORP /NH CENTRAL INDEX KEY: 0000880416 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 061339460 STATE OF INCORPORATION: NH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-43508 FILM NUMBER: 98569119 BUSINESS ADDRESS: STREET 1: 1000 ELM ST CITY: MANCHESTER STATE: NH ZIP: 03105 BUSINESS PHONE: 6036694000 MAIL ADDRESS: STREET 1: 107SELDEN ST CITY: BERLIN STATE: CT ZIP: 06037-1616 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission Registrant; State of Incorporation; I.R.S Employer File Number Address; and Telephone Number Identification No. 1-5324 NORTHEAST UTILITIES 04-2147929 (a Massachusetts voluntary association) 174 BRUSH HILL AVENUE WEST SPRINGFIELD, MASSACHUSETTS 01090-2010 Telephone: (413) 785-5871 0-11419 THE CONNECTICUT LIGHT AND POWER COMPANY 06-0303850 (a Connecticut corporation) 107 SELDEN STREET BERLIN, CONNECTICUT 06037-1616 Telephone: (860) 665-5000 1-6392 PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE 02-0181050 (a New Hampshire corporation) 1000 ELM STREET MANCHESTER, NEW HAMPSHIRE 03105-0330 Telephone: (603) 669-4000 0-7624 WESTERN MASSACHUSETTS ELECTRIC COMPANY 04-1961130 (a Massachusetts corporation) 174 BRUSH HILL AVENUE WEST SPRINGFIELD, MASSACHUSETTS 01090-2010 Telephone: (413) 785-5871 33-43508 NORTH ATLANTIC ENERGY CORPORATION 06-1339460 (a New Hampshire corporation) 1000 ELM STREET MANCHESTER, NEW HAMPSHIRE 03105-0330 Telephone: (603) 669-4000 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Registrant Title of Each Class on Which Registered NORTHEAST UTILITIES Common Shares, $5.00 par value New York Stock Exchange, Inc. THE CONNECTICUT LIGHT 9.3% Cumulative Monthly Income New York Stock AND POWER COMPANY Preferred Securities Series A(1) Exchange, Inc. (1)Issued by CL&P Capital, L.P., a wholly owned subsidiary of The Connecticut Light and Power Company ("CL&P"), and guaranteed by CL&P. Securities registered pursuant to Section 12(g) of the Act: Registrant Title of Each Class THE CONNECTICUT LIGHT Preferred Stock, par value $50.00 per share, issuable in AMD POWER COMPANY series, of which the following series are outstanding: $1.90 Series of 1947 4.96% Series of 1958 $2.00 Series of 1947 4.50% Series of 1963 $2.04 Series of 1949 5.28% Series of 1967 $2.20 Series of 1949 6.56% Series of 1968 3.90% Series of 1949 $3.24 Series G of 1968 $2.06 Series E of 1954 7.23% Series of 1992 $2.09 Series F of 1955 5.30% Series of 1993 4.50% Series of 1956 PUBLIC SERVICE COMPANY Preferred Stock, par value $25.00 per share,issuable in OF NEW HAMPSHIRE series, of which the following series are outstanding: 10.60% Series A of 1991 WESTERN MASSACHUSETTS Preferred Stock, par value $100.00 per share,issuable ELECTRIC COMPANY in series, of which the following series is outstanding: 7.72% Series B of 1971 Class A Preferred Stock, par value $25.00 per share, issuable in series, of which the following series are outstanding: 7.60% Series of 1987 Indicate by check mark whether the registrants (1) have 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 registrants were required to file such reports), and (2) have 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 the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of NORTHEAST UTILITIES' Common Shares, $5.00 Par Value, held by nonaffiliates, was $1,702,506,591 based on a closing sales price of $12.44 per share for the 136,857,443 common shares outstanding on February 27, 1998. NORTHEAST UTILITIES holds all of the 12,222,930 shares, 1,000 shares, 1,072,471 shares and 1,000 shares of the outstanding common stock of THE CONNECTICUT LIGHT AND POWER COMPANY, PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE, WESTERN MASSACHUSETTS ELECTRIC COMPANY, and NORTH ATLANTIC ENERGY CORPORATION, respectively. Documents Incorporated by Reference: Part of Form 10-K into Which Document Description is Incorporated Portions of Annual Reports to Shareholders of the following companies for the year ended December 31, 1997: Northeast Utilities Part II The Connecticut Light and Power Company Part II Public Service Company of New Hampshire Part II Western Massachusetts Electric Company Part II North Atlantic Energy Corporation Part II Portions of the Northeast Utilities Proxy Statement dated March 31, 1998. Part III GLOSSARY OF TERMS The following is a glossary of frequently used abbreviations or acronyms that are found throughout this report: COMPANIES NU..............................Northeast Utilities CL&P............................The Connecticut Light and Power Company Charter Oak or COE..............Charter Oak Energy, Inc. WMECO...........................Western Massachusetts Electric Company HWP.............................Holyoke Water Power Company NUSCO of the Service Company....Northeast Utilities Service Company NNECO...........................Northeast Nuclear Energy Company NAEC............................North Atlantic Energy Corporation NAESCO or North Atlantic........North Atlantic Energy Service Corporation PSNH............................Public Service Company of New Hampshire RRR.............................The Rocky River Realty Company Select Energy...................Select Energy, Inc., formerly NUSCO Energy Partners, Inc. Mode 1..........................Mode 1 Communications, Inc. HEC.............................HEC Inc. Quinnehtuk......................The Quinnehtuk Company the System......................The Northeast Utilities System CYAPC...........................Connecticut Yankee Atomic Power Company MYAPC...........................Maine Yankee Atomic Power Company VYNPC...........................Vermont Yankee Nuclear Power Corporation YAEC............................Yankee Atomic Electric Company the Yankee Companies............CYAPC, MYAPC, VYNPC, and YAEC GENERATING UNITS Millstone 1.....................Millstone Unit No. 1, a 660-MW nuclear generating unit completed in 1970 Millstone 2.....................Millstone Unit No. 2, an 870-MW nuclear electric generating unit completed in 1975 Millstone 3.....................Millstone Unit No. 3, a 1,154-MW nuclear electric generating unit completed in 1986 Seabrook or Seabrook 1..........Seabrook Unit No. 1, a 1,148-MW nuclear electric generating unit completed in 1986. Seabrook 1 went into service in 1990. REGULATORS DOE.............................U.S. Department of Energy DTE.............................Massachusetts Department of Telecommunications and Energy, formerly the Massachusetts Department of Public Utilities (DPU) DPUC............................Connecticut Department of Public Utility Control MDEP............................Massachusetts Department of Environmental Protection GLOSSARY OF TERMS REGULATORS (Continued) CDEP.......................... Connecticut Department of Environmental Protection EPA........................... U.S. Environmental Protection Agency FERC.......................... Federal Energy Regulatory Commission NHDES......................... New Hampshire Department of Environmental Services NHPUC......................... New Hampshire Public Utilities Commission NRC........................... Nuclear Regulatory Commission SEC........................... Securities and Exchange Commission OTHER 1935 Act...................... Public Utility Holding Company Act of 1935 CAAA.......................... Clean Air Act Amendments of 1990 DSM........................... Demand-Side Management Energy Act.................... Energy Policy Act of 1992 EWG........................... Exempt wholesale generator EAC........................... Energy Adjustment Clause (CL&P) FAC........................... Fuel Adjustment Clause (WMECO) FPPAC......................... Fuel and purchased power adjustment clause (PSNH) FUCO.......................... Foreign utility company kWh........................... Kilowatt-hour MW............................ Megawatt NBFT.......................... Niantic Bay Fuel Trust, lessor of nuclear fuel used by CL&P and WMECO ISO........................... Independent System Operator, successor to the New England Power Pool(NEPOOL) NUGs.......................... Nonutility generators NUG&T......................... Northeast Utilities Generation and Transmission Agreement NORTHEAST UTILITIES THE CONNECTICUT LIGHT AND POWER COMPANY PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE WESTERN MASSACHUSETTS ELECTRIC COMPANY NORTH ATLANTIC ENERGY CORPORATION 1997 Form 10-K Annual Report Table of Contents PART I Page Item 1. Business............................................... 1 The Northeast Utilities System.............................. 1 Safe Harbor Statement....................................... 2 Nuclear Plant Outages and Liquidity......................... 3 Electric Industry Restructuring............................. 4 General................................................ 4 Massachusetts Restructuring............................ 5 New Hampshire Restructuring............................ 7 Connecticut Restructuring.............................. 8 Rates....................................................... 8 Connecticut Retail Rates............................... 8 New Hampshire Retail Rates............................. 11 Massachusetts Retail Rates............................. 14 Financing Program........................................... 15 1997 Financings........................................ 15 1998 Financing Requirements............................ 17 1998 Financing Plans................................... 17 Financing Limitations.................................. 19 Electric Operations......................................... 23 Distribution and Load.................................. 23 Regional and System Coordination....................... 25 Transmission Access and FERC Regulatory Changes........ 26 Fossil Fuels........................................... 27 Nuclear Generation..................................... 28 Nuclear Plant Performance and Regulatory Oversight..... 29 Resource Plans.............................................. 38 Construction........................................... 38 Future Needs........................................... 39 Energy-Related Businesses................................... 39 Energy Products and Services........................... 39 Private Power Development.............................. 39 Energy Management Services............................. 40 Other Regulatory and Environmental Matters.................. 40 Environmental Regulation............................... 40 Electric and Magnetic Fields........................... 44 FERC Hydro Project Licensing................................ 44 Employees................................................... 45 Item 2. Properties............................................. 47 Item 3. Legal Proceedings...................................... 52 Item 4. Submission of Matters to a Vote of Security Holders.... 59 PART II Item 5. Market for Registrants' Common Equity and Related Shareholder Matters.................................... 59 Item 6. Selected Financial Data................................ 60 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 60 Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................................ 60 Item 8. Financial Statements and Supplementary Data............ 61 Item 9. Changes in Disagreements with Accountants on Accounting and Financial Disclosure.................... 61 PART III Item 10. Directors and Executive Officers of the Registrants.... 62 Item 11. Executive Compensation................................. 67 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................. 80 Item 13. Certain Relationships and Related Transactions......... 83 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................... 84 NORTHEAST UTILITIES THE CONNECTICUT LIGHT AND POWER COMPANY PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE WESTERN MASSACHUSETTS ELECTRIC COMPANY NORTH ATLANTIC ENERGY CORPORATION PART I ITEM 1. BUSINESS THE NORTHEAST UTILITIES SYSTEM Northeast Utilities (NU) is the parent of a number of companies comprising the Northeast Utilities system (the System) and is not itself an operating company. The System has traditionally furnished franchised retail electric service in Connecticut, New Hampshire and western Massachusetts through four of NU's wholly owned subsidiaries (The Connecticut Light and Power Company [CL&P], Public Service Company of New Hampshire [PSNH], Western Massachusetts Electric Company [WMECO] and Holyoke Water Power Company [HWP]). In addition to their franchised retail electric service, CL&P, PSNH, WMECO and HWP (including its wholly owned subsidiary, Holyoke Power and Electric Company) (the System companies) together furnish wholesale electric service to various municipalities and other utilities and participate in limited retail access programs, providing off-system retail service. The System serves about 30 percent of New England's electric needs and is one of the 25 largest electric utility systems in the country as measured by revenues. North Atlantic Energy Corporation (NAEC) is a special-purpose operating subsidiary of NU that owns a 35.98 percent interest in the Seabrook nuclear generating facility (Seabrook) in Seabrook, New Hampshire, and sells its share of the capacity and output from Seabrook to PSNH under two life-of-unit, full- cost recovery contracts. Several wholly owned subsidiaries of NU provide support services for the System companies and, in some cases, for other New England utilities. Northeast Utilities Service Company (NUSCO) provides centralized accounting, administrative, information resources, engineering, financial, legal, operational, planning, purchasing and other services to the System companies. North Atlantic Energy Service Corporation (NAESCO) has operational responsibility for Seabrook. Northeast Nuclear Energy Company (NNECO) acts as agent for the System companies and other New England utilities in operating the Millstone nuclear generating facilities (Millstone) in Waterford, Connecticut. Three other subsidiaries construct, acquire or lease some of the property and facilities used by the System companies. NU has three subsidiaries, Charter Oak Energy, Inc. (Charter Oak), HEC Inc. (HEC) and Select Energy, Inc. (Select Energy), which engage, either directly or indirectly through subsidiaries, in a variety of energy-related activities. For information regarding the energy-related activities of these subsidiaries and the ongoing sale of Charter Oak's assets, see "Energy-Related Businesses." The System is regulated in virtually all aspects of its business by various federal and state agencies, including the Securities and Exchange Commission (SEC), the Federal Energy Regulatory Commission (FERC), the Nuclear Regulatory Commission (NRC) and various state and/or local regulatory authorities with jurisdiction over the industry and the service areas in which each company operates, including the Connecticut Department of Public Utility Control (DPUC), the New Hampshire Public Utility Commission (NHPUC) and the Massachusetts Department of Telecommunications and Energy, formerly the Massachusetts Department of Public Utilities (collectively, the DTE). In recent years, there has been significant activity at both the legislative and regulatory levels, particularly in New England, to change the nature of regulation of the industry. For more information regarding recent restructuring initiatives, see "Electric Utility Restructuring," "Rates," and "Electric Operations." SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (Reform Act), NU and its subsidiaries are hereby filing cautionary statements identifying important factors that could cause NU or its subsidiaries' actual results to differ materially from those projected in forward-looking statements (as such term is defined in the Reform Act) of NU and its subsidiaries made by or on behalf of NU or its subsidiaries which are made in this combined Form 10-K, in presentations, in response to questions or otherwise. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as will likely result, are expected to, will continue, is anticipated, estimated, projection, outlook) are not statements of historical facts and may be forward- looking. Forward-looking statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Accordingly, any such statements are qualified in their entirety by reference to, and are accompanied by, the following important factors that could cause NU or its subsidiaries' actual results to differ materially from those contained in forward-looking statements of NU or its subsidiaries made by or on behalf of NU or its subsidiaries. Any forward-looking statement speaks only as of the date on which such statement is made, and NU and its subsidiaries undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Some important factors that could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements include prevailing governmental policies and regulatory actions, including those of the SEC, the NRC, the FERC and state regulatory agencies, with respect to allowed rates of return, industry and rate structure, operation of nuclear power facilities, acquisition and disposal of assets and facilities, operation and construction of plant facilities, recovery of purchased power costs, strandable costs, decommissioning costs and present or prospective wholesale and retail competition (including but not limited to retail wheeling and transmission costs). The business and profitability of NU and its subsidiaries are also influenced by economic and geographic factors including political and economic risks, changes in compliance with environmental and safety laws and policies, weather conditions (including natural disasters), population growth rates and demographic patterns, competition for retail and wholesale customers, pricing and transportation of commodities, market demand for energy from plants or facilities, changes in tax rates or policies or in rates of inflation, changes in project costs, unanticipated changes in certain expenses and capital expenditures, capital market conditions, competition for new energy development opportunities, and legal and administrative proceedings (whether, civil, such as environmental, or criminal) and settlements. All such factors are difficult to predict, contain uncertainties which may materially affect actual results and are beyond the control of NU or its subsidiaries. NUCLEAR PLANT OUTAGES AND LIQUIDITY The length of the ongoing outages at Millstone and the high costs of the recovery efforts weakened the System companies' 1997 earnings, balance sheets and cash flows and will continue to have an adverse impact on the System companies' financial conditions until the units are returned to service. The System companies also continue to face numerous civil lawsuits, criminal investigations and regulatory proceedings related to the outages, and they expect to incur significantly increased expenditures for replacement power and operation and maintenance (O&M) expensed at Millstone. CL&P, PSNH and WMECO have been expensing and will continue to expense all of these costs until the Millstone units return to service. For more information regarding the costs associated with the ongoing outages at Millstone, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Millstone 1, 2 and 3 have been out of service since November 4, 1995, February 21, 1996 and March 30, 1996, respectively. Millstone 1, a 660-MW boiling water reactor, and Millstone 2, an 870-MW pressurized water reactor, are each owned 81 percent by CL&P and 19 percent by WMECO. Millstone 3, a 1154-MW pressurized water reactor, is jointly owned by CL&P (52.93 percent), WMECO (12.24 percent), PSNH (2.85 percent) and other New England utilities. Subject to various requirements discussed more fully under "Electric Operations--Nuclear Generation" in this report, management hopes to return Millstone 3 to service in early Spring of 1998 and Millstone 2 three to four months after Millstone 3. As part of the System's efforts to reduce spending in 1998, Millstone 1 has been placed in extended maintenance status in which all restart-related projects have been suspended and activities at Millstone 1 are limited to those necessary to maintain the plant in a safe condition. Management will review its options with respect to Millstone 1 in 1998, including restart, early retirement and other options. The System has arranged a variety of financing facilities to fund its cash requirements, including the nuclear recovery efforts. The System companies' ability to borrow under their financing arrangements is dependent on their satisfaction of contractual borrowing conditions, which under certain agreements became more restrictive in 1998. Spending levels in 1998, particularly for the first half of 1998 while Millstone 3 and 2 are expected to be out of service, have been, and will be, constrained to levels intended to assure that all financial covenants are satisfied. However, there is no assurance that these financial covenants will be met as the System companies may encounter additional unexpected costs from storms, reduced revenues from regulatory actions or the effect of weather on sales levels. See "Financing Program--Financing Limitations," for more information regarding specific financial covenants under the System companies' financing agreements. If the return to service of Millstone 3 or Millstone 2 is delayed substantially beyond the present restart estimates, if some financing facilities become unavailable because of difficulties in meeting borrowing conditions or renegotiating extensions, if CL&P and WMECO encounter additional significant costs or if any other significant deviations from management's assumptions occur, including materially adverse regulatory decisions, NU, CL&P and WMECO could be unable to meet their cash requirements. In those circumstances, management would take even more stringent actions to reduce costs and cash outflows and attempt to obtain additional sources of funds. The availability of these funds would be dependent upon general market conditions and NU's, CL&P's and WMECO's credit and financial conditions at the time. For more information, see "Rates," "Financing Program--Financing Limitations," "Electric Operations--Nuclear Generation--Nuclear Plant Performance and Regulatory Oversight," "Item 3. Legal Proceedings" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." ELECTRIC INDUSTRY RESTRUCTURING GENERAL Competition in the energy industry continues to grow as a result of legislative and regulatory action, technological advances, relatively high electric rates in certain regions of the country, including New England, surplus generating capacity and the increased availability of natural gas. These competitive pressures are particularly strong in the System's service territories, where legislators and regulatory agencies have been at the forefront of restructuring. Changes in the industry are expected to place downward pressure on prices and to increase customer choice through competition. Restructuring initiatives in the System companies' service territories have created uncertainty with respect to future rates and the recovery of "strandable costs." Strandable costs are expenditures incurred, or commitments for future expenditures made, on behalf of customers with the expectation such expenditures would continue to be recoverable in the future through rates. However, under certain circumstances these costs might not be recoverable from customers in a fully competitive electric utility industry (i.e., the costs may result in above-market energy prices). The System is particularly vulnerable to strandable costs because of (i) the System's relatively high investment in nuclear generating capacity, which has a high cost to build and maintain, (ii) state and federal government mandated purchased power contracts priced above market, and (iii) significant regulatory assets, which are those costs that have been deferred by state regulators for future collection from customers. As of December 31, 1997, the System companies' net investment in nuclear generating capacity, excluding its investment in certain regional nuclear companies, was approximately $3.5 billion and its regulatory assets were approximately $2.2 billion. In addition, based on current market prices, the System companies have above-market purchase power obligations, the combined net present value of which is in excess of $1 billion. The System's exposure to strandable costs and above-market purchased power obligations exceeds its shareholders' equity. The System's financial strength and resulting ability to compete in a restructured environment will be negatively affected if the System companies were unable to recover their past investments and commitments. Even if the System companies are given the opportunity to recover a large portion of their strandable costs, earnings prospects in a restructured environment will be affected in ways that cannot now be estimated. Massachusetts and New Hampshire have been at the forefront of restructuring in New England as discussed more fully below. Connecticut has not implemented restructuring legislation to date, but legislators have proposed broad restructuring legislation, which will be considered in the Spring of 1998. Both PSNH and WMECO have proposed auctioning off their nonnuclear generating assets, which have a net book value of approximately $190 million and $60 million, respectively. If CL&P takes the same approach, it has nonnuclear generating assets, which have a net book value of approximately $200 million, that could be sold. These auctions must be approved by state and federal regulators. The System intends to participate in the auctions. Additionally, the System companies are actively seeking and/or supporting legislation permitting securitization of strandable costs recoveries after mitigation through various required measures. Securitization is the refinancing of strandable costs through the sale of debt securities by an independent entity, collateralized by the System companies' interests in their strandable cost recoveries. Management expects that the proceeds from securitization and nonnuclear generating plant auctions could be used to pay off significant amounts of subsidiary debt and preferred securities, as well as reducing much of the common equity investment NU has made in CL&P, PSNH, WMECO and NAEC. If approved by regulators, this would have the effect of reducing retail rates and significantly shrinking the capitalization of each of these companies. Management currently expects CL&P, PSNH and WMECO would continue to operate electric distribution and transmission systems, and that CL&P, WMECO, PSNH and NAEC would continue to hold their current ownership interests in the region's nuclear generating facilities. MASSACHUSETTS RESTRUCTURING On November 25, 1997, Massachusetts enacted comprehensive electric utility industry restructuring legislation. The bill provides that each Massachusetts electric company, including WMECO, will decrease its rates by 10 percent and allow all its customers to choose a retail supplier on March 1, 1998. The statute requires a further five percent rate reduction, adjusted for inflation, by September 1, 1999. In addition, the legislation provides, among other things, for: (i) recovery of strandable costs through a "transition charge" to customers, subject to review by the DTE, (ii) a possible limitation on WMECO's return on equity should its strandable cost charge go above a certain level, (iii) securitization of allowed strandable costs; and (iv) divestiture of nonnuclear generation. The statute also provides that an electric company must transfer or separate ownership of generation, transmission and distribution facilities into independent affiliates or "functionally separate such facilities within 30 business days of federal approval." Additionally, marketing companies formed by an electric company are to be separate from the electric company and separate from generation, transmission or distribution affiliates. On December 31, 1997, WMECO filed its restructuring plan with the DTE consistent with the Massachusetts restructuring legislation. The plan sets out the process by which WMECO initiated a 10 percent rate reduction for all customer rate classes and allowed customers to choose their energy supplier as of March 1, 1998. WMECO intends to mitigate its stranded costs through several steps, including divesting WMECO's nonnuclear generating plants at an auction and securitization of approximately $500 million of strandable costs. WMECO hopes that it will be able to complete securitization in late 1998. NU expects that a new generation subsidiary will participate in the competitive bid process for WMECO's generation resources. As required by the legislation, WMECO will continue to operate and maintain WMECO's transmission and local distribution network and deliver electricity to all customers. On February 20, 1998, the DTE issued an order approving in all material respects WMECO's restructuring plan on an interim basis, including a 10 percent rate reduction and customer choice of supplier effective March 1, 1998. WMECO's plan will be subject to extensive additional review, with evidentiary hearings likely to begin in March or April 1998. A final decision on the plan is expected in 1998. Because WMECO reduced rates on March 1, 1998 before the means of financing restructuring were completed, WMECO's cash flows and financial condition will be negatively affected. These impacts would become significant if there are material delays in the schedule for, or lower than estimated proceeds from, the divestiture of nonnuclear generation and securitization, or if there are further delays or cost increases in returning the Millstone units to service. Under the legislation, if a distribution company claims that it is unable to meet a price reduction of 10 percent initially and 15 percent by September 1, 1999, the distribution company may so state to the DTE and the DTE has the authority to explore other options to achieve the mandated rate reductions. Since the restructuring legislation was passed in November 1997, a citizens group has been organized that is expected to challenge the legislation by placing a repeal petition on the ballot for voter approval in November 1998. If Massachusetts' voters should approve the petition, the legislation would be immediately repealed. NEW HAMPSHIRE RESTRUCTURING On February 28, 1997, in accordance with earlier legislation, the NHPUC issued orders related to restructuring the state's electric utility industry and setting interim strandable cost charges for PSNH. In the orders, the NHPUC announced a departure from cost-based ratemaking and instead adopted a market- priced approach to strandable cost recovery. If PSNH had not received a stay of these orders, as discussed below, PSNH would have been required to discontinue accounting under Statement of Financial Accounting Standard No. 71 (SFAS 71), "Accounting for the Effects of Certain Types of Regulation" and would have had to remove over $400 million (after taxes) of its regulatory assets from its balance sheet as early as the quarter ending March 31, 1997. In March 1997, PSNH, NU, NAEC and NUSCO filed for a temporary restraining order, preliminary and permanent injunctive relief and for a declaratory judgment in the United States District Court for New Hampshire. The case was subsequently transferred to the United States District Court for Rhode Island (District Court). Also, in March 1997, the District Court issued a temporary restraining order, staying the enforcement of the NHPUC's restructuring orders as they affected PSNH. The District Court had suspended the procedural schedule associated with this court proceeding pending the resolution of appeals of certain preliminary rulings by the U.S. Circuit Court of Appeals for the First Circuit (Appeals Court). On February 3, 1998, the Appeals Court upheld the District Court's earlier ruling excluding certain intervenors from the case, which effectively resolved the other matters on appeal. The case has been remanded to the District Court for further proceedings. On February 17, 1998, the commissioners of the NHPUC filed a petition for rehearing with the Appeals Court. The March 1997 temporary restraining order will remain in effect until further order of either court. If the District Court's stay or another appropriate court action does not remain in effect or a settlement is not reached by the parties, the write-off triggered by the NHPUC's orders would result in defaults which, if not waived or renegotiated, would give investors and lenders the right to accelerate the repayment of approximately $686 million of PSNH indebtedness and $495 million of NAEC indebtedness. These circumstances could force PSNH and NAEC to seek protection under Chapter 11 of the bankruptcy laws. In May 1997, the NHPUC reopened its proceeding to reconsider various matters in its restructuring orders. In testimony filed with the NHPUC on November 7, 1997, PSNH proposed a new methodology to quantify its strandable costs. Under this proposal, PSNH would divest all owned generation and purchased-power obligations through an auction. To the extent that the auction fails to produce sufficient revenues to cover the net book value of owned generation and contractual purchased-power payment obligations, the difference would be recovered from customers through a non-bypassable transition charge. The proposal also relies upon securitization to reduce rates. On December 15, 1997, the NHPUC officially announced that industry restructuring would not take place on January 1, 1998. On December 24, 1997, the Governor's office filed a motion with the NHPUC formally requesting that certain issues concerning the rate agreement (Rate Agreement) between NU, PSNH and the state of New Hampshire, entered into in 1989 in connection with NU's reorganization plan to resolve PSNH's bankruptcy, be transferred to the New Hampshire Supreme Court for decision. The motion recommends that the NHPUC not issue any new rulings concerning the Rate Agreement pending such Supreme Court decision. On February 20, 1998, the NHPUC petitioned the New Hampshire Supreme Court to review two issues regarding the Rate Agreement: (i) whether the Rate Agreement creates private rights which would allow PSNH to seek damages under a contract theory if PSNH receives less than the full amount it claims as strandable costs under the Rate Agreement, and (ii) if yes, against whom and under what conditions would such rights be enforceable. The Supreme Court first must determine whether to accept the NHPUC's petition. On November 12, 1997, PSNH received an unsolicited offer from New Hampshire Electric Cooperative (NHEC) to purchase PSNH's transmission and distribution facilities, as well as PSNH's claims for recovery of strandable costs, for $1.4 billion. After a meeting between representatives of PSNH and NHEC and further review of the proposal, PSNH responded on November 25, 1997 to NHEC that the lack of certain information in the proposal made it impossible for PSNH to respond in a definitive manner at this time. No response has been received from NHEC. On February 20, 1998, PSNH forwarded a settlement offer to representatives from the State of New Hampshire that was consistent with PSNH's proposal in the restructuring rehearing proceedings discussed above, including among other things, a 20-percent rate reduction at the beginning of 1999, an auction of PSNH's nonnuclear generating units and securitization of approximately $1.15 billion of PSNH's strandable costs. CONNECTICUT RESTRUCTURING Proposed restructuring legislation is currently being considered by the Connecticut General Assembly, which provides, among other things, for retail choice to be phased in over a period of time, mandatory rate reductions, auctioning of generation assets, including nuclear units, and securitization of a portion of strandable costs. For more information regarding restructuring in the wholesale electric market, see "Electric Operations-Transmission Access and FERC Regulatory Changes." RATES CONNECTICUT RETAIL RATES GENERAL Approximately 64% of System revenues is derived from CL&P, and 58% of the book value of the System's electric utility assets is owned by CL&P. CL&P's retail rates are subject to the jurisdiction of the DPUC. In July 1996, the DPUC approved a rate settlement agreement with CL&P (the Settlement). Under the Settlement, CL&P froze base rates until at least December 31, 1997 and agreed to accelerate the amortization of regulatory assets during the period that the rate freeze remains in effect. The Settlement provided that CL&P's target return on equity (ROE) would be 10.7 percent but did not alter CL&P's allowed ROE of 11.7 percent. If CL&P's actual ROE for a calendar year exceeds the 10.7 percent target after the target regulatory asset amortization ($68 million in 1997) and after adjustment for any incremental NRC billings and any rate disallowances for nuclear operations, then CL&P shall retain two-thirds of any surplus and use the remaining one-third to provide a reduction in bills. CL&P's actual ROE, as adjusted, fell below the target ROE for 1996 and 1997 and, therefore, the accelerated amortization of regulatory assets was reduced to the minimum amounts allowed under the Settlement ($73 million in 1996 and $54 million in 1997). For each full year that the rate freeze remains in effect, CL&P agreed to amortize an additional $44 million of regulatory assets. As of December 31, 1997, CL&P's regulatory assets totaled approximately $1.3 billion. The DPUC is required to review a utility's rates every four years if there has not been a rate proceeding during such period. The DPUC conducted such a review of CL&P's rates in 1997, including an analysis of the possibility of removing one or more of the Millstone nuclear units from CL&P's rate base. On December 31, 1997, the DPUC issued its ruling in this matter. The decision did not change CL&P's rates, but set forth findings and conclusions that could be used to do so in additional proceedings. The most significant conclusion was that Millstone 1 should be removed from CL&P's rate base, which could cause an annual revenue reduction of approximately $30.5 million. The decision stated that the DPUC would open an interim rate case immediately to remove Millstone 1 from CL&P's rates and simultaneously to remove an additional $110.5 million of other expenses from rates related to perceived overearnings. The decision also provided that the DPUC will schedule hearings for April 1, 1998 and June 1, 1998 to determine the status of Millstone 3 and Millstone 2, respectively. If the units are not operating by those dates, the DPUC will consider their removal from rates. Finally, CL&P was directed to file a full rate case on April 1, 1998, later extended to June 1, 1998, to address potential overearnings amounting to an additional $150 million in 1998. The effective date of any rate order will be September 28, 1998. On February 25 1998, the DPUC issued a decision in CL&P's interim rate case, which was consistent with the December 31, 1997 four year rate decision. The decision required a $30.5 million credit to customer bills (1.39 percent rate decrease) to reflect the removal of Millstone 1 from rates. The reduction reflects the removal from rates of O&M, depreciation and investment return related to Millstone 1, but allows CL&P to recover the replacement power costs associated with Millstone 1. In addition, the decision requires CL&P to accelerate the amortization of regulatory assets by approximately $110.5 million, which includes the $44 million from the 1996 Settlement. These rates were effective as of March 1, 1998. On July 1, 1997, CL&P submitted continued unit operation studies to the DPUC showing that, under base case assumptions, Millstone 1 had a net present value to System customers (as compared to the cost of shutting down the unit and incurring replacement power costs) of approximately $70 million during the remaining thirteen years of its operating license and Millstone 2 had a net present value to System customers (on assumptions consistent with those used with Millstone 1) of approximately $500 million during the remaining eighteen years of its operating license. Two other cases submitted to the DPUC based on higher assumed O&M costs, which CL&P considered less likely, indicated that Millstone 1 would be uneconomic in varying degrees. The DPUC has stated it will consider these analyses in the context of CL&P's next integrated resource planning proceeding which begins in April 1998. However, in light of the delay in restarting Millstone 1, management will continue to review its options with respect to this unit, including restart, early retirement and other options. Among the various matters that management must consider with respect to Millstone 1 are certain Connecticut state law issues. In the four-year rate review proceeding, the DPUC noted that CL&P may not be able to recover its remaining investment in Millstone 1 if it were to determine that the unit had been prematurely shut down due to management imprudence. Additionally, there is a Connecticut statute that may limit CL&P's ability to collect decommissioning charges if Millstone 1 were to be retired before the end of its expected life. The net unrecovered Millstone 1 plant cost and unrecovered decommissioning cost at December 31, 1997 were approximately $216 million and $212 million, respectively. For more information regarding decommissioning matters, see "Electric Operations--Nuclear Generation--- Decommissioning." PRUDENCE AND ENERGY ADJUSTMENT CLAUSE On July 30, 1997, the DPUC issued a decision disallowing CL&P's recovery of all of the replacement power costs associated with the ongoing outages at Millstone. CL&P has expensed, and will continue to expense, the these costs as they are incurred. In October 1996, the DPUC issued its final order establishing an Energy Adjustment Clause (EAC), which became effective on January 1, 1997. The EAC is designed to reconcile and adjust every six months the difference between actual fuel costs and the fuel revenue collected through base rates. The Connecticut Office of Consumer Counsel (OCC) appealed the DPUC's EAC order, and the trial court upheld the DPUC's final order. The OCC subsequently appealed the trial court's decision, and the matter is pending before the Connecticut Supreme Court. CL&P agreed to a zero EAC rate for the period January 1, 1997 through June 30, 1997. On December 31, 1997, the DPUC approved an EAC rate of $.00112 for the period July 1, 1997 to December 31, 1997, which recovered approximately $11.5 million of additional fuel costs over this period. The decision upheld an earlier procedural order that excluded replacement power costs following the early retirement of the Connecticut Yankee nuclear unit (CY) (approximately $18 million for the July - December 1997 period, and approximately $4 million per month in the upcoming period January - June 1998) until a final decision in the pending CY FERC proceeding. CL&P has appealed the DPUC's ruling related to CY replacement power costs. For more information regarding the early retirement of CY and the FERC proceeding related thereto, see "Electric Operations - Nuclear Generation." On December 23, 1997, the DPUC approved an EAC rate of $.00273/per kWh for the period January 1, 1998 to June 30, 1998, which will recover approximately $27.9 million of additional fuel costs over this period. DEMAND-SIDE MANAGEMENT CL&P provides demand side management (DSM) programs for its residential, commercial and industrial customers. CL&P is allowed to recover DSM costs in excess of costs reflected in base rates over periods ranging from approximately four to ten years. On April 16, 1997, the DPUC approved CL&P's DSM budget of $36 million for 1997. On October 15, 1997, CL&P and other interested parties filed a stipulation with the DPUC requesting that the DPUC approve certain programs and establish a budget level of $32.7 million for 1998 and $28.8 million for 1999. The DPUC is expected to issue a decision on CL&P's DSM filing in March 1998. CL&P's unamortized DSM costs at December 31, 1997, excluding carrying costs, which are collected currently, were approximately $52.1 million. NEW HAMPSHIRE RETAIL RATES GENERAL Approximately 24% of System revenues is derived from PSNH, and 18% of the book value of the System's electric utility assets is owned by PSNH. PSNH's Rate Agreement provided for seven base rate increases of 5.5 percent per year beginning in 1990 and a comprehensive fuel and purchased power adjustment clause (FPPAC). The final base rate increase went into effect on June 1, 1996. The Rate Agreement provides that PSNH's rates are subject to traditional rate regulation after the fixed rate period, which expired on May 31, 1997. The FPPAC, however, would continue through May 31, 2001 and other Rate Agreement requirements would continue in accordance with the terms of the agreement. On May 2, 1997, PSNH made a rate filing with the NHPUC requesting that base rates remain at their current level after May 31, 1997. By order dated November 6, 1997, the NHPUC ordered a temporary rate reduction for PSNH at a revenue level 6.87 percent lower than then-current rates. The NHPUC also set an interim return on equity of 11 percent. The temporary rates became effective December 1, 1997. A final decision, which will be reconciled to July 1, 1997, is not expected to be issued until September 1998. A portion of this reduction was offset by an increase to rates through the FPPAC described below. FPPAC AND PRUDENCE The FPPAC provides for the recovery or refund by PSNH, for the ten-year period beginning on May 16, 1991, of the difference between its actual prudently incurred energy and purchased power costs and the estimated amounts of such costs included in base rates established by the Rate Agreement. The FPPAC amount is calculated for a six-month period based on forecasted data and is reconciled to actual data in subsequent FPPAC billing periods. On June 3, 1996, the NHPUC ordered PSNH to refund $41.5 million, which includes $5 million of interest related to nonutility generation (NUG) costs which had been previously collected through the FPPAC. The refund, which was made by crediting customer bills through May 31, 1997, was implemented on June 1, 1996. When actual fuel and purchased power costs are less than the estimated costs in base rates, PSNH is permitted to retain revenues to offset previously deferred charges, including the $41.5 million refund. By this method PSNH fully recovered the $41.5 million by May 1, 1997. On December 3, 1996, the NHPUC approved PSNH's FPPAC rate for December 1, 1996 through May 31, 1997, representing an overall rate decrease of 1.0 percent. On May 27, 1997, the NHPUC suspended the FPPAC proceeding related to the June 1, 1997 to November 30, 1997 FPPAC period and ordered a credit FPPAC rate of $.00481/per kWh, which resulted in PSNH refunding approximately $15 million of fuel costs over the period. On September 11, 1997, the NHPUC consolidated this FPPAC proceeding with the December 1, 1997 through May 31, 1998 FPPAC proceeding. On February 10, 1998, the NHPUC issued its written decision confirming its order on December 1, 1997 of an FPPAC rate of $.00266 per/kWh to be charged for December 1, 1997 through May 31, 1998, which will allow PSNH to collect approximately $9 million of additional fuel costs over the period. The new FPPAC rate increased customer bills by approximately six percent, which was offset in great part by the 6.87 percent temporary base rate decrease described above. The new rate also continues to defer a substantial portion of costs. In addition, recovery of the Seabrook deferred return (approximately $127 million annually) is scheduled to begin in June 1998. For more information regarding the Seabrook deferred return, see "Seabrook Power Contracts" below. The NHPUC also confirmed in its February 10, 1998, FPPAC decision that it would disallow approximately $3 million in replacement power costs and require PSNH to set aside $10 million as a reserve for potential overpayments due to the fact that PSNH has not required small power producers to reduce deliveries during so-called "light-loading" periods, pending the NHPUC's review of this matter. The decision also alleged various breaches of the Rate Agreement and ordered PSNH to meet with the State to discuss these matters. Finally, the decision indicated that the NHPUC would open a proceeding to review whether the proceeds of the sale of steam generators (approximately $ 20.9 million for NAEC's share) related to the canceled Unit 2 at Seabrook station should flow through rates to reduce customers bills. PURCHASE POWER CONTRACTS The costs associated with purchases by PSNH from certain NUGs at prices above the level assumed in rates are deferred and recovered through the FPPAC. As of December 31, 1997, NUG deferrals, including previously approved buy-out costs, totaled approximately $191.7 million. Under the Rate Agreement, PSNH and the State of New Hampshire have an obligation to use their best efforts to renegotiate burdensome purchased power arrangements with certain specified hydroelectric and wood-burning NUGs that were selling their output to PSNH under long-term NHPUC rate orders. If approved, PSNH will exchange near-term cash payments for partial relief from high-cost purchased power obligations to the NUGs, with such payments and an associated return on the unamortized portion being recoverable from customers in a future amortization period. PSNH reached agreements requiring NHPUC approval with the six remaining wood-fired NUGs. The six agreements could result in net savings of approximately $440 million to PSNH's customers over a period of 20 years in exchange for upfront payments of approximately $250 million recoverable in future charges to customers. In early 1996, the NHPUC began a proceeding to decide whether to approve these settlement agreements. Despite a determination by the New Hampshire Attorney General finding that PSNH had used its best efforts to renegotiate the 13 agreements, in March 1996, the NHPUC decided to open a docket, which is ongoing, to independently review that issue. In January 1997, the NHPUC issued an order approving one of the six NUG settlements. However, the order expressly indicated that PSNH is not assured of recovering all of the payments PSNH must make pursuant to the agreement. In addition, the order required PSNH and the NUG owner to contribute an undisclosed amount to create a fund designed to mitigate the impact of the buydown agreement on the wood-fuel industry. On February 14, 1997, PSNH filed a response with the NHPUC stating that the uncertainties of recovery stated in the order made it impossible to finance the upfront payments for the agreement. The NHPUC has initiated a proceeding requiring PSNH to show cause why it has not been imprudent in failing to close on this agreement. On January 12, 1998, the NHPUC indicated that it would reject the five remaining wood settlement agreements. The New Hampshire Legislature is considering a number of proposals that could impact PSNH's ability to renegotiate and refinance NUGs rate orders. UNAMORTIZED PSNH ACQUISITION COSTS The Rate Agreement also provides for the recovery by PSNH through rates of unamortized PSNH acquisition costs, which are the aggregate value placed by PSNH's reorganization plan on PSNH's assets in excess of the net book value of its non-Seabrook assets and the value assigned to Seabrook. The unrecovered balance of PSNH acquisition costs at December 31, 1997 was approximately $402.3 million. In accordance with the Rate Agreement, approximately $32.9 million of this amount will be recovered through rates by June 1, 1998, and the remaining amount, approximately $369.4 million, will be recovered through rates by 2011. PSNH earns a return each year on the unamortized portion of the costs. For more information regarding PSNH's recovery of these costs, see "Unamortized PSNH Acquisition Costs" in the notes to NU's financial statements and "Unamortized Acquisition Costs" in the notes to PSNH's financial statements. SEABROOK POWER CONTRACTS PSNH and NAEC have entered into two power contracts that collectively obligate PSNH to purchase NAEC's 35.98 percent ownership of the capacity and output of Seabrook for the term of Seabrook's NRC operating license and to pay NAEC's "cost of service" during this period, whether or not Seabrook continues to operate. NAEC's cost of service includes all of its prudently incurred Seabrook-related costs, including O&M expenses, cost of fuel, depreciation of NAEC's recoverable investment in Seabrook and a phased-in return on that investment. The payments by PSNH to NAEC under these contracts constitute purchased power costs for purposes of the FPPAC and are recovered from PSNH customers under the Rate Agreement. Decommissioning costs are separately collected by PSNH in its base rates. See "Rates--New Hampshire Retail Rates--- General" and--"FPPAC and Prudence" for information relating to the Rate Agreement. At December 31, 1997, NAEC's net utility plant investment in Seabrook, including fuel, was approximately $667.4 million. If Seabrook were retired before the expiration of its NRC operating license term, NAEC would continue to be entitled under the power contracts to recover its remaining Seabrook investment and a return on that investment and its other Seabrook-related costs over a 39-year period, less the period during which Seabrook has operated. The power contracts provide that NAEC's return on its "allowed investment" in Seabrook (its investment in working capital, fuel, capital additions after the date of commercial operation and a portion of the initial investment) is calculated based on NAEC's actual capitalization over the term of the contracts, its actual debt and preferred equity costs and a common equity cost of 12.53 percent for the first ten years of the contracts, and thereafter at an equity rate of return to be fixed in a filing with FERC. As of May 1, 1996, NAEC had completed phasing into rates 100 percent of the recoverable portion of its investment in Seabrook. From the date of acquisition through November 1997, NAEC recorded $203.9 million of deferred return on its investment in Seabrook. At November 30, 1997, NAEC's utility plant includes $84.1 million of deferred return that was transferred by PSNH as part of the Seabrook assets to NAEC on the acquisition date. Beginning on December 1, 1997, the deferred return, including the portion transferred to NAEC, is currently being billed through the Seabrook power contracts to PSNH and in accordance with the Rate Agreement is to be fully recovered from customers by May 2001. MASSACHUSETTS RETAIL RATES GENERAL Approximately 11% of System revenues is derived from WMECO, and 11% of the book value of the System's electric utility assets is owned by WMECO. WMECO's retail rates are subject to the jurisdiction of the DTE. The rates charged under HWP's contracts with its industrial customers are not subject to the ratemaking jurisdiction of any state or federal regulatory agency. In April 1996, the DTE approved a settlement proposed by WMECO and the Massachusetts Attorney General (the Agreement). The Agreement continued, through February 1998, a 2.4-percent rate reduction instituted in June 1994. The Agreement terminated pending reviews of WMECO's generating plant performance and any potential reviews associated with Millstone 2's 1994-1995 extended outage. The Agreement also accelerated WMECO's amortization of strandable assets by approximately $6 million in 1996 and $10 million in 1997. The Massachusetts restructuring legislation requires the DTE to issue rules instituting performance-based regulation for the distribution and transmission companies. No regulations have yet been promulgated. WMECO FUEL ADJUSTMENT CLAUSE AND GENERATING UNIT OPERATING PERFORMANCE Before the restructuring legislation, fuel costs were collected by Massachusetts utilities on a current basis by means of a forecasted quarterly fuel clause. In addition to energy costs, the fuel adjustment clause (FAC) includes capacity and transmission charges and credits that result from short- term transactions with other utilities and from certain FERC-approved contracts among the System operating companies. The Massachusetts restructuring legislation effectively eliminates the FAC, effective March 1, 1998. On February 28, 1997, the DTE approved a settlement agreement between WMECO and the Massachusetts Attorney General to maintain WMECO's FAC at its August 1996 level through August 1997. The settlement also provided that WMECO would not seek carrying charges on any deferred fuel costs incurred as a result of maintaining the FAC at the agreed-upon level. In accepting the settlement, the DTE deferred any inquiry into WMECO's fuel expenses, including replacement power fuel expenses related to the current Millstone outages. On August 20, 1997, WMECO filed with the DTE a joint motion for approval of a settlement agreement with the Massachusetts Attorney General which would apply an FAC of $.0080/per kWh, thereby allowing WMECO to recover approximately $15.3 million of additional fuel costs for the period September 1997 through February 1998. Under the terms of the settlement, WMECO would not seek to recover the replacement power costs associated with the Millstone outages that accrue during the same six month period. WMECO indicated in its restructuring filing on December 31, 1997 that it would not seek recovery of any of the replacement power costs associated with the ongoing Millstone outages. WMECO has been expensing and will continue to expense these costs. FINANCING PROGRAM 1997 FINANCINGS On November 21, 1996, NU, CL&P and WMECO entered into a new three-year Revolving Credit Agreement (the Revolving Credit Agreement) with a group of banks. On May 30, 1997, the Revolving Credit Agreement was amended to reflect (i) the provision by CL&P of first mortgage bonds in the principal amount of $225,000,000 and by WMECO of first mortgage bonds in the principal amount of $90,000,000 as collateral for their respective obligations under the Revolving Credit Agreement, (ii) revised financial covenants consistent with NU's, CL&P's and WMECO's financial forecasts and (iii) an upfront payment to the lenders in order to maintain commitments under the Revolving Credit Agreement. Under the Revolving Credit Agreement, as amended, CL&P and WMECO are able to borrow up to approximately $225,000,000 and $90,000,000, respectively, subject to a total borrowing limit of $313,750,000 for all three borrowers. NU will not be able to borrow under the Revolving Credit Agreement until NU, CL&P and WMECO have maintained a consolidated operating income to consolidated interest expense ratio of at least 2.50 to 1 for two consecutive fiscal quarters. NU, CL&P and WMECO currently cannot meet this requirement. At December 31, 1997, CL&P and WMECO had $35 million and $15 million, respectively, outstanding under the Revolving Credit Agreement. For more information regarding other covenant requirements under this agreement, see "Financing Limitations" below. On June 26, 1997, CL&P issued $200 million of First and Refunding Mortgage Bonds, 1997 Series B (CL&P Series B Bonds). The net proceeds of the sale of the CL&P Series B Bonds were used for repayment of short-term debt incurred for general working capital purposes, including costs associated with the current outages at the Millstone units. Pursuant to an agreement between CL&P and the purchasers of the CL&P 1997 Series B Bonds, such purchasers were granted certain registration rights. On October 9, 1997, CL&P issued $200 million of First and Refunding Mortgage Bonds, 1997 Series C (CL&P Series C Bonds) in an exchange offer to the holders of the CL&P Series B Bonds. No CL&P Series B Bonds remained outstanding subsequent to the exchange of CL&P Series C Bonds for CL&P Series B Bonds. The CL&P Series C Bonds bear interest at an annual rate of 7.75 percent and mature on June 1, 2002. On July 31, 1997, WMECO issued $60 million of First Mortgage Bonds, 1997 Series B (WMECO 1997 Series B Bonds). The net proceeds of the sale of the WMECO 1997 Series B Bonds were used to repay short-term debt that was incurred to refinance or refund debt and preferred stock and for general working capital purposes, including costs associated with the ongoing outages at the Millstone units. The WMECO 1997 Series B Bonds bear interest at an annual rate of 7.375 percent and will mature on July 1, 2001. CL&P and WMECO established facilities in 1996 under which they may sell from time to time up to $200 million and $40 million, respectively, of their accounts receivable and accrued utility revenues. In October 1997, CL&P completed the process of restructuring its accounts receivable sales agreement to comply with the requirements of Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," so that the transactions occurring under the agreement are accounted for as sales and not secured borrowings. As part of meeting these requirements, CL&P established a single-purpose, wholly owned subsidiary, CL&P Receivables Corporation (CRC). CRC's sole purpose is to purchase receivables from CL&P and periodically resell undivided ownership interests in those receivables to a third-party purchaser. As collections reduce previously sold undivided interests, new receivables may be sold. All receivables transferred to CRC become assets owned by CRC. In 1997, WMECO also restructured its accounts receivable sales agreement to permit it to treat transactions occurring under the agreement as sales. Like CL&P, WMECO established a single-purpose, wholly owned subsidiary, WMECO Receivables Corporation (WRC). WRC operates in substantially the same manner as does CRC. As of December 31, 1997, approximately $70 million and $20 million of receivables had been sold by CRC and WRC, respectively, to third party purchasers. For information regarding the effect of downgrades of the credit ratings of CL&P and WMECO on the availability of these facilities, see "Financing Limitations" below. As of December 31, 1997, approximately $70 million and $20 million of receivables had been sold to third party purchasers under CL&P's and WMECO's respective agreements. Total System debt, including short-term and capitalized lease obligations, was $4.15 billion as of December 31, 1997, compared with $4.15 billion as of December 31, 1996 and $4.25 billion as of December 31, 1995. For more information regarding System financing, see "Notes to Consolidated Statements of Capitalization" in NU's financial statements and other footnotes related to long-term debt, short-term debt and the sale of accounts receivables, as applicable, in the notes to NU's, CL&P's, PSNH's, WMECO's and NAEC's financial statements and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." 1998 FINANCING REQUIREMENTS The System's aggregate capital requirements for 1998, including requirements under the Niantic Bay Fuel Trust (NBFT) (discussed under "1998 Financing Plans") and excluding a one percent improvement fund* for certain WMECO First Mortgage Bonds, are approximately as follows: CL&P PSNH WMECO NAEC Other System (Millions) Construction $164.9 $ 41.9 $26.5 $ 8.9 $24.9 $267.1 Nuclear Fuel 37.6 1.7 8.4 12.9 - 60.6 Maturities 20.0 170.0 9.8 - - 199.8 Cash Sinking Funds 3.8 25.0 1.5 20.0 24.7 75.0 Total $226.3 $238.6 $46.2 $41.8 $49.6 $602.5 *With the issuance of the CL&P Series B Bonds, the one percent sinking fund for CL&P was eliminated under the provisions of the sixty-seventh supplemental indenture. For further information on NBFT, see "Leases" in the notes to NU's, CL&P's and WMECO's financial statements. For further information on the System's 1998 and five-year financing requirements, see "Notes to Consolidated Statements of Capitalization" in NU's financial statements, "Long-Term Debt" in the notes to CL&P's, PSNH's, WMECO's and NAEC's financial statements and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." 1998 FINANCING PLANS The System companies generally propose to finance their 1998 requirements through internally generated funds and short-term borrowings. In February 1998, because of borrowing restrictions on NU under the Revolving Credit Agreement, NU entered into a separate $25 million 364-day revolving credit agreement with one bank. See "Financing Program - 1997 Financings." In 1982, CL&P and WMECO entered into arrangements under which NBFT owns and finances the nuclear fuel for Millstone 1 and 2 and CL&P's and WMECO's share of the nuclear fuel for Millstone 3. NBFT obtains funds from bank loans and the sale of intermediate term notes. The fuel is leased to CL&P and WMECO by the trust while it is used in the reactors, and ownership of the fuel is transferred to CL&P and WMECO when it is permanently discharged from the reactors. CL&P and WMECO are severally obligated to make quarterly lease payments, to pay all expenses incurred by NBFT in connection with the fuel and the financing arrangements, to purchase the fuel under certain circumstances and to indemnify all the parties to the transactions. The NBFT arrangements with the banks were recently extended from February 19, 1998 to July 31, 1998, with the amount available under a credit agreement relating to the trust decreasing from $150 million to $100 million. The extension is contingent upon CL&P and WMECO issuing approximately $72 million and $18 million, respectively, of first mortgage bonds on or before May 1, 1998 to secure both the $100 million of bank credit and $80 million of Series F intermediate term NBFT notes. These notes mature on June 1, 1998, and CL&P and WMECO intend to cause the trust to refinance them at such time. CL&P, WMECO, PSNH and HWP have outstanding variable rate pollution control bonds backed by Letters of Credit (LOCs) from various banks. All of the outstanding LOCs are scheduled to expire in 1998. For each LOC, the company must either obtain an extension of the current LOC, obtain a replacement LOC, convert the outstanding variable rate security to a fixed rate security or retire the security. The total principal amounts of the pollution control bonds affected are approximately $362 million for CL&P, $229 million for PSNH, $54 million for WMECO and $38 million for HWP. The companies' ability to extend such LOCs will be dependent upon a number of factors at the time of such transaction, including their own financial condition, the availability of bank credit generally, receipt of necessary regulatory approvals and other factors. A portion of the debt secured in such fashion may be able to be remarketed as fixed rate debt without LOC support, but there is no assurance this could be done were there to be a shortfall in LOC support. Failure to obtain LOC extensions and to remarket such debt in fixed mode could lead to a request by the LOC banks for payment upon the expiration of the LOC arrangements. Generally speaking, such debt is payable on a demand basis. At this time the companies believe they will be able to negotiate LOC extensions and/or fix the interest rates of unsupported bonds so as to avoid such a situation. PSNH has a first mortgage bond maturity of $170 million, plus accrued interest, on May 14, 1998. PSNH expects to meet that maturity with cash on hand and a borrowing under a revolving credit agreement. PSNH is negotiating with banks the terms under which PSNH's current $125 million revolving credit agreement will be restructured, in part by the provision of first mortgage bonds and accounts receivables as collateral, in part by reducing the amount of commitments to $75 million from $100 million, and in part by adjusting the pricing terms. In addition, $229 million of PSNH LOCs mature on May 1, 1998. PSNH proposes to convert approximately half of the pollution control bonds to which those LOCs relate from floating rate mode to fixed rate mode, thereby eliminating the need for LOCS on that portion. PSNH is negotiating with banks the terms under which LOCs for the balance will be renewed, expected to be in part by adding accounts receivables as collateral and in part by adjusting the pricing terms. In December 1997 and January 1998, Moody's Investors Service (Moody's) and Standard & Poor's (S&P) downgraded the senior secured debt of CL&P, WMECO and NU, as well as the preferred stock of CL&P and WMECO. All NU System securities remain under review for further downgrade. This was the fourth time Moody's and S&P have downgraded CL&P and WMECO securities since the Millstone units went on the NRC watch list in 1996. All of the System's securities are rated below investment grade. Rating agency downgrades generally increase the future cost of borrowing funds because lenders will want to be compensated for increased risk and also affect the terms and ability of the System companies to extend existing agreements. See "Financing Limitations" regarding the effect of downgrades on specific System financing arrangements. FINANCING LIMITATIONS Many of the System companies' charters and borrowing facilities contain financial limitations that must be satisfied before borrowings can be made and for outstanding borrowings to remain outstanding. To date, CL&P, PSNH, WMECO and NAEC have satisfied all financial covenants required under their respective borrowing facilities, but NU, CL&P and WMECO needed and obtained waivers of interest coverage covenants and renegotiated covenant levels for certain agreements, as described below. Under the Revolving Credit Agreement, CL&P and WMECO are prohibited from incurring additional debt unless they are able to demonstrate, on a pro forma basis for the prior quarter and going forward, that their equity ratios will be at least 31 percent of their total capitalization through December 31, 1997 and 32 percent thereafter. At December 31, 1997, CL&P'S and WMECO's common equity ratios were 31.4 percent and 33.1 percent, respectively. The Revolving Credit Agreement also requires, beginning in the fourth quarter of 1997, each of CL&P and WMECO to demonstrate that its quarterly ratio of operating income to interest expense will be at least 1.25 to 1 through December 31, 1997; 1.50 to 1 for the quarters ended March 31, 1998 and June 30, 1998; 2.00 to 1 for the quarter ended September 30, 1998; and 2.50 to 1 at the end of each quarter thereafter. For the quarter ended December 31, 1997, CL&P's and WMECO's interest coverage ratios were 1.79 to 1 and 1.39 to 1, respectively. PSNH and NAEC are parties to a variety of financing agreements providing that the credit thereunder can be terminated or accelerated if they do not maintain specified minimum ratios of common equity to capitalization (as defined in each agreement). For PSNH, the minimum common equity ratio in a letter of credit agreement and in a revolving credit agreement is not less than 30 percent. At December 31, 1997, PSNH's common equity ratio was 43.0 percent. For NAEC, the minimum common equity ratio required under its term loan agreement is 25 percent; at December 31, 1997, NAEC's common equity ratio was 30.7 percent. In addition, PSNH's revolving credit agreement requires that for PSNH to obtain and maintain borrowings thereunder, it must demonstrate that its ratio of operating income to interest expense will be at least 1.75 to 1 at the end of each fiscal quarter for the remaining term of the agreement. The NAEC term loan agreement requires a ratio of adjusted net income to interest expense of 1.35 to 1 through December 31, 1997 and 1.50 to 1 thereafter. For the 12-month period ended December 31, 1997 the corresponding ratios for PSNH and NAEC, respectively, were 4.38 to 1 and 1.79 to 1, respectively. In addition, PSNH and NAEC are parties to a variety of financing agreements providing in effect that the credit thereunder can be terminated or accelerated if there are actions taken, either by PSNH or NAEC or by the State of New Hampshire, that deprive PSNH and/or NAEC of the benefits of the Rate Agreement and/or the Seabrook Power Contracts. The amounts of short-term borrowings that may be incurred by NU, CL&P, PSNH, WMECO, HWP and NAEC are also subject to periodic approval by the SEC under the 1935 Act. The following table shows the amount of short-term borrowings authorized by the SEC for each company as of January 1, 1998 and the net amounts of outstanding short-term debt and cash investments of those companies at the end of 1997 and as of February 28, 1998: Short-Term Debt Maximum Authorized Outstanding Short-Term Debt and (Cash Investments)* 12/31/97 2/28/98 (Millions) NU.................. $200 $ (34) $ (28) CL&P ............... 375 96 123 PSNH ............... 125 (94) (131) WMECO............... 150 29 38 HWP................. 5 (9) (9) NAEC................ 60 10 (14) OTHER............... n/a (77) (81) Total $ (79) $(101) * These columns include borrowings of or cash investments by various System companies from NU and other System companies. Total System short-term indebtedness to unaffiliated lenders was $50 million at December 31, 1997 and $125 million at February 28, 1998. The supplemental indentures under which NU issued $175 million in principal amount of 8.58 percent amortizing notes in December 1991 and $75 million in principal amount of 8.38 percent amortizing notes in March 1992 contain restrictions on dispositions of certain System companies' stock, limitations of liens on NU assets and restrictions on distributions on and acquisitions of NU stock. Under these provisions, NU, CL&P, PSNH and WMECO may not dispose of voting stock of CL&P, PSNH or WMECO other than to NU or another System company, except that CL&P may sell voting stock for cash to third persons if so ordered by a regulatory agency so long as the amount sold is not more than 19 percent of CL&P's voting stock after the sale. The restrictions also generally prohibit NU from pledging voting stock of CL&P, PSNH or WMECO or granting liens on its other assets in amounts greater than five percent of the total common equity of NU. As of December 31, 1997, no NU debt was secured by liens on NU assets. Finally, NU may not declare or make distributions on its capital stock, acquire its capital stock (or rights thereto), or permit a System company to do the same, at times when there is an event of default under the supplemental indentures under which the amortizing notes were issued. The charters of CL&P and WMECO contain preferred stock provisions restricting the amount of unsecured debt those companies may incur. As of December 31, 1997, CL&P's and WMECO's charters permit CL&P and WMECO to incur an additional $450 million and $114 million, respectively, of unsecured debt. In connection with NU's acquisition of PSNH, the DPUC imposed certain financial conditions intended to prevent NU from relying on CL&P resources if the PSNH acquisition strained NU's financial condition. The principal conditions provide for a DPUC review if CL&P's common equity falls to 36 percent or below, require NU to obtain DPUC approval to secure NU financings with CL&P stock or assets and obligate NU to use its best efforts to sell CL&P preferred or common stock to the public if NU cannot meet CL&P's need for equity capital. If, at any time, CL&P projects that its common equity ratio as of the end of the next fiscal quarter will be below 36%, or plans to take any action that will result or can reasonably be expected to result in reducing the above ratio below 36%, then CL&P is required to notify the DPUC in writing at least 45 days before such action is taken or event is anticipated to occur. The DPUC may conduct a proceeding after its receipt of CL&P's notice. CL&P did not meet this condition as of June 30, 1997, and notified the DPUC in accordance with the foregoing requirement. The DPUC acknowledged receipt of the notice and has taken no further action. While not directly restricting the amount of short-term debt that CL&P, WMECO, HWP, RRR and NU may incur, the revolving credit agreements to which CL&P, WMECO, HWP, RRR and NU are parties provide that the lenders are not required to make additional loans, and that the maturity of indebtedness can be accelerated, if NU (on a consolidated basis) does not meet a common equity ratio test that requires, in effect, that NU's consolidated common equity (as defined) be not less than 30 percent for any three consecutive fiscal quarters. At December 31, 1997, NU's common equity ratio was 33.4 percent. The indentures securing the outstanding first mortgage bonds of CL&P, PSNH, WMECO and NAEC provide that additional bonds may not be issued, except for certain refunding purposes, unless earnings (as defined in each indenture and before income taxes, and, in the case of PSNH, without deducting the amortization of PSNH's regulatory asset), are at least twice the pro forma annual interest charges on outstanding bonds and certain prior lien obligations and the bonds to be issued. CL&P and WMECO's 1997 earnings do not permit them to meet those earnings coverage tests, but as of February 28, 1998, CL&P and WMECO would be able to issue up to $145 million and $4 million of additional first mortgage bonds, respectively, on the basis of previously issued but refunded bonds, without having to meet the earnings coverage test. These amounts will decrease after CL&P and WMECO have issued additional first mortgage bonds to secure borrowings under the NBFT discussed above under "1998 Financing Plans." Because WMECO has limited available bonding capacity to secure its obligations under the NBFT, WMECO will reduce its borrowing limit by approximately $5 million under the Revolving Credit Agreement, which will result in the release of an equivalent amount of collateral bonds that secure the Revolving Credit Agreement. The preferred stock provisions of CL&P's, PSNH's and WMECO's charters also prohibit the issuance of additional preferred stock (except for refinancing purposes) unless income before interest charges (as defined and after income taxes and depreciation) is at least 1.5 times the pro forma annual interest charges on indebtedness and the annual dividend requirements on preferred stock that will be outstanding after the additional stock is issued. CL&P and WMECO are currently unable to issue additional preferred stock under these provisions. SEC rules under the 1935 Act require that dividends on NU's shares be based on the amount of dividends received from subsidiaries, not on the undistributed retained earnings of subsidiaries. NU suspended the payment of dividends beginning with the quarter ended June 30, 1997. The supplemental indentures under which CL&P's and WMECO's first mortgage bonds and the indenture under which PSNH's first mortgage bonds have been issued limit the amount of cash dividends and other distributions these subsidiaries can make to NU out of their retained earnings. As of December 31, 1997, WMECO had $28.7 million and PSNH had $170.1 million of unrestricted retained earnings. As of the same date, CL&P had an accumulated deficit of approximately $154 million that must be made up before it is able to pay dividends to NU. The indenture under which NAEC's Series A Bonds have been issued also limits the amount of cash dividends or distributions NAEC can make to NU to retained earnings plus $10 million. At December 31, 1997, approximately $68.7 million was available to be paid under this provision. PSNH's revolving credit agreement prohibits it from declaring or paying any cash dividends or distributions on any of its capital stock, except for dividends on the preferred stock, unless minimum interest coverage and common equity ratio tests are satisfied. PSNH's preferred stock provisions also limit the amount of cash dividends and other distributions PSNH can make to NU if after taking the dividend or other distribution into account, PSNH's common stock equity is less than 25 percent of total capitalization. At December 31, 1997, approximately $170.1 million was available to be paid under these provisions. If NAEC could not meet the common equity covenant referred to above, it would also be unable to pay common dividends. At December 31, 1997, $68.7 million was available to be paid under this provision. Certain System financing agreements also have covenants or trigger events tied to credit ratings of certain System companies. The downgrade by Moody's of WMECO's first mortgage bonds to Ba2 in December 1997 brought those ratings to a level at which the sponsor of WMECO's accounts receivable program can take various actions, in its discretion, which would have the practical effect of limiting WMECO's ability to utilize the facility. The WMECO accounts receivable program could be terminated if WMECO's first mortgage bond credit ratings experience one more level of downgrade. CL&P's accounts receivables program could be terminated if its senior secured debt is downgraded two more steps from its current ratings. As the result of the downgrades of CL&P's and WMECO's senior secured debt to below investment grade in the Spring of 1997, NNECO is required under the terms of its note agreement relating to $24.1 million of notes to make a series of four equal annual prepayments to the noteholder that effectively result in the notes being fully repaid by May 2000. NNECO made its first prepayment in May 1997. At December 31, 1997, there were approximately $18 million of these notes outstanding. RRR is the obligor under financing arrangements for office facilities at the System's Berlin (Connecticut) headquarters. Under those financing arrangements, the holders of $38 million of notes requested the repurchase of the notes in April 1997. Of the $38 million, RRR reacquired and retired $26 million of the notes and the remaining $12 million of the notes were sold to alternate purchasers during the second and third quarters of 1997. Under the repurchase agreements, the new noteholders are entitled to request repurchase of the notes if the senior secured debt of a major subsidiary (as defined) is rated below B1 by Moody's and B+ by S&P. The notes are secured by real estate leases between RRR and NUSCO, which provide for the acceleration of rent equal to RRR's note obligations if RRR is unable to pay, and NU has guaranteed the notes. Rent was accelerated for the $26 million of repurchased notes. For information regarding the effect of downgrades on certain fossil-fuel hedging agreements of CL&P, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." ELECTRIC OPERATIONS DISTRIBUTION AND LOAD The System companies traditionally have owned and operated a fully integrated electric utility business. Restructuring legislation in Massachusetts, however, requires WMECO to separate the distribution, transmission and generation functions of its business. Similar initiatives have been proposed in New Hampshire and Connecticut. The System companies' retail service territories cover approximately 11,335 square miles (4,400 in CL&P's service area, 5,445 in PSNH's service area and 1,490 in WMECO's service area) and have an estimated total population of approximately 4.1 million (2.5 million in Connecticut, 1 million in New Hampshire and 600,000 in Massachusetts). The companies furnish retail franchise service in 149, 198 and 59 cities and towns in Connecticut, New Hampshire and Massachusetts, respectively. In December 1997, CL&P furnished retail franchise service to approximately 1.1 million customers in Connecticut, PSNH provided retail service to approximately 400,000 customers in New Hampshire and WMECO served approximately 195,000 retail franchise customers in Massachusetts. HWP serves 33 retail customers in Holyoke, Massachusetts. The following table shows the sources of 1997 electric revenues based on categories of customers: CL&P PSNH** WMECO NAEC Total System Residential................ 41.8% 30.8% 37.6% - 38.3% Commercial................. 35.9 25.5 33.0 - 32.8 Industrial................. 12.7 15.6 19.4 - 14.2 Wholesale*................. 8.1 27.5 8.7 100.0% 13.5 Other...................... 1.5 .6 1.3 - 1.2 Total......................100.0% 100.0% 100.0% 100.0% 100.0% * Includes capacity sales and sales from PSNH to CL&P and WMECO. ** Excludes sales related to the retail pilot program in New Hampshire. NAEC's 1997 electric revenues were derived entirely from sales to PSNH under the Seabrook power contracts. See "Rates--New Hampshire Retail Rates--- Seabrook Power Contracts" for a discussion of the contracts. Through December 31, 1997, the all-time peak demand on the System was 6,456 MW, which occurred on July 15, 1997. At the time of the peak, the System's generating capacity, including capacity purchases, was 8,570 MW. System energy requirements were met in 1997 and 1996 as set forth below: Source 1997 1996 Nuclear .................................... 13% 28% Oil ...................................... 28 12 Coal ....................................... 13 11 Hydroelectric .............................. 4 5 Natural gas ............................... 7 3 NUGs .................................... 14 13 Purchased-power........................ 21 28 100% 100% The actual changes in retail kWh sales for the last two years and the forecasted sales growth estimates for the ten-year period 1997 through 2007, in each case exclusive of wholesale sales, non-franchised retail sales and sales related to the retail pilot program in New Hampshire, for the System, CL&P, PSNH and WMECO are set forth below: 1997 over 1996 over Forecast 1997-2007 1996 1995 Compound Rate of Growth System....... (.3)% 1.6% 1.4% CL&P........... .0 % 1.8% 1.2% PSNH........... (.1)% .4% 2.0% WMECO.......... (1.0)% 2.7% .7% Retail sales fell by .3 percent in 1997 compared with 1996 primarily due to mild weather. The warmer than normal weather in the first quarter of 1997 had the greatest impact on residential electric sales, which were down by 1.1 percent. Commercial sales were up by .7 percent for the year and industrial sales decreased by .3 percent. Retail sales at CL&P were essentially flat in 1997, while WMECO retail sales decreased by 1 percent. PSNH's retail sales decreased by .1 percent in 1997, partly due to a retail pilot program in New Hampshire. The System also acts as both a buyer and a seller of electricity in the highly competitive wholesale electricity market in the Northeastern United States (Northeast). Although revenues from long-term contracts have been declining, wholesale revenues of $319 million in 1997 were approximately the same as 1996 as a result of new contracts entered into in recent years and are expected to be remain constant in 1998. The System's most important wholesale market at this time remains New England. The opportunity for any significant new wholesale market opportunities remain limited due to continuing uncertainty associated with electric industry restructuring. With the System's generating capacity of 7,861 MW as of January 1, 1998 (including the net of capacity sales to and purchases from other utilities, and approximately 640 MW of capacity purchased from NUGs under existing contracts), the System expects to have a sufficient amount of capacity to meet its projected 1998 peak load obligations. The System companies operate and dispatch their generation as provided in the NEPOOL Agreement. In 1997, the peak demand on the NEPOOL system was 20,569 MW in July, which was 1062 MW above the 1996 peak load of 19,507 MW in August of that year. NEPOOL has projected that there will be an increase in demand in 1998 and estimates that the summer 1998 peak load could reach 22,080 MW. While management expects Millstone 3 to be operating during the summer of 1998, even if Millstone 3 is not operational at any time during the 1998 summer season, management expects that the System and NEPOOL will have sufficient capacity to meet peak load demands for New England, so long as the remaining generating units and transmission systems in Connecticut and the New England region have normal operability. If high levels of unplanned outages in New England were to occur, or if any of the System's transmission lines used to import power from other states were unavailable, or any significant amount of imported generating resources are not available at times of peak load demand, NU and the other New England utilities may have to resort to operating procedures designed to reduce load. During 1997, the System spent approximately $58 million to ensure adequate capacity availability, of which $40 million was expensed. In 1998, the System companies do not anticipate needing to take additional measures to ensure adequate generating capacity. In addition to these costs, CL&P and WMECO incurred, and will incur, additional costs in 1997 and 1998 as a result of the capacity deficiency under the NEPOOL Agreement, which is discussed more fully below under "Regional and System Coordination." REGIONAL AND SYSTEM COORDINATION The System companies and most other New England utilities are parties to an agreement (NEPOOL Agreement), which provides for coordinated planning and operation of the region's generation and transmission facilities. The NEPOOL Agreement was restated and revised as of March 1, 1997 to provide for a pool- wide open access transmission tariff and for the creation of an Independent System Operator (ISO). Under these new arrangements: (i) the ISO, a non-profit corporation whose board of directors and staff is not controlled by or affiliated with market participants, ensures the reliability of the NEPOOL transmission system, administers the NEPOOL tariff and oversees the efficient and competitive functioning of the regional power market; (ii) the NEPOOL tariff provides for non-discriminatory open access to the regional transmission network at one rate regardless of transmitting distance for all transactions; and (iii) a broader governance structure for NEPOOL and a more open, competitive market structure are established. On June 25, 1997, FERC issued an order that conditionally approved the formation of the ISO to succeed NEPOOL as the operator of the bulk electric power supply system in New England and the transfer of control over FERC- jurisdictional facilities to the ISO by NEPOOL's public utility members. On September 18, 1997, NEPOOL filed an agreement effecting compliance with FERC's ISO order. On October 31, 1997, NEPOOL filed the Fourth Supplement to the NEPOOL Agreement with FERC. The major intent of the filing was to address internal NEPOOL congestion and the use of the external transmission tie lines between New York and New Brunswick, and to provide a transition towards restructuring. This filing would allow NU to retain its current 72 percent use of the New York tie lines on a priority basis through April 1998. In May 1998, NU's priority use at any given time would be reduced from approximately 1000 MW to approximately 600 MW. This priority of 600 MW is gradually reduced to zero by January 2000. If NU requires use of the New York ties above the level discussed above, it would be available from the ISO on a first come, first serve basis at no additional cost as long as the amount requested is actually utilized. Management does not expect the change in its priority arrangements under the NEPOOL Agreement to limit the System's ability to meet its capacity requirements. Pursuant to the NEPOOL Agreement, if a participant is unable to meet its capacity responsibility obligations, the participant is required to purchase capacity through the ISO at a market clearing price as set forth in the NEPOOL Agreement. Management is currently meeting its capacity responsibility while the Millstone units remain shut down through purchased power contracts with other utilities. The cost of these arrangements is approximately $16 million for November 1997 to April 1998. If Millstone 3 and Millstone 2 return to service within their currently estimated restart schedules, the cost of these arrangements from May 1998 to October 1998 are estimated to be approximately $7.5 million. If neither unit returns to service prior to October 1998, the System's costs to meet their capacity responsibility obligations within such period are estimated to be approximately $30 million. There are two agreements that determine the manner in which costs and savings are allocated among the System companies. Under an agreement (NUG&T) among CL&P, WMECO and HWP (Initial System Companies), these companies pool their electric production costs and the costs of their principal transmission facilities. Pursuant to the merger agreement between NU and PSNH, the Initial System Companies and PSNH entered into a ten-year sharing agreement (Sharing Agreement), expiring in June 2002, that provides, among other things, for the allocation of the capability responsibility savings and energy expense savings resulting from a single-system dispatch through NEPOOL. In WMECO's restructuring filing with the DTE on December 31, 1997, WMECO indicated that it expects to withdraw from the NUG&T with FERC's approval in the summer of 1998. This withdrawal is necessary as a result of retail competition in Massachusetts and the divestiture of WMECO's nonnuclear generating plants. It is likely that as retail competition occurs in other states, further changes in the NUG&T will be necessary. The Sharing Agreement will remain in effect pending restructuring changes in Connecticut and New Hampshire. TRANSMISSION ACCESS AND FERC REGULATORY CHANGES In April 1996, FERC issued its final open access rule (Order 888) to promote competition in the electric industry. Order 888 requires, among other things, all public utilities that own, control or operate facilities used for transmitting electric energy in interstate commerce to file an open-access, nondiscriminatory transmission tariff and to take transmission service for their own new wholesale sales and purchases under the open access tariffs. Order 888 also supports full recovery of legitimate, prudent and verifiable wholesale strandable costs, but indicates that FERC will not interfere with state determinations of retail strandable costs. On May 2, 1997, the System companies, along with other parties, filed with the U.S. Court of Appeals an appeal of Order 888, challenging FERC's abdication of its responsibility to ensure uniform recovery of full strandable costs at the wholesale and retail level, including FERC's refusal to endorse strandable costs payments (e.g., exit fees) for customers physically bypassing their former supplier, as well as FERC's imposition of an ordinary negligence standard of liability on transmission providers. In a companion order to Order 888 (Order 889), FERC also required electric utilities to develop and maintain a same-time information system that will give existing and potential transmission users the same access to transmission information that the electric utility enjoys, and required electric utilities to separate transmission from generation marketing functions pursuant to standards of conduct. The System companies are complying with the requirements of Order 889. In 1997, the System companies collected approximately $35 million in incremental transmission revenues from other electric utility generators. FOSSIL FUELS In 1997, 47.4 percent and 38.9 percent of the System's generation was oil and coal-derived, respectively. The System's residual oil-fired generation stations used approximately 11 million barrels of oil in 1997. The System obtained the majority of its oil requirements in 1997 through contracts with several large, independent oil companies. Those contracts allow for some spot purchases when market conditions warrant. Spot purchases represented approximately 35 percent of the System's fuel oil purchases in 1997. The System currently does not anticipate any difficulties in obtaining necessary fuel oil supplies on economic terms. The System has nine generating stations, aggregating approximately 2,800 MW, which can fully or partially burn residual oil, natural gas or coal, as economics, environmental concerns or other factors dictate. Natural gas for CL&P's Devon, Middletown and Montville generating stations is being purchased directly from producers and traders on an interruptible basis and transported through the interstate pipeline system and the local gas distribution companies. Gas for WMECO's and PSNH's stations is being purchased from the respective local distribution companies. The System expects that interruptible natural gas will continue to be available for its dual-fuel electric generating units on economic terms and will continue to economically supplement fuel oil requirements. The System companies obtain their coal through long-term supply contracts and spot purchases. The System companies currently have an adequate supply of coal. Because of changes in federal and state air quality requirements, the System may be required to use lower sulfur coal in its plants in the future. See "Other Regulatory and Environmental Matters--Environmental Regulation Air Quality Requirements." WMECO is not a party to any fuel arrangements that will have a material effect on its ability to auction its nonnuclear generating units. For more information regarding WMECO's restructuring plan, see "Electric Utility Restructuring--Massachusetts Restructuring." NUCLEAR GENERATION GENERAL Certain System companies have ownership interests in four nuclear units, Millstone 1, 2 and 3 and Seabrook 1, and equity interests in four regional nuclear companies (the Yankee Companies) that separately own CY, MY, Vermont Yankee (VY) and Yankee Rowe. System companies operate the three Millstone units and Seabrook 1. Yankee Rowe was permanently removed from service in 1992; CY was permanently removed from service on December 4, 1996, and MY was permanently removed from service on August 6, 1997. CL&P and WMECO own 100 percent of Millstone 1 and 2 as tenants in common. Their respective ownership interests in each unit are 81 percent and 19 percent. CL&P, PSNH and WMECO have agreements with other New England utilities covering their joint ownership as tenants in common of Millstone 3. CL&P's ownership interest in the unit is 52.93 percent, PSNH's ownership interest in the unit is 2.85 percent and WMECO's interest is 12.24 percent. NAEC and CL&P have 35.98 percent and 4.06 percent ownership interests, respectively, in Seabrook. In 1996, one of the joint owners of Millstone 3, Vermont Electric Generation and Transmission Cooperative, Inc. (VEG&T), filed for bankruptcy. The subsequent liquidation resulted in the offering of VEG&T's .035 percent share of Millstone 3 for sale to the joint owners of Millstone 3. None of the non-NU joint owners accepted the offer. CL&P expects to make the necessary regulatory filings to acquire ownership of the VEG&T share in 1998. The Millstone 3 and Seabrook joint ownership agreements provide for pro- rata sharing by the owners of each unit of the construction and operating costs, the electrical output and the associated transmission costs. CL&P and WMECO, through NNECO as agent, operate Millstone 3 at cost, and without profit, under a sharing agreement that obligates them to utilize good utility operating practice and requires the joint owners to share the risk of employee negligence and other risks pro rata in accordance with their ownership shares. The sharing agreement provides that CL&P and WMECO would only be liable for damages to the non-NU owners for a deliberate breach of the agreement pursuant to authorized corporate action. For information regarding lawsuits filed against NU by the non-NU owners of Millstone 3 regarding the sharing agreement and certain arbitration proceedings related to the ongoing Millstone outages, see "Item 3 - Legal Proceedings." CL&P, PSNH, WMECO and other New England electric utilities are the stockholders of the Yankee companies. Each Yankee company owns a single nuclear generating unit. The stockholder-sponsors of each Yankee company are responsible for proportional shares of the operating and decommissioning costs of the respective Yankee company and are entitled to proportional shares of the electrical output in the case of Vermont Yankee (VY), which is the only operating unit of the four Yankee companies set forth below. The relative rights and obligations with respect to the Yankee companies are approximately proportional to the stockholders' percentage stock holdings, but vary slightly to reflect arrangements under which nonstockholder electric utilities have contractual rights to some of the output of particular units. The Yankee companies and CL&P's, PSNH's and WMECO's stock ownership percentages in the Yankee companies are set forth below: CL&P PSNH WMECO System Connecticut Yankee Atomic Power Company (CYAPC) ...... 34.5% 5.0% 9.5% 49.0% Maine Yankee Atomic Power Company (MYAPC) ............ 12.0% 5.0% 3.0% 20.0% Vermont Yankee Nuclear Power Corporation (VYNPC)... 9.5% 4.0% 2.5% 16.0% Yankee Atomic Electric Company (YAEC) ............ 24.5% 7.0% 7.0% 38.5% CL&P, PSNH and WMECO are obligated to provide their percentages of any additional equity capital necessary for VY, but do not expect to need to contribute additional equity capital in the future. CL&P, PSNH and WMECO believe that VY could require additional external financing in the next several years to finance construction expenditures, nuclear fuel and for other purposes. Although the way in which VYAPC would attempt to finance these expenditures, if they are needed, has not been determined, CL&P, PSNH and WMECO could be asked to provide further direct or indirect financial support. CYPAC, YAEC and MYAPC could also request their sponsors to provide future financial support necessary in connection with the decommissioning of their respective units, the level of which support cannot be estimated at this time, but could be material. The operators of Millstone 1, 2 and 3, VY and Seabrook 1 hold full term operating licenses from the NRC and are subject to the jurisdiction of the NRC. The NRC has broad jurisdiction over the design, construction and operation of nuclear generating stations, including matters of public health and safety, financial qualifications, antitrust considerations and environmental impact. The NRC issues 40-year initial operating licenses to nuclear units and NRC regulations permit renewal of licenses for an additional 20-year period. The NRC also has jurisdiction over the decommissioning activities at Yankee Atomic, CY and MY. The NRC also regularly conducts generic reviews of technical and other issues, a number of which may affect the nuclear plants in which System companies have interests. The cost of complying with any new requirements that may result from these reviews cannot be estimated at this time, but such costs could be substantial. For more information regarding recent actions taken by the NRC with respect to the System's nuclear units, see "Electric Operations--- Nuclear Generation--Nuclear Plant Performance and Regulatory Oversight." NUCLEAR PLANT PERFORMANCE AND REGULATORY OVERSIGHT MILLSTONE UNITS Millstone 1, 2 and 3 are located in Waterford, Connecticut, and have license expirations of October 6, 2010, July 31, 2015 and November 25, 2025, respectively, and are currently out of service. These units are presently on the NRC's watch list as Category 3 plants. Plants in this category are required to receive formal NRC commissioners' approval to resume operations. Millstone 1 began a planned refueling and maintenance outage on November 4, 1995. Millstone 2 was shut down on February 21, 1996 as a result of an engineering evaluation that determined that some valves could be inoperable in certain emergency scenarios. On March 30, 1996, Millstone 3 was shut down by NNECO following an engineering evaluation which determined that four safety- related valves would not be able to perform their design function during certain postulated events. Each of these outages has been extended in order to respond to various NRC requests to describe actions taken, including the resolution of specific technical issues and to ensure that future operation of the units will be conducted in accordance with the terms and conditions of their operating licenses, NRC regulations and their Updated Final Safety Analysis Reports. The System also must demonstrate that it maintains an effective corrective action program for Millstone, as required by NRC regulations, to identify and resolve conditions that are adverse to safety or quality. On January 8, 1998, management declared Millstone 3 physically ready for restart, which means that almost all of the restart-required physical work had been completed in the plant. The NRC is currently conducting a series of inspections to determine, among other things, whether the plant has effective leadership and corrective action and employee concerns programs. The Independent Corrective Action Verification Program (ICAVP) (discussed more fully below) must also be completed prior to restart. Management cannot predict when the NRC will allow any of the units to restart, but hopes to return Millstone 3 to service early in the Spring of 1998 and Millstone 2 three to four months after Millstone 3. Millstone 1 is in an extended maintenance status and various options regarding the future of the unit are being considered. Management estimates that it will take approximately six weeks for a unit to reach full power after NRC approval to restart. On August 14, 1996, the NRC issued a confirmatory order establishing the requirement for NNECO to conduct the ICAVP prior to the restart of each of the Millstone units. The confirmatory order requires that an independent, third party team, whose appointment is subject to NRC approval, verify the results of the corrective actions taken to resolve identified design and configuration management issues. ICAVP contractors have been selected for all three units and approved by the NRC. The ICAVP contractor for Millstone 3 is expected to issue a final report in March 1998. The ICAVP contractor for Millstone 2 is estimating that their final report will be available in July. By letter dated January 30, 1998, the NRC described additional criteria that it would use to evaluate the ICAVP and to determine whether the scope of the ICAVP needs to be expanded. On December 10, 1997, the NRC issued NNECO a notice of violation and proposed imposition of civil penalties in the amount of $2.1 million for past violations of NRC requirements at Millstone. Many of these violations were the subject of an enforcement conference in December 1996. The violations date back over a number of years, with the majority occurring before the end of 1996. NNECO has paid the fine. An NRC enforcement conference took place on January 13, 1998 to discuss findings arising from an NRC inspection (safety system functional inspection) conducted in the fall of 1997. The results of this conference are not expected to have a material impact on the System. In addition to the various technical and design basis issues at Millstone, the NRC continues to focus on the System's response to employee concerns at the units. On October 24, 1996, the NRC issued an order that requires NNECO to develop and implement a comprehensive plan for handling safety concerns raised by Millstone employees and for assuring an environment free from retaliation and discrimination. The NRC also ordered NNECO to contract for an independent third party to oversee the implementation of the comprehensive plan. The members of the independent third-party organization must not have had any direct previous involvement with activities at Millstone and must be approved by the NRC. Oversight by the third-party group will continue until NNECO demonstrates, by performance, that the conditions leading to this order have been corrected. This oversight role will continue after the units have been restarted. NNECO submitted to the NRC its comprehensive employee concerns plan (ECP) and its selection of the third-party oversight organization, which was subsequently approved by the NRC during 1997. The third party organization developed and submitted an oversight plan to the NRC. The third party organization provides a public report on its findings at least quarterly, consistent with the provisions of the order and has reported that while NNECO has shown improvement in this area, there still needs to be more progress. The NRC has indicated similar findings at the conclusion of a two week onsite review of NNECO's ECP and safety conscious work environment. On March 7, 1997, the NRC issued a letter to NNECO confirming NNECO's commitment to evaluate and correct problems identified within its licensed operator training programs at Millstone and CY. On June 27, 1997, NNECO temporarily suspended all nuclear training programs at Millstone to address programmatic deficiencies identified by NNECO and NRC inspectors during reviews of the System's licensed operator training programs at Millstone and CY. On October 31, 1997, NNECO indicated in writing to the NRC that its commitments under this letter were complete. For information regarding criminal investigations by the NRC's Office of Investigations (OI) and the Office of the U. S. Attorney for the District of Connecticut related to various matters at Millstone and CY, certain citizens' petitions related to NU's nuclear operations and potential joint owner litigation related to the extended outages, see "Item 3. Legal Proceedings." SEABROOK Seabrook 1, a 1148-MW pressurized-water reactor, has a license expiration date of October 17, 2026. The Seabrook operating license expires 40 years from the date of issuance of authorization to load fuel, which was about three and one-half years before Seabrook's full-power operating license was issued. The System will determine at the appropriate time whether to seek recapture of some or all of this period from the NRC and thus add up to an additional three and one-half years to the operating term for Seabrook. On June 28, 1997, Seabrook completed a 50-day planned refueling and maintenance outage. In 1997, Seabrook operated at a capacity factor of 78.3 percent. On December 5, 1997, Seabrook was shut down to repair leaks in a three inch stainless steel pipe in the residual heat removal system. The pipe was replaced, but problems were subsequently discovered in the control building air conditioning system. Design changes were implemented and the plant returned to service on January 16, 1998. YANKEE UNITS CONNECTICUT YANKEE CY, a 582-MW pressurized-water reactor, had a full term operating license, which would have expired on June 29, 2007. On December 4, 1996, the Board of Directors of CYAPC voted unanimously to retire CY. The decision to shut down CY was based on economic analyses that showed that shutting down the unit prematurely and incurring replacement power costs could produce potential savings to its purchasers compared to the costs of operating it over the remaining period of the unit's operating license. CYAPC has undertaken a number of regulatory filings intended to implement the decommissioning. Based upon FERC regulatory precedent, CYAPC believes it will be allowed to continue to collect from its power purchasers, including CL&P, WMECO and PSNH, CYAPC's decommissioning costs, the owners' unrecovered investments in CYAPC, and other costs associated with the permanent closure of the plant over the remaining period of its NRC operating license. Management in turn expects that CL&P, WMECO and PSNH will continue to be allowed to recover such FERC-approved costs from their customers. The current estimate of the sum of remaining future payments for the closing, decommissioning and recovery of the remaining investment in CY is approximately $619.9 million. The System's share of these remaining estimated costs is approximately $303.7 million. For more information regarding CYAPC's revised decommissioning estimate that was submitted to FERC in December 1996 and the proceedings related thereto, see "Decommissioning" below. As confirmed by the NRC in a letter dated March 4, 1997, CYAPC has agreed to take various steps to resolve deficiencies and weaknesses in the radiation protection program at CY. The NRC is continuing to monitor this issue at CY. It is expected that dismantlement at the unit will not begin until CYAPC has met its obligations under this letter. MAINE YANKEE MY, a 870-MW pressurized-water reactor, had an operating license, which would have expired on October 21, 2008. On August 6, 1997, the board of directors of MYAPC voted unanimously to retire MY. On January 14, FERC released an order on the MYAPC application to amend its power contracts with the owner/purchasers in order to revise its decommissioning and other charges. FERC has accepted the proposed application for filing, and made the amendments and the proposed charges under the contracts effective on January 15, 1998 subject to refund after hearings. At December 31, 1997, the estimated remaining obligation, including decommissioning, amounted to approximately $867.2 million, of which the NU system's share was approximately $173.4 million. Under the terms of the contracts with MYAPC, the shareholders-sponsor companies, including CL&P, PSNH and WMECO, are responsible for their proportionate share of the costs of the unit, including decommissioning. Based on FERC precedent, management expects that CL&P, PSNH and WMECO will be allowed to recover these costs from their customers. For more information regarding MYAPC's revised decommissioning estimate and the FERC proceedings related thereto, see "Decommissioning" below. VERMONT YANKEE VY, a 514-MW boiling water reactor, has a license expiration date of March 21, 2012. In 1997, VY operated at a capacity factor of 91.7 percent. VY is scheduled to begin a 56-day planned refueling and maintenance outage on September 28, 1998. YANKEE ROWE In 1992, YAEC's owners voted to shut down Yankee Rowe permanently based on an economic evaluation of the cost of a proposed safety review, the reduced demand for electricity in New England, the price of alternative energy sources and uncertainty about certain regulatory requirements. The power contracts between CL&P, PSNH, WMECO and other owners, and YAEC, permit YAEC to recover from each its proportional share of the Yankee Rowe shutdown and decommissioning costs. For more information regarding the decommissioning of Yankee Rowe, see "Decommissioning" below. NUCLEAR INSURANCE Nuclear plant licensees are required to maintain a minimum of $1.06 billion in nuclear property and decontamination insurance coverage. The NRC requires that proceeds from the policy following an accident that exceed $100 million will first be applied to pay stabilization and decontamination expenses. The insurance carried by the licensees of the Millstone units, Seabrook 1, CY, MY and VY meets the NRC's requirements. YAEC has obtained an exemption for Yankee Rowe from the $1.06 billion requirement and currently carries $25 million of insurance that otherwise meets the requirements of the rule. CYAPC has applied for a similar exemption, and MYAPC is expected to do the same. For more information regarding nuclear insurance, see "Commitments and Contingencies--- Nuclear Insurance Contingencies" in the notes to NU's, CL&P's, PSNH's, WMECO's and NAEC's financial statements. NUCLEAR FUEL The supply of nuclear fuel for the System's existing units requires the procurement of uranium concentrates, followed by the conversion, enrichment and fabrication of the uranium into fuel assemblies suitable for use in the System's units. Fuel may also be purchased at a point after any of the above processes are completed. The majority of the System companies' uranium enrichment services requirements is provided under a long-term contract with the United States Enrichment Corporation (USEC), a wholly owned United States government corporation. The majority of Seabrook's uranium enrichment services requirements is furnished through a Russian trading company (Global Nuclear Services and Supply). The System expects that uranium concentrates and related services for the units operated by the System and for the other units in which the System companies are participating, that are not covered by existing contracts, will be available for the foreseeable future on reasonable terms and prices. In August 1995, NAESCO filed a complaint in the United States Court of Federal Claims challenging the propriety of the prices charged by the USEC for uranium enrichment services procured for Seabrook Station in 1993. The complaint is an appeal of the final decision rendered by the USEC contracting officer denying NAESCO's claims, which range from $2.5 million to $5.8 million. On December 17, 1997, the court granted the government's motion to dismiss NAESCO's claims. As a result of the Energy Policy Act, the United States commercial nuclear power industry is required to pay the United States Department of Energy (DOE), through a special assessment, for the costs of the decontamination and decommissioning of uranium enrichment plants owned by the United States government, no more than $150 million per annum for 15 years beginning in 1993. Each domestic nuclear utility's payment is based on its pro rata share of all enrichment services received by the United States commercial nuclear power industry from the United States government through October 1992. Each year, the DOE adjusts the annual assessment using the Consumer Price Index. The Energy Policy Act provides that the assessments are to be treated as reasonable and necessary current costs of fuel, which costs shall be fully recoverable in rates in all jurisdictions. The System's remaining share to be recovered, assuming no escalation, is approximately $63.7 million as of December 31, 1997. Management believes that the DOE assessments against CL&P, WMECO, PSNH and NAEC will be recoverable in future rates. Accordingly, each of these companies has recognized these costs as a regulatory asset, with a corresponding obligation on its balance sheet. In June 1995, the United States Court of Federal Claims held that, as applied to YAEC, the Uranium Enrichment Decontamination and Decommissioning Fund is an unlawful add-on to the bargained-for contract price for enriched uranium. As a result, the federal government must refund the approximately $3.0 million that YAEC has paid into the fund since its inception. On May 6, 1997, the United States Court of Appeals for the Federal Circuit issued a 2-1 panel decision reversing the Court of Federal Claims' decision. YAEC filed a motion for rehearing with the Appeals Court, which was denied, and subsequently filed a petition with the U.S. Supreme Court to consider its appeal. NU is evaluating the applicability of this decision to the $25.2 million that the System companies have already paid into the fund and whether this alters the System companies' obligation to pay such special assessments in the future. Nuclear fuel costs associated with nuclear plant operations include amounts for disposal of spent nuclear fuel. The System companies include in their nuclear fuel expense spent fuel disposal costs accepted by the DPUC, NHPUC and DTE in rate case or fuel adjustment decisions. Spent fuel disposal costs also are reflected in FERC-approved wholesale charges. HIGH-LEVEL RADIOACTIVE WASTE The Nuclear Waste Policy Act of 1982 (NWPA) provides that the federal government is responsible for the permanent disposal of spent nuclear reactor fuel (SNF) and high-level waste. As required by the NWPA, electric utilities generating SNF and high-level waste are obligated to pay fees into a fund which would be used to cover the cost of siting, constructing, developing and operating a permanent disposal facility for this waste. The System companies have been paying for such services for fuel burned on or after April 7, 1983 on a quarterly basis since July 1983. The DPUC, NHPUC and DTE permit the fee to be recovered through rates. For nuclear fuel used to generate electricity prior to April 7, 1983 (prior-period fuel), payment must be made prior to the first delivery of spent fuel to the DOE. The DOE's current estimate for an available site is 2010. For more information regarding payments related to the prior- period fuel, see "Spent Nuclear Fuel Disposal Costs" in the notes to NU's, CL&P's, PSNH's, WMECO's and NAEC's financial statements. In return for payment of the fees prescribed by the NWPA, the federal government is to take title to and dispose of the utilities' high-level wastes and SNF. On March 3, 1997, CYAPC, NAESCO and NUSCO intervened as parties in a lawsuit brought by 35 nuclear utilities in the U.S. Court of Appeals for the District of Columbia Circuit on January 31, 1997, seeking additional action based on the DOE's assertion that it expects to be unable to begin acceptance of SNF for disposal by January 31, 1998 as specified under the NWPA. On May 8, 1997, pursuant to a court order, the petitioners and intervenors requested that the court compel DOE to begin accepting spent fuel on or before January 31, 1998 or to implement various other remedies. On November 14, 1997, the court issued its decision on the petitions. The court declined to order DOE to begin disposing of SNF by the statutory deadline of January 31, 1998, finding that the standard contract with DOE and each utility provides a potentially adequate remedy if DOE fails to fulfill its obligations by that date. However, the court's ruling also forecloses DOE from arguing that the delay in the high-level waste program was "unavoidable" in any future breach of contract actions brought by utilities against DOE. On December 29, 1997, DOE petitioned the court to reconsider its decision, arguing that the U. S. Court of Appeals lacks jurisdiction over an issue which only concerns contractual matters. Subsequent to DOE's failure to begin accepting spent fuel for disposal on January 31, 1998, a number of states, public utility commissions and utilities took additional legal action against DOE. On February 24, 1998, NUSCO, NAESCO and CYAPC joined the lawsuit that had been filed by the other utilities. On February 18, 1998, YAEC filed a complaint against DOE in the United States Court of Federal Claims seeking damages in excess of $70 million resulting from DOE's failure to accept spent nuclear fuel for disposal. CYAPC filed a similar complaint in the United States Court of Federal Claims on March 4, 1998, seeking damages of over $90 million. Until the federal government begins accepting nuclear waste for disposal, nuclear generating plants will need to retain high-level waste and spent fuel onsite or make some other provisions for their storage. With the addition of new storage racks, storage facilities for Millstone 3 are expected to be adequate for the projected life of the unit. With the implementation of currently planned modifications, the storage facilities for Millstone 1 and 2 are expected to be adequate (maintaining the capacity to accommodate a full-core discharge from the reactor) until 2004. Fuel consolidation, which has been licensed for Millstone 2, could provide adequate storage capability for the projected lives of Millstone 1 and 2. With the current installation of new racks in its existing spent fuel pool, Seabrook is expected to have spent fuel storage capacity until at least 2010. The storage capacity of the spent fuel pool at VY is expected to be reached in 2004 and the available capacity of the pool is expected to be able to accommodate full-core removal until 2001. Adequate storage capacity exists to accommodate all of the SNF at CY, MY and Yankee Rowe until that fuel is removed by the DOE. LOW-LEVEL RADIOACTIVE WASTE The System currently has contracts to dispose its low-level radioactive waste (LLRW) at two privately operated facilities in Clive, Utah, and in Barnwell, South Carolina. Because access to LLRW disposal may be lost at any time, the System has plans that will allow for onsite storage of LLRW for at least five years. DECOMMISSIONING Based upon the System's most recent comprehensive site-specific updates of the decommissioning costs for each of the three Millstone units and for Seabrook, the recommended decommissioning method continues to be immediate and complete dismantlement of those units at their retirement. The table below sets forth the estimated Millstone and Seabrook decommissioning costs for the System companies. The estimates are based on the latest site studies, stated in December 31, 1997 dollars. CL&P PSNH WMECO NAEC System (Millions) Millstone 1 $ 390.9 $ - $ 91.7 $ - $482.6 Millstone 2 350.2 - 82.1 - 432.3 Millstone 3 294.0 15.6 67.8 - 377.4 Seabrook 19.2 - - 170.2 189.4 Total $1054.3 $ 15.6 $240.8 $170.2 $1481.7 As of December 31, 1997, the System recorded balances (at market) in its external decommissioning trust funds as follows: CL&P PSNH WMECO NAEC System (Millions) Millstone 1 $173.1 $ - $ 48.2 $ - $221.3 Millstone 2 115.4 - 33.5 - 148.9 Millstone 3 77.8 4.3 21.0 - 103.1 Seabrook 2.9 - - 26.5 29.7 Total $369.2 $ 4.3 $102.7 $26.5 $502.7 In 1986, the DPUC approved the establishment of separate external trusts for the currently tax-deductible portions of decommissioning expense accruals for Millstone 1 and 2 and for all expense accruals for Millstone 3. The DPUC has authorized CL&P to collect its current decommissioning estimate for the three Millstone units from customers. This estimate includes an approximate 19 percent contingency factor for the decommissioning cost of each unit. WMECO has established independent trusts to hold all decommissioning expense collections from customers. The DPU has authorized WMECO to collect its current decommissioning estimate for the three Millstone units. New Hampshire enacted a law in 1981 requiring the creation of a state- managed fund to finance decommissioning of any units in that state. NAEC's costs for decommissioning are billed by it to PSNH and recovered by PSNH under the Rate Agreement. Under the Rate Agreement, PSNH is entitled to a base rate increase to recover increased decommissioning costs. In its recent restructuring orders, the NHPUC determined that PSNH would be allowed to recover decommissioning costs through strandable cost charges. See "Rates--New Hampshire Retail Rates" for further information on the Rate Agreement and restructuring. The decommissioning cost estimates for the System nuclear units are reviewed and updated regularly to reflect inflation and changes in decommissioning requirements and technology. Changes in requirements or technology, or adoption of a decommissioning method other than immediate dismantlement, could change these estimates. CL&P, PSNH and WMECO attempt to recover sufficient amounts through their allowed rates to cover their expected decommissioning costs. Only the portion of currently estimated total decommissioning costs that has been accepted by regulatory agencies is reflected in rates of the System companies. Based on present estimates, and assuming its nuclear units operate to the end of their respective license periods, the System expects that the decommissioning trust funds will be substantially funded when those expenditures have to be made. However, under Connecticut law, an electric company is prohibited from collecting in rates any decommissioning costs after the date of closing the facility unless the DPUC determines (i) that the utility has complied with the decommissioning financing plan under which such costs are incurred and (ii) that there are compelling reasons for including such costs in rates. A committee of the General Assembly may review any such determination not later than thirty days before such rates take effect. For more information regarding this matter, see "Rates--Connecticut Retail Rates." CYAPC, YAEC, VYNPC and MYAPC are all collecting revenues for decommissioning from their power purchasers. The table below sets forth the System companies' estimated share of decommissioning costs (and closure costs where applicable) of the Yankee units. The estimates are based on the latest site studies. For information on the equity ownership of the System companies in each of the Yankee units, see "Electric Operations---uclear Generation--- General." CL&P PSNH WMECO System (Millions) VY $ 48.0 $20.2 $12.6 $ 80.8 Yankee Rowe* 30.5 8.7 8.7 47.9 CY* 213.8 31.0 58.7 303.7 MY* 104.1 43.3 26.0 173.4 Total $396.4 $103.2 $106.0 $605.8 * As discussed more fully below, the costs shown include all of the expected future billings associated with the funding of decommissioning, recovery of remaining assets and other closure costs associated with the early retirement of Yankee Rowe, CY and MY as of December 31, 1997, which have been recorded as an obligation on the books of the System companies. As of December 31, 1997, the System's share of the external decommissioning trust fund balances (at market), which have been recorded on the books of the Yankee Companies, is as follows: CL&P PSNH WMECO System (Millions) VY $ 18.4 $ 7.7 $ 4.8 $ 30.9 Yankee Rowe 32.7 9.4 9.4 51.5 CY 89.8 13.0 24.8 127.6 MY 23.9 10.0 6.0 39.9 Total $164.8 $40.1 $45.0 $249.9 Effective January 1996, YAEC began billing its sponsors, including CL&P, WMECO and PSNH, amounts based on a revised estimate approved by FERC that assumes decommissioning by the year 2000. This revised estimate was based on continued access to the Barnwell, South Carolina, low-level radioactive waste facility, changes in assumptions about earnings on decommissioning trust investments and changes in other decommissioning cost assumptions. CYAPC accrues decommissioning costs on the basis of immediate dismantlement at retirement. In late December 1996, CYAPC made a filing with FERC to amend the wholesale power contracts between the owners of the facility and revise decommissioning cost estimates and other cost estimates for the facility. The amendments clarify the owners' entitlement to full recovery of sunk costs and the ongoing costs of maintaining the plant in accordance with NRC rules until decommissioning begins and ensures that decommissioning will continue to be funded through June 2007, the full license term, despite the unit's earlier shutdown. On February 26, 1997, FERC issued an order accepting the power contract amendments and making them effective March 1, 1997, subject to refund after hearing on the prudence of the decision to retire the plant and the reasonableness of the CY proposal. A number of parties have intervened in this proceeding. In total, the intervenors seek to disallow in excess of $200 million of the amount that CYAPC may collect from its power purchasers for decommissioning. In addition, the intervenors and FERC staff have proposed reductions in CY's currently allowed 11.5 percent return on equity, and certain intervenors have requested that CYAPC not be permitted to recover approximately $245 million of its unamortized investment in CY. The decision in this proceeding is expected in the Spring of 1998. MYAPC also accrues decommissioning costs on the basis of immediate dismantlement at retirement. On January 14, 1998, FERC released a draft order on the MYAPC application to amend its power contracts with the owners/purchasers and revise its decommissioning and other charges. FERC has accepted the proposed application for filing and made the amendments and the proposed charges under the contracts effective on January 15, 1998, subject to refund after hearings. FERC will determine the prudence of MYAPC's decision to retire the plant before it finally determines the justness and reasonableness of MY's proposed amended power contract rates. For information regarding a dispute between the sponsors of MY and a number of municipalities and cooperatives which had purchase agreements with MYAPC, see "Item 3 - Legal Proceedings." For more information regarding nuclear decommissioning, see "Nuclear Decommissioning" in the notes to NU's, CL&P's, PSNH's, WMECO's and NAEC's financial statements. RESOURCE PLANS CONSTRUCTION The System's construction program in the period 1998 through 2002 is estimated as follows: 1998 1999 2000 2001 2002 (Millions) CL&P $165 $283 $278 $310 $296 PSNH 42 61 69 63 68 WMECO 27 49 38 37 35 NAEC 9 10 9 3 5 OTHER 24 22 22 27 26 TOTAL $267 $425 $416 $440 $430 The construction program data shown above includes all anticipated capital costs necessary for committed projects and for those reasonably expected to become committed, regardless of whether the need for the project arises from environmental compliance, nuclear safety, reliability requirements or other causes. The construction program's main focus is maintaining and upgrading the existing transmission and distribution system and nuclear and fossil-generating facilities. The increase in construction expenditures after 1999 are primarily related to projected capital improvements for the distribution system. System companies' construction needs, however, may change substantially in light of its commitment to sell its nonnuclear generating units in Massachusetts and New Hampshire. It is conceivable that the System will no longer construct any new generating facilities, but instead contract with third parties for capacity in a competitive generation market. FUTURE NEEDS Restructuring of the electric industry will have a dramatic effect on the System's long-range planning. While electric utility companies traditionally have been required to meet their franchise customers' long-term electric needs, a company's long-term planning after restructuring will depend on the nature of its particular business. Where the electric company remains in the generation business, such companies will rely on more market-based planning to meet its supply obligations. ENERGY-RELATED BUSINESSES ENERGY PRODUCTS AND SERVICES NU organized NUSCO Energy Partners, Inc. (NEP) in 1996 to engage in the energy services business and in response to the NHPUC's requirement that PSNH's participation in the New Hampshire retail electric competition pilot program take place through an affiliate company. NEP acquired PSNH's retail sales interest in the New Hampshire pilot program in 1996. During 1997, NEP changed its name to Select Energy, Inc. Select Energy is a vehicle for participating in retail pilot programs and open-access retail electric markets in the Northeast and other appropriate areas of the country. In addition, Select Energy develops and markets energy-related products and services in order to enhance its core electric service and customer relationships. These include energy services, productivity services, business and financial services, and residential services. Select Energy continues to take steps to establish strategic alliances with other companies in various energy-related fields including fuel supply and management, power quality, energy efficiency and load management services. PRIVATE POWER DEVELOPMENT The System has participated as a developer and investor in domestic and international private power projects through its subsidiary, Charter Oak. Charter Oak has invested primarily in projects outside of the United States. In March 1997, the NU Board of Trustees approved the offering for sale of Charter Oak and its assets. Since March, three of the five operating projects in which Charter Oak had invested were sold for an aggregate purchase price of $21 million. Charter Oak incurred a loss of approximately $3 million on the three projects which it has sold. The other two projects are being actively marketed; however, NU has recorded a reserve of approximately $25 million against future losses attributed to the sale of these projects. NU had $33.4 million invested in the remaining Charter Oak projects as of December 31, 1997. ENERGY MANAGEMENT SERVICES In 1990, NU organized a subsidiary corporation, HEC, to acquire substantially all of the assets and personnel of a nonaffiliated energy management services company. In general, HEC contracts to reduce its customers' energy costs and/or conserve energy and other resources. HEC also provides DSM consulting services to utilities and others. HEC's energy management and consulting services have primarily been directed to the commercial, industrial and institutional markets and utilities in New England and New York. NU's aggregate equity investment in HEC was approximately $4 million as of December 31, 1997. OTHER REGULATORY AND ENVIRONMENTAL MATTERS ENVIRONMENTAL REGULATION GENERAL The System and its subsidiaries are subject to federal, state and local regulations with respect to water quality, air quality, toxic substances, hazardous waste and other environmental matters. Similarly, the System's major generation and transmission facilities may not be constructed or significantly modified without a review by the applicable state agency of the environmental impact of the proposed construction or modification. Compliance with environmental laws and regulations, particularly air and water pollution control requirements, may limit operations or require substantial investments in new equipment at existing facilities. See "Resource Plans" for a discussion of the System's construction plans. In order to enhance the System's oversight of environmental matters, management introduced a comprehensive energy management system in 1997, which is estimated to cost the System approximately $2 million dollars to implement through 1998. SURFACE WATER QUALITY REQUIREMENTS The federal Clean Water Act (CWA) requires every "point source" discharger of pollutants into navigable waters to obtain a National Pollutant Discharge Elimination System (NPDES) permit from the United States Environmental Protection Agency (EPA) or state environmental agency specifying the allowable quantity and characteristics of its effluent. System facilities have all required NPDES permits in effect. Compliance with NPDES and state water discharge permits has necessitated substantial expenditures, which are difficult to estimate, and may require further expenditures because of additional requirements that could be imposed in the future. For information regarding ongoing criminal investigations by the Office of the U. S. Attorney for the District of Connecticut related to allegations that there were violations of certain facilities' NPDES permits and a related civil lawsuit and investigations related to the Long Island cable, see "Item 3. Legal Proceedings." The Federal Oil Pollution Act of 1990 (OPA 90) sets out the requirements for facility response plans and periodic inspections of spill response equipment at facilities that can cause substantial harm to the environment by discharging oil or hazardous substances into the navigable waters of the United States and onto adjoining shorelines. The System companies are currently in compliance with the requirements of OPA 90. OPA 90 includes limits on the liability that may be imposed on persons deemed responsible for release of oil. The limits do not apply to oil spills caused by negligence or violation of laws or regulations. OPA 90 also does not preempt state laws regarding liability for oil spills. In general, the laws of the states in which the System owns facilities and through which the System transports oil could be interpreted to impose strict liability for the cost of remediating releases of oil and for damages caused by releases. The System currently carries general liability insurance in the total amount of $100 million per occurrence for oil spills. AIR QUALITY REQUIREMENTS The Clean Air Act Amendments of 1990 (CAAA) impose stringent requirements on emissions of sulfur dioxide (SO2) and nitrogen oxide (NOX) for the purpose of controlling acid rain and ground level ozone. In addition, the CAAA address the control of toxic air pollutants. Installation of continuous emissions monitors and expanded permitting provisions also are included. Compliance with CAAA requirements has cost the System approximately $44 million as of December 31, 1997: $10 million for CL&P, $30 million for PSNH, $1 million for WMECO and $3 million for HWP. Compliance costs for additional federal and state NOX control requirements to be effective in 1999 are currently estimated to be approximately $5 million for both CL&P and PSNH. In addition, PSNH expects to spend approximately $2 million a year for SO2 allowances. Existing and future federal and state air quality regulations, including recently proposed regulations, could hinder or possibly preclude the construction of new, or the modification of existing, fossil units in the System's service area and could raise the capital and operating cost of existing units. The ultimate cost impact of these requirements on the System cannot be estimated because of uncertainties about how EPA and the states will implement various requirements of the CAAA. Section 126 of the Clean Air Act provides for parties to request that the EPA take action against emissions sources whose emissions may be atmospherically transported and contribute to nonattainment of the National Ambient Air Quality Standards in other states. In accordance with this, a group of northeastern states filed a petition with EPA in 1997 asking them to take action against a broadly defined group of emissions sources in several midwestern states which are believed to be contributing to the nonattainment of the ozone standard in the Northeast. EPA has deferred specific action on the Section 126 petitions until its call for state implementation plans in the affected states is complete, probably about 2003. A final decision by the EPA could have a significant effect on NOX reduction requirements imposed on System companies after 1999. HAZARDOUS WASTE REGULATIONS As many other industrial companies have done in the past, System companies disposed of residues from operations by depositing or burying such materials on- site or disposing of them at off-site landfills or facilities. Typical materials disposed of include coal gasification waste, fuel oils, gasoline and other hazardous materials that might contain PCBs. It has since been determined that deposited or buried wastes, under certain circumstances, could cause groundwater contamination or create other environmental risks. The System has recorded a liability for what it believes is, based upon currently available information, its estimated environmental remediation costs for waste disposal sites for which the System companies expect to bear legal liability, and continues to evaluate the environmental impact of its former disposal practices. Under federal and state law, government agencies and private parties can attempt to impose liability on System companies for such past disposal. At December 31, 1997, the liability recorded by the System for its estimated environmental remediation costs for known sites needing remediation including those sites described below, exclusive of recoveries from insurance or from third parties, was approximately $16.2 million. These costs could be significantly higher if alternative remedies become necessary. Under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, commonly known as Superfund, EPA has the authority to clean up or order clean up of hazardous waste sites and to impose the clean up costs on parties deemed responsible for the hazardous waste activities on the sites. Responsible parties include the current owner of a site, past owners of a site at the time of waste disposal, waste transporters and waste generators. The System currently is involved in one Superfund site in New Jersey, two in New Hampshire and one in Kentucky, which could have a material impact on the System. The System has committed in the aggregate approximately $1.3 million to its share of the clean up of these sites. As discussed below, in addition to the remediation efforts for the above- mentioned Superfund sites, the System has been named as a potentially responsible party (PRP) and is monitoring developments in connection with several state environmental actions. The level of study of each site and the information about the waste contributed to the site by the System and other parties differs from site to site. Where reliable information is available that permits the System to make a reasonable estimate of the expected total costs of remedial action and/or the System's likely share of remediation costs for a particular site, those cost estimates are provided below. All cost estimates were made in accordance with generally accepted accounting principles where remediation costs were probable and reasonably estimable. In 1987, the Connecticut Department of Environmental Protection (CDEP) published a list of 567 hazardous waste disposal sites in Connecticut. The System owns two sites, in Stamford and Rockville, which are on this list. Both sites were formerly used by CL&P predecessor companies for the manufacture of coal gas (also known as town gas sites) from the late 1800s to the 1950s. Site investigations have been completed at these sites and discussions with state regulators are in progress to address the need for and extent of remediation necessary to protect public health and the environment. The total reserve established for these two sites is $6.5 million. CL&P has also established a reserve of $575,000 in connection with its share of the clean up of a site located in Winsted. CL&P owns a 2.6 mile section of an abandoned railroad bed in Portland. Past studies of portions of the railroad bed have indicated elevated levels of arsenic in the upper two to three feet of soil. A portion of this site was cleaned up in 1997, but the System continues to reserve $275,000 for remediation efforts at the remainder of the site. PSNH contacted New Hampshire Department of Environmental Services (NHDES) in December 1993 concerning possible coal tar contamination in Laconia, New Hampshire, in Lake Opechee and the Winnipesaukee River near an area where PSNH and a second PRP formerly owned and operated a coal gasification plant from the late 1800's to the 1950's. A comprehensive site investigation was completed in December 1996. This study has shown that byproducts from the operation of the former manufactured gas plant are present in groundwater, subsurface soil and in the sediments of the adjacent Winnipesaukee River. A reserve of $4.8 million has been established for this site. Additional studies are planned in 1998 to implement interim remedial measures, assess site risks and develop a remediation plan. Interim cost sharing agreements with a second PRP in which this PRP contributes 25% to the cost of the site investigations are in effect to implement studies in 1998. A second coal gasification facility formerly owned and operated by a predecessor company to PSNH is located in Keene, New Hampshire. The NHDES has been notified of the presence of coal tar and fuel oil contamination. Additional New Hampshire sites include several former manufactured gasification facilities, an inactive ash landfill located at Dover Point and a municipal landfill in Peterborough. Studies of these sites are ongoing. PSNH's liability at these sites is not expected to be material. In Massachusetts, System companies have been designated by the Massachusetts Department of Environmental Protection (MDEP) as a PRP for twelve sites under MDEP's hazardous waste and spill remediation program. At two sites, the System may incur remediation costs that may be material to HWP depending on the remediation requirements. At one site, HWP has been identified by MDEP as one of three PRPs in a coal tar site in Holyoke, Massachusetts. HWP owned and operated the Holyoke Gas Works from 1859 to 1902. The site is located on the east side of Holyoke, adjacent to the Connecticut River and immediately downstream of HWP's Hadley Falls Station. MDEP has designated both the land and river deposit areas as priority waste disposal sites. The PRPs have been notified of the need to remove tar deposits from the river. To date, HWP has spent approximately $1 million for river studies and construction costs related to the site. The total estimated costs for remediation of tar patches in the river range from $2 million to $3 million. HWP has agreed to complete the remediation of tar patches following negotiations of a consent decree with all state and federal regulatory agencies. The second site is a former manufactured gas plant facility in Easthampton, Massachusetts. WMECO predecessor companies owned and operated the Easthampton Gas Works from 1864 to 1924. Previous investigations have identified coal tar deposits on the land portion of the site. An analysis of the human, health and ecological risks at the site and a remedial action plan will be submitted to the MDEP in 1998. WMECO has reserved approximately $1 million for remediation costs for the site. In the past, the System has received other claims from government agencies and third parties for the cost of remediating sites not currently owned by the System but affected by past System disposal activities and may receive more such claims in the future. The System expects that the costs of resolving claims for remediating sites about which it has been notified will not be material, but cannot estimate the costs with respect to sites about which it has not been notified. ELECTRIC AND MAGNETIC FIELDS In recent years, published reports have discussed the possibility of adverse health effects from electric and magnetic fields (EMF) associated with electric transmission and distribution facilities and appliances and wiring in buildings and homes. Most researchers, as well as numerous scientific review panels considering all significant EMF epidemiological and laboratory studies to date, agree that current information remains inconclusive, inconsistent and insufficient for risk assessment of EMF exposures. The most significant scientific study released on EMF in 1997 was the July 3rd New England Journal of Medicine publication of the results of the U.S. National Cancer Institute's (NCI) study of potential associations between residential EMF exposure and childhood acute lymphocytic leukemia (ALL), the most common form of childhood cancer in the United States. The NCI study was the largest of its kind to date, and found "little support for the hypothesis that living in homes with high...average magnetic-field levels or in homes close to electrical transmission or distribution lines is related to risk" of childhood ALL. Based on this information, management does not believe that a causal relationship between EMF exposure and adverse health effects has been established or that significant capital expenditures are appropriate to minimize unsubstantiated risks. The System companies are continuing to closely monitor research and government policy developments. No legislation related to EMF was considered in Connecticut, Massachusetts or New Hampshire in 1997. The System supports further research into the subject and is voluntarily participating in the funding of the ongoing National EMF Research and Public Information Dissemination Program. If further investigation were to demonstrate that the present electricity delivery system is contributing to increased risk of cancer or other health problems, the industry could be faced with the difficult problem of delivering reliable electric service in a cost-effective manner while managing EMF exposures. In addition, if the courts were to conclude that individuals have been harmed and that utilities are liable for damages, the potential monetary exposure for all utilities, including the System companies, could be enormous. Without definitive scientific evidence of a causal relationship between EMF and health effects, and without reliable information about the kinds of changes in utilities' transmission and distribution systems that might be needed to address the problem, if one is found, no estimates of the cost impacts of remedial actions and liability awards are available. CL&P has been the focus of media reports since 1990 charging that EMF associated with a substation and related distribution lines in Guilford, Connecticut, are linked with various cancers and other illnesses in several nearby residents. See "Item 3. Legal Proceedings" for information about two suits brought by plaintiffs who now or formerly lived near that substation. FERC HYDRO PROJECT LICENSING Federal Power Act licenses may be issued for hydroelectric projects for terms of 30 to 50 years as determined by FERC. Upon the expiration of a license, any hydroelectric project so licensed is subject to reissuance by FERC to the existing licensee or to others upon payment to the licensee of the lesser of fair value or the net investment in the project plus severance damages less certain amounts earned by the licensee in excess of a reasonable rate of return. The System companies currently hold FERC licenses for 19 hydroelectric projects aggregating approximately 1,375 MW of capacity, located in Connecticut, Massachusetts and New Hampshire. Both WMECO and PSNH have proposed to auction their hydroelectric projects in the future, with WMECO's auction likely to occur in the first half of 1998. Four of the System licenses expired on December 31, 1993 (WMECO's Gardners Falls project and PSNH's Ayers Island, Smith and Gorham projects). These licenses have all been renewed over the last few years. The license for HWP's Holyoke Project expires in late 1999. On September 3, 1997, HWP filed its application for a new license for the Holyoke Project. On August 29, 1997, a competing application for the project was submitted by the Ashburnham Municipal Light Plant and the Massachusetts Municipal Wholesale Electric Company. The competing application proposes to add an additional 15 MW of generating capacity at the site, as well as additional changes, modifications and improvements to the facility. It is anticipated that the competing license application will be amended to add or substitute the City of Holyoke Gas and Electric Department as a competing applicant. Absent significant differences in the competing license applications the Federal Power Act gives a preference to an existing licensee for the new license. It is not known if the competing license applicants' proposal to add 15 MW of additional capacity and the other proposed changes, modifications and improvements to the Holyoke Project are sufficient to overcome HWP's preference. If the license is awarded to a competing applicant, HWP is entitled to compensation equal to the lesser of book value or fair market value and severance damages pursuant to the Federal Power Act. FERC has established a procedural schedule for preliminary licensing activities, but the time frame for completion of all licensing activities and issuance of a new license has not been established at this time. CL&P's FERC licenses for operation of the Falls Village and Housatonic Hydro Projects expire in 2001. A draft license application is scheduled to be completed in the last quarter of 1998. FERC has issued a notice indicating that it has authority to order project licensees to decommission projects that are no longer economic to operate. The potential costs of decommissioning a project, however, could be substantial. FERC has recently ordered its first project decommissioning under this authority. It is likely that this FERC decision will be appealed. EMPLOYEES As of December 31, 1997, the System companies had 9,015 full and part-time employees on their payrolls, of which 2,163 were employed by CL&P, 1,254 by PSNH, 507 by WMECO, 75 by HWP, 1,647 by NNECO, 2,530 by NUSCO and 839 by NAESCO. NU, NAEC, Charter Oak, Mode 1 and Select Energy have no employees. In December 1996, the System announced a voluntary separation program affecting approximately 1,100 employees. The separations of the 99 participants occurred between April 1, 1997 and March 1, 1998. The estimated cost of the program is approximately $5.8 million. Approximately 2,138 employees of CL&P, PSNH, WMECO, NAESCO and HWP are covered by nine union agreements, which expire between June 1, 1998 and May 31, 1999. ITEM 2. Properties The physical properties of the System are owned or leased by subsidiaries of NU. CL&P's principal plants and other properties are located either on land which is owned in fee or on land, as to which CL&P owns perpetual occupancy rights adequate to exclude all parties except possibly state and federal governments, which has been reclaimed and filled pursuant to permits issued by the United States Army Corps of Engineers. The principal properties of PSNH are held by it in fee. In addition, PSNH leases space in an office building under a 30-year lease expiring in 2002. WMECO's principal plants and a major portion of its other properties are owned in fee, although one hydroelectric plant is leased. NAEC owns a 35.98 percent interest in Seabrook 1 and approximately 560 acres of exclusion area land located around the unit. In addition, CL&P, PSNH, and WMECO have certain substation equipment, data processing equipment, nuclear fuel, gas turbines, nuclear control room simulators, vehicles, and office space that are leased. With few exceptions, the System companies' lines are located on or under streets or highways, or on properties either owned or leased, or in which the company has appropriate rights, easements, or permits from the owners. CL&P's properties and PSNH's properties are subject to the lien of each company's respective first mortgage indenture. In addition, any PSNH outstanding revolving credit agreement borrowings are secured by a second lien, junior to the lien of the first mortgage indenture, on PSNH's property located in New Hampshire. WMECO's properties are subject to the lien of its first mortgage indenture. NAEC's First Mortgage Bonds are secured by a lien on the Seabrook 1 interest described above, and all rights of NAEC under the Seabrook Power Contracts. In addition, CL&P's and WMECO's interests in Millstone 1 are subject to second liens for the benefit of lenders under agreements related to pollution control revenue bonds. Various of these properties are also subject to minor encumbrances which do not substantially impair the usefulness of the properties to the owning company. The System companies' properties are well maintained and are in good operating condition. Transmission and Distribution System At December 31, 1997, the System companies owned 103 transmission and 410 distribution substations that had an aggregate transformer capacity of 25,199,669 kilovoltamperes (kVa) and 9,115,203 kVa, respectively; 3,074 circuit miles of overhead transmission lines ranging from 69 kilovolt (kV) to 345 kV, and 192 cable miles of underground transmission lines ranging from 69 kV to 138 kV; 32,802 pole miles of overhead and 1,999 conduit bank miles of underground distribution lines; and 404,356 line transformers in service with an aggregate capacity of 16,997,000 kVa. Electric Generating Plants As of December 31, 1997, the electric generating plants of the System companies and the System companies' entitlement in the generating plant of the Vermont Yankee regional generating company were as follows (See "Item 1. Business - Electric Operations, Nuclear Generation" for information on ownership and operating results for the year.): Claim Year Capability* Owner Plant Name (Location) Type Installed (kilowatts) CL&P Millstone (Waterford, CT) Unit 1** Nuclear 1970 524,637 Unit 2** Nuclear 1975 708,345 Unit 3** Nuclear 1986 606,453 Seabrook (Seabrook, NH) Nuclear 1990 47,175 VT Yankee (Vernon, VT) Nuclear 1972 45,353 Total Nuclear-Steam Plants (5 units) 1,931,963 Total Fossil-Steam Plants (10 units) 1954-73 1,883,000 Total Hydro-Conventional (25 units) 1903-55 98,970 Total Hydro-Pumped Storage (7 units) 1928-73 937,550 Total Internal Combustion (20 units) 1966-96 567,940 Total CL&P Generating Plant (67 units) 5,419,423 PSNH Millstone (Waterford, CT) Unit 3** Nuclear 1986 32,624 VT Yankee (Vernon, VT) Nuclear 1972 19,068 Total Nuclear-Steam Plants (2 units) 51,692 Total Fossil-Steam Plants (7 units) 1952-78 1,051,538 Total Hydro-Conventional (20 units) 1917-83 69,040 Total Internal Combustion (5 units) 1968-70 103,900 Total PSNH Generating Plant (34 units) 1,276,170 WMECO Millstone (Waterford, CT) Unit 1** Nuclear 1970 123,063 Unit 2** Nuclear 1975 166,155 Unit 3** Nuclear 1986 140,216 VT Yankee (Vernon, VT) Nuclear 1972 11,948 Total Nuclear-Steam Plants (4 units) 441,382 Total Fossil-Steam Plants (1 unit) 1957 107,000 Total Hydro-Conventional (27 units) 1904-34 110,910*** Total Hydro-Pumped Storage (4 units) 1972-73 212,800 Total Internal Combustion (3 units) 1968-69 60,500 Total WMECO Generating Plant (39 units) 932,592 NAEC Seabrook (Seabrook, NH) Nuclear 1990 418,111 HWP Mt. Tom (Holyoke, MA) Fossil-Steam 1960 147,000 Total Hydro-Conventional (15 units) 1905-83 43,560 Total HWP Generating Plant (16 units) 190,560 NU System Millstone (Waterford, CT) Unit 1** Nuclear 1970 647,700 Unit 2** Nuclear 1975 874,500 Unit 3** Nuclear 1986 779.239 Seabrook (Seabrook, NH) Nuclear 1990 465,286 VT Yankee (Vernon, VT) Nuclear 1972 76,369 Total Nuclear-Steam Plants (5 units) 2,843,094 Total Fossil-Steam Plants (19 units) 1952-78 3,188,538 Total Hydro-Conventional (87 units) 1903-83 322,480 Total Hydro-Pumped Storage (7 units) 1928-73 1,150,350 Total Internal Combustion (28 units) 1966-96 732,350 Total NU System Generating Plant Including Vermont Yankee (146 units) 8,236,802 Excluding Vermont Yankee (145 units) 8,160,433 *Claimed capability represents winter ratings as of December 31, 1997. **The numbers shown represent claimed capability at December 31, 1996. Millstone 1, 2, and 3 have been out of service since November 4, 1995, February 21, 1996 and March 30, 1996, respectively. The company has restructured its nuclear organization and is currently implementing comprehensive plans to restart the units. The actual date of the return to service for each of the units is dependent upon the completion of independent inspections and reviews by the Nuclear Regulatory Commission (NRC) and a vote by the NRC Commissioners. NU hopes to return Millstone 3 to service in early spring of 1998 and Millstone 2 three to four months after Millstone 3. Millstone 1 is currently in extended maintenance status. ***Total Hydro-Conventional capability includes the Cobble Mtn. plant's 33,960 kW which is leased from the City of Springfield, MA. Franchises NU's operating subsidiaries hold numerous franchises in the territories served by them. For more information regarding recent judicial, regulatory and legislative decisions and initiatives that may affect the terms under which the System companies provide electric service in their franchised territories, see Item 1. "Business - Electric Industry Restructuring" and "Item 3. Legal Proceedings." CL&P. Subject to the power of alteration, amendment or repeal by the General Assembly of Connecticut and subject to certain approvals, permits and consents of public authority and others prescribed by statute, CL&P has, subject to certain exceptions not deemed material, valid franchises free from burdensome restrictions to sell electricity in the respective areas in which it is now supplying such service. In addition to the right to sell electricity as set forth above, the franchises of CL&P include, among others, rights and powers to manufacture, generate, purchase, transmit and distribute electricity, to sell electricity at wholesale to other utility companies and municipalities and to erect and maintain certain facilities on public highways and grounds, all subject to such consents and approvals of public authority and others as may be required by law. The franchises of CL&P include the power of eminent domain. PSNH. Subject to the power of alteration, amendment or repeal by the General Court (legislature) of the State of New Hampshire and subject to certain approvals, permits and consents of public authority and others prescribed by statute, PSNH has, subject to certain exceptions not deemed material, valid franchises free from burdensome restrictions to sell electricity in the respective areas in which it is now supplying such service. In addition to the right to sell electricity as set forth above, the franchises of PSNH include, among others, rights and powers to manufacture, generate, purchase, transmit and distribute electricity, to sell electricity at wholesale to other utility companies and municipalities and to erect and maintain certain facilities on certain public highways and grounds, all subject to such consents and approvals of public authority and others as may be required by law. The franchises of PSNH include the power of eminent domain. NNECO. Subject to the power of alteration, amendment or repeal by the General Assembly of Connecticut and subject to certain approvals, permits and consents of public authority and others prescribed by statute, NNECO has a valid franchise free from burdensome restrictions to sell electricity to utility companies doing an electric business in Connecticut and other states. In addition to the right to sell electricity as set forth above, the franchise of NNECO includes, among others, rights and powers to manufacture, generate and transmit electricity, and to erect and maintain facilities on certain public highways and grounds, all subject to such consents and approvals of public authority and others as may be required by law. WMECO. WMECO is authorized by its charter to conduct its electric business in the territories served by it, and has locations in the public highways for transmission and distribution lines. Such locations are granted pursuant to the laws of Massachusetts by the Department of Public Works of Massachusetts or local municipal authorities and are of unlimited duration, but the rights thereby granted are not vested. Such locations are for specific lines only, and, for extensions of lines in public highways, further similar locations must be obtained from the Department of Public Works of Massachusetts or the local municipal authorities. In addition, WMECO has been granted easements for its lines in the Massachusetts Turnpike by the Massachusetts Turnpike Authority. Pursuant to the Massachusetts restructuring legislation, the DTE is required to define service territories for each distribution company, including WMECO, based on the service territories actually served on July 1, 1997, and following to the extent possible municipal boundaries. After established by the DTE, until terminated by effect of law or otherwise, the distribution company shall have the exclusive obligation to provide distribution service to all retail customers within its service territory, and no other person shall provide distribution service within such service territory without the written consent of such distribution company. HWP and Holyoke Power and Electric Company (HP&E). HWP, and its wholly owned subsidiary HP&E, are authorized by their charters to conduct their businesses in the territories served by them. HWP's electric business is subject to the restriction that sales be made by written contract in amounts of not less than 100 horsepower, except for municipal customers in the counties of Hampden or Hampshire, Massachusetts and except for customers who occupy property in which HWP has a financial interest, by ownership or purchase money mortgage. HWP also has certain dam and canal and related rights, all subject to such consents and approvals of public authorities and others as may be required by law. The two companies have locations in the public highways for their transmission and distribution lines. Such locations are granted pursuant to the laws of Massachusetts by the Department of Public Works of Massachusetts or local municipal authorities and are of unlimited duration, but the rights thereby granted are not vested. Such locations are for specific lines only and, for extensions of lines in public highways, further similar locations must be obtained from the Department of Public Works of Massachusetts or the local municipal authorities. The two companies have no other utility franchises. NAEC. NAEC is authorized by the NHPUC to own and operate its interest in Seabrook 1. ITEM 3 - LEGAL PROCEEDINGS 1. Litigation Relating to Electric and Magnetic Fields NU and CL&P are currently involved in one lawsuit alleging physical and emotional damages from exposure to "electromagnetic radiation" generated by the defendants. Management believes that the allegations that EMF caused or contributed to the plaintiffs' illnesses are not supported by scientific evidence. A similar case was resolved in NU and CL&P's favor at the trial level, but was appealed and pending hearing in the Connecticut Supreme Court when on October 31, 1997 the plaintiff withdrew the appeal, ending the litigation. 2. Southeastern Connecticut Regional Resources Recovery Authority (SCRRRA) - Application of the Municipal Rate This matter involves three separate disputes over the rates that apply to CL&P's purchases of the generation of the SCRRRA project in Preston, Connecticut. A favorable ruling on all of these matters could result in savings to CL&P customers of approximately $20 million over the terms of the agreement with the SCRRRA. FERC has ruled in CL&P's favor in one of these matters, but this decision has been appealed to the United States D. C. Circuit Court of Appeals. A final ruling in this decision in favor of CL&P would also resolve the second dispute. A Connecticut Superior Court, however, has ruled in favor of the SCRRRA in the final dispute. CL&P has appealed this decision. The appeal is now pending in the Connecticut Supreme Court. 3. Wallingford Resource Recovery Lawsuit On April 18, 1997, CL&P was served with a lawsuit filed in Connecticut Superior Court by the Connecticut Resources Recovery Authority (CRRA) and a subsidiary of Ogden Martin. The suit claims that CL&P breached its electricity purchase agreement for the Wallingford Resources Recovery Project by refusing to purchase certain electricity at the rates specified in the agreement. The amount at issue through the end of 1997 is approximately $2.45 million, which amount will increase by approximately $700,000 each year. The electricity in question results from the buyout by the project of its steam contract and its termination of steam sales to American Cyanimid. Attorneys for CL&P have filed their appearance. 4. Connecticut DPUC - CL&P's Petition for Declaratory Ruling Regarding Proposed Retail Sales of Electricity by Texas-Ohio Power, Inc. (TOP) On August 3, 1995, CL&P filed a petition for declaratory rulings with the DPUC to determine whether TOP, which built a small cogeneration plant in Manchester, Connecticut, can sell electricity from the facility to two CL&P retail customers in Manchester. On December 6, 1995, the DPUC ruled that, because TOP's project would not use the public streets, it did not require specific legislative authorization to make retail sales of electricity. In February 1997, the Hartford Superior Court upheld the DPUC's decision. CL&P appealed this decision. On February 9, 1998, the Connecticut Supreme Court ruled in CL&P's favor. Specifically, the Court reversed the DPUC and Superior Court rulings, finding that TOP was a foreign electric company and therefore was prohibited from making retail sales of electricity in Connecticut. The Court did rule that the DPUC was correct in finding that because TOP did not use public streets it was not an electric light company prohibited by Connecticut corporate law from making retail electric sales. The Court made it clear that it would have ruled differently on this issue if TOP were using public streets. On February 27, 1998, TOP filed a petition for rehearing. In a related matter, CL&P has been sued in the United States Bankruptcy Court for the Southern District of Texas - Houston Division by Triple C Power, Inc., the successor of the now bankrupt TOP, alleging tortious interference with contract; vexatious litigation/malicious prosecution; restraint of trade in violation of the Sherman Act; monopolization; civil conspiracy; and deceptive trade practices. The plaintiff seeks $20 million in actual damages, plus attorneys' fees and court costs, $40 million in exemplary damages, and a trebling of the actual damages, for a total of about $100 million. CL&P believes this action is without merit and intends to vigorously defend itself. 5. Tax Litigation In 1991, the Town of Haddam, Connecticut (Haddam) performed a town-wide revaluation of the CY property in that town. Based on the report of the engineering firm hired by the town to perform the revaluation, Haddam determined that the full fair-market value of the property, as of October 1, 1991, was $840 million. At that time, CY's net-book value was $245 million. On September 5, 1996, a Connecticut court ruled that Haddam had over-assessed CY at three and a half times its proper assessment. The decision set the plant's fair market value at $235 million. On May 9, 1997, Haddam and CY reached an agreement regarding the over-assessment. Haddam repaid CY an amount totaling $13,990,000. 6. Long Island Cable - Citizen's Suit Settlement On April 4, 1996, a citizen's suit against Long Island Lighting Company (LILCO), a non-affiliate of NU, CL&P and NUSCO (collectively, the "Companies") was filed in Federal District Court in Connecticut. The suit was filed under the Federal Clean Water Act regarding leaks from the Long Island cable into the Long Island Sound. On April 23, 1997, the Companies and the plaintiffs jointly filed a Stipulation of Dismissal in Federal District Court, which settled this suit. The settlement does not impose material costs on CL&P or any other System companies. 7. Shareholder Derivative Actions Settlement On December 29, 1997, a United States District Court judge entered an order, which became final on January 28, 1998, approving a $25 million settlement of seven derivative lawsuits and one demand letter filed by shareholders of NU related to alleged mismanagement at Millstone. The settlement had been announced by the company in mid-1997. Under the agreement, insurers for certain of NU's present and former officers and trustees will pay NU $25 million less attorneys' fees, and NU has agreed to certain corporate governance enhancements. On February 2, 1998, approximately $18 million under the settlement was paid to NU. The judge has still not made a ruling regarding the amount of attorneys' fees to be deducted from the $25 settlement. The plaintiffs' counsel have requested fees of approximately $7.5 million. If and when the judge determines that less than approximately $7.5 million will be awarded as attorneys' fees, NU also will receive that amount. 8. Shareholder Securities Class Actions Consolidated Federal Court Actions: Pursuant to a court order dated October 1, 1997, the six class actions separately filed against NU in 1996 were consolidated for pre-trial and trial purposes. The actions are based on various Federal securities law and common law theories alleging misrepresentations and omissions in public disclosures related to the System's nuclear situation. These complaints represent classes of plaintiffs who purchased or otherwise acquired NU common stock during periods ranging from March 1994 to April 1996. State Court Actions: NU has been served with two separately filed class actions based on various state securities law and common law theories alleging misrepresentations and omissions in public disclosures related to the System's nuclear situation. These complaints represent classes of plaintiffs who purchased or otherwise acquired NU common stock during periods ranging from December 1993 to April 1996. Plaintiffs' counsel in both state actions agreed to stay the actions pending the outcome of the consolidated federal court actions described above. NU believes that all of these class actions are without merit and intends to vigorously defend in all such actions. 9. Connecticut Municipal Electric Energy Cooperative (CMEEC) Dispute This matter involves a dispute with CMEEC over its obligations under its Millstone Units 1 & 2 contract with CL&P, under which CMEEC has a 3.49 percent life-of-unit interest in each of the units. Since October 1996, CMEEC has failed to make payment on its obligations of approximately $1.8 million per month, claiming that CL&P materially breached its contractual obligations. CMEEC has requested arbitration of the issues, which arbitration is currently ongoing. CL&P has denied the allegations and filed a petition on July 1, 1997 requesting the Connecticut Superior Court to order CMEEC to pay the outstanding obligations (about $25 million) and make continuing payments while the arbitration is proceeding. CL&P's petition was denied and CL&P has requested reargument and that the court vacate its order. On March 2, 1998, the parties executed a release and settlement agreement that, upon authorization by the FERC, will result in the termination of CMEEC's life-of-unit contractual interests in Millstone Units 1 and 2, and 26 other fossil or hydro generating units owned by CL&P. Under the agreement, CMEEC will pay CL&P, upon FERC approval of the settlement, the lump sum amount of $24 million and each party will provide to the other a release of any claims that relate to the contracts or to Millstone Units 1 and 2. The parties have agreed to request suspension of the arbitration and court proceedings pending FERC's authorization to cancel the rate schedules for the life-of-unit contracts. 10. Millstone 3 - Joint Owner Litigation CL&P and WMECO, through NNECO as agent, operate Millstone 3, at cost and without profit, under a Sharing Agreement that obligates them to utilize good utility operating practices and requires the joint owners of the facility to share the risk of employee negligence and other risks of operation and maintenance pro-rata in accordance with their ownership shares. The Sharing Agreement also provides that CL&P and WMECO would only be liable for damages to the non-NU owners for a deliberate breach of the agreement pursuant to authorized corporate action. On August 7, 1997, the non-NU owners of Millstone 3 filed demands for arbitration with CL&P and WMECO as well as lawsuits in Massachusetts Superior Court against NU and its current and many of its former trustees. The non-NU owners raise a number of contract, tort and statutory claims, arising out of the operation of Millstone 3. The arbitrations and lawsuits seek to recover compensatory damages, punitive damages, treble damages and attorneys' fees. Owners representing approximately two-thirds of the non-NU interests in Millstone 3 have claimed compensatory damages in excess of $200 million. In addition, one of the lawsuits seeks to restrain NU from disposing of its shares of the stock of WMECO and Holyoke Water Power Company, pending the outcome of the lawsuit. The NU companies believe there is no legal basis for the claims and intend to defend against them vigorously. The parties are proceeding with the selection of an arbitrator to hear the claims against CL&P and WMECO. The defendants, including NU, in the three lawsuits have requested consolidation of those actions and have filed motions to dismiss the lawsuits or, in the alternative, to stay the court proceedings pending the outcome of the arbitrations. 11. Maine Yankee - Secondary Purchasers Dispute A number of municipalities and cooperatives (Secondary Purchasers) have notified the sponsors of MY, including CL&P, WMECO and PSNH, that they consider their purchase and payment obligations under their purchase agreements to have been terminated as a result of the August 6, 1997 decision by the MYAPC Board of Directors (MY Board) to retire the facility. Accordingly, these Secondary Purchasers have informed the sponsors that they will be making no further payments under the contracts for the period following the MY Board's decision. Through such contracts, the sponsors agreed to deliver a portion of the capacity and electrical output from the facility until the year 2003 in exchange for payment by the Secondary Purchasers of a pro rata share of the plant's costs and expenses. NU's subsidiaries' estimated exposure under these contracts is approximately $15 million to $20 million over the remaining term of these agreements. On November 28, 1997, the Secondary Purchasers filed a "Notice of Initiation of Arbitration" with the sponsors. On December 15, 1997, the sponsors filed a complaint at FERC against the Secondary Purchasers, asking FERC to (i) direct them to pay all amounts due plus interest; (ii) to declare that the Secondary Purchasers remain obligated to make payment through December 2002; and (iii) to order a modification to the contracts that preserves the continuing obligations of the municipalities for decommissioning and other post-shutdown costs beyond 2002. On January 16, 1998, the Secondary Purchasers filed a Motion to Compel Arbitration in Maine State Court. 12. NRC - Section 2.206 Petitions Spent Fuel Pool Off-Load Practices 2.206 Petition: In August 1995, a petition was filed with the NRC under Section 2.206 of the NRC's regulations by the organization We the People and a NUSCO employee. The petitioners maintained that NU's historic practice of off-loading the full reactor core at Millstone 1 resulted in spent fuel pool heat loads in excess of the pool's NRC-approved cooling capability, and asserted that the practice was a knowing and willful violation of NRC requirements. The petitioners also filed a supplemental petition concerning refueling practices at Millstone 2 and 3 and Seabrook Station. On December 26, 1996, the Acting Director of the Office of Nuclear Reactor Regulation issued a partial decision granting, in part, the petition. The decision, which is limited to the NRC staff's technical review of the issues raised by petitioners, concluded that the design of the spent fuel pool and related system at Millstone 1 was adequate, and that the full core offload practices at that unit, Millstone 3 and Seabrook were safe. The petitioners' assertions regarding Millstone 2 were not substantiated. The Director further concluded that the regulatory actions taken by the NRC to date regarding the three Millstone units, including the imposition of an Independent Corrective Action Verification Program prior to restart, were broader than the actions requested by petitioners and thus constituted a partial grant of petitioners' request. Issues of wrongdoing raised in the petition remain under consideration by the NRC staff, and will not be addressed until after the U.S. Attorney has concluded its investigation of the spent fuel pool issues and decided whether to commence criminal proceedings (See paragraph 13 below). By letter to the NRC dated July 9, 1997, the petitioner requested that the hearing on its petition be reconvened to submit additional information in support of the petition. Other 2.206 Petitions: The Citizens Awareness Network (CAN) filed a petition with the NRC under Section 2.206 of the NRC's regulations in November 1996 requesting that the NRC suspend or revoke the operating licenses for Millstone 1, 2, and 3 and CY. The petition also requested that the NRC take enforcement actions and make investigations based on numerous allegations. On September 12, 1997, the Director of Nuclear Reactor Regulation (Director) issued a partial decision granting certain aspects of the petition, denying other aspects and deferring other aspects of the petition pertaining to possible wrongdoing. The NRC responded to these requests by relying upon actions that have already been taken or actions that are currently under way. The NRC also denied petitioners' request that the Millstone restart decision be postponed until completion of pending investigations into alleged wrongdoing. However, the NRC decision indicated that the results of these investigations will be considered by the NRC as part of the restart deliberations. On September 3, 1997, the Director issued a partial decision deferring in part and denying in part another Section 2.206 petition that had been filed by CAN and the Nuclear Information Resource Service seeking NRC enforcement action and placement of certain restrictions on decommissioning activities at CY. The decision deferred that aspect of the petition requesting that the NRC take enforcement action with respect to the radiological controls program at the plant. The petitioners' requests that CY be placed on the NRC's watch list and that a six-month moratorium be placed on decommissioning activities at CY were denied. Another petition under Section 2.206 was filed with the NRC in March 1997 by a then NU employee with the NRC requesting various actions be taken with respect to the operating licenses for Millstone Units 1, 2 and 3 and CY. The NRC has advised the petitioner of receipt of the petition and indicated that the NRC Director's decision may be delayed as a result of ongoing investigations by the NRC Office of Investigations and NRC Office of Inspector General. On February 11, 1998, the Director of the Office of Nuclear Reactor Regulation issued a decision which denied the petitioners' requests in their entirety. On February 2, 1998, CAN filed a third Section 2.206 petition with the NRC pertaining to nuclear issues in Connecticut. This petition requests that the NRC revoke the operating licenses of Millstone Units 1, 2 and 3 as a result of the company's harassment and intimidation of the nuclear workforce for raising safety issues. CAN's petition was prompted by the public disclosure of an internal memorandum prepared by the Millstone Nuclear Oversight organization. CAN also requested that the NRC refer the matter to the U.S. Department of Justice for an investigation. The NRC has not yet responded to CAN's petition. 13. NRC Office of Investigations and U.S. Attorney Investigations and Related Matters The NRC's Office of Investigations (OI) has been examining various matters at Millstone and CY, including but not limited to procedural and technical compliance matters and employee concerns. One of these matters has been referred, and others may be referred, to the Office of the U.S. Attorney for the District of Connecticut (U.S. Attorney) for possible criminal prosecution. The referred matter concerns full core off-load procedures and related matters at Millstone. The U.S. Attorney is also reviewing possible criminal violations arising out of certain of NNECO's other activities at Millstone and CY, including the 1996 nuclear workforce reduction; its licensed operator training programs; and a matter involving health physics records. The U.S. Attorney, together with the U.S. EPA, is also investigating possible criminal violations of federal environmental laws at certain NU facilities, including Millstone and Devon. NU has been informed by the government that it is a target of the investigation, but that no one in senior management is either a target or a subject of their investigations. Management does not believe that any System company or officer has engaged in conduct that would warrant a federal criminal prosecution. NU intends to fully cooperate with the OI and the U.S. Attorney in their ongoing investigations. 14. Connecticut Attorney General - Civil Lawsuit On November 17, 1997, the Connecticut Attorney General (Attorney General) initiated a civil lawsuit, on behalf of the Connecticut Department of Environmental Protection (CDEP), against NNECO and NUSCO for violations of the Millstone Station water discharge permit and Connecticut water discharge regulations. The seven count suit alleges in general that NNECO moved a sampling point for a discharge to an inappropriate location and treated and/or discharged certain waste waters without authorization. The Attorney General has stated publicly that he is seeking penalties over $1 million. 15. New Hampshire Office of Consumer Advocate (OCA) and the Campaign for Ratepayers Rights (CRR) Case On March 5, 1998, the New Hampshire Supreme Court (Court) denied two appeals of several NHPUC orders which approved special contracts between PSNH and five industrial customers. The appellants, OCA and CRR, complained that all of PSNH's special contracts were void and constituted a breach of the 1989 statute authorizing the NHPUC to approve the PSNH Rate Agreement. The Court found that approval of such special contracts did not violate the enabling statute, which only required the establishment of a fixed rate path under the PSNH Rate Agreement for tariff rates of general application. Since PSNH did not request any adjustment to other customers' rates as a result of the special contracts, the customers represented by OCA and CRR suffered no harm. 16. Other Legal Proceedings The following sections of Item 1. "Business" discuss additional legal proceedings: See "Rates" for information about CL&P's rate and energy adjustment clause proceedings, various state restructuring proceedings and civil lawsuits related thereto and NHPUC proceedings involving PSNH's franchise rights; "Electric Operations--Transmission Access and FERC Regulatory Changes" for information about proceedings relating to power and transmission issues; "Electric Operations--Nuclear Generation" and "Electric Operations-Nuclear Plant Performance and Regulatory Oversight" for information related to nuclear plant performance, nuclear fuel enrichment pricing, high-level and low-level radioactive waste disposal, decommissioning matters and NRC regulation; "Other Regulatory and Environmental Matters" for information about proceedings involving surface water and air quality, toxic substances and hazardous waste, electric and magnetic fields, licensing of hydroelectric projects, and other matters. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No Event that would be described in response to this item occurred with respect to NU, CL&P, PSNH, WMECO or NAEC. PART II Item 5. Market for the Registrants' Common Equity and Related Shareholder Matters NU. The common shares of NU are listed on the New York Stock Exchange. The ticket symbol is "NU," although it is frequently presented as "Noeast Util" and/or "NE Util" in various financial publications. The high and low sales prices for the past two years, by quarters, are shown below. Year Quarter High Low 1997 First $14 1/4 $ 7 5/8 Second 9 7/8 7 3/4 Third 10 9/16 9 Fourth 13 15/16 9 1/2 1996 First $25 1/4 19 Second 20 1/4 11 7/8 Third 13 3/8 11 1/2 Fourth 13 1/2 9 1/2 As of January 30, 1998, there were 98,923 common shareholders of record of NU. As of the same date, there were a total of 136,849,710 common shares issued, including 6,606,181 million unallocated ESOP shares held in the ESOP trust. NU declared and paid a quarterly dividend of $0.25 per share during the first quarter of 1997. On March 25, 1997, the NU Board of Trustees adopted a resolution suspending the quarterly dividends on NU's common shares, indefinitely. The declaration of future dividends may vary depending on capital requirements and income, as well as financial and other conditions existing at the time. Information with respect to dividend restrictions for NU and its subsidiaries is contained in Item 1. Business under the caption "Financing Program - Financing Limitations" and in Note (b) to the "Consolidated Statements of Common Shareholders' Equity" on page 27 of NU's 1997 Annual Report to Shareholders, which information is incorporated herein by reference. CL&P, PSNH, WMECO, and NAEC. The information required by this item is not applicable because the common stock of CL&P, PSNH, WMECO, and NAEC is held solely by NU. Item 6. Selected Financial Data NU. Reference is made to information under the heading "Selected Consolidated Financial Data" contained on page 52 of NU's 1997 Annual Report to Shareholders, which information is incorporated herein by reference. CL&P. Reference is made to information under the heading "Selected Financial Data" contained on page 54 of CL&P's 1997 Annual Report, which information is incorporated herein by reference. PSNH. Reference is made to information under the heading "Selected Financial Data" contained on pages 50 and 51 of PSNH's 1997 Annual Report, which information is incorporated herein by reference. WMECO. Reference is made to information under the heading "Selected Financial Data" contained on page 49 of WMECO's 1997 Annual Report, which information is incorporated herein by reference. NAEC. Reference is made to information under the heading "Selected Financial Data" contained on page 32 of NAEC's 1997 Annual Report, which information is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations; and Item 7A. Quantitative and Qualitative Disclosures About Market Risk NU. Reference is made to information under the heading "Management's Discussion and Analysis" contained on pages 12 through 21 in NU's 1997 Annual Report to Shareholders, which information is incorporated herein by reference. CL&P. Reference is made to information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained on pages 42 through 53 in CL&P's 1997 Annual Report, which information is incorporated herein by reference. PSNH. Reference is made to information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained on pages 42 through 49 in PSNH's 1997 Annual Report, which information is incorporated herein by reference. WMECO. Reference is made to information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained on pages 39 through 48 in WMECO's 1997 Annual Report, which information is incorporated herein by reference. NAEC. Reference is made to information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained on pages 26 through 31 in NAEC's 1997 Annual Report, which information is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data NU. Reference is made to information under the headings "Company Report," "Report of Independent Public Accountants," "Consolidated Statements of Income," "Consolidated Statements of Cash Flows," "Consolidated Statements of Income Taxes," "Consolidated Balance Sheets," "Consolidated Statements of Capitalization," "Consolidated Statements of Common Shareholders' Equity," "Notes to Consolidated Financial Statements," and "Consolidated Statements of Quarterly Financial Data" contained on pages 22 through 51 in NU's 1997 Annual Report to Shareholders, which information, which information is incorporated herein by reference. CL&P. Reference is made to information under the headings "Consolidated Balance Sheets," "Consolidated Statements of Income," "Consolidated Statements of Cash Flows," "Consolidated Statements of Common Stockholder's Equity," "Notes to Consolidated Financial Statements," "Report of Independent Public Accountants," and "Statements of Quarterly Financial Data" contained on pages 2 through 41 and page 54 in CL&P's 1997 Annual Report, which information is incorporated herein by reference. PSNH. Reference is made to information under the headings "Balance Sheets," "Statements of Income," "Statements of Cash Flows," "Statements of Common Stockholder's Equity," "Notes to Financial Statements," "Report of Independent Public Accountants," and "Statements of Quarterly Financial Data" contained on pages 2 through 40 and page 52 in PSNH's 1997 Annual Report, which information is incorporated herein by reference. WMECO. Reference is made to information under the headings "Consolidated Balance Sheets," "Consolidated Statements of Income," "Consolidated Statements of Cash Flows," "Consolidated Statements of Common Stockholder's Equity," "Notes to Consolidated Financial Statements," "Report of Independent Public Accountants," and "Statements of Quarterly Financial Data" contained on pages 2 through 38 and page 49 in WMECO's 1997 Annual Report, which information is incorporated herein by reference. NAEC. Reference is made to information under the headings "Balance Sheets,""Statements of Income," "Statements of Cash Flows," "Statements of Common Stockholder's Equity," "Notes to Financial Statements," "Report of Independent Public Accountants," and "Statements of Quarterly Financial Data" contained on pages 2 through 24 and page 32 in NAEC's 1997 Annual Report which information is incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No event that would be described in response to this item has occurred with respect to NU, CL&P, PSNH, WMECO, or NAEC. PART III Item 10. Directors and Executive Officers of the Registrants NU. In addition to the information provided below concerning the executive officers of NU, incorporated herein by reference is the information contained in the sections "Proxy Statement", "Committee Composition and Responsibility", "Common Stock Ownership of Certain Beneficial Owners", "Common Stock Ownership of Management", "Compensation of Trustees", "Executive Compensation", "Pension Benefits", and "Report on Executive Compensation" of the definitive proxy statement for solicitation of proxies by NU's Board of Trustees, dated March 31, 1998, which will be and filed with the Commission pursuant to Rule 14a-6 under the Securities Exchange Act of 1934 (the Act). First First Positions Elected Elected Name Held an Officer a Trustee John H. Forsgren EVP, CFO 02/01/96 n/a William T. Frain, Jr. OTH 02/01/94 n/a Cheryl W. Grise OTH 06/01/91 n/a Bruce D. Kenyon P 09/03/96 n/a Hugh C. MacKenzie P 07/01/88 n/a Michael G. Morris CHB, P, CEO, T 08/19/97 08/19/97 Lisa J. Thibdaue OTH 01/01/98 n/a Robert P. Wax SVP, SEC, GC 08/01/92 n/a CL&P. First First Positions Elected Elected Name Held an Officer a Director John H. Forsgren EVP, CFO, D 02/01/96 06/10/96 Cheryl W. Grise SVP, CAO 06/01/91 Note 1 Bruce D. Kenyon P, D 09/03/96 09/03/96 Hugh C. MacKenzie P, D 07/01/88 06/06/90 Michael G. Morris CH, D 08/19/97 08/19/97 Lisa J. Thibdaue VP 01/01/98 n/a Robert P. Wax SVP, SEC, GC 08/01/92 n/a PSNH. First First Positions Elected Elected Name Held an Officer a Director John C. Collins D n/a 10/19/92 John H. Forsgren EVP, CFO, D 02/01/96 08/05/96 William T. Frain, Jr. P, COO, D 03/18/71 02/01/94 Bruce D. Kenyon P, D 09/03/96 11/24/97 Gerald Letendre D n/a 10/19/92 Hugh C. MacKenzie D n/a 02/01/94 Michael G. Morris CH, CEO, D 08/19/97 08/19/97 Jane E. Newman D n/a 10/19/92 Lisa J. Thibdaue VP 01/01/98 n/a Robert P. Wax SVP, SEC, GC 08/01/92 n/a WMECO. First First Positions Elected Elected Name Held an Officer a Director Robert G. Abair VP, CAO 09/06/88 Note 1 John H. Forsgren EVP, CFO, D 02/01/96 06/10/96 Cheryl W. Grise SVP 06/01/91 Note 1 Bruce D. Kenyon P, D 09/03/96 09/03/96 Hugh C. MacKenzie P, D 07/01/88 06/06/90 Michael G. Morris CH, D 08/19/97 08/19/97 Lisa J. Thibdaue VP 01/01/98 n/a Robert P. Wax SVP, SEC, AC, GC 08/01/92 n/a NAEC. First First Positions Elected Elected Name Held an Officer a Director Ted C. Feigenbaum EVP, CNO 10/21/91 Note 1 John H. Forsgren EVP, CFO, D 02/01/96 11/01/97 Cheryl W. Grise SVP, CAO 10/21/91 Note 1 Bruce D. Kenyon P, CEO, D 09/03/96 09/03/96 Michael G. Morris CH, D 08/19/97 08/19/97 Robert P. Wax SVP, SEC, GC 08/01/92 n/a Note 1 - resigned as a Director, effective 11/01/97. Key: AC - Assistant Clerk EVP - Executive Vice President CAO - Chief Administrative Officer GC - General Counsel CEO - Chief Executive Officer OTH - Executive Officer of NU system CFO - Chief Financial Officer P - President CH - Chairman SEC - Secretary CHB - Chairman of the Board SVP - Senior Vice President COO - Chief Operating Officer T - Trustee D - Director VP - Vice President Name Age Business Experience During Past 5 Years Robert G. Abair (1) 59 Vice President and Chief Administrative Officer of WMECO since 1988. John C. Collins (2) 52 Chief Executive Officer, The Hitchcock Clinic, Dartmouth - Hitchcock Medical Center since 1977. Ted C. Feigenbaum (3) 47 Executive Vice President and Chief Nuclear Officer of NAEC since February, 1996; previously Senior Vice President of NAEC since 1991; Senior Vice President and Chief Nuclear Officer of PSNH June, 1992 to August, 1992; President and Chief Executive Officer - New Hampshire Yankee Division of PSNH October, 1990 to June, 1992 and Chief Nuclear Production Officer of PSNH January, 1990 to June, 1992. John H. Forsgren (4) 51 Executive Vice President and Chief Financial Officer of NU, CL&P, PSNH, WMECO and NAEC since February, 1996; previously Managing Director of Chase Manhattan Bank from 1995 to 1996 and Senior Vice President-Chief Financial Officer of Euro Disney, The Walt Disney Company from 1990 to 1995. William T. Frain, Jr.(5) 56 President and Chief Operating Officer of PSNH since February, 1994; previously Senior Vice President of PSNH from 1992 to 1994. Cheryl W. Grise 45 Senior Vice President and Chief Administrative Officer of CL&P, PSNH and NAEC, and Senior Vice President of WMECO since December, 1995; previously Senior Vice President-Human Resources and Administrative Services of CL&P, WMECO and NAEC from 1994 to 1995 and Vice President-Human Resources of CL&P, WMECO and NAEC from 1992 to 1994. Bruce D. Kenyon (6) 55 President and Chief Executive Officer of NAEC and President-Nuclear Group of NU, CL&P, PSNH and WMECO since September, 1996; previously President and Chief Operating Officer of South Carolina Electric and Gas Company from 1990 to 1996. Gerald Letendre 56 President, Diamond Casting & Machine Co., Inc. since 1972. Hugh C. MacKenzie (7) 55 President-Retail Business Group of NU since February, 1996 and President of CL&P and WMECO since January, 1994; previously Senior Vice President-Customer Service Operations of CL&P and WMECO from 1990 to 1994. Michael G. Morris (8) 51 Chairman of the Board, President and Chief Executive Officer of NU, Chairman and Chief Executive Officer of PSNH, and Chairman of CL&P, NAEC and WMECO since August, 1997; previously President and Chief Executive Officer of Consumers Power Company from 1994 to 1997 and Executive Vice President and Chief Operating Officer of Consumers Power Company from 1992 to 1994. Jane E. Newman (9) 52 Dean, Whittemore School of Business and Economics of the University of New Hampshire since January, 1998; previously Executive Vice President and Director, Exeter Trust Company from 1995 to 1997 and President, Coastal Broadcasting Corporation from 1992 to 1995. Lisa J. Thibdaue 44 Vice President-Rates, Regulatory Affairs and Compliance of CL&P, PSNH and WMECO since January, 1998; previously Executive Director, Rates and Regulatory Affairs, Consumers Power Company from 1996 to 1998 and Director of Regulatory Affairs, Consumers Power Company from 1991 to 1996. Robert P. Wax (10) 49 Senior Vice President, Secretary and General Counsel of NU, CL&P, PSNH, NAEC and WMECO since February, 1997. Previously Vice President, Secretary and General Counsel of PSNH and NAEC from 1994 to 1997; Vice President, Secretary and General Counsel of NU and CL&P and Vice President, Secretary, Assistant Clerk and General Counsel of WMECO from 1993 to 1997; Vice President, Assistant Secretary and General Counsel of PSNH and NAEC from 1993 to 1994; and Vice President and General Counsel-Regulatory of NU, CL&P, PSNH, WMECO and NAEC from 1992 to 1993. (1) Member-Advisory Committee, BankBoston Springfield/Pioneer Valley. (2) Director of Fleet Bank - New Hampshire, Hamden Assurance Company Limited and the Business and Industry Association of New Hampshire. (3) Director of Connecticut Yankee Atomic Power Company, Maine Yankee Atomic Power Company, Vermont Yankee Nuclear Power Corporation, and Yankee Atomic Electric Company. (4) Director of Connecticut Yankee Atomic Power Company. (5) Director of the Business and Industry Association of New Hampshire and the Greater Manchester Chamber of Commerce; Trustee of Saint Anselm College. (6) Trustee of Columbia College and Director of Connecticut Yankee Atomic Power Company. (7) Director of Connecticut Yankee Atomic Power Company. (8) Director of Connecticut Yankee Atomic Power Company. (9) Director of Exeter Trust Company, Perini Corporation and Consumers Water Company. (10) Director of New England Legal Foundation. There are no family relationships between any director or executive officer and any other director or executive officer of NU, CL&P, PSNH, WMECO or NAEC. Item 11. Executive Compensation NU. Incorporated herein by reference is the information contained in the sections "Executive Compensation", "Summary Compensation Table", "Option/SAR Grants in Last Fiscal Year", "Pension Benefits", and "Report on Executive Compensation" of the definitive proxy statement for solicitation of proxies by NU, dated March 31, 1998, which will be filed with the Commission pursuant to Rule 14a-6 under the Act. CL&P, PSNH, WMECO and NAEC SUMMARY COMPENSATION TABLE The following table presents the cash and non-cash compensation received by the Chief Executive Officer and the next four highest paid executive officers of CL&P, PSNH, WMECO and NAEC, and by a former Chief Executive Officer and one former executive officer, in accordance with rules of the Securities and Exchange Commission (SEC): The compensation reported for 1997 includes grants of restricted stock units and stock appreciation rights under the Stock Price Recovery Incentive Program, which for these officers took the place of participation in short and long-term incentive programs under the Executive Incentive Plan in 1996, 1997 and 1998, as discussed under "Report on Executive Compensation" below. The "Securities Underlying Options/Stock Appreciation Rights" column in the Summary Compensation table below lists the Northeast Utilities common shares for which options and stock appreciation rights were granted; the value of the options and stock appreciation rights as of the date of grant is given in the last column of the "Option/SAR Grants in Last Fiscal Year" table below. Annual Compensation Long Term Compensation Awards Payouts
Securities Other Restrict- Underlying Long Term All Annual ed Stock Options/ Incentive Other Compensa- Award(s) Stock Program Compen- Name and Salary tion($) ($) Appreciation Payouts sation($) Principal Position Year ($) Bonus($) (Note 1) (Note 2) Rights (#) ($) (Note 3) Michael G. Morris 1997 258,333 1,350,000 - - 500,000 - - Chairman of the Board, President 1996 - - - - - - - and Chief Executive Officer 1995 - - - - - - - Bruce D. Kenyon 1997 500,000 300,000 - 306,522 139,745 - - President - Nuclear Group 1996 144,231 400,000 - 499,762 - - - 1995 - - - - - - - John H. Forsgren 1997 350,000 50,000 - 378,787 184,382 - - Executive Vice President and 1996 305,577 - 62,390 80,380 - - - Chief Financial Officer 1995 - - - - - - - Hugh C. MacKenzie 1997 270,000 - - 189,778 142,549 26,998 4,800 President - Retail Business Group 1996 264,904 - - - - 19,834 7,500 1995 247,665 128,841 - - - 46,789 7,350 Robert P. Wax 1997 207,660 - - 129,775 97,499 6,075 4,800 Senior Vice President, 1996 193,650 - - - - 9,859 5,809 Secretary and General Counsel 1995 183,427 96,225 - - - 17,147 5,503 Bernard M. Fox 1997 447,165 - - - 226,106 68,777 880,916 Retired Chairman of the Board, President 1996 551,300 - - - - 65,420 7,500 and Chief Executive Officer 1995 551,300 246,168 - - - 130,165 7,350 Ted C. Feigenbaum 1997 260,000 - - - - 21,498 4,800 Executive Vice President and 1996 248,858 - - - - 14,770 7,222 Chief Nuclear Officer of NAEC 1995 185,300 - - - - - 5,553
Option/SAR Grants in Last Fiscal Year Individual Grants Grant Date Value
Name Number of % of Total Exercise Expiration Grant Date Securities Options/SARs or Date Present Underlying Granted to Base Price Value($) Options/SARS Employees in ($/sh) Granted (#) Fiscal Year Michael G. Morris 500,000 (Note 4) 34.9% 9.625 8/20/2007 840,744 (Note 4) Bruce D. Kenyon 41,236 (Note 5) 2.9% 13.125 12/31/2001 71,751 (Note 5) 98,509 (Note 6) 6.9% 9.75 12/31/2001 66,986 (Note 6) John H. Forsgren 54,408 (Note 5) 3.8% 13.125 12/31/2001 94,670 (Note 5) 129,974 (Note 6) 9.1% 9.75 12/31/2001 88,382 (Note 6) Hugh C. MacKenzie 42,063 (Note 5) 2.9% 13.125 12/31/2001 73,190 (Note 5) 100,486 (Note 6) 7.0% 9.75 12/31/2001 68,330 (Note 6) Robert P. Wax 28,764 (Note 5) 2.0% 13.125 12/31/2001 50,049 (Note 5) 68,735 (Note 6) 4.8% 9.75 12/31/2001 46,740 (Note 6) Bernard M. Fox 226,106 (Note 5) 15.8% 13.125 12/31/2001 393,424 (Note 5) Ted C. Feigenbaum - N/A N/A N/A N/A
Notes to Summary Compensation and Option/SAR Grants Tables: 1. Other annual compensation for Mr. Forsgren consists of tax payments on a restricted stock award. 2. The aggregate restricted stock holdings by the seven individuals named in the table were, at December 31, 1997, 131,993 shares with a value of $1,559,169. Awards shown for 1997 (except for additional awards made for Messrs. Kenyon and Forsgren - see below) were restricted stock unit grants under the Stock Price Recovery Incentive Program made on January 1, 1997. The number of units in each grant will be adjusted on December 31, 1998 to reflect the relative performance of Northeast Utilities common shares between December 31, 1996 and December 31, 1998 versus the performance of the Standard and Poor's Electric Company Index during the same period. The adjusted units will vest on January 4, 1999 if the recipient is still actively employed as a senior officer of the System (subject to earlier vesting upon death, disability or retirement). Mr. Kenyon also received 12,200 restricted stock units on July 8, 1997, with a value at date of grant of $120,475, which will vest, as will the restricted shares granted to him in 1996, when Millstone Station is removed from the NRC's "watch list", provided that this occurs within three years of Mr. Kenyon's commencement of employment (September 3, 1996) and the Systematic Assessment of Licensee Performance and Institute of Nuclear Power Operations ratings of Seabrook Station have not materially changed from their 1996 levels, or, if earlier, when he is transferred to a new position within the System or with an affiliate, as defined. Mr. Forsgren also received 13,500 restricted stock units on July 8, 1997, with a value at grant of $133,313, which will vest, as will the restricted stock granted to him in 1996, on January 1, 1999. Any dividends paid on restricted stock and units are reinvested into additional restricted stock and units, respectively, subject to the same vesting schedule. 3. "All Other Compensation" consists of employer matching contributions under the Northeast Utilities Service Company 401(k) Plan, generally available to all eligible employees. It also includes, in the case of Mr. Fox, who retired from the System in 1997, a payment of $166,667 as a contractor to the System in 1997, a payment of $82,000 which had been withheld from Mr. Fox's 1995 annual bonus, $389,866, which is the approximate value at the date of his retirement of that portion of Mr. Fox's retirement benefit in excess of what would be payable under the System's retirement plans, and a payment of $237,583 for payment of taxes on an annuity that provides a portion of such retirement benefit. See Employment Contracts and Termination of Employment Arrangements, below. 4. Mr. Morris received upon the commencement of his employment options to purchase 500,000 NU common shares at a price of $9.625 commencing August 20, 1999 (250,000 shares), August 20, 2000 (125,000 shares) and August 20, 2001 (125,000 shares). The options expire August 20, 2007 or, if earlier, three years after termination of his employment. Valued using the Black- Scholes option pricing model, with the following assumptions: Volatility: 31.89 percent (36 months of monthly data); Risk-free rate: 6.41 percent; Dividend yield: 7.42 percent (36 months of monthly data); Exercise price: $9.625; Grant price: $9.625; Option term: 10 years; Exercise date: August 20, 2007. 5. These SARs were granted on January 1, 1997 under the Stock Price Recovery Incentive Program. The total number of SARs in this grant will be adjusted on December 31, 1998 to reflect the relative performance of NU common shares between December 31, 1996 and December 31, 1998 versus the performance of the Standard and Poor's Electric Companies Index during the same period. This adjustment factor is assumed to be one for purposes of valuation for this table. Valued using the Black-Scholes option pricing model, with the following assumptions: Volatility: 25.63 percent (36 months of monthly data); Risk-free rate: 6.17 percent, Dividend yield: 7.95 percent (36 months of monthly data); Exercise date: December 31, 2001. 6. These SARs were granted on August 12, 1997 under the Stock Price Recovery Incentive Program. Their value may not exceed $3.375 per SAR, which is the value they would have if the price of a Northeast Utilities common share on the date of exercise were $13.125 or higher. Valued using the Black- Scholes option pricing model, assuming that the value limitation described in the preceding sentence acts as a stock appreciation right written by the recipient of the actual SARs to the Company, with a base price equal to $13.125, but with other characteristics equivalent to the actual SARs, with the following assumptions: Volatility: 31.89 percent (36 months of monthly data); Risk-free rate: 6.22 percent; Dividend yield: 7.42 percent (36 months of monthly data); Exercise date: December 31, 2001. REPORT ON EXECUTIVE COMPENSATION The Compensation Committee of the Board of Trustees (the Committee) is the administrator of executive compensation for the executives of the Northeast Utilities system (the Company) with authority to establish and interpret the terms of the Company's executive salary and incentive programs and to make payment of awards. Compensation Strategy: The Committee's executive compensation goals for 1997 were to continue to provide a competitive compensation package to enable the Company to attract and retain key executives both during this critical period and with an eye towards the future, and to further align executive interests with those of Northeast Utilities' shareholders and with Company performance. The 1997 compensation of the Company's executives included base salary and long-term incentive awards. No annual incentive awards were paid in 1997. To achieve the compensation goal of providing a competitive package, the Committee draws upon information from a variety of sources, including compensation consultants, utility and general industry surveys, and other publicly available information, including proxy statements. In 1997, the Company's comparison groups for purposes of executive compensation consisted of a consultant's database of over 600 companies from a broad variety of industries, a consultant's database of over 90 electric and combination electric and gas utilities, and a smaller group of ten electric utilities whose operating characteristics were substantially similar to those of the Company in terms of generation mix, revenues and customer size. Nine of the ten companies are included in the Standard & Poor's (S&P) Electric Companies Index, which is the index used in the "Share Performance Chart" shown in the NU Proxy Statement. Base Salary: The target level for the base salary of each executive reflects the median base salary level for that position within the market comparison groups. The Committee periodically adjusts the level of base salary to reflect considerations such as changes in responsibility, market sensitivity, individual performance and internal equity. The Committee sets base salary ranges for all executive officers and sets the annual base salary for each executive officer except for the Chief Executive Officer (CEO), whose base salary is set by the Board of Trustees following a recommendation by the Committee. During 1997, there were no changes in the base salary structure over 1996. Because 1997 base salary levels were generally within targeted pay levels of the comparison group, only one executive officer received a 1997 base salary adjustment. Incentive Pay: Consistent with its goal to recognize the importance of retaining key executive talent and to help assure the officers' continuing dedication to their duties to the Company and its shareholders, during 1997 the Committee established for officers not participating in the Stock Price Recovery Incentive Program, as described below, a one-year short-term incentive program and a three-year long-term incentive program. The programs calculate payouts based on actual performance against target goals with respect to either total shareholder return or Company division measures. Each measure has a threshold performance level (below which no amount is awarded) and an upper limit (which will yield the maximum payout of twice the target amount). The performance measures for the 1997 short-term incentive program were division-specific functional and financial performance. The corporate performance measure for the 1997-1999 long-term incentive program was total shareholder return over the three-year period. The total shareholder return goal will be met at target if the total return on a Northeast Utilities common share for the performance period exceeds the return on the S&P Electric Companies Index for the same period by thirty-three percent. Awards under the 1997 short-term program, if any, are expected to be made in cash in the first quarter of 1998, and awards under the 1997-1999 long-term program are expected to be made in Northeast Utilities common shares in the first quarter of 2000. For 1997, target awards for participants in the short-term program ranged from 25 percent to 30 percent, and for participants in the long-term program from 15 percent to 25 percent of the going rate for their positions. Awards under the short-term program can vary from those determined solely by corporate performance, depending on individual achievement of a set of assigned goals established for the performance year. These assigned goals vary as appropriate from officer to officer and include, among other things, employee safety; service reliability; nuclear operations; economic development; operating, maintenance and capital expenditure levels; environmental initiatives; and generating unit capacity and availability. During 1996, the Committee determined that establishing a special Stock Price Recovery Incentive Program for eight senior officers was in the best interest of the Company and its shareholders. The purpose of this program is to focus key senior officers on achieving fundamental business goals relative to the challenges of nuclear operations and industry restructuring, with a net effect of advancing shareholder interests through share price recovery. In connection with the commencement of this incentive program, the Committee terminated the participation of these officers in the 1996 short-term program and the 1996-1998 long-term program and resolved that these officers would not participate in the 1997 or 1998 short-term or the 1997-1999 and 1998-2000 long- term incentive programs. Awards under the Stock Price Recovery Incentive Program will be based solely on appreciation of the price of Northeast Utilities common shares between December 31, 1996 and December 31, 1998 against a targeted share price goal, indexed to reflect the relative performance of a Northeast Utilities common share compared to the performance of the S&P Electric Companies Index during the same period. The target award of each participant is equal to the value of the 1996, 1997, and 1998 short-term and long-term incentive programs at target, assuming that there had been no changes in the 1997 and 1998 program target payout opportunities for these executives. There are no individual performance goals in the program. Awards under the program are made in restricted stock units and stock appreciation rights (SARs). The SARs are exercisable from January 1, 1999 through December 31, 2001. During 1997, the Committee granted additional SARs to the participants in the Stock Price Recovery Incentive Program as a further retention device. Also during 1997, the Committee made awards under the 1994-1996 long-term incentive program. Awards, in Northeast Utilities common shares, were based on the Company's relative ranking against a group of electric utilities with respect to shareholder return and cost of service (COS). Achievement of goals was less than target and resulted in awards that were 60.5 percent of target. CEO Pay: The Committee did not increase Mr. Fox's base salary in 1997 because of Company performance. During 1997, Mr. Fox announced his intention to take early retirement from the Company. Mr. Fox retired on September 1, 1997. The terms of Mr. Fox's retirement arrangements are described below. Following an executive search, the Company hired Mr. Morris as its Chairman of the Board, President and Chief Executive Officer, effective August 19, 1997. Mr. Morris's base salary was set at $750,000, which was determined to be market competitive. The Company paid Mr. Morris a sign-on bonus of $1.35 million, reflecting in large part his loss of stock options from his previous employer. CEO Long-Term Incentive Programs: During 1997, Mr. Fox was awarded 8,465 Northeast Utilities common shares in conformance with the provisions of the 1994-1996 long-term incentive program whose payouts were based on the Company's performance under COS and shareholder return measures as described above. Mr. Morris received, upon his employment with the Company, nonqualified stock options to purchase 500,000 NU common shares at $9.625 per share, expiring in 2007, which become exercisable in 1999 (50 percent), 2000 (25 percent), and 2001 (25 percent). New Compensation Plans: During 1997, the Committee met with its compensation consultants to begin the process of restructuring compensation plans to more closely align them with the changing electric utility industry. The new Incentive Plan was approved by the Board in January, 1998, subject to shareholder and SEC approval. This plan is further described [under "Approval of Incentive Plan" in the NU proxy statement]. The Board has approved two other new compensation plans. The first is a Deferred Compensation Plan under the terms of which all officers and certain other key employees of the Company may defer all or some portion of their compensation and, to the extent they are prevented by federal tax rules from taking full advantage of the Company's 401(k) Plan, receive a matching contribution (which is also deferred and will be payable on distribution in the form of Northeast Utilities common shares) in an amount equal to the employer matching contribution forgone under the 401(k) Plan because of the application of the federal tax rules. The second is an Employee Share Purchase Plan, also subject to shareholder and SEC approval, under which the Company may make available to eligible employees the opportunity to purchase Northeast Utilities common shares at a discount from time to time. The Employee Share Purchase Plan is further described [under "Approval of Employee Share Purchase Plan" in the Northeast Utilities proxy statement]. The Committee believes that these new plans serve the best interests of shareholders by further aligning employees' interests with those of shareholders. The Committee intends that the new Incentive Plan will adequately respond to issues raised by the deductibility cap placed on executive salaries by Section 162(m) of the Internal Revenue Code because of its use of stock options and qualified performance-based compensation as described [under "Approval of Incentive Plan in the NU proxy statement"]. The Committee believes that the Company's executive compensation programs continue to appropriately balance shareholder and customer interests. Respectfully submitted, Robert E. Patricelli, Chairman William J. Pape II, Vice Chairman Cotton Mather Cleveland John F. Curley Elizabeth T. Kennan Dated: January 13, 1998 PENSION BENEFITS The following table shows the estimated annual retirement benefits payable to an executive officer of the registrants upon retirement, assuming that retirement occurs at age 65 and that the officer is at that time not only eligible for a pension benefit under the NU Service Company Retirement Plan (the Retirement Plan) but also eligible for the make-whole benefit and the target benefit under the Supplemental Executive Retirement Plan for Officers of Northeast Utilities System Companies (the Supplemental Plan). The Supplemental Plan is a non-qualified pension plan providing supplemental retirement income to system officers. The make-whole benefit under the Supplemental Plan, available to all officers, makes up for benefits lost through application of certain tax code limitations on the benefits that may be provided under the Retirement Plan, and includes as "compensation" awards under the Executive Incentive Compensation Program and the Executive Incentive Plan and deferred compensation (as earned). The target benefit further supplements these benefits and is available to officers at the Senior Vice President level and higher who are selected by the NU Board of Trustees to participate in the target benefit and who remain in the employ of NU companies until at least age 60 (unless the Board of Trustees sets an earlier age). Each of the executive officers of NU named in the Summary Compensation Table above is currently eligible for a target benefit, except Messrs. Morris and Kenyon, whose Employment Agreements provide specially calculated retirement benefits, based on their previous arrangements with CMS Energy/Consumers Energy Company (CMS) and South Carolina Electric and Gas, respectively. Mr. Morris's agreement provides that upon retirement after reaching the fifth anniversary of his employment date with the System (or upon disability or termination without cause or following a change in control, as defined, of NU) he will be entitled to receive a special retirement benefit calculated by applying the benefit formula of the CMS Supplemental Executive Retirement Plan to all compensation earned from the System and to all service rendered to the System and CMS. If Mr. Kenyon retires with at least three years but less than five years of service with the System, he will be deemed to have five years of service. In addition, if Mr. Kenyon retires with at least three years of service with the System, he will receive a lump sum payment of $500,000. The benefits presented below are based on a straight life annuity beginning at age 65 and do not take into account any reduction for joint and survivorship annuity payments. ANNUAL TARGET BENEFIT Final Average Years of Credited Service Compensation 15 20 25 30 35 $200,000 $72,000 $96,000 $120,000 $120,000 $120,000 250,000 90,000 120,000 150,000 150,000 150,000 300,000 108,000 144,000 180,000 180,000 180,000 350,000 126,000 168,000 210,000 210,000 210,000 400,000 144,000 192,000 240,000 240,000 240,000 450,000 162,000 216,000 270,000 270,000 270,000 500,000 180,000 240,000 300,000 300,000 300,000 600,000 216,000 288,000 360,000 360,000 360,000 700,000 252,000 336,000 420,000 420,000 420,000 800,000 288,000 384,000 480,000 480,000 480,000 900,000 324,000 432,000 540,000 540,000 540,000 1,000,000 360,000 480,000 600,000 600,000 600,000 1,100,000 396,000 528,000 660,000 660,000 660,000 1,200,000 432,000 576,000 720,000 720,000 720,000 Final average compensation for purposes of calculating the target benefit is the highest average annual compensation of the participant during any 36 consecutive months compensation was earned. Compensation taken into account under the target benefit described above includes salary, bonus, restricted stock awards, and long-term incentive payouts shown in the Summary Compensation Table, but does not include employer matching contributions under the 401k Plan. In the event that an officer's employment terminates because of disability, the retirement benefits shown above would be offset by the amount of any disability benefits payable to the recipient that are attributable to contributions made by NU and its subsidiaries under long term disability plans and policies. As of December 31, 1997, the five current executive officers named in the Summary Compensation Table had the following years of credited service for purposes of calculating target benefits under the Supplemental Plan (or in the case of Messrs. Morris and Kenyon, for purposes of calculating the special retirement benefits under their respective Employment Agreements): Mr. Morris - 9, Mr. Kenyon - 1, Mr. Forsgren - 1, Mr. MacKenzie - 32, and Mr. Wax - 18. Assuming that retirement were to occur at age 65 for these officers, retirement would occur with 23, 11, 15, 41 and 34 years of credited service, respectively. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS Officer Agreements NUSCO (or, in the case of Mr. Morris, NU) has entered into employment agreements (the Officer Agreements) with each of the named executive officers and certain other executive officers and subsidiary directors. The Officer Agreements are also binding on NU and on each majority-owned subsidiary of NU. Each Officer Agreement obligates the officer to perform such duties as may be directed by the NUSCO Board of Directors or the NU Board of Trustees, protect the System's confidential information, and refrain, while employed by the System and for a period of time thereafter, from competing with the System in a specified geographic area. Each Officer Agreement provides that the officer's base salary will not be reduced below certain levels without the consent of the officer, that the officer will participate in specified benefits under the Supplemental Executive Retirement Plan or other supplemental retirement programs (see Pension Benefits, above), in applicable executive incentive programs (see Report on Executive Compensation, above), and, beginning on January 1, 1999 (January 1, 1998 for Mr. Morris's participation in short-term programs), if the employment term has not ended, in each short-term and long-term incentive compensation program established by the System for such executives generally, at an incentive opportunity level not less than that in effect for the officer as of January 1, 1996 (or January 1, 1997 for certain officers, and, for Mr. Morris, with minimum short-term and long-term target levels of 80 percent and 60 percent, respectively, of base salary and maximum opportunities of 130 percent and 120 percent, respectively, of base salary). Each Officer Agreement provides for a specified employment term and for automatic one-year extensions of the employment term unless at least six months' notice of non-renewal is given by either party. The employment term may also be ended by the System for "cause", as defined, at any time (in which case no supplemental retirement benefit, if any, shall be due), or by the officer on thirty days' prior written notice for any reason. Absent "cause", the System may remove the officer from his or her position on sixty days' prior written notice, but in the event the officer is so removed and signs a release of all claims against the System, the officer will receive one or two years' base salary and annual incentive payments, specified employee welfare and pension benefits, and vesting of stock appreciation rights, options and restricted stock. Under the terms of an Officer Agreement, upon any termination of employment of the officer within two years following a change of control, as defined, if the officer signs a release of all claims against the Company the officer will be entitled to certain payments including two or three times annual base salary (or in the case of Mr. Morris, if greater, the product of annual base salary times one less than the number of years remaining in the initial five-year term of his employment agreement), annual incentive payments, specified employee welfare and pension benefits, and vesting of stock appreciation rights, options and restricted stock. Certain of the change of control provisions may be modified by the Board of Trustees prior to a change of control, on at least two years' notice to the affected officer(s). Besides the terms described above, Mr. Forsgren's Officer Agreement provides for a starting salary of $350,000 per year and a $100,000 restricted stock grant. Mr. Kenyon's Officer Agreement provides for an initial starting salary at $500,000 per year, a $500,000 restricted stock grant and a $400,000 cash signing bonus. Mr. Kenyon's Officer Agreement also provides for a special retirement benefit and a special short term incentive compensation program in lieu of a portion of the Stock Price Recovery Incentive Program. Under this incentive program Mr. Kenyon will be eligible to receive a payment up to 100 percent of base salary depending on his fulfillment of certain incentive goals for each of the years ending August 31, 1997 and August 31, 1998, and for the 16 month period ending December 31, 1999. Mr. Kenyon received a payment of $300,000, or 60 percent of his base salary, under this program during 1997. Mr. Morris's Officer Agreement provides for an initial five-year term base salary of $750,000 per year subject to annual review, a $1,350,000 cash signing bonus, a grant of stock options, and a special retirement benefit. See Summary Compensation Table and Pension Benefits, above, for further description of these provisions. Retention Bonuses During July, 1997, the Compensation Committee agreed to pay Messrs. Forsgren and MacKenzie cash retention bonuses of $100,000 each, payable in July, 1998 and December, 1998, respectively. Transition and Retirement Agreement In February, 1997, NU entered into a Transition and Retirement Agreement (the Transition Agreement) with Mr. Fox, and Mr. Fox subsequently retired on September 1, 1997. The Transition Agreement obligates Mr. Fox to maintain the confidentiality of System information during his employment and following his retirement, and not to compete with the System for certain periods of time in specified geographic areas. The Transition Agreement provides that Mr. Fox will be engaged as a consultant to the Board of Trustees for 24 months following his retirement, with a fee of $500,000 for the first 12 months and $300,000 for the second 12 months, payable in full notwithstanding Mr. Fox's death or disability during such period or the occurrence of a change of control, as defined. The Transition Agreement also provides that Mr. Fox will be entitled to a target benefit under the Supplemental Executive Retirement Plan (actuarially reduced to reflect payments beginning prior to age 57), and for vesting of all stock appreciation rights granted to him in the Stock Price Recovery Incentive Program. Further, Mr. Fox signed a release of claims against the System "and all related parties" with respect to matters arising out of his employment with the System, and the System released Mr. Fox from all civil liability which may arise from his being or having been a Trustee or officer of NU and its subsidiaries, except for any liability which has been or may be asserted against Mr. Fox by the System as the result of an investigation conducted upon the demand of a shareholder or by a shareholder on behalf of the System. The Transition Agreement is binding on each active majority-owned subsidiary of NU. The descriptions of the various agreements set forth above are for purpose of disclosure in accordance with the proxy and other disclosure rules of the SEC and shall not be controlling on any party; the actual terms of the agreements themselves determine the rights and obligations of the parties. Item 12. Security Ownership of Certain Beneficial Owners and Management NU. Incorporated herein by reference is the information contained in the sections "Common Stock Ownership of Certain Beneficial Owners", "Common Stock Ownership of Management", "Compensation of Trustees", "Executive Compensation", "Pension Benefits", and "Report on Executive Compensation" of the definitive proxy statement for solicitation of proxies by NU, dated March 31, 1998 which will be filed with the Commission pursuant to Rule 14a-6 under the Act. CL&P, PSNH, WMECO and NAEC. NU owns 100% of the outstanding common stock of registrants CL&P, PSNH, WMECO and NAEC. As of February 24, 1998, the Directors and Executive Officers of CL&P, PSNH, WMECO and NAEC beneficially owned the number of shares of each class of equity securities of NU listed below. No equity securities of CL&P, PSNH, WMECO or NAEC are owned by the Directors and Executive Officers of CL&P, PSNH, WMECO and NAEC. CL&P, PSNH, WMECO, and NAEC DIRECTORS AND EXECUTIVE OFFICERS Title of Restricted Percent Class Directly Restricted Stock of Name Owned(1) Stock (2) Units(3) Class(4) NU Common John C. Collins(5) 0 NU Common Ted C. Feigenbaum (6) 3,558 NU Common John H. Forsgren(7) 0 5,577 32,816 NU Common Bruce D. Kenyon(8) 3,373 41,615 26,840 NU Common Gerald Letendre(5) 0 NU Common Hugh C. MacKenzie(9) 12,573 14,933 NU Common Michael G. Morris(10) 1,000 NU Common Jane E. Newman(5) 0 NU Common Robert P. Wax(11) 4,746 10,212 Amount beneficially owned by Directors and Executive Officers as a group: Directly Restricted Restricted Stock Company Number of Persons Owned(1) Stock(2) Units (3) CL&P 7 27,958 47,192 94,173 PSNH 10 27,958 47,192 84,801 WMECO 7 27,958 47,192 94,173 NAEC 7 18,944 47,192 79,240 (1) Unless otherwise noted, each Director and Executive Officer of CL&P, PSNH, WMECO and NAEC has sole voting and investment power with respect to the listed shares. (2) The beneficial owner has the right to vote but no right to dispose of restricted stock until the restrictions have lapsed. (3) The beneficial owner has no right to vote or dispose of restricted stock units until the restrictions have lapsed. (4) As of February 24, 1998 there were 136,857,443 common shares of NU outstanding. The percentage of such shares beneficially owned by any Director or Executive Officer, and by all Directors and Executive Officers of CL&P, PSNH, WMECO and NAEC as a group, does not exceed one percent. (5) Messrs. Collins, Letendre and Ms. Newman are Directors of PSNH. (6) Mr. Feigenbaum is a former Director and Executive Officer of NAEC. (7) Mr. Forsgren is a Director and Executive Officer of CL&P, WMECO, PSNH and NAEC. (8) Mr. Kenyon is a Director and Executive Officer of CL&P, PSNH, NAEC and WMECO. (9) Mr. MacKenzie is a Director of CL&P, PSNH and WMECO and an Executive Officer of CL&P and WMECO. Mr. MacKenzie shares voting and investment power with his wife for 1,584 of these shares. (10) Mr. Morris is a Director and Executive Officer of CL&P, PSNH, WMECO and NAEC. Mr. Morris shares voting and investment power with his wife for these shares. (11) Mr. Wax is an Executive Officer of CL&P, PSNH, WMECO and NAEC. Item 13. Certain Relationships and Related Transactions NU. Incorporated herein by reference is the information contained in the section "Certain Relationships and Related Transactions" of the definitive proxy statement for solicitation of proxies by NU's Board of Trustees, dated March 31, 1998, which will be filed with the Commission pursuant to Rule 14a-6 under the Act. CL&P, PSNH, WMECO and NAEC. No relationships or transactions that would be described in response to this item exist now or existed during 1997 with respect to CL&P, PSNH, WMECO and NAEC. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) 1. Financial Statements: The Report of Independent Public Accountants and financial statements of NU, CL&P, PSNH, WMECO and NAEC are hereby incorporated by reference and made a part of this report (see "Item 8. Financial Statements and Supplementary Data"). Report of Independent Public Accountants on Schedules S-1 Consent of Independent Public Accountants S-3 2. Schedules: Financial Statement Schedules for NU (Parent), NU and Subsidiaries, CL&P and Subsidiaries, PSNH and WMECO and Subsidiary are listed in the Index to Financial Statements Schedules S-4 3. Exhibits Index E-1 (b) Reports on Form 8-K: NU, CL&P, PSNH, WMECO and NAEC filed Form 8-Ks dated November 24, 1997 with the SEC on November 26, 1997. This 8-K filing disclosed that: . New Hampshire Electric Cooperative, Inc., made an unsolicited offer to purchase PSNH's transmission and distribution facilities, as well as PSNH's claims for recovery of stranded costs for $1.4 billion. . Neil S. Carns had resigned as a Senior Vice President and Chief Nuclear Officer - Millstone. NU, CL&P, WMECO, PSNH and NAEC filed Form 8-Ks dated November 25, 1997 with the SEC on December 23, 1997. This filing disclosed that: . A U.S. District Court judge orally approved the $25 million settlement of seven derivative lawsuits and one demand letter filed by shareholders of NU related to alleged mismanagement at Millstone. Under the approved settlement, NU would receive the $25 million, less attorneys' fees which had yet to be determined, from insurers of certain of NU's present and former officers and trustees. . The DPUC issued a draft decision regarding its review of CL&P's rates. The draft decision requires CL&P to remove Millstone 1 from rate base early in 1998, pending its return to service. . On November 25, 1997, Massachusetts enacted a comprehensive electric utility industry restructuring bill calling for a ten percent reduction of rates and choice of retail electric supplier on March 1, 1998. It additionally calls for a further five percent rate reduction, adjusted for inflation, by September 1, 1999. . On December 17, 1997, Moody's Investors Service downgraded the senior secured debt of CL&P, WMECO and NU, as well as the preferred stock of CL&P and WMECO. All NU system securities remain under review for further downgrade. . On December 10, 1997, the NRC issued Millstone a notice of violation and proposed imposition of civil penalties in the amount of $2.1 million for past violations of NRC requirements. . On December 1, 1997, the NHPUC issued the FPPAC rate to be collected by PSNH for the period December 1, 1997 through May 31, 1998, increasing customer bills by approximately six percent. NU, CL&P and WMECO filed Form 8-Ks dated December 31, 1997 with the SEC on January 27, 1998. This filing disclosed: . NU consolidated's 1997 earnings. . The current status of the DPUC's review of CL&P's rates. . The DPUC ordered CL&P to file a full rate case and will schedule hearings to determine the status of Millstone 3 and Millstone 2. . WMECO filed its restructuring plan with the DTE on December 31, 1997. NORTHEAST UTILITIES 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. NORTHEAST UTILITIES (Registrant) Date: March 6, 1998 By /s/ Michael G. Morris Michael G. Morris Chairman of the Board and President and Chief Executive Officer 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 Title Signature March 6, 1998 Chairman of the Board, /s/ Michael G. Morris President and Michael G. Morris Chief Executive Officer and a Trustee March 6, 1998 Executive Vice /s/ John H. Forsgren President and John H. Forsgren Chief Financial Officer March 6, 1998 Vice President and /s/ John J. Roman Controller John J. Roman NORTHEAST UTILITIES SIGNATURES (CONT'D) Date Title Signature March 6, 1998 Trustee /s/ Cotton M. Cleveland Cotton M. Cleveland March 6, 1998 Trustee /s/ William F. Conway William F. Conway March 6, 1998 Trustee John F. Curley March 6, 1998 Trustee /s/ E. Gail de Planque E. Gail de Planque March 6, 1998 Trustee /s/ Elizabeth T. Kennan Elizabeth T. Kennan March 6, 1998 Trustee /s/ William J. Pape II William J. Pape II March 6, 1998 Trustee /s/ Robert E. Patricelli Robert E. Patricelli March 6, 1998 Trustee /s/ John F. Swope John F. Swope March 6, 1998 Trustee /s/ John F. Turner John F. Turner THE CONNECTICUT LIGHT AND POWER COMPANY 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. THE CONNECTICUT LIGHT AND POWER COMPANY (Registrant) Date: March 6, 1998 By /s/ Michael G. Morris Michael G. Morris Chairman 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 Title Signature March 6, 1998 Chairman and /s/ Michael G. Morris a Director Michael G. Morris March 6, 1998 President and /s/ Hugh C. MacKenzie a Director Hugh C. MacKenzie March 6, 1998 Executive Vice /s/ John H. Forsgren President and John H. Forsgren Chief Financial Officer and a Director March 6, 1998 Vice President /s/ John J. Roman and Controller John J. Roman March 6, 1998 Director /s/ Bruce D. Kenyon Bruce D. Kenyon PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE 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. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE (Registrant) Date: March 6, 1998 By /s/ Michael G. Morris Michael G. Morris Chairman and Chief Executive Officer 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 Title Signature March 6, 1998 Chairman and Chief /s/ Michael G. Morris Executive Officer Michael G. Morris and a Director March 6, 1998 President and /s/ William T. Frain, Jr. Chief Operating William T. Frain, Jr. Officer and a Director March 6, 1998 Executive Vice /s/ John H. Forsgren President and John H. Forsgren Chief Financial Officer and a Director March 6, 1998 Vice President /s/ John J. Roman and Controller John J. Roman PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE SIGNATURES (CONT'D) Date Title Signature March 6, 1998 Director /s/ John C. Collins John C. Collins March 6, 1998 Director /s/ Bruce D. Kenyon Bruce D. Kenyon March 6, 1998 Director /s/ Gerald Letendre Gerald Letendre March 6, 1998 Director /s/ Hugh C. MacKenzie Hugh C. MacKenzie March 6, 1998 Director /s/ Jane E. Newman Jane E. Newman WESTERN MASSACHUSETTS ELECTRIC COMPANY 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. WESTERN MASSACHUSETTS ELECTRIC COMPANY (Registrant) Date: March 6, 1998 By /s/ Michael G. Morris Michael G. Morris Chairman 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 Title Signature March 6, 1998 Chairman and /s/ Michael G. Morris a Director Michael G. Morris March 6, 1998 President and /s/ Hugh C. MacKenzie a Director Hugh C. MacKenzie March 6, 1998 Executive Vice /s/ John H. Forsgren President and John H. Forsgren Chief Financial Officer and a Director March 6, 1998 Vice President /s/ John J. Roman and Controller John J. Roman March 6, 1998 Director /s/ Bruce D. Kenyon Bruce D. Kenyon NORTH ATLANTIC ENERGY CORPORATION 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. NORTH ATLANTIC ENERGY CORPORATION (Registrant) Date: March 6, 1998 By /s/ Michael G. Morris Michael G. Morris Chairman 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 Title Signature March 6, 1998 Chairman and /s/ Michael G. Morris a Director Michael G. Morris March 6, 1998 President and /s/ Bruce D. Kenyon Chief Executive Bruce D. Kenyon Officer and a Director March 6, 1998 Executive Vice /s/ John H. Forsgren President and John H. Forsgren Chief Financial Officer and a Director March 6, 1998 Vice President /s/ John J. Roman and Controller John J. Roman REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES We have audited in accordance with generally accepted auditing standards, the financial statements included in Northeast Utilities' annual report to shareholders and The Connecticut Light and Power Company's and Western Massachusetts Electric Company's annual reports, incorporated by reference in this Form 10-K, and have issued our reports thereon dated February 20, 1998. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the accompanying Index to Financial Statements Schedules are the responsibility of the companies' management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Hartford, Connecticut February 20, 1998 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES We have audited in accordance with generally accepted auditing standards, the financial statements included in North Atlantic Energy Corporation's and Public Service Company of New Hampshire's annual reports to shareholders, incorporated by reference in this Form 10-K and have issued our reports thereon dated February 20, 1998. Our reports included an explanatory paragraph regarding the existence of conditions which raise substantial doubt about the companies' abilities to continue as going concerns. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the accompanying Index to Financial Statements Schedules are the responsibility of the companies' management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Hartford, Connecticut February 20, 1998 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included (or incorporated by reference) in this Form 10-K, into the Company's previously filed Registration Statements No. 33-55279 of The Connecticut Light and Power Company, No. 33-56537 of CL&P Capital, LP and No. 33-34622, No. 33-44814, No. 33-63023, and No. 33-40156 of Northeast Utilities. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Hartford, Connecticut March 6, 1998 INDEX TO FINANCIAL STATEMENTS SCHEDULES Schedule I. Financial Information of Registrant: Northeast Utilities (Parent) Balance Sheets 1997 and 1996 S-5 Northeast Utilities (Parent) Statements of Income 1997, 1996, and 1995 S-6 Northeast Utilities (Parent) Statements of Cash Flows 1997, 1996, and 1995 S-7 II. Valuation and Qualifying Accounts and Reserves 1997, 1996, and 1995: Northeast Utilities and Subsidiaries S-8 - S-10 The Connecticut Light and Power Company and Subsidiaries S-11 - S-13 Public Service Company of New Hampshire S-14 - S-16 Western Massachusetts Electric Company and Subsidiary S-17 - S-19 All other schedules of the companies' for which provision is made in the applicable regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable, and therefore have been omitted. SCHEDULE I NORTHEAST UTILITIES (PARENT) FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS AT DECEMBER 31, 1997 AND 1996 (Thousands of Dollars)
1997 1996 ---------- ---------- ASSETS - ------ Other Property and Investments: Investments in subsidiary companies, at equity............................................... $2,271,902 $2,506,254 Investments in transmission companies, at equity...... 19,635 21,186 Other, at cost........................................ 402 413 ----------- ----------- 2,291,939 2,527,853 ----------- ----------- Current Assets: Cash.................................................. 10 10 Notes receivable from affiliated companies............ 34,200 5,475 Notes and accounts receivable......................... 711 813 Receivables from affiliated companies................. 961 7,106 Prepayments........................................... 265 224 ----------- ----------- 36,147 13,628 ----------- ----------- Deferred Charges: Accumulated deferred income taxes..................... 5,692 5,293 Unamortized debt expense.............................. 232 524 Other................................................. 47 46 ----------- ----------- 5,971 5,863 ----------- ----------- Total Assets..................................... $2,334,057 $2,547,344 =========== =========== CAPITALIZATION AND LIABILITIES - ------------------------------ Capitalization: Common Shareholders' Equity: Common shares, $5 par value--Authorized 225,000,000 shares; 136,842,170 shares issued and 130,182,736 shares outstanding in 1997 and 136,051,938 shares issued and 128,444,373 outstanding in 1996..................... $ 684,211 $ 680,260 Capital surplus, paid in.............................. 932,493 940,446 Deferred benefit plan--employee stock ownership plan.. (154,141) (176,091) Retained earnings..................................... 664,678 832,520 ----------- ----------- Total common shareholders' equity................... 2,127,241 2,277,135 Long-term debt........................................ 177,000 194,000 ----------- ----------- Total capitalization................................ 2,304,241 2,471,135 ----------- ----------- Current Liabilities: Notes payable to banks................................ - 38,750 Long-term debt and preferred stock--current portion... 17,000 16,000 Accounts payable...................................... 1,857 15,504 Accounts payable to affiliated companies.............. 216 600 Accrued taxes......................................... 7,860 2,158 Accrued interest...................................... 2,343 2,602 Dividend reinvestment plan............................ 90 - Other................................................. - 2 ----------- ----------- 29,366 75,616 ----------- ----------- Other Deferred Credits.................................. 450 593 ----------- ----------- Total Capitalization and Liabilities $2,334,057 $2,547,344 =========== ===========
S-5 SCHEDULE I NORTHEAST UTILITIES (PARENT) FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (Thousands of Dollars Except Share Information)
1997 1996 1995 ------------- ------------- ------------- Operating Revenues............... $ - $ - $ - ------------- ------------- ------------- Operating Expenses: Other.......................... 8,657 8,920 14,267 Federal income taxes........... (10,697) (10,390) (8,585) ------------- ------------- ------------- Total operating expenses...... (2,040) (1,470) 5,682 ------------- ------------- ------------- Operating Income (Loss).......... 2,040 1,470 (5,682) ------------- ------------- ------------- Other Income: Equity in earnings of subsidiaries.................. (123,941) 18,272 310,025 Equity in earnings of transmission companies........ 2,968 3,306 3,561 Other, net..................... 2,184 368 329 ------------- ------------- ------------- Other income, net............ (118,789) 21,946 313,915 ------------- ------------- ------------- Income before interest charges..................... (116,749) 23,416 308,233 ------------- ------------- ------------- Interest Charges ................ 18,959 21,585 25,799 ------------- ------------- ------------- Earnings for Common Shares ...... $ (135,708) $ 1,831 $ 282,434 ============= ============= ============= Earnings Per Common Share........ $ (1.05) $ 0.01 $ 2.24 ============= ============= ============= Common Shares Outstanding (average)....................... 129,567,708 127,960,382 126,083,645 ============= ============= =============
SCHEDULE I NORTHEAST UTILITIES (PARENT) FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996, 1995 (Thousands of Dollars)
1997 1996 1995 ------------ -------------- -------------- Operating Activities: Net (loss) income $ (135,708) $ 1,831 $ 282,434 Adjustments to reconcile to net cash from operating activities: Equity in earnings of subsidiary companies 123,941 (18,272) (310,025) Cash dividends received from subsidiary companies 132,994 247,101 272,350 Deferred income taxes 1,558 3,868 772 Other sources of cash 11,738 17,961 6,916 Other uses of cash (2,101) (3,065) (528) Changes in working capital: Receivables 6,247 (7,312) 1,991 Accounts payable (14,031) (3,183) 15,381 Other working capital (excludes cash) 5,490 (13,724) 7,396 ------------ -------------- -------------- Net cash flows from operating activities 130,128 225,205 276,687 ------------ -------------- -------------- Financing Activities: Issuance of common shares 6,502 10,622 47,218 Net decrease in short-term debt (38,750) (18,750) (46,500) Reacquisitions and retirements of long-term debt (16,000) (14,000) (12,000) Cash dividends on common shares (32,134) (176,276) (221,701) ------------ -------------- -------------- Net cash flows used for financing activities (80,382) (198,404) (232,983) ------------ -------------- -------------- Investment Activities: NU System Money Pool (28,725) 4,200 (7,700) Investment in subsidiaries (22,583) (33,217) (38,963) Other investment activities, net 1,562 2,208 2,935 ------------ -------------- -------------- Net cash flows used for investments (49,746) (26,809) (43,728) ------------ -------------- -------------- Net decrease in cash for the period 0 (8) (24) Cash - beginning of period 10 18 42 ------------ -------------- -------------- Cash - end of period $ 10 $ 10 $ 18 ============ ============== ============== Supplemental Cash Flow Information Cash paid during the year for: Interest, net of amounts capitalized $ 18,960 $ 21,770 $ 26,430 ============ ============== ============== Income taxes (refund) $ (16,000) $ (7,700) $ (8,418) ============ ============== ==============
NORTHEAST UTILITIES AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEAR ENDED DECEMBER 31, 1997 (Thousands of Dollars)
- ------------------------------------------------------------------------------------------------------ Column A Column B Column C Column D Column E Additions -------------------- (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts- Deductions- at end Description of period expenses describe describe of period - ------------------------------------------------------------------------------------------------------ RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Reserves for uncollectible accounts $ 17,062 $ 14,854 $ - $ 29,864 (a) $ 2,052 ========= ========= ========= ========= ========= RESERVES NOT APPLIED AGAINST ASSETS: Operating reserves $ 99,460 $ 150,342 $ - $ 142,365 (b) $ 107,437 ========= ========= ========= ========= ========= (a) Amounts written off, net of recoveries. (b) Principally payments for environmental remediation, various injuries and damages, employee medical expenses, nuclear compliance expenditures and expenses in connection therewith.
NORTHEAST UTILITIES AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEAR ENDED DECEMBER 31, 1996 (Thousands of Dollars)
- ------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Additions -------------------- (1) (2) Charged to Balance atCharged to other Balance beginning costs and accounts- Deductions- at end Description of period expenses describe describe of period - ------------------------------------------------------------------------------------------------- RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Reserves for uncollectible accounts $ 14,379 $ 21,761 $ - $ 19,078 (a) $ 17,062 ========= ========= ========= ========== ========== Asset valuation reserves $ 10,266 $ $ - $ 10,266 $ 0 ========= ========= ========= ========== ========== RESERVES NOT APPLIED AGAINST ASSETS: Operating reserves $ 38,409 $ 71,597 $ - $ 10,546 (b) $ 99,460 ========= ========= ========= ========== ========== (a) Amounts written off, net of recoveries. (b) Principally payments for environmental remediation, various injuries and damages, employee medical expenses, and expenses in connection therewith.
NORTHEAST UTILITIES AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEAR ENDED DECEMBER 31, 1995 (Thousands of Dollars)
- ------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Additions -------------------- (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts- Deductions- at end Description of period expenses describe describe of period - ------------------------------------------------------------------------------------------------------- RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Reserves for uncollectible accounts $ 16,826 $ 18,010 $ - $ 20,458 (a)$ 14,378 ========= ========= ========= ========= ========= Asset valuation reserves $ 8,684 $ 1,582 $ - $ - $ 10,266 ========= ========= ========= ========= ========= RESERVES NOT APPLIED AGAINST ASSETS: Operating reserves $ 34,721 $ 11,475 $ - $ 7,787 (b)$ 38,409 ========= ========= ========= ========= ========= (a) Amounts written off, net of recoveries. (b) Principally payments for environmental remediation, various injuries and damages, employee medical expenses, and expenses in connection therewith.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEAR ENDED DECEMBER 31, 1997 (Thousands of Dollars)
- ------------------------------------------------------------------------------------------------------ Column A Column B Column C Column D Column E Additions -------------------- (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts- Deductions- at end Description of period expenses describe describe of period - ------------------------------------------------------------------------------------------------------ RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Reserves for uncollectible accounts $ 13,241 $ 10,509 $ - $ 23,450 (a) $ 300 ========= ========= ========= ========= ========= RESERVES NOT APPLIED AGAINST ASSETS: Operating reserves $ 69,379 $ 118,174 $ - $ 113,891 (b) $ 73,662 ========= ========= ========= ========= ========= (a) Amounts written off, net of recoveries. (b) Principally payments for environmental remediation, various injuries and damages, employee medical expenses, nuclear compliance expenditures and expenses in connection therewith.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEAR ENDED DECEMBER 31, 1996 (Thousands of Dollars)
- ------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Additions -------------------- (1) (2) Charged to Balance atCharged to other Balance beginning costs and accounts- Deductions- at end Description of period expenses describe describe of period - ------------------------------------------------------------------------------------------------- RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Reserves for uncollectible accounts $ 10,567 $ 15,704 $ - $ 13,030 (a) $ 13,241 ========= ========= ========= ========== ========== Asset valuation reserves $ 10,266 $ - $ - $ 10,266 $ 0 ========= ========= ========= ========== ========== RESERVES NOT APPLIED AGAINST ASSETS: Operating reserves $ 19,874 $ 56,209 $ - $ 6,704 (b) $ 69,379 ========= ========= ========= ========== ========== (a) Amounts written off, net of recoveries. (b) Principally payments for environmental remediation, various injuries and damages, employee medical expenses, and expenses in connection therewith.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEAR ENDED DECEMBER 31, 1995 (Thousands of Dollars)
- ------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Additions -------------------- (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts- Deductions- at end Description of period expenses describe describe of period - ------------------------------------------------------------------------------------------------------- RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Reserves for uncollectible accounts $ 12,778 $ 12,722 $ - $ 14,933 (a)$ 10,567 ========= ========= ========= ========= ========= Asset valuation reserves $ 8,684 $ 1,582 $ - $ - $ 10,266 ========= ========= ========= ========= ========= RESERVES NOT APPLIED AGAINST ASSETS: Operating reserves $ 19,529 $ 5,633 $ - $ 5,288 (b)$ 19,874 ========= ========= ========= ========= ========= (a) Amounts written off, net of recoveries. (b) Principally payments for environmental remediation, various injuries and damages, employee medical expenses, and expenses in connection therewith.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEAR ENDED DECEMBER 31, 1997 (Thousands of Dollars)
- ------------------------------------------------------------------------------------------------------ Column A Column B Column C Column D Column E Additions -------------------- (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts- Deductions- at end Description of period expenses describe describe of period - ------------------------------------------------------------------------------------------------------ RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Reserves for uncollectible accounts $ 1,700 $ 3,259 $ - $ 3,257 (a) $ 1,702 ========= ========= ========= ========= ========= RESERVES NOT APPLIED AGAINST ASSETS: Operating reserves $ 8,165 $ 2,970 $ - $ 2,847 (b) $ 8,288 ========= ========= ========= ========= ========= (a) Amounts written off, net of recoveries. (b) Principally payments for environmental remediation, various injuries and damages, employee medical expenses, nuclear compliance expenditures and expenses in connection therewith.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEAR ENDED DECEMBER 31, 1996 (Thousands of Dollars)
- ------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Additions -------------------- (1) (2) Charged to Balance atCharged to other Balance beginning costs and accounts- Deductions- at end Description of period(expenses describe describe of period - ------------------------------------------------------------------------------------------------- RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Reserves for uncollectible accounts $ 1,582 $ 2,906 $ - $ 2,788 (a) $ 1,700 ========= ========= ========= ========== ========== RESERVES NOT APPLIED AGAINST ASSETS: Operating reserves $ 8,142 1,940 $ - $ 1,917 (b) $ 8,165 ========= ========= ========= ========== ========== (a) Amounts written off, net of recoveries. (b) Principally payments for environmental remediation, various injuries and damages, employee medical expenses, and expenses in connection therewith.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEAR ENDED DECEMBER 31, 1995 (Thousands of Dollars)
- ------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Additions -------------------- (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts- Deductions- at end Description of period(a)expenses describe describe of period - ------------------------------------------------------------------------------------------------------- RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Reserves for uncollectible accounts $ 2,015 $ 2,454 $ - $ 2,887 (a)$ 1,582 ========= ========= ========= ========= ========= RESERVES NOT APPLIED AGAINST ASSETS: Operating reserves $ 5,113 $ 3,668 $ - $ 639 (b)$ 8,142 ========= ========= ========= ========= ========= (a) Amounts written off, net of recoveries. (b) Principally payments for environmental remediation, various injuries and damages, employee medical expenses, and expenses in connection therewith.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEAR ENDED DECEMBER 31, 1997 (Thousands of Dollars)
- ------------------------------------------------------------------------------------------------------ Column A Column B Column C Column D Column E Additions -------------------- (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts- Deductions- at end Description of period expenses describe describe of period - ------------------------------------------------------------------------------------------------------ RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Reserves for uncollectible accounts $ 2,121 $ 1,086 $ - $ 3,157 (a) $ 50 ========= ========= ========= ========= ========= RESERVES NOT APPLIED AGAINST ASSETS: Operating reserves $ 17,375 $ 27,722 $ - $ 25,794 (b) $ 19,303 ========= ========= ========= ========= ========= (a) Amounts written off, net of recoveries. (b) Principally payments for environmental remediation, various injuries and damages, employee medical expenses, nuclear compliance expenditures and expenses in connection therewith.
WESTERN MASSACHUSETTS ELECTRIC COMPANY SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEAR ENDED DECEMBER 31, 1996 (Thousands of Dollars)
- ------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Additions -------------------- (1) (2) Charged to Balance atCharged to other Balance beginning costs and accounts- Deductions- at end Description of period expenses describe describe of period - ------------------------------------------------------------------------------------------------- RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Reserves for uncollectible accounts $ 2,230 $ 3,097 $ - $ 3,206 (a) $ 2,121 ========= ========= ========= ========== ========== RESERVES NOT APPLIED AGAINST ASSETS: Operating reserves $ 5,144 $ 13,022 $ - $ 791 (b) $ 17,375 ========= ========= ========= ========== ========== (a) Amounts written off, net of recoveries. (b) Principally payments for environmental remediation, various injuries and damages, employee medical expenses, and expenses in connection therewith.
WESTERN MASSACHUSETTS ELECTRIC COMPANY SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEAR ENDED DECEMBER 31, 1995 (Thousands of Dollars)
- ------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Additions -------------------- (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts- Deductions- at end Description of period expenses describe describe of period - ------------------------------------------------------------------------------------------------------- RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Reserves for uncollectible accounts $ 2,032 $ 2,836 $ - $ 2,638 (a)$ 2,230 ========= ========= ========= ========= ========= RESERVES NOT APPLIED AGAINST ASSETS: Operating reserves $ 4,674 $ 1,340 $ - $ 870 (b)$ 5,144 ========= ========= ========= ========= ========= (a) Amounts written off, net of recoveries. (b) Principally payments for environmental remediation, various injuries and damages, employee medical expenses, and expenses in connection therewith.
EXHIBIT INDEX Each document described below is incorporated by reference to the files of the Securities and Exchange Commission, unless the reference to the document is marked as follows: * - Filed with the 1997 Annual Report on Form 10-K for NU and herein incorporated by reference from the 1997 NU Form 10-K, File No. 1-5324 into the 1997 Annual Reports on Form 10-K for CL&P, PSNH, WMECO and NAEC. # - Filed with the 1997 Annual Report on Form 10-K for NU and herein incorporated by reference from the 1997 NU Form 10-K, File No. 1-5324 into the 1997 Annual Report on Form 10-K for CL&P. @ - Filed with the 1997 Annual Report on Form 10-K for NU and herein incorporated by reference from the 1997 NU Form 10-K, File No. 1-5324 into the 1997 Annual Report on Form 10-K for PSNH. ** - Filed with the 1997 Annual Report on Form 10-K for NU and herein incorporated by reference from the 1997 NU Form 10-K, File No. 1-5324 into the 1997 Annual Report on Form 10-K for WMECO. ## - Filed with the 1997 Annual Report on Form 10-K for NU and herein incorporated by reference from the 1997 Form 10-K, File No. 1-5324 into the 1997 Annual Report on Form 10-K for NAEC. Exhibit Number Description 3 Articles of Incorporation and By-Laws 3.1 Northeast Utilities 3.1.1 Declaration of Trust of NU, as amended through May 24, 1988. (Exhibit 3.1.1, 1988 NU Form 10-K, File No. 1-5324) 3.2 The Connecticut Light and Power Company 3.2.1 Certificate of Incorporation of CL&P, restated to March 22, 1994. (Exhibit 3.2.1, 1993 NU Form 10-K, File No. 1-5324) 3.2.2 Certificate of Amendment to Certificate of Incorporation of CL&P, dated December 26, 1996. (Exhibit 3.2.2, 1996 NU Form 10-K, File No. 1-5324) 3.2.3 By-laws of CL&P, as amended to January 1, 1997. (Exhibit 3.2.3, 1996 NU Form 10-K, File No. 1-5324) 3.3 Public Service Company of New Hampshire 3.3.1 Articles of Incorporation, as amended to May 16, 1991. (Exhibit 3.3.1, 1993 NU Form 10-K, File No. 1-5324) 3.3.2 By-laws of PSNH, as amended to November 1, 1993. (Exhibit 3.3.2, 1993 NU Form 10-K, File No. 1-5324) 3.4 Western Massachusetts Electric Company 3.4.1 Articles of Organization of WMECO, restated to February 23, 1995. (Exhibit 3.4.1, 1994 NU Form 10-K, File No. 1-5324) ** 3.4.2 By-laws of WMECO, as amended to February 11, 1998. 3.5 North Atlantic Energy Corporation 3.5.1 Articles of Incorporation of NAEC dated September 20, 1991. (Exhibit 3.5.1, 1993 NU Form 10-K, File No. 1-5324) 3.5.2 Articles of Amendment dated October 16, 1991 and June 2, 1992 to Articles of Incorporation of NAEC. (Exhibit 3.5.2, 1993 NU Form 10-K, File No. 1-5324) 3.5.3 By-laws of NAEC, as amended to November 8, 1993. (Exhibit 3.5.3, 1993 NU Form 10-K, File No. 1-5324) 4 Instruments defining the rights of security holders, including indentures 4.1 Northeast Utilities 4.1.1 Indenture dated as of December 1, 1991 between Northeast Utilities and IBJ Schroder Bank & Trust Company, with respect to the issuance of Debt Securities. (Exhibit 4.1.1, 1991 NU Form 10-K, File No. 1-5324) 4.1.2 First Supplemental Indenture dated as of December 1, 1991 between Northeast Utilities and IBJ Schroder Bank & Trust Company, with respect to the issuance of Series A Notes. (Exhibit 4.1.2, 1991 NU Form 10-K, File No. 1-5324) 4.1.3 Second Supplemental Indenture dated as of March 1, 1992 between Northeast Utilities and IBJ Schroder Bank & Trust Company with respect to the issuance of 8.38% Amortizing Notes. (Exhibit 4.1.3, 1992 NU Form 10-K, File No. 1-5324) 4.1.4 Credit Agreements among CL&P, NU, WMECO, NUSCO (as Agent) and 3 Commercial Banks dated December 3, 1992 (Three-Year Facility). (Exhibit C.2.38, 1992 NU Form U5S, File No. 30- 246) 4.1.5 Credit Agreements among CL&P, WMECO, NU, Holyoke Water Power Company, RRR, NNECO and NUSCO (as Agent) and 1 commercial bank dated December 3, 1992 (Three-Year Facility). (Exhibit C.2.39, 1992 NU Form U5S, File No. 30-246) 4.1.6 Credit Agreement among NU, CL&P and WMECO and several commercial banks, dated as of November 21, 1996. (Exhibit No. B.1, File No. 70-8875) 4.1.7 First Amendment and Waiver dated as of May 30, 1997 to Credit Agreement dated as of November 21, 1996 among NU, CL&P, WMECO, and the Co-Agents and Banks named therein. (Exhibit B.4(a) (Execution Copy), File No. 70-8875) 4.1.8 Credit Agreement dated as of February 10, 1998 among NU, the Lenders named therein, and Toronto Dominion (Texas), Inc., as Administrative Agent, TD Securities (USA) Inc., as Arranger. (Exhibit B.9 (Execution Copy), File No. 70-8875) 4.2 The Connecticut Light and Power Company 4.2.1 Indenture of Mortgage and Deed of Trust between CL&P and Bankers Trust Company, Trustee, dated as of May 1, 1921. (Composite including all twenty-four amendments to May 1, 1967.) (Exhibit 4.1.1, 1989 NU Form 10-K, File No. 1-5324) Supplemental Indentures to the Composite May 1, 1921 Indenture of Mortgage and Deed of Trust between CL&P and Bankers Trust Company, dated as of: 4.2.2 December 1, 1969. (Exhibit 4.20, File No. 2-60806) 4.2.3 June 30, 1982. (Exhibit 4.33, File No. 2-79235) 4.2.4 December 1, 1989. (Exhibit 4.1.26, 1989 NU Form 10-K, File No. 1-5324) 4.2.5 July 1, 1992. (Exhibit 4.31, File No. 33-59430) 4.2.6 July 1, 1993. (Exhibit A.10(b), File No. 70-8249) 4.2.7 July 1, 1993. (Exhibit A.10(b), File No. 70-8249) 4.2.8 December 1, 1993. (Exhibit 4.2.14, 1993 NU Form 10-K, File No. 1-5324) 4.2.9 February 1, 1994. (Exhibit 4.2.15, 1993 NU Form 10-K, File No. 1-5324) 4.2.10 February 1, 1994. (Exhibit 4.2.16, 1993 NU Form 10-K, File No. 1-5324) 4.2.11 June 1, 1994. (Exhibit 4.2.15, 1994 NU Form 10-K, File No. 1-5324) 4.2.12 October 1, 1994. (Exhibit 4.2.16, 1994 NU Form 10-K, File No. 1-5324) 4.2.13 June 1, 1996. (Exhibit 4.2.16, 1996 NU Form 10-K, File No. 1-5324) 4.2.14 January 1, 1997. (Exhibit 4.2.17, 1996 NU Form 10-K, File No. 1-5324) 4.2.15 May 1, 1997. (Exhibit 4.19, File No. 333-30911) 4.2.16 June 1, 1997. (Exhibit 4.20, File No. 333-30911) # 4.2.17 June 1, 1997. 4.2.18 Financing Agreement between Industrial Development Authority of the State of New Hampshire and CL&P (Pollution Control Bonds, 1986 Series) dated as of December 1, 1986. (Exhibit C.1.47, 1986 NU Form U5S, File No. 30-246) 4.2.18.1 Letter of Credit and Reimbursement Agreement (Pollution Control Bonds, 1986 Series) dated as of August 1, 1994. (Exhibit 1 (Execution Copy), File No. 70-7320) 4.2.19 Financing Agreement between Industrial Development Authority of the State of New Hampshire and CL&P (Pollution Control Bonds, 1988 Series) dated as of October 1, 1988. (Exhibit C.1.55, 1988 NU Form U5S, File No. 30-246) 4.2.19.1 Letter of Credit (Pollution Control Bonds, 1988 Series) dated October 27, 1988. (Exhibit 4.2.17.1, 1995 NU Form 10-K, File No. 1-5324) 4.2.19.2 Reimbursement and Security Agreement (Pollution Control Bonds, 1988 Series) dated as of October 1, 1988. (Exhibit 4.2.17.2, 1995 NU form 10-K, File No. 1-5324) 4.2.20 Financing Agreement between Industrial Development Authority of the State of New Hampshire and CL&P (Pollution Control Bonds) dated as of December 1, 1989. (Exhibit C.1.39, 1989 NU Form U5S, File No. 30-246) 4.2.21 Loan and Trust Agreement among Business Finance Authority of the State of New Hampshire, CL&P and the Trustee (Pollution Control Bonds, 1992 Series A) dated as of December 1, 1992.(Exhibit C.2.33, 1992 NU Form U5S, File No. 30-246) 4.2.21.1 Letter of Credit and Reimbursement Agreement (Pollution Control Bonds, 1992 Series A) dated as of December 1, 1992. (Exhibit 4.2.19.1, 1995 NU Form 10-K, File No. 1-5324) 4.2.22 Loan Agreement between Connecticut Development Authority and CL&P (Pollution Control Bonds - Series A, Tax Exempt Refunding) dated as of September 1, 1993. (Exhibit 4.2.21, 1993 NU Form 10-K, File No. 1-5324) 4.2.22.1 Letter of Credit and Reimbursement Agreement (Pollution Control Bonds - Series A, Tax Exempt Refunding) dated as of September 1, 1993. (Exhibit 4.2.23, 1993 NU Form 10-K, File No. 1- 5324) 4.2.23 Loan Agreement between Connecticut Development Authority and CL&P (Pollution Control Bonds - Series B, Tax Exempt Refunding) dated as of September 1, 1993. (Exhibit 4.2.22, 1993 NU Form 10-K, File No. 1-5324) 4.2.23.1 Letter of Credit and Reimbursement Agreement (Pollution Control Bonds - Series B, Tax Exempt Refunding) dated as of September 1, 1993. (Exhibit 4.2.24, 1993 NU Form 10-K, File No. 1- 5324) 4.2.24 Amended and Restated Loan Agreement between Connecticut Development Authority and CL&P (Pollution Control Revenue Bond - 1996A Series) dated as of May 1, 1996 and Amended and Restated as of January 1, 1997. (Exhibit 4.2.24, 1996 NU Form 10-K, File No. 1-5324) 4.2.24.1 Amended and Restated Indenture of Trust between Connecticut Development Authority and the Trustee (CL&P Pollution Control Revenue Bond-1996A Series), dated as of May 1, 1996 and Amended and Restated as of January 1, 1997. (Exhibit 4.2.24.1, 1996 NU Form 10-K, File No. 1-5324) 4.2.24.2 Standby Bond Purchase Agreement among CL&P, Societe Generale, New York Branch and the Trustee, dated January 23, 1997. (Exhibit 4.2.24.2, 1996 NU Form 10-K, File No. 1-5324) # 4.2.24.3 Amendment No. 1, dated January 21, 1998, to the Standby Bond Purchase Agreement, dated January 23, 1997. 4.2.24.4 AMBAC Municipal Bond Insurance Policy issued by the Connecticut Development Authority (CL&P Pollution Control Revenue Bond-1996A Series), effective January 23, 1997. (Exhibit 4.2.24.3, 1996 NU Form 10-K, File No. 1-5324) 4.2.25 Amended and Restated Limited Partnership Agreement (CL&P Capital, L.P.) among CL&P, NUSCO, and the persons who became limited partners of CL&P Capital, L.P. in accordance with the provisions thereof dated as of January 23, 1995 (MIPS). (Exhibit A.1 (Execution Copy), File No. 70-8451) 4.2.26 Indenture between CL&P and Bankers Trust Company, Trustee (Series A Subordinated Debentures), dated as of January 1, 1995 (MIPS). (Exhibit B.1 (Execution Copy), File No. 70- 8451) 4.2.27 Payment and Guaranty Agreement of CL&P dated as of January 23, 1995 (MIPS). (Exhibit B.3 (Execution Copy), File No. 70-8451) 4.3 Public Service Company of New Hampshire 4.3.1 First Mortgage Indenture dated as of August 15, 1978 between PSNH and First Fidelity Bank, National Association, New Jersey, Trustee, (Composite including all amendments to May 16, 1991). (Exhibit 4.4.1, 1992 NU Form 10-K, File No. 1-5324) 4.3.1.1 Tenth Supplemental Indenture dated as of May 1, 1991 between PSNH and First Fidelity Bank, National Association. (Exhibit 4.1, PSNH Current Report on Form 8-K dated February 10, 1992, File No. 1-6392) 4.3.2 Revolving Credit Agreement, dated as of May 1, 1991 (includes a collateral mortgage). (Exhibit 4.12, PSNH Current Report on Form 8-K, File No. 1-6392) 4.3.2.1 Amended and Restated Revolving Credit Agreement, dated as of April 1, 1996 (includes amendment to collateral mortgage). (Exhibit 4.3.2, 1996 NU Form 10-K, File No. 1-5324) 4.3.3 Series A (Tax Exempt New Issue) PCRB Loan and Trust Agreement dated as of May 1, 1991. (Exhibit 4.2, PSNH Current Report on Form 8-K dated February 10, 1992, File No. 1-6392) 4.3.4 Series B (Tax Exempt Refunding) PCRB Loan and Trust Agreement dated as of May 1, 1991. (Exhibit 4.3, PSNH Current Report on Form 8-K dated February 10, 1992, File No. 1-6392) 4.3.5 Series C (Tax Exempt Refunding) PCRB Loan and Trust Agreement dated as of May 1, 1991. (Exhibit 4.4, PSNH Current Report on Form 8-K dated February 10, 1992, File No. 1-6392) 4.3.6 Series D (Taxable New Issue) PCRB Loan and Trust Agreement dated as of May 1, 1991. (Exhibit 4.5, PSNH Current Report on Form 8-K dated February 10, 1992, File No. 1-6392) 4.3.6.1 First Supplement to Series D (Tax Exempt Refunding Issue) PCRB Loan and Trust Agreement dated as of December 1, 1992. (Exhibit 4.4.5.1, 1992 NU Form 10-K, File No. 1-5324) 4.3.6.2 Second Series D (May 1, 1991 Taxable New Issue and December 1, 1992 Tax Exempt Refunding Issue) PCRB Letter of Credit and Reimbursement Agreement dated as of May 1, 1995 (Exhibit B.4, Execution Copy, File No. 70-8036) 4.3.7 Series E (Taxable New Issue) PCRB Loan and Trust Agreement dated as of May 1, 1991. (Exhibit 4.6, PSNH Current Report on Form 8-K dated February 10, 1992, File No. 1-6392) 4.3.7.1 First Supplement to Series E (Tax Exempt Refunding Issue) PCRB Loan and Trust Agreement dated as of December 1, 1993. (Exhibit 4.3.8.1, 1993 NU Form 10-K, File No. 1-5324) 4.3.7.2 Second Series E (May 1, 1991 Taxable New Issue and December 1, 1993 Tax Exempt Refunding Issue) PCRB Letter of Credit and Reimbursement Agreement dated as of May 1, 1995. (Exhibit B.5, (Execution Copy), File No. 70-8036) 4.4 Western Massachusetts Electric Company 4.4.1 First Mortgage Indenture and Deed of Trust between WMECO and Old Colony Trust Company, Trustee, dated as of August 1, 1954. (Exhibit 4.4.1, 1993 NU Form 10-K, File No. 1-5324) Supplemental Indentures thereto dated as of: 4.4.2 October 1, 1954.(Exhibit 4.2, File No. 33-51185) ** 4.4.3 March 1, 1967. 4.4.4 July 1, 1973. (Exhibit 2.10. File No. 2-68808) 4.4.5 December 1, 1992. (Exhibit 4.15, File No. 33-55772) 4.4.6 January 1, 1993. (Exhibit 4.5.13, 1992 NU Form 10-K, File No. 1-5324) 4.4.7 March 1, 1994. (Exhibit 4.4.11, 1993 NU Form 10-K, File No. 1-5324) 4.4.8 March 1, 1994. (Exhibit 4.4.12, 1993 NU Form 10-K, File No. 1-5324) 4.4.9 May 1, 1997. (Exhibit 4.11, File No. 33-51185) ** 4.4.10 July 1, 1997. 4.4.11 Loan Agreement between Connecticut Development Authority and WMECO, (Pollution Control Bonds - Series A, Tax Exempt Refunding) dated as of September 1, 1993. (Exhibit 4.4.13, 1993 NU Form 10-K, File No. 1-5324) 4.4.11.1 Letter of Credit and Reimbursement Agreement (Pollution Control Bonds - Series A, Tax Exempt Refunding) dated as of September 1, 1993. (Exhibit 4.4.14, 1993 NU Form 10-K, File No. 1- 5324) 4.5 North Atlantic Energy Corporation 4.5.1 First Mortgage Indenture and Deed of Trust between NAEC and United States Trust Company of New York, Trustee, dated as of June 1, 1992. (Exhibit 4.6.1, 1992 NU Form 10-K, File No. 1-5324) 4.5.2 Term Credit Agreement dated as of November 9, 1995. (Exhibit 4.5.2, 1995 NU Form 10-K, File No. 1-5324) 10 Material Contracts 10.1 Stockholder Agreement dated as of July 1, 1964 among the stockholders of Connecticut Yankee Atomic Power Company (CYAPC). (Exhibit 10.1, 1994 NU Form 10-K, File No. 1-5324) 10.2 Form of Power Contract dated as of July 1, 1964 between CYAPC and each of CL&P, HELCO, PSNH and WMECO. (Exhibit 10.2, 1994 NU Form 10-K, File No. 1-5324) 10.2.1 Form of Additional Power Contract dated as of April 30, 1984, between CYAPC and each of CL&P, PSNH and WMECO. (Exhibit 10.2.1, 1994 NU Form 10-K, File No. 1-5324) 10.2.2 Form of 1987 Supplementary Power Contract dated as of April 1, 1987, between CYAPC and each of CL&P, PSNH and WMECO. (Exhibit 10.2.6, 1987 NU Form 10-K, File No. 1-5324) 10.3 Capital Funds Agreement dated as of September 1, 1964 between CYAPC and CL&P, HELCO, PSNH and WMECO. (Exhibit 10.3, 1994 NU Form 10-K, File No. 1-5324) 10.4 Stockholder Agreement dated December 10, 1958 between Yankee Atomic Electric Company (YAEC) and CL&P, HELCO, PSNH and WMECO. (Exhibit 10.4, 1993 NU Form 10-K, File No. 1-5324) 10.5 Form of Amendment No. 3, dated as of April 1, 1985, to Power Contract between YAEC and each of CL&P, PSNH and WMECO, including a composite restatement of original Power Contract dated June 30, 1959 and Amendment No. 1 dated April 1, 1975 and Amendment No. 2 dated October 1, 1980. (Exhibit 10.5, 1988 NU Form 10-K, File No. 1-5324.) 10.5.1 Form of Amendment No. 4 to Power Contract, dated May 6, 1988, between YAEC and each of CL&P, PSNH and WMECO. (Exhibit 10.5.1, 1989 NU Form 10-K, File No. 1-5324) 10.5.2 Form of Amendment No. 5 to Power Contract, dated June 26, 1989, between YAEC and each of CL&P, PSNH and WMECO. (Exhibit 10.5.2, 1989 NU Form 10-K, File No. 1-5324) 10.5.3 Form of Amendment No. 6 to Power Contract, dated July 1,1989, between YAEC and each of CL&P, PSNH and WMECO. (Exhibit 10.5.3, 1989 NU Form 10-K, File No. 1-5324) 10.5.4 Form of Amendment No. 7 to Power Contract, dated February 1, 1992, between YAEC and each of CL&P, PSNH and WMECO. (Exhibit 10.5.4, 1993 NU Form 10-K, File No. 1-5324) #@**10.6 Stockholder Agreement dated as of May 20, 1968 among stockholders of MYAPC. #@**10.7 Form of Power Contract dated as of May 20, 1968 between MYAPC and each of CL&P, HELCO, PSNH and WMECO. 10.7.1 Form of Amendment No. 1 to Power Contract dated as of March 1, 1983 between MYAPC and each of CL&P, PSNH and WMECO. (Exhibit 10.7.1, 1993 NU Form 10-K, File No. 1-5324) 10.7.2 Form of Amendment No. 2 to Power Contract dated as of January 1, 1984 between MYAPC and each of CL&P, PSNH and WMECO. (Exhibit 10.7.2, 1993 NU Form 10-K, File No. 1-5324) 10.7.3 Form of Amendment No. 3 to Power Contract dated as of October 1, 1984 between MYAPC and each of CL&P, PSNH and WMECO. (Exhibit No. 10.7.3, 1994 NU Form 10-K, File No. 1- 5324) 10.7.4 Form of Additional Power Contract dated as of February 1, 1984 between MYAPC and each of CL&P, PSNH and WMECO. (Exhibit 10.7.4, 1993 NU Form 10-K, File No. 1-5324) #@**10.8 Capital Funds Agreement dated as of May 20, 1968 between MYAPC and CL&P, PSNH, HELCO and WMECO. 10.8.1 Amendment No. 1 to Capital Funds Agreement, dated as of August 1, 1985, between MYAPC, CL&P, PSNH and WMECO. (Exhibit No. 10.8.1, 1994 NU Form 10-K, File No. 1-5324) #@**10.9 Sponsor Agreement dated as of August 1, 1968 among the sponsors of Vermont Yankee Nuclear Power Corporation (VYNPC). #@**10.10 Form of Power Contract dated as of February 1, 1968 between VYNPC and each of CL&P, HELCO, PSNH and WMECO. 10.10.1 Form of Amendment to Power Contract dated as of June 1, 1972 between VYNPC and each of CL&P, HELCO, PSNH and WMECO. (Exhibit 5.22, File No. 2-47038) 10.10.2 Form of Second Amendment to Power Contract dated as of April 15, 1983 between VYNPC and each of CL&P, PSNH and WMECO. (Exhibit 10.10.2, 1993 NU Form 10-K, File No. 1-5324) 10.10.3 Form of Third Amendment to Power Contract dated as of April 24, 1985 between VYNPC and each of CL&P, PSNH and WMECO. (Exhibit No. 10.10.3, 1994 NU Form 10-K, File No. 1-5324) 10.10.4 Form of Fourth Amendment to Power Contract dated as of June 1, 1985 between VYNPC and each of CL&P, PSNH and WMECO. (Exhibit No. 10.10.4, 1996 NU Form 10-K, File No. 1-5324) 10.10.5 Form of Fifth Amendment to Power Contract dated as of May 6, 1988 between VYNPC and each of CL&P, PSNH and WMECO. (Exhibit 10.10.5, 1990 NU Form 10-K, File No. 1-5324) 10.10.6 Form of Sixth Amendment to Power Contract dated as of May 6, 1988 between VYNPC and each of CL&P, PSNH and WMECO. (Exhibit 10.10.6, 1990 NU Form 10-K, File No. 1-5324) 10.10.7 Form of Seventh Amendment to Power Contract dated as of June 15, 1989 between VYNPC and each of CL&P, PSNH and WMECO. (Exhibit 10.10.7, 1990 NU Form 10-K, File No. 1-5324) 10.10.8 Form of Eighth Amendment to Power Contract dated as of December 1, 1989 between VYNPC and each of CL&P, PSNH and WMECO. (Exhibit 10.10.8, 1990 NU Form 10-K, File No. 1- 5324) 10.10.9 Form of Additional Power Contract dated as of February 1, 1984 between VYNPC and each of CL&P, PSNH and WMECO. (Exhibit 10.10.9, 1993 NU Form 10-K, File No. 1-5324) #@**10.11 Capital Funds Agreement dated as of February 1, 1968 between VYNPC and CL&P, HELCO, PSNH and WMECO. #@** 10.11.1 Form of First Amendment to Capital Funds Agreement dated as of March 12, 1968 between VYNPC and CL&P, HELCO, PSNH and WMECO. 10.11.2 Form of Second Amendment to Capital Funds Agreement dated as of September 1, 1993 between VYNPC and CL&P, HELCO, PSNH and WMECO. (Exhibit 10.11.2, 1993 NU Form 10-K, File No. 1- 5324) 10.12 Amended and Restated Millstone Plant Agreement dated as of December 1, 1984 by and among CL&P, WMECO and Northeast Nuclear Energy Company (NNECO). (Exhibit 10.12, 1994 NU Form 10-K, File No. 1-5324) 10.13 Sharing Agreement dated as of September 1, 1973 with respect to 1979 Connecticut nuclear generating unit (Millstone 3). (Exhibit 6.43, File No. 2-50142) 10.13.1 Amendment dated August 1, 1974 to Sharing Agreement - 1979 Connecticut Nuclear Unit. (Exhibit 5.45, File No. 2-52392) 10.13.2 Amendment dated December 15, 1975 to Sharing Agreement - 1979 Connecticut Nuclear Unit. (Exhibit 7.47, File No. 2- 60806) 10.13.3 Amendment dated April 1, 1986 to Sharing Agreement - 1979 Connecticut Nuclear Unit. (Exhibit 10.17.3, 1990 NU Form 10-K, File No. 1-5324) 10.14 Agreement dated July 19, 1990, among NAESCO and Seabrook Joint owners with respect to operation of Seabrook. (Exhibit 10.53, 1990 NU Form 10-K, File No. 1-5324) 10.15 Sharing Agreement between CL&P, WMECO, HP&E, HWP and PSNH dated as of June 1, 1992. (Exhibit 10.17, 1992 NU Form 10-K, File No. 1- 5324) 10.16 Rate Agreement by and between NUSCO, on behalf of NU, and the Governor of the State of New Hampshire and the New Hampshire Attorney General dated as of November 22, 1989. (Exhibit 10.44, 1989 NU Form 10-K, File No. 1-5324) 10.16.1 First Amendment to Rate Agreement dated as of December 5, 1989. (Exhibit 10.16.1, 1995 NU Form 10-K, File No. 1- 5324) 10.16.2 Second Amendment to Rate Agreement dated as of December 12, 1989. (Exhibit 10.16.2, 1995 NU Form 10-K, File No. 1- 5324) 10.16.3 Third Amendment to Rate Agreement dated as of December 3, 1993. (Exhibit 10.16.3, 1995 NU Form 10-K, File No. 1- 5324) 10.16.4 Fourth Amendment to Rate Agreement dated as of September 21, 1994. (Exhibit 10.16.4, 1995 NU Form 10-K, File No. 1-5324) 10.16.5 Fifth Amendment to Rate Agreement dated as of September 9, 1994. (Exhibit 10.16.5, 1995 NU Form 10-K, File No. 1- 5324) 10.17 Form of Seabrook Power Contract between PSNH and NAEC, as amended and restated. (Exhibit 10.45, 1992 NU Form 10-K, File No. 1-5324) 10.18 Agreement (composite) for joint ownership, construction and operation of New Hampshire nuclear unit, as amended through the November 1, 1990 twenty-third amendment. (Exhibit No. 10.17, 1994 NU Form 10-K, File No. 1-5324) 10.18.1 Memorandum of Understanding dated November 7, 1988 between PSNH and Massachusetts Municipal Wholesale Electric Company (Exhibit 10.17, PSNH 1989 Form 10-K, File No. 1-6392) 10.18.2 Agreement of Settlement among Joint Owners dated as of January 13, 1989. (Exhibit 10.13.21, 1988 NU Form 10-K, File No. 1-5324) 10.18.2.1 Supplement to Settlement Agreement, dated as of February 7, 1989, between PSNH and Central Maine Power Company. (Exhibit 10.18.1, PSNH 1989 Form 10-K, File No. 1-6392) 10.19 Amended and Restated Agreement for Seabrook Project Disbursing Agent dated as of November 1, 1990. (Exhibit 10.4.7, File No. 33-35312) 10.19.1 Form of First Amendment to Exhibit 10.19. (Exhibit 10.4.8, File No. 33-35312) 10.19.2 Form (Composite) of Second Amendment to Exhibit 10.19. (Exhibit 10.18.2, 1993 NU Form 10-K, File No. 1-5324) 10.20 Agreement dated November 1, 1974 for Joint Ownership, Construction and Operation of William F. Wyman Unit No. 4 among PSNH, Central Maine Power Company and other utilities. (Exhibit 5.16 , File No. 2-52900) 10.20.1 Amendment to Exhibit 10.20 dated June 30, 1975. (Exhibit 5.48, File No. 2-55458) 10.20.2 Amendment to Exhibit 10.20 dated as of August 16, 1976. (Exhibit 5.19, File No. 2-58251) 10.20.3 Amendment to Exhibit 10.20 dated as of December 31, 1978. (Exhibit 5.10.3, File No. 2-64294) 10.21 Form of Service Contract dated as of July 1, 1966 between each of NU, CL&P and WMECO and the Service Company. (Exhibit 10.20, 1993 NU Form 10-K, File No. 1-5324) 10.21.1 Service Contract dated as of June 5, 1992 between PSNH and the Service Company. (Exhibit 10.12.4, 1992 NU Form 10-K, File No. 1-5324) 10.21.2 Service Contract dated as of June 5, 1992 between NAEC and the Service Company. (Exhibit 10.12.5, 1992 NU Form 10-K, File No. 1-5324) 10.21.3 Form of Service Agreement dated as of June 29, 1992 between PSNH and North Atlantic Energy Service Corporation, and the First Amendment thereto. (Exhibits B.7 and B.7.1, File No. 70-7787) 10.21.4 Form of Annual Renewal of Service Contract. (Exhibit 10.20.3, 1993 NU Form 10-K, File No. 1-5324) 10.22 Memorandum of Understanding between CL&P, HELCO, HP&E, HWP and WMECO dated as of June 1, 1970 with respect to pooling of generation and transmission. (Exhibit 13.32, File No. 2-38177) 10.22.1 Amendment to Memorandum of Understanding between CL&P, HELCO, HP&E, HWP and WMECO dated as of February 2, 1982 with respect to pooling of generation and transmission. (Exhibit 10.21.1, 1993 NU Form 10-K, File No. 1-5324) 10.22.2 Amendment to Memorandum of Understanding between CL&P, HELCO, HP&E, HWP and WMECO dated as of January 1, 1984 with respect to pooling of generation and transmission. (Exhibit 10.21.2, 1994 NU Form 10-K, File No. 1-5324) 10.23 New England Power Pool Agreement effective as of November 1, 1971, as amended to December 1, 1996. (Exhibit 10.15, 1988 NU Form 10-K, File No. 1-5324.) 10.23.1 Twenty-sixth Amendment to Exhibit 10.23 dated as of March 15, 1989. (Exhibit 10.15.1, 1990 NU Form 10-K, File No. 1- 5324) 10.23.2 Twenty-seventh Amendment to Exhibit 10.23 dated as of October 1, 1990. (Exhibit 10.15.2, 1991 NU Form 10-K, File No. 1-5324) 10.23.3 Twenty-eighth Amendment to Exhibit 10.23 dated as of September 15, 1992. (Exhibit 10.18.3, 1992 NU Form 10-K, File No. 1-5324) 10.23.4 Twenty-ninth Amendment to Exhibit 10.23 dated as of May 1, 1993. (Exhibit 10.22.4, 1993 NU Form 10-K, File No. 1-5324) 10.23.5 Thirty-second Amendment (Amendments 30 and 31 were withdrawn) to Exhibit 10.23 dated as of September 1, 1995. (Exhibit 10.23.5, 1995 NU Form 10-K, File No. 1-5324) 10.23.6 Thirty-third Amendment to Exhibit 10.23 dated as of December 31, 1996 and Form of Interim Independent System Operator (ISO) Agreement. (Exhibit 10.23.6, 1996 NU Form 10-K, File No. 1-5324) 10.24 Agreements among New England Utilities with respect to the Hydro- Quebec interconnection projects. (See Exhibits 10(u) and 10(v); 10(w), 10(x), and 10(y), 1990 and 1988, respectively, Form 10-K of New England Electric System, File No. 1-3446.) 10.25 Trust Agreement dated February 11, 1992, between State Street Bank and Trust Company of Connecticut, as Trustor, and Bankers Trust Company, as Trustee, and CL&P and WMECO, with respect to NBFT. (Exhibit 10.23, 1991 NU Form 10-K, File No. 1-5324) 10.25.1 Nuclear Fuel Lease Agreement dated as of February 11, 1992, between Bankers Trust Company, Trustee, as Lessor, and CL&P and WMECO, as Lessees. (Exhibit 10.23.1, 1991 NU Form 10-K, File No. 1-5324) 10.26 Simulator Financing Lease Agreement, dated as of February 1, 1985, by and between ComPlan and NNECO. (Exhibit 10.25, 1994 NU Form 10-K, File No. 1-5324) 10.27 Simulator Financing Lease Agreement, dated as of May 2, 1985, by and between The Prudential Insurance Company of America and NNECO. (Exhibit No. 10.26, 1994 NU Form 10-K, File No. 1-5324) 10.28 Lease dated as of April 14, 1992 between The Rocky River Realty Company (RRR) and Northeast Utilities Service Company (NUSCO) with respect to the Berlin, Connecticut headquarters (office lease). (Exhibit 10.29, 1992 NU Form 10-K, File No. 1-5324) 10.28.1 Lease dated as of April 14, 1992 between RRR and NUSCO with respect to the Berlin, Connecticut headquarters (project lease). (Exhibit 10.29.1, 1992 NU Form 10-K, File No. 1- 5324) 10.29 Millstone Technical Building Note Agreement dated as of December 21, 1993 between, by and between The Prudential Insurance Company of America and NNECO. (Exhibit 10.28, 1993 NU Form 10-K, File No. 1- 5324) 10.30 Lease and Agreement, dated as of December 15, 1988, by and between WMECO and Bank of New England, N.A., with BNE Realty Leasing Corporation of North Carolina. (Exhibit 10.63, 1988 NU Form 10-K, File No. 1-5324.) 10.31 Note Agreement dated April 14, 1992, by and between The Rocky River Realty Company (RRR) and Purchasers named therein (Connecticut General Life Insurance Company, Life Insurance Company of North America, INA Life Insurance Company of New York, Life Insurance Company of Georgia), with respect to RRR's sale of $15 million of guaranteed senior secured notes due 2007 and $28 million of guaranteed senior secured notes due 2017. (Exhibit 10.52, 1992 NU Form 10-K, File No. 1-5324) * 10.31.1 Amendment to Note Agreement, dated September 26, 1997. 10.31.2 Note Guaranty dated April 14, 1992 by Northeast Utilities pursuant to Note Agreement dated April 14, 1992 between RRR and Note Purchasers, for the benefit of The Connecticut National Bank as Trustee, the Purchasers and the owners of the notes. (Exhibit 10.52.1, 1992 NU Form 10-K, File No. 1-5324) * 10.31.2.1 Extension of Note Guaranty, dated September 26, 1997. 10.31.3 Assignment of Leases, Rents and Profits, Security Agreement and Negative Pledge, dated as of April 14, 1992 among RRR, NUSCO and The Connecticut National Bank as Trustee, securing notes sold by RRR pursuant to April 14, 1992 Note Agreement. (Exhibit 10.52.2, 1992 NU Form 10-K, File No. 1-5324) * 10.31.3.1 Modification of and Confirmation of Assignment of Leases, Rents and Profits, Security Agreement and Negative Pledge, dated as of September 26, 1997. * 10.31.4 Purchase and Sale Agreement, dated July 28, 1997 by and between RRR and the Sellers and Purchasers named therein. * 10.31.5 Purchase and Sale Agreement, dated September 26, 1997 by and between RRR and the Purchaser named therein. 10.32 Master Trust Agreement dated as of September 2, 1986 between CL&P and WMECO and Colonial Bank as Trustee, with respect to reserve funds for Millstone 1 decommissioning costs. (Exhibit No. 10.32, 1996 NU Form 10-K, File No. 1-5324) 10.32.1 Notice of Appointment of Mellon Bank, N.A. as Successor Trustee, dated November 20, 1990, and Acceptance of Appointment. (Exhibit 10.41.1, 1992 NU Form 10-K, File No. 1-5324) 10.33 Master Trust Agreement dated as of September 2, 1986 between CL&P and WMECO and Colonial Bank as Trustee, with respect to reserve funds for Millstone 2 decommissioning costs. (Exhibit No. 10.33, 1996 NU Form 10-K, File No. 1-5324) 10.33.1 Notice of Appointment of Mellon Bank, N.A. as Successor Trustee, dated November 20, 1990, and Acceptance of Appointment. (Exhibit 10.42.1, 1992 NU Form 10-K, File No. 1-5324) 10.34 Master Trust Agreement dated as of April 23, 1986 between CL&P and WMECO and Colonial Bank as Trustee, with respect to reserve funds for Millstone 3 decommissioning costs. (Exhibit No. 10.34, 1996 NU Form 10-K, File No. 1-5324) 10.34.1 Notice of Appointment of Mellon Bank, N.A. as Successor Trustee, dated November 20, 1990, and Acceptance of Appointment. (Exhibit 10.43.1, 1992 NU Form 10-K, File No. 1-5324) 10.35 NU Executive Incentive Plan, effective as of January 1, 1991. (Exhibit 10.44, NU 1991 Form 10-K, File No. 1-5324) 10.36 Supplemental Executive Retirement Plan for Officers of NU System Companies, Amended and Restated effective as of January 1, 1992. (Exhibit 10.45.1, NU Form 10-Q for the Quarter Ended June 30, 1992, File No. 1-5324) 10.36.1 Amendment 1 to Exhibit 10.36, effective as of August 1, 1993. (Exhibit 10.35.1, 1993 NU Form 10-K, File No. 1-5324) 10.36.2 Amendment 2 to Exhibit 10.36, effective as of January 1, 1994. (Exhibit 10.35.2, 1993 NU Form 10-K, File No. 1-5324) 10.36.3 Amendment 3 to Exhibit 10.36, effective as of January 1, 1996. (Exhibit 10.36.3, 1995 NU Form 10-K, File No. 1-5324) 10.37 Special Severance Program for Officers of NU System Companies, as adopted on June 9, 1997. (Exhibit No. 10.33, File No. 333-30911) 10.38 Loan Agreement dated as of December 2, 1991, by and between NU and Mellon Bank, N.A., as Trustee, with respect to NU's loan of $175 million to an ESOP Trust. (Exhibit 10.46, 1991 NU Form 10-K, File No. 1-5324) 10.38.1 First Amendment to Exhibit 10.37 dated February 7, 1992. (Exhibit 10.36.1, 1993 NU Form 10-K, File No. 1-5324) 10.38.2 Loan Agreement dated as of March 19, 1992 by and between NU and Mellon Bank, N.A., as Trustee, with respect to NU's loan of $75 million to the ESOP Trust. (Exhibit 10.49.1, 1992 NU Form 10-K, File No. 1-5324) 10.38.3 Second Amendment to Exhibit 10.37 dated April 9, 1992. (Exhibit 10.36.3, 1993 NU Form 10-K, File No. 1-5324) * 10.39 Employment Agreement with Michael G. Morris. 10.40 Transition and Retirement Agreement with Bernard M. Fox. (Exhibit 10.39, 1996 NU Form 10-K, File No. 1-5324) 10.41 Employment Agreement with Bruce M. Kenyon. (Exhibit 10.40, 1996 NU Form 10-K, File No. 1-5324) 10.42 Employment Agreement with John H. Forsgren. (Exhibit 10.41, 1996 NU Form 10-K, File No. 1-5324) 10.43 Employment Agreement with Hugh C. MacKenzie. (Exhibit 10.42, 1996 NU Form 10-K, File No. 1-5324) * 10.44 Employment Agreement with Robert P. Wax. 10.45 Northeast Utilities Deferred Compensation Plan for Trustees, Amended and Restated December 13, 1994. (Exhibit 10.39, 1995 NU Form 10-K, File No. 1-5324) 10.46 Deferred Compensation Plan for Officers of Northeast Utilities System Companies adopted September 23, 1986. (Exhibit 10.40, 1995 NU Form 10-K, File No. 1-5324) 10.47 Northeast Utilities Deferred Compensation Plan for Executives, adopted January 13, 1998. (Exhibit A.5, File No. 70-09185) 10.48 Reciprocal Support Agreement Among NNECO, NAESCO, CYAPC, YAEC and NUSCO dated January 1, 1996. (Exhibit 10.41, 1995 NU Form 10K, File No. 1-5324) # 10.49 Receivables Purchase and Sale Agreement (CL&P and CL&P Receivables Corporation), dated as of September 30, 1997. # 10.49.1 Purchase and Contribution Agreement (CL&P and CL&P Receivables Corporation), dated as of September 30, 1997. ** 10.50 Receivables Purchase Agreement (WMECO and WMECO Receivables Corporation), dated as of May 22, 1997. ** 10.50.1 Purchase and Sale Agreement (WMECO and WMECO Receivables Corporation), dated as of May 22, 1997. 10.51 Master Lease Agreement between General Electric Capital Corporation and CL&P, dated as of June 21, 1996. (Exhibit 10.50, 1996 NU Form 10-K, File No. 1-5324) # 10.51.1 Amendment No. 1 to Master Lease Agreement, dated as of August 29, 1997. 13 Annual Report to Security Holders (Each of the Annual Reports is filed only with the Form 10-K of that respective registrant.) * 13.1 Portions of the Annual Report to Shareholders of NU (pages 12-53) that have been incorporated by reference into this Form 10-K. 13.2 Annual Report of CL&P. 13.3 Annual Report of WMECO. 13.4 Annual Report of PSNH. 13.5 Annual Report of NAEC. *21 Subsidiaries of the Registrant. 27 Financial Data Schedules (Each Financial Data Schedule is filed only with the Form 10-K of that respective registrant.) 27.1 Financial Data Schedule of NU. 27.2 Financial Data Schedule of CL&P. 27.3 Financial Data Schedule of WMECO. 27.4 Financial Data Schedule of PSNH. 27.5 Financial Data Schedule of NAEC. EX-3.(II) 2 BYLAWS OF WMECO Exhibit 3.4.2 BY-LAWS WESTERN MASSACHUSETTS ELECTRIC COMPANY Adopted: February 11, 1937 Amended: February 18, 1942 January 13, 1943 October 19, 1945 January 15, 1947 August 18, 1948 November 17, 1954 February 26, 1960 September 9, 1960 February 27, 1962 July 8, 1964 May 19, 1966 December 5, 1967 June 3, 1970 August 2, 1971 October 13, 1971 October 20, 1975 December 16, 1981 March 1, 1982 April 12, 1983 December 15, 1983 (effective November 13, 1986) February 11, 1987 February 24, 1988 April 11, 1994 (effective February 13, 1995) February 11, 1998 WESTERN MASSACHUSETTS ELECTRIC COMPANY BY-LAWS ARTICLE I STOCKHOLDERS' MEETINGS The Annual Meeting of Stockholders for the election of directors and for the transaction of such other business as may properly be brought before the meeting shall be held in such place and on such day and hour in the months of January, February, March, April, May or June in each year as shall be fixed by the Board of Directors, or failing action by the Board, by the President, and designated in the call or on any subsequent time or day to which such meeting may be adjourned. In the event that no date for the annual meeting is established or said meeting has not been held on the date so fixed or determined, a special meeting in lieu of the annual meeting may be held with all of the force and effect of an annual meeting. Special meetings of the Stockholders may be called by the President or by the Directors, and shall be called by the Clerk, or in case of the death, absence, incapacity or refusal of the Clerk, by any other officer, upon written application of any stockholder or stockholders who are entitled to vote and who hold at least ten percent of the capital stock, stating the time, place and purpose of the meeting. Notice of the time and place of any annual or special meeting of stockholders shall be given by the Clerk or an Assistant Clerk at least seven days before the meeting to each stockholder entitled to vote thereat, by leaving such notice with him or at this residence or usual place of business, or by mailing it, postage prepaid, and addressed to such stockholder at his address as it appears in the records of the corporation. A majority in interest of all the shares of stock of the corporation outstanding present in person or by proxy shall constitute a quorum for the transaction of business but less than a quorum may adjourn either sine die or to a date certain. Any action required or permitted to be taken at any meeting of the stockholders may be taken without a meeting if all stockholders entitled to vote on the matter consent to the action in writing and the written consents are filed with the records of the meetings of stockholders. Such consents shall be treated for all purposes as a vote at a meeting. ARTICLE II OFFICERS The officers of the corporation shall be a Chairman of the Board of Directors, a President, an Executive Vice-president, one or more Vice- presidents, a Treasurer, a Clerk, and such other officers as the Board of Directors may appoint, including, if the Directors see fit, a Secretary and one or more Assistant Treasurers. The officers need not be stockholders. No two of the following offices may be held by the same person: Chairman of the Board of Directors, President, Executive Vice-president, and Vice-president, and the Treasurer shall not be an Assistant Treasurer. The business, property and affairs of the Company shall be managed by a Board of not less than three nor more than sixteen Directors. Within these limits, the number of positions on the Board of Directors for any year shall be the number fixed by resolution of the shareholders or of the Board of Directors, or, in the absence of such a resolution, shall be the number of Directors elected at the preceding Annual Meeting of Shareholders. The Directors so elected shall continue in office until their successors have been elected and qualified. ARTICLE III ELECTION OF OFFICERS The Directors, the clerk, and the Treasurer shall be elected by ballot each year at the annual meeting of the stockholders. The Chairman of the Board, the President, the Executive Vice-president, and each Vice- president shall be elected annually by, and the Chairman of the Board and the President shall be elected from, The Board of Directors. All such other officers as the Directors may appoint, as provided in Article II, shall be elected annually by the Board of Directors. Any vacancy in the office of Chairman of the Board, President, Executive Vice-president, Vice-president, Directors, Treasurer, Assistant Treasurer, or Clerk arising from non-election, resignation, declination, death, or any other cause, may be filled by the Board of Directors, except that whenever the number of Directors shall be increased at any special meeting of the stockholders the additional Directors so provided for shall be elected by ballot by the stockholders at the same meeting. Said Board may also elect an officer pro tempore to serve during the disability or absence of any officer. Officers chosen to fill vacancies shall hold their offices until new officers are duly chosen by the stockholders or Directors, as the case may be. ARTICLE IV DIRECTORS Meetings of the Board of Directors may be held at any time and place at the call of the Chairman of the Board, the President, or any two Directors. Notice of each meeting shall be given to each Director either by notice mailed to him at least forty-eight (48) hours before the time of such meeting, or by a telephone or telegraphic message sent to his place of business or residence, or other form of notice actually given to him twenty-four (24) hours before the time of such meetings. However, any meeting of the Board and all business transacted thereat shall be legal and valid without such notice if each member of the Board is present in person or waives notice thereof by writing filed with the records of the meeting or assents in writing to the recorded proceedings of the meeting. One-third of the directors then in office shall constitute a quorum, except that no quorum shall consist of less than two Directors. A number less than a quorum may adjourn from time to time until a quorum is present. In the event of such an adjournment, notice of the adjourned meeting shall be given to all Directors. The Board of Directors may at any time elect by ballot not less than five (5) of their members who shall constitute an Executive committee of the Board, and if such an Executive Committee is elected the Board of Directors shall make regulations defining the powers and duties of such Executive Committee and may delegate to it any or all of their powers in management of the property, business and affairs of the corporation except so far as is incompatible with these By-laws or with the laws of the Commonwealth. A majority of the Executive Committee shall constitute a quorum. Such Executive Committee shall elect a Chairman and Secretary and shall keep a record of its doings which at all reasonable times shall be open to inspection by each member of the Board of Directors. The Chairman of the Executive Committee shall submit its records to the Board of Directors at may deem proper. The Directors as a Board shall have the management of the property, business and affairs of the corporation and they are hereby invested in such management with all the powers which the corporation itself possesses so far as such investing is not incompatible with the provisions of these By-laws or the laws of the Commonwealth. However, so long as the holders of the outstanding shares of the corporation's preferred stock voting as a class have not exercised their right to elect a majority of the Board of Directors of the corporation on the happening of any of the events of default specified in the preferred stock provisions of these By-laws, any right of the corporation to terminate, amend, rescind, waive, discharge, or in any other way alter or change the obligations of the corporation under any contract with Northeast Nuclear Energy Company covering the maintaining of an inventory of nuclear core elements for Unit Nos. 1, 2 or 3 of the Millstone Nuclear Power Station, including, without limitation, the Fuel Supply Contract dated as of December 1, 1972, (as it is to be amended by a Contract of Amendment to be dated as of October 1, 1975), by and among the corporation, The Hartford Electric Light Company, and the Connecticut Light and Power Company and Northeast Nuclear Energy Company, shall be reserved to the common stockholders of the corporation. They may appoint and remove at pleasure such subordinate officers and employees as may see to them wise. They may assign such powers and duties to any officers or subordinate officers or employees as may not be inconsistent with Laws or these By-laws. They shall have access to the books, vouchers and funds of the corporation in the custody of the Treasurer, shall determine upon the form of the corporate seal and of the certificates of stock, shall fix the salaries of the officers, and shall declare dividends from time to time as they may deem for the best interests of the corporation. They may make contributions to corporations, trusts, funds or foundations organized and operated exclusively for charitable, scientific or educational purposes, no part of the earnings of which inures to the benefit of any private shareholder or individual, in such amounts as they may deem reasonable up to but not exceeding in any fiscal year in the aggregate one-half of one percent of the capital and surplus of the corporation as at the close of the fiscal year last preceding the making of any such contribution. The Company shall indemnify each of its Directors and officers (including persons who serve at its request as Directors, officers, or in any other similar capacity of another organization in which it has any interest as a shareholder, creditor or otherwise) against all liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees, reasonably incurred by him in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which he may be involved or with which he may be threatened, while in office or thereafter, by reason of his being or having been such a Director or officer, except with respect to any matter as to which he shall have been adjudicated in such action, suit or proceeding not to have acted in good faith in the reasonable belief that his action was in the best interests of the corporation; provided, however, that as to any matter disposed of by a compromise payment by such Director or officer pursuant to a consent decree or otherwise, no indemnification either for said payment or for any other expenses shall be provided unless such compromise shall be approved as in the best interests of the corporation, after notice that it involves such indemnification, (a) by a disinterested majority of the Directors then in office; or (b) by a majority of the disinterested Directors then in office, provided that there has been obtained an opinion in writing of independent legal counsel to the effect that such Director or officer appears to have acted in good faith in the reasonable belief that his action was in the best interests of the corporation; or (c) by the holders of majority of the outstanding stock at the time entitled to vote for Directors, voting as a single class, exclusive of any stock owned by an interested Director or officer. In discharging his duty any such Director or officer, when acting in good faith, may rely upon the books of account of the corporation or of such other organization, reports made to the corporation or to such other organization by any of its officers or employees or by counsel, accountants, appraisers or other experts selected with reasonable care by the Board of Directors or officers, or upon other records of the corporation or of such other organization. Expenses incurred with respect to any such action, suit or proceeding may be advanced by the corporation prior to the final disposition of such action, suit or proceeding, upon receipt of an undertaking by or on behalf of the recipient to repay such amount unless it is ultimately determined that he is entitled to indemnification. The right of indemnification hereby provided shall not be exclusive of or affect any other right to which any Director or officer may be entitled. As used in this paragraph, the terms "Director" and "officer" include their respective heirs, executors and administrators, and an "interested" Director or officer is one against whom in such capacity the proceedings in question or another proceeding on the same or similar grounds is then pending. Nothing contained in this Article shall be found, in any action, suit or proceeding to be invalid or ineffective, the validity and the effect of the remaining parts shall not be affected. ARTICLE V CHAIRMAN OF THE BOARD OF DIRECTORS The Chairman of the Board of Directors shall preside at the meetings of the Board and shall act in a general advisory capacity to the Board in regard to all activities of the corporation, and shall have such other powers and perform such other duties as may from time to time be determined by the Board. ARTICLE VI THE PRESIDENT The President shall preside at all meetings of the stockholders and in the absence of the Chairman of the Board at all meetings of the Board of Directors. The President shall be the chief executive officer of the corporation and shall have full charge of its business and affairs and shall perform all the duties of this office prescribed by law and all powers and duties given him by the Board of Directors. ARTICLE VII EXECUTIVE VICE-PRESIDENT AND VICE-PRESIDENTS The Executive Vice-president shall have such powers and perform such duties as may be assigned to him by the Board of Directors or as may be delegated to him by the President. In the absence or disability of the President, or in case of an unfilled vacancy in that office, the Executive Vice-president shall perform the duties and exercise the powers of the President. The Vice-president or Vice-presidents shall perform such duties of a general or special nature as may be assigned to him or them by the Board of Directors or as may be delegated to him or them by or through the President. In case of the absence or disability of the Executive Vice-president, a Vice-president shall perform all the duties and have all the powers of the Executive Vice-president. If there are at any time two or more Vice-presidents, the one to act in place of the Executive Vice-president shall be selected by the Board of Directors, provided, however, that prior to the making of such selection by said Board a Vice-president to act as aforesaid may be appointed by the President, or if he is unable to make such appointment or fails to do so, by the Chairman of the Board, and the Vice-president so appointed shall continue to act as aforesaid until another Vice-president has been appointed for that purpose by the Board of Directors. ARTICLE VIII THE SECRETARY AND THE CLERK The Secretary shall have such duties as may from time to time be delegated to him by the Board of Directors. The Clerk shall be a resident of Massachusetts. He shall be sworn, and shall record all votes of the corporation in a book to be kept for the purpose. He shall attend all meetings of stockholders, of the Board of Directors, and of the Executive Committee. In the absence of the Clerk or if at any such meeting he shall be otherwise engaged, an Assistant Clerk if present shall record the votes taken at the meeting, and if no Assistant Clerk shall be present, a Clerk pro tempore shall be chosen for that purpose. The Clerk or any Assistant Clerk may furnish certified copies of any portion of the records of the corporation under its corporate seal. All Assistant Clerks shall be sworn. ARTICLE IX THE TREASURER The Treasurer when required by the Directors shall give bond with sureties acceptable to them for the faithful discharge of his duties and in such sum as the Directors may determine, and the premium may, by vote of the Board of Directors, be paid from the funds of the corporation. He shall be the transfer agent of the stock of the corporation unless a special transfer agent is appointed by the Directors, shall keep a record of the names and residences of all the stockholders, shall have the custody of the corporate seal and of all the moneys, funds and valuable papers and documents of the corporation except his own bond which shall be in the custody of the President. He shall deposit all the funds of the corporation in such bank or banks as the Directors shall designate to the credit of the corporation by its corporate name, subject to the checks of the corporation signed by its Treasurer or an Assistant Treasurer or such other officer or employee as may be designated for that purpose by the vote of the Directors, but with such requirements, if any, as to joint signatures and such other limitations, if any, of the authority as aforesaid of any signing officer or employee as the Directors may see fit to impose. He shall issue notes and accept drafts on behalf of the corporation only when authorized thereto by the Directors. He shall keep accurate books of account of the corporation's transactions which shall be the property of the corporation, which together with all its property in his custody shall be subject at all times to inspection and control of the Directors. ARTICLE X ASSISTANT TREASURER Each Assistant Treasurer, if any, shall have such powers and duties as may be given him by the Directors and shall give bond when required by the Directors with sureties acceptable to them for the faithful discharge of his duties in such sum as the Directors may determine, and the premiums may, by vote of the Board of Directors, be paid by the corporation. ARTICLE XI SALES, LEASES, AND CONVEYANCES OF REAL ESTATE The President and Treasurer may in their discretion, to the extent authorized by law and by vote of the Directors or of the Executive Committee, lease for any term of time and convey all of its real estate including water power and release or modify easements and other rights in real estate whether granted to or by the corporation; and all deeds, conveyances and leases of real estate including water power and releases and modifications of easements and of other rights in real estate of the corporation, unless otherwise provided by vote of the corporation, shall be made in the name of the corporation under its corporate seal, and be signed by the President, the Executive Vice-president, or any Vice-president thereto authorized by a vote of the Directors or of the Executive Committee and may be acknowledged by any person signing as aforesaid. ARTICLE XII CERTIFICATES OF STOCK-TRANSFERS Certificates of stock may be signed by the President or a Vice-president and the Treasurer or an Assistant Treasurer. Such certificates shall be in such form as the Directors may approve, and shall also bear the seal of the corporation which shall be in the form theretofore used by the corporation, or in a newer form adopted by the Directors. Shares of stock may be transferred by assignment thereof in writing, accompanied by delivery of the certificates; but no such transfer of stock shall affect the right of the corporation to pay any dividend thereon or to treat the holder of record as the holder in fact until the transfer has been recorded upon the books of the corporation or a new certificate has been issued to the person to whom the stock has been transferred. In case of the loss of a certificate, a duplicate may be issued on such reasonable terms as the Directors shall prescribe. ARTICLE XIII CLOSING OF TRANSFER BOOKS The transfer books of the corporation may be closed for not exceeding fifteen (15) days next prior to any meeting of the stock-holders and at such other times and for such reasonable periods as may be determined by the Board of Directors. ARTICLE XIV FISCAL YEAR The fiscal year of the corporation shall end on the thirty-first day of December in each year. ARTICLE XV TRANSFER AGENT AND REGISTRAR If the Board of Directors deem it advisable to have a transfer agent other than the Treasurer, they may appoint any Bank or Trust Company to that office. They may appoint the same or any other Bank or Trust Company as Registrar of stock certificates if it appear desirable to have the stock registered. They may terminate the authority of any Bank acting in either capacity whenever it shall seem wise. ARTICLE XVI SENIOR STOCK PROVISIONS The Company's capital stock includes a class of capital stock designated "Common Stock," a class of capital stock designated "Preferred Stock," and a class of capital stock designated "Class A Preferred Stock." The authorized shares of Common Stock, Preferred Stock and Class A Preferred Stock are the number of shares authorized in the Company's articles of organization, as amended from time to time. The Preferred Stock and the Class A Preferred Stock are hereinafter for convenience of reference sometimes collectively referred to as the "Senior Stock," and either class may hereinafter individually be referred to as "Senior Stock." Shares of Preferred Stock and shares of Class A Preferred Stock shall rank on a parity in respect of dividends or payment in case of liquidation, and, to the extent not fixed and determined by these by-laws or the Company's articles of organization or otherwise by law, shall have the same rights, preferences and powers. The general terms, limitations and relative rights and preferences of each share of Preferred Stock and each share of Class A Preferred Stock shall be determined in accordance with the following Sections: Section 1. Issuance of Senior Stock Shares of Preferred Stock may be issued from time to time in one or more series on such terms and for such consideration as may be determined by the Board of Directors. Shares of Class A Preferred Stock may be issued from time to time in one or more series on such terms and for such consideration as may be determined by the Board of Directors. The series designation, dividend rate, redemption prices, and any other terms, limitations and relative rights and preferences of each series of either class of Senior Stock shall be determined by the Board of Directors to the extent not fixed and determined by this Article or the Company's articles of organization. Section 2. Dividends A. The holders of either class of the Senior Stock shall receive, but only when and as declared by the Board of Directors, cumulative dividends at the rate provided for the particular series and payable on such dividend payment dates in each year as said Board may determine, such dividends to be payable to holders of record on such dates as may be fixed by said Board but not more than 45 days before each dividend date, provided, however, that dividends shall not be declared and set apart for payment, or paid, on Senior Stock of any one class and series, for any dividend period, unless dividends have been or are contemporaneously declared and set apart for payment, or paid, on Senior Stock of all series for all dividend periods terminating on the same or an earlier date. B. Dividends on each share of Senior Stock shall be cumulative from the date of issue thereof or from such earlier date as the Board of Directors may determine therefor. Unless full cumulative dividends to the last preceding dividend date shall have been paid or set apart for payment on all outstanding shares of Senior Stock, no dividend shall be paid on any junior stock. The term "junior stock" means Common Stock or any other stock of the Company subordinate to the Senior Stock in respect of dividends or payments in liquidation. C. So long as any shares of Senior Stock are outstanding, the Company shall not declare any dividends or make any other distributions in respect of outstanding shares of any junior stock of the Company, other than dividends or distributions in shares of junior stock, or purchase or otherwise acquire for value any outstanding shares of junior stock (the declaration of any such dividend or the making of any such distribution, purchase or acquisition being herein called a "junior stock payment") in contravention of the following: (1) If and so long as the junior stock equity (hereinafter defined), adjusted to reflect the proposed junior stock payment, at the end of the calendar month immediately preceding the calendar month in which the proposed junior stock payment is to be made is less than 20% of total capitalization (hereinafter defined) at that date, as so adjusted, the Company shall not make such junior stock payment in an amount which, together with all other junior stock payments made within the year ending with and including the date on which the proposed junior stock payment is to be made, exceeds 50% of the net income of the Company available for dividends on junior stock for the 12 full calendar months immediately preceding the calendar month in which such junior stock payment is made, except in an amount not exceeding the aggregate of junior stock payments which under the restrictions set forth above in this paragraph (1) could have been, and have not been, made. (2) If and so long as the junior stock equity, adjusted to reflect the proposed junior stock payment, at the end of the calendar month immediately preceding the calendar month in which the proposed junior stock payment is to be made, is less than 25% but not less than 20% of the total capitalization at that date, as so adjusted, the Company shall not make such junior stock payment in an amount which, together with all other junior stock payments made within the year ending with and including the date on which the proposed junior stock payment is to be made, exceeds 75% of the net income of the Company available for dividends on the junior stock for the 12 full calendar months immediately preceding the calendar month in which such junior stock payment is made, except in an amount not exceeding the aggregate of junior stock payments which under the restrictions set forth above in this paragraph (2) could have been, and have not been, made. D. The term "junior stock equity" means the aggregate of the part value of or stated capital represented by, the outstanding shares of junior stock, all earned surplus, capital or paid-in surplus, and any premiums on the junior stock then carried on the books of the Company, less: (1) the excess, if any, of the aggregate amount payable on involuntary liquidation of the Company upon all outstanding shares of Senior Stock over the sum of (i) the aggregate par or stated value of such shares and (ii) any premiums thereon; (2) any amounts on the books of the Company known, or estimated if not known, to represent the excess, if any, of recorded value over original cost of used or useful utility plant; and (3) any intangible items set forth on the asset side of the balance sheet of the Company as a result of accounting convention, such as unamortized debt discount and expense; provided, however, that no deductions shall be required to be made in respect of items referred to in clauses (2) and (3) of this subsection D in cases in which such items are being amortized or are provided for, or are being provided for, by reserves. E. The term "total capitalization" means the aggregate of: (1) the principal amount of all outstanding indebtedness of the Company maturing more than 12 months after the date of issue thereof; and (2) the par value or stated capital represented by, and any premiums carried on the books of the Company in respect of, the outstanding shares of all classes of the capital stock of the Company, earned surplus, and capital or paid-in surplus, less any amounts required to be deducted pursuant to clauses (2) and (3) of subsection D of this Section 2 in the determination of junior stock equity. Section 3. Redemption or Purchase of Senior Stock A. All or any part of any series of Senior Stock may by vote of the Board of Directors be called for redemption at any time at the redemption price provided for the particular series and in the manner hereinbelow provided. Subject to the provisions of subsection B of this Section 3, all or any part of any series of Senior Stock may be called for redemption without calling all or any part of any other series of Senior Stock. If less than all of any series of Senior Stock is so called, the Transfer Agent shall determine by lot or in some other manner approved by the Board of Directors the shares of such series of Senior Stock to be called. B. No call for redemption of less than all shares of Senior Stock outstanding shall be made if the Company shall be in arrears in respect of payment of dividends on any shares of Senior Stock outstanding. C. The sums payable in respect of any shares of Senior Stock so called shall be payable at the office of an incorporated bank or trust company in good standing. Notice of such call stating the redemption date shall be mailed not less than 30 days before the redemption date to each holder of record of shares of Senior Stock so called at his address as it appears upon the books of the Company. D. The Company shall, before the redemption date, deposit with said bank or trust company all sums payable with respect to shares of Senior Stock so called. After such mailing and deposit the holders of shares of Senior Stock so called for redemption shall cease to have any right to future dividends or other rights or privileges as stockholders in respect of such shares and shall be entitled to look for payment on and after the redemption date only to the sums so deposited with said bank or trust company for their respective amounts. Shares so redeemed may be reissued but only subject to the limitations imposed upon the issue of Senior Stock. E. The Company may at any time purchase all or any of the then outstanding shares of Senior Stock of any class and series upon the best terms reasonably obtainable, but not exceeding the then current redemption price of such shares, except that no such purchase shall be made if the Company shall be in arrears in respect of payment of dividends on any shares of Senior Stock outstanding or if there shall exist an event of default as defined in Section 5 hereof. Section 4. Amounts Payable on Liquidation A. The holders of any series of Senior Stock shall receive upon any voluntary liquidation, dissolution or winding up of the Company the then current redemption price of the particular series and if such action is involuntary $100 per share in the case of the Preferred Stock and $25 per share in the case of the Class A Preferred Stock, plus in each case all dividends accrued and unpaid to the date of such payment, before any payment in liquidation is made on any junior stock. B. If the net assets of the Company available for distribution on liquidation to the holders of Senior Stock shall be insufficient to pay said amounts in full, then such net assets shall be distributed among the holders of Senior Stock, who shall receive a common percentage of the full respective preferential amounts. Section 5. Voting Powers A. Except as provided in this Article or in the Company's articles of organization and as provided by law, the holders of Senior Stock shall have no voting power or right to notice of any meeting. B. Whenever the holders of the Senior Stock shall have the right to vote or consent to an action as provided in these Articles or the Company's articles of organization or as provided by law, both classes of Senior Stock shall (except as provided below) vote together as a single class, each outstanding share of Preferred Stock entitled to vote and each outstanding share of Class A Preferred Stock entitled to vote having such voting rights as are proportionate to the ratio of (i) the par value represented by such share to (ii) the par value represented by all shares of Senior Stock then outstanding. Whenever only one class of the Senior Stock shall have the right to vote or consent to an action as provided in these Articles or the Company's articles of organization or as provided by law, or whenever each class of the Senior Stock shall be entitled or be required to vote as a separate class on a matter, each outstanding share of such class entitled to vote shall be entitled to one vote on each such matter. C. Whenever dividends on any share of Senior Stock shall be in arrears in an amount equal to or exceeding four quarterly dividend payments, or whenever there shall have occurred some default in the observance of any of the provisions of this Article, or some default on which action has been taken by debentureholders, bondholders or the trustee of any deed of trust or mortgage of the Company, or whenever the Company shall have been declared bankrupt or a receiver of its property shall have been appointed (any of said conditions being herein called an "event of default"), then the holders of Senior Stock shall be given notice of all stockholders' meetings and shall have the right voting together as a class to elect the smallest number of directors necessary to constitute a majority of the Board of Directors of the Company and the exclusive right voting together as a class to amend the by-laws to make such appropriate increase in the number of directorships as may be required to effect such election. When all arrears of dividends shall have been paid and such event of default shall have been terminated, all the rights and powers of the holders of Senior Stock to receive notice and to vote shall cease, subject to being again revived on any subsequent event of default. D. Whenever the right to elect directors shall have accrued to the holders of Senior Stock the Company shall call a meeting of stockholders for the election of directors and, if necessary, the amendment of the by-laws to permit the holders of Senior Stock to exercise their rights pursuant to subsection C of this Section 5, such meeting to be held not less than 45 days and not more than 90 days after the accrual of such rights. When such rights shall cease, the Company shall, within seven days from the delivery to the Company of a written request therefor by any stockholder, cause a meeting of the stockholders to be held within 30 days from the delivery of such request for the purpose of electing a new Board of Directors. Forthwith, upon the election of such new Board of Directors, the directors in office immediately prior to such election (other than persons elected directors in such election) shall be deemed removed from office without further action by the Company. Section 6. Action Requiring Certain Consent of Senior Stockholders A. So long as any Senior Stock is outstanding, the Company, without the affirmative vote or written consent of at least a majority in interest of the Senior Stock then outstanding voting or giving consent together as a class shall not: (1) Issue or assume any unsecured notes, unsecured debentures or other securities representing unsecured debt (other than for the purpose of refunding or renewing outstanding unsecured securities issued or assumed by the Company resulting in equal or longer maturities or redeeming or otherwise retiring all outstanding shares of Senior Stock) if immediately after such issue or assumption (a) the total outstanding principal amount of all unsecured notes, unsecured debentures or other securities representing unsecured debt of the Company will thereby exceed 20% of the aggregate of all outstanding secured debt of the Company and the capital stock, premiums thereon, and surplus of the Company, as stated on its books, or (b) the total outstanding principal amount of all unsecured debt of the Company of maturities of less than 10 years will thereby exceed 10% of the aggregate of all outstanding secured debt of the Company and the capital stock, premiums thereon, and surplus of the Company, as stated on its books. For the purposes of this subsection A, the payment due upon the maturity of unsecured debt having an original single stated maturity of 10 years or more shall not be regarded as unsecured debt with a maturity of less than 10 years until within three years of the maturity thereof, and none of the payments due upon any unsecured serial debt having an original stated maturity for the final serial payment of 10 years or more shall be regarded as unsecured debt of a maturity of less than 10 years until within three years of the maturity of the final serial payment. (2) Issue, sell or otherwise dispose of any shares of the then authorized but unissued Senior Stock or any other stock ranking on a parity with or having a priority over Senior Stock in respect of dividends or of payments in liquidation, or reissue, sell or otherwise dispose of any reacquired shares of Senior Stock or such other stock, other than to refinance an equal par value or stated value of Senior Stock or of stock ranking on a parity with or having priority over Senior Stock in respect of dividends or of payments in liquidation, if: (a) For a period of 12 consecutive calendar months within 15 calendar months immediately preceding the calendar month in which any such shares shall be issued, the Income before Interest Charges of the Company for said period available for the payment of interest determined in accordance with the systems of accounts then prescribed for the Company by the Department of Public Utilities of the Commonwealth of Massachusetts (or by such other official body as may then have authority to prescribe such systems of accounts) but in any event after deducting depreciation charges and taxes (including income taxes) and including, in any case in which such stock is to be issued, sold or otherwise disposed of in connection with the acquisition of any property, the Income before Interest Charges of the property to be so acquired, computed as nearly as practicable in the manner specified above, shall not have been at least one and one-half (1 1/2) times the sum of (i) the interest charges for one year on all indebtedness which shall then be outstanding (excluding interest charges on any indebtedness, proposed to be retired in connection with the issue, sale or other disposition of such shares), and (ii) an amount equal to all annual dividend requirements on all outstanding shares of Senior Stock and all other stock, if any, ranking on a parity with or having priority over Senior Stock in respect of dividends or of payments in liquidation, including the shares proposed to be issued, but not including any shares proposed to be retired in connection with such issue, sale or other disposition; or if (b) Such issue, sale or disposition would bring the aggregate of the amount payable in connection with an involuntary liquidation of the Company with respect to all shares of Senior Stock and all shares of stock, if any, ranking on a parity with or having priority over Senior Stock in respect of dividends or of payments in liquidation to an amount in excess of the sum of the junior stock equity. If for the purposes of meeting the requirements of this clause (b), it shall have been necessary to take into consideration any earned surplus of the Company, the Company shall not thereafter pay any dividends on or make any distributions in respect of, or make any payment for the purchase or other acquisition of, junior stock which would result in reducing the junior stock equity to an amount less than the amount payable on involuntary liquidation of the Company in respect of Senior Stock and all shares ranking on a parity with or having a priority over Senior Stock in respect of dividends or of payments in liquidation at the time outstanding. If during the period for which Income before Interest Charges is to be determined for the purpose set forth in this paragraph (2), the amount, if any, required to be expended by the Company during such period for property additions pursuant to a renewal and replacement fund or similar fund established under any indenture of mortgage or deed of trust of the Company shall exceed the amount deducted during such period in the determination of such Income before Interest Charges on account of depreciation and amortization of electric plan acquisition adjustments, such excess shall also be deducted in determining such Income before Interest Charges. B. So long as any Senior Stock is outstanding, the Company, without the affirmative vote or written consent of at least two-thirds in interest of the Senior Stock then outstanding voting or giving consent together as a class shall not authorize any shares of any class of stock having a priority over the Senior Stock in respect of dividends or of payments in liquidation or issue any shares of any such prior ranking stock more than 12 months after the date of the vote or consent authorizing such prior ranking stock. C. The provisions of this Article may be changed only by the affirmative vote or written consent of at least two-thirds in interest of the issued and outstanding shares of each class of capital stock of the Company voting or giving their consent in each case separately as a class; provided, however, that if any such change or proposed change would affect only one class of Senior Stock, then such change may be effected only by the affirmative vote or written consent of at least two-thirds in interest of the issued and outstanding shares of Common Stock and at least two-thirds in interest of the issued and outstanding shares of the class of Senior Stock that is affected, voting or giving their consent in each case separately as a class; and provided further, however, the holders of Senior Stock shall not be entitled to vote on an increase in the number of authorized shares of Preferred Stock or Class A Preferred Stock. In no event shall any reduction of the dividend rate or of the amounts payable upon redemption or liquidation with respect to any share of Senior Stock be made without the consent of the holder thereof, and no such reduction in respect of the shares of any particular series of Senior Stock shall be made without the consent of all the holders of shares of such series. D. No share of Senior Stock shall be deemed to be "outstanding" within the meaning of this Section 6 or of Section 7 if, at or prior to the time when the approval herein or therein referred to would otherwise be required, provision shall be made for its redemption, including a deposit complying with the requirements of subsection D of Section 3. Section 7. Merger, Consolidation or Sale of All Assets Except with the affirmative vote or written consent of a majority in interest of Senior Stock then outstanding voting or giving consent together as a class, the Company shall not merge or consolidate with or into any other corporation or sell or otherwise dispose of all or substantially all of its assets (except by mortgage or pledge) unless such merger, consolidation, sale or other disposition, or the issuance or assumption of securities in the effectuation thereof shall have been ordered, approved or permitted under the Public Utility Holding Company Act of 1935. Section 8. No Preemptive Right Except as otherwise expressly provided by law, the holders of Senior Stock shall have no preemptive right to subscribe to any further issue of additional shares of Senior Stock or of any other class of stock now or hereafter authorized, nor for any future issue of bonds, debentures, notes or other evidence of indebtedness or other security convertible into stock. If it is expressly required by law that, notwithstanding the provisions of the preceding sentence, any such further or future issue be offered proportionately to the stockholders, the holders of Preferred Stock only shall be entitled to subscribe for new or additional Preferred Stock, the holders of Class A Preferred Stock only shall be entitled to subscribe for new or additional Class A Preferred Stock and the holders of Common Stock only shall be entitled to subscribe for new or additional Common Stock; and notice of such increase as required by law need be given and the new shares need be offered proportionately only to the stockholders who are so entitled to subscribe. Section 9. Immunity of Directors, Officers and Agents No director, officer or agent of the Company shall be held personally responsible for any action taken in good faith though subsequently adjudged to be in violation of this Article. Section 10. Transfer Agent The Company shall always have at least one transfer agent for Senior Stock, which shall be an incorporated bank or trust company of good standing. ARTICLE XVII PROVISIONS WITH RESPECT TO THE SERIES OF PREFERRED STOCK 1. 9.60% Preferred Stock, Series A There shall be a series of Preferred Stock designated "9.60% Preferred Stock, Series A," and consisting of 150,000 shares with an aggregate par value of $15,000,000 and a par value per share of $100. The dividend rate and redemption prices as to said 9.60% Preferred Stock, Series A, shall be as follows: (a) Dividends on said 9.60% Preferred Stock, Series A, shall be at the rate of 9.60% per share per annum, and no more, and shall be cumulative from June 1, 1970. Said dividends, when declared, shall be payable on the first days of March, June, September and December in each year. (b) Redemption Prices of said 9.60% Preferred Stock, Series A, shall be $111.19 per share if redeemed on or before June 1, 1975, $108.79 per share if redeemed after June 1, 1975 and on or before June 1, 1980, $106.39 per share if redeemed after June 1, 1980 and on or before June 1, 1985, and $103.99 per share if redeemed after June 1, 1985, plus in all cases that portion of the quarterly dividend accrued thereon to the redemption date and all unpaid dividends thereon, if any. 2. 7.72% Preferred Stock, Series B There shall be a series of Preferred Stock designated "7.72% Preferred Stock, Series B," and consisting of 200,000 shares with an aggregate par value of $20,000,000 and a par value per share of $100. The dividend rate and redemption prices as to said 7.72% Preferred Stock, Series B, shall be as follows: (a) Dividends on said 7.72% Preferred Stock, Series B, shall be at the rate of 7.72% per share per annum, and no more, and shall be cumulative from October 1, 1971. Said dividends, when declared, shall be payable on the first days of January, April, July and October in each year. (b) Redemption Prices of said 7.72% Preferred Stock, Series B, shall be $109.30 per share if redeemed on or before October 1, 1976, $107.37 per share if redeemed after October 1, 1976 and on or before October 1, 1981, $105.44 per share if redeemed after October 1, 1981 and on or before October 1, 1986, and $103.51 per share if redeemed after October 1, 1986, plus in all cases that portion of the quarterly dividend accrued thereon to the redemption date and all unpaid dividends thereon, if any, provided, however, that none of the 7.72% Preferred Stock, Series B shall be redeemed prior to October 1, 1976, if such redemption is for the purpose of or in anticipation of refunding such 7.72% Preferred Stock, Series B through the use, directly or indirectly, of finds borrowed by the Company or of the proceeds of the issue by the Company of shares of any stock ranking prior to or on a parity with the 7.72% Preferred Stock, Series B as to dividends or assets, if such borrowed funds or such shares have an effective interest cost or effective dividend cost to the Company (computed in accordance with generally accepted financial principles), as the case may be, of less than 7.69% per annum. 3. 16% Preferred Stock, Series C There shall be a series of Preferred Stock designated "16% Preferred Stock, Series C," and consisting of 150,000 shares with an aggregate par value of $15,000,000 and a par value per share of $100. The dividend rate and redemption prices as to said 16% Preferred Stock, Series C, shall be as follows: (a) Dividends on said 16% Preferred Stock, Series C, shall be at the rate of 16% per share per annum, and no more, and shall be cumulative from date of issuance. Said dividends, when declared, shall be payable on the first days of March, June, September and December in each year, commencing March 1, 1982. (b) Redemption Prices of said 16% Preferred Stock, Series C, shall be $116.00 per share if redeemed on or before December 1, 1986, $112.00 per share if redeemed after December 1, 1986 and on or before December 1, 1991, $108.00 per share if redeemed after December 1, 1991 and on or before December 1, 1996, $104.00 per share if redeemed after December 1, 1996 and on or before December 1, 2001, and at $101.60 per share if redeemed after December 1, 2001, plus in all cases that portion of the quarterly dividend accrued thereon to the redemption date and all unpaid dividends thereon, if any; provided, however, that none of the 16% Preferred Stock, Series C shall be redeemed prior to December 1, 1986, if such redemption is for the purpose of or in anticipation of refunding such 16% Preferred Stock, Series C through the use, directly or indirectly, of funds borrowed by the Company or of the proceeds of the issue by the company of shares of any stock ranking prior to or on a parity with the 16% Preferred Stock, Series C as to dividends or assets, if such borrowed funds or such shares have an effective interest cost or effective dividend cost to the Company (computed in accordance with generally accepted financial principles), as the case may be, of less than 16.59% per annum. (c) As and for a sinking fund for said 16% Preferred Stock, Series C, commencing on December 1, 1986 and on or before each December 1 in each year thereafter so long as any shares of the 16% Preferred Stock, Series C remain outstanding, the Company shall, to the extent of any funds of the Company legally available therefor and except as otherwise restricted by the Company's Statement of Preferred Stock Provisions, redeem 7,500 shares of 16% Preferred Stock, Series C (or such lesser number of such shares as remain outstanding) at $100 per share plus accrued dividends to the date of redemption; provided, however, that if in any year the Company does not redeem the full number of shares of 16% Preferred Stock, Series C required to be redeemed pursuant to this sinking fund, the deficiency shall be made good on the next December 1 on which the Company has funds legally available for, and is otherwise permitted to effect, the redemption of shares of 16% Preferred Stock, Series C, pursuant to this sinking fund. The number of shares of 16% Preferred Stock, Series C, redeemed on any December 1 shall be reduced by the number of such shares purchased and cancelled by the Company during the preceding twelve-month period or redeemed during such period pursuant to subsection (b) hereof. Any shares so redeemed or purchased or cancelled may be given the status of authorized but unissued shares or Preferred Stock, but none of such shares shall be reissued as shares of 16% Preferred Stock, Series C. The Company shall have the option, which shall be noncumulative, to redeem on December 1, 1986 and on each December 1 thereafter up to an additional 7,500 shares of 16% Preferred Stock, Series C, at the sinking fund redemption price. No such optional sinking fund shall operate to reduce the number of shares of the 15% Preferred Stock, Series C, required to be redeemed pursuant to the mandatory sinking fund provisions hereinabove set forth. In the event that the Company shall at any time fail to make a full mandatory sinking fund payment on any sinking fund payment date, the Company shall not pay any dividends or make any other distributions in respect of outstanding shares of any junior stock (as that term is defined in Subsection A of Section of Article XVI of the by-laws of the Company) of the Company, other than dividends or distributions in shares of junior stock, or purchase or otherwise acquire for value any out-standing shares of junior stock, until all such payments have been made. 4. Adjustable Rate Preferred Stock, Series D There shall be a series of Preferred Stock designated "Adjustable Rate Preferred Stock, Series D", and consisting of 350,000 shares with an aggregate par value of $35,000,000 and a par value per share of $100. The dividend rate provisions, redemption prices and sinking fund provisions as to said Adjustable Rate Preferred Stock, Series D, shall be as follows: (a) The dividend per share on said Adjustable Rate Preferred Stock, Series D, shall be (1) at the rate of 12% per annum per share for the Initial Dividend Payment Period (as herein defined) (2) at the rate of forty-one hundredth (40/100th) of one percentage point above the Applicable Rate (as herein defined), from time to time in effect, for each subsequent quarterly Dividend Period (as herein defined); provided, however, the dividend rate for any Dividend Period (including the Initial Dividend Payment Period) shall not be at a rate of less than 8% per annum per share or greater than 13% per annum per share. Dividends shall be cumulative from the date of issuance. Except as provided below in this paragraph, the "Applicable Rate" for any Dividend Period shall be the highest of (i) the Treasury Bill Rate, (ii) the Ten Year Constant Maturity Rate and (iii) the Twenty Year Constant Maturity Rate (each as hereinafter defined) for such Dividend Period. If the Company determines in good faith that for any reason one or more of such rates cannot be determined for a particular Dividend Period, then the Applicable Rate for such Dividend Period shall be the higher of whichever of such rates can be so determined. If the Company determines in good faith that none of such rates can be determined for a particular Dividend Period, then the Applicable Rate in effect for the preceding Dividend Period shall be continued for such Dividend Period. Except as provided below in this paragraph, the "Treasury Bill Rate" for each Dividend Period shall be the arithmetic average of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period (as defined below)) for three-month U.S. Treasury bills, as published weekly by the Federal Reserve Board or its successor agency during the Calendar Period immediately prior to the ten calendar days immediately preceding the Dividend Payment Date for the dividend period immediately prior to the Dividend Period for which the dividend rate on the Adjustable Rate Preferred Stock, Series D is being determined. If the Federal Reserve Board or its successor agency does not publish such a weekly per annum market discount rate during such Calendar Period, then the Treasury Bill Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if one such rate shall be published during the relevant Calendar Period) for three-month U.S. Treasury bills, as published weekly during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Company. If a per annum market discount rate for three-month U.S. Treasury bills shall not be published by the Federal Reserve Board or its successor agency or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Treasury Bill Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if one such rate shall be published during the relevant Calendar Period) for all of the U.S. Treasury bills then having maturities of not less than 80 nor more than 100 days, as published during such Calendar Period by the Federal Reserve Board or its successor agency or, if the Federal Reserve Board or its successor agency shall not publish such rates, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Company. If the Company determines in good faith that for any reason no such U.S. Treasury bill rates are published as provided above during such Calendar Period, then the Treasury Bill Rate for such Dividend Period shall be the arithmetic average of the per annum market discount rates based upon the closing bids during such Calendar Period for each of the issues of marketable non-interest bearing U.S. Treasury securities with a maturity of not less than 80 nor more than 100 days from the date of each such quotation, as quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the Company by at least three recognized U.S. Government securities dealers selected by the Company. If the Company determines in good faith that for any reason the Company cannot determine the Treasury Bill Rate for any Dividend Period as provided above in this paragraph, the Treasury Bill Rate for such Dividend Period shall be the arithmetic average of the per annum market discount rates based upon the closing bids during the related Calendar Period for each of the issues of marketable interest-bearing U.S. Treasury securities with a maturity of not less than 80 nor more than 100 days from the date of each such quotation, as quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the Company by at least three recognized U.S. Government securities dealers selected by the Company. Except as provided below in this paragraph, the "Ten Year Constant Maturity Rate" for each Dividend Period shall be the arithmetic average of the two most recent weekly per annum Ten Year Average Yields (or the one weekly per annum Ten Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period as provided below), as published weekly by the Federal Reserve Board or its successor agency during the Calendar Period immediately prior to the ten calendar days immediately preceding the Dividend Payment Date prior to the Dividend Period for which the dividend rate on the Adjustable Rate Preferred Stock, Series D is being determined. If the Federal Reserve Board or its successor agency does not publish such a weekly per annum Ten Year Average Yield during such Calendar Period, then the Ten Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum Ten Year Average Yields (or the one weekly per annum Ten Year Average Yield, if only one such Yield shall be published during such Calendar Period), as published weekly during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Company. If a per annum Ten Year Average Yield shall not be published by the Federal Reserve Board or its successor agency or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Ten Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum average yields to maturity (or the one weekly average yield to maturity, if only one such yield shall be published during such Calendar Period) for all of the actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities (as defined below)) then having maturities of not less than eight nor more than twelve years, as published during such Calendar Period by the Federal Reserve Board or its successor agency or, if the Federal Reserve Board or its successor agency shall not publish such yields, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Company. If the Company determines in good faith that for any reason the Company cannot determine the Ten Year Constant Maturity Rate for any Dividend Period as provided above in this paragraph, then the Ten Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the per annum average yields to maturity based upon the closing bids during such Calendar Period for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) with a final maturity date not less than eight nor more than twelve years from the date of each such quotation, as quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the Company by at least three recognized U.S. Government securities dealers selected by the Company. Except as provided below in this paragraph, the "Twenty Year Constant Maturity Rate" for each Dividend Period shall be the arithmetic average of the two most recent weekly per annum Twenty Year Average Yields (or the one weekly per annum Twenty Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period), as published weekly by the Federal Reserve Board or its successor agency during the Calendar Period immediately prior to the ten calendar days immediately preceding the Dividend Payment Date prior to the Dividend Period for which the dividend rate on the Adjustable Rate Preferred Stock, Series D is being determined. If the Federal Reserve Board or its successor agency does not publish such a weekly per annum Twenty Year Average Yield during such Calendar Period, then the Twenty Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum Twenty Year Average Yields (or the one weekly per annum Twenty Year Average Yield, if only one such Yield shall be published during such Calendar Period), as published weekly during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Company. If a per annum Twenty Year Average Yield shall not be published by the Federal Reserve Board or its successor agency or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Twenty Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum average yields to maturity (or the one weekly average yield to maturity, if only one such yield shall be published during such Calendar Period) for all of the actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) then having maturities of not less than eighteen nor more than twenty-two years, as published during such Calendar Period by the Federal Reserve Board or its successor agency or, if the Federal Reserve Board or its successor agency shall not publish such yields, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Company. If the Company determines in good faith that for any reason the Company cannot determine the Twenty Year Constant Maturity Rate for any Dividend Period as provided above in this paragraph, then the Twenty Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the per annum average yields to maturity based upon the closing bids during such Calendar Period for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) with a final maturity date not less than eighteen nor more than twenty-two years from the date of each such quotation, as quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the Company by at least three recognized U.S. Government securities dealers selected by the Company. The Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Twenty Year Constant Maturity Rate shall each be rounded to the nearest five one-hundredths of a percentage point. The "Initial Dividend Payment Period" shall be that period beginning on April 19, 1983 (the date of issuance) and continuing through and including June 30, 1983. The initial dividend payment date shall be July 1, 1983. A "Dividend Period" shall mean the three month period beginning April 1, July 1, October 1, and January 1 in each year. A "Dividend Payment Date" shall mean the first day of April, July, October, and January in each year, commencing October 1, 1983. The amount of dividends per share payable for each Dividend Period shall be computed by dividing the dividend rate for such Dividend Period by four and applying such rate against the par value per share of the Adjustable Rate Preferred Stock, Series D. The amount of dividends payable for the Initial Dividend Period or any period shorter than a full quarterly Dividend Period shall be computed on the basis of 30-day months, a 360-day year and the actual number of days elapsed in such period. The dividend rate with respect to each Dividend Period will be calculated as promptly as practicable by the Company according to the appropriate method described herein. The mathematical accuracy of each such calculation will be confirmed in writing by independent accountants of recognized standing. The Company will cause each dividend rate to be published in a newspaper of general circulation in New York City prior to the commencement of the new Dividend Period to which it applies and will cause notice of such dividend rate to be enclosed with the dividend payment checks next mailed to the holders of the Adjustable Rate Preferred Stock, Series D. As used herein, the term "Calendar Period" means a period of fourteen calendar days; the term "Special Securities" means securities which can, at the option of the holder, be surrendered at face value in payment of any Federal estate tax or which provide tax benefits to the holder and are priced to reflect such tax benefits or which were originally issued at a deep or substantial discount; the term "Ten Year Average Yield" means the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of ten years); and the term "Twenty Year Average Yield" means the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of twenty years). (b) The redemption prices of the Adjustable Rate Preferred Stock, Series D, shall be $112.00 per share if redeemed on or before April 1, 1988, $103.00 per share if redeemed after April 1, 1988 but on or before April 1, 1993, or $100.00 per share if redeemed after April 1, 1993. In each case the redemption price will also include accrued dividends to the date of redemption. None of the Adjustable Rate Preferred Stock, Series D shall be redeemed prior to April 1, 1988 if such redemption is for the purpose of or in anticipation of refunding the Adjustable Rate Preferred Stock, Series D through the use, directly or indirectly, of borrowed funds or of the proceeds of the issue by the Company of shares of any stock ranking prior to or on a parity with the Adjustable Rate Preferred Stock, Series D as to dividends or assets, if such borrowed funds or such shares have an effective interest cost or effective dividend cost (computed in accordance with generally accepted financial principles), as the case may be, of less than 12.36 % per annum per share. (c) As and for a sinking fund for the Adjustable Rate Preferred Stock, Series D, commencing on April 1, 1988 and on or before each April 1 in each year thereafter so long as any shares of the Adjustable Rate Preferred Stock, Series D remain outstanding, the Company shall, to the extent of any funds of the Company legally available therefor and except as otherwise restricted by the Company's Statement of Preferred Stock Provisions, redeem 17,500 shares of Adjustable Rate Preferred Stock, Series D (or such lesser number of such shares as remain outstanding) at $100 per share plus accrued dividends to the date of redemption; provided, however, that if in any year the Company does not redeem the full number of shares of Adjustable Rate Preferred Stock, Series D required to be redeemed pursuant to this sinking fund, the deficiency shall be made good on the next April 1 on which the Company has funds legally available for, and is otherwise permitted to effect, the redemption of shares of Adjustable Rate Preferred Stock, Series D, pursuant to this sinking fund. The number of shares of Adjustable Rate Preferred Stock, Series D, redeemed on any April 1 shall be reduced by the number of such shares purchased and cancelled by the Company during the preceding twelve-month period or redeemed during such period pursuant to subsection (b) hereof. Any shares so redeemed or purchased or cancelled may be given the status of authorized but unissued shares of Preferred Stock, but none of such shares shall be reissued as shares of Adjustable Rate Preferred Stock, Series D. The Company shall have the option, which shall be noncumulative, to redeem on April 1, 1988 and on each April 1 thereafter up to an additional 17,500 shares of Adjustable Rate Preferred Stock, Series D, at the sinking fund redemption price. No such optional sinking fund shall operate to reduce the number of shares of the Adjustable Rate Preferred Stock, Series D, required to be redeemed pursuant to the mandatory sinking fund provisions hereinabove set forth. In the event that the Company shall at any time fail to make a full mandatory sinking fund payment on any sinking fund payment date, the Company shall not pay any dividends or make any other distributions in respect of outstanding shares of any junior stock (as that term is defined in Subsection A of Section of Article XVI of the by-laws of the Company) of the Company, other than dividends or distributions in shares of junior stock, or purchase or otherwise acquire for value any outstanding shares of junior stock, until all such payments have been made. 5. 7.60% Class A Preferred Stock, 1987 Series There shall be a series of Preferred Stock designated "7.60% Class A Preferred Stock, 1987 Series," and consisting of 1,200,000 shares with an aggregate par value of $30,000,000 and a par value per share of $25. The dividend rate and redemption prices as to said 7.60% Class A Preferred Stock, 1987 Series, shall be as follows: (a) Dividends on said 7.60% Class A Preferred Stock, 1987 Series, shall be at the rate of 7.60% per share per annum, and no more, and shall be cumulative from the date of issuance. Said dividends, when declared, shall be payable on the first days of February, May, August and November in each year, commencing May 1, 1987. (b) For each of the twelve month periods commencing February 1, 1987, the redemption prices of said 7.60% Class A Preferred Stock, 1987 Series, shall be the amount per share set forth below: Twelve Twelve Months Redemption Months Redemption Beginning Price Beginning Price February 1 Per Share February 1 Per Share 1987 $26.90 2000 $25.26 1988 26.90 2001 25.13 1989 26.90 2002 25.00 1990 26.90 2003 25.00 1991 26.90 2004 25.00 1992 26.27 2005 25.00 1993 26.14 2006 25.00 1994 26.02 2007 25.00 1995 25.89 2008 25.00 1996 25.76 2009 25.00 1997 25.64 2010 25.00 1998 25.51 2011 25.00 1999 25.38 plus in all cases that portion of the quarterly dividend accrued thereon to the redemption date and all unpaid dividends thereon, if any; provided, however, that none of the 7.60% Class A Preferred Stock, 1987 Series, shall be redeemed prior to February 1, 1992, if such redemption is for the purpose of or in anticipation of refunding such 7.60% Class A Preferred Stock, 1987 Series, through the use, directly or indirectly, of funds borrowed by the Company or of the proceeds of the issue by the Company of shares of any stock ranking prior to or on a parity with the 7.60% Class A Preferred Stock, 1987 Series, as to dividends or assets, if such borrowed funds or such shares have an effective interest cost or effective dividend cost to the Company (computed in accordance with generally accepted financial principles), as the case may be, of less than 7.69% per annum. (c) As and for a sinking fund for said 7.60% Class A Preferred Stock, 1987 Series, commencing on February 1, 1992, and on each February 1 in each year thereafter so long as any shares of the 7.60% Class A Preferred Stock, 1987 Series, remain outstanding, the Company shall, to the extent of any funds of the Company legally available therefor and except as otherwise restricted by the Company's Statement of Preferred Stock Provisions, redeem 60,000 shares of 7.60% Class A Preferred Stock, 1987 Series (or such lesser number of such shares as remain outstanding) at $25 per share plus accrued dividends to the date of redemption; provided, however, that if in any year the Company does not redeem the full number of shares of 7.60% Class A Preferred Stock, 1987 Series, required to be redeemed pursuant to this sinking fund, the deficiency shall be made good on the next succeeding February 1 on which the Company has funds legally available for, and is otherwise permitted to effect, the redemption of shares of 7.60% Class A Preferred Stock, 1987 Series, pursuant to this sinking fund. At the option of the Company, the number of shares of 7.60% Class A Preferred Stock, 1987 Series, redeemed on any February 1 may be reduced by the number of such shares purchased and canceled by the Company during the preceding twelve-month period or redeemed during such period pursuant to subsection (b) hereof. Any shares so redeemed or purchased and canceled may be given the status of authorized but unissued shares of Senior Stock, but none of such shares shall be reissued as shares of 7.60% Class A Preferred Stock, 1987 Series. The Company shall have the option, which shall be noncumulative, to redeem on February 1, 1992 and on each February 1 thereafter up to an additional 60,000 shares of 7.60% Class A Preferred Stock, 1987 Series, at the sinking fund redemption price. No such optional sinking fund shall operate to reduce the number of shares of the 7.60% Class A Preferred Stock, 1987 Series, required to be redeemed pursuant to the mandatory sinking fund provisions hereinabove set forth. In the event that the Company shall at any time fail to make a full mandatory sinking fund payment on any sinking fund payment date, the Company shall not pay any dividends or make any other distributions in respect of outstanding shares of any junior stock (as that term is defined in Subsection 2D of Section 2 of Article XVI of the by-laws of the Company) of the Company, other than dividends or distributions in shares of junior stock, or purchase or otherwise acquire for value any outstanding shares of junior stock, until all such payments have been made. 6. Dutch Auction Rate Transferable Securities Class A Preferred Stock, 1988 Series There shall be a series of Class A Preferred Stock designated "Dutch Auction Rate Transferable Securities Class A Preferred Stock, 1988 Series" (the "1988 DARTS") consisting of 2,140,000 shares with an aggregate par value of $53,500,000 and a par value per share of $25. The provisions governing the issue and sale of the 1988 DARTS in Units, certification, dividend rights, redemption, reacquisition, auction procedures, and other preferences, qualifications and special or relative rights or privileges with respect to the 1988 DARTS shall be as follows: (1) Units The 1988 DARTS shall be issued and sold by the Company only in units of 4,000 shares per unit ("Units"). No partial Units shall be issued and sold by the Company, and no fractional shares of the 1988 DARTS shall be issued and sold, no transfer of the 1988 DARTS in less than whole Units shall be made, nor shall any transfer in less than whole Units be registered on the transfer books of the Company or be effective for any purpose. (2) Certification Except as otherwise provided by law, all outstanding DARTS shall be represented by a certificate or certificates registered in the name of a nominee of the Securities Depository (as defined in Section (6)(a)(xxi) below), and no person acquiring Units shall be entitled to receive a certificate representing the 1988 DARTS. The nominee of the Securities Depository shall be the sole holder of record of the 1988 DARTS. Each purchaser of Units will receive dividends, distributions and notices according to the procedures of the Securities Depository and, if such purchaser is not a member of the Securities Depository, of such purchaser's Agent Member (as defined in Section (6)(a)(ii) below). (3) Dividend Rights (a) Dividends on the 1988 DARTS shall be paid, when, as and if declared by the Board of Directors of the Company out of funds legally available therefor, at the rate per annum determined as set forth below in subsection (c) of this Section (3) and no more (the "Applicable Rate"), payable on the respective dates set forth below. (b) Dividends on the 1988 DARTS shall accrue from the date of original issuance and shall be payable commencing on May 3, 1988, and on each succeeding seventh Tuesday thereafter, except that if any of such Tuesday, the Monday preceding such Tuesday, or the Wednesday following such Tuesday is not a Business Day (as defined below), then (i) the dividend payment date shall be the first Business Day after such Tuesday that is immediately followed by a Business Day and is preceded by a Business Day that is the preceding Monday or a day after such Monday, or (ii) if the Securities Depository shall make available to its participants and members, in funds immediately available in New York City on dividend payment dates, the amount due as dividends on such dividend payment dates (and the Securities Depository shall have so advised the Trust Company (as defined in Section (6)(a)(xxx) below)), then the dividend payment date shall be the first Business Day on or after such Tuesday that is preceded by a Business Day that is the preceding Monday or a day after such Monday. "Business Day" means a day on which the New York Stock Exchange is open for trading and which is not a day on which banks in New York City are authorized by law to close. Each dividend payment date determined as provided above is referred to herein as the "Dividend Payment Date." Although any particular Dividend Payment Date may not occur on the originally scheduled Tuesday because of the exceptions discussed above, the next succeeding Dividend Payment Date shall be, subject to such exceptions, the seventh Tuesday following the originally designated Tuesday Dividend Payment Date for the prior Dividend Period. As used herein, Dividend Period means the period commencing on a Dividend Payment Date for DARTS and ending on the day next preceding the next Dividend Payment Date. Notwithstanding the foregoing, in the event of a change in law altering the minimum holding period (currently found in Section 246(c) of the Internal Revenue Code of 1986, as amended (the "Code")) required for taxpayers to be entitled to the dividends received deduction on preferred stock held by non-affiliated corporations (currently found in Section 243(a) of the Code), the Company shall adjust the period of time between Dividend Payment Dates so as to adjust uniformly the number of days (such number of days without giving effect to the exceptions referred to above being hereinafter referred to as "Dividend Period Days") in Dividend Periods commencing after the date of such change in law to equal or exceed the then current minimum holding period; provided that the number of Dividend Period Days shall not exceed by more than nine days the length of such then current minimum holding period and shall be evenly divisible by seven, and the maximum number of Dividend Period Days in no event shall exceed 98 days. Upon any such change in the number of Dividend Period Days as a result of a change in law, the Company shall give notice of such change to all Existing Holders of Units. (c) The dividend rate on shares of the 1988 DARTS during the period from and after the date of original issuance to the Initial Dividend Payment Date (the "Initial Dividend Period") shall be 6.375 percent per annum. Commencing on the Initial Dividend Payment Date, the dividend rate on shares of the 1988 DARTS for each subsequent Dividend Period shall be at a rate per annum that results from the implementation of the Auction procedures set forth in Section (6) below. The amount of dividends per Unit for the 1988 DARTS payable for each Dividend Period shall be computed by multiplying the dividend rate for such series for each Dividend Period determined in accordance with subsection (c) above by a fraction the numerator of which shall be the number of days in such Dividend Period (calculated by counting the first day thereof but excluding the last day thereof) such Unit was outstanding and the denominator of which shall be 360, and multiplying the amount so obtained by $100,000 per Unit. (d) Prior to each Dividend Payment Date, the Company shall pay to the Trust Company sufficient funds for the payment of declared dividends. (e) For the purpose of determining whether and when holders of the Senior Stock are entitled to the rights to elect certain directors of the Company, described under Article XVI, Section 5(c) of these By-laws, dividends on the DARTS shall be deemed to be in arrears "in an amount equal to or exceeding four quarterly dividend payments," if, at the time dividends are in arrears for four quarterly dividend payments for Senior Stock having quarterly dividend payments, dividends on the 1988 DARTS are in arrears for each Dividend Period beginning on or after the first day of the first of the four quarterly dividend periods as to which dividends on the Senior Stock having quarterly dividends are in arrears. (4) Redemption Provisions (a) At the option of the Company, the Units may be redeemed out of funds legally available therefor in whole on any Dividend Payment Date at a redemption price of $25 per share of the 1988 DARTS ($100,000 per Unit) plus accrued and unpaid dividends (whether or not earned or declared) to the redemption date. Only whole Units may be redeemed. See Section (5) below for restrictions on the reissue of Units after redemption. (b) In accordance with Article XVI, Section 3 of these By-laws, notice of redemption shall be mailed to each record holder of Units and to the Trust Company not less than 30 days prior to the date fixed for redemption thereof. Each notice of redemption shall include a statement setting forth: (i) the redemption date, (ii) the number of Units to be redeemed, (iii) the redemption price, (iv) the place or places where Units are to be surrendered for payment of the redemption price, and (v) that dividends of the Units to be redeemed will cease to accrue on such redemption date. No defect in the notice of redemption or in the mailing thereof shall affect the validity of the redemption proceedings, except as required by applicable law. (c) If less than all of the outstanding Units are to be redeemed, the number of Units to be redeemed shall be determined by the Company and communicated to the Trust Company. In accordance with Article XVI, Section 3A of these By-laws, the Trust Company shall give notice to the Securities Depository and the Securities Depository will determine by lot under its usual operating procedures the number of Units, if any, to be redeemed from the account of the Agent Member of each Existing Holder. An Agent Member may determine to redeem Units from some Existing Holders without redeeming Units from the accounts of other Existing Holders. (5) Reacquisition Except in an Auction (as defined in Section (6)(a)(iii) below), the Company shall have the right, in accordance with Article XVI, Section 3E of these By-laws, and where permitted by applicable law, to purchase or otherwise acquire Units upon the best terms reasonably obtainable, but not exceeding the then current redemption price of such Units, except that no such purchase shall be made if the Company shall be in arrears in respect to payment of dividends on any shares of Senior Stock outstanding or if there shall exist an event of default as defined in Article XVI, Section 5 of these By-laws. Notwithstanding the provisions of Article XVI, Section 3D of these By-laws, Units that have been redeemed, purchased or otherwise acquired by the Company shall not be reissued as 1988 DARTS and shall either be restored to authorized but unissued shares of the Company's Class A Preferred Stock or canceled at the Company's option. (6) Auction Procedures (a) Certain Definitions. As used in this Section 6 of these Provisions with Respect to the series of Senior Stock, the following terms shall have the following meanings, unless the context otherwise requires: (i) "Affiliate" shall mean any Person known to the Trust Company to be controlled by, in control of, or under common control with the Company. (ii) "Agent Member" shall mean the member of the Securities Depository that will act on behalf of a Bidder and is identified as such in such Bidder's Purchaser's Letter. (iii) "Auction" shall mean the periodic operation of the procedures set forth herein. (iv) "Auction Date" shall mean the Business Day next preceding a Dividend Payment Date. (v) "Available Units" shall have the meaning specified in paragraph (d)(i)(A) below. (vi) "Bid" shall have the meaning specified in paragraph(b)(i) below. (vii) "Bidder" shall have the meaning specified in paragraph(b)(i) below. (viii) "Board of Directors" shall mean the Board of Directors of the Company. (ix) "Broker-Dealer" shall mean any broker-dealer, or other entity permitted by law to perform the functions required of a Broker-Dealer herein, that has been selected by the Company and has entered into a Broker-Dealer Agreement with the Trust Company that remains effective. (x) "Broker-Dealer Agreement" shall mean an agreement between the Trust Company and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the procedures specified herein. (xi) "DARTS" or "1988 DARTS" shall mean the 2,140,000 shares of Dutch Auction Rate Transferable Securities Class A Preferred Stock, 1988 Series, $25 Par Value, of the Company. (xii) "Existing Holder," when used with respect to Units, shall mean a Person who has signed a Purchaser's Letter and is listed as the beneficial owner of such Units in the records of the Trust Company. (xiii) "Hold Order" shall have the meaning specified in paragraph (b)(i) below. (xiv) "Maximum Applicable Rate," on any Auction Date, shall mean the percentage of the 60-day "AA" Composite Commercial Paper Rate (as defined below) in effect on such Auction Date, determined as set forth below based on the prevailing rating of the DARTS in effect at the close of business on the day preceding such Auction Date: Prevailing Rating Percentage AA/aa or Above........................... 110% A/a...................................... 120% BBB/baa.................................. 130% BB/ba.................................... 175% Below BB/ba.............................. 200% For purposes of this definition, the "prevailing rating" of the DARTS shall be (i) AA/aa or Above, if the DARTS have a rating of AA- or better by Standard & Poor's Corporation or its successor ("S&P") and aa3 or better by Moody's Investors Service, Inc. or its successor ("Moody's"), or the equivalent of both of such ratings by such agencies or a substitute rating agency or substitute rating agencies selected as provided below, (ii) if not AA/aa or Above, then A/a, if the DARTS have a rating of A- or better by S&P and a3 or better by Moody's or the equivalent of both of such ratings by such agencies or a substitute rating agency or substitute rating agencies selected as provided below, (iii) if not AA/aa or Above or A/a, then BBB/Baa, if the DARTS have a rating of BBB- or better by S&P and baa3 or better by Moody's or the equivalent of both of such ratings by such agencies or a substitute rating agency or substitute rating agencies selected as provided below, and (iv) if not AA/aa or Above, A/a or BBB/baa, then BB/ba, if the DARTS have a rating of BB- or better by S&P and Ba3 or better by Moody's, or the equivalent of both of such ratings by such agencies or a substitute rating agency or substitute rating agencies selected as provided below, and (v) if not AA/aa or Above, A/a, BBB/baa or BB/ba, then Below BB/ba. The Company shall take all reasonable action necessary to enable S&P and Moody's to provide a rating for the DARTS. If either S&P or Moody's shall not make such a rating available, or neither S&P nor Moody's shall make such a rating available, Salomon Brothers Inc and Morgan Stanley & Co. Incorporated, or their successors shall select a nationally recognized securities rating agency or two nationally recognized securities rating agencies to act as substitute rating agency or substitute rating agencies, as the case may be. (xv) "Minimum Applicable Rate," on any Auction Date, shall mean 59% of the 60-day "AA" Composite Commercial Paper Rate in effect on such Auction Date. (xvi) "Order" shall have the meaning specified in paragraph(b)(i) below. (xvii) "Outstanding" shall mean, as of any date, the DARTS theretofore issued by the Company except, without duplication, (A) any DARTS theretofore canceled or delivered to the Trust Company for cancellation, or redeemed by the Company, or as to which a notice of redemption shall have been given by the Company, (B) any DARTS as to which the Company or any Affiliate thereof shall be an Existing Holder and (C) any DARTS represented by any certificate in lieu of which a new certificate has been executed and delivered by the Company. (xviii) "Person" shall mean and include an individual, a partnership, a corporation, a trust, an unincorporated association, a joint venture or other entity or a government or any agency or political subdivision thereof. (xix) "Potential Holder" shall mean any Person, including any Existing Holder, (A) who shall have executed and delivered or caused to be delivered a Purchaser's Letter to the Trust Company and (B) who may be interested in acquiring Units (or, in the case of an Existing Holder, additional Units). (xx) "Purchaser's Letter" shall mean a letter addressed to the Company, the Trust Company, Broker-Dealer and other persons in which a Person agrees, among other things, to offer to purchase, purchase, offer to sell and/or sell Units as set forth herein. (xxi) "Securities Depository" shall mean The Depository Trust Company and its successors and assigns or any other securities depository selected by the Company which agrees to follow the procedures required to be followed by such securities depository in connection with the DARTS. (xxii) "Sell Order" shall have the meaning specified in paragraph (b)(i) below. (xxiii) "60-day 'AA' Composite Commercial Paper Rate," on any date, means (i) the interest equivalent of the 60-day rate on commercial paper placed on behalf of issuers whose corporate bonds are rated "AA" by S&P or the equivalent of such rating by S&P or another rating agency, as such 60-day rate is made available on a discount basis or otherwise by the Federal Reserve Bank of New York for the Business Day immediately preceding such date, or (ii) in the event that the Federal Reserve Bank of New York does not make available such a rate, then the interest equivalent of the 60-day rate on commercial paper placed on behalf of such issuers, as quoted on a discount basis or otherwise by Morgan Stanley & Co. Incorporated or, in lieu thereof, any affiliates or successor thereof (the "Commercial Paper Dealer"), to the Trust Company for the close of business on the Business Day immediately preceding such date. If the Commercial Paper Dealer does not quote a rate required to determine the 60-day "AA" Composite Commercial Rate, the 60-day "AA" Composite Commercial Paper Rate shall be determined on the basis of the quotation or quotations furnished by any Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers selected by the Company to provide such rate. If the Company, however, shall adjust the number of Dividend Period Days in the event of a change in the dividends received deduction minimum holding period contained in the Internal Revenue Code of 1986, as amended, with the result that (i) the Dividend Period Days shall be fewer than 70 days, such rate shall be the interest equivalent of the 60-day rate on such commercial paper, (ii) the Dividend Period Days shall be 70 or more days but fewer than 85 days, such rate shall be the arithmetic average of the interest equivalent of the 60-day and 90-day rates on such commercial paper, and (iii) the Dividend Period Days shall be 85 or more days but 98 or fewer days, such rate shall be the interest equivalent of the 90-day rate on such commercial paper. For the purposes of such definition, "interest equivalent" means the equivalent yield on a 360-day basis of a discount basis security to an interest-bearing security and "Substitute Commercial Paper Dealer" shall mean any commercial paper dealer that is a leading dealer in the commercial paper market, provided that neither such dealer nor any of its affiliates is a Commercial Paper Dealer. (xxiv) "Submission Deadline" shall mean 12:30 P.M., New York City time, on any Auction Date or such other time on any Auction Date by which Broker-Dealers are required to submit Orders to the Trust Company as specified by the Trust Company from time to time. (xxv) "Submitted Bid" shall have the meaning specified in paragraph (d)(i) below. (xxvi) "Submitted Hold Order" shall have the meaning specified in paragraph (d)(i) below. (xxvii) "Submitted Order" shall have the meaning specified in paragraph (d)(i) below. (xxviii) "Submitted Sell Order" shall have the meaning specified in paragraph (d)(i) below. (xxvix) "Sufficient Clearing Bids" shall have the meaning specified in paragraph (d)(i) below. (xxx) "Trust Company" shall mean Bankers Trust Company and its successor, and assigns or any other bank, trust company or other entity selected by the Company which agrees to follow the Auction Procedures described in this Section (6) for the purposes of determining the Applicable Rate for the DARTS. (xxxi) "Winning Bid Rate" shall have the meaning specified in paragraph (d)(i) below. (b) Orders by Existing Holders and Potential Holders (i) On or prior to each Auction Date: (A) each Existing Holder may submit to a Broker-Dealer information as to: (1) the number of Outstanding Units, if any, held by such Existing Holder which such Existing Holder desires to continue to hold without regard to the Applicable Rate for the next succeeding Dividend Period; (2) the number of Outstanding Units, if any, held by such Existing Holder which such Existing Holder desires to continue to hold, provided that the Applicable Rate for the next succeeding Dividend Period shall not be less than the rate per annum specified by such Existing Holder; and/or (3) the number of Outstanding Units, if any, held by such Existing Holder which such Existing Holder offers to sell without regard to the Applicable Rate for the next succeeding Dividend Period; and (B) Each Broker-Dealer, using a list of Potential Holders that shall be maintained in good faith for the purpose of conducting a competitive Auction shall contact Potential Holders, including Persons that are not Existing Holders, on such list to determine the number of Outstanding Units, if any, which each such Potential Holder offers to purchase, provided that the Applicable Rate for the next succeeding Dividend Period shall not be less than the rate per annum specified by such Potential Holder. For the purposes hereof, the communication to a Broker-Dealer of information referred to in clause (A) or (B) of this paragraph (b)(i) is hereinafter referred to as an "Order" and each Existing Holder and each Potential Holder placing an Order is hereinafter referred to as a "Bidder"; and Order containing the information referred to in clause (A)(1) of this paragraph (b)(i) is hereinafter referred to as a "Hold Order"; an Order containing the information referred to in clause (A)(2) or (B) of this paragraph (b)(i) is hereinafter referred to as a "Bid"; and an Order containing the information referred to in clause (A)(3) of this paragraph (b)(i) is hereinafter referred to as a "Sell Order." (ii) (A) A Bid by an Existing Holder shall constitute an irrevocable offer to sell: (1) the number of Outstanding Units specified in such Bid if the Applicable Rate determined on such Auction Date shall be less than the rate specified therein; or (2) such number or a lesser number of Outstanding Units to be determined as set forth in paragraph (e)(i)(D) if the Applicable Rate determined on such Auction Date shall be equal to the rate specified therein; or (3) a lesser number of Outstanding Units to be determined as set forth in paragraph (e)(ii)(C) if such specified rate shall be higher than Maximum Applicable Rate and Sufficient Clearing Bids do not exist. (B) A Sell Order by an Existing Holder shall constitute an irrevocable offer to sell: (1) the number of Outstanding Units specified in such Sell Order; or (2) such number or a lesser number of Outstanding Units to be determined as set forth in paragraph (e)(ii)(C) if Sufficient Clearing Bids do not exist. (C) A Bid by a Potential Holder shall constitute an irrevocable offer to purchase: (1) the number of Outstanding Units specified in such Bid if the Applicable Rate determined on such Auction Date shall be higher than the rate specified therein; or (2) such number of a lesser number of Outstanding Units to be determined as set forth in paragraph (e)(i)(E) if the Applicable Rate determined on such Auction Date shall be equal to the rate specified therein. (c) Submission of Orders by Broker-Dealers to Trust Company (i) Each Broker-Dealer shall submit in writing to the Trust Company prior to the Submission Deadline on each Auction Date all Orders obtained by such Broker-Dealer and specifying with respect to each Order: (A) the name of the Bidder placing such Order; (B) the aggregate number of Outstanding Units that are subject of such Order; (C) to the extent that such Bidder is an Existing Holder: (1) the number of Outstanding Units, if any, subject to any Hold Order placed by such Existing Holder; (2) the number of Outstanding Units, if any, subject to any Bid placed by such Existing Holder and the rate specified in such Bid; and (3) the number of Outstanding Units, if any, subject to any Sell Order placed by such Existing Holder; and (D) to the extent such Bidder is a Potential Holder, the rate specified in such Potential Holder's Bid. (ii) If any rate specified in any Bid contains more than three figures to the right of the decimal point, the Trust Company shall round such rate up to the next highest one-thousandth (.001) of 1%. (iii) If an Order or Orders covering all of the Outstanding Units held by an Existing Holder is not submitted to the Trust Company prior to the Submission Deadline, the Trust Company shall deem a Hold Order to have been submitted on behalf of such Existing Holder covering the number of Outstanding Units held by such Existing Holder and not subject to Orders submitted to the Trust Company. (iv) If one or more Orders covering in the aggregate more than the number of Outstanding Units held by an Existing Holder are submitted to the Trust Company, such Orders shall be considered valid as follows and in the following order or priority: (A) any Hold Order submitted on behalf of such Existing Holder shall be considered valid up to and including the number of Outstanding Units held by such Existing Holder; provided that if more than one Hold Order is submitted on behalf of such Existing Holder and the number of Units subject to such Hold Orders exceeds the number of Outstanding Units held by such Existing Holder, the number of Units subject to such Hold Orders shall be reduced pro rata so that such Hold Orders shall cover the number of Outstanding Units held by such Existing Holder; (B) (1) any Bid shall be considered valid up to and including the excess of the number of Outstanding Units held by such Existing Holder over the number of Units subject to Hold Orders referred to in paragraph (c)(iv)(A); (2) subject to clause (1) above, if more than one Bid with the same rate is submitted on behalf of such Existing Holder and the number of Outstanding Units subject to such Bids is greater than such excess, the number of Outstanding Units subject to such Bids shall be reduced pro rata so that such Bids shall cover the number of Outstanding Units equal to such excess; and (3) subject to clause (1) above, if more than one Bid with different rates is submitted on behalf of such Existing Holder, such Bids shall be considered valid in the ascending order of their respective rates and in any such event the number, if any, of such Outstanding shares subject to Bids not valid under this clause (B) shall be treated as the subject of a Bid by a Potential Holder; and (C) any Sell Order shall be considered valid up to and including the excess of the number of Outstanding Units held by such Existing Holder over the number of Outstanding Units subject to Hold Orders referred to in paragraph (c)(iv)(A) and Bids referred to in paragraph (c)(iv)(B). (v) If more than one Bid is submitted on behalf of any Potential Holder, each Bid submitted shall be a separate Bid with the rate and Units therein specified. (vi) If any rate specified in any Bid is lower than the Minimum Applicable Rate for the Dividend Period to which such Bid relates, such Bid shall be deemed to be a Bid specifying a rate equal to such Minimum Applicable Rate. (vii) Orders by Existing Holders and Potential Holders must specify numbers of Units in whole Units. Any Order that specifies a number of Units other than in whole shares will be invalid and will not be considered a Submitted Order for purposes of an Auction. (d) Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate (i) Not earlier than the Submission Deadline on each Auction Date, the Trust Company shall assemble all Orders submitted or deemed submitted to it by the Broker-Dealers (each such Order as submitted or deemed submitted by a Broker-Dealer being hereinafter referred to individually as a "Submitted Hold Order" a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as a "Submitted Order") and shall determine: (A) the excess of the total number of Outstanding Units over the number of Outstanding Units that are the subject of Submitted Hold Orders (such excess being hereinafter referred to as the "Available Units"); (B) from the Submitted Orders, whether: (1) the number of Outstanding Units that are the subject of Submitted Bids by Potential Holders specifying one or more rates equal to or lower than the Maximum Applicable Rate exceeds or is equal to the sum of: (2) [a] the number of Outstanding Units that are the subject of Submitted Bids by Existing Holders specifying one or more rates higher than the Maximum Applicable Rate, and [b] the number of Outstanding Units that are subject to Submitted Sell Orders (if such excess of such equality exists (other than because the number of Outstanding Units in clauses [a] and [b] above are each zero because all of the Outstanding Units are the subject of Submitted Hold Orders), such Submitted Bids in clause (1) above being hereinafter referred to collectively as "Sufficient Clearing Bids"); and (C) if Sufficient Clearing Bids exist, the lowest rate specified in the Submitted Bids (the "Winning Bid Rate"), which if: (1) each Submitted Bid from Existing Holders specifying the Winning Bid Rate and all other Submitted Bids from Existing Holders specifying lower rates were rejected, thus entitling such Existing Holders to continue to hold the Units that are the subject of such Submitted Bids, and (2) each Submitted Bid from Potential Holders specifying the Winning Bid Rate and all other Submitted Bids from Potential Holders specifying lower rates were accepted, thus entitling the Potential Holders to purchase the Units that are the subject of such Submitted Bids, would result in the number of shares subject to all Submitted Bids specifying the Winning Bid Rate or a lower rate being at least equal to the Available Units. (ii) Promptly after the Trust Company has made the determinations pursuant to paragraph (d)(i), the Trust Company shall advise the Company of the Maximum Applicable Rate and the Minimum Applicable Rate and, based on such determinations, the Applicable Rate for the next succeeding Dividend Period as follows: (A) if Sufficient Clearing Bids exist, that the Applicable Rate for the next succeeding Dividend Period shall be equal to the Winning Bid Rate so determined; (B) if Sufficient Clearing Bids do not exist (other than because all of the Outstanding Units are the subject of Submitted Hold Orders), that the Applicable Rate for the next succeeding Dividend Period shall be equal to the Maximum Applicable Rate; or (C) if all the Outstanding Units are the subject of Submitted Hold Orders, that the Applicable Rate for the next succeeding Dividend Period shall be equal to the Minimum Applicable Rate. (e) Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares Based on the determinations made pursuant to paragraph (d)(i), the Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the Trust Company shall take such other action as set forth below: (i) If Sufficient Clearing Bids have been made, subject to the provisions of paragraphs (e)(iii) and (e)(iv), Submitted Bids and Submitted Sell Orders shall be accepted or rejected in the following order or priority and all other Submitted bids shall be rejected: (A) the Submitted Sell Orders of Existing Holders shall be accepted and the Submitted Bid of each of the Existing Holders specifying any rate that is higher than the Winning Bid Rate shall be rejected, thus requiring each such Existing Holder to sell the Outstanding Units that are the subject of such Submitted Bid; (B) the Submitted Bid of each of the Existing Holders specifying any rate that is lower than the Winning Bid Rate shall be accepted, thus entitling each such Existing Holder to continue to hold the Outstanding Units that are the subject of such Submitted Bid; (C) the Submitted Bid of each of the Potential Holders specifying any rate that is lower than the Winning Bid Rate shall be accepted; (D) the Submitted Bid of each of the Existing Holders specifying a rate that is equal to the Winning Bid Rate shall be accepted, thus entitling each such Existing Holder to continue to hold the Outstanding Units that are the subject of such Submitted Bid, unless the number of Outstanding Units subject to all such Submitted Bids shall be greater than the number of Outstanding Units ("remaining shares") equal to the excess of the Available Units over the number of Outstanding Units subject to Submitted Bids described in paragraphs (e)(i)(B) and (e)(i)(C), in which event the Submitted Bids of each such Existing Holder shall be rejected, and each such Existing Holder shall be required to sell Outstanding Units, but only in an amount equal to the difference between (1) the number of Outstanding Units then held by such Existing Holder subject to such Submitted Bid and (2) the number of Units obtained by multiplying (x) the number of remaining shares by (y) a fraction the numerator of which shall be the number of Outstanding Units held by such Existing Holder subject to such Submitted Bid and the denominator of which shall be the sum of the number of Outstanding Units subject to such Submitted Bids made by all such Existing Holders that specified a rate equal to the Winning Bid Rate; and (E) the Submitted Bid of each of the Potential Holders specifying a rate that is equal to the Winning Bid Rate shall be accepted but only in an amount equal to the number of Outstanding Units obtained by multiplying (x) the difference between the Available Units and the number of Outstanding Units subject to the Submitted Bids described in paragraphs (e)(i)(B), (e)(i)(C) and (e)(i)(D) by (y) a fraction the numerator of which shall be the number of Outstanding shares of Units subject to such Submitted Bid and the denominator of which shall be the sum of the number of Outstanding Units subject to such Submitted Bids made by all such Potential Holders that specified rates equal to the Winning Bid Rate. (ii) If Sufficient Clearing Bids have been made (other than because all of the Outstanding Units are subject to Submitted Hold Orders), subject to the provisions of paragraphs (e)(iii) and (e)(iv), Submitted Orders shall be accepted or rejected as follows in the following order of priority and all other Submitted Bids shall be rejected: (A) the Submitted Bid of each Existing Holder specifying any rate that is equal to or lower than the Maximum Applicable Rate shall be accepted, thus entitling such Existing Holder to continue to hold the Outstanding Units that are the subject of such Submitted Bid; (B) the Submitted Bid of each Potential Holder specifying any rate that is equal to or lower than the Maximum Applicable Rate shall be accepted, thus requiring such Potential Holder to purchase the Outstanding Units that are the subject of such Submitted Bid; and (C) the Submitted Bids of each Existing Holder specifying any rate that is higher than the Maximum Applicable Rate shall be rejected and the Submitted Sell Orders of each Existing Holder shall be accepted, in both cases only in an amount equal to the difference between (1) the number of Outstanding Units then held by such Existing Holder subject to such Submitted Bid or Submitted Sell Order and (2) the number of Units obtained by multiplying (x) the difference between the Available Units and the aggregate number of Outstanding Units subject to Submitted Bids described in paragraphs (e)(ii)(A) and (e)(ii)(B) by (y) a fraction the numerator of which shall be the number of Outstanding Units held by such Existing Holder subject to such Submitted Bid or Submitted Sell Order and the denominator of which shall be the number of Outstanding Units subject to all such Submitted Bids and Submitted Sell Orders. (iii) If, as a result of the procedures described in paragraph (e)(i) or (e)(ii), any Existing Holder would be entitled or required to sell, or any Potential Holder would be entitled or required to purchase, a fraction of a Unit on any Auction Date, the Trust Company shall, in such manner as, in its sole discretion, it shall determine, round up or down the number of Units to be purchased or sold by any Existing Holder or Potential Holder on such Auction Date so that the number of Outstanding shares purchased or sold by each Existing Holder or Potential Holder on such Auction Date shall be whole Units. (iv) If, as a result of the procedures described in paragraph (e)(i), any Potential Holder would be entitled or required to purchase less than a whole Unit on any Auction Date, the Trust Company shall, in such manner as, in its sole discretion, it shall determine, allocate Units for purchase among Potential Holders so that only whole Units are purchased on such Auction Date by any Potential Holder, even if such allocation results in one or more of such Potential Holders not purchasing Units on such Auction Date. (v) Based on the results of each Auction, the Trust Company shall determine the aggregate number of Outstanding Units to be purchased and the aggregate number of Outstanding Units to be sold by Potential Holders and Existing Holders on whose behalf each Broker-Dealer submitted Bids or Sell Orders, and, with respect to each Broker-Dealer, to the extent that such aggregate number of Outstanding shares to be purchased and such aggregate number of Outstanding shares to be sold differ, determine to which other Broker-Dealer or Broker-Dealers acting for one or more purchasers such Broker-Dealer shall deliver, or from which other Broker-Dealer or Broker-Dealers acting for one or more sellers such Broker-Dealer shall receive, as the case may be, Outstanding Units. (f) Miscellaneous The Board of Directors may interpret the provisions of these Auction Procedures to resolve any inconsistency or ambiguity, and may remedy any formal defect or make any other change or modification which does not adversely affect the rights of Existing Holders of Units. An Existing Holder (A) may sell, transfer or otherwise dispose of Units only pursuant to a Bid or Sell Order in accordance with the procedures described in this paragraph or to or through a Broker-Dealer or to a Person that has delivered a signed copy of a Purchaser's Letter to the Trust Company, provided that in the case of all transfers other than pursuant to Auctions such Existing Holder, its Broker-Dealer or its Agent Member advises the Trust Company of such transfer and (B) shall have the ownership of the Units held by it maintained in book entry form by the Securities Depository in the account of its Agent Member, which in turn will maintain records of such Existing Holder's beneficial ownership. Neither the Company nor any Affiliate shall submit an Order, either directly or indirectly, in any Auction. Except as otherwise provided by law, all of the Outstanding Units shall be represented by a certificate registered in the name of the nominee of the Securities Depository and no Person acquiring Units shall be entitled to receive a certificate representing such shares. (g) Headings of Subdivisions The headings of the various subdivisions of these Auction Procedures are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. ARTICLE XVIII AMENDMENTS Except as otherwise provided in Article XVI hereof, these By-Laws may be altered, amended or repealed at any meeting of the stockholders called for the purpose by vote of a majority of stock present and voting thereon or at any meeting of the Board of Directors called for the purpose by vote of a majority of the Board of Directors. EX-4.1 3 SUPPLEMENTAL INDENTURE OF CL&P Exhibit 4.2.17 SIXTY-EIGHTH SUPPLEMENTAL INDENTURE Dated as of June 1, 1997 TO Indenture of Mortgage and Deed of Trust Dated as of May 1, 1921 THE CONNECTICUT LIGHT AND POWER COMPANY TO BANKERS TRUST COMPANY, Trustee 7-3/4% 1997 Series C Bonds, Due June 1, 2002 THE CONNECTICUT LIGHT AND POWER COMPANY Sixty-Eighth Supplemental Indenture, Dated as of June 1, 1997 Table of Contents Parties Recitals Granting Clauses Habendum Grant in Trust ARTICLE 1. FORM AND PROVISIONS OF BONDS OF 1997 SERIES C SECTION 1.01. Designation; Amount SECTION 1.02. Form of Bonds of 1997 Series C SECTION 1.03. Provisions of Bonds of 1997 Series C; Interest Accrual SECTION 1.04. Transfer and Exchange of Bonds of 1997 Series C ARTICLE 2. REDEMPTION OF BONDS OF 1997 Series C ARTICLE 3. MISCELLANEOUS SECTION 3.01. Benefits of Supplemental Indenture and Bonds of 1997 Series C SECTION 3.02. Effect of Table of Contents and Headings SECTION 3.03. Counterparts TESTIMONIUM SIGNATURES ACKNOWLEDGMENTS SCHEDULE A - Form of Bond of 1997 Series C, Form of Trustee's Certificate SCHEDULE B - Property Subject to the Lien of the Mortgage SIXTY-EIGHTH SUPPLEMENTAL INDENTURE, dated as of the first day of June, 1997, between THE CONNECTICUT LIGHT AND POWER COMPANY, a corporation organized and existing under the laws of the State of Connecticut (hereinafter called "Company"), and BANKERS TRUST COMPANY, a corporation organized and existing under the laws of the State of New York (hereinafter called "Trustee"), with its principal corporate trust office at Four Albany Street, New York, NY 10006. WHEREAS, the Company heretofore duly executed, acknowledged and delivered to the Trustee a certain Indenture of Mortgage and Deed of Trust dated as of May 1, 1921, and sixty-seven Supplemental Indentures thereto dated respectively as of May 1, 1921, February 1, 1924, July 1, 1926, June 20, 1928, June 1, 1932, July 1, 1932, July 1, 1935, September 1, 1936, October 20, 1936, December 1, 1936, December 1, 1938, August 31, 1944, September 1, 1944, May 1, 1945, October 1, 1945, November 1, 1949, December 1, 1952, December 1, 1955, January 1, 1958, February 1, 1960, April 1, 1961, September 1, 1963, April 1, 1967, May 1, 1967, January 1, 1968, October 1, 1968, December 1, 1969, January 1, 1970, October 1, 1970, December 1, 1971, August 1, 1972, April 1, 1973, March 1, 1974, February 1, 1975, September 1, 1975, May 1, 1977, March 1, 1978, September 1, 1980, October 1, 1981, June 30, 1982, October 1, 1982, July 1, 1983, January 1, 1984, October 1, 1985, September 1, 1986, April 1, 1987, October 1, 1987, November 1, 1987, April 1, 1988, November 1, 1988, June 1, 1989, September 1, 1989, December 1, 1989, April 1, 1992, July 1, 1992, October 1, 1992, July 1, 1993, July 1, 1993, December 1, 1993, February 1, 1994, February 1, 1994, June 1, 1994, October 1, 1994, June 1, 1996, January 1, 1997, May 1, 1997 and June 1, 1997 (said Indenture of Mortgage and Deed of Trust (i) as heretofore amended, being hereinafter generally called the "Mortgage Indenture," and (ii) together with said Supplemental Indentures thereto, being hereinafter generally called the "Mortgage"), all of which have been duly recorded as required by law, for the purpose of securing its First and Refunding Mortgage Bonds (of which $1,746,000,000 aggregate principal amount are outstanding at the date of this Supplemental Indenture) in an unlimited amount, issued and to be issued for the purposes and in the manner therein provided, of which Mortgage this Supplemental Indenture is intended to be made a part, as fully as if therein recited at length; WHEREAS, the Company by appropriate and sufficient corporate action in conformity with the provisions of the Mortgage has duly determined to create a further series of bonds under the Mortgage to be designated "First and Refunding Mortgage 7-3/4% Bonds, 1997 Series C" (hereinafter generally referred to as the "bonds of 1997 Series C"), to consist of fully registered bonds containing terms and provisions duly fixed and determined by the Board of Directors of the Company and expressed in this Supplemental Indenture, such fully registered bonds and the Trustee's certificate of its authentication thereof to be substantially in the forms thereof respectively set forth in Schedule A appended hereto and made a part hereof; and WHEREAS, the execution and delivery of this Supplemental Indenture and the issue of not in excess of Two Hundred Million Dollars ($200,000,000) in aggregate principal amount of bonds of 1997 Series C and other necessary actions have been duly authorized by the Board of Directors of the Company; and WHEREAS, the Company has purchased, constructed or otherwise acquired certain additional property not specifically described in the Mortgage but which is and is intended to be subject to the lien thereof, and proposes specifically to subject such additional property to the lien of the Mortgage at this time; and WHEREAS, the Company proposes to execute and deliver this Supplemental Indenture to provide for the issue of the bonds of 1997 Series C and to confirm the lien of the Mortgage on the property referred to below, all as permitted by Section 14.01 of the Mortgage Indenture; and WHEREAS, all acts and things necessary to constitute this Supplemental Indenture a valid, binding and legal instrument and to make the bonds of 1997 Series C, when executed by the Company and authenticated by the Trustee valid, binding and legal obligations of the Company have been authorized and performed; NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE OF MORTGAGE AND DEED OF TRUST WITNESSETH: That in order to secure the payment of the principal of and interest on all bonds issued and to be issued under the Mortgage, according to their tenor and effect, and according to the terms of the Mortgage and this Supplemental Indenture, and to secure the performance of the covenants and obligations in said bonds and in the Mortgage and this Supplemental Indenture respectively contained, and for the better assuring and confirming unto the Trustee, its successor or successors and its or their assigns, upon the trusts and for the purposes expressed in the Mortgage and this Supplemental Indenture, all and singular the hereditaments, premises, estates and property of the Company thereby conveyed or assigned or intended so to be, or which the Company may thereafter have become bound to convey or assign to the Trustee, as security for said bonds (except such hereditaments, premises, estates and property as shall have been disposed of or released or withdrawn from the lien of the Mortgage and this Supplemental Indenture, in accordance with the provisions thereof and subject to alterations, modifications and changes in said hereditaments, premises, estates and property as permitted under the provisions thereof), the Company, for and in consideration of the premises and the sum of One Dollar ($1.00) to it in hand paid by the Trustee, the receipt whereof is hereby acknowledged, and of other valuable considerations, has granted, bargained, sold, assigned, mortgaged, pledged, transferred, set over, aliened, enfeoffed, released, conveyed and confirmed, and by these presents does grant, bargain, sell, assign, mortgage, pledge, transfer, set over, alien, enfeoff, release, convey and confirm unto said Bankers Trust Company, as Trustee, and its successor or successors in the trusts created by the Mortgage and this Supplemental Indenture, and its and their assigns, all of said hereditaments, premises, estates and property (except and subject as aforesaid), as fully as though described at length herein, including, without limitation of the foregoing, the property, rights and privileges of the Company described or referred to in Schedule B hereto. Together with all plants, buildings, structures, improvements and machinery located upon said real estate or any portion thereof, and all rights, privileges and easements of every kind and nature appurtenant thereto, and all and singular the tenements, hereditaments and appurtenances belonging to the real estate or any part thereof described or referred to in Schedule B or intended so to be, or in any wise appertaining thereto, and the reversions, remainders, rents, issues and profits thereof, and also all the estate, right, title, interest, property, possession, claim and demand whatsoever, as well in law as in equity, of the Company, of, in and to the same and any and every part thereof, with the appurtenances; except and subject as aforesaid. TO HAVE AND TO HOLD all and singular the property, rights and privileges hereby granted or mentioned or intended so to be, together with all and singular the reversions, remainders, rents, revenues, income, issues and profits, privileges and appurtenances, now or hereafter belonging or in any way appertaining thereto, unto the Trustee and its successor or successors in the trust created by the Mortgage and this Supplemental Indenture, and its and their assigns, forever, and with like effect as if the above described property, rights and privileges had been specifically described at length in the Mortgage and this Supplemental Indenture. Subject, however, to permitted liens, as defined in the Mortgage Indenture. IN TRUST, NEVERTHELESS, upon the terms and trusts of the Mortgage and this Supplemental Indenture for those who shall hold the bonds and coupons issued and to be issued thereunder, or any of them, without preference, priority or distinction as to lien of any of said bonds and coupons over any others thereof by reason of priority in the time of the issue or negotiation thereof, or otherwise howsoever, subject, however, to the provisions in reference to extended, transferred or pledged coupons and claims for interest set forth in the Mortgage and this Supplemental Indenture (and subject to any sinking fund that may heretofore have been or hereafter be created for the benefit of any particular series). And it is hereby covenanted that all such bonds of 1997 Series C are to be issued, authenticated and delivered, and that the mortgaged premises are to be held by the Trustee, upon and subject to the trusts, covenants, provisions and conditions and for the uses and purposes set forth in the Mortgage and this Supplemental Indenture and upon and subject to the further covenants, provisions and conditions and for the uses and purposes hereinafter set forth, as follows, to wit: ARTICLE 1. FORM AND PROVISIONS OF BONDS OF 1997 SERIES C SECTION 1.01. Designation; Amount. The bonds of 1997 Series C shall be designated "First and Refunding Mortgage 7-3/4% Bonds, 1997 Series C" and, subject to Section 2.08 of the Mortgage Indenture, shall not exceed Two Hundred Million Dollars ($200,000,000) in aggregate principal amount at any one time outstanding. The initial issue of the bonds of 1997 Series C may be effected upon compliance with the applicable provisions of the Mortgage Indenture. SECTION 1.02. Form of Bonds of 1997 Series C. The bonds of 1997 Series C shall be issued only in fully registered form without coupons in denominations of One Hundred Thousand Dollars ($100,000) or integral multiples of $1,000 in excess thereof; provided, however, that, if any registered holder holds less than $100,000 in aggregate principal amount of the bonds of 1997 Series C as result of a partial redemption by the Company in accordance with Article 2 hereof, a bond of 1997 Series C in the amount of such holder's aggregate holdings shall be issued. The bonds of 1997 Series C and the certificate of the Trustee upon said bonds shall be substantially in the forms thereof respectively set forth in Schedule A appended hereto. SECTION 1.03. Provisions of Bonds of 1997 Series C; Interest Accrual. The bonds of 1997 Series C shall mature on June 1, 2002 and shall bear interest, payable semiannually on the first days of June and December of each year, commencing December 1, 1997, at the rate of 7-3/4% per annum, until the Company's obligation in respect of the principal thereof shall be discharged; and shall be payable both as to principal and interest at the office or agency of the Company in the Borough of Manhattan, New York, New York, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts. The interest on the bonds of 1997 Series C, whether in temporary or definitive form, shall be payable without presentation of such bonds; and only to or upon the written order of the registered holders thereof of record at the applicable record date. The bonds of 1997 Series C shall be callable for redemption in whole or in part according to the terms and provisions herein in Article 2. Each bond of 1997 Series C shall be dated as of June 1, 1997 and shall bear interest on the principal amount thereof from the interest payment date next preceding the date of authentication thereof by the Trustee to which interest has been paid on the bonds of 1997 Series C, or if the date of authentication thereof is prior to November 16, 1997, then from June 1, 1997, or if the date of authentication thereof be an interest payment date to which interest is being paid or a date between the record date for any such interest payment date and such interest payment date, then from such interest payment date. The person in whose name any bond of 1997 Series C is registered at the close of business on any record date (as hereinafter defined) with respect to any interest payment date shall be entitled to receive the interest payable on such interest payment date notwithstanding the cancellation of such bond upon any registration of transfer or exchange thereof subsequent to the record date and prior to such interest payment date, except that if and to the extent the Company shall default in the payment of the interest due on such interest payment date, then such defaulted interest shall be paid to the person in whose name such bond is registered on a subsequent record date for the payment of defaulted interest if one shall have been established as hereinafter provided and otherwise on the date of payment of such defaulted interest. A subsequent record date may be established by the Company by notice mailed to the owners of bonds of 1997 Series C not less than ten (10) days preceding such record date, which record date shall not be more than thirty (30) days prior to the subsequent interest payment date. The term "record date" as used in this Section with respect to any regular interest payment (i.e., June 1 or December 1) shall mean the May 15 or November 15, as the case may be, next preceding such interest payment date, or if such May 15 or November 15 shall be a legal holiday or a day on which banking institutions in the Borough of Manhattan, New York, New York are authorized by law to close, the next preceding day which shall not be a legal holiday or a day on which such institutions are so authorized to close. SECTION 1.04. Transfer and Exchange of Bonds of 1997 Series C. The bonds of 1997 Series C may be surrendered for registration of transfer as provided in Section 2.06 of the Mortgage Indenture at the office or agency of the Company in the Borough of Manhattan, New York, New York, and may be surrendered at said office for exchange for a like aggregate principal amount of bonds of 1997 Series C of other authorized denominations. Notwithstanding the provisions of Section 2.06 of the Mortgage Indenture, no charge, except for taxes or other governmental charges, shall be made by the Company for any registration of transfer of bonds of 1997 Series C or for the exchange of any bonds of 1997 Series C for such bonds of other authorized denominations. ARTICLE 2. REDEMPTION OF BONDS OF 1997 SERIES C. The bonds of 1997 Series C shall be redeemable, as a whole at any time or in part from time to time, in accordance with the provisions of the Mortgage and upon not less than thirty (30) days and not more than 60 days prior notice given by mail as provided in the Mortgage (which notice may state that it is subject to the receipt of the redemption moneys by the Trustee on or before the date fixed for redemption and which notice shall be of no effect unless such moneys are so received on or before such date), at the option of the Company, at a redemption price equal to the greater of (i) 100% of the principal amount of the bonds being redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon, discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Yield, plus in each case accrued interest to the date of redemption (the "Redemption Date"). "Treasury Yield" means, with respect to any Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date. "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker having a maturity comparable to the remaining term of the bonds of 1997 Series C that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the bonds of 1997 Series C. "Independent Investment Banker" means Morgan Stanley & Co. Incorporated or, if such firm is unwilling or unable to select the Comparable Treasury Issue, an independent investment banking institution of national standing to be selected by the Company and appointed by the Trustee. "Comparable Treasury Price" means, with respect to any Redemption Date (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third business day preceding such Redemption Date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S. Government Securities" or (ii) if such release (or any successor release) is not published or does not contain such prices on such business day, (A) the average of the Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (B) if the Trustee obtains fewer than four Reference Treasury Dealer Quotations, the average of all such Quotations. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding such Redemption Date. "Reference Treasury Dealer" means each of Morgan Stanley & Co. Incorporated, Salomon Brothers Inc and another Primary Treasury Dealer (as defined herein) at the option of the Company, provided, however, that if any of the foregoing shall cease to be a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer"), the Company shall substitute therefor another Primary Treasury Dealer. ARTICLE 3. MISCELLANEOUS. SECTION 3.01. Benefits of Supplemental Indenture and Bonds of 1997 Series C. Nothing in this Supplemental Indenture, or in the bonds of 1997 Series C, expressed or implied, is intended to or shall be construed to give to any person or corporation other than the Company, the Trustee and the holders of the bonds and interest obligations secured by the Mortgage and this Supplemental Indenture, any legal or equitable right, remedy or claim under or in respect of this Supplemental Indenture or of any covenant, condition or provision herein contained. All the covenants, conditions and provisions hereof are and shall be for the sole and exclusive benefit of the Company, the Trustee and the holders of the bonds and interest obligations secured by the Mortgage and this Supplemental Indenture. SECTION 3.02. Effect of Table of Contents and Headings. The table of contents and the description headings of the several Articles and Sections of this Supplemental Indenture are inserted for convenience of reference only and are not to be taken to be any part of this Supplemental Indenture or to control or affect the meaning, construction or effect of the same. SECTION 3.03. Counterparts. For the purpose of facilitating the recording hereof, this Supplemental Indenture may be executed in any number of counterparts, each of which shall be and shall be taken to be an original and all collectively but one instrument. IN WITNESS WHEREOF, The Connecticut Light and Power Company has caused these presents to be executed by a Vice President and its corporate seal to be hereunto affixed, duly attested by an Assistant Secretary, and Bankers Trust Company has caused these presents to be executed by a Vice President and its corporate seal to be hereunto affixed, duly attested by an Assistant Vice President, as of the day and year first above written. THE CONNECTICUT LIGHT AND POWER COMPANY Attest: s/s O. Kay Comendul By: s/s John B. Keane Name: O. Kay Comendul Name: John B. Keane Title: Assistant Secretary Title: Vice President and Treasurer (SEAL) Signed, sealed and delivered in the presence of: s/s Tracy A. DeCredico s/s Christine A. Balboni STATE OF CONNECTICUT ) ) ss.: Berlin COUNTY OF HARTFORD ) On this 3rd day of October 1997, before me, Judith D. Boucher, the undersigned officer, personally appeared John B. Keane and O. Kay Comendul, who acknowledged themselves to be Vice President and Treasurer and Assistant Secretary, respectively, of THE CONNECTICUT LIGHT AND POWER COMPANY, a corporation, and that they, as such Vice President and Treasurer and such Assistant Secretary, being authorized so to do, executed the foregoing instrument for the purpose therein contained, by signing the name of the corporation by themselves as Vice President and Treasurer and Assistant Secretary, and as their free act and deed. IN WITNESS WHEREOF, I hereunto set my hand and official seal. s/s Judith D. Boucher Judith D. Boucher Notary Public My commission expires on September 30, 1999 (SEAL) BANKERS TRUST COMPANY Attest: s/s Jason C. Theriault By: s/s Scott F. Thiel Name: Jason C. Theriault Name: Scott F. Thiel Title: Assistant Treasurer Title: Assistant Vice President (SEAL) Signed, sealed and delivered in the presence of: s/s David Beane s/s Stephen M. Moore STATE OF NEW YORK ) ) ss.: New York COUNTY OF NEW YORK ) On this 3rd day of October, 1997, before me, Sharon V. Alston, the undersigned officer, personally appeared Scott F. Thiel and Jason C. Theriault who acknowledged themselves to be an Assistant Vice President and an Assistant Treasurer, respectively, of BANKERS TRUST COMPANY, a corporation, and that they, as such Assistant Vice President and such Assistant Treasurer, being authorized so to do, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by themselves as Assistant Vice President and Assistant Treasurer, and as their free act and deed. IN WITNESS WHEREOF, I hereunto set my hand and official seal. s/s Sharon V. Alston Name: Sharon V. Alston Notary Public, State of New York No. 31-4966275 Qualified in New York County Commission Expires May 7, 1998 (SEAL) SCHEDULE A [FORM OF BOND OF 1997 SERIES C] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. No. $ THE CONNECTICUT LIGHT AND POWER COMPANY Incorporated under the Laws of the State of Connecticut FIRST AND REFUNDING MORTGAGE 7-3/4% BOND, 1997 SERIES C PRINCIPAL DUE JUNE 1, 2002 FOR VALUE RECEIVED, THE CONNECTICUT LIGHT AND POWER COMPANY, a corporation organized and existing under the laws of the State of Connecticut (hereinafter called the Company), hereby promises to pay to , or registered assigns, the principal sum of dollars, on the first day of June, 2002 and to pay interest on said sum, semiannually on the first days of June and December in each year, commencing December 1, 1997, until the Company's obligation with respect to said principal sum shall be discharged, at the rate of 7-3/4% per annum from the interest payment date next preceding the date of authentication hereof to which interest has been paid on the bonds of this series, or if the date of authentication hereof is prior to November 16, 1997, then from June 1, 1997, or if the date of authentication hereof is an interest payment date to which interest is being paid or a date between the record date for any such interest payment date and such interest payment date, then from such interest payment date. Both principal and interest shall be payable at the office or agency of the Company in the Borough of Manhattan, New York, New York, in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts. Each installment of interest hereon (other than overdue interest) shall be payable to the person who shall be the registered owner of this bond at the close of business on the record date, which shall be the May 15 or November 15, as the case may be, next preceding the interest payment date, or, if such May 15 or November 15 shall be a legal holiday or a day on which banking institutions in the Borough of Manhattan, New York, New York, are authorized by law to close, the next preceding day which shall not be a legal holiday or a day on which such institutions are so authorized to close. Reference is hereby made to the further provisions of this bond set forth on the reverse hereof, including without limitation provisions in regard to the call and redemption and the registration of transfer and exchangeability of this bond, and such further provisions shall for all purposes have the same effect as though fully set forth in this place. This bond shall not become or be valid or obligatory until the certificate of authentication hereon shall have been signed by Bankers Trust Company (hereinafter with its successors as defined in the Mortgage hereinafter referred to, generally called the Trustee), or by such a successor. IN WITNESS WHEREOF, The Connecticut Light and Power Company has caused this bond to be executed in its corporate name and on its behalf by its President by his signature or a facsimile thereof, and its corporate seal to be affixed or imprinted hereon and attested by the manual or facsimile signature of its Secretary. Dated as of , 1997. THE CONNECTICUT LIGHT AND POWER COMPANY By: Name: Title: President Attest: Name: Title: Secretary [FORM OF TRUSTEE'S CERTIFICATE] Bankers Trust Company hereby certifies that this bond is one of the bonds described in the within mentioned Mortgage. BANKERS TRUST COMPANY, TRUSTEE By: Name: Title: Authorized Officer [FORM OF BOND] [REVERSE] THE CONNECTICUT LIGHT AND POWER COMPANY FIRST AND REFUNDING MORTGAGE 7-3/4% BOND, 1997 SERIES C This bond is one of an issue of bonds of the Company, of an unlimited authorized amount of coupon bonds or registered bonds without coupons, or both, known as its First and Refunding Mortgage Bonds, all issued or to be issued in one or more series, and is one of a series of said bonds limited in principal amount to Two Hundred Million Dollars ($200,000,000), consisting only of registered bonds without coupons and designated "First and Refunding Mortgage 7-3/4% Bonds, 1997 Series C," all of which bonds are issued or are to be issued under, and equally and ratably secured by, a certain Indenture of Mortgage and Deed and Trust dated as of May 1, 1921, and by sixty-eight Supplemental Indentures dated respectively as of May 1, 1921, February 1, 1924, July 1, 1926, June 20, 1928, June 1, 1932, July 1, 1932, July 1, 1935, September 1, 1936, October 20, 1936, December 1, 1936, December 1, 1938, August 31, 1944, September 1, 1944, May 1, 1945, October 1, 1945, November 1, 1949, December 1, 1952, December 1, 1955, January 1, 1958, February 1, 1960, April 1, 1961, September 1, 1963, April 1, 1967, May 1, 1967, January 1, 1968, October 1, 1968, December 1, 1969, January 1, 1970, October 1, 1970, December 1, 1971, August 1, 1972, April 1, 1973, March 1, 1974, February 1, 1975, September 1, 1975, May 1, 1977, March 1, 1978, September 1, 1980, October 1, 1981, June 30, 1982, October 1, 1982, July 1, 1983, January 1, 1984, October 1, 1985, September 1, 1986, April 1, 1987, October 1, 1987, November 1, 1987, April 1, 1988, November 1, 1988, June 1, 1989, September 1, 1989, December 1, 1989, April 1, 1992, July 1, 1992, October 1, 1992, July 1, 1993, July 1, 1993, December 1, 1993, February 1, 1994, February 1, 1994, June 1, 1994, October 1, 1994, June 1, 1996, January 1, 1997, May 1, 1997, June 1, 1997 and June 1, 1997 (said Indenture of Mortgage and Deed of Trust and Supplemental Indentures being collectively referred to herein as the "Mortgage"), all executed by the Company to Bankers Trust Company, as Trustee, all as provided in the Mortgage to which reference is made for a statement of the property mortgaged and pledged, the nature and extent of the security, the rights of the holders of the bonds in respect thereof and the terms and conditions upon which the bonds may be issued and are secured; but neither the foregoing reference to the Mortgage nor any provision of this bond or of the Mortgage shall affect or impair the obligation of the Company, which is absolute, unconditional and unalterable, to pay at the maturities herein provided the principal of and interest on this bond as herein provided. The principal of this bond may be declared or may become due on the conditions, in the manner and at the time set forth in the Mortgage, upon the happening of an event of default as in the Mortgage provided. This bond is transferable by the registered holder hereof in person or by attorney upon surrender hereof at the office or agency of the Company in the Borough of Manhattan, New York, New York, together with a written instrument of transfer in approved form, signed by the holder, and a new bond or bonds of this series for a like principal amount in authorized denominations will be issued in exchange, all as provided in the Mortgage. Prior to due presentment for registration of transfer of this bond, the Company and the Trustee may deem and treat the registered owner hereof as the absolute owner hereof, whether or not this bond be overdue, for the purpose of receiving payment and for all other purposes, and neither the Company nor the Trustee shall be affected by any notice to the contrary. This bond is exchangeable at the option of the registered holder hereof upon surrender hereof, at the office or agency of the Company in the Borough of Manhattan, New York, New York, for an equal principal amount of bonds of this series of other authorized denominations, in the manner and on the terms provided in the Mortgage. Bonds of this series are to be issued initially under a book-entry only system and, except as hereinafter provided, will be evidenced by a single Global Security registered in the name of The Depository Trust Company, New York, New York ("DTC") or its nominee, which shall be considered to be the holder of all such bonds for all purposes of the Mortgage, including, without limitation, payment by the Company of principal of and interest on such bonds and receipt of notices and exercise of rights of holders of such bonds. The Global Security shall be immobilized in the custody of DTC with the owners of book-entry interests in the Global Security ("Book-Entry Interests") having no right to receive bonds of this series in the form of physical securities or certificates. Ownership of Book-Entry Interests shall be shown by book-entry on the system maintained and operated by DTC, its participants (the "Participants") and certain persons acting through the Participants. Transfers of ownership of Book-Entry Interests are to be made only by DTC and the Participants by that book-entry system, the Company and the Trustee having no responsibility therefor so long as the Global Security is registered in the name of DTC or its nominee. DTC is to maintain records of positions of Participants in bonds of this series registered by the Global Security, and the Participants and persons acting through Participants are to maintain records of the purchasers and owners of Book-Entry Interests. If DTC or its nominee determines not to continue to act as a depository for the bonds of this series in connection with a book-entry only system, another depository, if available, may act instead and the Global Security will be transferred into the name of such other depository or its nominee, in which case the above provisions will continue to apply to the new depository. If the book-entry system for bonds of this series is discontinued for any reason, upon surrender and cancellation of the Global Security registered in the name of the then depository or its nominee, new registered bonds of this series will be issued in authorized denominations to the holders of Book-Entry Interests in principal amounts coinciding with the amounts of Book-Entry Interests shown on the book-entry system immediately prior to the discontinuance thereof. Neither the Trustee nor the Company shall be responsible for the accuracy of the interests shown on that system. The bonds of this series are subject to redemption prior to maturity, as a whole at any time or in part from time to time, in accordance with the provisions of the Mortgage, upon not less than thirty (30) days and not more than 60 days prior notice (which notice may be made subject to the deposit of redemption moneys with the Trustee before the date fixed for redemption) given by mail as provided in the Mortgage, at the option of the Company, at a redemption price equal to the greater of (i) 100% of their principal amount and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Yield, plus in each case accrued interest to the date of redemption (the "Redemption Date"). "Treasury Yield" means, with respect to any Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date. "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker having a maturity comparable to the remaining term of the bonds of this series that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the bonds of this series. "Independent Investment Banker" means Morgan Stanley & Co. Incorporated or, if such firm is unwilling or unable to select the Comparable Treasury Issue, an independent investment banking institution of national standing to be selected by the Company and appointed by the Trustee. "Comparable Treasury Price" means, with respect to any Redemption Date, (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third business day preceding such Redemption Date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S. Government Securities" or (ii) if such release (or any successor release) is not published or does not contain such prices on such business day (A) the average of the Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (B) if the Trustee obtains fewer than four Reference Treasury Dealer Quotations, the average of all such Quotations. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding such Redemption Date. "Reference Treasury Dealer" means each of Morgan Stanley & Co. Incorporated and Salomon Brothers Inc. and another Primary Treasury Dealer (as defined herein) at the option of the Company, provided, however, that if any of the foregoing shall cease to be a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer"), the Company shall substitute therefor another Primary Treasury Dealer. The Mortgage provides that the Company and the Trustee, with consent of the holders of not less than 66-2/3% in aggregate principal amount of the bonds at the time outstanding which would be affected by the action proposed to be taken, may by supplemental indenture add any provisions to or change or eliminate any of the provisions of the Mortgage or modify the rights of the holders of the bonds and coupons issued thereunder; provided, however, that without the consent of the holder hereof no such supplemental indenture shall affect the terms of payment of the principal of or interest or premium on this bond, or reduce the aforesaid percentage of the bonds the holders of which are required to consent to such a supplemental indenture, or permit the creation by the Company of any mortgage or pledge or lien in the nature thereof ranking prior to or equal with the lien of the Mortgage or deprive the holder hereof of the lien of the Mortgage on any of the property which is subject to the lien thereof. No recourse shall be had for the payment of the principal of or the interest on this bond, or any part thereof, or for any claim based thereon or otherwise in respect thereof, to any incorporator, or any past, present or future stockholder, officer or director of the Company, either directly or indirectly, by virtue of any statute or by enforcement of any assessment or otherwise, and any and all liability of the said incorporators, stockholders, officers or directors of the Company in respect to this bond is hereby expressly waived and released by every holder hereof. SCHEDULE B PROPERTY SUBJECT TO THE LIEN OF THE MORTGAGE TOWN OF AVON All of the following described rights, privileges and easements situated in the Town of Avon, County of Hartford and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (1) Avonridge, Incorporated June 19, 1997 334 380 (2) Avonridge, Incorporated July 30, 1997 337 86 (3) Solo Development, Inc. July 16, 1997 336 818 (4) PSIC, LLC August 27, 1997 337 313 (5) The Avon Water Company August 22, 1997 337 933 TOWN OF BARKHAMSTED All of the following described rights, privileges and easements situated in the Town of Barkhamsted, County of Litchfield and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (6) Donald F. Oldakowski August 18, 1997 101 1053 TOWN OF BEACON FALLS All of the following described rights, privileges and easements situated in the Town of Beacon Falls, County of New Haven and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (7) Calloway Group, Inc. October 7, 1997 103 251 (8) Duane Douglas et al May 27, 1997 103 254 (9) David R. Gualtieri et al June 26, 1997 103 256 (10) John C. Shepherd, Jr. et al July 9, 1997 103 258 TOWN OF BETHEL All of the following described rights, privileges and easements situated in the Town of Bethel, County of Fairfield and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (11) Gary Crossland November 6, 1996 617 392 (12) Robert V. Dibble et al November 13, 1996 617 118 TOWN OF BRANFORD All of the following described rights, privileges and easements situated in the Town of Branford, County of New Haven and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (13) Charles E. Weber, Jr. et al May 21, 1997 629 766 (14) Carole A. Barber et al July 25, 1997 631 972 TOWN OF BRIDGEWATER All of the following described rights, privileges and easements situated in the Town of Bridgewater, County of Litchfield and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (15) Mountain Laurel Estates March 21, 1997 45 654 Development Corp. TOWN OF BRISTOL All of the following described rights, privileges and easements situated in the Town of Bristol, County of Hartford and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (16) East View Farm Associates et al May 31, 1996 1187 818 TOWN OF BROOKFIELD All of the following described rights, privileges and easements situated in the Town of Brookfield, County of Fairfield and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (17) Alice Shultz July 15, 1996 310 294 (18) Empire Development, Inc. August 27, 1996 313 791 (19) Samual A. Prata et al November 27, 1996 315 335 (20) Stephen R. Weise et al May 1, 1997 319 936 (21) Phoenix Industries of NY Corp. March 26, 1997 318 384 TOWN OF CHESHIRE All of the following described rights, privileges and easements situated in the Town of Cheshire, County of New Haven and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (22) JRR Associates, LLC June 27, 1997 1224 4 (23) Michael S. Adams et al July 25, 1997 1225 101 (24) Sasso Custom Homes, Inc. April 8, 1993 1171 305 (25) Lynne Rosenberg August 14, 1997 1228 331 TOWN OF COLCHESTER All of the following described rights, privileges and easements situated in the Town of Colchester, County of New London and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (26) Signature Pelletier, LLC May 16, 1997 431 149 TOWN OF COLUMBIA All of the following described rights, privileges and easements situated in the Town of Columbia, County of Tolland and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (27) Lori L. Kalinowski July 30, 1997 113 29 (28) Estate of Leonard C. German et al July 10, 1997 112 801 (29) Gregory F. Ethier et al July 31, 1997 113 31 (30) Estate of Leonard C. German et al August 2, 1997 & 113 378 September 3, 1997 TOWN OF COVENTRY All of the following described rights, privileges and easements situated in the Town of Coventry, County of Tolland and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (31) Robert L. Therien May 20, 1997 587 127 (32) C. Bruno Primus et al June 23, 1997 589 350 TOWN OF DANBURY All of the following described rights, privileges and easements situated in the Town of Danbury, County of Fairfield and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (33) Gary Mead May 17, 1996 1149 1185 (34) Old Field Development Corp. May 8, 1996 1149 20 (35) Salame Plaza, LLC January 29, 1997 1173 553 (36) Silversmith Heights, LLC December 5, 1996 1168 296 (37) Construction Consultants, LLC November 5, 1996 1166 866 TOWN OF DARIEN All of the following described rights, privileges and easements situated in the Town of Darien, County of Fairfield and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (38) PG Properties Limited Partnership May 3, 1996 798 505 (39) Marie S. O'Neill December 2, 1996 817 339 TOWN OF DEEP RIVER All of the following described rights, privileges and easements situated in the Town of Deep River, County of Middlesex and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (40) W H Estates, L.L.C. May 7, 1997 145 785 (41) W H Estates, L.L. C. May 7, 1997 145 787 (42) Springbrook Properties, L.L.C. September 9, 1997 147 423 TOWN OF DURHAM All of the following described rights, privileges and easements situated in the Town of Durham, County of Middlesex and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (43) Michael L. Petrucelli et al June 10, 1997 153 816 TOWN OF EAST HADDAM All of the following described rights, privileges and easements situated in the Town of East Haddam, County of Middlesex and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (44) Progressive Building Systems, Inc. May 23, 1997 408 344 (45) Emanuel A. Misenti et al July 11, 1997 412 165 TOWN OF EAST WINDSOR All of the following described rights, privileges and easements situated in the Town of East Windsor, County of Hartford and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (46) Country Home Partners, LLC May 23, 1997 196 659 TOWN OF ELLINGTON All of the following described rights, privileges and easements situated in the Town of Ellington, County of Tolland and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (47) Robert D. Gingras August 25, 1997 234 416 (48) J&K Assoc., L.L.C. August 29, 1997 234 340 TOWN OF FARMINGTON All of the following described rights, privileges and easements situated in the Town of Farmington, County of Hartford and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (49) Evelyn L. Waldron et al July 5, 1994 488 742 (50) Andrew Mason & Terraform, LLC July 3, 1997 542 714 (51) Paul Construction Corporation July 17, 1997 543 787 (52) Paul Construction Corporation August 19, 1997 547 656 TOWN OF GLASTONBURY All of the following described rights, privileges and easements situated in the Town of Glastonbury, County of Hartford and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (53) Carol E. Carson et al May 21, 1997 1080 347 (54) GJLM Builders, LLC August 25, 1997 1104 91 TOWN OF GRANBY All of the following described rights, privileges and easements situated in the Town of Granby, County of Hartford and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (55) Michael B. Guarco July 2, 1997 216 355 TOWN OF GREENWICH All of the following described rights, privileges and easements situated in the Town of Greenwich, County of Fairfield and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (56) Scott A. Rogers et al June 28, 1996 2812 96 (57) Richard C. McKenzie, Jr. et al December 10, 1996 2864 78 (58) Rodney L. McBride et al March 5, 1997 2894 224 (59) Jeffrey R. Peterson March 4, 1997 2894 222 (60) Bridle Path Associates, Ltd. May 21, 1997 2920 38 TOWN OF GROTON All of the following described rights, privileges and easements situated in the Town of Groton, County of New London and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (61) Braebourne Estates, LLC July 16, 1997 647 465 TOWN OF GUILFORD All of the following described rights, privileges and easements situated in the Town of Guilford, County of New Haven and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (62) M & E Construction, Inc. May 22, 1997 475 572 (63) Orcutt Family Ltd., Partnership January 20, 1997 471 820 (64) Orcutt Family Limited Partnership July 14, 1997 478 322 TOWN OF HARTFORD All of the following described rights, privileges and easements situated in the Town of Hartford, County of Hartford and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (65) Connecticut Natural Gas Corporation May 19, 1997 3822 93 TOWN OF HEBRON All of the following described rights, privileges and easements situated in the Town of Hebron, County of Tolland and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (66) K & M Properties, LLC May 15, 1997 182 886 (67) Donald W. Brancard, Jr. July 3, 1997 183 981 (68) Charles R. Smith March 7, 1997 183 1143 TOWN OF KILLINGLY All of the following described rights, privileges and easements situated in the Town of Killingly, County of Windham and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (69) Todd Waldron May 19, 1997 682 308 (70) Keith B. Olsen et al June 24, 1997 685 8 TOWN OF LITCHFIELD All of the following described rights, privileges and easements situated in the Town of Litchfield, County of Litchfield and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (71) Nancy B. Flammia et al February 18, 1997 235 781 TOWN OF LYME All of the following described rights, privileges and easements situated in the Town of Lyme, County of New London and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (72) Joseph Henry Rhodes, III et al June 13, 1997 104 569 (73) William W. Martin et al May 27, 1997 104 273 (74) Lee Erwin Rhodes et al June 5, 1997 104 271 TOWN OF MADISON All of the following described rights, privileges and easements situated in the Town of Madison, County of New Haven and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (75) Vigliotti Construction Co. et al June 9, 1997 748 159 (76) Kenneth L. Evarts et al May 29, 1997 746 205 (77) Indigo Woods, L.L.C. August 7, 1997 757 194 (78) Tish Stevens-Brown August 5, 1997 757 198 (79) John F. Brady et al September 23, 1997 762 132 TOWN OF MANSFIELD All of the following described rights, privileges and easements situated in the Town of Mansfield, County of Tolland and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (80) PARC Associates April 28, 1997 385 413 TOWN OF MERIDEN All of the following described rights, privileges and easements situated in the Town of Meriden, County of New Haven and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (81) Record Journal Publishing Company November 18, 1996 2225 209 TOWN OF MIDDLETOWN All of the following described rights, privileges and easements situated in the Town of Middletown, County of Middlesex and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (82) The Ravenswood Company, LLC February 18, 1997 1119 15 (83) The Bysiewicz Corporation May 29, 1997 1128 130 (84) Thaddeus P. Byziewicz et al May 29, 1997 1128 133 (85) Ameritage Construction Corp. May 29, 1997 1128 136 (86) Richard H. Ricciardi, Jr. et al March 27, 1997 1123 337 (87) Laurel Grove Associates, LLC May 16, 1997 1128 103 (88) Yvon Beaudoin Builder, Inc. January 17, 1997 1119 387 (89) Yvon Beaudoin Builder, Inc. May 14, 1997 1128 99 TOWN OF MONROE All of the following described rights, privileges and easements situated in the Town of Monroe, County of Fairfield and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (90) Jan's Construction Company, Inc. May 28, 1996 704 294 (91) J&C Bargas Construction LLC May 15, 1996 703 19 (92) S & J Development, L.L.C. October 2, 1996 720 291 (93) Monroe Investment Group August 28, 1996 716 32 Limited Partnership TOWN OF MONTVILLE All of the following described rights, privileges and easements situated in the Town of Montville, County of New London and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (94) Donald G. Concascia et al June 16, 1997 300 215 TOWN OF NEW CANAAN All of the following described rights, privileges and easements situated in the Town of New Canaan, County of Fairfield and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (95) Special Properties II LLC June 17, 1996 456 873 (96) Special Properties II LLC May 6, 1996 455 506 (97) Forest Glen, Inc. May 13, 1996 455 548 (98) William E. Erickson et al December 21, 1996 465 152 (99) Ronald O. Drake et al March 18, 1997 468 532 (100)Stately Homes, LLC November 1, 1996 464 569 TOWN OF NEW FAIRFIELD All of the following described rights, privileges and easements situated in the Town of New Fairfield, County of Fairfield and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (101) Twin Hills, LLC October 31, 1996 266 970 (102) Brighton Development, LLC August 12, 1997 274 328 TOWN OF NEW MILFORD All of the following described rights, privileges and easements situated in the Town of New Milford, County of Litchfield and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (103) Cordeiro's Construction Corporation March 28, 1996 534 853 (104) Fordyce Associates II, Inc. February 19, 1997 553 40 (105) SAN-P., Homes Inc. September 13, 1996 547 728 (106) Debra F. Vosburgh October 3, 1996 546 291 (107) William F. Saunders January 10, 1997 552 721 (108) Canterbury School, Incorporated May 6, 1997 558 571 (109) Robert H. Mouat et al January 13, 1997 555 447 (110) Louis M. Venezia et al February 26, 1997 557 70 (111) MTV Properties L.L.C. August 5, 1996 542 853 TOWN OF NEWINGTON All of the following described rights, privileges and easements situated in the Town of Newington, County of Hartford and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (112) Milo & Denorfia Construction Co., Inc. June 3, 1997 1141 271 (113) Adelme J. Sirois et al June 12, 1997 1141 273 (114) Steven J. DaCosta, L.L.C. May 23, 1997 1141 822 TOWN OF NEWTOWN All of the following described rights, privileges and easements situated in the Town of Newtown, County of Fairfield and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (115) Anthony J. Crisci et al April 26, 1996 532 44 (116) Charles W. Tilson et al June 5, 1996 535 445 (117) Joel Fitzgerald September 4, 1996 544 175 (118) Toll Land XVII Limited Partnership July 30, 1996 538 459 (119) High Meadow Farm Associates December 10, 1996 547 141 (120) David G. French Builders, LLC September 12, 1996 541 806 (121) Bennetts Farm Associates December 2, 1996 545 753 (122) M & M Development, LLC February 20, 1997 556 599 (123) M & E Land Group June 9, 1994 495 674 (124) Danzinger Development Inc. April 5, 1995 510 97 (125) Half Farm Estates Acquisition and Development Partnership August 18, 1994 499 610 (126) Newtown Housing for the Elderly, Inc. October 27, 1994 507 362 (127) Anthony T. Pietrini et al July 31, 1996 312 237 (128) PSD Partnership July 17, 1997 559 527 TOWN OF NORWALK All of the following described rights, privileges and easements situated in the Town of Norwalk, County of Fairfield and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (129) John Efstathiades et al August 30, 1996 3255 121 (130) West Greyrock LLC April 2, 1997 3333 318 (131) Sarno Associates May 23, 1997 3355 119 TOWN OF NORTH STONINGTON All of the following described rights, privileges and easements situated in the Town of North Stonington, County of New London and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (132) Milltown Properties, LLC April 30, 1997 114 187 TOWN OF OLD LYME All of the following described rights, privileges and easements situated in the Town of Old Lyme, County of New London and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (133) Whitney A. Talcott et al May 13, 1997 238 481 TOWN OF OLD SAYBROOK All of the following described rights, privileges and easements situated in the Town of Old Saybrook, County of Middlesex and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (134) Kevin F. Buchanan July 18, 1997 346 219 TOWN OF POMFRET All of the following described rights, privileges and easements situated in the Town of Pomfret, County of Windham and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (135) Mark D. Graham et al June 13, 1997 136 182 (136) John H. Perkins et al May 5, 1997 135 77 (137) Long Meadow Farm, LLC April 10, 1997 135 72 (138) David J. Gregoire et al April 16, 1997 134 74 TOWN OF PORTLAND All of the following described rights, privileges and easements situated in the Town of Portland, County of Middlesex and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (139) Lauralee J. Kelley August 19, 1997 356 316 TOWN OF PRESTON All of the following described rights, privileges and easements situated in the Town of Preston, County of New London and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (140) Alexander N. Grillo et al June 11, 1997 113 22 (141) Twomey & Whitney Enterprises, LLC September 10, 1997 113 959 TOWN OF PROSPECT All of the following described rights, privileges and easements situated in the Town of Prospect, County of New Haven and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (142) A.C.E. Development Group LLC June 19, 1997 292 158 TOWN OF REDDING All of the following described rights, privileges and easements situated in the Town of Redding, County of Fairfield and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (143) Jack H. Whitton et al October 30, 1996 204 688 (144) Twenty Gallows Hill, L.L.C. March 3, 1997 207 169 (145) Gilbert & Bennett Limited Partnership April 16, 1997 208 557 (146) Fyber Properties Broadriver North Limited Partnership October 31, 1996 204 892 TOWN OF RIDGEFIELD All of the following described rights, privileges and easements situated in the Town of Ridgefield, County of Fairfield and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (147) Robert L. Lewis et al June 11, 1996 529 26 (148) Griswold Forbes et al May 9, 1996 525 1078 (149) Robert Cioffoletti May 8, 1996 526 447 (150) Effie W. Pinchbeck June 11, 1996 527 993 (151) Barry N. Finch et al October 16, 1996 534 1009 (152) A. J. Czyr, Inc. November 1, 1996 536 205 (153) Tuccio Development, Inc. May 19, 1997 545 550 (154) Heritage Homes, LLC April 10, 1997 542 712 (155) Elizabeth Valentine April 16, 1997 543 966 (156) John N. Sturges September 30, 1996 534 166 (157) John N. Sturges Construction, Inc. November 14, 1996 535 876 (158) J. Randolph Gepfert, III July 31, 1997 549 981 TOWN OF ROCKY HILL All of the following described rights, privileges and easements situated in the Town of Rocky Hill, County of Hartford and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (159) BT Rocky Hill Realty Corp. July 22, 1997 315 868 TOWN OF ROXBURY All of the following described rights, privileges and easements situated in the Town of Roxbury, County of Litchfield and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (160) Roxbury Associates January 11, 1997 67 940 TOWN OF SEYMOUR All of the following described rights, privileges and easements situated in the Town of Seymour, County of New Haven and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (161) Hickory Estates Developers, LLC February 21, 1997 234 348 TOWN OF SHERMAN All of the following described rights, privileges and easements situated in the Town of Sherman, County of Fairfield and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (162) Michael Mill et al June 10, 1996 79 480 TOWN OF SIMSBURY All of the following described rights, privileges and easements situated in the Town of Simsbury, County of Hartford and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (163) Robert S. Martin, MD., Trustee June 27, 1997 473 303 (164) C.G.R. Associates, L.L.C. December 20, 1996 465 845 TOWN OF SOUTHINGTON All of the following described rights, privileges and easements situated in the Town of Southington, County of Hartford and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (165) Westridge Development Corporation May 22, 1997 671 687 (166) Jeffrey A. Wight May 6, 1997 672 154 (167) LePage Homes, Inc. July 9, 1997 674 252 (168) Peter Welch August 7, 1997 676 829 (169) Sunset Ridge of Southington, LLC July 11, 1997 675 660 (170) F C III L.L.C. August 11, 1997 677 745 (171) Randolph C. Parent et al July 16, 1997 677 857 (172) Christine M. Gombotz July 25, 1997 677 860 (173) Peter A. Perez et al August 14, 1997 677 846 (174) Stephen J. Annelli July 9, 1997 675 546 (175) Michael K. Saucier et al July 17, 1997 677 849 (176) John P. Morelli et al July 14, 1997 677 852 (177) The Town of Southington July 24, 1997 677 855 TOWN OF STAMFORD All of the following described rights, privileges and easements situated in the Town of Stamford, County of Fairfield and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (178) Norman A. Fieber July 29, 1996 4620 300 (179) 778 Long Ridge Road May 23, 1997 4765 88 Associates Limited Partnership TOWN OF STONINGTON All of the following described rights, privileges and easements situated in the Town of Stonington, County of New London and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (180) Atlas Paving Company, Inc. et al August 1, 1997 407 509 TOWN OF SUFFIELD All of the following described rights, privileges and easements situated in the Town of Suffield, County of Hartford and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (181) Harry Kraiza, Jr. et al May 15, 1997 275 516 & May 28, 1997 (182) Begin Homes, Inc. August 26, 1997 277 599 TOWN OF TOLLAND All of the following described rights, privileges and easements situated in the Town of Tolland, County of Tolland and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (183) SHC, L.L.C. July 14, 1997 563 151 (184) Lee & Lamont Realty August 4, 1997 565 71 TOWN OF UNION All of the following described rights, privileges and easements situated in the Town of Union, County of Tolland and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (185) J & J Excavating August 11, 1997 40 176 TOWN OF VOLUNTOWN All of the following described rights, privileges and easements situated in the Town of Voluntown, County of New London and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (186) John H. Wood, Jr. July 10, 1997 66 414 TOWN OF WASHINGTON All of the following described rights, privileges and easements situated in the Town of Washington, County of Litchfield and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (187) Orchard Lane Associates, L.L.C. August 13, 1997 137 495 TOWN OF WATERBURY All of the following described rights, privileges and easements situated in the Town of Waterbury, County of New Haven and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (188) MJV Development, Inc. May 7, 1997 3472 130 TOWN OF WATERFORD All of the following described rights, privileges and easements situated in the Town of Waterford, County of New London and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (189) RTT Development, Inc. June 11, 1997 470 464 TOWN OF WATERTOWN All of the following described rights, privileges and easements situated in the Town of Watertown, County of Litchfield and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (190) Madelaine B. Pecci March 10, 1997 847 330 TOWN OF WESTBROOK All of the following described rights, privileges and easements situated in the Town of Westbrook, County of Middlesex and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (191) Sheryl S. Magnano July 24, 1997 183 669 (192) Johnson Pond LLC August 27, 1997 184 532 TOWN OF WESTPORT All of the following described rights, privileges and easements situated in the Town of Westport, County of Fairfield and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (193) Lorna B. Christophersen May 13, 1996 1466 162 (194) and Elena B. Dreiske, Successor (195) Trustees et al (196) Robert F. Grele, Trustee November 26, 1996 1489 59 (197) Richard Kornutik et al March 5, 1997 1504 309 (198) Arnold P. Cohen et al July 22, 1994 1336 74 (199) Ronald Schulman et al July 7, 1997 1529 190 TOWN OF WESTON All of the following described rights, privileges and easements situated in the Town of Weston, County of Fairfield and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (200) Annette J. Sandstrom July 17, 1996 241 654 (201) O&J Investments, LLC May 1, 1997 250 225 (202) The Rector, Wardens and June 20, 1996 239 695 Vestry of the Emmanuel Episcopal Church of Weston, Connecticut TOWN OF WETHERSFIELD All of the following described rights, privileges and easements situated in the Town of Wethersfield, County of Hartford and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (203) Premier Building & Development, Inc. June 24, 1997 657 198 TOWN OF WILTON All of the following described rights, privileges and easements situated in the Town of Wilton, County of Fairfield and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (204) Rosemary E. Middeleer et al June 25, 1996 1001 166 (205) Marc A. Fleisher et al January 25, 1997 1029 42 (206) Grumman Hill, LLC July 30, 1996 1002 278 (207) Grumman Hill, LLC March 18, 1997 1032 263 (208) Fairfield 2000 Homes Corporation September 12, 1996 1008 166 (209) Kenneth R. Young et al October 1, 1996 1014 307 (210) H. Back Builders, Inc. September 11, 1996 1014 303 (211) Nod Hill Properties, LLC September 10, 1996 1009 92 (212) John R. Gregory et al November 12, 1996 1028 320 TOWN OF WINDHAM All of the following described rights, privileges and easements situated in the Town of Windham, County of Windham and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (213) Gaetano D'Elia et al June 10, 1997 516 68 TOWN OF WOODSTOCK All of the following described rights, privileges and easements situated in the Town of Woodstock, County of Windham and State of Connecticut, more particularly described in the following deeds, viz: RECORDED GRANTOR DATE OF INSTRUMENT VOLUME PAGE (214) Colleen R. Boxx August 4, 1997 277 387 (215) Michael H. Heckendorf et al July 9, 1997 277 251 EX-4.2 4 AMENDMENT TO STANDBY BOND PURCHASE AGMT Exhibit 4.2.24.3 AMENDMENT NO. 1 to the STANDBY BOND PURCHASE AGREEMENT AMENDMENT NO. 1, dated January 21, 1998 ("Amendment No. 1"), to the Standby Bond Purchase Agreement, dated January 23, 1997 (the "Original Agreement"), among THE CONNECTICUT LIGHT AND POWER COMPANY, a corporation organized and existing and qualified to do business as a public utility in the State of Connecticut (the "Company"), SOCIETE GENERALE, a banking corporation organized under the laws of France, acting though its New York Branch (the "Bank"), and STATE STREET BANK AND TRUST COMPANY, a national banking association, as successor trustee under the Indenture referred to below (including any successor trustee, the "Trustee"). W I T N E S S E T H: WHEREAS, the liquidity facility (the "Liquidity Facility") provided by the Bank pursuant to the Original Agreement is scheduled to expire on January 21, 1998; WHEREAS, the Company has requested that the Bank extend the Stated Expiration Date for an additional 364-day period (the "First Extension"), and the Bank has agreed to do so on the terms and conditions contained herein and, to the extent applicable and not superseded by this Amendment No. 1, according to the terms and conditions of the Original Agreement; WHEREAS, certain conditions precedent to the effectiveness of this Amendment No. 1 have been or will be fulfilled to the satisfaction of the Bank and its counsel as of the date of this Amendment No. 1; NOW, THEREFORE, in consideration of the premises herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. Unless otherwise defined herein, all capitalized terms used herein shall have the same respective meanings as in the Original Agreement. From and after the date of this Amendment No. 1, the term "Agreement" shall be deemed to mean the Original Agreement as amended by this Amendment No. 1. 2. Extension of Stated Expiration Date. The Stated Expiration Date is hereby extended for an additional 364-day period, to expire on January 19, 1999, and the definition of "Stated Expiration Date" contained in Section 1.1 of the Original Agreement is hereby amended accordingly. The Bank Purchase Period means the period from the date of this Amendment No. 1 to and including the earliest of (a) the Stated Expiration Date then in effect, (b) the close of business on the fifth Business Day following the Conversion Date on which all of the Bonds shall have been converted to a Fixed Rate or a Multiannual Rate (provided, however, that if less than all of the Bonds shall have been converted to a Fixed Rate or Multiannual Rate, the Bank's Available Commitment shall extend only to those Bonds not bearing interest at the Fixed Rate or the Multiannual Rate), (c) the fifth Business Day following the mandatory tender for purchase in connection with a Substitution Date, or (d) the Purchase Termination Date. 3. Representations and Warranties. The Company hereby represents and warrants that all of the representations and warranties contained in Article 5 of the Original Agreement are true and correct, including any statements made regarding the Related Documents as they may have been or will be amended, supplemented or otherwise modified in connection with this First Extension, as of the date hereof (except that the dates contained in Section 5.5 shall be deemed to refer to the end of the Company's most recently completed fiscal year and most recently completed fiscal quarter, respectively). The Company further represents and warrants that no Event of Default or Event of Termination has occurred or is occurring, and that no event has occurred which, with notice or the lapse of time or both, would become an Event of Default or Event of Termination, as the case may be. 4. Specific Amendments. (a) Section 2.5 of the Original Agreement is hereby amended in part to correct a typographical error at Level 2 and should now read as follows: Level 2 0.125% (b) Section 1.1 is hereby amended in part to correct a typographical error and should now read as follows: ""Claim" has the meaning set forth in Section 6.8." 5. Conditions Precedent to the Effectiveness of this Amendment No. 1. The Bank's obligation to enter into and perform its obligations under this Amendment No. 1 is subject to the fulfillment, to the satisfaction of the Bank and its counsel, of each of the following conditions as of the date of this Amendment No. 1: (a) The Act; the Resolution. Neither the Act nor the Resolution shall have been revoked or rescinded, or modified or amended in any material respect adverse to the interests of the Bank or the holders of the Bonds. (b) Receipt of Documents. The Bank shall have received an executed copy of this Amendment No. 1 as well as any other documents and instruments as the Bank shall reasonably request. (c) Certificate. The Bank shall have received a certificate from the Company, dated the date of this Agreement and duly executed by an Authorized Officer, stating that on and as of the date thereof, except as otherwise disclosed to the Bank as of the date of this Amendment No. 1: (i) the Company has obtained all consents, permits, licenses and approvals of, has made all registrations and declarations with, and has taken all other actions with respect to, governmental authorities required under law to be obtained, made or taken by the Company, to maintain the Bonds and to execute, deliver and perform this Amendment No. 1.; (ii) that the Insurance Policy is currently effective and provides for (i) the payment of interest on the Bank Bonds at the Bank Rate and (ii) amortization of the Bank Bonds in equal semi-annual installments during the Amortization Period. (iii) to the best knowledge of the Authorized Officer executing the certificate, no Event of Default or event which, with the giving of notice or the passage of time or both would constitute an Event of Default, has occurred or would occur after giving effect to the issuance of the Bonds or this Amendment No. 1.; (iv) all representations and warranties of the Company set forth in the Original Agreement and the Related Documents to which the Company is a party are true and correct in all material respects, except to the extent that any such representation or warranty relates solely to a prior date; (v) the Company is not in default of its obligations under this Amendment No. 1 or the Original Agreement or any of the Related Documents to which it is a party; (vi) except for any pending or threatened action, suit, investigation or proceeding disclosed in the Reoffering Circular or otherwise disclosed to the Bank in writing prior to the date hereof (as to which certification is not being made), there is no action, suit, investigation or proceeding pending or, to the best knowledge of the Authorized Officer executing the certificate, threatened (A) in connection with the Bonds, the replacement of the Letter of Credit, the Original Agreement, this Amendment No. 1 or any of the other transactions contemplated by this Amendment No. 1 or the Related Documents, or (B) against or affecting the Company, the result of which is reasonably likely to have a materially adverse effect on the business, financial condition or operations of the Company or the ability of the Company to perform or observe any of its duties, liabilities or obligations under this Amendment No. 1 or any of the Related Documents. (d) Proceedings and Certifications. The Bank shall have received a copy, certified by an Authorized Officer, of all proceedings taken by the Company authorizing the transactions hereunder and contemplated hereby, including, without limitation, the execution and delivery of this Amendment No. 1 and all other documents and agreements contemplated hereby, together with such other certifications as to matters of fact as shall reasonably be requested by the Bank or its counsel. (e) Incumbency Certificate. The Bank shall have received a certificate of the Secretary or Assistant Secretary of the Company certifying the names and true signatures of the officials of the Company authorized to sign this Amendment No. 1 and the other documents to be delivered by the Company hereunder, and shall also cover such other matters incident to the transactions contemplated by this Agreement as the Bank or its counsel may request. (f) Opinion of Company Counsel. The Bank shall have received an opinion addressed to it of Day, Berry & Howard, counsel to the Company, dated the closing date on which the extension of the Liquidity Facility provided by this Amendment No. 1 shall have become effective, in form and substance satisfactory to the Bank and its counsel. (g) Other Documents, Etc. The Bank shall have received such other documents, certificates, and opinions as the Bank or its counsel may reasonably request, including, without limitation, organizational documents of the Authority, the Company, and the Bond Insurer, and all matters relating to this Amendment No. 1 and the Bonds shall be satisfactory to the Bank. 6. Fees and Expenses. (a) Expenses Relating to Amendment No. 1. The Company hereby agrees to pay all costs and expenses of the Bank (including, without limitation, reasonable attorneys' fees and disbursements, but excluding overhead and other internal costs of the Bank) in connection with the negotiation, preparation, review, execution and delivery of this Amendment No. 1. The Company hereby also agrees to pay on demand all costs and expenses paid or incurred by the Bank, if any, in connection with the enforcement of this Amendment No. 1 and in connection the amendment or enforcement of any Related Documents, and the protection of the rights of the Bank hereunder and thereunder (including reasonable counsel fees and disbursements but excluding overhead and other internal costs of the Bank). (b) Amendment and Extension Fee. The Company hereby also agrees to pay a one time amendment and extension fee (the "Amendment and Extension Fee"), calculated at 7.5 basis points on the total Liquidity Facility amount of sixty-two million nine hundred eighteen thousand dollars ($62,918,000) for a total Amendment and Extension Fee of forty-seven thousand one hundred eighty-eight dollars and fifty cents ($47,188.50). 7. Continued Effectiveness. This Amendment No. 1 is to be narrowly construed. Except as expressly amended by this Amendment No. 1, all terms and provisions of the Original Agreement are and shall continue in full force and effect. 8. Governing Law. This Amendment No. 1 shall be governed by, and construed in accordance with, the laws of the State of New York. 9. Counterparts. This Amendment No. 1 may be executed by the parties hereto in any number of counterparts. IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be duly executed and delivered by their respective officers thereunto authorized as of the date first written above. THE CONNECTICUT LIGHT AND POWER COMPANY By: s/s David R. McHale Name: David R. McHale Title: Assistant Treasurer-Finance SOCIETE GENERALE, New York Branch By: s/s Gordon Eadon Name: Gordon Eadon Title: Vice President STATE STREET BANK AND TRUST COMPANY, as Trustee By: s/s Kathy Larimore Name: Kathy Larimore Title: Assistant Vice President EX-4.3 5 SUPPLEMENTAL INDENTURE - WMECO Exhibit 4.4.3 TWENTY-FOURTH SUPPLEMENTAL INDENTURE dated as of the first day of March, 1967, made and entered into by and between WESTERN MASSACHUSETTS ELECTRIC COMPANY, a corporation organized under the laws of the Commonwealth of Massachusetts having its principal place of business at West Springfield in the County of Hampden, in said Commonwealth, (hereinafter called the Company) and OLD COLONY TRUST COMPANY, a corporation organized under the laws of the Commonwealth of Massachusetts, and having its principal office and usual place of business at Boston in the County of Suffolk in said Commonwealth, (hereinafter called the Trustee). WITNESSETH that: WHEREAS the Company has heretofore executed and delivered to the Trustee its First Mortgage Indenture and Deed of Trust dated as of August 1, 1954, (hereinafter as amended by a First Supplemental Indenture dated as of October 1, 1954, called the Original Indenture) conveying certain property therein described in trust as security for the Bonds of the Company to be issued thereunder as therein provided and for other purposes more particularly specified therein, and the Trustee has accepted said Trust; and WHEREAS there are now outstanding thereunder $11,000,000 aggregate principal amount of First Mortgage Bonds, Series A, 2.95% due October 1, 1973; under said First Supplemental Indenture, $6,000,000 aggregate principal amount of First Mortgage Bonds, Series B, 3 1/8%, due October 1, 1984; under a Sixth Supplemental Indenture, $12,000,000 aggregate principal amount of First Mortgage Bonds, Series C, 4 3/8% due April 1, 1987; and under a Sixteenth Supplemental Indenture $8,000,000 aggregate principal amount of First Mortgage Bonds, Series E, 4 3/8%, due May 1, 1992; and WHEREAS the Company has authorized the issue pursuant to Section 3.08 of the Original Indenture of an additional series of its fully registered First Mortgage Bonds without coupons, to be issued under the Original Indenture and this Twenty-fourth Supplemental Indenture (hereinafter with all prior Supplemental Indentures called the Indenture) to be designated "First Mortgage Bonds, Series F, 5 3/4%, due March 1, 1997" (hereinafter called the Series F Bonds) and to be limited in aggregate principal amount to $15,000,000, being the entire issue of the Series F Bonds; and WHEREAS the Company, pursuant to votes or resolutions duly and legally adopted by its Board of Directors and by its stockholder at meetings duly called and held for the purpose, has duly authorized the execution and delivery of this Twenty-fourth Supplemental Indenture and the issue of the Series F Bonds in the aggregate principal amount of $15,000,000; and WHEREAS the issue of the Series F Bonds in said aggregate principal amount of $15,000,000 and the execution and delivery of this Twenty-fourth Supplemental Indenture have been duly approved to the extent required by law by the Department of Public Utilities of said Commonwealth, the Public Utilities Commission of the State of Connecticut, and by the Securities and Exchange Commission pursuant to the provisions of the Public Utility Holding Company Act of 1935; and WHEREAS, pursuant to the provisions of Section 16.01(b) of the Original Indenture, the Company desires to add to the covenants and agreements of the Company contained in the Original Indenture other covenants and agreements to be observed after the execution and delivery of this Twenty-fourth Supplemental Indenture which its Board of Directors has considered to be for the protection of the Mortgaged Property and of the holders of the Bonds, although the freedom of action of the Company may be restricted thereby; and WHEREAS the permanent form of the Series F Bonds in fully registered form without coupons, and of the transfer thereof, and the form of the certificate of authentication to be affixed thereto shall be substantially as follows: FORM of BOND No. FR $ WESTERN MASSACHUSETTS ELECTRIC COMPANY First Mortgage Bond, Series F. 5 3/4%, due March 1, 1997 FOR VALUE RECEIVED, WESTERN MASSACHUSETTS ELECTRIC COMPANY, a corporation of the Commonwealth of Massachusetts, (hereinafter called the Company) hereby promises to pay to , or registered assigns, the principal sum of $ dollars, on the first day of March, 1997, and semi-annually on the first days of March and September in each year until the Company's obligation with respect to said principal sum shall be discharged, to pay interest on said sum at the rate per annum specified in the title of this Bond from the interest payment date next preceding the date hereof to which interest has been paid on the Bonds of this series, or if the date hereof is prior to August 16, 1967 then from March 1, 1967, or if the date hereof be an interest payment date to which interest is being paid or a date between the record date for any interest payment date to which interest is paid and such interest payment date, then from such interest payment date. Both principal and interest shall be payable at the principal office in the City of Boston in the County of Suffolk and said Commonwealth of Old Colony Trust Company, a corporation organized under the laws of said Commonwealth (hereinafter with its successors, as defined in the Indenture mentioned on the reverse hereof, generally called the Trustee), or of such successors, in such coin or currency of the United States of America as at the time of payment is legal tender for public and private debts. Each installment of interest hereon (other than overdue interest) shall be payable to the person (as defined in the Original Indenture mentioned on the reverse hereof) who shall be the registered owner of this Bond at the close of business on the record date, which shall be the February 15 or August 15, as the case may be, next preceding such interest payment date, or, if such February 15 or August 15 shall be a legal holiday or a day on which banking institutions in the City of Boston, Massachusetts, are authorized by law to close, the next preceding day which shall not be a legal holiday or a day on which such institutions are so authorized to close. Reference is hereby made to the further provisions of this Bond set forth on the reverse hereof, including without limitation, provisions in regard to the call and redemption and the transfer and exchangeability of this Bond, and such further provisions shall for all purposes, have the same effect as though fully set forth in this place. This Bond shall take effect as a sealed instrument. This Bond shall not become or be valid or obligatory until the certificate of authentication hereon shall have been signed by the Trustee. IN WITNESS WHEREOF, WESTERN MASSACHUSETTS ELECTRIC COMPANY has caused this Bond to be executed in its name and on its behalf by its President or a Vice President and its Treasurer or an Assistant Treasurer thereunto duly authorized, and its corporate seal to be impressed or imprinted hereon. Dated: WESTERN MASSACHUSETTS ELECTRIC COMPANY By By CERTIFICATE OF AUTHENTICATION This Bond is one of the First Mortgage Bonds, Series F, 5 3/4%, due March 1, 1997, described and provided for in the within mentioned Indenture. OLD COLONY TRUST COMPANY, Trustee By Authorized Officer [FORM OF BOND] [REVERSE] This Bond is one of a series of Bonds fully registered form known as the "First Mortgage Bonds, Series F, 5 3/4%, due March 1, 1997" of the Company, limited to fifteen million dollars ($15,000,000) in aggregate principal amount (except as provided by the terms of Section 2.13 of the Indenture mentioned below), and issued under and secured by a First Mortgage Indenture and Deed of Trust between the Company and said Old Colony Trust Company, as Trustee, dated as of August 1, l954, (herein as amended by a First Supplemental Indenture dated as of October 1, 1954, called the Original Indenture and together with all indentures stated to be supplemental thereto to which the Trustee shall be a party, including the Twenty-fourth Supplemental Indenture mentioned below, generally called the Indenture) and a Twenty-fourth Supplemental Indenture dated as of March 1, 1967, an executed counterpart of each of which is on file at the principal office of the Trustee, to which Indenture reference is hereby made for a description of the nature and extent of the security, the rights thereunder of the bearers or registered owners of Bonds issued and to be issued thereunder, the rights, duties, and immunities thereunder of the Trustee, the rights and obligations thereunder of the Company, and the terms and conditions upon which said Bonds, and other and further Bonds of other series, are issued and are to be issued; but neither the foregoing reference to the Indenture nor any provision of this Bond or of the Indenture shall affect or impair the obligation of the Company, which is absolute, unconditional and unalterable, to pay at the maturities herein provided the principal of and interest on this Bond as herein provided. The fully registered Bonds of this series in permanent form are issuable in denominations of one thousand dollars ($1,000) and any multiple thereof. This Bond is transferable by the registered owner hereof in person or by his duly authorized attorney at the principal office of the Trustee or at the office or agency of the Company in the Borough of Manhattan, The City of New York, New York, upon surrender and cancellation hereof, and a new Bond or Bonds of this series for a like principal amount will be issued in exchange, all as provided in the Indenture. Prior to due presentment for registration of transfer of this Bond the Company and the Trustee may deem and treat the registered owner hereof as the absolute owner hereof, whether or not this Bond be overdue, for the purpose of receiving payment and for all other purposes, and neither the Company nor the Trustee shall be affected by any notice to the contrary. This Bond is exchangeable at the option of the registered owner hereof at the principal office of the Trustee or at the office or agency of the Company in the Borough of Manhattan, The City of New York, New York, for an equal principal amount of fully registered Bonds of this series of other denominations, in the manner and on the terms provided in the Indenture. The Bonds of this series are subject to redemption prior to maturity upon not less than thirty (30) days' prior notice, as a whole at any time, or subject to the provisions of Section 5.06 of the Original Indenture in part from time to time, either at the option of the Company, or for the purposes of the Improvement Fund for Bonds of this series or of any other applicable provision of the Indenture, in the manner and with the effect provided in the Indenture, (i) if from Improvement Fund moneys pursuant to Article IV of said Twenty-fourth Supplemental Indenture or from moneys received by the Trustee pursuant to Sections 4.05, 4.18, 7.03, 7.04, 7.05, or 7.07 to be applied by the Trustee as provided in Section 8.03(a) or in Section 8.05 of the Original Indenture, at the applicable percentages of the called principal amount thereof specified under the column headed Special Redemption Price, below, and (ii) if at the option of the Company or pursuant to any provisions of the Indenture other than those in respect of said Improvement Fund or of the aforesaid moneys applied pursuant to Section 8.03(a) or Section 8.05 of the Original Indenture, at the applicable percentages of the called principal amount thereof specified under the column headed Optional Redemption Price, below, together in each case with accrued and unpaid interest to the date fixed for redemption: If Redeemed If Redeemed During the During the 12 Months' Optional Special 12 Months'Optional Special Period Redemption Redemption Period Redemption Redemption Starting Price Price Starting Price Price March 1 % % March 1 % % 1967 107.75 102.00 1982 103.45 101.41 1968 107.47 102.00 1983 103.16 101.35 1969 107.18 101.97 1984 102.88 101.28 1970 106.89 101.94 1985 102.59 101.22 1971 106.61 101.91 1986 102.30 101.14 1972 106.32 101.87 1987 102.01 101.07 1973 106.03 101.84 1988 101.73 100.98 1974 105.75 101.80 1989 101.44 100.90 1975 105.46 101.76 1990 101.15 100.81 1976 105.17 101.72 1991 100.87 100.71 1977 104.88 101.68 1992 100.58 100.58 1978 104.60 101.63 1993 100.29 100.29 1979 104.31 101.58 1994 100.00 100.00 1980 104.02 101.53 1995 100.00 100.00 1981 103.74 101.47 1996 100.00 100.00 Notice of redemption as aforesaid shall be mailed by the Trustee not less than thirty (30) days nor more than sixty (60) days prior to the date set for redemption, by first class mail, to the registered owners of all Bonds of this series which have been called for redemption, at their last addresses upon the books for registration kept by the Registrar. If this Bond, or a part hereof, shall be called for redemption, or provision for such call shall have been made, as provided in the Indenture, and payment of the redemption price shall have been duly provided for by the Company, interest shall cease to accrue hereon, or on such called part, from and after the redemption date, the Company shall from the time provided in the Indenture be under no further liability in respect of the principal of, or premium, if any, or interest on, this Bond, or such called part, and the registered owner hereof shall from and after such time look for payment hereof, or of such called part, solely to the money so provided. The Indenture contains provisions permitting the Company and the Trustee with the consent of the bearers or registered owners of not less than seventy percentum (70%) in principal amount of the Bonds at the time outstanding (except Bonds held by or for the benefit of the Company), including, if more than one series of Bonds shall be at the time outstanding, not less than seventy percentum (70% ) in principal amount of the Bonds (except Bonds held by or for the benefit of the Company) of each series affected differently from those of other series, to effect by supplemental indenture modifications or alterations of the Indenture and of the rights and obligations of the Company and of the bearers and registered owners of the Bonds; but no such modification or alteration shall be made which, without the written approval or consent of the registered owner hereof, will extend the maturity hereof or reduce the rate or extend the time for payment of interest hereon or reduce the amount of the principal hereof or of any premium payable on the redemption hereof, or which will reduce the percentage of the principal amount of Bonds or the percentage of the principal amount of Bonds of any one series required for the adoption of the modifications or alterations as aforesaid, or authorize the creation by the Company, except as expressly authorized by the Indenture, of any mortgage, pledge, or lien upon the property subjected thereto ranking prior to or on an equality with the lien thereof. If a default as defined in the Indenture shall occur, the principal of this Bond may become or be declared due and payable before maturity, in the manner and with the effect provided in the Indenture; but any default and the consequences thereof may be waived by certain percentages of the bearers or registered owners of Bonds, all as provided in the Indenture. No recourse shall be had for the payment of the principal of or the interest on this Bond or for any claim based hereon or otherwise in respect hereof or of the Indenture against any incorporator, stockholder, director, or officer, past, present, or future, as such, of the Company or of any predecessor or successor corporation under any constitution, statute, or rule of law, or by the enforcement of any assessment, penalty, or otherwise, all such liability being waived and released by the holder hereof by the acceptance of this Bond. FORM FOR TRANSFER FOR VALUE RECEIVED hereby sell, assign, and transfer the within Bond to and hereby irrevocably constitute and appoint attorney to transfer said Bond on the books of the Company with full power of substitution in the premises. Dated this day of , 19 In presence of: AND WHEREAS all requirements of law and of the certificate of incorporation as amended, and of the by-laws of the Company, including all requisite action on the part of directors and officers, and all things necessary to make the Series F Bonds, when duly executed by the Company and delivered, the valid, binding, and legal obligations of the Company, and the covenants and stipulations herein contained valid and binding obligations of the Company, have been done and performed, and the execution and delivery hereof have been in all respects duly authorized; NOW, THEREFORE, THIS TWENTY-FOURTH SUPPLEMENTAL WITNESSETH: In consideration of the premises and of the mutual covenants herein contained and of the purchase and acceptance by the registered owners thereof of the Series F Bonds at any time issued hereunder, and of one dollar ($1) duly paid to the Company by the Trustee and for other good and valuable considerations, the receipt whereof at or before the ensealing and delivery of these presents is hereby acknowledged, and in confirmation of and supplementing the Indenture, and in the performance and observance of the provisions thereof, and in order to establish the forms and characteristics of the Series F Bonds, and to secure the payment of the principal of and premium, if any, and interest on all Bonds from time to time outstanding under the Indenture according to their tenor and effect, and to secure the performance and observance of all the covenants and conditions contained therein and in this Twenty-fourth Supplemental Indenture, the Company has executed and delivered this Twenty-fourth Supplemental Indenture, and does hereby confirm the conveyance, transfer, assignment, and mortgage of the franchises and properties as set forth in the Original Indenture and in all subsequent indentures prior hereto and has granted, bargained, sold, conveyed, assigned, transferred, mortgaged, and confirmed, and by these presents does grant, bargain, sell, convey, assign, transfer, mortgage, and confirm unto Old Colony Trust Company, as Trustee, as provided in the Indenture, its successors in the trusts thereof and hereof, and its and their assigns, all and singular the franchises and properties of the Company of the character described and defined in the Original Indenture as Mortgaged Property, including all and singular such franchises and properties which may hereafter be acquired by the Company, acquired after the execution of the Original Indenture, subject, however, to Permitted Encumbrances and to any mortgages or other liens or encumbrances thereon of the character described in Section 4.10 of the Original Indenture existing at the time of the acquisition of such franchises and properties by the Company or created contemporaneously to secure or to raise a part of the purchase price thereof and to any renewals or extensions of such mortgages or other liens or encumbrances; it being intended that such conveyance, transfer, and assignment shall include without limitation thereby all Fundable Property not previously so conveyed, transferred, or assigned to the Trustee. There is furthermore expressly excepted and excluded from the lien and operation of this Twenty-fourth Supplemental Indenture, and from the definition of Mortgaged Property, all the property of the Company described in clauses A to J, both inclusive, of the granting clauses of said Original Indenture, whether owned at the time of the execution of this Twenty-fourth Supplemental Indenture or hereafter acquired by it. TO HAVE AND TO HOLD all and singular the above described franchises and properties unto the said Old Colony Trust Company, as Trustee under the Indenture, its successors in the trusts thereof and hereof, and its and their assigns, to its and their own use forever. BUT IN TRUST, NEVERTHELESS, upon the terms and trusts set forth in the Indenture for the equal pro rata benefit, security, and protection of the bearers or registered owners of the Bonds from time to time certified, issued, and outstanding under the Indenture, without any discrimination, preference, priority, or distinction of any Bond or coupon over any other Bond or coupon by reason of series, priority in the time of issue, sale, or negotiation thereof, or otherwise howsoever, except as otherwise provided in the Indenture; PROVIDED, HOWEVER, and these presents are upon the condition that if the Company, its successors or assigns, shall pay or cause to be paid, the principal of and the premium, if any, and interest on the Bonds outstanding under the Indenture at the times and in the manner stipulated therein and in the Indenture and shall keep, perform, and observe all and singular the covenants and promises in said Bonds and in the Indenture expressed to be kept, performed, and observed by or on the part of the Company, then this Twenty-fourth Supplemental Indenture, and the estate and rights hereby granted shall, pursuant to the provisions of Article XV of the Original Indenture, cease, determine and be void, but only if the Original Indenture shall have ceased, determined and become void, as therein provided, otherwise to be and remain in full force and effect. ARTICLE I. DESCRIPTION AND ISSUE OF SERIES F BONDS. Section 1.01. The permanent Series F Bonds shall be substantially in the form hereinbefore set forth, with such changes therein as shall be approved by the Company and the Trustee, shall be designated as the First Mortgage Bonds, Series F, 5 3/4%, due March 1, 1997, of the Company, shall be issuable in the aggregate principal amount of fifteen million dollars ($15,000,000) and no more except as provided in Section 2.13 of the Original Indenture, shall be dated as provided in said Indenture and in Section 1.02 of this Twenty-fourth Supplemental Indenture, shall mature March 1, 1997, shall bear interest at the rate specified in their title as provided in said Section 1.02 until the Company's obligation in respect of the principal thereof shall be discharged, payable semi-annually on the first days of March and September in each year as provided in said Indenture and in said Section 1.02 (the principal, premium, if any, and interest thereon being payable at the principal office of the Trustee in the City of Boston, Massachusetts, in such coin or currency of the United States of America as at the time of payment is legal tender for public and private debts), shall be issued in fully registered form in denominations of one thousand dollars ($1,000) and any multiple thereof, shall be transferable as provided in Section 2.08 of said Indenture at the principal office the Trustee or at the office or agency of the Company in the Borough of Manhattan, The City of New York, New York, shall be redeemable at the times and in the manner provided in Article V of the Original Indenture and as hereinafter provided in Article III of this Twenty-fourth Supplemental Indenture and shall be entitled to the benefit of the Improvement Fund described in Article IV of this Twenty-fourth Supplemental Indenture. Notwithstanding the provisions of Section 2.11 of the Original Indenture, no charge, except for taxes or governmental charges, shall be made by the Company upon any transfer or exchange of Series F Bonds. Series F Bonds in fully registered form may be exchanged at the principal office of the Trustee or at the office or agency of the Company in the Borough of Manhattan, The City of New York, New York, for a like aggregate principal amount of Series F Bonds in fully registered form of other denominations and, upon surrender for exchange of one or more of such Series F Bonds, the Company shall execute and the Trustee shall certify and there shall be delivered in exchange therefor a like aggregate principal amount of such Series F Bonds of other denominations. Bonds so surrendered for exchange shall be considered as having been surrendered for Cancellation and shall be forthwith Cancelled by the Trustee. Neither the Company nor the Trustee shall be required (i) to transfer or exchange Series F Bonds for a period of fifteen days next preceding any selection of Series F Bonds to be redeemed, or (ii) to transfer or exchange any Series F Bond or that portion of any Series F Bond which has been called for redemption. Pursuant to the provisions of Section 2.07 of the Original Indenture, the Company appoints Bankers Trust Company and its successors as the agency of the Company in the Borough of Manhattan, The City of New York, New York, for the registration, transfer, and exchange of Series F Bonds. Section 1.02. Notwithstanding the provisions of Section 2.12 of the Original Indenture, the person in whose name any Series F Bond is registered at the close of business on any record date (as hereinbelow defined) with respect to any interest payment date shall be entitled to receive the interest payable on such interest payment date notwithstanding the Cancellation of such Bond upon any transfer or exchange thereof subsequent to the record date and prior to such interest payment date, except if and to the extent the Company shall default in the payment of the interest due on such interest payment date, then such defaulted interest shall be paid to the person in whose name such Bond is registered on a subsequent record date for the payment of such defaulted interest if one shall have been established as hereinafter provided and otherwise on the date of payment of such defaulted interest. A subsequent record date may be established by the Company by notice mailed to the owners of Series F Bonds not less than ten days preceding such record date, which record date shall be not more than thirty days prior to the subsequent interest payment date. The term "record date" as used in this Section with respect to any regular interest payment date shall mean the February 15 or August 15, as the case may be, next preceding such interest payment date, or, if such February 15 or August 15 shall be a legal holiday or a day on which banking institutions in The City of Boston, Massachusetts, are authorized by law to close, the next preceding day which shall not be a legal holiday or a day on which such institutions are so authorized to close. Notwithstanding the provisions of Sections 2.01 and 2.12 of the Original Indenture, each Series F Bond shall be dated the date of the certification thereof by the Trustee, and shall bear interest on the principal amount thereof payable semi-annually on the first days of March and September in each year, until the Company's obligation with respect to the principal shall be discharged, at the rate per annum specified in the title from the interest payment date next preceding the date thereof to which interest has been paid on the Bonds of said series, or if the date thereof is prior to August 16, 1967 then from March 1, 1967, or if the date thereof be an interest payment date to which interest is being paid or a date between the record date for any interest payment date to which interest is paid and such interest payment date, then from such interest payment date. ARTICLE II. DIVIDEND COVENANT. Section 2.01. The Company hereby covenants and agrees with the Trustee and with the respective owners of Series F Bonds that so long as any of the Series F Bonds shall be Outstanding the Company will not on or after January 1, 1967, declare or pay any dividends or make any other distributions (except (a) dividends payable or distributions made in shares of common stock of the Company and (b) dividends payable in cash when, concurrently with the payment of the dividend, an amount of cash equal to the dividend is received by the Company as a capital contribution or as the proceeds of the issue and sale of its common stock) on or in respect of its common stock or purchase or otherwise acquire for a consideration any shares of its common stock if the aggregate of such dividends, distributions and such consideration for purchase or other acquisition of shares of its common stock after December 31, 1966 shall exceed: (i) the earned surplus of the Company accumulated after December 31, 1966, (determined in accordance with generally accepted accounting principles and without giving effect to any subsequent net transfers from earned surplus to stated capital, or to any subsequent charges to earned surplus on account of such dividends, distributions, or acquisitions, or to any subsequent charges to earned surplus on account of the disposition of any amounts which may then be classified by the Company on its books as amounts in excess of the original cost of utility plant, or to any subsequent charges or credits to earned surplus applicable to the period prior to January 1, 1967, including charges for write-offs or write-downs of book values of assets owned by the Company on January 1, 1967) plus (ii) $3,300,000 plus (iii) such additional amount as shall be authorized or approved, upon application by the Company, by the Securities and Exchange Commission, or by any successor commission thereto, under the Public Utility Holding Company Act of 1935, less (iv) dividends accruing subsequent to December 31, 1966, on any preferred stock of the Company; and also less (v) the total amount, if any, by which the charges to income or earned surplus since December 31, 1966, as provision for the depreciation of Mortgaged Property shall have been less than the Replacement Fund Requirement since said date. The term "consideration", as used in this Section, shall mean Cost or Fair Value, whichever is less, if the consideration be other than cash, and the term "provision for depreciation" shall not be deemed to include provision for the amortization of any amounts classified by the Company on its books as amounts in excess of original cost of Mortgaged Property. In the event that the Company shall merge or consolidate with any other corporation or corporations pursuant to Article XIV of the Original Indenture, the earned surplus of the Company shall not be increased or diminished by the surplus or deficit of such corporation or corporations or by its or their earnings, dividends, distributions, or purchases prior to the date of such merger or consolidation. ARTICLE III. REDEMPTION OF SERIES F BONDS. Section 3.01. The Series F Bonds shall be redeemable as a whole at any time, or, subject to the provisions of Section 5.06 of the Original Indenture, in part, from time to time, either at the option of the Company or for the purposes of the Improvement Fund provided for in Article IV hereof or of any other applicable provisions of the Indenture including this Twenty-fourth Supplemental Indenture (i) if from Improvement Fund moneys pursuant to said Article IV or from moneys received by the Trustee pursuant to Sections 4.05, 4.18, 7.03, 7.04, 7.05, or 7.07 to be applied by the Trustee as provided in Section 8.03(a) or in Section 8.05 of the Original Indenture, at the applicable percentages of the called principal amount thereof specified under the column headed Special Redemption Price in the form of Series F Bond hereinabove contained, and (ii) if at the option of the Company or pursuant to any provisions of the Indenture including this Twenty-fourth Supplemental Indenture, other than those in respect of said Improvement Fund or of the aforesaid moneys applied pursuant to Section 8.03(a) or Section 8.05 of the Original Indenture, at the applicable percentages of the called principal amount thereof specified under the column headed Optional Redemption Price in the form of Series F Bond hereinabove contained, together in each case with accrued and unpaid interest to the date fixed for redemption. Section 3.02. Notice of redemption of the Series F Bonds either as a whole of in part shall be mailed by the Trustee by first class mail, postage prepaid, to the registered owner or owners of each Series F Bond called for redemption either in whole or in part not less than thirty (30) nor more than sixty (60) days prior to the date set for redemption by the Company at their last addresses as they shall appear upon the books for registration kept by the Registrar. Any notice given in the foregoing manner shall be conclusively deemed to have been duly given whether or not received by the owner or owners. Failure to give such notice by mail to the owner or owners of any Series F Bond designated for redemption in whole or in part, or any defect therein, shall not affect the validity of any proceedings for the redemption of any other Series F Bond. Except as aforesaid and except that in the event a Series F Bond shall be called for redemption in its entirety the notice need not contain the number of the Bond so called, the applicable provisions of Article V of the Original Indenture shall control and be followed in all matters connected with the redemption and payment of Series F Bonds. ARTICLE IV. IMPROVEMENT FUND. Section 4.01. The Company covenants that so long as any Series F Bonds are Outstanding hereunder it will on the first day of November, 1968, and on the first day of November in each calendar year thereafter pay to the Trustee the sum of one hundred fifty thousand dollars ($150,000), as an Improvement Fund to be held and applied by the Trustee pursuant to the terms of Section 4.03 of this Article IV; provided however, that the Company may, at its option, upon filing the application and other documents described in Section 4.02 of this Article IV (i) deposit with the Trustee Outstanding Series F Bonds, toward the satisfaction of the obligation aforesaid in an amount equal to one hundred percentum (100%) of the aggregate principal amount of Series F Bonds so deposited; and/or (ii) irrevocably allocate Net Property Additions toward the satisfaction of the obligation aforesaid in an amount equal to sixty percentum (60%) of the Available Net Property Additions as set forth in Item G of the Certificate of Available Net Property Additions filed in connection with said application. Section 4.02. For the purpose of determining the amount of money, if any, to be paid to the Trustee pursuant to the provisions of Section 4.01, the Company shall file with the Trustee on or before each said first day of November the following: (a) an application consisting of an Officers' Certificate conforming to the requirements of Section 17.02 of the Original Indenture and otherwise substantially in the following form: WESTERN MASSACHUSETTS ELECTRIC COMPANY To Old Colony Trust Company, Trustee under Indenture dated as of August 1, 1954 Improvement Fund Application under Twenty-fourth Supplemental Indenture filed November 1, 19 In conformity with the provisions of Article IV of the Twenty-fourth Supplemental Indenture providing for an annual Improvement Fund in the amount of $150,000 for the benefit of the registered owners of the First Mortgage Bonds, Series F, 5 3/4%, due March 1, 1997, of the aforesaid Company issued under the aforesaid Indenture, we hereby certify that the sum of $150,000 is due at this time from the Company to you as Trustee as aforesaid on account of said Improvement Fund obligation now due and payable. (If deposit of Series F Bonds in the aggregate principal sum of $150,000 is made, the following should be used) Outstanding Series F Bonds in the aggregate principal sum of $150,000 are transmitted herewith for Cancellation in full satisfaction of said obligation. (If deposit of money in the amount of $150,000 is made, the following should be used) The sum of $150,000 is transmitted herewith in cash in full satisfaction of said obligation. (If irrevocable allocation of Net Property Additions is in full satisfaction of the Improvement Fund obligation then current, the following should be used) Application is hereby made irrevocably to allocate in the amount of $250,000 the Available Net Property Additions set forth in Item G of the accompanying Certificate of Available Net Property Additions in full satisfaction of said obligation. (If full satisfaction be not achieved by any one of the foregoing, the following should be used, omitting reference to Series F Bonds and/or to money if none are transmitted, and to Net Property Additions if none are irrevocably allocated) Outstanding Series F Bonds in the aggregate principal amount of $ and the sum of $ is [are] transmitted herewith and application is hereby made irrevocably to allocate Net Property Additions shown in the accompanying Certificate of Available Net Property Additions by application of an amount equal to sixty percentum (60% ) of the Available Net Property Additions set forth in Item G of said Certificate, in full satisfaction of said obligation. Office held Office held (b) if Series F Bonds are transmitted (1) Outstanding Series F Bonds in the aggregate principal amount set forth in the application described in (a) above; (2) An Officers' Certificate containing the statements described in subparagraph (d) (1) of Section 3.04 of the Original Indenture, and a further statement that the Bonds so deposited comply with the definition of Outstanding contained in the Original Indenture. (c) if irrevocable allocation of any Net Property Additions be made (1) a Directors Resolution authorizing the execution of a Supplemental Indenture in form satisfactory to the Trustee conveying, transferring and/or assigning to the Trustee all Fundable Property not previously so conveyed, transferred and/or assigned; (2) said Supplemental Indenture duly executed by the Company, and if necessary by the Trustee, in as many counterparts as the Trustee shall require; (3) a Certificate of Available Net Property Additions; (4) an Accountant's Certificate similar, except for necessary variations, to the Accountant's Certificate described in subparagraph (f) of Section 3.08 of the Original Indenture; (5) an Engineer's Certificate similar, except for necessary variations, to the Engineer's Certificate described in subparagraph (g) of Section 3.08 of the Original Indenture. (d) an Opinion of Counsel to the effect that the amount of the Improvement Fund obligation then due pursuant to this Section is correctly stated in said application, and that the documents described in this Section and/or the sum of money paid to the Trustee and/or the Series F Bonds transmitted to the Trustee and/or the Net Property Additions irrevocably allocated pursuant to this Section fully satisfy the liability of the Company upon the Improvement Fund obligation then due pursuant to this Section and if any Fundable Property be conveyed, assigned, and/or transferred to the Trustee, that all corporate action prerequisite or necessary for the execution and delivery of the Supplemental Indenture has been taken; that the Properly Additions described in Item B of said Certificate are Fundable Property within the definition thereof contained in the Original Indenture; and that all recording and filing in respect of said Supplemental Indenture necessary for the security of any and all Bonds has been or will be completed. (e) The Company shall also pay to the Trustee with the documents aforesaid the sum of money, if any, set forth in the said application. All Series F Bonds deposited with the Trustee pursuant to this Article IV shall be Canceled by it. Section 4.03. If at the close of the first day of November, 1968, and of the first day of November in any calendar year thereafter, there shall be in the hands of the Trustee any cash paid to the Trustee pursuant to the provisions of Section 4.02, in the aggregate amount of five thousand dollars ($5,000) or more, said cash shall be set aside by the Trustee for the call and redemption of Series F Bonds then Outstanding and the Trustee, on behalf of and in the name of the Company and at the Company's expense, shall call for redemption on or prior to the next succeeding thirty-first day of December, at a redemption price in respect of each Bond so called for redemption consisting of the applicable percentage of the called principal amount thereof specified under the column headed Special Redemption Price in the forms of Series F Bonds hereinabove contained and interest accrued thereon to the date fixed for redemption, Series F Bonds to a principal amount sufficient (exclusive of premium and accrued interest) to exhaust as nearly as may be the cash so set aside. Notice to owners of the Series F Bonds called for redemption under this Section shall be given in the manner provided in Section 3.02 of this Twenty-fourth Supplemental Indenture and such Series F Bonds shall be presented for payment and paid in the manner provided in Section 5.04 of the Original Indenture; the particular Series F Bonds to be redeemed shall, unless they shall include all the Series F Bonds then Outstanding, be chosen by lot as provided in Section 5.02 of the Original Indenture; and the provisions of Section 5.05 of the Original Indenture shall be applicable to the redemption of such Series F Bonds and all matters related thereto. The Company shall reimburse the Trustee, forthwith upon its request, for all sums paid or to be paid out as premium and interest upon Series F Bonds redeemed pursuant to the provisions of this Section. ARTICLE V. THE TRUSTEE. Section 5.01. The Trustee shall be entitled to, may exercise, and shall be protected by, where and to the full extent that the same are applicable, all the rights, powers, privileges, immunities and exemptions provided in the Indenture, as if the provisions concerning the same were incorporated herein at length. The remedies and provisions of the Indenture applicable in case of any default by the Company thereunder are hereby adopted and made applicable in case of any default with respect to the properties included herein and, without limitation of the generality of the foregoing, there are hereby conferred upon the Trustee the same powers of sale and other powers over the properties described herein as are expressed to be conferred by the Indenture. ARTICLE VI. DEFASANCE. Section 6.01. This Twenty-fourth Supplemental Indenture shall become void when the Indenture shall be void. ARTICLE VII. AMENDMENTS OF ORIGINAL INDENTURE. Section 7.01. The Original Indenture is hereby amended pursuant to subparagraph (b) of Section 16.01 of the Original Indenture, as follows: (a) Section 1.02 (1) is amended by adding thereto the following sentence: "The term 'Original Indenture' shall mean the Indenture dated as of August 1, 1954, as amended by Article VII of the First Supplemental Indenture dated as of October 1, 1954." (b) Section 1.02 (7) is amended by substituting therein for the words "Western Massachusetts Companies" the words "Northeast Utilities". (c) Section 1.02 (33) is amended by adding thereto the following sentence: "The total of all Property Additions shall be determined on the basis of the Cost or Fair Value thereof, whichever is less, and the total of all Property Retirements on the basis of the Cost thereof as and to the extent provided in Section 1.02(32)." (d) Section 1.02 is amended by inserting at the end thereof the following: (38) Replacement Fund Requirement The term "Replacement Fund Requirement" (1) for any period of time, other than a period of twelve (12) consecutive calendar months which is not a calendar year, shall mean an amount equal to the sum of the minimum provisions for replacement of Depreciable Property for: (i) each calendar year, if any, included within the period in question, and (ii) the months, if any, included within such period which are subsequent to the end of the last completed calendar year, and (2) for a period of twelve (12) consecutive calendar months which is not a calendar year shall mean the minimum provision for replacement of Depreciable Property for such period. The minimum provision for replacement of Depreciable Property for a calendar year or any other period of twelve (12) consecutive calendar months shall be 2.25% (or such other percentage as shall be authorized or approved, upon application by the Company, by the Securities and Exchange Commission, or by any commission successor thereto, under the Public Utility Holding Company Act of 1935) of the average of the Company's Depreciable Property as at the beginning and end of such year or other period. The minimum provision for replacement of Depreciable Property for the period of months subsequent to the end of the last completed calendar year shall be 1/12th of 2.25% (or such other percentage as shall be approved by the Securities and Exchange Commission as aforesaid) of the average of the Company's Depreciable Property as at the beginning and end of such period for each month included within such period. (39) Depreciable Property The term "Depreciable Property" shall mean, as of any specified time of computation, an amount, determined in accordance with generally accepted accounting principles, equal to the sum of (a) the aggregate of the Cost to the Company or the original cost (whichever is less) of the Mortgaged Property as defined in the Original Indenture, other than land, flowage rights, rights of way, water rights and other like undepreciable real estate and rights in real estate, and unfinished construction, excluding however any amount included in utility plant acquisition adjustments accounts or in any accounts for similar purposes, and (b) amounts included in the utility plant acquisition adjustments accounts or in accounts for similar purposes of the Company if (1) the Company shall have failed to provide a reserve therefor on its books and (2) the Company shall have failed to make provision for charges to income and/or periodic charges to surplus in lieu of charges to income adequate to permit the write-off thereof at the expiration of the estimated useful life of the property represented thereby. (e) Section 1.02 (35) is amended by substituting in the second full paragraph thereof for the parenthesis "(but excluding charges to income for the amortization of plant and equipment (devoted to utility operation) account or amounts transferred therefrom)" the following parenthesis: "(including such additional annual charges as shall be necessary to provide for complete amortization of depreciable plant and equipment (devoted to utility operation) account of hereafter acquired plant or systems at the close of their estimated useful life, and the amount, if any, by which the Replacement Fund Requirement for the period for which net earnings are calculated exceeds the depreciation charged to income in said period on the property on which the said Replacement Fund Requirement is based)" (f) Section 1.03 is amended by changing Items D and E of the Form of Certificate of Available Net Property Additions set forth therein to read respectively as follows in any such Certificate filed with the Trustee after March 31, 1967: D. (1) That the Cost of all Property Retirements made by the Company after May 31, 1954, and on or prior to December 31, 1956, is $ (2) That the greater of (x), the Cost of all Property Retirements made by the Company after December 31, 1966, and on or prior to , 19 [here insert the date inserted in the second space in Item B] and (y) the Replacement Fund Requirement for the period between December 31, 1966, to and including [here insert the date inserted in the second space in Item B] is $ E. That the total of all Net Property Additions heretofore made the basis for the withdrawal of money from the hands of the Trustee pursuant to the provisions of Section 3.06 or of Section 8.03(b), or the issue of additional Bonds pursuant to Section 3.08, or irrevocably allocated for credit against the Improvement Fund pursuant to the provisions of Section 6.01, or (here insert the name of any Sinking Fund, Maintenance and Renewal Fund, Improvement Fund or analogous : fund created by Supplemental Indenture against the obligations of which Net Property Additions have been heretofore credited) or allocated to satisfy a Replacement Deficit and not thereafter reinstated pursuant to Section 4.18 is $ (g) Section 2.03 is amended by inserting between the first and second sections thereof the following sentence: "The signature of any such officer or officers may be facsimile." (h) Section 4.10 is amended by adding thereto a new sentence reading as follows: "The Company will not permit any increase in the aggregate principal amount of the outstanding indebtedness secured by any such mortgage, encumbrance, or lien superior to the lien of this Indenture upon the Mortgaged Property, unless the additional obligations representing such increase are issued in exchange for or in lieu of outstanding obligations on the exercise by holders of such outstanding obligations of a right possessed by holders thereof at the date of acquisition by the Company of the property subject to such mortgage, encumbrance, or lien." (i) Article IV is amended as follows: by substituting the following Section 4.17 for Section 4.17: Section 4.17. That in every Certificate of Available Net Property Additions filed with the Trustee for any purpose under this Indenture, all Property Additions and all Property Retirements, the Cost or Fair Value of which is included in any such Certificate will comply with the definition herein of Property Additions and Property Retirements, respectively; that the Cost and Fair Value of all such Property Additions and the Cost of all such Property Retirements will be compiled in accordance with the definitions herein of Cost and Fair Value respectively; that no property which is not Fundable Property will be included in Item A or Item B of any such Certificate; and that no Property Additions which have once been Made the Basis for Action or Credit hereunder will thereafter be Made the Basis for Action or Credit hereunder unless reinstated pursuant to the provisions of Section 4.18, provided however that property at any time subject to the Lien hereof consisting solely of materials or supplies usable as components in the construction of electric utility or steam plant, and which has once been Made the Basis for Action or Credit hereunder may again be Made the Basis for subsequent Action or Credit hereunder when restored to service if it shall in the meantime have been retired from service and the Cost thereof (less any credit for salvage value actually received) shall then have been charged to the depreciation reserve, the reserve for contributions to extensions, or to the surplus account of the Company and such charge shall have been reflected in Item D of any Certificate of Available Net Property Additions filed with the Trustee pursuant to the provisions of Sections 3.06, 3.08, 6.02(b), 8.03(b) or 4.18. and by adding the following Section 4.18 thereto: Section 4.18. On or before May 1 of each year, beginning with the year 1968, the Company will deliver to the Trustee an Officers' Certificate (hereinafter called the Maintenance Certificate), which shall be dated within thirty (30) days of the date of delivery to the Trustee and shall state: (i) the Replacement Fund Requirement for the period between December 31, 1966, and the January 1 which next precedes the date of the Certificate; (ii) the amount specified pursuant to Item (i) in the Maintenance Certificate, if any, filed in the preceding calendar year; (iii) the difference between the amount specified in Item (i) and the amount specified in Item (ii) above; (iv) the amount expended by the Company for Property Additions made in the period between December 31, 1966, and that January 1, which next precedes the date of the Certificate; (v) the amount specified pursuant to Item (iv) in the Maintenance Certificate, if any, filed in the preceding calendar year; (vi) the difference between the amount specified in Item (iv) above and the amount specified in Item (v) above; (vii) any Available Replacement Credit, as hereinafter defined, and the computation thereof; and (viii) the Replacement Credit or Replacement Deficit, as hereinafter defined. The amount "expended by the Company for Property Additions", for purposes of this Section, shall not include (a) any amount on account of Property Additions acquired by the Company which were used by another Person in a business or for a purpose similar to the business of, or to their proposed use by, the Company or acquired by merger or consolidation or (b) any amount expended for the acquisition of any property disposed of by the Company within the year immediately preceding such acquisition. The term "Replacement Credit" shall mean the excess of the sum of the amounts stated pursuant to Items (vi) and (vii) of the Maintenance Certificate over the amount stated pursuant to Item (iii). The term "Available Replacement Credit" shall mean the amount of the Replacement Credit, if any, stated in Item (viii) of the latest Maintenance Certificate filed with the Trustee after deducting the principal amount of Bonds and cash which, pursuant to the terms of this Section, were transmitted to the Trustee and subsequently withdrawn and/or the Cost or Fair Value of any Available Net Property Additions allocated to satisfy a Replacement Deficit to the extent subsequently reinstated as hereafter in this Section provided. The term "Replacement Deficit" shall mean the amount by which amounts stated pursuant to Item (iii) of the Maintenance Certificate exceed the sum of the amounts stated pursuant to Items (vi) and (vii). In case any Maintenance Certificate shows any Replacement Deficit, the Company will, concurrently with the filing of such Certificate, satisfy such Replacement Deficit by any one or more of the following methods: 1. depositing cash with the Trustee; or 2. depositing Outstanding Bonds to the Trustee; or 3. allocating Available Net Property Additions. For the purposes of this Section, Bonds so deposited shall be taken at the aggregate principal amount thereof and credit shall be allowed in an amount equal to 100% of Available Net Property Additions. If Outstanding Bonds shall be deposited with the Trustee to satisfy a Replacement Deficit, the Company shall deliver to the Trustee an Officers' Certificate containing the statements described in subparagraph (d)(l) of Section 3.04 of the Original Indenture, and a further statement that the Bonds so deposited comply with the definition of Outstanding contained in the Original Indenture. If Available Net Property Additions shall be allocated to satisfy a Replacement Deficit, the Company shall deliver to the Trustee a Certificate of Available Net Property Additions, an Accountant's Certificate similar, except for necessary variations, to the Accountant's Certificate described in subparagraph (f) of Section 3.08 of the Original Indenture, an Engineer's Certificate similar, except for necessary variations, to the Engineer's Certificate described in subparagraph (g) of Section 3.08 of the Original Indenture, and an Opinion of Counsel to the effect that the Property Additions described in Item B of said Certificate of Available Net Property Additions are Fundable Property within the definition thereof contained in the Original Indenture. At any time while the Trustee shall be holding cash or Bonds deposited with it or while Available Net Property Additions have been allocated in satisfaction of the Replacement Deficit and not reinstated, in all cases pursuant to the provisions of this Section, the Company may: 1. substitute Outstanding Bonds or Available Net Property Additions for such cash, Outstanding Bonds for Available Net Property Additions so allocated, or Available Net Property Additions for Bonds so deposited, the basis of substitution being the same as the basis for deposit hereinbefore set forth; Bonds may be substituted for cash or for Available Net Property Additions upon written application made by the Company accompanied by an Officers' Certificate substantially similar to the Officers' Certificate required in connection with the deposit of Bonds with the Trustee; Available Net Property Additions may be substituted for cash or for Bonds upon written application made by the Company accompanied by Certificates substantially similar to the Certificates required in connection with the allocation of Available Net Property Additions in satisfaction of a Replacement Deficit; 2. withdraw cash or Bonds upon written application therefor accompanied by an Officers' Certificate stating (i) the amount of cash or the aggregate principal amount of Bonds to be withdrawn; (ii) the Available Replacement Credit on the date of the Certificate, which shall at least equal the amount of the cash or the aggregate principal amount of the Bonds to be withdrawn, and the computation thereof; and (iii) that to the best of the knowledge and belief of such Officers the Company is not in default in the performance and observance of any terms, covenants, and conditions of the Indenture; 3. reinstate the Cost or Fair Value of Available Net Property Additions allocated in satisfaction of any Replacement Deficit or for the withdrawal of cash or of Bonds as above provided in an amount equal to any Available Replacement Credit upon the filing with the Trustee of an Officers' Certificate stating the Available Replacement Credit and the amount of the Available Net Property Additions to be reinstated and that the Company is not in default in the performance and observance of any terms, covenants and conditions of the Indenture, and thereupon the Available Net Property Additions so reinstated may be made the Basis for Action or Credit hereunder in all Certificates of Available Net Property Additions thereafter filed with the Trustee. Except as hereinbefore provided for the withdrawal of cash or Bonds, any cash deposited with the Trustee pursuant to the provisions of this Section shall be held and disposed of pursuant to the provisions of Section 8.02 of the Original Indenture, and any Bonds deposited with the Trustee shall be held by the Trustee and while so held shall not be made the basis for the certification of Bonds, the withdrawal, use or application of cash, or the release of property under the provisions of the Indenture or used to satisfy a Replacement Deficit or to satisfy any other requirements of the Indenture. No payment by way of principal, interest, or otherwise on any Bonds held by the Trustee shall be made or demanded by the Trustee while so held. ARTICLE VIII. MISCELLANEOUS PROVISIONS. Section 8.01. The recitals in this Twenty-fourth Supplemental Indenture shall be taken as recitals by the Company alone, and shall not be considered as made by or as imposing any obligation or liability upon the Trustee, nor shall the Trustee be held responsible for the legality or validity of this Twenty-fourth Supplemental Indenture, and the Trustee makes no covenants or representations, and shall not be responsible, as to or for the effect, authorization, execution, delivery, or recording of this Twenty-fourth Supplemental Indenture, except as expressly set forth in the Original Indenture. The Trustee shall not be taken impliedly to waive by this Twenty-fourth Supplemental Indenture any right it would otherwise have. As provided in the Original Indenture, this Twenty-fourth Supplemental Indenture shall hereafter form a part of the Indenture. Section 8.02. If and to the extent that any provision of this Twenty-fourth Supplemental Indenture limits, qualifies, or conflicts with another provision of the Indenture required by any of Sections 310 to 317, inclusive, of the Trust Indenture Act of 1939 to be included in an indenture to be qualified under said Act, such required provision shall control. Section 8.03. This Twenty-fourth Supplemental Indenture may be simultaneously executed in any number of counterparts, each of which shall be deemed an original; and all said counterparts executed and delivered, each as an original, shall constitute but one and the same instrument, which shall for all purposes be sufficiently evidenced by any such original counterpart. Section 8.04. This Twenty-fourth Supplemental Indenture is intended to be filed under the Uniform Commercial Code of Massachusetts as a financing statement or as an amendment to a financing statement previously filed, Western Massachusetts Electric Company, 174 Brush Hill Avenue, West Springfield, in said County of Hampden, said Commonwealth, being the debtor, and Old Colony Trust Company, 1 Federal Street, Boston, in the County of Suffolk, said Commonwealth, being the secured party. IN WITNESS WHEREOF, said Western Massachusetts Electric Company has caused this instrument to be executed in its corporate name its President, or one of its Vice Presidents, "thereunto duly authorized, and its corporate seal to be hereto affixed, attested by its Clerk or an Assistant Clerk, and said Old Colony Trust Company teas caused this instrument to be executed in its corporate name by one of its Vice Presidents, "thereunto duly authorized, and its corporate seal to be hereto affixed, all as of the day and year first above written. WESTERN MASSACHUSETTS ELECTRIC COMPANY By /s/PAUL H. MEHRTENS President Attest: /s/N. F. PLANTE Clerk Signed, sealed and delivered by Western Massachusetts Electric Company in our presence: PAUL J. SULLIVAN W. L. MITCHELL OLD COLONY TRUST COMPANY By J. J. WALSH Vice President Signed, sealed and delivered by Old Colony Trust Company in our presence: M. R. WALSH H. G. MAGUIRE COMMONWEALTH OF MASSACHUSETTS HAMPDEN, ss. On this 21th day of March in the year 1967 before me personally came PAUL H. MEHRTENS and N. F. PLANTE, both to me personally known, who being by me duly sworn did depose and say that they are respectively President and Clerk of Western Massachusetts Electric Company, one of the corporations described in and which executed the foregoing instrument; that they know the seal of said corporation; that the seal affixed to said instrument opposite the execution was affixed thereto pursuant to the authority of its Board of Directors; that they signed their respective names thereto by like authority; and each of them acknowledged said instrument to be his free act and deed in his said capacity and the free act and deed of Western Massachusetts Electric Company. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal, at West Springfield in said Commonwealth, the day and year first above written. MARIE A. NOLIN Notary Public for the Commonwealth of Massachusetts My commission expires: Dec. 1, 1972 COMMONWEALTH OF MASSACHUSETTS SUFFOLK, ss. On this 21th day of March in the year 1967 before me personally came J. J. WALSH, to me personally known, who being by me duly sworn did depose and say that he is a Vice President of Old Colony Trust Company, one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument opposite the execution was affixed thereto pursuant to the authority of its Board of Directors; that he signed his name thereto by like authority; and he acknowledged said instrument to be his free act and deed in his said capacity and the free act and deed of Old Colony Trust Company. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal, at Boston in said Commonwealth, the day and year first above written. MARIETTA R. LYNCH Notary Public for the Commonwealth of Massachusetts MY commission expires: Jan. 25, 1974 I, the undersigned, Clerk of WESTERN MASSACHUSETTS ELECTRIC COMPANY, hereby CERTIFY that at an adjourned session of a special meeting of the stockholders of said Company, duly convened and held at West Springfield, Massachusetts, on March 16, 1967, the following vote was duly adopted by the affirmative vote of all the outstanding stock of said Company; and I, the undersigned, FURTHER CERTIFY that at a meeting of the Board of Directors of said Company, duly called and held on March 16, 1967, at which a quorum was present and voting, the same identical vote was duly adopted by said Board: Voted: That the form, as presented to this meeting, of the proposed Twenty-fourth Supplemental Indenture to be dated as of March 1, 1967, between the Company and Old Colony Trust Company, as its Trustee, under the First Mortgage Indenture and Deed of Trust dated as of August 1, 1954, which Twenty-fourth Supplemental Indenture conveys, transfers, and/or assigns to said Old Colony Trust Company as Trustee as aforesaid all property of the character defined as Fundable Property in definition (28) of Section 1.02 of said First Mortgage Indenture, is hereby approved and the proper officers of the Company are severally authorized to execute and deliver the same in the name and on behalf of the Company. AND I FURTHER CERTIFY that PAUL H. MEHRTENS is the President of said Company, duly authorized to execute in the name and on behalf of said Company, the foregoing Twenty-fourth Supplemental Indenture dated as of March 1, 1967; that I am the Clerk of said Company, duly authorized to attest the ensealing of said Twenty-fourth Supplemental Indenture; that the Twenty-fourth Supplemental Indenture to which this certificate is attached is substantially in the form presented to and approved at each of said meetings held March 16, 1967; that the foregoing is a correct copy of the vote adopted at each of said meetings; and that the foregoing vote, as adopted at each of said meetings, remains in full force and effect without alteration. IN WITNESS WHEREOF, I have hereunto subscribed my name as Clerk and have caused the corporate seal of the Company to be hereunto affixed on March 21, 1967. N. F. PLANTE Clerk EX-4.4 6 SUPPLEMENTAL INDENTURE OF WMECO Exhibit 4.4.10 EIGHTIETH SUPPLEMENTAL INDENTURE dated as of the 1st day of July, 1997, made and entered into by and between WESTERN MASSACHUSETTS ELECTRIC COMPANY, a corporation organized under the laws of the Commonwealth of Massachusetts, with its principal place of business at 174 Brush Hill Avenue, West Springfield, Massachusetts 01089 (hereinafter generally called the Company), and STATE STREET BANK AND TRUST COMPANY, a trust company organized under the laws of the Commonwealth of Massachusetts, as successor to The First National Bank of Boston, as TRUSTEE under the Mortgage Indenture described below, with its principal corporate trust office at Two International Place, 4th Floor, Boston, MA 02110 (said State Street Bank and Trust Company or, as applied to action antedating the effective date of said succession, said The First National Bank of Boston, or its predecessor by merger, Old Colony Trust Company, being hereinafter generally called the Trustee). WITNESSETH that: WHEREAS , the Company has heretofore executed and delivered to the Trustee its First Mortgage Indenture and Deed of Trust (See Note 1) dated as of August 1, 1954 (hereinafter as amended by a First Supplemental Indenture dated as of October 1, 1954, called the Original Indenture, the Original Indenture with all indentures supplemental thereto being hereinafter generally called the Indenture), conveying certain property therein described in trust as security for the Bonds of the Company to be issued thereunder as therein provided and for other purposes more particularly specified therein, and the Trustee has accepted said Trust; and Note 1: For details as to the filing and recording of this instrument in Massachusetts, see Schedule C. WHEREAS there are outstanding $334,800,000 aggregate principal amount of Bonds which have been issued at various times and in various amounts and with various dates of maturity and rates of interest and have been denominated Series G, Series V, Series W, Series X, Series Y and 1997 Series A; and WHEREAS the Company has authorized the issue pursuant to Section 3.08 of the Original Indenture of an additional series of its fully registered First Mortgage Bonds without coupons, to be issued under the Indenture, to be designated "First Mortgage 7-3/8% Bonds, 1997 Series B, due July 1, 2001" (hereinafter called the 1997 Series B Bonds) and to be limited (except as provided in Section 2.13 of the original Indenture) in aggregate principal amount to $60,000,000 being the entire issue of the 1997 Series B Bonds; and WHEREAS the Company, pursuant to resolutions duly and legally adopted by its Board of Directors at a meeting duly called and held for the purpose, has duly authorized the execution and delivery of this Eightieth Supplemental Indenture and the issue of the 1997 Series B Bonds in the aggregate principal amount of $60,000,000; and WHEREAS the issue of the 1997 Series B Bonds in said aggregate principal amount of $60,000,000 and the execution and delivery of this Eightieth Supplemental Indenture have been duly approved to the extent required by law by the Department of Public Utilities of said Commonwealth and by the Department of Public Utility Control of the State of Connecticut; and WHEREAS all requirements of law and of the certificate of incorporation, as amended, and of the by-laws of the Company, including all requisite action on the part of directors and officers, and all things necessary to make the 1997 Series B Bonds, when duly executed by the Company and delivered, the valid, binding, and legal obligations of the Company, and the covenants and stipulations herein contained valid and binding obligations of the Company, have been done and performed, and the execution and delivery hereof have been in all respects duly authorized; and NOW, THEREFORE, THIS EIGHTIETH SUPPLEMENTAL INDENTURE WITNESSETH: In consideration of the premises and of the mutual covenants herein contained and of the purchase and acceptance by the registered owners thereof of the 1997 Series B Bonds at any time issued hereunder, and of one dollar ($1) duly paid to the Company by the Trustee and for other good and valuable considerations, the receipt whereof at or before the ensealing and delivery of these presents is hereby acknowledged, and in confirmation of and supplementing the Indenture, and in the performance and observance of the provisions thereof, and in order to establish the form and characteristics of the 1997 Series B Bonds, and to secure the payment of the principal of and premium, if any, and interest on all Bonds from time to time outstanding under the Indenture according to their tenor and effect, and to secure the performance and observance of all the covenants and conditions contained therein and in this Eightieth Supplemental Indenture, the Company has executed and delivered this Eightieth Supplemental Indenture, and does hereby confirm the conveyance, transfer, assignment, and mortgage of the franchises and properties as set forth in the Original Indenture and in all supplemental indentures prior hereto, excepting only such as have been released in accordance with Article VII of the Indenture and has granted, bargained, sold, conveyed, assigned, transferred, mortgaged, and confirmed, and by these presents does grant, bargain, sell, convey, assign, transfer, mortgage, and confirm unto State Street Bank and Trust Company, as Trustee, as provided in the Indenture, its successors in the trusts thereof and hereof, and its and their assigns, all and singular the franchises and properties of the Company of the character described and defined in the Original Indenture as Mortgaged Property (including all and singular such franchises and properties which may hereafter be acquired by the Company) acquired after the execution of the Original Indenture including all real property conveyed to the Company prior to the date hereof, including, but not limited to, the property set forth in Schedule B appended hereto, subject, however, to Permitted Encumbrances and to any mortgages or other liens or encumbrances thereon of the character described in Section 4.10 of the Indenture existing at the time of the acquisition of such franchises and properties by the Company or created contemporaneously to secure or to raise a part of the purchase price thereof and to any renewals or extensions of such Permitted Encumbrances, mortgages or other liens or encumbrances. There is furthermore expressly excepted and excluded from the lien and operation of this Eightieth Supplemental Indenture, and from the definition of Mortgaged Property, all the property of the Company described in clauses A to J, both inclusive, of the granting clauses of the Original Indenture, whether owned at the time of the execution of this Eightieth Supplemental Indenture or thereafter acquired by it. TO HAVE AND TO HOLD all and singular the above described franchises and properties unto the said State Street Bank and Trust Company, as Trustee under the Indenture, its successors in the trusts thereof and hereof, and its and their assigns, to its and their own use forever. BUT IN TRUST, NEVERTHELESS, upon the terms and trusts set forth in the Indenture for the equal pro rata benefit, security, and protection of the bearers or registered owners of the Bonds from time to time certified, issued, and outstanding under the Indenture, without any discrimination, preference, priority, or distinction of any Bond or coupon over any other Bond or coupon by reason of series, priority in the time of issue, sale, or negotiation thereof, or otherwise howsoever, except as otherwise provided in the Indenture; PROVIDED, HOWEVER, and these presents are upon the condition that if the Company, its successors or assigns, shall pay or cause to be paid the principal of and the premium, if any, and interest on the Bonds Outstanding under the Indenture at the times and in the manner stipulated therein and in the Indenture and shall keep, perform, and observe all and singular the covenants and promises in said Bonds and in the Indenture expressed to be kept, performed, and observed by or on the part of the Company, then this Eightieth Supplemental Indenture and the estate and rights hereby granted shall, pursuant to the provisions of Article XV of the Original Indenture, cease, determine and be void, but only if the Indenture shall have ceased, determined and become void, as therein provided, otherwise to be and remain in full force and effect. ARTICLE I. DESCRIPTION AND ISSUE OF 1997 SERIES B BONDS. Section 1.01. 1997 Series B Bonds and the certificate of authentication of the Trustee upon said Bonds shall be substantially in the forms thereof respectively set forth in Schedule A appended hereto, with such changes therein as shall be approved by the Company and the Trustee. 1997 Series B Bonds shall be designated as the First Mortgage 7-3/8 % Bonds, 1997 Series B, due July 1, 2001, of the Company, shall be issuable in the aggregate principal amount of sixty million dollars ($60,000,000) and no more except as provided in Section 2.13 of the Original Indenture, shall be dated as provided in Section 1.02 of this Eightieth Supplemental Indenture, shall mature July 1, 2001, shall bear interest at the rate specified in their title, as provided in said Section 1.02 until the Company's obligation in respect of the principal thereof shall be discharged, payable semiannually on the first days of January and July in each year as provided in said Section 1.02 (the principal, premium, if any, and interest thereon being payable at the principal corporate trust office of the Trustee in the City of Boston, Massachusetts, or at the principal corporate trust office of its successors, in such coin or currency of the United States of America as at the time of payment is legal tender for public and private debts), shall be issued in fully registered form in denominations of one thousand dollars ($1,000) and any multiple thereof, shall be transferable as provided in Section 2.08 of said Original Indenture at the principal corporate trust office of the Trustee or at the office or agency of the Company in the Borough of Manhattan, The City of New York, New York, and shall be redeemable at the times and in the manner provided in Article V of the Original Indenture and as hereinafter provided in Article III of this Eightieth Supplemental Indenture. Notwithstanding the provisions of Section 2.11 of the Original Indenture, no charge, except for taxes or governmental charges, shall be made by the Company upon any registration of transfer or exchange of 1997 Series B Bonds. 1997 Series B Bonds in fully registered form may be exchanged at the principal corporate trust office of the Trustee or at the office or agency of the Company in the Borough of Manhattan, The City of New York, New York, for a like aggregate principal amount of 1997 Series B Bonds in fully registered form of other authorized denominations and, upon surrender for exchange of one or more of such 1997 Series B Bonds, the Company shall execute and the Trustee shall certify and there shall be delivered in exchange therefor a like aggregate principal amount of such 1997 Series B Bonds of other authorized denominations. Bonds so surrendered for exchange shall be considered as having been surrendered for cancellation and shall be forthwith canceled by the Trustee. Pursuant to the provisions of Section 2.07 of the Original Indenture, the Company appoints State Street Bank and Trust Company, N.A. and its successors as the agency of the Company in the Borough of Manhattan, The City of New York, New York, for the registration of transfer and exchange of 1997 Series B Bonds. Section 1.02. Notwithstanding the provisions of Section 2.12 of the Original Indenture, the person in whose name any 1997 Series B Bond is registered at the close of business on any record date (as herein below defined) with respect to any interest payment date shall be entitled to receive the interest payable on such interest payment date notwithstanding the cancellation of such Bond upon any registration of transfer or exchange thereof subsequent to the record date and prior to such interest payment date, except if and to the extent the Company shall default in the payment of the interest due on such interest payment date, then such defaulted interest shall be paid to the person in whose name such Bond is registered on a subsequent record date for the payment of such defaulted interest if one shall have been established as hereinafter provided and otherwise on the date of payment of such defaulted interest. A subsequent record date may be established by the Company by notice mailed to the owners of 1997 Series B Bonds not less than ten (10) days preceding such record date, which record date shall be not more than thirty (30) days prior to the subsequent interest payment date. The term "record date" as used in this Section with respect to any regular interest payment date shall mean the December 15 or June 15, as the case may be, next preceding such interest payment date, or, if such December 15 or June 15 shall be a day on which banking institutions in the City of Boston, Massachusetts, are authorized by law to close, the next preceding day which shall not be a day on which such institutions are so authorized to close. Notwithstanding the provisions of Sections 2.01 and 2.12 of the Original Indenture, each 1997 Series B Bond shall be dated the date of the certification thereof by the Trustee, and shall bear interest on the principal amount thereof payable semiannually on the first days of January and July in each year, until the Company's obligation with respect to the principal shall be discharged, at the rate per annum specified in the title from the interest payment date next preceding the date thereof to which interest has been paid on the Bonds of said series, or if the date thereof is prior to December 16, 1997, then from the date of original issuance, or if the date thereof be an interest payment date to which interest is being paid or a date between the record date for any interest payment date to which interest is paid and such interest payment date, then from such interest payment date. Section 1.03. Each initial and successive holder of any 1997 Series B Bond, solely by virtue of its acquisition thereof, shall have and be deemed to have given written consent, without the need for any further action or consent by such holder, to the following amendment to the Original Indenture, and each said holder hereby authorizes and directs the Trustee, on behalf of the holder, to waive any notice contemplated by the Indenture and to give written consent to such amendment. The amendment modifies Section 3.04 (h) of the Original Indenture to read as follows: (h) in the event that (i) the total annual interest requirements of the Bonds then to be issued under this Section exceed the total annual interest requirements of the Bonds in respect of the payment, retirement, redemption, Cancellation or surrender to the Trustee for Cancellation of which said Bonds are then to be issued and (ii) such Bonds in respect of the payment, retirement, redemption, Cancellation or surrender to the Trustee for Cancellation of which said Bonds are then to be issued are then Outstanding and mature more than two years from the date of the Officers' Certificate contemplated by paragraph (d) of this Section, an Earnings Certificate. ARTICLE II DIVIDEND COVENANT Section 2.01. This Eightieth Supplemental Indenture imposes no additional restrictions on the Company's right to declare or pay any dividends or make any other distributions on or in respect of its common stock or to purchase or otherwise acquire for a consideration any shares of its common stock beyond those created by prior supplemental indentures and those in the Company's preferred stock provisions, by-laws and those otherwise required by law. ARTICLE III. REDEMPTION OF 19997 SERIES B BONDS. Section 3.01. The 1997 Series B Bonds will be redeemable in whole or in part, at the option of the Company at any time, at a redemption price equal to the greater of (i) 100% of their principal amount and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Yield, plus in each case accrued interest to the date of redemption (the Redemption Date). "Treasury Yield" means, with respect to any Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date. "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker having a maturity comparable to the remaining term of the 1997 Series B Bonds that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the 1997 Series B Bonds. "Independent Investment Banker" means Morgan Stanley & Co. Incorporated or, if such firm is unwilling or unable to select the Comparable Treasury Issue, an independent investment banking institution of national standing selected by the Company and appointed by the Trustee. "Comparable Treasury Price" means, with respect to any Redemption Date, (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third business day preceding such Redemption Date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S. Government Securities" or (ii) if such release (or any successor release) is not published or does not contain such prices on such business day, (A) the average of the Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (B) if the Trustee obtains fewer than four Reference Treasury Dealer Quotations, the average of all such Quotations. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding such Redemption Date. "Reference Treasury Dealer" means each of Morgan Stanley & Co. Incorporated, Salomon Brothers Inc and another Primary Treasury Dealer (as defined herein) at the option of the Company, that if any of the foregoing shall cease to be a primary U.S. Government Securities dealer in New York City (a "Primary Treasury Dealer"), the Company shall substitute therefor another Primary Treasury Dealer. Section 3.02. Notice of redemption of the 1997 Series B Bonds either as a whole or in part shall be mailed by the Trustee by first class mail, postage prepaid, to the registered owner or owners of each 1997 Series B Bond called for redemption either in whole or in part not less than thirty (30) or more than sixty (60) days prior to the date set for redemption at their last addresses as they shall appear upon the books for registration kept by the Registrar. Such notice may state that it is subject to the receipt of redemption moneys by the Trustee on or before the date fixed for redemption and the notice shall be of no effect unless such moneys are so received on or before such date. Any notice given in the foregoing manner shall be conclusively deemed to have been duly given whether or not received by the owner or owners. Failure to give such notice by mail to the owner or owners of any 1997 Series B Bond designated for redemption in whole or in part, or any defect therein, shall not affect the validity of any proceedings for the redemption of any other 1997 Series B Bond. Except as aforesaid and except that (a) Published Notice need not be given, (b) in the event a 1997 Series B Bond shall be called for redemption in its entirety the notice herein provided need not contain the number of the Bond so called, and (c) any such notice may be made subject to the deposit of redemption moneys with the Trustee before the date fixed for redemption, the applicable provisions of Article V of the Original Indenture shall control and be followed in all matters connected with the redemption and payment of 1997 Series B Bonds. ARTICLE IV. THE TRUSTEE. Section 4.01. The Trustee shall be entitled to, may exercise, and shall be protected by, where and to the full extent that the same are applicable, all the rights, powers, privileges, immunities and exemptions provided in the Indenture, as if the provisions concerning the same were incorporated herein at length. The remedies and provisions of the Indenture applicable in case of any default by the Company thereunder are hereby adopted and made applicable in case of any default with respect to the properties included herein and, without limitation of the generality of the foregoing, there are hereby conferred upon the Trustee the same powers of sale and other powers over the properties described herein as are expressed to be conferred by the Indenture. ARTICLE V. DEFEASANCE. Section 5.01. This Eightieth Supplemental Indenture shall become void when the Indenture shall become void. ARTICLE VI. MISCELLANEOUS PROVISIONS. Section 6.01. The recitals in this Eightieth Supplemental Indenture shall be taken as recitals by the Company alone, and shall not be considered as made by or as imposing any obligation or liability upon the Trustee, nor shall the Trustee be held responsible for the legality or validity of this Eightieth Supplemental Indenture, and the Trustee makes no covenants or representations, and shall not be responsible, as to or for the effect, authorization, execution, delivery, or recording of this Eightieth Supplemental Indenture, except as expressly set forth in the Original Indenture. The Trustee shall not be taken impliedly to waive by this Eightieth Supplemental Indenture any right it would otherwise have as provided in the Original Indenture. This Eightieth Supplemental Indenture shall hereafter form a part of the Indenture. Section 6.02. This Eightieth Supplemental Indenture may be simultaneously executed in any number of counterparts, each of which shall be deemed an original; and all said counterparts executed and delivered, each as an original, shall constitute but one and the same instrument, which shall for all purposes be sufficiently evidenced by any such original counterpart. IN WITNESS WHEREOF, said Western Massachusetts Electric Company has caused this instrument to be executed in its corporate name by its President or one of its Vice Presidents and by its Treasurer or an Assistant Treasurer, thereunto duly authorized, and its corporate seal to be hereto affixed and attested by its Clerk or an Assistant Clerk, and said State Street Bank and Trust Company has caused this instrument to be executed in its corporate name by one of its Vice Presidents or Assistant Vice Presidents, thereunto duly authorized, and its corporate seal to be hereto affixed, all as of the day and year first above written. WESTERN MASSACHUSETTS ELECTRIC COMPANY By s/s John B. Keane Vice President and by s/s David R. McHale Assistant Treasurer Attest: (CORPORATE SEAL) s/s O. Kay Comendul Assistant Clerk Signed, sealed and delivered by Western Massachusetts Electric Company in our presence: s/s Alyssa Lagace s/s Tracy A. DeCredico STATE OF CONNECTICUT BERLIN COUNTY OF HARTFORD On this 29th day of July in the year 1997 before me personally came John B. Keane and David R. McHale, to me personally known, who being by me duly sworn did depose and say that they are respectively a Vice President and an Assistant Treasurer of Western Massachusetts Electric Company, one of the corporations described in and which executed the foregoing instrument; that they know the seal of said corporation; that the seal affixed to said instrument opposite the execution was affixed thereto pursuant to the authority of its Board of Directors; that they signed their names thereto by like authority; and they acknowledged said instrument to be their free act and deed in their said respective capacities and the free act and deed of Western Massachusetts Electric Company. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal, at Berlin in said State, the day and year first above written. s/s Judith D. Boucher Judith D. Boucher Notary Public for the My commission expires September 30, 1999 State of Connecticut (NOTARIAL SEAL) STATE STREET BANK AND TRUST COMPANY, Trustee By s/s Henry W. Seemore Name: Henry W. Seemore Title: Assistant Vice President (CORPORATE SEAL) Signed, sealed and delivered by State Street Bank and Trust Company in our presence: s/s James E. Schultz s/s COMMONWEALTH OF MASSACHUSETTS BOSTON COUNTY OF SUFFOLK On this 29th day of July in the year 1997 before me personally came Henry W. Seemore, to me personally known, who being by me duly sworn did depose and say that he is an Assistant Vice President of State Street Bank and Trust Company, one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument opposite the execution was affixed thereto pursuant to the authority of its Board of Directors; that he signed his name thereto by like authority; and he acknowledged said instrument to be his free act and deed in his said capacity and the free act and deed of State Street Bank and Trust Company. IN WITNESS WHEREOF, I have hereunto set my hand and my official seal, at Boston in said Commonwealth, the day and year first above written. s/s Laura L. Morse Notary Public for the Commonwealth of Massachusetts My commission expires: July 12, 2002 (NOTARIAL SEAL) 1 For details as to the filing and recording of this instrument in Massachusetts, see Schedule C. Schedule A [FORM OF BOND] No. $_________ WESTERN MASSACHUSETTS ELECTRIC COMPANY First Mortgage 7-3/8 % Bond, 1997 Series B, due July 1, 2001 FOR VALUE RECEIVED, WESTERN MASSACHUSETTS ELECTRIC COMPANY, a corporation of the Commonwealth of Massachusetts (hereinafter called the Company), hereby promises to pay to , or registered assigns, the principal sum of dollars, on the first day of July, 2001 and to pay interest on said sum semiannually on the first days of January and July in each year until the Company's obligation with respect to said principal sum shall be discharged at the rate per annum specified in the title of this Bond from the interest payment date next preceding the date hereof to which interest has been paid on the Bonds of this series, or if the date hereof is prior to December 16, 1997 then from the date of original issuance, or if the date hereof be an interest payment date to which interest is being paid or a date between the record date for any interest payment date to which interest is paid and such interest payment date, then from such interest payment date. Both principal and interest shall be payable at the principal corporate trust office in the City of Boston in the County of Suffolk in said Commonwealth of State Street Bank and Trust Company (hereinafter with its successors, generally called the Trustee), or at the principal corporate trust office of its successors, in such coin or currency of the United States of America as at the time of payment is legal tender for public and private debts. Each installment of interest hereon (other than overdue interest) shall be payable to the person (as defined in the Original Indenture mentioned on the reverse hereof) who shall be the registered owner of this Bond at the close of business on the record date, which shall be the December 15 or June 15, as the case may be, next preceding such interest payment date, or, if such December 15 or June 15 shall be a day on which banking institutions in the City of Boston, Massachusetts, are authorized by law to close, the next preceding day which shall not be a day on which such institutions are so authorized to close. Reference is hereby made to the further provisions of this Bond set forth on the reverse hereof, including without limitation provisions in regard to the registration of transfer and exchangeability of this Bond, and such further provisions shall for all purposes have the same effect as though fully set forth in this place. This Bond shall take effect as a sealed instrument. This Bond shall not become or be valid or obligatory until the certificate of authentication hereon shall have been signed by the Trustee. IN WITNESS WHEREOF, WESTERN MASSACHUSETTS ELECTRIC COMPANY has caused this Bond to be executed in its name and on its behalf by its President or a Vice President and its Treasurer or an Assistant Treasurer thereunto duly authorized, and its corporate seal to be impressed or imprinted hereon. Dated: WESTERN MASSACHUSETTS ELECTRIC COMPANY By s/s By s/s CERTIFICATE OF AUTHENTICATION This Bond is one of the First Mortgage 7-3/8 % Bonds, 1997 Series B, due July 1, 2001, described and provided for in the within mentioned Indenture. STATE STREET BANK AND TRUST COMPANY By s/s Authorized Signatory [FORM OF BOND] [REVERSE] This Bond is one of a series of Bonds in fully registered form known as the "First Mortgage 7-3/8 % Bonds, 1997 Series B, due July 1, 2001" of the Company, limited to sixty million dollars ($60,000,000) in aggregate principal amount (except as provided by the terms of Section 2.13 of the Original Indenture mentioned below), and issued under and secured by a First Mortgage Indenture and Deed of Trust between the Company and Old Colony Trust Company (now State Street Bank and Trust Company, successor Trustee) as Trustee, dated as of August 1, 1954 (herein as amended by a First Supplemental Indenture dated as of October 1, 1954, called the Original Indenture, the Original Indenture with all indentures supplemental thereto, including specifically the Eightieth Supplemental Indenture dated as of July 1, 1997, being herein generally called the Indenture) and said Eightieth Supplemental Indenture, an executed counterpart of each of which is on file at the principal corporate trust office of the Trustee, to which Indenture reference is hereby made for a description of the nature and extent of the security, the rights thereunder of the bearers or registered owners of Bonds issued and to be issued thereunder, the rights, duties, and immunities thereunder of the Trustee, the rights and obligations thereunder of the Company, and the terms and conditions upon which said Bonds, and other and further Bonds of other series, are issued and are to be issued; but neither the foregoing reference to the Indenture nor any provision of this Bond or of the Indenture shall affect or impair the obligation of the Company, which is absolute, unconditional and unalterable, to pay at the maturities herein provided the principal of and premium, if any, and interest on this Bond as herein provided. The Bonds of this series are issuable in fully registered form in denominations of one thousand dollars ($1,000) and any multiple thereof. This Bond is transferable by the registered owner hereof upon surrender hereof at the principal corporate trust office of the Trustee or at the office or agency of the Company in the Borough of Manhattan, The City of New York, New York, together with a written instrument of transfer in approved form signed by the registered owner or by his duly authorized attorney, and a new Bond or Bonds of this series for a like principal amount will be issued in exchange, all as provided in the Indenture. Prior to due presentment for registration of transfer of this Bond, the Company and the Trustee may deem and treat the registered owner hereof as the absolute owner hereof, whether or not this Bond be overdue, for the purpose of receiving payment and for all other purposes, and neither the Company nor the Trustee shall be affected by any notice to the contrary. This Bond is exchangeable at the option of the registered owner hereof at the principal corporate trust office of the Trustee or at the office or agency of the Company in the Borough of Manhattan, The City of New York, New York, for an equal principal amount of fully registered bonds of this series of other authorized denominations, in the manner and on the terms provided in the Indenture. Bonds of this series are to be issued initially under a book-entry only system and, except as hereinafter provided, registered in the name of The Depository Trust Company, New York, New York ("DTC") or its nominee, which shall be considered to be the holder of all bonds of this series for all purposes of the Indenture, including, without limitation, payment by the Company of principal of and premium, if any, and interest on such Bonds of this series and receipt of notices and exercise of rights of holders of such Bonds of this series. There shall be a single Bond of this series which shall be immobilized in the custody of DTC with the owners of book-entry interests in Bonds of this series ("Book-Entry Interests") having no right to receive Bonds of this series in the form of physical securities or certificates. Ownership of Book-Entry Interests shall be shown by book-entry on the system maintained and operated by DTC, its participants (the "Participants") and certain persons acting through the Participants. Transfer of ownership of Book-Entry Interests are to be made only by DTC and the Participants by that book-entry system, the Company and the Trustee having no responsibility therefor so long as Bonds of this series are registered in the name of DTC or its nominee. DTC is to maintain records of positions of Participants in Bonds of this series, and the Participants and persons acting through Participants are to maintain records of the purchasers and owners of Book-Entry Interests. If DTC or its nominee determines not to continue to act as a depository for the Bonds of this series in connection with a book-entry only system, another depository, if available, may act instead and the single Bond of this series will be transferred into the name of such other depository or its nominee, in which case the above provisions will continue to apply but to the new depository. If the book-entry only system for Bonds of this series is discontinued for any reason, upon surrender and cancellation of the single Bond of this series registered in the name of the depository or its nominee, new registered Bonds of this series will be issued in authorized denominations to the holder of Book-Entry Interests shown on the book-entry system immediately prior to the discontinuance thereof. Neither the Trustee nor the Company shall be responsible for the accuracy of the interests shown on that system. The 1997 Series B Bonds will be redeemable in whole or in part, at the option of the Company at any time, at a redemption price equal to the greater of (i) 100% of their principal amount and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Yield, plus in each case accrued interest to the date of redemption (the Redemption Date). "Treasury Yield" means, with respect to any Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date. "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker having a maturity comparable to the remaining term of the 1997 Series B Bonds that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the 1997 Series B Bonds. "Independent Investment Banker" means Morgan Stanley & Co. Incorporated or, if such firm is unwilling or unable to select the Comparable Treasury Issue, an independent investment banking institution of national standing selected by the Company and appointed by the Trustee. "Comparable Treasury Price" means, with respect to any Redemption Date, (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third business day preceding such Redemption Date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S. Government Securities" or (ii) if such release (or any successor release) is not published or does not contain such prices on such business day, (A) the average of the Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (B) if the Trustee obtains fewer than four Reference Treasury Dealer Quotations, the average of all such Quotations. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding such Redemption Date. "Reference Treasury Dealer" means each of Morgan Stanley & Co. Incorporated, Salomon Brothers Inc and another Primary Treasury Dealer (as defined herein) at the option of the Company, that if any of the foregoing shall cease to be a primary U.S. Government Securities dealer in New York City (a "Primary Treasury Dealer"), the Company shall substitute therefor another Primary Treasury Dealer. Notice of redemption as aforesaid (which notice may be made subject to the deposit of redemption moneys with the Trustee before the date fixed for redemption) shall be mailed by the Trustee not less than thirty (30) days nor more than sixty (60) days prior to the date set for redemption, by first class mail, postage prepaid, to the registered owner or owners of each Bond of this series called for redemption, at their last addresses as they shall appear upon the books for registration kept by the Registrar. If this Bond, or a part hereof, shall be duly called for redemption, or provision for such call shall have been made, as provided in the Indenture, and payment of the redemption price shall have been duly provided for by the Company, interest shall cease to accrue hereon, or on such called part, from and after the redemption date, the Company shall from the time provided in the Indenture be under no further liability in respect of the principal of, or premium, if any, or interest on, this Bond, or such called part, and the registered owner hereof shall from and after such time look for payment hereof, or of such called part, solely to the money so provided. The Indenture contains provisions permitting the Company and the Trustee with the consent of the bearers or registered owners of not less than seventy percentum (70%) in principal amount of the Bonds at the time outstanding (except Bonds held by or for the benefit of the Company), including, if more than one series of Bonds shall be at the time outstanding, not less than seventy percentum (70%) in principal amount of the Bonds (except Bonds held by or for the benefit of the Company) of each series affected differently from those of other series, to effect by supplemental indenture modifications or alterations of the Indenture and of the rights and obligations of the Company and of the bearers and registered owners of the Bonds; but no such modification or alteration shall be made which, without the written approval or consent of the registered owner hereof, will extend the maturity hereof or reduce the rate or extend the time for payment of interest hereon or change the amount of the principal hereof or of any premium payable on the redemption hereof, or which will reduce the percentage of the principal amount of Bonds or the percentage of the principal amount of Bonds of any one series required for the adoption of the modifications or alterations as aforesaid, or authorize the creation by the Company, except as expressly authorized by the Indenture, of any mortgage, pledge, or lien upon the property subjected thereto ranking prior to or on an equality with the lien thereof. Each initial and successive holder of this Bond, solely by virtue of its acquisition thereof, shall have and be deemed to have given written consent, without the need for any further action or consent by such holder, to the following amendment to the Original Indenture and each said holder hereby authorizes and directs the Trustee, on behalf of the holder, to waive any notice contemplated by the Indenture, and to give written consent to such amendment. The amendment modifies Section 3.04 (h) of the Original Indenture to read as follows: (h) in the event that (i) the total annual interest requirements of the Bonds then to be issued under this Section exceed the total annual interest requirements of the Bonds in respect of the payment, retirement, redemption, Cancellation or surrender to the Trustee for Cancellation of which said Bonds are then to be issued and (ii) such Bonds in respect of the payment, retirement, redemption, Cancellation or surrender to the Trustee for Cancellation of which said Bonds are then to be issued are then Outstanding and mature more than two years from the date of the Officers' Certificate contemplated by paragraph (d) of this Section, an Earnings Certificate. If a default as defined in the Indenture shall occur, the principal of this Bond may become or be declared due and payable before maturity, in the manner and with the effect provided in the Indenture; but any default and the consequences thereof may be waived by certain percentages of the bearers or registered owners of Bonds, all as provided in the Indenture. No recourse shall be had for the payment of the principal of or the interest on this Bond or for any claim based hereon or otherwise in respect hereof or of the Indenture against any incorporator, stockholder, director, or officer, past, present, or future, as such, of the Company or of any predecessor or successor corporation under any constitution, statute, or rule of law, or by the enforcement of any assessment, penalty, or otherwise, all such liability being waived and released by the holder hereof by the acceptance of this Bond. Schedule B NONE Schedule C Detail of Filing and Recording of First Mortgage Indenture and Deed Trust dated as of August 1, 1954 in Massachusetts. Date Page Recorded Doc. No. Book Registry of Deeds County of Berkshire Middle District 8/18/54 22357 614 395 Northern District 8/18/54 2684 512 97 Southern District 8/18/54 None 310 379 Assigned County of Franklin 8/18/54 3501 1007 2 County of Hampshire 8/18/54 5070 1175 388 County of Hampden 8/15/54 20682 2331 1 Registry District of Land Court County of Berkshire Middle District 10/4/54 8407-A Northern District 11/5/68 3115 County of Hampshire 8/18/54 822 County of Hampden 8/19/54 18800 Office of Town Clerk, West Springfield* 3/22/67 6917 None Assigned *Confirmatory Indenture of Mortgage filed 8/18/54 None 54 121 Assigned Secretary of the Commonwealth 442315 EX-10.1 7 STOCKHOLDER AGMT - MYAPC Exhibit 10.6 [Composite Conformed Copy] STOCKHOLDER AGREEMENT, dated as of May 20, 1968, among the stockholders of MAINE YANKEE ATOMIC POWER COMPANY ("Maine Yankee"), a Maine corporation, namely: State of Stockholder Incorporation Central Maine Power Company Maine New England Power Company Massachusetts The Connecticut Light and Power Company Connecticut Bangor Hydro-Electric Company Maine Maine Public Service Company Maine Public Service Company of New Hampshire New Hampshire Cambridge Electric Light Company Massachusetts Montaup Electric Company Massachusetts The Hartford Electric Light Company Connecticut Western Massachusetts Electric Company Massachusetts Central Vermont Public Service Corporation Vermont (hereinafter referred to collectively as the "Stockholders" and individually as the "Stockholder"). It is agreed as follows: 1. Relationship Among the Parties Maine Yankee has been organized to provide for the supply of power to the Stockholders. It has commenced construction of a nuclear electric generating unit of the pressurized water type, designed to have a capability of approximately 800 megawatts electric, at a site on tidewater in the Town of Wiscasset, Maine (such unit being herein, together with the site and all related facilities to be owned by Maine Yankee, referred to as the "Unit"). Construction of the Unit is now being carried out under contracts with Combustion Engineering, Inc. and Westinghouse Electric Corporation for certain major systems of equipment and Stone and Webster Engineering Corporation as Architect-Engineer. By separate power contracts (the "Power Contracts") and capital funds agreements (the "Capital Funds Agreements"), Maine Yankee is agreeing to sell the entire output of the Unit to the Stockholders and the Stockholders are agreeing to purchase such output and to provide Maine Yankee with necessary capital funds. The respective percentages of the capacity and output of the Unit to be purchased by the Stockholders will be the same as their respective percentages of stock ownership as follows: Stock Stockholders Percentage Central Maine Power Company 38% New England Power Company 20% The Connecticut Light and Power Company 8% Bangor Hydro-Electric Company 7% Maine Public Service Company 5% Public Service Company of New Hampshire 5% Cambridge Electric Light Company 4% Montaup Electric Company 4% The Hartford Electric Light Company 4% Western Massachusetts Electric Company 3% Central Vermont Public Service Corporation 2% 2. Unanimous Consent to Certain Matters The Stockholders will not cause or permit Maine Yankee to take any of the following actions unless the holders at the time of all of Maine Yankee's outstanding common stock consent thereto, by vote or otherwise: (a) the amendment in any material respect of any of the Power Contracts or Capital Funds Agreements; (b) the construction by Maine Yankee of an additional generating unit or units at the Wiscasset site or elsewhere; and (c) participation by Maine Yankee, to a material extent, in any business other than the generation and sale of electric power. However, the amendment of particular Power Contracts and Capital Funds Agreements to effect changes in entitlement and stock percentages of the Stockholders shall not constitute such a material amendment, if, after the amendment, the sum of the entitlement percentages of all Stockholders under all Power Contracts then in force, and the sum of the stock percentages of all Stockholders under all Capital Funds Agreements then in force, continues to be 100%. 3. Consent to Construction of Additional Units by Others The Stockholders will not cause or permit Maine Yankee to make any arrangement with respect to the construction and/or operation by one or more persons other than Maine Yankee of an additional generating unit or units at the Wiscasset site unless the holders at the time of at least 60% of Maine Yankee's outstanding common stock consent thereto by vote. However, if the holders at the time of at least 60% of Maine Yankee's outstanding common stock vote to consent to such a proposed arrangement at a meeting of Stockholders duly held on at least 30 days' notice which shall specify in reasonable detail the proposed arrangement to be voted on, Maine Yankee may give effect to such arrangement by selling, leasing or otherwise transferring a portion of the site and of the facilities included in the Unit to one or more other persons proposing to construct an additional generating unit or units at the site, and by contracting with such person or persons with respect to operating the same and other matters. 4. Power Entitlement Upon Failure to Provide Additional Capital If, as the result of any Stockholder's failure to provide capital to Maine Yankee as requested by Maine Yankee pursuant to Sections 4 or 6 of such Stockholder's Capital Funds Agreement, such Stockholder's entitlement percentage under its Power Contract is in excess of its "capital percentage" (as hereinafter defined), then, in such event and so long as such condition continues, such Stockholder shall, if requested to do so by Stockholders whose respective entitlement percentages are less than their respective capital percentages, enter into appropriate arrangements to sell to such Stockholders at its cost some or all, as such Stockholders may from time to time determine, of its "excess power" (as hereinafter defined). For the purposes of this Section, (i) a Stockholder's "capital percentage" as of any time shall be the percentage which the aggregate amount (whether paid with respect to the Common Stock, by capital contributions, by loans or by advances, paid to Maine Yankee by the Stockholder under its Capital Funds Agreement bears to the aggregate amount paid to Maine Yankee by all of the Stockholders under the Capital Funds Agreements, and (ii) a Stockholder's "excess power" as of any time shall be that amount of Maine Yankee's capacity and net electric output determined by subtracting such Stockholder's then capital percentage of such capacity and output from such Stockholder's entitlement percentage of such capacity and output. 5. Cancellation of Power Contracts If at any time: (a) Stockholders owning more than 50% of Maine Yankee's outstanding common stock have canceled their Power Contracts pursuant to Section 9 thereof, and (b) Maine Yankee has paid in full, or made adequate provision for the payment in full of, all its outstanding bonds and notes and other indebtedness and liabilities, other than its indebtedness to Stockholders for loans and advances made pursuant to Section 6 of the Capital Funds Agreements, then, and in such case, upon the request of any Stockholder who has theretofore so canceled its Power Contract, the Stockholders whose Power Contracts are still in effect will forthwith cancel their respective Power Contracts pursuant to Section 9 thereof. Upon occurrence of (a) and (b) above and cancellation of all Power Contracts, the Capital Funds Agreements shall terminate forthwith and the Stockholders shall cause Maine Yankee to confirm such termination. 6. Arbitration In case any dispute shall arise as to the interpretation or performance of this contract which cannot be settled by agreement among the parties and which may be finally determined by arbitration under the law of the State of Maine then in effect, such dispute shall be submitted to arbitration, and arbitration of such dispute shall be a condition precedent to any action at law or suit in equity that can be brought. The parties shall if possible agree upon a single arbitrator. In case of failure to agree upon an arbitrator within 15 days after the delivery by any party to the other parties of a written notice requesting arbitration, any party may request the American Arbitration Association to appoint the arbitrator. The arbitrator, after opportunity for each of the parties to be heard, shall consider and decide the dispute and notify the parties in writing of his decision. The expenses of the arbitration shall be borne equally by the parties. 7. Interpretation The interpretation and performance of this Agreement shall be in accordance with and controlled by the laws of the State of Maine. 8. Addresses Except as the parties may otherwise agree, any notice, request or other communication from a party to any other party, relating to this Agreement, or the rights, obligations or performance of the parties hereunder, shall be in writing and shall be effective upon delivery to the other party. Any such communication shall be considered as duly delivered upon the lapse of 48 hours after mailing by registered or certified mail, postage prepaid, to the post office address of the other party shown following the signature of such other party hereto, or such other address as may be designated by written notice given as provided in this Section 8. 9. Successors and Assigns This Agreement shall be binding upon and shall inure to the benefit of, and may be performed by, the corporate successors of the parties. No assignment of this Agreement, other than to a corporate successor to all or substantially all the electric business and property of a party, shall operate to relieve the assignor of its obligations under this Agreement without the written consent of the remaining parties hereto. 10. Execution in Counterparts This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one and the same instrument. This Agreement shall become effective at such time as counterparts thereof have been executed by each of the parties and it shall not be a condition to its effectiveness that each of the parties have executed the same counterpart. IN WITNESS WHEREOF, the undersigned parties have executed this Stockholder Agreement by their respective officers thereunto duly authorized as of the date first above written. CENTRAL MAINE POWER COMPANY 9 Green Street Augusta, Maine By W. H. Dunham President NEW ENGLAND POWER COMPANY 441 Stuart Street Boston, Massachusetts By Robert F. Krause President THE CONNECTICUT LIGHT AND POWER COMPANY P.O. Box 2010 Hartford, Connecticut By S. R. Knapp Chairman BANGOR HYDRO-ELECTRIC COMPANY 33 State Street Bangor, Maine By R. N. Haskell President MAINE PUBLIC SERVICE COMPANY 209 State Street Presque Isle, Maine By C. Hazen Stetson Chairman of the Board PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE 1087 Elm Street Manchester, New Hampshire By W. C. Tallman President CAMBRIDGE ELECTRIC LIGHT COMPANY 130 Austin Street Cambridge, Massachusetts By John F. Rich President MONTAUP ELECTRIC COMPANY P.O. Box 2333 Boston, Massachusetts By Guido R. Perera President THE HARTFORD ELECTRIC LIGHT COMPANY P.O. Box 2370 Hartford, Connecticut By C. L. Derrick Chairman WESTERN MASSACHUSETTS ELECTRIC COMPANY 174 Brush Hill Avenue West Springfield, Massachusetts By Robert E. Barrett, Jr. President CENTRAL VERMONT PUBLIC SERVICE CORPORATION 77 Grove Street Rutland, Vermont By L. Douglas Meredith President EX-10.2 8 FORM OF POWER CONTRACT - MYAPC Exhibit 10.7 [Composite Conformed Copy] POWER CONTRACT, dated as of May 20, 1968, between MAINE YANKEE ATOMIC POWER COMPANY ("Maine Yankee"), a Maine corporation, and (The names of the Purchasers appear in the attached Appendix) (the "Purchaser"). It is agreed as follows: 1. Basic Understandings Maine Yankee has been organized to provide for the supply of power to its eleven sponsoring utility companies (including the Purchaser). Late in 1966 and early in 1967, it entered into contracts for the manufacture of the major components and the services of an architect-engineer for the construction of a nuclear electric generating unit of the pressurized water type, designed to have a capability of approximately 800 megawatts electric, at a site on tidewater in the Town of Wiscasset, Maine (such unit being herein, together with the site and all related facilities to be owned by Maine Yankee, referred to as the "Unit"). Construction of the Unit is now being carried out under contracts with Combustion Engineering, Inc. and Westinghouse Electric Corporation for certain major systems of equipment and Stone and Webster Engineering Corporation as Architect-Engineer. The Unit is to be operated to supply power to each of the eleven sponsoring utilities (the "sponsors"), each of which has contemporaneously agreed to purchase a stated percentage of the capacity and output of the Unit and a like percentage of Maine Yankee's stock. The names of the sponsors and their respective percentages ("entitlement percentages") of the capacity and output of the Unit are as follows: Entitlement Sponsors Percentage Central Maine Power Company 38.0% New England Power Company 20.0% The Connecticut Light and Power Company 8.0% Bangor Hydro-Electric Company 7.0% Maine Public Service Company 5.0% Public Service Company of New Hampshire 5.0% Cambridge Electric Light Company 4.0% Montaup Electric Company 4.0% The Hartford Electric Light Company 4.0% Western Massachusetts Electric Company 3.0% Central Vermont Public Service Corporation 2.0% Maine Yankee and its other sponsors are contemporaneously entering into power contracts which are identical to this contract except for necessary changes in the names of the parties. 2. Effective Date and Term This contract shall become effective upon receipt by the Purchaser of notice that Maine Yankee has entered into power contracts, as contemplated by Section 1 above, with each of the other sponsors. The term of this contract shall expire 30 years after the plant completion date. The "plant completion date" shall be the earlier of (i) December 31, 1973, or (ii) the date on which the Unit is placed in commercial operation, as determined by Maine Yankee (the "commercial operation date"). 3. Construction of the Unit Maine Yankee will proceed with due diligence with construction of the Unit, and will exercise its best efforts to complete and place it in commercial operation by May 1, 1972 within present cost estimates, and will keep the Purchaser reasonably informed as to the progress of construction, material modifications in cost estimates, and the expected plant completion date. 4. Operation and Maintenance of the Unit Maine Yankee will operate and maintain the Unit in accordance with good utility practice under the circumstances and all applicable law, including the applicable provisions of the Atomic Energy Act of 1954, as amended, and of any licenses issued thereunder to Maine Yankee. Within the limits imposed by good utility practice under the circumstances and applicable law, the Unit will be operated at its maximum capability and on a long hour use basis. Outages for inspection, maintenance, refueling and repairs and replacements will be scheduled in accordance with good utility practice and insofar as practicable shall be mutually agreed upon by Maine Yankee and the Purchaser. In the event of an outage, Maine Yankee will use its best efforts to restore the Unit to service as promptly as practicable. 5. Purchaser's Entitlement The Purchaser will, throughout the term of this contract, be entitled and obligated to take its entitlement percentage of the capacity and net electrical output of the Unit, at whatever level the Unit is operated or operable, whether more or less than 800 megawatts electric. 6. Deliveries and Metering The Purchaser's entitlement percentage of the output of the Unit will be delivered to and accepted by it at the step-up substation at the site. All deliveries will be made in the form of 3-phase, 60 cycle, alternating current at a nominal voltage of 345,000 volts. The Purchaser will make its own arrangements for the transmission of its entitlement percentage of the output of the Unit. Maine Yankee will supply and maintain all necessary metering equipment for determining the quantity and conditions of supply of deliveries under this contract, will make appropriate tests of such equipment in accordance with good utility practice and as reasonably requested by the Purchaser, and will maintain the accuracy of such equipment within reasonable limits. Maine Yankee will furnish the Purchaser with such summaries of meter readings as the Purchaser may reasonably request. 7. Payment With respect to each month commencing prior to the plant completion date, the Purchaser will pay Maine Yankee at the rate of 3.75 mills per kilowatt-hour, for the Purchaser's entitlement percentage of the net electrical output (if any) of the Unit during the particular month. With respect to each month commencing on or after the plant completion date, the Purchaser will pay Maine Yankee an amount equal to the Purchaser's entitlement percentage of the sum of (a) Maine Yankee's total fuel costs for the month with respect to the Unit, plus (b) Maine Yankee's total operating expenses for the month with respect to the Unit, plus (c) an amount equal to one-twelfth of the composite percentage for such month of the net Unit investment as most recently determined in accordance with this Section 7. "Composite percentage" shall be computed as of the plant completion date and as of the last day of each month thereafter (the "computation date") and for any month the composite percentage shall be that computed as of the last day of the previous month. "Composite percentage" as of a computation date shall be the sum of (i) nine and eight-tenths percent (9.8%) multiplied by the percentage which equity investment with respect to the Unit (other than equity investment for the financing of fuel inventory, including nuclear materials and the cost of fabrication thereof, for the Unit) as of such date is of the total capital as of such date; plus (ii) the "effective interest rate" per annum of each principal amount of indebtedness outstanding on such date for money borrowed with respect to the Unit (other than for money borrowed for the financing of fuel inventory, including nuclear materials and the cost of fabrication thereof, for the Unit), multiplied by the percentage which such principal amount is of total capital as of such date. The "effective interest rate" of each principal amount of indebtedness referred to in clause (ii) of the next preceding sentence will reflect the annual interest requirements and to the extent applicable, amortization of issue expenses, discounts and premiums, sinking fund call premiums, expenses and discounts, refunding and retirement expenses, discounts and premiums, and all other expenses applicable to the issue. "Equity investment" as of any date shall consist of the sum of (i) all amounts theretofore paid to Maine Yankee for all capital stock theretofore issued, plus all capital contributions, less the sum of any amounts paid by Maine Yankee in the form of stock retirements, repurchases or redemptions or return of capital; plus (ii) any credit balance in the capital surplus account not included under (i) and in the earned surplus account on the books of Maine Yankee as of such date. "Total capital" as of any date shall be the equity investment with respect to the Unit, plus the total of all other securities and indebtedness then outstanding with respect to the Unit other than equity investment, securities, indebtedness and other obligations issued in connection with the financing or leasing of fuel inventory, including nuclear materials and the cost of fabrication thereof, for the Unit. "Uniform System" shall mean the Uniform System of Accounts prescribed by the Federal Power Commission for Class A and Class B Public Utilities and Licensees as in effect on the date of this contract and as said System may be hereafter amended to take account of private ownership of special nuclear material. Maine Yankee's "fuel costs" for any month shall include (i) amounts chargeable in accordance with the Uniform System in such month as amortization of costs of fuel assemblies and components and burnup of nuclear materials for the Unit; plus (ii) all other amounts properly chargeable in accordance with the Uniform System to fuel costs for the Unit less any applicable credits thereto; plus (iii) one-twelfth of nine and eight-tenths percent (9.8%) multiplied by the equity investment for the financing of fuel inventory, including nuclear materials and the cost of fabrication thereof, for the Unit; plus (iv) to the extent not provided for in any of the foregoing, all payments (or accruals therefor or amortization thereof) with respect to obligations incurred in connection with the financing or leasing of fuel inventory, including nuclear materials and the cost of fabrication thereof, for the Unit. Maine Yankee's "operating expenses" shall include all amounts properly chargeable to operating expense accounts (other than such amounts which are included in Maine Yankee's fuel costs) less any applicable credits thereto, in accordance with the Uniform System; provided, however, that for the purposes of this contract, the accrual of depreciation and amortization of the Unit as an operating expense shall commence on the plant completion date. The amount of depreciation and amortization for each period shall be at a rate at least sufficient to fully amortize the then non-salvable plant investment balance in equal amounts over the periods remaining until May 1, 2002. The "net Unit investment" shall consist, in each case with respect to the Unit, of the net sum of (i) the aggregate amount properly chargeable at the time in accordance with the Uniform System to Maine Yankee's electric plant accounts (including construction work in progress); plus (ii) the amount of any unamortized property losses; less (iii) the amount of any reserves for depreciation and for amortization of property losses; plus (iv) such allowances for inventories, materials and supplies (other than fuel assemblies and components), prepaid items and cash working capital as may reasonably be determined from time to time by Maine Yankee. The net Unit investment shall be determined as of the plant completion date and thereafter as of the commencement of each calendar year, or if Maine Yankee elects, at more frequent intervals. Maine Yankee will bill the Purchaser, as soon as practicable after the end of each month, for all amounts payable by the Purchaser with respect to the particular month. Such bills will be rendered in such detail as the Purchaser may reasonably request and may be rendered on an estimated basis subject to corrective adjustments in subsequent billing periods. All bills shall be paid in full within 10 days after receipt thereof by the Purchaser. 8. Make-up Term and Option Term (a) The Purchaser may elect to extend the contract term by written notice to Maine Yankee upon the following conditions and for the following period or periods: (i) In the event that the Unit is not in commercial operation on the plant completion date, the contract term may be extended for a period equal to the number of consecutive days by which commercial operation is delayed beyond the plant completion date; and (ii) if at any time after the commencement of commercial operation no deliveries are made under this contract for a period of at least 120 consecutive days, the contract may be extended for a period equal to the aggregate of such periods during which no deliveries were made. If the term of the contract is extended pursuant to the provisions of this subsection (a), all of the contract provisions shall remain in effect for the extended term. (b) Upon expiration of the initial term of this contract or upon expiration of the term as extended in accordance with subsection (a) of this Section 8, the Purchaser shall continue to be entitled, at its option, to its entitlement percentage of the capacity and output of the Unit upon terms at least as favorable as those obtained by any other person. 9. Cancellation of Contract If deliveries cannot be made to the Purchaser because either (i) the Unit is damaged to the extent of being completely or substantially completely destroyed, or (ii) the Unit is taken by exercise of the right of eminent domain or a similar right or power, or (iii) (a) the Unit cannot be used because of contamination, or because a necessary license or other necessary public authorization cannot be obtained or is revoked, or because the utilization of such a license or authorization is made subject to specified conditions which are not met, and (b) the situation cannot be rectified to an extent which will permit Maine Yankee to make deliveries to the Purchaser from the Unit; then and in any such case, the Purchaser may cancel this contract. Such cancellation shall be effected by written notice given by the Purchaser to Maine Yankee. In the event of such cancellation, all continuing obligations of the parties, including the Purchaser's obligations to continue payments, shall cease forthwith. The Purchaser may cancel this contract or be relieved of its obligations to make payments hereunder only as provided in the next preceding paragraph of this Section 9. Further, if for reasons beyond Maine Yankee's reasonable control, deliveries are not made as contemplated by this contract, Maine Yankee shall have no liability to the purchaser on account of such nondelivery. 10. Insurance Prior to the first shipment of fuel to the plant site, Maine Yankee will obtain, and thereafter will at all times maintain, insurance to cover its "public liability" for personal injury and property damage resulting from a "nuclear incident" (as those terms are defined in the Atomic Energy Act of 1954 as amended), with limits not less than Maine Yankee may be required to maintain to qualify for governmental indemnity under said Act and shall execute and maintain an indemnification agreement with the Atomic Energy Commission as provided by said Act. Maine Yankee will also at all times maintain such other types of liability insurance, including workmens' compensation insurance, in such amounts, as is customary in the case of other similar electric utility companies, or as may be required by law. Maine Yankee will at all times keep insured such portions of the Unit (other than the fuel assemblies and components, including nuclear materials) as are of a character usually insured by electric utility companies similarly situated and operating like properties, against the risk of a "nuclear incident" and such other risks as electric utility companies, similarly situated and operating like properties, usually insure against; and such insurance shall to the extent available be carried in amounts sufficient to prevent Maine Yankee from becoming a co-insurer. Maine Yankee will at all times keep its fuel assemblies and components (including nuclear materials) insured against such risks and in such amounts as shall, in the opinion of Maine Yankee, provide adequate protection. 11. Additional Units Maine Yankee or its nominees may install one or more additional generating units at the Wiscasset site. The installation of such unit or units shall not affect the terms of this contract, but in such case if any portion of the Unit (whether such portion constitutes land, structures or equipment) is also used with an additional unit or units, an appropriate allocation of the cost of the Unit shall be made and the net Unit investment shall be reduced accordingly, subject, however, to the limitation that the aggregate amount of the reduction in net Unit investment resulting from all such allocations shall not exceed $5,000,000. Maine Yankee may make any other necessary allocations or any necessary adjustments in its accounts with respect to the Unit (including fuel assemblies and components) and any additional unit or units, and such allocations and adjustments shall be binding on the sponsors. 12. Audit Maine Yankee's books and records (including metering records) shall be open to reasonable inspection and audit by the Purchaser. 13. Arbitration In case any dispute shall arise as to the interpretation or performance of this contract which cannot be settled by mutual agreement and which may be finally determined by arbitration under the law of the State of Maine then in effect, such dispute shall be submitted to arbitration, and arbitration of such dispute shall be a condition precedent to any action at law or suit in equity that can be brought. The parties shall if possible agree upon a single arbitrator. In case of failure to agree upon an arbitrator within 15 days after the delivery by either party to the other of a written notice requesting arbitration, either party may request the American Arbitration Association to appoint the arbitrator. The arbitrator, after opportunity for each of the parties to be heard, shall consider and decide the dispute and notify the parties in writing of his decision. The expenses of the arbitration shall be borne equally by the parties. 14. Regulation This contract, and all rights, obligations and performance of the parties hereunder, are subject to all applicable state and federal law and to all duly promulgated orders and other duly authorized action of governmental authority having jurisdiction in the premises. 15. Assignment This contract shall be binding upon and shall inure to the benefit of, and may be performed by, the successors and assigns of the parties, except that no assignment, pledge or other transfer of this contract by either party shall operate to release the assignor, pledgor or transferor from any of its obligations under this contract unless consent to the release is given in writing by the other party, or, if the other party has theretofore assigned, pledged or otherwise transferred its interest in this contract, by the other party's assignee, pledgee or transferee, or unless such transfer is incident to a merger or consolidation with, or transfer of all or substantially all of the assets of the transferor to, another sponsor which shall, as a part of such succession, assume all the obligations of the transferor under this contract. 16. Right of Setoff The Purchaser shall not be entitled to set off against the payments required to be made by it under this contract (i) any amounts owed to it by Maine Yankee or (ii) the amount of any claim by it against Maine Yankee. However, the foregoing shall not affect in any other way the Purchaser's right and remedies with respect to any such amounts owed to it by Maine Yankee or any such claim by it against Maine Yankee. 17. Interpretation The interpretation and performance of this contract shall be in accordance with and controlled by the law of the State of Maine. 18. Addresses Except as the parties may otherwise agree, any notice, request, bill or other communication from one party to the other, relating to this contract, or the rights, obligations or performance of the parties hereunder, shall be in writing and shall be effective upon delivery to the other party. Any such communication shall be considered as duly delivered when delivered in person or upon the lapse of 48 hours from mailing by registered or certified mail, postage prepaid, to the post office address of the other party shown following the signature of such other party hereto, or such other address as may be designated by written notice given as provided in this Section 18. 19. Corporate Obligations This contract is the corporate act and obligation of the parties hereto, and any claim hereunder against any stockholder (other than the Purchaser), director or officer of either party, as such, is expressly waived. 20. All Prior Agreements Superseded This contract represents the entire agreement between us relating to the subject matter hereof, and all previous agreements, discussions, communications and correspondence with respect to the subject matter are hereby superseded and are of no further force and effect. IN WITNESS WHEREOF, the parties have executed this contract by their respective officers thereunto duly authorized as of the date first above written. MAINE YANKEE ATOMIC POWER COMPANY By William H. Dunham President 9 Green Street Augusta, Maine 04330 [Purchaser] By (Officer & Title) (Address) APPENDIX Separate Power Contracts were entered into, identical in form with the foregoing except as to the execution thereof and except that on page 1 the names of the respective Purchasers were inserted. The Power Contracts were executed by the respective parties thereto, as follows: MAINE YANKEE ATOMIC POWER COMPANY By W. H. Dunham, President 9 Green Street Augusta, Maine 04330 CENTRAL MAINE POWER COMPANY By S. Giddings Executive Vice President 9 Green Street Augusta, Maine NEW ENGLAND POWER COMPANY By Robert F. Krause President 441 Stuart Street Boston, Massachusetts THE CONNECTICUT LIGHT AND POWER COMPANY By Sherman R. Knapp Chairman P.O. Box 2010 Hartford, Connecticut 06101 BANGOR HYDRO-ELECTRIC COMPANY By R. N. Haskell President 33 State Street Bangor, Maine 04401 MAINE PUBLIC SERVICE COMPANY By C. H. Stetson Chairman 209 State Street Presque Isle, Maine 04769 PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE By W. C. Tallman President 1087 Elm Street Manchester, New Hampshire 03105 CAMBRIDGE ELECTRIC LIGHT COMPANY By John F. Rich President 130 Austin Street Cambridge, Massachusetts 02139 MONTAUP ELECTRIC COMPANY By Guido R. Perera President P.O. Box 2333 Boston, Massachusetts 02107 THE HARTFORD ELECTRIC LIGHT COMPANY By C. L. Derrick Chairman P.O. Box 2370 Hartford, Connecticut 06101 WESTERN MASSACHUSETTS ELECTRIC COMPANY By Robert E. Barrett, Jr. President 174 Brush Hill Avenue West Springfield, Massachusetts 01089 CENTRAL VERMONT PUBLIC SERVICE CORPORATION By L. Douglas Meredith President 77 Grove Street Rutland, Vermont 05701 EX-10.3 9 CAPITAL FUNDS AGMT - MYAPC Exhibit 10.8 [Composite Conformed Copy] CAPITAL FUNDS AGREEMENT, dated as of May 20, 1968, between MAINE YANKEE ATOMIC POWER COMPANY ("Maine Yankee"), a Maine corporation, and (The names of the Sponsors appear in the attached Appendix) (the "Sponsor"). It is agreed as follows: 1. Basic Understandings Maine Yankee has been organized to provide for the supply of power to its eleven sponsoring utility companies (including the Sponsor). Late in 1966 and early in 1967, it entered into contracts for the manufacture of the major components and the services of an architect-engineer for the construction of a nuclear electric generating unit of the pressurized water type, designed to have a capability of approximately 800 megawatts electric, at a site on tidewater in the Town of Wiscasset, Maine (such unit being herein, together with the site and all related facilities to be owned by Maine Yankee, referred to as the "Unit"). Construction of the Unit is now being carried out under contracts with Combustion Engineering, Inc. and Westinghouse Electric Corporation for certain major systems of equipment and Stone and Webster Engineering Corporation as Architect-Engineer. Each of the eleven sponsoring utilities (the "sponsors") has contemporaneously agreed to purchase a stated percentage of the capacity and output of the Unit and a like percentage of Maine Yankee's stock (its "stock percentage"). The names of the sponsors and their respective stock percentages are as follows: Stock Sponsors Percentage Central Maine Power Company 38.0% New England Power Company 20.0% The Connecticut Light and Power Company 8.0% Bangor Hydro-Electric Company 7.0% Maine Public Service Company 5.0% Public Service Company of New Hampshire 5.0% Cambridge Electric Light Company 4.0% Montaup Electric Company 4.0% The Hartford Electric Light Company 4.0% Western Massachusetts Electric Company 3.0% Central Vermont Public Service Corporation 2.0% Maine Yankee and each of its other sponsors are contemporaneously entering into capital funds agreements which are identical to this agreement except for the necessary changes in the names of the parties. Maine Yankee's authorized and outstanding capital as of the date of this agreement is $10,000,000 consisting of 100,000 shares of common stock, $100 par value, which is owned by Maine Yankee's sponsors in their respective stock percentages. Maine Yankee's estimated capital requirements with respect to the Unit (exclusive of fuel) aggregate $145,000,000. It is the present intention of Maine Yankee to finance not less than 65% of the capital requirements of the Unit, whether incurred before or after the Unit is placed in commercial operation, through the issuance and sale of mortgage bonds or other securities and through borrowings from other than the sponsors, and the balance through the issuance and sale of additional common stock to its sponsors or the receipt from its sponsors of loans, advances or capital contributions or the issuance and sale of preferred stock to other than the sponsors. 2. Effective Date and Term This agreement shall become effective upon receipt by the Sponsor of notice that Maine Yankee has entered into capital funds agreements, as contemplated by Section 1 above, with each of the other sponsors. The term of this agreement shall expire December 31, 2003. 3. Construction of the Unit Maine Yankee will proceed with due diligence with the construction of the Unit, and will exercise its best efforts to complete and place it in commercial operation by May 1, 1972 within present cost estimates, and will keep the Sponsor informed as to the progress of construction, material modifications in cost estimates, and the date on which it is expected the Unit will be placed in commercial operation. 4. Stock Purchases and Capital Contributions to Provide the Capital Requirements of the Unit From time to time when Maine Yankee requires capital to meet the capital requirements of the Unit, it may offer shares of its common stock to its sponsors for subscription, or may request capital contributions from its sponsors, to raise such capital. Subject to the provisions of Section 7, (i) whenever Maine Yankee determines to offer any such shares for such purpose, Maine Yankee agrees to offer to the Sponsor, and the Sponsor agrees to subscribe for and purchase, for cash at the par value thereof, the Sponsor's stock percentage of the shares so offered, and (ii) whenever Maine Yankee requests capital contributions for such purpose, the Sponsor will contribute in cash its stock percentage of the total capital contribution so requested. 5. Capital Requirements of the Unit Defined Maine Yankee shall be deemed to have capital requirements of the Unit within the meaning of Section 4 if it requires capital (including funds to reimburse Maine Yankee for expenditures made for any of the following purposes out of the proceeds of short-term borrowings) for any of the following purposes: (i) to complete construction of the Unit and place it in commercial operation at a gross capability of at least 800 megawatts electric; (ii) to make additions and replacements (other than those chargeable to maintenance) to the Unit which are required to insure the continued regular operation of the Unit at a gross capability of at least 800 megawatts electric or to restore it to regular operation at such gross capability; (iii) to make any change in or addition to the Unit which must be made in order to obtain or maintain, or to meet the conditions of any license or other public authorization, regulation or order which is required for or applicable to the regular operation of the Unit at a gross capability of at least 800 megawatts electric; (iv) to provide materials and supplies, or funds for prepaid items or cash working capital, required for the regular operation of the Unit at a gross capability of at least 800 megawatts electric; (v) to finance the costs of obtaining and maintaining an inventory of nuclear fuel of a type and amount required for the operation of the Unit. If Maine Yankee shall at any time or times determine that it would be more feasible, economic or otherwise desirable for regular operation for the generation of power and energy for delivery under its Power Contracts with its sponsors for the Unit to operate at a lower gross capability than 800 megawatts and if it holds or can obtain all licenses and other public authorizations required for the regular operation of the Unit at such lower level, then the "capital requirements of the Unit" shall include any additional capital required for any of the foregoing purposes for operation of the Unit at any such lower level of capability. 6. Loans and Advances In lieu of offering shares of its common stock for subscription and purchase or requesting capital contributions under Section 4, Maine Yankee may, at its option, request its sponsors to provide required capital by means of loans or advances. In any case where Maine Yankee determines to request such loans or advances in lieu of stock purchases, Maine Yankee agrees to offer to the Sponsor, and the Sponsor, subject to the provisions of Section 7, agrees to provide to Maine Yankee the Sponsor's stock percentage thereof. However, Maine Yankee shall not be entitled to request such loans or advances except in circumstances where it would be entitled to require the Sponsor to make a stock subscription or capital contribution pursuant to Section 4. The terms of any loans and advances requested by Maine Yankee under the preceding paragraph, as to interest, maturity date, rights and terms of prepayment, and otherwise shall be the same for all sponsors. Such terms shall be as determined by Maine Yankee in its discretion, except that the terms of each such loan or advance shall provide for quarterly payments of interest at an annual rate not less than 11/2% in excess of the lowest prime rate for commercial loans at the time in effect at any bank in Boston, Massachusetts. Nothing in this agreement shall be construed as prohibiting Maine Yankee from requesting and receiving non-interest bearing open account advances from its sponsors in the nature of interim investment advances to be applied toward the purchase of stock or capital contributions. 7. Conditions to the Sponsor's Obligations The Sponsor shall not be obligated to subscribe for and purchase its stock percentage of any stock issue under Section 4 or to provide its stock percentage of any capital contribution under Section 4 or of any loan or advance under Section 6, unless all necessary regulatory approvals shall have been obtained with respect to both the action to be taken by Maine Yankee and the action to be taken by the Sponsor in connection with such stock issue, capital contribution, loan or advance. The parties will use their best efforts to obtain, or to assist in obtaining, the foregoing regulatory approvals. Except as expressly provided in this Section 7, no action of, nor failure to act by, Maine Yankee or any of the several sponsors shall permit cancellation of, or relieve the Sponsor from any of its obligations under, this agreement. The failure of any other sponsor to purchase its stock percentage of any stock issue or to make its stock percentage of any capital contribution, loan or advance requested by Maine Yankee shall not excuse the Sponsor from making stock purchases, capital contributions, loans or advances which do not in the aggregate exceed the Sponsor's stock percentage of the total stock purchases, capital contributions, loans and advances requested under Sections 4 or 6 from all sponsors. However, no sponsor shall be required to make any stock purchase, capital contribution, loan or advance which is for the purpose of providing funds required by reason of the failure of another sponsor to purchase its stock percentage of any stock issue or to make its stock percentage of any capital contribution, loan or advance requested by Main Yankee. 8. Other Financing Nothing in this agreement shall be construed as precluding Maine Yankee from offering shares of its common stock to, or requesting capital contributions and loans and advances from, its sponsors to finance capital requirements other than those contemplated by Section 5, or from financing, in its discretion, its capital requirements (including the capital requirements contemplated by Section 5), by means other than the sale of its common stock to the sponsors or capital contributions or loans or advances from them, but not by the sale of its common stock other than to its sponsors. 9. Cooperation by Sponsor The Sponsor agrees that it will cooperate with Maine Yankee in taking all such action as may be necessary or appropriate to effectuate the purposes of this agreement. 10. Restrictions on Transfer The Sponsor acknowledges notice of the restrictions on stock transfers contained in Section 8.1 of Maine Yankee's by-laws and agrees to be bound by said provisions with respect to all shares of Maine Yankee's common stock which it may acquire. 11. Arbitration In case any dispute shall arise as to the interpretation or performance of this contract which cannot be settled by mutual agreement and which may be finally determined by arbitration under the law of the State of Maine then in effect, such dispute shall be submitted to arbitration, and arbitration of such dispute shall be a condition precedent to any action at law or suit in equity that can be brought. The parties shall if possible agree upon a single arbitrator. In case of failure to agree upon an arbitrator within 15 days after the delivery by either party to the other of a written notice requesting arbitration, either party may request the American Arbitration Association to appoint the arbitrator. The arbitrator, after opportunity for each of the parties to be heard, shall consider and decide the dispute and notify the parties in writing of his decision. The expenses of the arbitration shall be borne equally by the parties. 12. Interpretation The interpretation and performance of this agreement shall be in accordance with and controlled by the law of the State of Maine. 13. Addresses Except as the parties may otherwise agree, any notice, request or other communication from one party to the other, relating to this agreement or the rights, obligations or performance of the parties hereunder, shall be in writing and shall be effective upon delivery to the other party. Any such communication shall be considered as duly delivered when delivered in person or upon the lapse of 48 hours after mailing by registered or certified mail, postage prepaid, to the address of the other party shown following the signature of such other party hereto, or such other address as may be designated by written notice given as provided in this Section 13. 14. Assignment This agreement shall be binding upon and shall inure to the benefit of, and may be performed by, the successors and assigns of the parties, except that no assignment, pledge or other transfer of this agreement by either party shall operate to release the assignor, pledgor or transferor from any of its obligations under this agreement unless consent to the release is given in writing by the other party (if not theretofore released pursuant to this Section) and, if the other party has theretofore assigned, pledged or otherwise transferred its interest in this agreement, by the other party's assignee, pledgee or transferee, or unless such transfer is incident to a merger or consolidation with, or transfer of all or substantially all of the assets of the transferor to, another sponsor which shall, as a part of such succession, assume all the obligations of the transferor under this agreement. 15. Corporate Obligations This agreement is the corporate act and obligation of the parties hereto, and any claim hereunder against any stockholder (other than the Sponsor), director or officer of either party, as such, is expressly waived. 16. All Prior Agreements Superseded This agreement represents the entire agreement between Maine Yankee and the Sponsor relating to the subject matter hereof, and all previous agreements, discussions, communications and correspondence with respect to the subject matter are hereby superseded and are of no further force and effect. IN WITNESS WHEREOF, the parties have executed this agreement by their respective officers thereunto duly authorized as of the date first above written. MAINE YANKEE ATOMIC POWER COMPANY By W. H. Dunham President 9 Green Street Augusta, Maine 04330 [Sponsor] By (Officer) Its (Title) (Address) APPENDIX Separate Capital Funds Agreements were entered into, identical in form with the foregoing except as to the execution thereof and except that on page 1 the names of the respective Sponsors were inserted. The Capital Funds Agreements were executed by the respective parties thereto, as follows: MAINE YANKEE ATOMIC POWER COMPANY By W. H. Dunham, President 9 Green Street Augusta, Maine 04330 CENTRAL MAINE POWER COMPANY By S. Giddings Executive Vice President 9 Green Street Augusta, Maine NEW ENGLAND POWER COMPANY By Robert F. Krause President 441 Stuart Street Boston, Massachusetts THE CONNECTICUT LIGHT AND POWER COMPANY By Sherman R. Knapp Chairman P.O. Box 2010 Hartford, Connecticut 06101 BANGOR HYDRO-ELECTRIC COMPANY By R. N. Haskell President 33 State Street Bangor, Maine 04401 MAINE PUBLIC SERVICE COMPANY By C. Hazen Stetson Chairman 209 State Street Presque Isle, Maine 04769 PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE By W. C. Tallman President 1087 Elm Street Manchester, New Hampshire 03105 CAMBRIDGE ELECTRIC LIGHT COMPANY By John F. Rich President 130 Austin Street Cambridge, Massachusetts 02139 MONTAUP ELECTRIC COMPANY By Guido R. Perera President P.O. Box 2333 Boston, Massachusetts 02107 THE HARTFORD ELECTRIC LIGHT COMPANY By C. L. Derrick Chairman P.O. Box 2370 Hartford, Connecticut 06101 WESTERN MASSACHUSETTS ELECTRIC COMPANY By Robert E. Barrett, Jr. President 174 Brush Hill Avenue West Springfield, Massachusetts 01089 CENTRAL VERMONT PUBLIC SERVICE CORPORATION By L. Douglas Meredith President 77 Grove Street Rutland, Vermont 05701 EX-10.4 10 SPONSOR AGMT - VYNPC Exhibit 10.9 SPONSOR AGREEMENT, dated as of August 1, 1968, among the sponsors of VERMONT YANKEE NUCLEAR POWER CORPORATION ("Vermont Yankee"), a Vermont corporation, namely: Central Vermont Public Service Corporation, Green Mountain Power Corporation, New England Power Company, The Connecticut Light and Power Company, Central Maine Power Company, Public Service Company of New Hampshire, The Hartford Electric Light Company, Montaup Electric Company, Western Massachusetts Electric Company and Cambridge Electric Light Company (collectively called the "Sponsors"). It is agreed as follows: 1. Relationship Among the Parties Vermont Yankee has been organized to provide a supply of power to the Sponsors by the construction of a nuclear electric generating unit of the boiling water type, which is being designed to have a maximum net capability of approximately 540 megawatts electric, at a site adjacent to the Connecticut River at Vernon, Vermont (the unit being herein, together with the site and all related facilities to be owned by Vermont Yankee, referred to as the "Unit"). Construction of the Unit is being carried out under contracts with General Electric Company and Ebasco Services Incorporated. By separate power contracts (the "Power Contract") and capital funds agreements (the "Capital Funds Agreement"), all dated as of February 1, 1968, Vermont Yankee has agreed to sell the entire output of the Unit to the Sponsors and the Sponsors have agreed to purchase the output and to provide Vermont Yankee with necessary capital funds. The respective percentages of the capacity and output of the Unit to be purchased by the Sponsors will be the same as their respective percentages of stock ownership (exclusive of directors' qualifying shares) and as of the date of this Agreement are as follows: Stock Sponsors Percentage Central Vermont Public Service Corporation 35.0% Green Mountain Power Corporation 20.0% New England Power Company 20.0% The Connecticut Light and Power Company 6.0% Central Maine Power Company 4.0% Public Service Company of New Hampshire 4.0% The Hartford Electric Light Company 3.5% Western Massachusetts Electric Company 2.5% Montaup Electric Company 2.5% Cambridge Electric Light Company 2.5% 2. Unanimous Consent to Certain Matters The Sponsors will not cause or permit Vermont Yankee to take any of the following actions unless all of the Sponsors consent thereto, by vote or otherwise: (a) the amendment in any material respect of any of the Power Contracts or Capital Funds Agreements; (b) participation by Vermont Yankee, to a material extent, in any business other than the generation and sale of electric power; and (c) the construction by Vermont Yankee of an additional generating unit or units at the Vernon site or elsewhere. However, the amendment of particular Power Contracts and Capital Funds Agreements to effect changes in entitlement and stock percentages of the Sponsors shall not constitute such a material amendment, if, after the amendment, the sum of the entitlement percentages of all Sponsors under all Power Contracts then in force, and the sum of the stock percentages of all Sponsors under all Capital Funds Agreements then in force, continues to be 100%. 3. Power Entitlement Upon Failure to Provide Additional Capital If, as the result of any Sponsor's failure to provide capital to Vermont Yankee as requested by Vermont Yankee pursuant to Sections 4 or 6 of such Sponsor's Capital Funds Agreement, such Sponsor's entitlement percentage under its Power Contract is in excess of its "capital percentage" (as hereinafter defined), then, in such event and so long as such condition continues, such Sponsor shall, if requested to do so by Sponsors whose respective entitlement percentages are less than their respective capital percentages, enter into appropriate arrangements to sell to such Sponsors at its cost some or all, as such Sponsors may from time to time determine, of its "excess power" (as hereinafter defined). For the purposes of this Section, (i) a Sponsor's "capital percentage" as of any time shall be the percentage which the aggregate amount (whether paid with respect to the Common Stock or by loans or advances) paid to Vermont Yankee by the Sponsor under its Capital Funds Agreement bears to the aggregate amount paid to Vermont Yankee by all of the Sponsors under the Capital Funds Agreements, and (ii) a Sponsor's "excess power" as of any time shall be that amount of Vermont Yankee's capacity and net electric output determined by subtracting such Sponsor's then capital percentage of such capacity and output from such Sponsor's entitlement percentage of such capacity and output. 4. Cancellation of Power Contracts and Capital Funds Agreements If at any time: (a) Sponsors owning more than 50% of Vermont Yankee's outstanding Common Stock have canceled their Power Contracts, pursuant to Section 9 thereof, because either (i) the Unit is damaged to the extent of being completely or substantially completely destroyed, or (ii) the Unit is taken by exercise of the right of eminent domain or a similar right or power, or (iii) the Unit cannot be used because of contamination, or because a necessary license or other necessary public authorization cannot be obtained or is revoked, or because the utilization of such a license or authorization is made subject to specified conditions which are not met, and the situation cannot be rectified to an extent which will permit Vermont Yankee to make deliveries to the Sponsors from the Unit, and (b) Vermont Yankee has paid in full, or made adequate provision for the payment in full of, all its outstanding bonds and notes and other indebtedness and liabilities, other than its indebtedness to Sponsors for loans and advances made pursuant to Section 6 of the Capital Funds Agreements, then, and in such case, upon the request of any Sponsor who has theretofore canceled its Power Contract, the Sponsors whose Power Contracts are still in effect will forthwith cancel their respective Power Contracts pursuant to Section 9 thereof. After the events described in (a) and (b) above have occurred, it is agreed that the Capital Funds Agreement between Vermont Yankee and each Sponsor shall terminate concurrently with the cancellation of the Power Contract between said parties and the Sponsors agree to cause Vermont Yankee to take all action necessary to accomplish such termination. 5. Arbitration In case any dispute shall arise as to the interpretation or performance of this Agreement which cannot be settled by mutual agreement, such dispute shall be submitted to arbitration. The disputing parties shall if possible agree upon a single arbitrator. In case of failure to agree upon an arbitrator within 15 days after the delivery by either disputing party to the other of a written notice requesting arbitration, either disputing party may request the American Arbitration Association to appoint the arbitrator. The arbitrator, after opportunity for each of the disputing parties to be heard, shall consider and decide the dispute and notify the disputing parties in writing of his decision. Such decision shall be binding upon the disputing parties, and the expenses of the arbitration shall be borne equally by them. 6. Interpretation The interpretation and performance of this Agreement shall be in accordance with and controlled by the laws of the State of Vermont. 7. Addresses Except as the parties may otherwise agree, any notice, request or other communication from a party to any other party, relating to this Agreement, or the rights, obligations or performance of the parties hereunder, shall be in writing and shall be effective upon delivery to the other party. Any such communication shall be considered as duly delivered upon the lapse of 48 hours after mailing by registered or certified mail, postage prepaid, to the respective post office address of the other party shown following the signature of such other party hereto, or such other post office address as may be designated by written notice given as provided in this Section 7. 8. Successors and Assigns This Agreement shall be binding upon and shall inure to the benefit of, and may be performed by, the corporate successors of the parties. No assignment of this Agreement, other than to a corporate successor to all or substantially all the electric business and property of a party, shall operate to relieve the assignor of its obligations under this Agreement without the written consent of the remaining parties hereto. 9. Execution in Counterparts This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one and the same instrument. This Agreement shall become effective at such time as counterparts thereof have been executed by each of the parties and it shall not be a condition to its effectiveness that each of the parties have executed the same counterpart. IN WITNESS WHEREOF, the undersigned parties have executed this Sponsor Agreement by their respective officers thereunto duly authorized as of the date first above written. CENTRAL VERMONT PUBLIC SERVICE CORPORATION 77 Grove Street Rutland, Vermont By L. Douglas Meredith President GREEN MOUNTAIN POWER CORPORATION 1 Main Street Burlington, Vermont By Glen M. McKibben President NEW ENGLAND POWER COMPANY 441 Stuart Street Boston, Massachusetts 02116 By Robert F. Krause President THE CONNECTICUT LIGHT AND POWER COMPANY P.O. Box 2010 Hartford, Connecticut 06101 By Sherman R. Knapp Chairman CENTRAL MAINE POWER COMPANY 9 Green Street Augusta, Maine 04330 By W. H. Dunham President PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE 1037 Elm Street Manchester, New Hampshire By W. C. Tallman President THE HARTFORD ELECTRIC LIGHT COMPANY P.O. Box 2370 Hartford, Connecticut 06101 By Joseph R. McCormick President WESTERN MASSACHUSETTS ELECTRIC COMPANY 174 Brush Hill Avenue West Springfield, Massachusetts 01089 By Robert E. Barrett, Jr. President MONTAUP ELECTRIC COMPANY P.O. Box 2333 Boston, Massachusetts 02107 By R. F. Dinnie Vice President CAMBRIDGE ELECTRIC LIGHT COMPANY 130 Austin Street Cambridge, Massachusetts 02133 By John F. Rich President EX-10.5 11 FORM OF POWER CONTRACT - VYNPC Exhibit 10.10 POWER CONTRACT, dated as of February 1, 1968, between VERMONT YANKEE NUCLEAR ATOMIC POWER CORPORATION ("Vermont Yankee"), a Vermont corporation, and (the "Purchaser"). It is agreed as follows: 1. Basic Understandings Vermont Yankee has been organized to provide for the supply of power to its ten sponsoring utility companies (including the Purchaser), which utilities are hereinafter called the "sponsors." In the spring of 1967, it commenced the construction of a nuclear electric generating unit of the boiling water type, which is being designed to have a maximum net capability of approximately 540 megawatts electric, at a site adjacent to the Connecticut River at Vernon, Vermont (the unit being herein, together with the site and all related facilities to be owned by Vermont Yankee, referred to as the "Unit"). Construction of the Unit is being carried out under contracts with General Electric Company and Ebasco Services Incorporated. It is presently estimated that construction costs and working capital will aggregate approximately $115,000,000, exclusive of fuel. The Unit is to be operated to supply power to Vermont Yankee's sponsors, each of which is undertaking to purchase a fixed percentage of the capacity and output of the Unit. The names of the sponsors and their respective percentages ("entitlement percentages") of the capacity and output of the Unit are as follows: Entitlement Sponsor Percentage Central Vermont Public Service Corporation 35.0% Green Mountain Power Corporation 20.0% New England Power Company 20.0% The Connecticut Light and Power Company 6.0% Central Maine Power Company 4.0% Public Service Company of New Hampshire 4.0% The Hartford Electric Light Company 3.5% Western Massachusetts Electric Company 2.5% Montaup Electric Company 2.5% Cambridge Electric Light Company 2.5% Vermont Yankee and its other sponsors are entering into power contracts which are identical to this contract except for necessary changes in the names of the parties. 2. Effective Date and Term This contract shall become effective upon receipt by the Purchaser of notice that Vermont Yankee has entered into power contracts, as contemplated by Section 1 above, with each of its other sponsors. The term of this contract shall expire 30 years after the plant completion date. The "plant completion date" shall be the earlier of (i) December 31, 1972, or (ii) the date on which the Unit is placed in commercial operation, as determined by Vermont Yankee (the "commercial operation date"). 3. Construction of the Unit Vermont Yankee will proceed with due diligence with construction of the Unit, and will exercise its best efforts to complete and place it in commercial operation by July 1, 1971, on the presently estimated schedule therefor and within present cost estimates, and will keep the Purchaser reasonably informed as to the progress of construction, material modifications in cost estimates, and expected plant completion date. 4. Operation and Maintenance of the Unit Vermont Yankee will operate and maintain the Unit in accordance with good utility practice under the circumstances and all applicable law, including the applicable provisions of the Atomic Energy Act of 1954, as amended, and of any licenses issued thereunder to Vermont Yankee. Within the limits imposed by good utility practice under the circumstances and applicable law, the Unit will be operated at its maximum capability and on a longhour use basis. Outages for inspection, maintenance, refueling and repairs and replacements will be scheduled in accordance with good utility practice and insofar as practicable shall be mutually agreed upon by Vermont Yankee and the Purchaser. In the event of an outage, Vermont Yankee will use its best efforts to restore the Unit to service as promptly as practicable. 5. Purchaser's Entitlement The Purchaser will, throughout the term of this contract, be entitled and obligated to take its entitlement percentage of the capacity and net electrical output of the Unit, at whatever level the Unit is operated or operable, whether more or less than 540 megawatts electric. 6. Deliveries and Metering The Purchaser's entitlement percentage of the output of the Unit will be delivered to and accepted by it at the step-up substation at the site. All deliveries will be made in the form of 3-phase, 60 cycle, alternating current at a nominal voltage of 345,000 volts. The Purchaser will make its own arrangements for the transmission of its entitlement percentage of the output of the Unit. Vermont Yankee will supply and maintain all necessary metering equipment for determining the quantity and conditions of supply of deliveries under this contract, will make appropriate tests of such equipment in accordance with good utility practice and as reasonably requested by the Purchaser, and will maintain the accuracy of such equipment within reasonable limits. Vermont Yankee will furnish the Purchaser with such summaries of meter readings as the Purchaser may reasonably request. 7. Payment With respect to each month commencing prior to the plant completion date, the Purchaser will pay Vermont Yankee at the rate of 4 mills per kilowatt-hour, for the Purchaser's entitlement percentage of the net electrical output (if any) of the Unit during the particular month. With respect to each month commencing on or after the plant completion date, the Purchaser will pay Vermont Yankee an amount equal to the Purchaser's entitlement percentage of the sum of (a) Vermont Yankee's total fuel costs for the month with respect to the Unit, plus (b) Vermont Yankee's total operating expenses for the month with respect to the Unit, plus (c) an amount equal to one-twelfth of the composite percentage for such month of the net Unit investment as most recently determined in accordance with this Section 7. "Composite percentage" shall be computed as of the plant completion date and as of the last day of each month thereafter (the "computation date") and for any month the composite percentage shall be that computed as of the most recent computation date. "Composite percentage" as of a computation date shall be the sum of (i) eight and one-half percent (81/2%) multiplied by the percentage which equity investment as of such date is of the total capital as of such date; plus (ii) the stated interest rate per annum of each principal amount of indebtedness bearing a particular rate of interest outstanding on such date for money borrowed from other than sponsors multiplied by the percentage which such principal amount is of total capital as of such date. "Equity investment" as of any date shall consist of not less than the sum of (i) all amounts theretofore paid to Vermont Yankee for all capital stock theretofore issued (taken at the total par value thereof plus the total of all amounts in excess of such par value paid thereon); plus all capital contributions, loans and advances theretofore made to Vermont Yankee by its sponsors, less the sum of any amounts distributed by Vermont Yankee to its sponsors or stockholders in the form of stock repurchases or redemptions, return of capital or repayments of loans and advances; plus (ii) any credit balance in the capital surplus account (not included under (i)) and in earned surplus account on the books of Vermont Yankee as of such date. "Total capital" as of any date shall be the equity investment plus the total of all indebtedness then outstanding for money borrowed from other than Vermont Yankee's sponsors. "Uniform System" shall mean the Uniform System of Accounts prescribed by the Federal Power Commission for Class A and Class B Public Utilities and Licensees as in effect on the date of this contract and as said System may be hereafter amended to take account of private ownership of special nuclear material. Vermont Yankee's "fuel costs" for any month shall include (i) amounts chargeable in accordance with the Uniform System in such month as amortization of costs of fuel assemblies and components and burn-up of nuclear materials for the Unit; plus (ii) all other amounts properly chargeable in accordance with the Uniform System to fuel costs for the Unit less any applicable credits thereto; plus (iii) to the extent not so chargeable, all payments (or accruals therefor) with respect to lease obligations incurred in connection with such fuel assemblies and components, including nuclear materials, for the Unit. Vermont Yankee's "operating expenses" shall include all amounts properly chargeable to operating expense accounts (other than such amounts which are included in Vermont Yankee's fuel costs), less any applicable credits thereto, in accordance with the Uniform System; provided, however, that for purposes of this contract, the accrual of depreciation as an operating expense shall commence on the plant completion date at the rate of 3.846% per annum, whether or not the Unit is then in operation, and during each of the first 26 years after the plant completion date, the amount included in operating expenses on account of depreciation accruals (and amortization, if any, of property losses) shall in no event be less than 3.846% of the excess of: (a) the amount properly chargeable at the plant completion date in accordance with the Uniform System to electric plant accounts (including construction work in progress) with respect to the depreciable portion of the Unit (or, if the plant completion date is prior to the commercial operation date and the amount so chargeable with respect to the depreciable portion of the Unit on the commercial operation date is greater than it was on the plant completion date, then such greater amount), over (b) the amount of net available cash. The "net Unit investment" shall consist, in each case with respect to the Unit, of (i) the aggregate amount properly chargeable at the time in accordance with the Uniform System to Vermont Yankee's electric plant accounts (including construction work in progress); less the sum of (x) the aggregate minimum amount required by this Section 7 to be included in operating expenses from the plant completion date to the date in question on account of depreciation accruals (and amortization, if any, of property losses) reduced by the aggregate of all amounts charged during such period against the accumulated provision for depreciation plus (y) the amount of net available cash; plus (ii) the aggregate amount properly chargeable at the time in accordance with the Uniform System to accounts representing fuel assemblies and components (including nuclear materials) and other materials and supplies, less the balance, if any, at the time of the accumulated amortization thereof; plus (iii) such reasonable allowances for prepaid items and cash working capital as may from time to time be determined by Vermont Yankee. However, for purposes of this contract, the net amount included at any date after the plant completion date in net Unit investment under clause (i) of the immediately preceding sentence shall in no event be less than the excess of: (a) the amount properly chargeable at the plant completion date in accordance with the Uniform System to electric plant accounts (including construction work in progress) with respect to the Unit (or, if the plant completion date is prior to the commercial operation date and the amount so chargeable with respect to the Unit on the commercial operation date is greater than it was on the plant completion date, then such greater amount), over (b) the sum of (x) the aggregate minimum amount required by this Section 7 to be included in operating expenses from the plant completion date to the date in question on account of depreciation accruals (and amortization, if any, of property losses) plus (y) the amount of net available cash. The net Unit investment shall be determined as of the plant completion date and thereafter as of the commencement of each calendar year, or if Vermont Yankee elects, at more frequent intervals. "Net available cash" means, at any date as of which the amount thereof is to be determined, the excess of (a) the aggregate amount received by Vermont Yankee after the plant completion date and prior to two years before the determination date as insurance proceeds on account of loss or damage to the Unit or as the proceeds of a sale or condemnation of a portion of the Unit, over (b) the aggregate amount expended after the plant completion date and prior to the determination date on account of rebuilding, repairs, replacements and additions to the Unit, provided that insurance proceeds received with respect to a particular loss shall be taken into account for purposes of the foregoing computation only if the amount received with respect to the loss exceeds $150,000. Vermont Yankee will bill the Purchaser, as soon as practicable after the end of each month, for all amounts payable by the Purchaser with respect to the particular month. Such bills will be rendered in such detail as the Purchaser may reasonably request and may be rendered on an estimated basis subject to corrective adjustments in subsequent billing periods. All bills shall be paid in full within 10 days after receipt thereof by the Purchaser. 8. Make-up Term and Option Term (a) The Purchaser may elect to extend the contract term by written notice to Vermont Yankee upon the following conditions and for the following period or periods: (i) In the event that the Unit is not in commercial operation on the plant completion date, the contract term may be extended for a period equal to the number of consecutive days by which commercial operation is delayed beyond the plant completion date; and (ii) if at any time after the commencement of commercial operation no deliveries are made under this contract for a period of at least 120 consecutive days, the contract may be extended for a period equal to the aggregate of such periods during which no deliveries were made. If the term of the contract is extended pursuant to the provisions of this subsection (a), all of the contract provisions shall remain in effect for the extended term. (b) Upon expiration of the initial term of this contract or upon expiration of the term as extended in accordance with subsection (a) of this Section 8, the Purchaser shall continue to be entitled, at its option, to its entitlement percentage of the capacity and output of the Unit upon terms at least as favorable as those obtained by any other person. 9. Cancellation of Contract If deliveries cannot be made to the Purchaser because either (i) the Unit is damaged to the extent of being completely or substantially completely destroyed, or (ii) the Unit is taken by exercise of the right of eminent domain or a similar right or power, or (iii) (a) the Unit cannot be used because of contamination, or because a necessary license or other necessary public authorization cannot be obtained or is revoked, or because the utilization of such a license or authorization is made subject to specified conditions which are not met, and (b) the situation cannot be rectified to an extent which will permit Vermont Yankee to make deliveries to the Purchaser from the Unit; then and in any such case, the Purchaser may cancel this contract. Such cancellation shall be effected by written notice given by the Purchaser to Vermont Yankee. In the event of such cancellation, all continuing obligations of the parties, including the Purchaser's obligations to continue payments, shall cease forthwith. Any dispute as to the Purchaser's right to cancel this contract pursuant to the foregoing provisions shall be referred to arbitration in accordance with the provisions of Section 12. Notwithstanding anything in this contract elsewhere contained, the Purchaser may cancel this contract or be relieved of its obligations to make payments hereunder only as provided in the next preceding paragraph of this Section 9. Further, if for reasons beyond Vermont Yankee's reasonable control, deliveries are not made as contemplated by this contract, Vermont Yankee shall have no liability to the Purchaser on account of such nondelivery. 10. Insurance Prior to the first shipment of fuel to the plant site, Vermont Yankee will obtain, and thereafter will at all times maintain, insurance to cover its "public liability" for personal injury and property damage resulting from a "nuclear incident" (as those terms are defined in the Atomic Energy Act of 1954 as amended), with limits not less than Vermont Yankee may be required to maintain to qualify for governmental indemnity under said Act and shall execute and maintain an indemnification agreement with the Atomic Energy Commission as provided by said Act. Vermont Yankee will also at all times maintain such other types of liability insurance, including workmens' compensation insurance, in such amounts, as is customary in the case of other similar electric utility companies, or as may be required by law. Vermont Yankee will at all times keep insured such portions of the Unit (other than the fuel assemblies and components, including nuclear materials) as are of a character usually insured by electric utility companies similarly situated and operating like properties, against the risk of a "nuclear incident" and such other risks as electric utility companies, similarly situated and operating like properties, usually insure against; and such insurance shall to the extent available be carried in amounts sufficient to prevent Vermont Yankee from becoming a co-insurer. Vermont Yankee will at all times keep its fuel assemblies and components (including nuclear materials) insured against such risks and in such amounts as shall, in the opinion of Vermont Yankee, provide adequate protection. 11. Audit Vermont Yankee's books and records (including metering records) shall be open to reasonable inspection and audit by the Purchaser. 12. Arbitration In case any dispute shall arise as to the interpretation or performance of this contract which cannot be settled by mutual agreement, such dispute shall be submitted to arbitration. The parties shall if possible agree upon a single arbitrator. In case of failure to agree upon an arbitrator within 15 days after the delivery by either party to the other of a written notice requesting arbitration, either party may request the American Arbitration Association to appoint the arbitrator. The arbitrator, after opportunity for each of the parties to be heard, shall consider and decide the dispute and notify the parties in writing of his decision. Such decision shall be binding upon the parties, and the expenses of the arbitration shall be borne equally by them. 13. Regulation This contract, and all rights, obligations and performance of the parties hereunder, are subject to all applicable state and federal law and to all duly promulgated orders and other duly authorized action of governmental authority having jurisdiction in the premises. 14. Assignment This contract shall be binding upon and shall inure to the benefit of, and may be performed by, the successors and assigns of the parties, except that no assignment, pledge or other transfer of this contract by either party shall operate to release the assignor, pledgor or transferor from any of its obligations under this contract unless consent to the release is given in writing by the other party, or, if the other party has theretofore assigned, pledged or otherwise transferred its interest in this contract, by the other party's assignee, pledgee or transferee, or unless such transfer is incident to a merger or consolidation with, or transfer of all or substantially all of the assets of the transferor to, another sponsor which shall, as a part of such succession, assume all the obligations of the transferor under this contract. 15. Right of Setoff The Purchaser shall not be entitled to set off against the payments required to be made by it under this contract (i) any amounts owed to it by Vermont Yankee or (ii) the amount of any claim by it against Vermont Yankee. However, the foregoing shall not affect in any other way the Purchaser's right and remedies with respect to any such amounts owed to it by Vermont Yankee or any such claim by it against Vermont Yankee. 16. Interpretation The interpretation and performance of this contract shall be in accordance with and controlled by the law of the State of Vermont. 17. Addresses Except as the parties may otherwise agree, any notice, request, bill or other communication from one party to the other, relating to this contract, or the rights, obligations or performance of the parties hereunder, shall be in writing and shall be effective upon delivery to the other party. Any such communication shall be considered as duly delivered when delivered in person or mailed by registered or certified mail, postage prepaid, to the respective post office address of the other party shown following the signatures of such other party hereto, or such other address as may be designated by written notice given as provided in this Section 17. 18. Corporate Obligations This contract is the corporate act and obligation of the parties hereto, and any claim hereunder against any stockholder, director or officer of either party, as such, is expressly waived. 19. All Prior Agreements Superseded This contract represents the entire agreement between us relating to the subject matter hereof, and all previous agreements, discussions, communications and correspondence with respect to the subject matter are hereby superseded and are of no further force and effect. IN WITNESS WHEREOF, the parties have executed this contract by their respective officers thereunto duly authorized as of the date first above written. VERMONT YANKEE NUCLEAR POWER CORPORATION By President 77 Grove Street Rutland, Vermont 05701 PURCHASER By (Officer & Title) (Address) EX-10.6 12 CAPITAL FUNDS AGREEMENT - VYNPC Exhibit 10.11 CAPITAL FUNDS AGREEMENT, dated as of February 1, 1968, between VERMONT YANKEE NUCLEAR POWER CORPORATION ("Vermont Yankee"), a Vermont corporation, and (the "Sponsor"). It is agreed as follows: 1. Basic Understandings Vermont Yankee has been organized to provide for the supply of power to its ten sponsoring utility companies (including the Sponsor). In the spring of 1967, it commenced the construction of a nuclear electric generating unit of the boiling water type, which is being designed to have a maximum net capability of approximately 540 megawatts electric, at a site adjacent to the Connecticut River at Vernon, Vermont (the unit being herein, together with the site and all related facilities to be owned by Vermont Yankee, referred to as the "Unit"). Construction of the Unit is being carried out under contracts with General Electric Company and Ebasco Services Incorporated. Each of the ten sponsoring utilities (the "sponsors") has heretofore committed itself to purchase a stated percentage (its "stock percentage") of the capacity and output of the Unit and a like percentage of Vermont Yankee's stock exclusive of directors' qualifying shares. The names of the sponsors and their respective stock percentages are as follows: Stock Sponsors Percentage Central Vermont Public Service Corporation 35.0% Green Mountain Power Corporation 20.0% New England Power Company 20.0% The Connecticut Light and Power Company 6.0% Central Maine Power Company 4.0% Public Service Company of New Hampshire 4.0% The Hartford Electric Light Company 3.5% Western Massachusetts Electric Company 2.5% Montaup Electric Company 2.5% Cambridge Electric Light Company 2.5% Vermont Yankee and each of its other sponsors are entering into capital funds agreements which are identical to this agreement except for the necessary changes in the names of the parties. Vermont Yankee represents to Sponsor that all stockholders of Vermont Yankee other than the above-named sponsors - being 13 directors and (possibly) certain Vermont electric distribution utilities which may acquire stock from one or more of the sponsors - have waived or will waive any preemptive rights which they might possess with respect to future stock issues by Vermont Yankee. Vermont Yankee's authorized capital as of the date of this agreement is $20,010,000 consisting of 200,100 shares of common stock, $100 par value, of which 13 directors' qualifying shares have been purchased at the par value thereof by its directors. Vermont Yankee's sponsors have, subject to obtaining necessary regulatory approvals, entered into subscription agreements with it covering the purchase of their respective stock percentages of an aggregate issue of 200,000 shares of Vermont Yankee's common stock, $100 par value, at the par value thereof. Vermont Yankee's estimated capital requirements, exclusive of fuel, with respect to the Unit aggregate $115,000,000. It is the present intention of Vermont Yankee to finance not less than 65% of the capital requirements of the Unit, whether incurred before or after plant completion date, through the issuance and sale of first mortgage bonds or other securities and through borrowings from others than the sponsors, and the balance through the issuance and sale of additional common stock to its sponsors or the receipt from its sponsors of loans, advances or capital contributions. 2. Effective Date and Term This agreement shall become effective upon receipt by the Sponsor of notice that Vermont Yankee has entered into capital funds agreements, as contemplated by Section 1 above, with each of the other sponsors, and the execution of capital funds agreements by such other sponsors shall constitute consideration for the obligations of the Sponsor hereunder. The term of this agreement shall expire December 31, 2002. 3. Construction of the Unit Vermont Yankee will proceed with due diligence with construction of the Unit, and will exercise its best efforts to complete and place it in commercial operation by July 1, 1971, on the presently estimated schedule therefor and within present cost estimates, and will keep the Sponsor currently informed as to the progress of construction and expected plant completion date. 4. Stock Purchases and Capital Contributions to Provide the Capital Requirements of the Unit From time to time when Vermont Yankee requires capital to meet the capital requirements of the Unit, it may offer shares of its common stock to its sponsors for subscription, or may request capital contributions from its sponsors, to raise such capital. Subject to the condition in Section 7, (i) whenever Vermont Yankee determines to offer any such shares for such purpose, Vermont Yankee agrees to offer to the Sponsor, and the Sponsor agrees to subscribe for and purchase, for cash at the par value thereof the Sponsor's stock percentage of the shares so offered, and (ii) whenever Vermont Yankee requests capital contributions for such purpose after the issuance of common stock to the sponsors, the Sponsor will contribute in cash its stock percentage of the total capital contribution so requested. 5. Capital Requirements of the Unit Defined Vermont Yankee shall be deemed to have capital requirements of the Unit within the meaning of Section 4 if it requires capital for any of the following purposes: (i) to complete construction of the Unit and place it in commercial operation at a gross capability of at least 520 megawatts electric; (ii) to make additions and replacements (other than those chargeable to maintenance) to the Unit which are required to insure the continued regular operation of the Unit at a gross capability of at least 520 megawatts electric or to restore it to regular operation at such gross capability; (iii) to make any changes in or addition to the Unit which must be effected in order to obtain or maintain, or to meet the conditions of, any license or other public authorization, regulation or order which is required for or applicable to the regular operation of the Unit at a gross capability of at least 520 megawatts electric; (iv) to provide materials and supplies, or funds for prepaid items or cash working capital, required for the regular operation of the Unit at a gross capability of at least 520 megawatts electric, or to finance the cost of acquiring and maintaining an inventory of nuclear fuel owned by Vermont Yankee. If Vermont Yankee shall at any time or times determine that it would be more feasible, economic or otherwise desirable for regular operation for the generation of power and energy for delivery under its Power Contracts with its sponsors for the Unit to operate at a lower gross capability than 520 megawatts and if it holds or can obtain all licenses and other public authorizations required for the regular operation of the Unit at such lower level, then the "capital requirements of the Unit" shall include any additional capital required for any of the foregoing purposes for operation of the Unit at any such lower level of capability as from time to time determined. 6. Loans and Advances In lieu of offering additional shares of its common stock for subscription and purchase or requesting capital contributions under Section 4, Vermont Yankee may, at its option, request its sponsors to provide required capital by means of loans or advances. In any case where Vermont Yankee determines to request such loans or advances in lieu of stock purchases, Vermont Yankee agrees to offer to the Sponsor, and the Sponsor, subject to the condition in Section 7, agrees to provide to Vermont Yankee the Sponsor's stock percentage thereof. However, Vermont Yankee shall not be entitled to request such loans or advances except in circumstances where it would be entitled to require the Sponsor to make a stock subscription or capital contribution pursuant to Section 4. The terms of any loans and advances requested by Vermont Yankee under this Section 6, as to interest, maturity date, rights and terms of prepayment, and otherwise shall be the same for all sponsors. Such terms shall be as determined by Vermont Yankee in its discretion, except that the terms of each such loan or advance shall provide for quarterly payments of interest at an annual rate not less than 11/2% in excess of the lowest prime rate for commercial loans at the time in effect at any bank in New York, New York. Nothing in this agreement shall be construed as prohibiting Vermont Yankee from requesting and receiving non-interest bearing open account advances from its sponsors in the nature of interim investment advances to be applied toward the purchase of stock or capital contributions. 7. Conditions to the Sponsor's Obligations The obligation of the Sponsor to subscribe for and purchase its stock percentage of any stock issue under Section 4 and to provide its stock percentage of any capital contribution under Section 4 or of any loan or advance under Section 6 shall be subject to the condition that all necessary regulatory approvals shall have been obtained with respect to both the action to be taken by Vermont Yankee and the action to be taken by the Sponsor. The parties will use their best efforts to obtain, or to assist in obtaining, the foregoing regulatory approvals. Except as expressly provided in this Section 7, no action of, nor failure to act by, Vermont Yankee or any of the several sponsors referred to in Section 1 shall permit cancellation of, or relieve the Sponsor from any of its obligations under, this agreement. However, the failure of any other sponsor to purchase its stock percentage of any stock issue or to make its stock percentage of any capital contribution, loan or advance requested by Vermont Yankee shall not require the Sponsor to make stock purchases (including those under the subscriptions referred to in Section 1), capital contributions, loans or advances which in the aggregate exceed the Sponsor's stock percentage of the total capital requirements of the Unit. 8. Other Financing Nothing in this agreement shall be construed as precluding Vermont Yankee from offering shares of its common stock to, or requesting capital contributions and loans and advances from, its sponsors to finance capital requirements other than those contemplated by Section 5, or from financing, in its discretion, its capital requirements (including the capital requirements contemplated by Section 5) by means other than the sale of its common stock to the sponsors or capital contributions or loans or advances from them, but not by the sale of its common stock other than to sponsors. 9. Cooperation by Sponsor The Sponsor agrees that it will cooperate with Vermont Yankee in taking all such action as may be necessary or appropriate to effectuate the purposes of this agreement. 10. Restrictions on Transfer The Sponsor acknowledges notice of the restrictions on stock transfers contained in Section 8.1 of Vermont Yankee's by-laws, and agrees to be bound by said provisions with respect to all shares of Vermont Yankee's capital stock which it may acquire. 11. Arbitration In case any dispute shall arise as to the interpretation or performance of this contract which cannot be settled by mutual agreement, such dispute shall be submitted to arbitration. The parties shall if possible agree upon a single arbitrator. In case of failure to agree upon an arbitrator within 15 days after the delivery by either party to the other of a written notice requesting arbitration, either party may request the American Arbitration Association to appoint the arbitrator. The arbitrator, after opportunity for each of the parties to be heard, shall consider and decide the dispute and notify the parties in writing of his decision. Such decision shall be binding upon the parties, and the expenses of the arbitration shall be borne equally by them. 12. Interpretation The interpretation and performance of this agreement shall be in accordance with and controlled by the law of the State of Vermont. 13. Addresses Except as the parties may otherwise agree, any notice, request or other communication from one party to the other, relating to this agreement or the rights, obligations or performance of the parties hereunder, shall be in writing and shall be effective upon delivery to the other party. Any such communication shall be considered as duly delivered when delivered in person or mailed by registered or certified mail, postage prepaid, to the respective address of the other party shown following the signatures of such other party hereto, or such other address as may be designated by written notice given as provided in this Section 13. 14. Assignment This agreement shall be binding upon and shall inure to the benefit of, and may be performed by, the successors and assigns of the parties, except that no assignment, pledge or other transfer of this agreement by either party shall operate to release the assignor, pledgor or transferor from any of its obligations under this agreement unless consent to the release is given in writing by the other party (if not theretofore released pursuant to this Section) and, if the other party has theretofore assigned, pledged or otherwise transferred its interest in this agreement, by the other party's assignee, pledgee or transferee, or unless such transfer is incident to a merger or consolidation with, or transfer of all or substantially all of the assets of the transferor to, another sponsor which shall, as a part of such succession, assume all the obligations of the transferor under this agreement. 15. Corporate Obligations This agreement is the corporate act and obligation of the parties hereto, and any claim hereunder against any stockholder, director or officer of either party, as such, is expressly waived. 16. All Prior Agreements Superseded This agreement represents the entire agreement between Vermont Yankee and the Sponsor relating to the subject matter hereof, and all previous agreements, discussions, communications and correspondence with respect to the subject matter are hereby superseded and are of no further force and effect, except that the uncalled portion of the outstanding subscription agreements referred to in Section 1, between the Sponsor and Vermont Yankee with respect to the Sponsor's subscription for its stock percentage of 200,000 shares of Vermont Yankee's common stock, $100 par value, is not superseded and shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this agreement by their respective officers thereunto duly authorized as of the date first above written. VERMONT YANKEE NUCLEAR POWER CORPORATION By President 77 Grove Street Rutland, Vermont 05701 By (Officer) (Address) EX-10.7 13 FORM OF AMENDMENT NO. 1 Exhibit 10.11.1 AMENDMENT dated as of March 12, 1968, between VERMONT YANKEE NUCLEAR POWER CORPORATION ("Vermont Yankee") a Vermont corporation, and (the "Sponsor") to the Capital Funds Agreement dated as of February 1, 1968, between Vermont Yankee and the Sponsor. It is agreed that, in order to clarify a possible ambiguity in said Capital Funds Agreement, Section 5 of said Capital Funds Agreement is hereby amended by striking out the following: "Vermont Yankee shall be deemed to have capital requirements of the Unit within the meaning of Section 4 if it requires capital for any of the following purposes:" and by inserting in lieu thereof the following: "Vermont Yankee shall be deemed to have capital requirements of the Unit within the meaning of Section 4 if it requires capital (including funds to reimburse it for expenditures made for any of the following purposes out of the proceeds of short term borrowings) for any of the following purposes:" IN WITNESS WHEREOF, the parties have executed this amendment by their respective officers duly authorized as of the date first above written. VERMONT YANKEE NUCLEAR POWER CORPORATION By President SPONSOR By (Officer) Its (Title) (Address) EX-10.8 14 AMENDMENT TO NOTE AGREEMENT Exhibit 10.31.1 AMENDMENT TO NOTE AGREEMENT AMENDMENT dated September 26, 1997 (herein, the "Amendment") by and among WESTERN NATIONAL LIFE INSURANCE COMPANY, a Texas corporation having its principal place of business in Houston, Texas ("WLIC"), ML CBO VII, Series 1997-C-3 ("ML CBO3"), a Cayman Islands entity having its principal place of business in George Town, Grand Cayman, ROYALTON COMPANY, a Cayman Islands entity having its principal place of business in George Town, Grand Cayman ("Royalton")(WLIC, ML CBO3 and Royalton are sometimes referred to collectively as the "Purchasers") and THE ROCKY RIVER REALTY COMPANY, a Connecticut corporation having its principal place of business in Berlin, Connecticut (the "Company"). WHEREAS, pursuant to certain Note Agreements dated April 14, 1992 between the Company and the institutional investors named therein (collectively, the "Note Agreement") and certain other Operative Agreements, as defined in the Note Agreement, the Company issued $15,000,000 aggregate principal amount of 8.81% Guaranteed Senior Secured Notes, Series A, due April 14, 2007 (the "Series A Notes"). As contemplated by and provided for in the Note Agreement and this Amendment, certain of the Series A Notes have been assigned and transferred by the original holders thereof to WLIC and ML CBO3 and the remaining outstanding Series A Notes have been repurchased by the Company and are being reissued to Royalton as of the date hereof (the "Note Reissue"); and WHEREAS, the Purchasers and the Company have determined that certain technical amendments to the Note Agreement are desirable to effect the Note Reissue. NOW THEREFORE, the parties hereto agree as follows: 1. Amendment (a) A new sentence is hereby added to the end of Section 4.2(b)(ii) of the Note Agreement as follows: "Notwithstanding the foregoing, the Company in its sole discretion may, prior to such closing, repurchase any such Notes for reissuance under the terms set forth in such written commitment letter as provided in this subsection and all or any of such repurchased Notes may be reissued by the Company at any time thereafter and, as reissued, the Notes and the holders thereof shall be fully entitled to all the benefits, obligations and provisions of this Agreement." (b) The first sentence of Section 14.5 of the Note Agreement is hereby amended by the addition of the words "Other than as set forth in Section 4.2(b)(ii)," to the beginning of the sentence. (c) The definition of "Operative Agreements" set forth in Section 3.1(b) of the Note Agreement is hereby amended to read as follows: "(b) each other agreement or instrument executed and delivered at the Closing, all as amended or supplemented from time to time, including, but not limited to, the Extension of Note Guaranty by Guarantor dated September 26, 1997 and the Modification of and Confirmation of Assignment of Leases, Permits and Profits, Security Agreement and Negative Pledge dated September 26, 1997." 2. Miscellaneous. (a) All references to the "Agreement" in the Note Agreement, and all other documents executed in connection therewith, shall be deemed to refer to the "Agreement" as amended hereby. (b) The Note Agreement and all other documents executed in connection therewith shall each be deemed amended, to the extent necessary, if any, to give effect to the provisions of this Amendment. (c) As hereby amended, the Note Agreement is in all respects reaffirmed, ratified and confirmed for the benefit of each of the Series A Noteholders as of the date hereof. IN WITNESS WHEREOF, the undersigned have caused this Amendment to be executed on the date first written above. ROYALTON COMPANY THE ROCKY RIVER REALTY COMPANY By Pacific Investment Management Company, as its Investment Advisor By s/s David R. McHale David R. McHale Assistant Treasurer By s/s Raymond Kennedy Its Vice President WESTERN NATIONAL LIFE INSURANCE ML CBO VII, Series 1997-C-3 COMPANY By CONSECO Capital Management, Inc., By CONSECO Capital Management, Inc., acting as Investment Advisor acting as Investment Advisor By s/s Gary F. Greaur By s/s Gary F. Greaur Its Assistant Vice President Its Assistant Vice President EX-10.9 15 EXTENSION OF NOTE GUARANTY Exhibit 10.31.2.1 EXTENSION OF NOTE GUARANTY EXTENSION OF NOTE GUARANTY dated September 26, 1997 (herein called the "Extension") by NORTHEAST UTILITIES, a Massachusetts business trust having an address at 107 Selden Street, Berlin, Connecticut 06037 (herein called "Guarantor"). Capitalized terms used herein but not otherwise defined shall have the meanings set forth in the Guaranty hereinafter referred to. WHEREAS, pursuant to certain Note Agreements dated April 14, 1992 between the Company and the institutional investors named therein and certain other Operative Agreements, as defined in the Note Agreements, the Company issued $15,000,000 aggregate principal amount of 8.81% Guaranteed Senior Secured Notes, Series A, due April 14, 2007 (the "Series A Notes"). As contemplated by and provided for in the Note Agreements, as amended by an Amendment to Note Agreement dated the date hereof, certain of the Series A Notes have been assigned and transferred by the original holders thereof to the current holders thereof identified on Appendix A hereto and the remaining outstanding Series A Notes in the outstanding principal amount of $5,828,180.14 have been repurchased by the Company and are being reissued to Royalton Company, a Cayman Islands entity having its principal place of business in George Town, Grand Cayman ("Royalton") (Royalton and the purchasers identified on Appendix A hereto are referred to herein as the "New Series A Noteholders") as of the date hereof; and WHEREAS, in order to induce each New Series A Noteholder to acquire the Series A Notes, and notwithstanding the provisions of Section 11 of the Note Guaranty dated April 14, 1992 by Guarantor (the "Guaranty"), the Guarantor hereby desires to hereby reaffirm and extend the benefits of the Guaranty to the New Series A Noteholders ("Extension") as of the respective dates of purchase of the Series A Notes by the New Series A Noteholders. NOW, THEREFORE, in consideration of the acquisition of the Series A Notes by the New Series A Noteholders and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the Guarantor, the Guarantor hereby agrees, for the equal and ratable benefit of all New Series A Noteholders and the subsequent owners of the Series A Notes hereinafter from time to time outstanding, as follows: 1. The Guarantor hereby irrevocably and unconditionally guarantees the due and punctual payment and performance by the Company of the following obligations (individually, a "Guaranteed Obligation" and collectively, the "Guaranteed Obligations"): (a) the payment when due and payable (whether at maturity or on a date fixed for any payment or any prepayment or by declaration or acceleration or otherwise) of the principal of and premium (including, without limitation, the Make-Whole Premium), if any, and interest on the Series A Notes; and (b) the payment when due and payable and punctual performance of any and all other indebtedness and obligations of the Company under and in respect of the Note Agreements (including, without limitation, any indebtedness arising under Section 9 of the Note Agreements), each of the other Operative Agreements, and any other agreement, document or instrument relating thereto, all as amended from time to time. 2. Guarantor hereby reaffirms and acknowledges, for the benefit of the New Series A Noteholders, effective as of the dates of their respective purchases of the Series A Notes, its obligation (a) to perform each and all of the covenants, agreements and obligations under the Guaranty to be performed by it thereunder, at the time, in the manner and in all respects as provided in the Guaranty and (b) to be bound by each and all of the terms and provisions of the Guaranty as though the Guaranty had originally been made, executed and delivered to the New Series A Noteholders. 3. The Guaranty and this Extension shall be binding upon and inure to the benefit of the Guarantor, the New Series A Noteholders and their respective successors and assigns. 4. No shareholder or trustee of Guarantor shall be held to any liability whatever for the payment of any sum of money or for damages or otherwise under this Extension, and this Extension shall be enforceable against the trustees of Guarantor only as such, and every person, firm, association, trust or corporation having any claim or demand arising under this Extension relating to Guarantor, its shareholders or trustees shall look solely to the trust estate of Guarantor for the payment or satisfaction thereof. 5. As of the date hereof, the Guarantor represents and warrants, for the benefit of the New Series A Noteholders, that: (a) each of the Series A Notes is in the outstanding principal amount set forth beside the name of each New Series A Noteholder identified on Appendix A; and (b) no part of the outstanding principal amount of any of the Series A Notes set forth on Appendix A has been terminated, paid or otherwise reduced, other than pursuant to the terms thereof; and (c) the Note being issued to Royalton as the date hereof is in the outstanding principal amount of $5,828,180.14, no part of which has been terminated, paid or otherwise reduced. 6. This Extension shall supplement the Guaranty, which is in all other respects reaffirmed, ratified and confirmed for the benefit of the New Series A Noteholders. IN WITNESS WHEREOF, the Guarantor has caused this Extension to be duly executed as an instrument under seal and hand delivered as of the date first above written. NORTHEAST UTILITIES By: s/s David R. McHale David R. McHale Assistant Treasurer APPENDIX A Principal Amount of Purchaser Series A Notes Purchased WESTERN NATIONAL $1,138,344.82 COMPANIES ML CBO VII, $4,754,000.00 Series 1997 C-3 EX-10.10 16 MATERIAL CONTRACT Exhibit 10.31.3.1 MODIFICATION OF AND CONFIRMATION OF ASSIGNMENT OF LEASES, RENTS AND PROFITS, SECURITY AGREEMENT AND NEGATIVE PLEDGE THIS MODIFICATION OF AND CONFIRMATION OF ASSIGNMENT OF LEASES, RENTS AND PROFITS, SECURITY AGREEMENT AND NEGATIVE PLEDGE (the "Modification Agreement") is made and entered into as of the 26th day of September, 1997, by and among THE ROCKY RIVER REALTY COMPANY, a Connecticut corporation having its principal office at 107 Selden Street, Berlin, Connecticut 06037 (the "Company"), NORTHEAST UTILITIES SERVICE COMPANY, a Connecticut corporation having its principal office at 107 Selden Street, Berlin, Connecticut 06037 (the "Lessee"), and FLEET NATIONAL BANK (formerly known as The Connecticut National Bank), a national banking association having its principal office at 777 Main Street, Hartford, Connecticut 06115 (together with all successors thereto, collectively, the "Trustee"). W I T N E S S E T H : WHEREAS, effective as of April 14, 1992, the Company, the Lessee and the Trustee entered into an Assignment of Leases, Rents and Profits, Security Agreement and Negative Pledge (the "Assignment Agreement") pursuant to which the Company absolutely and unconditionally assigned to the Trustee all of its right, title and interest in and to all present and future leases of the Office Lease Property and the Project Lease Property, including, without limitation, the Office Lease and the Project Lease to secure the Notes and the other Obligations (as such capitalized terms are defined in the Assignment Agreement), which Assignment Agreement was recorded in Volume 326, Page 805 of the Berlin Land Records and in Volume 829, Page 204 of the Newington Land Records; and WHEREAS, as contemplated by and provided for in the Note Agreements (as such capitalized term is defined in the Assignment Agreement), certain of the Series A Notes (as such capitalized term is defined in the Assignment Agreement) have been assigned and transferred by the original holders thereof to subsequent purchasers and holders thereof (herein referred to as the "Transferred Series A Notes") and the remaining outstanding Series A Notes have been repurchased by the Company to be reissued to a new purchaser and holder thereof on the effective date hereof (herein referred to as the "Reissued Series A Notes"), which Reissued Series A Notes are to be of the same series, tenor and aggregate outstanding principal amount as the Series A Notes repurchased by the Company; and WHEREAS, also as contemplated by and provided for in the Note Agreements, the Company has purchased and retired in full all of the Series B Notes (as such capitalized term is defined in the Assignment Agreement); and WHEREAS, the Company, the Lessee and the Trustee wish to enter into this Modification Agreement to unconditionally confirm the lien and security interest in the Assigned Estate (as such capitalized term is defined in the Assignment Agreement) previously granted by the Company to the Trustee, for the benefit of the holders of the Transferred Series A Notes and the Reissued Series A Notes, to secure the Company's obligations under such Transferred Series A Notes and Reissued Series A Notes, and, to the extent necessary, to re-grant to the Trustee, for the benefit of the holders of the Transferred Series A Notes and the Reissued Series A Notes, a continuing first priority lien and security interest in the Assigned Estate to secure the Obligations; and NOW, THEREFORE, in consideration of the sum of One Dollar ($1.00) and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the Trustee, and in further consideration of the premises and the promises of the parties contained herein, it is hereby agreed as follows: 1. From and after the effective date of this Modification Agreement, all references in the Assignment Agreement to the term "Notes" shall refer to the Transferred Series A Notes and the Reissued Series A Notes (and the term "Note" shall refer to any one of them), copies of which Transferred Series A Notes and Reissued Series A Notes and the names and addresses of the holders thereof are on file in the office of the Trustee at the address set forth above, and the term "Obligations" as defined in the Assignment Agreement shall include the indebtedness evidenced by the Transferred Series A Notes and the Reissued Series A Notes and the payment of all principal of, premium, if any, and interest on such Transferred Series A Notes and Reissued Series A Notes. 2. The Company hereby acknowledges and confirms the previous grant, pursuant to the Assignment Agreement, of a valid, continuing first priority lien and security interest in the Assigned Estate to Trustee, for the ratably equal benefit of the holders of the Notes, to secure the Obligations, and hereby agrees that the execution and delivery of this Modification Agreement does not in any way impair or adversely affect the Trustee's continuing first priority lien and security interest in the Assigned Estate. 3. In furtherance of the modification evidenced by this Modification Agreement, and in addition to the grant set forth in the Assignment Agreement (which grant is confirmed herein), the Company does hereby give, grant, bargain, sell and confirm unto the Trustee, its successors and assigns forever, the Assigned Estate. TO HAVE AND TO HOLD all and singular the Assigned Estate, whether now owned or held or hereafter acquired, unto the Trustee and its successors and assigns forever, to its own proper use and benefit forever, subject, however, to the terms and conditions of the Assignment Agreement, as modified by this Modification Agreement. The assignment and conveyance of the Assigned Estate to the Trustee as set forth in the Assignment Agreement, and as confirmed in this Modification Agreement, is and shall hereafter be a present and absolute assignment and conveyance of the Assigned Estate and is and shall not be conditioned upon the occurrence of any default hereunder or under the Obligations, or any other event or contingency, and is and shall not be subject to defeasance except in accordance with the terms of the Assignment Agreement, as modified by this Modification Agreement. IN TRUST, NEVERTHELESS upon the terms and trusts set forth in the Assignment Agreement, as modified by this Modification Agreement, to secure the Obligations for the equal and proportionate benefit and security of the owners from time to time of the Notes, without preference, priority or distinction of any one Note over any other Note by reason of priority in the issue, sale and negotiation thereof or for any other reason, except as explicitly provided otherwise in the Assignment Agreement, as modified by this Modification Agreement. 4. All of the other terms, covenants, agreements and conditions in the Assignment Agreement, other than those specifically modified hereby, shall remain unchanged. 5. The rights, privileges, duties and obligations of the parties under the Assignment Agreement shall, except as above modified, remain unchanged and in full force and effect, and nothing herein contained shall operate to release the Company or the Lessee from its joint and several liabilities to the Trustee under the Assignment Agreement, and to keep and perform the terms, conditions, obligations and agreements contained in the Assignment Agreement, except as herein modified, and the Company hereby agrees to pay the indebtedness secured by the Assignment Agreement with interest and all of the payments required to be made by the Notes and the Assignment Agreement in accordance with the provisions thereof, except as herein expressly modified. 6. The modifications and agreements herein contained are expressly made binding upon and shall inure to the benefit of the heirs, executors, administrators, successors and assigns of the parties hereto. IN WITNESS WHEREOF, the parties have executed this Modification Agreement as of the 26th day of September, 1997. Signed, Sealed and Delivered in the presence of: THE ROCKY RIVER REALTY COMPANY s/s Jane P. Seidl Jane P. Seidl By: s/s David R. McHale s/s Lori A. Anjiras David R. McHale Lori A. Anjiras Its Assistant Treasurer NORTHEAST UTILITIES SERVICE COMPANY s/s Jane P. Seidl Jane P. Seidl By: s/s David R. McHale s/s Lori A. Anjiras David R. McHale Lori A. Anjiras Its Assistant Treasurer FLEET NATIONAL BANK s/s Melanie C. Moir Melanie C. Moir By: s/s Elizabeth Hammer s/s Laurel Melody-Casasanta Elizabeth Hammer Laurel Melody-Casasanta Its Vice President as Attorney-in-Fact STATE OF CONNECTICUT ) ) ss: Berlin September 26, 1997 COUNTY OF HARTFORD ) Personally appeared David R. McHale, the Assistant Treasurer of THE ROCKY RIVER REALTY COMPANY, a Connecticut corporation, signer of the foregoing instrument, and acknowledged the same to be his free act and deed as such officer, and the free act and deed of said corporation, before me. s/s Judith D. Boucher Judith D. Boucher Commissioner of the Superior Court/ Notary Public My Commission Expires: 9/30/99 STATE OF CONNECTICUT ) ) ss: Berlin September 26, 1997 COUNTY OF HARTFORD ) Personally appeared David R. McHale, the Assistant Treasurer of NORTHEAST UTILITIES SERVICE COMPANY, a Connecticut corporation, signer of the foregoing instrument, and acknowledged the same to be his free act and deed as such officer, and the free act and deed of said corporation, before me. s/s Judith D. Boucher Judith D. Boucher Commissioner of the Superior Court/ Notary Public My Commission Expires: 9/30/99 STATE OF CONNECTICUT ) ) ss: Hartford September 26, 1997 COUNTY OF HARTFORD ) Personally appeared Elizabeth Hammer, Attorney In Fact of FLEET NATIONAL BANK, a national banking association, signer of the foregoing instrument, and acknowledged the same to be his/her free act and deed as such officer, and the free act and deed of said bank, before me. s/s Karen R. Felt Karen R. Felt Commissioner of the Superior Court/ Notary Public My Commission Expires: 02/28/99 After Recording, Return To: Carmody & Torrance 50 Leavenworth Street Waterbury, Connecticut 06702 Attention: Joseph L. Kinsella, Esq. EX-10.11 17 PURCHASE AND SALE AGREEMENT Exhibit 10.31.4 PURCHASE AND SALE AGREEMENT AGREEMENT ("Agreement") entered into this 28th day of July, 1997 by and between CONNECTICUT GENERAL LIFE INSURANCE COMPANY, a Connecticut corporation having its principal place of business in Bloomfield, Connecticut ("CGLIC"), LIFE INSURANCE COMPANY OF NORTH AMERICA, a Pennsylvania corporation having its principal place of business in Philadelphia, Pennsylvania ("LINA"), and LIFE INSURANCE COMPANY OF GEORGIA, a Georgia corporation having its principal place of business in Atlanta, Georgia ("LIC") (CGLIC, LINA and LIC are sometimes individually referred to herein as "Seller" and collectively as the "Sellers"); WESTERN NATIONAL LIFE INSURANCE COMPANY a Texas corporation having its principal place of business in Houston, Texas ("WLIC"), ML CBO VII, Series 1997-C-3 ("ML CBO3"), a Cayman Islands entity having its principal place of business in George Town, Grand Cayman (WLIC and ML CBO3 are sometimes individually referred to herein as "Purchaser" and collectively as the "Purchasers"), and THE ROCKY RIVER REALTY COMPANY, a Connecticut corporation having its principal place of business in Berlin, Connecticut (the "Company"). All of Sellers' agreements hereunder are subject to the provisions of Section 5 below. Sellers own an aggregate of $11,784,689.32 principal amount of 8.81% Guaranteed Senior Secured Notes, Series A, due April 14, 2007 (the "Series A Notes") issued by the Company in the original aggregate principal amount of $15,000,000 pursuant to Note Agreements dated April 14, 1992 between the Sellers, the Company and certain others (collectively, the "Note Agreements") and certain other Operative Agreements, as defined in the Note Agreements. Purchasers desire to purchase $5,892,344.81 aggregate principal amount of the Series A Notes (the "Notes") from Sellers, as set forth more fully below and in Exhibit A hereto. Simultaneously with the consummation of the transactions contemplated herein, the Company is separately repurchasing from Sellers the remaining outstanding Series A Notes not being purchased and sold hereunder. Capitalized terms used herein which are defined in the Note Agreements have the respective meanings set forth therein, unless otherwise defined herein or the context otherwise requires. AGREEMENT NOW, THEREFORE, in consideration of the premises and agreements herein contained, the parties have agreed and do hereby agree as follows: 1. Transfer of Notes. Upon the terms set forth in this Agreement, Sellers will sell, assign, transfer and deliver to Purchasers, and Purchasers will purchase from Sellers, at the Closing (as defined in Section 6) and as contemplated in the escrow letter agreement dated July 28, 1997 among the Sellers, the Purchasers, the Company and the individuals to whom it is addressed (the "Escrow Letter"), the Notes and all the rights of the Sellers with respect to the Notes under the related Note Agreements, free and clear of all liens, charges and encumbrances of any nature whatsoever, in the principal amounts and for the amounts to be paid to the Sellers set forth on Exhibit A hereof. 2. Representations and Warranties of Sellers. Each of the Sellers represents and warrants for itself only to the Purchasers that: (a) Organization of Seller. Seller is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation, and has valid corporate authority to execute and deliver this Agreement and to sell the Notes held by it as provided herein. (b) Authority. The execution, delivery and performance of this Agreement, the Note Agreement and the other Operative Agreements to which Seller is a party and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized and approved by Seller and no further corporate action by Seller is or shall be required for such execution, delivery or performance. This Agreement and the Operative Agreements to which Seller is a party have been duly executed and delivered by Seller and constitute the legal, valid and binding Agreements of Seller enforceable against Seller in accordance with their terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other similar laws of general application affecting the rights of creditors and by general equity principles. No governmental or regulatory approval is necessary for the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated hereby by the Sellers. (c) No Liens. When sold to Purchasers as provided herein, the Notes will be free of all liens, charges and encumbrances of any nature whatsoever. (d) No Registration. Based on Purchasers' representations herein, the sale of the Notes hereunder is not required to be registered under the Securities Act of 1933, as amended (the "Act"), or any state securities or "Blue Sky" laws. 3. Representations and Warranties of Purchasers. Each Purchaser represents and warrants for itself only to the Sellers and the Company as follows: (a) Organization and Authority of Purchaser. Purchaser is duly organized, validly existing and in good standing under the laws of its state of incorporation or foreign jurisdiction, as applicable, and has valid corporate authority to execute and deliver this Agreement and to purchase the Notes to be purchased by it as provided herein. (b) Authority. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized and approved by Purchaser, have received all necessary governmental or regulatory approval and no further corporate action by Purchaser is or shall be required for such execution, delivery, performance or consummation. (c) No Registration. Purchaser understands that the Notes have not been and will not be registered under the Securities Act of 1933, as amended (the "Act"), or any state securities or "Blue Sky" laws, and may be resold only if registered pursuant to the provisions of the Act and applicable state securities laws or if an exemption from such registration is available; that neither the Company nor the Seller is required to register the Notes; and that any transfer must comply with the agreements and documents that govern the Notes. Each Purchaser will comply with all applicable federal and state securities laws in connection with any subsequent resale of the Notes it purchases hereunder. (d) Status of Purchaser, Purpose of Purchase. The Purchaser is a sophisticated institutional investor that is an "accredited investor" within the meaning of Rule 501 under the Act and has knowledge and experience in financial and business matters and is capable of evaluating the merits and risks of its investment in the Notes and is able to bear the economic risk of such investment. The Purchaser represents that it is not (i) an employee benefit plan (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), whether or not it is subject to the provisions of Title I of ERISA or (ii) a plan described in Section 4975(e)(1) of the Internal Revenue Code of 1986, as amended. The Purchaser is acquiring the Notes for its own account, and not with a present view to, or for sale in connection with any, distribution thereof, provided that the disposition of the Purchaser's property shall at all times be and remain within its control. (e) No Solicitation. The Notes were not offered or sold to Purchaser by any form of general solicitation or general advertising. (f) Independent Investigation. Purchaser acknowledges that it has conducted, to the extent it deemed necessary, an independent investigation of such matters, and has had the opportunity to receive such information as, in its judgment, is necessary for it to make an informed investment decision, and has not relied upon the Seller for any investigation or assessment to evaluate the transaction contemplated hereby. (g) Public Information. Certain information that may be pertinent to the Purchaser's decision to purchase the Notes can be obtained from a variety of public sources, including the Securities and Exchange Commission. The Purchaser has obtained and carefully reviewed the Company's most recent Annual Report on Form 10K and the press releases and other public disclosures made by the Company since the filing of its annual report. (h) Reliance. The Seller has not made any representation or warranty, express or implied, of any kind to the Purchasers, other than as set forth herein. Seller has no obligation to Purchaser, express or implied, including without limitation fiduciary obligations, except for the obligations specifically set forth in this Agreement or in the Escrow Letter. Purchaser is fully aware that, with regard to the sale of the Notes it is purchasing hereunder, Seller is relying upon the truth and accuracy of these representations and warranties. 4. Representations and Warranties of the Company. The Company represents and warrants to Purchasers as follows: (a) Organization. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Connecticut and has valid corporate authority to execute and deliver this Agreement. (b) Authority. The execution, delivery and performance of this Agreement, the Note Agreement and the other Operative Agreements and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized and approved by the Company and no further corporate action by the Company is or shall be required for such execution, delivery, performance or consummation. This Agreement and the other Operative Agreements have been duly executed and delivered by the Company and constitute the legal, valid and binding agreements of the Company enforceable against the Company in accordance with their terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or similar laws of general application affecting the rights of creditors and by general equity principles. No governmental or regulatory approval is necessary for the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated hereby by the Company. (c) No Conflict or Restrictions. The Company is not now under any obligation of a contractual or other nature to any person, firm or corporation which is inconsistent or in conflict with this Agreement, the Notes, the Note Agreement or the other Operative Agreements, or which would prevent, limit or impair in any way its performance of its obligations hereunder or thereunder. (d) Title to Property. The Company owns the Office Lease Property free and clear of all liens, charges and encumbrances, other than as permitted under the Note Agreement and other Operative Agreements. (e) Series B Notes. The Company has paid off in full and retired the Series B Notes. The Series A Notes which are not being purchased and sold hereunder are being repurchased simultaneously with the consummation of the transactions contemplated herein. (f) Defaults; Guaranty. There are no Defaults or Events of Default under the Notes or the Note Agreement. Since December 31, 1996, there has been no material adverse change in the financial condition of the Company other than as disclosed in Northeast Utilities' 1996 Annual Report, Annual Report on Form 10-K for the year ended December 31, 1996, Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and its Current Reports on Form 8-K filed after January 1, 1997. The Guaranty has been duly authorized, executed and delivered by, and constitutes a legal, valid and binding obligation of, the Guarantor enforceable against the Guarantor in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or similar laws of general application affecting the rights of creditors and by general equity principles and is in full force and effect. (g) Documentation. True and complete copies of the Notes, the applicable Note Agreement and the other Operative Agreements have been provided to Purchasers. (h) No Registration. Based on Purchasers' representations herein, the sale and purchase of the Notes hereunder is not required to be registered under the Act or any state securities or "Blue Sky" laws. 5. Sellers' Agreements. Notwithstanding any other provisions of this Agreement, the undertakings and agreements of CGLIC, LINA, and LIC in this Agreement constitute agreements and undertakings of each of them individually and not collectively, and any and all such undertakings and agreements are for the benefit of the Purchasers only, and are not intended to nor shall they be construed as conferring any benefit on or creating any rights in favor of the Company with respect to the Sellers or any of them. The Sellers have not verified any matters covered by any representations and warranties of the Company to Purchasers contained in this Agreement, and Sellers shall in no way be deemed to have agreed with any such representations and warranties of the Company (except to the extent covered by specific representations and warranties of Sellers under Section 2 hereof) to have any duty of due diligence or disclosure to the Purchasers with respect to those matters covered by the Company's representations and warranties contained in this Agreement. Further, in the event that the transactions contemplated hereunder and by the Escrow Letter are not timely consummated, Sellers have not waived and each of them specifically reserves any and all rights they and each of them may have with respect to the Company under the terms of the Note Agreement, the Operative Agreements, and any other agreements or documents delivered to them or any of them in connection with the transactions which are covered by or are the subject of the Note Agreement (collectively, the "Sellers' Transaction Documents"). Specifically, and without in any way limiting the generality of the preceding sentence, in the event the transactions contemplated hereunder and by the Escrow Letter are not timely consummated, the Sellers have not and shall not be deemed to have consented to or agreed to the provisions, or to have consented to the deferral of the exercise of any rights they or any of them may have under any of the Sellers' Transaction Documents or to any waiver, modification or amendment of or with respect to any of the Sellers' Transaction Documents, including, without limitation, the rights of the Sellers under Section 4.2(b) of the Note Agreement. 6. Closing. The closing of the purchase and sale of the Notes as provided for herein (the "Closing") shall take place on or before July 30, 1997 as contemplated in the Escrow Letter. The obligations under this Agreement of each party to this Agreement shall be terminated and shall be of no further force and effect if the transactions contemplated hereby, including receipt by Sellers of all payments due to Sellers hereunder in connection with their sale of the Notes, and receipt by Sellers of all payments due to Sellers in connection with the separate contemporaneous repurchase by the Company from Sellers of the remaining outstanding Series A Notes have not occurred on or before July 30, 1997, time being of the essence. 7. Payment of Consideration. At the Closing, (i) each Seller shall execute and deliver to the Purchaser purchasing the Notes an assignment of the Notes and Sellers' rights under the related Note Agreement as shall be appropriate to carry out the intent of this Agreement and sufficient to sell, assign, transfer and deliver to Purchasers all of Sellers' right, title and interest in and to the Notes; (ii) Purchasers shall deliver to Sellers the consideration (to be paid by Purchasers) for the Notes and Sellers' rights with respect to the Notes under the related Note Agreement as set forth on Exhibit A hereof by wire transfer of immediately available funds; (iii) the Company shall pay to each Seller by wire transfer of immediately available funds the amount (to be paid by the Company) set forth on Exhibit A hereto with respect to the Notes and (iv) the Company shall deliver to Purchasers at the addresses for physical delivery therefor set forth on Exhibit A replacement notes relating to the Notes purchased by Purchasers hereunder and an opinion of counsel substantially in the form of Exhibit B hereto. 8. Consent Regarding Note Agreement. The Purchasers hereby consent that so long as they shall hold the Notes, they will only seek to enforce the below-referenced provisions of the Note Agreement as if such provisions provide as follows: (a) Section 3.1: The definition of "Major Subsidiary" shall exclude Public Service Company of New Hampshire and North Atlantic Energy Corporation for all completed fiscal years of NU ending on or before December 31, 1998. Furthermore, the term "Major Subsidiary" shall be limited to Western Massachusetts Electric Company, a Massachusetts corporation; The Connecticut Light and Power Company, a Connecticut corporation; Public Service Company of New Hampshire, a New Hampshire corporation; and North Atlantic Energy Corporation, a New Hampshire corporation, so long as each of these Subsidiaries from time to time either holds more than ten percent (10%) of the consolidated assets of Guarantor and its Subsidiaries (as defined in Section 3.1 of the Note Agreement), or accounts for more than ten percent (10%) of the consolidated earnings of Guarantor and its Subsidiaries, both tests measured as of the end of the most recently completed fiscal year of Guarantor. (b) Sections 4.2(b) and 11.1(h): The term "Investment Grade" is replaced in each place where it appears in Section 4.2 (b) of the Note Agreement with the term "Minimum Grade", which for those purposes and for purposes of Section 11.1(h) of the Note Agreement is defined as "a rating by Moody's Investor Services, Inc. (or any successor) of what is currently referred to as "B1" or higher, or by Standard & Poor's Corporation (or any successor) of what is currently known as "B+" or higher, respectively. In addition, the notification required by Section 11.1(h) of the Note Agreement shall apply only to becoming aware that Moody's Investors Services, Inc. or Standard & Poor's Corporation (or any successor to either such entity if either or both do not then exist) has placed the senior debt of any Major Subsidiary on a so-called "watch list" prior to a possible downgrading to a rating lower than Minimum Grade. (c) Transfer. Each Purchaser agrees that, without the prior written consent of the Company, it will not sell, assign, transfer or deliver any Note unless it shall arrange to make the provisions of this Section 8 survive any subsequent transfer of the Note. 9. Purchasers' Covenant. Each Purchaser hereby covenants, promises and agrees (a) to perform each and all of the covenants, agreements and obligations under the Note Agreement and the Operative Agreements to be performed by the Sellers thereunder on or after the date hereof, at the time, in the manner and in all respects as provided in such documentation, and (b) to be bound by each and all of the terms and provisions of the Note Agreement and the Operative Agreements as though such documentation had originally been made, executed and delivered by such Purchaser on the date hereof, as such terms and provisions have been amended by this Agreement as to Purchasers. 10. Miscellaneous (a) Modification. The rights and duties hereunder may not be modified, revised or terminated except by a writing signed by all parties hereto or their duly authorized representatives. (b) Expenses of Parties; Brokers. Except as otherwise specifically provided for herein, each party hereto shall bear all expenses incurred by it in connection with this Agreement including, without limitation, the charges of its counsel and other experts or brokers. Each party hereto further represents and warrants that no agent, broker, investment banker, person or firm acting on its behalf is or will be entitled to any broker's or finder's fee or any other commission or similar fee directly or indirectly from any of the parties hereto in connection with any of the transactions contemplated herein, except for the fee of Donaldson Lufkin & Jenrette Securities Corporation, which the Company agrees to pay. (c) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same agreement of the parties hereto. (d) Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Connecticut. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of the day and year first above written. CONNECTICUT GENERAL LIFE WESTERN NATIONAL LIFE INSURANCE INSURANCE COMPANY COMPANY By CIGNA Investments, Inc. By CONSECO Capital Management, Inc., acting as Investment Advisor s/s Lawrence A. Drake s/s Gary F. Greaur By Lawrence A. Drake By Gary F. Greaur Its Managing Director Its Assistant Vice President LIFE INSURANCE COMPANY ML CBO VII, Series 1997-C-3 OF NORTH AMERICA By CONSECO Capital Management, Inc., By CIGNA Investments, Inc. acting as Investment Advisor s/s Lawrence A. Drake s/s Gary F. Greaur By Lawrence A. Drake By Gary F. Greaur Its Managing Director Its Assistant Vice President LIFE INSURANCE COMPANY THE ROCKY RIVER REALTY COMPANY OF GEORGIA By ING Investment Management, Inc. its Agent s/s Fred C. Smith s/s David R. McHale By Fred C. Smith By David R. McHale Its SVP and Managing Its Assistant Treasurer Director EX-10.12 18 PURCHASE AND SALE AGREEMENT Exhibit 10.31.5 PURCHASE AND SALE AGREEMENT AGREEMENT ("Agreement") entered into this 26th day of September, 1997 by and between ROYALTON COMPANY, a Cayman Islands entity having its principal place of business in George Town, Grand Cayman (the "Purchaser"), and THE ROCKY RIVER REALTY COMPANY, a Connecticut corporation having its principal place of business in Berlin, Connecticut (the "Company" or the "Seller"). Pursuant to Note Agreements each dated April 14, 1992 between the Company and certain others (collectively, the "Original Note Agreement") and certain other Operative Agreements, as defined in the Original Note Agreement, the Company issued $15,000,000 aggregate principal amount of 8.81% Guaranteed Senior Secured Notes, Series A, due April 14, 2007 (the "Series A Notes"). As contemplated by and provided for in the Original Note Agreement, certain of the Series A Notes have been assigned and transferred by the original holders thereof to subsequent purchasers and holders thereof and the remaining outstanding Series A Notes have been repurchased by the Company to be reissued to the Purchaser under the terms of the Amendment to Note Agreement dated as of September 26, 1997 (together with the Original Note Agreements, the "Note Agreement") and as further provided herein, which reissued note in the aggregate principal amount of $5,828,180.14 (the "Note") is to be of the same series and tenor as the Series A Notes repurchased by the Company. Purchaser desires to purchase the Note from Seller, as set forth more fully below and in Exhibit A hereto. Capitalized terms used herein which are defined in the Note Agreement have the respective meanings set forth therein, unless otherwise defined herein or the context otherwise requires. AGREEMENT NOW, THEREFORE, in consideration of the premises and agreements herein contained, the parties have agreed and do hereby agree as follows: 1. Transfer of Note. Upon the terms set forth in this Agreement, Seller will sell, assign, transfer and deliver to Purchaser, and Purchaser will purchase from Seller, at the Closing (as defined in Section 4), the Note for the amount to be paid to the Company set forth on Exhibit A hereof. 2. Representations and Warranties of Purchaser. Purchaser represents and warrants as follows: (a) Organization and Authority of Purchaser. Purchaser is duly organized, validly existing and in good standing under the laws of its foreign jurisdiction and has valid corporate authority to execute and deliver this Agreement and to purchase the Note. (b) Authority. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized and approved by Purchaser, have received all necessary governmental or regulatory approval and no further corporate action by Purchaser is or shall be required for such execution, delivery, performance or consummation. (c) No Registration. Purchaser understands that the Note has not been and will not be registered under the Securities Act of 1933, as amended (the "Act"), or any state securities or "Blue Sky" laws, and may be resold only if registered pursuant to the provisions of the Act and applicable state securities laws or if an exemption from such registration is available; that the Company is not required to register the Note; and that any transfer must comply with the agreements and documents that govern the Note. The Purchaser will comply with all applicable federal and state securities laws in connection with any subsequent resale of the Note it purchases hereunder. (d) Status of Purchaser; Purpose of Purchase. The Purchaser is a sophisticated institutional investor that is an "accredited investor" within the meaning of Rule 501 under the Act and has knowledge and experience in financial and business matters and is capable of evaluating the merits and risks of its investment in the Note and is able to bear the economic risk of such investment. The Purchaser represents that it is not (i) an employee benefit plan (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), whether or not it is subject to the provisions of Title I of ERISA or (ii) a plan described in Section 4975(e)(1) of the Internal Revenue Code of 1986, as amended. The Purchaser is acquiring the Note for its own account, and not with a present view to, or for sale in connection with any, distribution thereof, provided that the disposition of the Purchaser's property shall at all times be and remain within its control. (e) No Solicitation. The Note was not offered or sold to Purchaser by any form of general solicitation or general advertising. (f) Independent Investigation. Purchaser acknowledges that it has conducted, to the extent it deemed necessary, an independent investigation of such matters, and has had the opportunity to receive such information as, in its judgment, is necessary for it to make an informed investment decision, and has not relied upon the Seller for any investigation or assessment to evaluate the transaction contemplated hereby. (g) Public Information. Certain information that may be pertinent to the Purchaser's decision to purchase the Note can be obtained from a variety of public sources, including the Securities and Exchange Commission. The Purchaser has obtained and carefully reviewed the Company's most recent Annual Report on Form 10K and the press releases and other public disclosures made by the Company since the filing of its annual report. (h) Principal Amount. The Note is in the outstanding principal amount of $5,828,180.14, no part of which has been terminated, paid or otherwise reduced. 3. Representations and Warranties of the Company. The Company represents and warrants to Purchaser as follows: (a) Organization. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Connecticut and has valid corporate authority to execute and deliver this Agreement, the Note Agreement and the Modification and Confirmation of Assignment of Leases, Rents and Profits, Security Agreement and Negative Pledge (the "Modification"). (b) Authority. The execution, delivery and performance of this Agreement, the Note Agreement and the other Operative Agreements, including the Note, and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized and approved by the Company and no further corporate action by the Company is or shall be required for such execution, delivery, performance or consummation. This Agreement and the other Operative Agreements have been duly executed and delivered by the Company and constitute the legal, valid and binding agreements of the Company enforceable against the Company in accordance with their terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or similar laws of general application affecting the rights of creditors and by general equity principles. No governmental or regulatory approval is necessary for the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated hereby by the Company. (c) No Conflict or Restrictions. The Company is not now under any obligation of a contractual or other nature to any person, firm or corporation which is inconsistent or in conflict with this Agreement, the Notes, the Note Agreement or the other Operative Agreements, or which would prevent, limit or impair in any way its performance of its obligations hereunder or thereunder. (d) Title to Property. The Company owns the Office Lease Property free and clear of all liens, charges and encumbrances, other than as permitted under the Note Agreement and other Operative Agreements. (e) Series B Notes. The Company has paid off in full and retired the Series B Notes. (f) Defaults; Guaranty. There are no Defaults or Events of Default under the Notes or the Note Agreement. Since December 31, 1996, there has been no material adverse change in the financial condition of the Company other than as disclosed in Northeast Utilities' 1996 Annual Report, Annual Report on Form 10-K for the year ended December 31, 1996, Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997 and June 30, 1997 and its Current Reports on Form 8-K filed after January 1, 1997. The Guaranty has been duly authorized, executed and delivered by, and constitutes a legal, valid and binding obligation of, the Guarantor enforceable against the Guarantor in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or similar laws of general application affecting the rights of creditors and by general equity principles and is in full force and effect. (g) Documentation. True and complete copies of the Notes, the applicable Note Agreement and the other Operative Agreements have been provided to Purchasers. 4. Closing. The closing of the purchase and sale of the Notes as provided for herein (the "Closing") shall take place on or before September 26, 1997, or at such other time as mutually agreed to by the parties hereto. 5. Payment of Consideration. At the Closing, (i) Purchaser shall deliver to the Company the consideration for the Note as set forth on Exhibit A hereof by wire transfer of immediately available funds and (ii) the Company shall deliver to Purchaser at the address for physical delivery therefor set forth on Exhibit A the Note purchased by Purchaser hereunder and an opinion of counsel substantially in the form of Exhibit B hereto. 6. Consent Regarding Note Agreement. The Purchaser hereby consents that so long as it shall hold the Note, it will only seek to enforce the below-referenced provisions of the Note Agreement as if such provisions provide as follows: (a) Section 3.1: The definition of "Major Subsidiary" shall exclude Public Service Company of New Hampshire and North Atlantic Energy Corporation for all completed fiscal years of NU ending on or before December 31, 1998. Furthermore, the term "Major Subsidiary" shall be limited to Western Massachusetts Electric Company, a Massachusetts corporation; The Connecticut Light and Power Company, a Connecticut corporation; Public Service Company of New Hampshire, a New Hampshire corporation; and North Atlantic Energy Corporation, a New Hampshire corporation, so long as each of these Subsidiaries from time to time either holds more than ten percent (10%) of the consolidated assets of Guarantor and its Subsidiaries (as defined in Section 3.1 of the Note Agreement), or accounts for more than ten percent (10%) of the consolidated earnings of Guarantor and its Subsidiaries, both tests measured as of the end of the most recently completed fiscal year of Guarantor. (b) Sections 4.2(b) and 11.1(h): The term "Investment Grade" is replaced in each place where it appears in Section 4.2 (b) of the Note Agreement with the term "Minimum Grade", which for those purposes and for purposes of Section 11.1(h) of the Note Agreement is defined as "a rating by Moody's Investor Services, Inc. (or any successor) of what is currently referred to as "B1" or higher, or by Standard & Poor's Corporation (or any successor) of what is currently known as "B+" or higher, respectively. In addition, the notification required by Section 11.1(h) of the Note Agreement shall apply only to becoming aware that Moody's Investors Services, Inc. or Standard & Poor's Corporation (or any successor to either such entity if either or both do not then exist) has placed the senior debt of any Major Subsidiary on a so-called "watch list" prior to a possible downgrading to a rating lower than Minimum Grade. (c) Transfer. Purchaser agrees that, without the prior written consent of the Company, it will not sell, assign, transfer or deliver the Note, or any portion thereof, unless it shall arrange to make the provisions of this Section 6 survive any subsequent transfer of the Note. 7. Purchaser's Covenant. Purchaser hereby covenants, promises and agrees (a) to perform each and all of the covenants, agreements and obligations under the Note Agreement and the Operative Agreements to be performed by the original purchasers thereunder on or after the date hereof, at the time, in the manner and in all respects as provided in such documentation, and (b) to be bound by each and all of the terms and provisions of the Note Agreement and the Operative Agreements as though such documentation had originally been made, executed and delivered by such Purchaser on the date hereof, as such terms and provisions have been amended by this Agreement as to Purchaser. 8. Conditions to Closing. The parties hereto acknowledge that simultaneously with the consummation of the transactions contemplated herein, and as conditions to Closing, (i) the Company, Northeast Utilities Service Company and the Trustee are separately entering into the Modification to be dated the date hereof; (ii) the Company, the Purchaser and the holders of the Series A Notes not being purchased and sold hereunder are entering into the Amendment to be dated the date hereof; and (iii) Northeast Utilities is executing an Extension of Note Guaranty to be dated the date hereof. 9. Miscellaneous. (a) Modification. The rights and duties hereunder may not be modified, revised or terminated except by a writing signed by all parties hereto or their duly authorized representatives. (b) Expenses of Parties; Brokers. Except as otherwise specifically provided for herein, each party hereto shall bear all expenses incurred by it in connection with this Agreement including, without limitation, the charges of its counsel and other experts or brokers. Each party hereto further represents and warrants that no agent, broker, investment banker, person or firm acting on its behalf is or will be entitled to any broker's or finder's fee or any other commission or similar fee directly or indirectly from any of the parties hereto in connection with any of the transactions contemplated herein, except for the fee of Donaldson Lufkin & Jenrette Securities Corporation, which the Company agrees to pay. (c) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same agreement of the parties hereto. (d) Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Connecticut. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of the day and year first above written. ROYALTON COMPANY By Pacific Investment Management Company, as its Investment Advisor By s/s Raymond Kennedy Raymond Kennedy Vice President THE ROCKY RIVER REALTY COMPANY By s/s David R. McHale David R. McHale Assistant Treasurer EX-10.13 19 EMPLOYMENT AGREEMENT Exhibit 10.39 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") entered into as of August 20, 1997, by and between Northeast Utilities, a Massachusetts business trust (together with its successors and assigns permitted under the Agreement and each direct and indirect affiliated company that shall adopt this Agreement pursuant to Section 18 hereof, the "Company"), with its principal office in West Springfield, Massachusetts, and its general office in Berlin, Connecticut, and Michael G. Morris, a resident of Northville, Michigan ("Executive"). WHEREAS, both parties desire to enter into an agreement to reflect Executive's executive capacities in the Company's business and to provide for Executive's employment by the Company, upon the terms and conditions set forth herein: NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Employment. The Company hereby agrees to employ Executive, and Executive hereby accepts such employment and agrees to perform Executive's duties and responsibilities, in accordance with the terms, conditions and provisions hereinafter set forth. 1.1. Employment Term. The term of Executive's employment under this Agreement shall commence as of the date hereof (the "Effective Date") and shall continue until August 20, 2002, unless sooner terminated in accordance with Section 5 or Section 6 hereof, and shall automatically renew for periods of one year unless one party gives written notice to the other, at least six months prior to August 20, 2002 or at least six months prior to the end of any one-year renewal period, that the Agreement shall not be further extended. The period commencing as of the Effective Date and ending on August 20, 2002 is hereinafter referred to as the "Initial Employment Term," and the period commencing as of the Effective Date and ending on the date on which the term of Executive's employment under the Agreement shall terminate is hereinafter referred to as the "Employment Term". 1.2. Duties and Responsibilities. Executive shall serve as Chairman, President and Chief Executive Officer of Northeast Utilities and in such other senior positions, if any, to which he may be elected during the Employment Term. During the Employment Term, Executive shall perform all duties and accept all responsibilities incident to such positions as may be assigned to him by the Northeast Utilities' Board of Trustees (the "Trustees"). 1.3. Extent of Service. During the Employment Term, Executive agrees to use Executive's best efforts to carry out Executive's duties and responsibilities under Section 1.2 hereof and, consistent with the other provisions of this Agreement, to devote substantially all Executive's business time, attention and energy thereto. Except as provided in Section 3 hereof, the foregoing shall not be construed as preventing Executive from making minority investments in other businesses or enterprises provided that Executive agrees not to become engaged in any other business activity which, in the reasonable judgment of the Trustees, is likely to interfere with Executive's ability to discharge Executive's duties and responsibilities to the Company. 1.4. Base Salary. For all the services rendered by Executive hereunder, the Company shall pay Executive a base salary ("Base Salary"), commencing on the Effective Date, at the annual rate of $750,000, payable in installments at such times as the Company customarily pays its other senior level executives (but in any event no less often than monthly). Executive's Base Salary shall be reviewed annually for appropriate adjustment (but shall not be reduced below that in effect on the Effective Date without Executive's written consent) by the Trustees pursuant to its normal performance review policies for senior level executives. 1.5. Retirement and Benefit Coverages. During the Employment Term, Executive shall be entitled to participate in all (a) employee pension and retirement plans and programs ("Retirement Plans") and (b) welfare benefit plans and programs ("Benefit Coverages"), in each case made available to the Company's senior level executives as a group or to its employees generally, as such Retirement Plans or Benefit Coverages may be in effect from time to time, but not the Company's Supplemental Executive Retirement Plan for Officers (the "Supplemental Plan"). Executive shall also be covered by an individual term life insurance policy in the face amount that was maintained for Executive by his immediately prior employer, CMS Energy, ("CMS") on the day before the Effective Date. In lieu of coverage under the Supplemental Plan, Executive shall also be entitled to receive a special retirement benefit (the "Special Retirement Benefit") equal to the excess of (i) the annual benefit payable at normal or early retirement, as applicable, under the benefit formula (including any actuarial subsidy for early retirement) of the Supplemental Executive Retirement Plan for Employees of CMS Energy/Consumers Energy Company, as in effect on the Effective Date, as set forth in Appendix A to this Agreement, and based on all service rendered for the Company and CMS but on compensation paid only by the Company over (ii) the retirement benefit actually due to Executive, at his normal or early retirement date, as applicable, under the Retirement Plan of the Company; provided, however, that, except as otherwise specifically provided in this Agreement, Executive must be employed by the Company until at least the fifth anniversary of the Effective Date in order to be entitled to the Special Retirement Benefit. In the event a Special Retirement Benefit is payable under this Agreement, the time of commencement of payment of the Benefit shall be governed by the terms of the Supplemental Executive Retirement Plan of Consumers Energy Company, as in effect on the Effective Date. The standard and optional forms of benefit with respect to the Special Retirement Benefit shall also be governed by the terms of the Supplemental Executive Retirement Plan of Consumers Energy Company, as in effect on the Effective Date. In the event of Executive's death prior to retirement and without regard to the length of the Employment Term, a survivor benefit (the "Survivor Benefit") shall be paid as follows: a Survivor Benefit shall be paid to Executive's surviving spouse, if any, equal to the excess of (i) the survivor benefit that would be calculated for such spouse under the Supplemental Plan if (x) Executive's Special Retirement Benefit, as calculated above, had been a vested Target Benefit under the Supplemental Plan and (y) Executive's surviving spouse had been entitled to a pre-retirement death benefit with respect to that Target Benefit under the Supplemental Plan over (ii) the survivor benefit actually due to such spouse under the Retirement Plan of the Company. 1.6. Reimbursement of Expenses and Dues; Vacation. Executive shall be provided with reimbursement of expenses related to Executive's employment by the Company on a basis no less favorable than that which may be authorized from time to time for senior level executives as a group, and shall be entitled to five weeks of vacation annually and holidays in accordance with the Company's normal personnel policies for senior level executives. In addition, Executive shall be entitled to (i) the initiation fee for and the annual dues of a luncheon club in Hartford, Connecticut and (ii) the use of an automobile including all operating and maintenance expenses until Executive relocates his residence to Connecticut from Michigan or August 31, 1998, if earlier, both to be used primarily in pursuit of the business of the Company. 1.7. Short-Term Incentive Compensation. If the Employment Term has not previously terminated, beginning on January 1, 1998, Executive shall be entitled to participate in any short-term incentive compensation programs established by the Company for its senior level executives generally, depending upon achievement of certain annual individual or business performance objectives specified and approved by the Trustees (or a Committee thereof) in its sole discretion; provided, however, that Executive's "target opportunity" and "maximum opportunity" under any such program shall be at least 80% and 130% respectively of Executive's Base Salary. Executive's short-term incentive compensation, either in shares of NU or cash, as applicable from time to time, shall be paid to Executive, subject to the Trustees' reasonable discretion, not later than such payments are made to the Company's senior level executives generally. 1.8. Long-Term Incentive Compensation. If the Employment Term has not previously terminated, beginning on January 1, 1999, Executive shall also be entitled to participate in any long-term incentive compensation programs established by the Company for its senior level executives generally, depending upon achievement of certain business performance objectives specified and approved by the Trustees (or a Committee thereof) in its sole discretion; provided, however, that Executive's "target opportunity" and "maximum opportunity" under any such program shall be at such percentages of Base Salary as are determined by the Trustees but at least 60% and 120% respectively of Base Salary. Executive's long-term incentive compensation, either in shares of NU, restricted stock units, options or cash, as applicable from time to time, shall be paid to Executive, subject to the Trustees' reasonable discretion, not later than such payments are made to the Company's senior level executives generally. 1.9 Signing Bonus and Stock Option Grant. On or about the Effective Date, the Company shall pay Executive a bonus of $1,350,000 for agreeing to become an Executive of the Company and to forego certain compensation and benefits otherwise to have been provided by his former employer. In addition, on the Effective Date, Executive shall be granted a non-qualified stock option (for a term expiring August 20, 2007 or, if earlier, three years after the date of Executive's termination from employment by the Company for any reason other than Cause, as defined in Section 5.3, in which case the term shall expire immediately) to purchase 500,000 shares of common stock of the Company at a purchase price of $9.625 for each share purchased (the "Option"). Executive's right to exercise the Option shall vest in increments equal to 250,000 shares on August 20, 1999, an additional 125,000 shares on August 20, 2000 (a total of 375,000 shares), and an additional 125,000 (all 500,000 shares) on August 20, 2001, provided that Executive remains employed by the Company (except that in the case of death, disability, as defined in Section 5.1, a Termination upon Change of Control, as defined in Section 6.1(f), or removal without cause, as provided in Section 5.4(b), Executive shall be fully vested in the right to purchase all such shares). The terms of the Option, to the extent not inconsistent with the provisions outlined in this Section shall be made subject to the terms of the Company's stock option plan, if one is developed by the Company for its other executives and approved by the Company's shareholders in 1998. 1.10 Temporary Living and Moving Expenses. The Company shall provide temporary housing for Executive in a suitable residence in the vicinity of its offices and shall pay the cost of Executive commuting between such residence and his current residence in Northville, Michigan until Executive relocates his residence to Connecticut from Michigan or August 31, 1998, if earlier. The Company shall also reimburse Executive for moving and home seeking and buying expenses incurred by Executive in accordance with its relocation policy for senior level executives and the Company shall purchase Executive's residence in Northville, Michigan and Executive's vacation home in Green Oak Township, Michigan (if Executive is unable to sell either or both such properties within 90 days of placing either or both on the market) for fair market value as determined in accordance with the Company's normal policy for senior level executives. The Company shall also pay Executive a tax equivalency bonus in an amount such that all federal, state and local income taxes (calculated at the highest marginal rate) which may be due by reason of any such expenses and the tax equivalency bonus being included in Executive's taxable income will not reduce the net amount of reimbursement that Executive is to receive hereunder. 2. Confidential Information. Executive recognizes and acknowledges that by reason of Executive's employment by and service to the Company during and, if applicable, after the Employment Term Executive will continue to have access to certain confidential and proprietary information relating to the business of the Company, which may include, but is not limited to, trade secrets, trade "know-how", customer information, supplier information, cost and pricing information, marketing and sales techniques, strategies and programs, computer programs and software and financial information (collectively referred to as "Confidential Information"). Executive acknowledges that such Confidential Information is a valuable and unique asset of the Company and Executive covenants that Executive will not, unless expressly authorized in writing by the Trustees, at any time during the course of Executive's employment use any Confidential Information or divulge or disclose any Confidential Information to any person, firm or corporation except in connection with the performance of Executive's duties for the Company and in a manner consistent with the Company's policies regarding Confidential Information. Executive also covenants that at any time after the termination of such employment, directly or indirectly, Executive will not use any Confidential Information or divulge or disclose any Confidential Information to any person, firm or corporation, unless such information is in the public domain through no fault of Executive or except when required to do so by a court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) with apparent jurisdiction to order Executive to divulge, disclose or make accessible such information, in which case Executive will inform the Company in writing promptly of such required disclosure, but in any event at least two business days prior to disclosure. All written Confidential Information (including, without limitation, in any computer or other electronic format) which comes into Executive's possession during the course of Executive's employment shall remain the property of the Company. Except as required in the performance of Executive's duties for the Company, or unless expressly authorized in writing by the Trustees, Executive shall not remove any written Confidential Information from the Company's premises, except in connection with the performance of Executive's duties for the Company and in a manner consistent with the Company's policies regarding Confidential Information. Upon termination of Executive's employment, Executive agrees immediately to return to the Company all written Confidential Information in Executive's possession. For the purposes of this Section 2, the term "Company" shall be deemed to include NU and the Affiliates, as defined in Section 6.1(a), of NU and the Company. 3. Non-Competition; Non-Solicitation. (a) During Executive's employment by the Company and for a period of two years after Executive's termination of employment for any reason, within the Company's "Service Area," as defined below, Executive will not, except with the prior written consent of the Trustees, directly or indirectly, own, manage, operate, join, control, finance or participate in the ownership, management, operation, control or financing of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with, or use or permit Executive's name to be used in connection with, any business or enterprise which is engaged in any business that is competitive with any business or enterprise in which the Company is engaged. For the purposes of this Section, "Service Area" shall mean the geographic area within the states of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont, or any other state in which the Company, in the aggregate, generates 25% or more of its revenues in the fiscal year of NU in which Executive's termination of employment occurs. Executive acknowledges that the listed Service Area is the area in which the Company presently does business. (b) The foregoing restrictions shall not be construed to prohibit the ownership by Executive of less than five percent (5%) of any class of securities of any corporation which is engaged in any of the foregoing businesses having a class of securities registered pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), provided that such ownership represents a passive investment and that neither Executive nor any group of persons including Executive in any way, either directly or indirectly, manages or exercises control of any such corporation, guarantees any of its financial obligations, otherwise takes any part in its business, other than exercising Executive's rights as a shareholder, or seeks to do any of the foregoing. (c) Executive further covenants and agrees that during Executive's employment by the Company and for the period of two years thereafter, Executive will not, directly or indirectly, (i) solicit, divert, take away, or attempt to solicit, divert or take away, any of the Company's "Principal Customers," defined for the purposes hereof to include any customer of the Company, from which $100,000 or more of annual gross revenues are derived at such time, or (ii) encourage any Principal Customer to reduce its patronage of the Company. (d) Executive further covenants and agrees that during Executive's employment by the Company and for the period of two years thereafter, Executive will not, except with the prior written consent of the Trustees, directly or indirectly, solicit or hire, or encourage the solicitation or hiring of, any person who was a managerial or higher level employee of the Company at any time during the term of Executive's employment by the Company by any employer other than the Company for any position as an employee, independent contractor, consultant or otherwise. The foregoing covenant of Executive shall not apply to any person after 12 months have elapsed subsequent to the date on which such person's employment by the Company has terminated. (e) Nothing in this Section 3 shall be construed to prohibit Executive from being connected as a partner, principal, shareholder, associate, counsel or otherwise with another lawyer or a law firm which performs services for clients engaged in any business or enterprise that is competitive with any business or enterprise in which the Company is engaged, provided that Executive is not personally involved, directly or indirectly, in performing services for any such clients during the period specified in Section 3(a) and provided further that such lawyer or law firm takes reasonable precautions to screen Executive from participating for the period specified in Section 3(a) in the representation of any such clients. The parties agree that any such personal performance of services by Executive for any such clients during such period would create an unreasonable risk of violation by Executive of the provisions of Section 2 of this Agreement, and Executive agrees (and the Company may elect) to notify in writing any lawyer or law firm with which Executive may be connected during the period specified in Section 3(a) of Executive's Agreement as set forth herein. Executive agrees to notify the Company in writing in advance of the precautions to be taken by such lawyer or law firm to screen Executive from any representation of such competing client by such lawyer or law firm. (f) For the purposes of this Section 3, the term "Company" shall be deemed to include NU and the Affiliates, as defined in Section 6.1(a), of NU and the Company. 4. Equitable Relief. (a) Executive acknowledges and agrees that the restrictions contained in Sections 2 and 3 are reasonable and necessary to protect and preserve the legitimate interests, properties, goodwill and business of the Company, that the Company would not have entered into this Agreement in the absence of such restrictions and that irreparable injury will be suffered by the Company should Executive breach any of the provisions of those Sections. Executive represents and acknowledges that (i) Executive has been advised by the Company to consult Executive's own legal counsel in respect of this Agreement, and (ii) that Executive has had full opportunity, prior to execution of this Agreement, to review thoroughly this Agreement with Executive's counsel. (b) Executive further acknowledges and agrees that a breach of any of the restrictions in Sections 2 and 3 cannot be adequately compensated by monetary damages. Executive agrees that the Company shall be entitled to preliminary and permanent injunctive relief, without the necessity of proving actual damages, as well as an equitable accounting of all earnings, profits and other benefits arising from any violation of Sections 2 or 3 hereof, which rights shall be cumulative and in addition to any other rights or remedies to which the Company may be entitled. In the event that any of the provisions of Sections 2 or 3 hereof should ever be adjudicated to exceed the time, geographic, service, or other limitations permitted by applicable law in any jurisdiction, it is the intention of the parties that the provision shall be amended to the extent of the maximum time, geographic, service, or other limitations permitted by applicable law, that such amendment shall apply only within the jurisdiction of the court that made such adjudication and that the provision otherwise be enforced to the maximum extent permitted by law. (c) If Executive breaches any of Executive's obligations under Sections 2 or 3 hereof, and such breach constitutes "cause," as defined in Section 5.3 hereof, or would constitute cause if it had occurred during the Employment Term, the Company shall thereafter remain obligated only for the compensation and other benefits provided in any plans, policies or practices then applicable to Executive in accordance with the terms thereof. (d) Executive irrevocably and unconditionally (i) agrees that any suit, action or other legal proceeding arising out of Sections 2 or 3 hereof, including without limitation, any action commenced by the Company for preliminary and permanent injunctive relief and other equitable relief, may be brought in the United States District Court for the District of Connecticut, or if such court does not have jurisdiction or will not accept jurisdiction, in any court of general jurisdiction in Hartford, Connecticut, (ii) consents to the non-exclusive jurisdiction of any such court in any such suit, action or proceeding, and (iii) waives any objection which Executive may have to the laying of venue of any such suit, action or proceeding in any such court. Executive also irrevocably and unconditionally consents to the service of any process, pleadings, notices or other papers in a manner permitted by the notice provisions of Section 10 hereof. (e) Executive agrees that for a period of five years following the termination of Executive's employment by the Company Executive will provide, and that at all times after the date hereof the Company may similarly provide, a copy of Sections 2 and 3 hereof to any business or enterprise (i) which Executive may directly or indirectly own, manage, operate, finance, join, control or of which he may participate in the ownership, management, operation, financing, or control, or (ii) with which Executive may be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise, or in connection with which Executive may use or permit to be used Executive's name; provided, however, that this provision shall not apply in respect of Section 3 hereof after expiration of the time periods set forth therein. (f) For the purposes of this Section 4, the term "Company" shall be deemed to include NU and the Affiliates, as defined in Section 6.1(a), of NU and the Company. 5. Termination. The Employment Term shall terminate upon the occurrence of any one of the following events: 5.1. Disability. The Company may terminate the Employment Term if Executive is unable substantially to perform Executive's duties and responsibilities hereunder to the full extent required by the Trustees by reason of illness, injury or incapacity for six consecutive months, or for more than six months in the aggregate during any period of twelve calendar months; provided, however, that the Company shall continue to pay Executive's Base Salary until the Company acts to terminate the Employment Term. If the Company terminates the Employment Term, Executive shall be entitled to receive (i) any amounts earned, accrued or owing but not yet paid under Section 1 above, (ii) a continuation of his Base Salary until the end of the Initial Employment Term, (iii) the Special Retirement Benefit regardless of whether the fifth anniversary of the Effective Date occurred prior to the termination, calculated on the basis of all Base Salary (including Base Salary to be paid pursuant to clause (ii) above) and all service that would have been credited through the end of the Initial Employment Term, and calculated as if the last day of the Initial Employment Term were his early retirement date for purposes of eligibility for early retirement as to the Special Retirement Benefit if Executive has not then attained age 55; provided, however, that commencement of such benefit and the actuarial reduction for determining the amount of such benefit shall always be based on his actual age, and (iv) any other benefits in accordance with the terms of any applicable plans and programs of the Company. Otherwise, the Company shall have no further liability or obligation to Executive for compensation under this Agreement. Executive agrees, in the event of a dispute under this Section 5.1, to submit to a physical examination by a licensed physician selected by the Trustees. 5.2. Death. The Employment Term shall terminate in the event of Executive's death. In such event, the Company shall pay to Executive's executors, legal representatives or administrators, as applicable, an amount equal to the installment of Executive's Base Salary set forth in Section 1.4 hereof for the month in which Executive dies and to Executive's surviving spouse the Survivor Benefit. In addition, Executive's estate shall be entitled to receive (i) any other amounts earned, accrued or owing but not yet paid under Section 1 above and (ii) any other benefits in accordance with the terms of any applicable plans and programs of the Company. Otherwise, the Company shall have no further liability or obligation under this Agreement to Executive's executors, legal representatives, administrators, heirs or assigns or any other person claiming under or through Executive. 5.3. Cause. The Company may terminate the Employment Term, at any time, for "cause" upon written notice, in which event all payments under this Agreement shall cease, except for Base Salary to the extent already accrued, but Executive shall remain entitled to any other benefits in accordance with the terms of any applicable plans and programs of the Company but shall not be entitled to the Special Retirement Benefit. For purposes of this Agreement, Executive's employment may be terminated for "cause" if (i) Executive is convicted of a felony, (ii) in the reasonable determination of the Trustees, Executive has (x) committed an act of fraud, embezzlement, or theft in connection with Executive's duties in the course of Executive's employment with the Company, (y) caused intentional, wrongful damage to the property of the Company or intentionally and wrongfully disclosed Confidential Information, or (z) engaged in gross misconduct or gross negligence in the course of Executive's employment with the Company or (iii) Executive materially breached Executive's obligations under this Agreement and shall not have remedied such breach within 30 days after receiving written notice from the Trustees specifying the details thereof. For purposes of this Agreement, an act or omission on the part of Executive shall be deemed "intentional" only if it was not due primarily to an error in judgment or negligence and was done by Executive not in good faith and without reasonable belief that the act or omission was in the best interest of the Company. 5.4. Termination Without Cause and Non-Renewal. (a) The Company may remove Executive, at any time, without cause from the position in which Executive is employed hereunder (in which case the Employment Term shall be deemed to have ended) upon not less than 60 days' prior written notice to Executive; provided, however, that, in the event that such notice is given, Executive shall be under no obligation to render any additional services to the Company and, subject to the provisions of Section 3 hereof, shall be allowed to seek other employment. Upon any such removal or if the Company informs Executive that the Agreement will not be renewed after December 31, 2002 or at the end of any subsequent renewal period, Executive shall be entitled to receive, as liquidated damages for the failure of the Company to continue to employ Executive, only the amount due to Executive under the Company's then current severance pay plan for employees. No other payments or benefits shall be due under this Agreement to Executive, but Executive shall be entitled to any other benefits in accordance with the terms of any applicable plans and programs of the Company. Notwithstanding anything in this Agreement to the contrary, on or after the date Executive attains age 65, no action by the Company shall be treated as a removal from employment or non-renewal if on the effective date of such action Executive satisfies all of the requirements for the executive or high policy-making exception to applicable provisions of state and federal age discrimination legislation. (b) Notwithstanding the provisions of Section 5.4(a) (other than the last sentence), in the event that Executive executes a written release upon such removal or non-renewal, substantially in the form attached hereto as Annex 1, (the "Release"), of any and all claims against the Company and all related parties with respect to all matters arising out of Executive's employment by the Company (other than any entitlements under the terms of this Agreement or under any other plans or programs of the Company in which Executive participated and under which Executive has accrued a benefit), or the termination thereof, Executive shall be entitled to receive, in lieu of the payment described in Section 5.4(a), which Executive agrees to waive, (i) as liquidated damages for the failure of the Company to continue to employ Executive, a single cash payment, within 30 days after the effective date of the removal or non-renewal, equal to Executive's Base Compensation, as defined in Section 6.1(b) below; (ii) for a period equal to two years following the end of the Employment Term, Executive and Executive's spouse and dependents shall be eligible for a continuation of those Benefit Coverages, as in effect at the time of such termination or removal, and as the same may be changed from time to time, as if Executive had been continued in employment during said period or to receive cash in lieu of such benefits or premiums, as applicable, where such Benefit Coverages may not be continued (or where such continuation would adversely affect the tax status of the plan pursuant to which the Benefit Coverage is provided) under applicable law or regulations; (iii) any other amounts earned, accrued or owing but not yet paid under Section 1 above; (iv) any other benefits in accordance with the terms of any applicable plans and programs of the Company; (v) as additional consideration for the non-competition and non-solicitation covenant contained in Section 3, a single cash payment, within 30 days after the effective date of the removal or non-renewal, equal to Executive's Base Compensation, as defined in Section 6.1(b) below; (vi) in addition, (w) Executive shall be entitled to the Special Retirement Benefit without regard to the duration of his employment, (x) Executive's years of service with the Company shall be increased by two years following the end of the Employment Term and shall be taken into account in determining the amount of the Special Retirement Benefit, (y) the last day of the Initial Employment Term shall be treated as his early retirement date for purposes of eligibility for early retirement as to the Special Retirement Benefit if Executive has not then attained age 55; provided, however, that commencement of such benefit and the actuarial reduction for determining the amount of such benefit shall always be based on his actual age, and (z) two years of Base Compensation shall be taken into account as compensation during such additional two year period in determining Executive's Special Retirement Benefit, but only if the effect is to increase the amount of the Special Retirement Benefit; and (vii) The Option, to the extent not already vested prior to the removal or non-renewal, shall be fully vested and immediately exercisable as if Executive had remained actively employed by the Company, and satisfied all time requirements as to exercise, including the right of exercise, where appropriate, within 36 months after the removal or non-renewal. 5.5. Voluntary Termination. Executive may voluntarily terminate the Employment Term upon 30 days' prior written notice for any reason. In such event, after the effective date of such termination, no further payments shall be due under this Agreement except that Executive shall be entitled to the Special Retirement Benefit to the extent vested pursuant to Section 1.5 and any benefits due in accordance with the terms of any applicable plan and programs of the Company. 6. Payments Upon a Change in Control. 6.1. Definitions. For all purposes of this Section 6, the following terms shall have the meanings specified in this Section 6.1 unless the context otherwise clearly requires: (a) "Affiliate" shall mean an "affiliate" as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. (b) "Base Compensation" shall mean, for a calendar year, Executive's annualized Base Salary as would be reported for federal income tax purposes on Form W-2 for such calendar year, together with any and all salary reduction authorized amounts under any of the Company's benefit plans or programs for such calendar year, and all short-term incentive compensation at the target level to be paid to Executive in all employee capacities with the Company attributable to such calendar year and taxable in the following calendar year. "Base Compensation" shall be the higher of (i) Base Compensation for the calendar year in which occurs the Change of Control or, if no Change of Control occurs, the calendar year in which occurs the involuntary termination; or (ii) Base Compensation for the full calendar year immediately prior thereto. "Base Compensation" shall not include the value of the Option, any subsequent stock options or any exercise thereunder. (c) "Change of Control" shall mean the happening of any of the following: (i) When any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), other than the Company, its Affiliates, or any Company or NU employee benefit plan (including any trustee of such plan acting as trustee), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of NU representing more than 20% of the combined voting power of either (i) the then outstanding shares of common stock of NU (the "Outstanding Common Stock") or (ii) the then outstanding voting securities of NU entitled to vote generally in the election of directors (the "Voting Securities"); or (ii) Individuals who, as of the beginning of any twenty-four month period, constitute the Trustees (the "Incumbent Trustees") cease for any reason to constitute at least a majority of the Trustees or cease to be able to exercise the powers of the majority of the Trustees, provided that any individual becoming a trustee subsequent to the beginning of such period whose election or nomination for election by the Company's stockholders was approved by a vote of at least a majority of the trustees then comprising the Incumbent Trustees shall be considered as though such individual were a member of the Incumbent Trustees, but excluding, for this purpose, any such individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Trustees of NU (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act); or (iii) Consummation by NU of a reorganization, merger or consolidation (a "Business Combination"), in each case, with respect to which all or substantially all of the individuals and entities who were the respective beneficial owners of the Outstanding Common Stock and Voting Securities immediately prior to such Business Combination do not, following consummation of all transactions intended to constitute part of such Business Combination, beneficially own, directly or indirectly, more than 75% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation, business trust or other entity resulting from or being the surviving entity in such Business Combination in substantially the same proportion as their ownership immediately prior to such Business Combination of the Outstanding Common Stock and Voting Securities, as the case may be; or (iv) Consummation of a complete liquidation or dissolution of NU or sale or other disposition of all or substantially all of the assets of NU other than to a corporation, business trust or other entity with respect to which, following consummation of all transactions intended to constitute part of such sale or disposition, more than 75% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, is then owned beneficially, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Common Stock and Voting Securities immediately prior to such sale or disposition in substantially the same proportion as their ownership of the Outstanding Common Stock and Voting Securities, as the case may be, immediately prior to such sale or disposition. (d) "Termination Date" shall mean the date of receipt of a Notice of Termination of this Agreement or any later date specified therein. (e) "Termination of Employment" shall mean the termination of Executive's actual employment relationship with the Company, including a failure to renew the Agreement after August 20, 2002 or at the end of any subsequent renewal period, in either case occasioned by the Company's action. (f) "Termination upon a Change of Control" shall mean a Termination of Employment upon or within two years after a Change of Control either: (i) initiated by the Company for any reason other than Executive's (w) disability, as defined in Section 5.1 hereof, (x) death, (y) retirement on or after attaining age 65, or (z) "cause," as defined in Section 5.3 hereof, or (ii) initiated by Executive (A) upon any failure of the Company materially to comply with and satisfy any of the terms of this Agreement, including any material reduction by the Company of the authority, duties or responsibilities of Executive, any reduction of Executive's compensation or benefits due hereunder, or the assignment to Executive of duties which are materially inconsistent with the duties of Executive's position as defined in Section 1.2 above, or (B) if Executive is transferred, without Executive's written consent, to a location that is more than 50 miles from Executive's principal place of business immediately preceding the Change of Control. 6.2. Notice of Termination. Any Termination upon a Change of Control shall be communicated by a Notice of Termination to the other party hereto given in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) briefly summarizes the facts and circumstances deemed to provide a basis for a Termination of Employment and the applicable provision hereof, and (iii) if the Termination Date is other than the date of receipt of such notice, specifies the Termination Date (which date shall not be more than 15 days after the giving of such notice). 6.3. Payments upon Termination. Subject to the provisions of Section 6.6 hereof, in the event of Executive's Termination upon a Change of Control, the Company agrees, in the event Executive executes the Release required by Section 5.4(b), to pay to Executive, in a single cash payment, within thirty days after the Termination Date, the greater of (i) Executive's Base Compensation, as defined in Section 6.1(b), for the balance of the Initial Employment Term minus one year, or (ii) two multiplied by Executive's Base Compensation. The payment made under clause (i) or under clause (ii), together with an additional year of Base Compensation shall be taken into account as additional compensation over the period in which it would have been paid in determining Executive's Special Retirement Benefit, but only if the effect is to increase the amount of the Special Retirement Benefit. In addition, all amounts, benefits and Benefit Coverages described in Section 5.4(b)(ii), (iii), (iv) and (v) shall also be due to Executive, provided that in (ii) Benefit Coverages shall continue for at least three years instead of two. In the event Executive fails or refuses to execute the Release required by Section 5.4(b), the Company shall only pay to Executive, in a single cash payment, within thirty days after the Termination Date, the amount due under Section 5.4(a) above and, in addition, all other amounts and benefits described in Section 5.4(a). 6.4. Other Payments, Special Retirement Benefit, Stock Option and Stock Grants, etc. Subject to the provisions of Section 6.6 hereof, in the event of Executive's Termination upon a Change of Control, and the execution of the Release required by Section 5.4(b): (a) Executive's years of service with the Company through the greater of (i) the balance of the Initial Employment Term, or (ii) the 36th month following the Termination Date shall be taken into account in determining Executive's eligibility for, but not amount of cost sharing under, the Company's retiree health plan and, in addition, such number of months shall be added to Executive's age for this purpose; (b) Executive's years of service with the Company through the greater of (i) the balance of the Initial Employment Term, or (ii) the 36th month following the Termination Date shall be taken into account in determining the amount of, and Executive's eligibility for, the Special Retirement Benefit and the last day of the Initial Employment Term shall be treated as his early retirement date for purposes of eligibility for early retirement as to the Special Retirement Benefit if Executive has not then attained age 55; provided, however, that commencement of such benefit and the actuarial reduction for determining the amount of such benefit shall always be based on his actual age; (c) On Executive's Termination Date, the Option and any subsequent stock option grants previously granted to Executive, to the extent not already vested prior to the Termination Date, shall be fully vested and immediately exercisable as if Executive had remained actively employed by the Company and satisfied all requirements as to exercise, including the right of exercise where appropriate within 36 months of the removal or non-renewal, and if the Change of Control results in the Voting Securities of NU ceasing to be traded on a national securities exchange or though the national market system of the National Association of Securities Dealers Inc., the price at which the Option shall be exercised shall be the average of the closing prices for the five trading days preceding the day such Voting Securities cease trading. 6.5. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit Executive's continuing or future participation in or rights under any benefit, bonus, incentive or other plan or program provided by the Company and for which Executive may qualify; provided, however, that if Executive becomes entitled to and receives all of the payments provided for in this Agreement, Executive hereby waives Executive's right to receive payments under any severance plan or similar program applicable to all employees of the Company. 6.6. Certain Increase in Payments. (a) Anything in this Agreement to the contrary notwithstanding, in the event that it shall be determined that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (the "Payment"), would constitute an "excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), Executive shall be paid an additional amount (the "Gross-Up Payment") such that the net amount retained by Executive after deduction of any excise tax imposed under Section 4999 of the Code, and any federal, state and local income and employment tax and excise tax imposed upon the Gross-Up Payment shall be equal to the Payment. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income tax and employment taxes at the highest marginal rate of federal income and employment taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Executive's residence on the Termination Date, net of the maximum reduction in federal income taxes that may be obtained from the deduction of such state and local taxes. (b) All determinations to be made under this Section 6 shall be made by the Company's independent public accountant immediately prior to the Change of Control (the "Accounting Firm"), which firm shall provide its determinations and any supporting calculations both to the Company and Executive within 10 days of the Termination Date. Any such determination by the Accounting Firm shall be binding upon the Company and Executive. Within five days after the Accounting Firm's determination, the Company shall pay (or cause to be paid) or distribute (or cause to be distributed) to or for the benefit of Executive such amounts as are then due to Executive under this Agreement. (c) In the event that upon any audit by the Internal Revenue Service, or by a state or local taxing authority, of the Payment or Gross-Up Payment, a change is finally determined to be required in the amount of taxes paid by Executive, appropriate adjustments shall be made under this Agreement such that the net amount which is payable to Executive after taking into account the provisions of Section 4999 of the Code shall reflect the intent of the parties as expressed in subsection (a) above, in the manner determined by the Accounting Firm. (d) All of the fees and expenses of the Accounting Firm in performing the determinations referred to in subsections (b) and (c) above shall be borne solely by the Company. The Company agrees to indemnify and hold harmless the Accounting Firm of and from any and all claims, damages and expenses resulting from or relating to its determinations pursuant to subsections (b) and (c) above, except for claims, damages or expenses resulting from the gross negligence or willful misconduct of the Accounting Firm. 7. Survivorship. The respective rights and obligations of the parties under this Agreement shall survive any termination of Executive's employment to the extent necessary to the intended preservation of such rights and obligations. 8. Mitigation. Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise and there shall be no offset against amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment that Executive may obtain. 9. Arbitration; Expenses. In the event of any dispute under the provisions of this Agreement other than a dispute in which the primary relief sought is an equitable remedy such as an injunction, the parties shall be required to have the dispute, controversy or claim settled by arbitration in the City of Hartford, Connecticut in accordance with National Rules for the Resolution of Employment Disputes then in effect of the American Arbitration Association, before a panel of three arbitrators, two of whom shall be selected by the Company and Executive, respectively, and the third of whom shall be selected by the other two arbitrators. Any award entered by the arbitrators shall be final, binding and nonappealable (except as provided in Section 52-418 of the Connecticut General Statutes) and judgment may be entered thereon by either party in accordance with applicable law in any court of competent jurisdiction. This arbitration provision shall be specifically enforceable. The arbitrators shall have no authority to modify any provision of this Agreement or to award a remedy for a dispute involving this Agreement other than a benefit specifically provided under or by virtue of the Agreement. If Executive prevails on any material issue which is the subject of such arbitration or lawsuit, the Company shall be responsible for all of the fees of the American Arbitration Association and the arbitrators and any expenses relating to the conduct of the arbitration (including the Company's and Executive's reasonable attorneys' fees and expenses). Otherwise, each party shall be responsible for its own expenses relating to the conduct of the arbitration (including reasonable attorneys' fees and expenses) and shall share the fees of the American Arbitration Association. 10. Notices. All notices and other communications required or permitted under this Agreement or necessary or convenient in connection herewith shall be in writing and shall be deemed to have been given when hand delivered or mailed by registered or certified mail, as follows (provided that notice of change of address shall be deemed given only when received): If to the Company, to: Northeast Utilities P.O. Box 270 Hartford, CT 06141-0270 Attention: Senior Vice President, Secretary and General Counsel With a required copy to: Morgan, Lewis & Bockius 2000 One Logan Square Philadelphia, PA 19103-6993 Attention: Robert J. Lichtenstein, Esquire If to Executive, to: Michael G. Morris 996 Elmsmere Northville, MI 48167 With a required copy to: Shipman & Goodwin One American Row Hartford, CT 06103-2819 Attention: Brian Clemow, Esquire or to such other names or addresses as the Company or Executive, as the case may be, shall designate by notice to each other person entitled to receive notices in the manner specified in this Section. 11. Contents of Agreement; Amendment and Assignment. (a) This Agreement sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and cannot be changed, modified, extended or terminated except upon written amendment approved by the Trustees and executed on its behalf by a duly authorized officer and by Executive. (b) All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, executors, administrators, legal representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of Executive under this Agreement are of a personal nature and shall not be assignable or delegatable in whole or in part by Executive. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to Executive, expressly to assume and agree to perform this Agreement in the same manner and to the extent the Company would be required to perform if no such succession had taken place. 12. Severability. If any provision of this Agreement or application thereof to anyone or under any circumstances is adjudicated to be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect any other provision or application of this Agreement which can be given effect without the invalid or unenforceable provision or application and shall not invalidate or render unenforceable such provision or application in any other jurisdiction. If any provision is held void, invalid or unenforceable with respect to particular circumstances, it shall nevertheless remain in full force and effect in all other circumstances. 13. Remedies Cumulative; No Waiver. No remedy conferred upon a party by this Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to any other remedy given under this Agreement or now or hereafter existing at law or in equity. No delay or omission by a party in exercising any right, remedy or power under this Agreement or existing at law or in equity shall be construed as a waiver thereof, and any such right, remedy or power may be exercised by such party from time to time and as often as may be deemed expedient or necessary by such party in its sole discretion. 14. Beneficiaries/References. Executive shall be entitled, to the extent permitted under any applicable law, to select and change a beneficiary or beneficiaries to receive any compensation or benefit payable under this Agreement following Executive's death by giving the Company written notice thereof. In the event of Executive's death or a judicial determination of Executive's incompetence, reference in this Agreement to Executive shall be deemed, where appropriate, to refer to Executive's beneficiary, estate or other legal representative. 15. Miscellaneous. All section headings used in this Agreement are for convenience only. This Agreement may be executed in counterparts, each of which is an original. It shall not be necessary in making proof of this Agreement or any counterpart hereof to produce or account for any of the other counterparts. 16. Withholding. The Company may withhold from any payments under this Agreement all federal, state and local taxes as the Company is required to withhold pursuant to any law or governmental rule or regulation. Executive shall bear all expense of, and be solely responsible for, all federal, state and local taxes due with respect to any payment received under this Agreement. 17. Governing Law. This Agreement shall be governed by and interpreted under the laws of the State of Connecticut without giving effect to any conflict of laws provisions. 18. Adoption by Affiliates; Obligations. (a) The obligations under this Agreement shall, in the first instance, be paid and satisfied by the Company; provided, however, that the Company will use its best efforts to cause NU and each entity in which NU (or its successors or assigns) now or hereafter holds, directly or indirectly, more than a 50 percent voting interest (an "Employer") to approve and adopt this Agreement and, by such approval and adoption, to be bound by the terms hereof as though a signatory hereto. If the Company shall be dissolved or for any other reason shall fail to pay and satisfy the obligations, each individual Employer shall thereafter shall be jointly and severally liable to pay and satisfy the obligations to Executive. (b) The Declaration of Trust of NU provides that no shareholder of NU shall be held to any liability whatever for the payment of any sum of money, or for damages or otherwise under any contract, obligation or undertaking made, entered into or issued by the trustees of NU or by any officer, agent or representative elected or appointed by the trustees and no such contract, obligation or undertaking shall be enforceable against the trustees or any of them in their or his individual capacities or capacity and all such contracts, obligations and undertakings shall be enforceable only against the trustees as such and every person, firm, association, trust and corporation having any claim or demand arising out of any such contract, obligation or undertaking shall look only to the trust estate for the payment or satisfaction thereof. Any liability for benefits under this Agreement incurred by NU shall be subject to the provisions of this Subsection (b). 19. Establishment of Trust. The Company may establish an irrevocable trust fund pursuant to a trust agreement to hold assets to satisfy any of its obligations under this Agreement. Funding of such trust fund shall be subject to the Trustees's discretion, as set forth in the agreement pursuant to which the fund will be established. IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have executed this Agreement as of the date first above written. NORTHEAST UTILITIES By:/S/ROBERT P.WAX /S/MICHAEL G. MORRIS Name: Robert P. Wax Title: Senior Vice President and General Counsel APPENDIX A The Special Retirement Benefit described in Section 1.5 of this Agreement shall be calculated, subject to the modifications set forth in 1, 2 and 3 below, in accordance with the benefit formula of the Supplemental Executive Retirement Plan for Employees of CMS Energy/Consumers Energy Company (the "Consumers SERP"), a copy of which follows. A copy of the Pension Plan for Employees of Consumers Power Company (the "Consumers Pension Plan") is also included because the Consumers SERP uses certain terms defined in the Consumers Pension Plan. In calculating the Special Retirement Benefit, the following modifications shall apply to the benefit formula set forth in the Consumers SERP: 1. The term "Executive Incentive Compensation" in the Consumers SERP shall refer to any short-term incentive compensation programs established by the Company for its senior level executives, as described in Section 1.7 of this Agreement and any long-term incentive compensation programs established by the Company for its senior level executives, as described in Section 1.8 of this Agreement; provided, however, that in the event that the Target Benefit under the Supplemental Plan is amended in the future to eliminate or modify the use of long-term incentive compensation from or in its calculation, as applicable, then long-term incentive compensation shall be eliminated or modified in the same manner and to the same extent in this calculation. 2. No reduction shall be made pursuant to Section V.1(ii) of the Consumers SERP for any benefits payable under the Consumers Pension Plan. 3. Payment of the Special Retirement Benefit shall not be conditioned on a payment under the Consumers Pension Plan. ANNEX 1 CONFIDENTIAL SEPARATION AGREEMENT AND GENERAL RELEASE THIS AGREEMENT, made and entered into on this day of , , by and between Northeast Utilities, a Massachusetts business trust, with its principal office in West Springfield, Massachusetts, (together with each direct and indirect affiliated company that has adopted the Employment Agreement entered into as of August 20, 1997 (the "Employment Agreement"), with , hereinafter, the "Company"), and , a resident of , Connecticut ("Executive"). W I T N E S S E T H: WHEREAS, the Company had heretofore employed Executive under the Employment Agreement; and WHEREAS, Executive's employment [has been terminated\has not been renewed]; and WHEREAS, the Company and Executive wish to enter into an agreement to provide for a mutual release as to any claims including, without limitation, claims that might be asserted by Executive under the Employment Agreement and the Age Discrimination in Employment Act, as further described herein, and reaffirm Executive's right to indemnification; NOW, THEREFORE, in consideration of the mutual promises contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: 1. The Company and Executive hereby agree that [Executive's termination of employment\the non-renewal] shall be effective on , and that the Employment Agreement shall continue only to the extent provided therein as to obligations that survive the termination of Executive's employment. 2. Executive agrees and acknowledges that the Company, on a timely basis, has paid, or agreed to pay, to Executive all other amounts due and owing based on Executive's prior services in accordance with the terms of the Employment Agreement or any other contract with Executive, whether express or implied, and that the Company has no obligation, contractual or otherwise to Executive, except as provided herein, in the Employment Agreement or any other such contract with Executive, nor does it have any obligation to hire, rehire or re-employ Executive in the future. 3. In full and complete settlement of any claims that Executive may have against the Company, including any possible violations of the Age Discrimination in Employment Act, 29 U.S.C. Section 621 et seq., ("ADEA") in connection with Executive's termination of employment, and for and in consideration of the undertakings of the Company described herein, Executive does hereby REMISE, RELEASE, AND FOREVER DISCHARGE the Company, and each of its subsidiaries and affiliates, their officers, directors, shareholders, partners, employees and agents, and their respective successors and assigns, heirs, executors and administrators (hereinafter all included within the term "the Company"), of and from any and all manner of actions and causes of actions, suits, debts, claims and demands whatsoever in law or in equity, which Executive ever had, now has, or hereafter may have, or which Executive's heirs, executors or administrators hereafter may have, by reason of any matter, cause or thing whatsoever from the beginning of Executive's employment to the date of this Agreement; and particularly, but without limitation of the foregoing general terms, any claims arising from or relating in any way to Executive's employment relationship or the Employment Agreement to the extent of any obligation that does not survive Executive's [termination of employment/non-renewal] and Executive's termination from that employment relationship, including but not limited to, any claims which have been asserted, could have been asserted, or could be asserted now or in the future under any federal, state or local laws, including any claims under ADEA, Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. Section 2000e et seq. ("Title VII"), the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the Rehabilitation Act of 1973, the Americans with Disabilities Act, the Family and Medical Leave Act, the Energy Reorganization Act of 1974, as amended, Section 11(c) of the Occupational Safety and Health Act, and the Energy Policy Act, and any common law claims now or hereafter recognized and all claims for counsel fees and costs. Notwithstanding the foregoing, nothing contained in this Agreement shall prevent Executive from requiring the Company to fulfill its obligations under this Agreement, under the Employment Agreement, to the extent of any continuing obligations thereunder, under any employee benefit plan, as defined in Section 3(3) of ERISA, maintained by the Company and in which Executive participated or any other contract with Executive, whether express or implied. Nothing in this Agreement shall be construed to prohibit Executive from reporting any suspected instance of illegal activity of any nature, any nuclear safety concern, any workplace safety concern, or any public safety concern to the Nuclear Regulatory Commission (NRC), the United States Department of Labor, or any other federal or state governmental agency. This Agreement shall not be construed to prohibit Executive from providing information to the NRC or to any other federal or state governmental agency or governmental officials, or testifying in any civil or criminal proceedings concerning any matter. This Agreement shall not be construed as a waiver or withdrawal of safety concerns, if any, which Executive may have reported to the NRC, or the withdrawal of participation by Executive in any NRC proceedings. Nothing in this Agreement shall limit or impair any right Executive may otherwise have to indemnity and defense by the Company, and, notwithstanding any contrary provision of this Agreement, (i) the Company shall indemnify and defend Executive in connection with any action, suit or proceeding in which Executive may be involved or with which Executive may be threatened by reason of Executive's being or having been an officer of the Company in the same manner contemplated by (including the payment or advancement of any reasonable expenses as incurred) and to the fullest extent permitted by the Declaration of Trust of Northeast Utilities as of the date hereof, unless later limited in accordance with applicable law, or under applicable law, (in which case Executive shall notify the Company within five business days after receiving service of process as to the commencement of the action, suit or proceeding and give the Company the right to control the defense of any such action, suit or proceeding, provided that no delay in giving such notice shall result in a forfeiture of any rights by Executive unless, and then only to the extent that, the Company is actually prejudiced by such delay), and (ii) Executive may join the Company in any action, suit or proceeding, or bring any action, suit or proceeding against the Company, as may be necessary for the protection or enforcement of such rights of indemnification and defense by the Company. 4. Except to the extent permitted by paragraph 3, Executive further agrees and covenants that neither Executive, nor any person, organization or other entity on Executive's behalf, will file, charge, claim, sue or cause or permit to be filed, charged, or claimed, any action for damages, including injunctive, declaratory, monetary or other relief against the Company, involving any matter occurring at any time in the past up to the date of this Agreement, or involving any continuing effects of any actions or practices which may have arisen or occurred prior to the date of this Agreement, including any charge of discrimination under ADEA, Title VII, the Workers' compensation Act or state or local laws. In addition, Executive further agrees and covenants that should Executive, or any other person, organization or entity on Executive's behalf, file, charge, claim, sue or cause or permit to be filed, charged, or claimed, any action for damages, including injunctive, declaratory, monetary or other relief, despite Executive's agreement not to do so under this Agreement, or should Executive otherwise fail to abide, in any material respect, by any of the terms of this Agreement, then the Company will be relieved of all further obligations owed under the Employment Agreement and this Agreement, Executive will forfeit all monies paid to Executive under the Employment Agreement following Executive's [termination of employment/non-renewal] and Executive will pay all of the costs and expenses of the Company (including reasonable attorneys' fees) incurred in the defense of any such action or undertaking. 5. In full and complete settlement of any claims that the Company may have against Executive, other than the fulfillment of Executive's obligations under this Agreement or under the Employment Agreement, and for and in consideration of the undertakings of Executive described herein, the Company does hereby REMISE, RELEASE, AND FOREVER DISCHARGE Executive and Executive's heirs, executors and administrators (hereinafter all included within the term "Executive"), of and from any and all manner of actions and causes of actions, suits, debts, claims and demands whatsoever in law or in equity, which the Company ever had, now has, or hereafter may have, by reason of any civil (but specifically not any criminal act) matter, cause or thing whatsoever by reason of Executive's being or having been an officer of the Company from the beginning of Executive's employment with the Company to the date of this Agreement; and particularly, but without limitation of the foregoing general terms, any claims arising from or relating in any way to actions taken by Executive by reason of Executive's being or having been an officer of the Company and Executive's termination from those relationships with the Company. 6. The Company further agrees and covenants that neither it, nor any person, organization or other entity on its behalf, will file, charge, claim, sue or cause or permit to be filed, charged, or claimed, any action for damages, including injunctive, declaratory, monetary or other relief against Executive, involving any matter occurring at any time in the past up to the date of this Agreement, or involving any continuing effects of any actions or practices which may have arisen or occurred prior to the date of this Agreement, by reason of Executive's being or having been an officer of the Company, so long as Executive meets, in all material respects, Executive's obligations under this Agreement and the Employment Agreement. In addition, the Company further agrees and covenants that should it, or any other person, organization or entity on its behalf, file, charge, claim, sue or cause or permit to be filed, charged, or claimed, any action for damages, including injunctive, declaratory, monetary or other relief, despite its agreement not to do so under this Agreement, then it will pay all of the costs and expenses of Executive (including reasonable attorneys' fees) incurred in the defense of any such action or undertaking. 7. Executive hereby agrees and acknowledges that under this Agreement, the Company has agreed to provide Executive with compensation and benefits that are in addition to any amounts to which Executive otherwise would have been entitled under the Employment Agreement or otherwise in the absence of this Agreement, and that such additional compensation is sufficient to support the covenants and agreements by Executive herein. 8. Executive and the Company, its officers and directors, will not, disparage the name, business reputation or business practices of the other. In addition, by signing this Agreement, Executive agrees not to pursue any internal grievance with the Company. 9. Executive hereby certifies that Executive has read the terms of this Agreement, that Executive has been advised by the Company to consult with an attorney and that Executive understands its terms and effects. Executive acknowledges, further, that Executive is executing this Agreement of Executive's own volition, without any threat, duress or coercion and with a full understanding of its terms and effects and with the intention, as expressed in paragraph 3 hereof, of releasing all claims recited herein in exchange for the consideration described herein, which Executive acknowledges is adequate and satisfactory to Executive provided the Company meets all of its obligations under this Agreement. The Company has made no representations to Executive concerning the terms or effects of this Agreement other than those contained in this Agreement. 10. Executive hereby acknowledges that Executive was presented with this Agreement on , , and that Executive was informed that Executive had the right to consider this Agreement and the release contained herein for a period of twenty-one (21) days prior to execution. Executive also understands that Executive has the right to revoke this Agreement for a period of seven (7) days following execution, by giving written notice to the Company at 107 Selden Street, Berlin, CT 06037, in which event the provisions of this Agreement shall be null and void, and the parties shall have the rights, duties, obligations and remedies afforded by applicable law. 11. This Agreement shall be interpreted and enforced under the laws of the State of Connecticut. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. ATTEST: NORTHEAST UTILITIES By: Secretary Witness Executive EX-10.14 20 EMPLOYMENT AGREEMENT Exhibit 10.44 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") entered into as of February 25, 1997, by and between Northeast Utilities Service Company, a Connecticut corporation (the "Company"), with its principal office in Berlin, Connecticut, and Robert P. Wax, a resident of West Hartford, Connecticut ("Executive"). WHEREAS, Executive is currently employed as the Senior Vice President, Secretary and General Counsel of the Company and both parties desire to enter into an agreement to reflect Executive's contribution to the Company's business in Executive's executive capacities and to provide for Executive's continued employment by the Company, upon the terms and conditions set forth herein: NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Employment. The Company hereby agrees to continue the employment of Executive, and Executive hereby accepts such employment and agrees to perform Executive's duties and responsibilities, in accordance with the terms, conditions and provisions hereinafter set forth. 1.1. Employment Term. The term of Executive's employment under this Agreement shall commence as of the date hereof (the "Effective Date") and shall continue until December 31, 1998, unless sooner terminated in accordance with Section 5 or Section 6 hereof, and shall automatically renew for periods of one year unless one party gives written notice to the other, at least six months prior to December 31, 1998 or at least six months prior to the end of any one-year renewal period, that the Agreement shall not be further extended. The period commencing as of the Effective Date and ending on the date on which the term of Executive's employment under the Agreement shall terminate is hereinafter referred to as the "Employment Term". 1.2. Duties and Responsibilities. Executive shall serve in such senior positions as directed by the Company's Board of Directors (the "Board") or the Board of Trustees (the "Trustees") of Northeast Utilities ("NU") that provide Executive with duties and compensation that are substantially equivalent to Executive's current position in terms of duties and responsibilities. During the Employment Term, Executive shall perform all duties and accept all responsibilities incident to such positions as may be assigned to Executive by the Board. 1.3. Extent of Service. During the Employment Term, Executive agrees to use Executive's best efforts to carry out Executive's duties and responsibilities under Section 1.2 hereof and, consistent with the other provisions of this Agreement, to devote substantially all Executive's business time, attention and energy thereto. Except as provided in Section 3 hereof, the foregoing shall not be construed as preventing Executive from making minority investments in other businesses or enterprises provided that Executive agrees not to become engaged in any other business activity which, in the reasonable judgment of the Board, is likely to interfere with Executive's ability to discharge Executive's duties and responsibilities to the Company. 1.4. Base Salary. For all the services rendered by Executive hereunder, the Company shall pay Executive a base salary ("Base Salary"), commencing on the Effective Date, at the annual rate then being paid to Executive by the Company, payable in installments at such times as the Company customarily pays its other senior level executives (but in any event no less often than monthly). Executive's Base Salary shall be reviewed annually for appropriate adjustment (but shall not be reduced below that in effect on the Effective Date without Executive's written consent) by the Trustees pursuant to its normal performance review policies for senior level executives. 1.5. Retirement and Benefit Coverages. During the Employment Term, Executive shall be entitled to participate in all (a) employee pension and retirement plans and programs ("Retirement Plans") and (b) welfare benefit plans and programs ("Benefit Coverages"), in each case made available to the Company's senior level executives as a group or to its employees generally, as such Retirement Plans or Benefit Coverages may be in effect from time to time, including, without limitation, the Company's Supplemental Executive Retirement Plan for Officers (the "Supplemental Plan"), both as to the Make-Whole Benefit and the Target Benefit. 1.6. Reimbursement of Expenses; Vacation. Executive shall be provided with reimbursement of expenses related to Executive's employment by the Company on a basis no less favorable than that which may be authorized from time to time for senior level executives as a group, and shall be entitled to vacation and holidays in accordance with the Company's normal personnel policies for senior level executives. 1.7. Short-Term Incentive Compensation. If the Employment Term has not previously terminated, beginning on January 1, 1999, Executive shall be entitled to participate in any short-term incentive compensation programs established by the Company for its senior level executives generally depending upon achievement of certain annual individual or business performance objectives specified and approved by the Trustees (or a Committee thereof) in its sole discretion; provided, however, that Executive's "target opportunity" and "maximum opportunity" under any such program shall be at least at the same level as in effect for Executive on January 1, 1996. Executive's short-term incentive compensation, either in shares of NU or cash, as applicable from time to time, shall be paid to Executive, subject to the Board's or the Trustee's reasonable discretion, not later than such payments are made to the Company's senior level executives generally. 1.8. Long-Term Incentive Compensation. On and after the Effective Date and until December 31, 1998, Executive shall participate in the NU Stock Price Recovery Plan, in accordance with the terms adopted by the Trustees and NU's Organization, Compensation and Board Affairs Committee on December 21, 1996. If the Employment Term has not previously terminated, beginning on January 1, 1999, Executive shall also be entitled to participate in any long-term incentive compensation programs established by the Company for its senior level executives generally depending upon achievement of certain business performance objectives specified and approved by the Trustees (or a Committee thereof) in its sole discretion; provided, however, that Executive's "target opportunity" and "maximum opportunity" under any such program shall be at least at the same level as in effect for Executive on January 1, 1996. Executive's long-term incentive compensation, either in shares of NU or cash, as applicable from time to time, shall be paid to Executive, subject to the Board's or the Trustee's reasonable discretion, not later than such payments are made to the Company's senior level executives generally. 2. Confidential Information. Executive recognizes and acknowledges that by reason of Executive's employment by and service to the Company before, during and, if applicable, after the Employment Term Executive has had and will continue to have access to certain confidential and proprietary information relating to the business of the Company, which may include, but is not limited to, trade secrets, trade "know-how", customer information, supplier information, cost and pricing information, marketing and sales techniques, strategies and programs, computer programs and software and financial information (collectively referred to as "Confidential Information"). Executive acknowledges that such Confidential Information is a valuable and unique asset of the Company and Executive covenants that Executive will not, unless expressly authorized in writing by the Board, at any time during the course of Executive's employment use any Confidential Information or divulge or disclose any Confidential Information to any person, firm or corporation except in connection with the performance of Executive's duties for the Company and in a manner consistent with the Company's policies regarding Confidential Information. Executive also covenants that at any time after the termination of such employment, directly or indirectly, Executive will not use any Confidential Information or divulge or disclose any Confidential Information to any person, firm or corporation, unless such information is in the public domain through no fault of Executive or except when required to do so by a court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) with apparent jurisdiction to order Executive to divulge, disclose or make accessible such information, in which case Executive will inform the Company in writing promptly of such required disclosure, but in any event at least two business days prior to disclosure. All written Confidential Information (including, without limitation, in any computer or other electronic format) which comes into Executive's possession during the course of Executive's employment shall remain the property of the Company. Except as required in the performance of Executive's duties for the Company, or unless expressly authorized in writing by the Board, Executive shall not remove any written Confidential Information from the Company's premises, except in connection with the performance of Executive's duties for the Company and in a manner consistent with the Company's policies regarding Confidential Information. Upon termination of Executive's employment, Executive agrees immediately to return to the Company all written Confidential Information in Executive's possession. For the purposes of this Section 2, the term "Company" shall be deemed to include NU and the Affiliates, as defined in Section 6.1(a), of NU and the Company. 3. Non-Competition; Non-Solicitation. (a) During Executive's employment by the Company and for a period of two years after Executive's termination of employment for any reason, within the Company's "service area," as defined below, Executive will not, except with the prior written consent of the Board, directly or indirectly, own, manage, operate, join, control, finance or participate in the ownership, management, operation, control or financing of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with, or use or permit Executive's name to be used in connection with, any business or enterprise which is engaged in any business that is competitive with any business or enterprise in which the Company is engaged. For the purposes of this Section, "service area" shall mean the geographic area within the states of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont, or any other geographic area in which, at the time of Executive's termination of employment from the Company, the Company is doing business. Executive acknowledges that the listed service area is the area in which the Company presently does business. (b) The foregoing restrictions shall not be construed to prohibit the ownership by Executive of less than five percent (5%) of any class of securities of any corporation which is engaged in any of the foregoing businesses having a class of securities registered pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), provided that such ownership represents a passive investment and that neither Executive nor any group of persons including Executive in any way, either directly or indirectly, manages or exercises control of any such corporation, guarantees any of its financial obligations, otherwise takes any part in its business, other than exercising Executive's rights as a shareholder, or seeks to do any of the foregoing. (c) Executive further covenants and agrees that during Executive's employment by the Company and for the period of two years thereafter, Executive will not, directly or indirectly, (i) solicit, divert, take away, or attempt to solicit, divert or take away, any of the Company's "Principal Customers," defined for the purposes hereof to include any customer of the Company, from which $100,000 or more of annual gross revenues are derived at such time, or (ii) encourage any Principal Customer to reduce its patronage of the Company. (d) Executive further covenants and agrees that during Executive's employment by the Company and for the period of two years thereafter, Executive will not, directly or indirectly, solicit or hire, or encourage the solicitation or hiring of, any person who was a managerial or higher level employee of the Company at any time during the term of Executive's employment by the Company by any employer other than the Company for any position as an employee, independent contractor, consultant or otherwise. The foregoing covenant of Executive shall not apply to any person after 12 months have elapsed subsequent to the date on which such person's employment by the Company has terminated. (e) Nothing in this Section 3 shall be construed to prohibit Executive, if Executive is a lawyer, from being connected as a partner, principal, shareholder, associate, counsel or otherwise with another lawyer or a law firm which performs services for clients engaged in any business or enterprise that is competitive with any business or enterprise in which the Company is engaged, provided that Executive is not personally involved, directly or indirectly, in performing services for any such clients during the period specified in Section 3(a) and provided further that such lawyer or law firm takes reasonable precautions to screen Executive from participating for the period specified in Section 3(a) in the representation of any such clients. The parties agree that any such personal performance of services by Executive for any such clients during such period would create an unreasonable risk of violation by Executive of the provisions of Section 2 of this Agreement, and Executive agrees (and the Company may elect) to notify in writing any lawyer or law firm with which Executive may be connected during the period specified in Section 3(a) of Executive's Agreement as set forth herein. The parties further agree that, in addition to the nondisclosure obligations of Section 2 of this Agreement, Executive remains subject to all ethical obligations relating to confidentiality of information to the extent that Executive acted as a lawyer for the Company, but Executive's knowledge of such confidential information shall not be imputed to such other lawyer or law firm with which Executive subsequently may become connected. Executive agrees to notify the Company in writing in advance of the precautions to be taken by such lawyer or law firm to screen Executive from any representation of such competing client of such lawyer or law firm. (f) For the purposes of this Section 3, the term "Company" shall be deemed to include NU and the Affiliates, as defined in Section 6.1(a), of NU and the Company. 4. Equitable Relief. (a) Executive acknowledges and agrees that the restrictions contained in Sections 2 and 3 are reasonable and necessary to protect and preserve the legitimate interests, properties, goodwill and business of the Company, that the Company would not have entered into this Agreement in the absence of such restrictions and that irreparable injury will be suffered by the Company should Executive breach any of the provisions of those Sections. Executive represents and acknowledges that (i) Executive has been advised by the Company to consult Executive's own legal counsel in respect of this Agreement, and (ii) that Executive has had full opportunity, prior to execution of this Agreement, to review thoroughly this Agreement with Executive's counsel. (b) Executive further acknowledges and agrees that a breach of any of the restrictions in Sections 2 and 3 cannot be adequately compensated by monetary damages. Executive agrees that the Company shall be entitled to preliminary and permanent injunctive relief, without the necessity of proving actual damages, as well as an equitable accounting of all earnings, profits and other benefits arising from any violation of Sections 2 or 3 hereof, which rights shall be cumulative and in addition to any other rights or remedies to which the Company may be entitled. In the event that any of the provisions of Sections 2 or 3 hereof should ever be adjudicated to exceed the time, geographic, service, or other limitations permitted by applicable law in any jurisdiction, it is the intention of the parties that the provision shall be amended to the extent of the maximum time, geographic, service, or other limitations permitted by applicable law, that such amendment shall apply only within the jurisdiction of the court that made such adjudication and that the provision otherwise be enforced to the maximum extent permitted by law. (c) If Executive breaches any of Executive's obligations under Sections 2 or 3 hereof, and such breach constitutes "Cause," as defined in Section 5.3 hereof, or would constitute Cause if it had occurred during the Employment Term, the Company shall thereafter have no Target Benefit obligation pursuant to the Supplemental Plan, but shall remain obligated for the Make-Whole Benefit under the Supplemental Plan, but only to the extent not modified by the terms of this Agreement, and compensation and other benefits provided in any plans, policies or practices then applicable to Executive in accordance with the terms thereof. (d) Executive irrevocably and unconditionally (i) agrees that any suit, action or other legal proceeding arising out of Sections 2 or 3 hereof, including without limitation, any action commenced by the Company for preliminary and permanent injunctive relief and other equitable relief, may be brought in the United States District Court for the District of Connecticut, or if such court does not have jurisdiction or will not accept jurisdiction, in any court of general jurisdiction in Hartford, Connecticut, (ii) consents to the non-exclusive jurisdiction of any such court in any such suit, action or proceeding, and (iii) waives any objection which Executive may have to the laying of venue of any such suit, action or proceeding in any such court. Executive also irrevocably and unconditionally consents to the service of any process, pleadings, notices or other papers in a manner permitted by the notice provisions of Section 10 hereof. (e) Executive agrees that for a period of five years following the termination of Executive's employment by the Company Executive will provide, and that at all times after the date hereof the Company may similarly provide, a copy of Sections 2 and 3 hereof to any business or enterprise (i) which Executive may directly or indirectly own, manage, operate, finance, join, control or participate in the ownership, management, operation, financing, or control of, or (ii) with which Executive may be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise, or in connection with which Executive may use or permit Executive's name to be used; provided, however, that this provision shall not apply in respect of Section 3 hereof after expiration of the time periods set forth therein. (f) For the purposes of this Section 4, the term "Company" shall be deemed to include NU and the Affiliates, as defined in Section 6.1(a), of NU and the Company. 5. Termination. The Employment Term shall terminate upon the occurrence of any one of the following events: 5.1. Disability. The Company may terminate the Employment Term if Executive is unable substantially to perform Executive's duties and responsibilities hereunder to the full extent required by the Board by reason of illness, injury or incapacity for six consecutive months, or for more than six months in the aggregate during any period of twelve calendar months; provided, however, that the Company shall continue to pay Executive's Base Salary until the Company acts to terminate the Employment Term. In addition, Executive shall be entitled to receive (i) any amounts earned, accrued or owing but not yet paid under Section 1 above and (ii) any other benefits in accordance with the terms of any applicable plans and programs of the Company. Otherwise, the Company shall have no further liability or obligation to Executive for compensation under this Agreement. Executive agrees, in the event of a dispute under this Section 5.1, to submit to a physical examination by a licensed physician selected by the Board. 5.2. Death. The Employment Term shall terminate in the event of Executive's death. In such event, the Company shall pay to Executive's executors, legal representatives or administrators, as applicable, an amount equal to the installment of Executive's Base Salary set forth in Section 1.4 hereof for the month in which Executive dies. In addition, Executive's estate shall be entitled to receive (i) any other amounts earned, accrued or owing but not yet paid under Section 1 above and (ii) any other benefits in accordance with the terms of any applicable plans and programs of the Company. Otherwise, the Company shall have no further liability or obligation under this Agreement to Executive's executors, legal representatives, administrators, heirs or assigns or any other person claiming under or through Executive. 5.3. Cause. The Company may terminate the Employment Term, at any time, for "cause" upon written notice, in which event all payments under this Agreement shall cease, except for Base Salary to the extent already accrued, and no Target Benefit shall be due under the Supplemental Plan, but Executive shall remain entitled to the Make-Whole Benefit under the Supplemental Plan, but only to the extent not modified by the terms of this Agreement, and any other benefits in accordance with the terms of any applicable plans and programs of the Company. For purposes of this Agreement, Executive's employment may be terminated for "cause" if (i) Executive is convicted of a felony, (ii) in the reasonable determination of the Board, Executive has (x) committed an act of fraud, embezzlement, or theft in connection with Executive's duties in the course of Executive's employment with the Company, (y) caused intentional, wrongful damage to the property of the Company or intentionally and wrongfully disclosed Confidential Information, or (z) engaged in gross misconduct or gross negligence in the course of Executive's employment with the Company or (iii) Executive materially breached Executive's obligations under this Agreement and shall not have remedied such breach within 30 days after receiving written notice from the Board specifying the details thereof. For purposes of this Agreement, an act or omission on the part of Executive shall be deemed "intentional" only if it was not due primarily to an error in judgment or negligence and was done by Executive not in good faith and without reasonable belief that the act or omission was in the best interest of the Company. 5.4. Termination Without Cause and Non-Renewal. (a) The Company may remove Executive, at any time, without cause from the position in which Executive is employed hereunder (in which case the Employment Term shall be deemed to have ended) upon not less than 60 days' prior written notice to Executive; provided, however, that, in the event that such notice is given, Executive shall be under no obligation to render any additional services to the Company and, subject to the provisions of Section 3 hereof, shall be allowed to seek other employment. Upon any such removal or if the Company informs Executive that the Agreement will not be renewed after December 31, 1998 or at the end of any subsequent renewal period, Executive shall be entitled to receive, as liquidated damages for the failure of the Company to continue to employ Executive, only the amount due to Executive under the Company's then current severance pay plan for employees. No other payments or benefits shall be due under this Agreement to Executive, but Executive shall be entitled to any other benefits in accordance with the terms of any applicable plans and programs of the Company. Notwithstanding anything in this Agreement to the contrary, on or after Executive attains age 65, no action by the Company shall be treated as a removal from employment or non-renewal if on the effective date of such action Executive satisfies all of the requirements for the executive or high policy-making exception to applicable provisions of state and federal age discrimination legislation. (b) Notwithstanding the foregoing, in the event that Executive executes a written release upon such removal or non-renewal, substantially in the form attached hereto as Annex 1, (the "Release"), of any and all claims against the Company and all related parties with respect to all matters arising out of Executive's employment by the Company (other than any entitlements under the terms of this Agreement or under any other plans or programs of the Company in which Executive participated and under which Executive has accrued a benefit), or the termination thereof, Executive shall be entitled to receive, in lieu of the payment described in subsection (a) hereof, which Executive agrees to waive, (i) as liquidated damages for the failure of the Company to continue to employ Executive, a single cash payment, within 30 days after the effective date of the removal or non-renewal, equal to Executive's Base Compensation, as defined in Section 6.1(a) below, which shall not constitute a "severance benefit" to Executive for purposes of the Target Benefit under the Supplemental Plan; (ii) for a period of two years following the end of the Employment Term, Executive and Executive's spouse and dependents shall be eligible for a continuation of those Benefit Coverages, as in effect at the time of such termination or removal, and as the same may be changed from time to time, as if Executive had been continued in employment during said period or to receive cash in lieu of such benefits or premiums, as applicable, where such Benefit Coverages may not be continued (or where such continuation would adversely affect the tax status of the plan pursuant to which the Benefit Coverage is provided) under applicable law or regulations; (iii) any other amounts earned, accrued or owing but not yet paid under Section 1 above; (iv) any other benefits in accordance with the terms of any applicable plans and programs of the Company and a payment equal to any unused vacation; (v) as additional consideration for the non-competition and non-solicitation covenant contained in Section 3, a single cash payment, within 30 days after the effective date of the removal or non-renewal, equal to Executive's Base Compensation, as defined in Section 6.1(a) below, which shall not constitute a "severance benefit" to Executive for purposes of the Target Benefit under the Supplemental Plan; (vi) Executive's years of service with the Company through the 24th month following the Termination Date shall be taken into account in determining the amount of, and eligibility for, the Target Benefit and Make-Whole Benefit under the Supplemental Plan and 24 months shall be added to Executive's age for purposes of determining Executive's eligibility for both such Benefits and the actuarial reduction under the Plan; and (vii) All stock appreciation rights and restricted stock units granted to Executive under NU's Stock Price Recovery Plan or stock options or restricted shares previously granted to Executive, to the extent not already vested prior to the removal or non-renewal, shall be fully vested and exercisable or paid as if Executive had remained actively employed by the Company, including the right of exercise, where appropriate, within 36 months after the removal or non-renewal; provided, however, that the stock appreciation rights and restricted stock units shall be paid on a pro rata basis for the number of completed months in the applicable period for any such stock appreciation rights or restricted stock units during which Executive was employed by the Company. 5.5. Voluntary Termination. Executive may voluntarily terminate the Employment Term upon 30 days' prior written notice for any reason. In such event, after the effective date of such termination, no further payments shall be due under this Agreement except that Executive shall be entitled to any benefits due in accordance with the terms of any applicable plan and programs of the Company. 6. Payments Upon a Change in Control. 6.1. Definitions. For all purposes of this Section 6, the following terms shall have the meanings specified in this Section 6.1 unless the context otherwise clearly requires: (a) "Affiliate" shall mean an "affiliate" as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. (b) "Base Compensation" shall mean Executive's annualized Base Salary and all short-term incentive compensation at the target level for Executive (but in no event less than the target level for Executive in effect on January 1, 1996), specified under programs established by the Company for its senior level executives generally, received by Executive in all capacities with the Company, as would be reported for federal income tax purposes on Form W-2, together with any and all salary reduction authorized amounts under any of the Company's benefit plans or programs, for the most recent full calendar year immediately preceding the calendar year in which occurs Executive's Termination Date or preceding the Change of Control, if higher. "Base Compensation" shall not include the value of any stock appreciation rights or restricted stock units granted to Executive under NU's Stock Price Recovery Plan. (c) "Change of Control" shall mean the happening of any of the following: (i) When any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), other than the Company, its Affiliates, or any Company or NU employee benefit plan (including any trustee of such plan acting as trustee), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of NU representing more than 20% of the combined voting power of either (i) the then outstanding shares of common stock of NU (the "Outstanding Common Stock") or (ii) the then outstanding voting securities of NU entitled to vote generally in the election of directors (the "Voting Securities"); or (ii) Individuals who, as of the beginning of any twenty-four month period, constitute the Trustees (the "Incumbent Board") cease for any reason to constitute at least a majority of the Trustees or cease to be able to exercise the powers of the majority of the Board, provided that any individual becoming a trustee subsequent to the beginning of such period whose election or nomination for election by the Company's stockholders was approved by a vote of at least a majority of the trustees then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Trustees of NU (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act); or (iii) Consummation by NU of a reorganization, merger or consolidation (a "Business Combination"), in each case, with respect to which all or substantially all of the individuals and entities who were the respective beneficial owners of the Outstanding Common Stock and Voting Securities immediately prior to such Business Combination do not, following such Business Combination, beneficially own, directly or indirectly, more than 75% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation, business trust or other entity resulting from or being the surviving entity in such Business Combination in substantially the same proportion as their ownership immediately prior to such Business Combination of the Outstanding Common Stock and Voting Securities, as the case may be; or (iv) Consummation of a complete liquidation or dissolution of NU or sale or other disposition of all or substantially all of the assets of NU other than to a corporation, business trust or other entity with respect to which, following such sale or disposition, more than 75% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, is then owned beneficially, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Common Stock and Voting Securities immediately prior to such sale or disposition in substantially the same proportion as their ownership of the Outstanding Common Stock and Voting Securities, as the case may be, immediately prior to such sale or disposition. (d) "Termination Date" shall mean the date of receipt of a Notice of Termination of this Agreement or any later date specified therein. (e) "Termination of Employment" shall mean the termination of Executive's actual employment relationship with the Company, including a failure to renew the Agreement after December 31, 1998 or at the end of any subsequent renewal period, in either case occasioned by the Company's action. (f) "Termination upon a Change of Control" shall mean a Termination of Employment upon or within two years after a Change of Control either: (i) initiated by the Company for any reason other than Executive's (w) disability, as described in Section 5.1 hereof, (x) death, (y) retirement on or after attaining age 65, or (z) "cause," as defined in Section 5.3 hereof, or (ii) initiated by Executive (A) upon any failure of the Company materially to comply with and satisfy any of the terms of this Agreement, including any significant reduction by the Company of the authority, duties or responsibilities of Executive, any reduction of Executive's compensation or benefits due hereunder, or the assignment to Executive of duties which are materially inconsistent with the duties of Executive's position as defined in Section 1.2 above, or (B) if Executive is transferred, without Executive's written consent, to a location that is more than 50 miles from Executive's principal place of business immediately preceding the Change of Control. 6.2. Notice of Termination. Any Termination upon a Change of Control shall be communicated by a Notice of Termination to the other party hereto given in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) briefly summarizes the facts and circumstances deemed to provide a basis for a Termination of Employment and the applicable provision hereof, and (iii) if the Termination Date is other than the date of receipt of such notice, specifies the Termination Date (which date shall not be more than 15 days after the giving of such notice). 6.3. Payments upon Termination. Subject to the provisions of Sections 6.6 and 6.7 hereof, in the event of Executive's Termination upon a Change of Control, the Company agrees (a) in the event Executive executes the Release required by Section 5.4(b), to pay to Executive, in a single cash payment, within thirty days after the Termination Date, two multiplied by Executive's Base Compensation and, in addition, all amounts, benefits and Benefit Coverages described in Section 5.4(b)(ii), (iii), (iv) and (v), provided that in (ii) Benefit Coverages shall continue for three years instead of two, or (b) in the event Executive fails or refuses to execute the Release required by Section 5.4(b), to pay to Executive, in a single cash payment, within thirty days after the Termination Date, the amount due under Section 5.4(a) above and, in addition, all other amounts and benefits described in Section 5.4(a). 6.4. Other Payments, Supplemental Plan, Stock Option and Stock Grants, etc. Subject to the provisions of Sections 6.6 and 6.7 hereof, in the event of Executive's Termination upon a Change of Control, and the execution of the Release required by Section 5.4(b): (a) Under the Supplemental Plan, Executive shall be entitled to a Target Benefit and a Make-Whole Benefit commencing as provided below with an actuarial reduction in the event the Target Benefit and Make-Whole Benefit commence prior to age 65 (age 60 if Executive has attained age 60 and completed at least 30 years of service at the Termination Date), whether or not Executive is then age 60 and notwithstanding the Plan's requirement that a participant retire on or after age 60 and be entitled to a vested benefit under the Company's Retirement Plan. The actuarial reduction shall be 2% for each year younger than age 65 to age 60, if applicable, 3% for each year younger than age 60 to age 55 and a full actuarial reduction, as determined by the enrolled actuary for the Retirement Plan, for each year younger than 55. Executive's years of service with the Company through the 36th month following the Termination Date shall be taken into account in determining the amount of the Target Benefit and Make-Whole Benefit and 36 months shall be added to Executive's age for purposes of determining Executive's eligibility for both such Benefits and the actuarial reduction under the Plan as modified herein. Executive shall determine the form of payment in which the Target Benefit and Make-Whole Benefit shall be paid, in accordance with the terms of the Supplemental Plan or may elect to receive a single sum payment equal to the then actuarial present value (computed using the 1983 GAM (50%/Male/50%/ Female) Mortality Table and at an interest rate equal to the discount rate used in the Retirement Plan's previous year's FASB 87 accounting) of the amount of the Target Benefit and Make-Whole Benefit as determined in accordance with the first three sentences of this subsection (a). Payment shall commence or be made within 30 days after the Termination Date or on any date thereafter, as specified by Executive in a written election. Such election may be made at any time and amended at any time but any election or amendment, other than one made within 30 days of the Effective Date, shall be ineffective if made within six months prior to the Termination Date. In the absence of any election or determination provided for herein, the terms of the Supplemental Plan shall govern the form and time of payment. (b) Executive's years of service with the Company through the 36th month following the Termination Date shall be taken into account in determining Executive's eligibility for, but not amount of cost sharing under, the Company's retiree health plan and, in addition, 36 months shall be added to Executive's age for this purpose. (c) On Executive's Termination Date, all stock appreciation rights and restricted stock units granted to Executive under NU's Stock Price Recovery Plan or stock options or restricted shares previously granted to Executive, to the extent not already vested prior to the Termination Date, shall be fully vested and exercisable or paid as if Executive had remained actively employed by the Company, including the right of exercise, where appropriate, within 36 months after the Termination Date and, if the Change of Control results in the Voting Securities of NU ceasing to be traded on a national securities exchange or though the national market system of the National Association of Securities Dealers Inc., the price at which the rights or units may be exercised shall be the average of the closing prices for the five trading days preceding the day such Voting Securities cease trading. 6.5. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit Executive's continuing or future participation in or rights under any benefit, bonus, incentive or other plan or program provided by the Company and for which Executive may qualify; provided, however, that if Executive becomes entitled to and receives all of the payments provided for in this Agreement, Executive hereby waives Executive's right to receive payments under any severance plan or similar program applicable to all employees of the Company. 6.6. Certain Increase in Payments. (a) Anything in this Agreement to the contrary notwithstanding, in the event that it shall be determined that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (the "Payment"), would constitute an "excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), Executive shall be paid an additional amount (the "Gross-Up Payment") such that the net amount retained by Executive after deduction of any excise tax imposed under Section 4999 of the Code, and any federal, state and local income and employment tax and excise tax imposed upon the Gross-Up Payment shall be equal to the Payment. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income tax and employment taxes at the highest marginal rate of federal income and employment taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Executive's residence on the Termination Date, net of the maximum reduction in federal income taxes that may be obtained from the deduction of such state and local taxes. (b) All determinations to be made under this Section 6 shall be made by the Company's independent public accountant immediately prior to the Change of Control (the "Accounting Firm"), which firm shall provide its determinations and any supporting calculations both to the Company and Executive within 10 days of the Termination Date. Any such determination by the Accounting Firm shall be binding upon the Company and Executive. Within five days after the Accounting Firm's determination, the Company shall pay (or cause to be paid) or distribute (or cause to be distributed) to or for the benefit of Executive such amounts as are then due to Executive under this Agreement. (c) In the event that upon any audit by the Internal Revenue Service, or by a state or local taxing authority, of the Payment or Gross-Up Payment, a change is finally determined to be required in the amount of taxes paid by Executive, appropriate adjustments shall be made under this Agreement such that the net amount which is payable to Executive after taking into account the provisions of Section 4999 of the Code shall reflect the intent of the parties as expressed in subsection (a) above, in the manner determined by the Accounting Firm. (d) All of the fees and expenses of the Accounting Firm in performing the determinations referred to in subsections (b) and (c) above shall be borne solely by the Company. The Company agrees to indemnify and hold harmless the Accounting Firm of and from any and all claims, damages and expenses resulting from or relating to its determinations pursuant to subsections (b) and (c) above, except for claims, damages or expenses resulting from the gross negligence or wilful misconduct of the Accounting Firm. 6.7 Changes to Sections 6.3 and 6.4. The payments, benefits and other compensation provided under Sections 6.3 and 6.4 may be revised, in the sole discretion of the Board, after the expiration of two years following written notice to Executive of the Board's intention to do so and the changes to be made; provided, however, that no revision may be made that would reduce the payments, benefits and other compensation below those provided under Section 5.4 in the event Executive's employment is terminated without cause or this Agreement is not renewed; and provided, further, that no such notice may be given and no such revision may become effective following a Change of Control. Notice under this Section 6.7 shall not constitute a non-renewal or removal of Executive, nor shall any such actual revision be grounds for a determination that this Agreement is not being renewed or that Executive has been removed, for purposes of Section 5.4. 7. Survivorship. The respective rights and obligations of the parties under this Agreement shall survive any termination of Executive's employment to the extent necessary to the intended preservation of such rights and obligations. 8. Mitigation. Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise and there shall be no offset against amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment that Executive may obtain. 9. Arbitration; Expenses. In the event of any dispute under the provisions of this Agreement other than a dispute in which the primary relief sought is an equitable remedy such as an injunction, the parties shall be required to have the dispute, controversy or claim settled by arbitration in the City of Hartford, Connecticut in accordance with National Rules for the Resolution of Employment Disputes then in effect of the American Arbitration Association, before a panel of three arbitrators, two of whom shall be selected by the Company and Executive, respectively, and the third of whom shall be selected by the other two arbitrators. Any award entered by the arbitrators shall be final, binding and nonappealable (except as provided in Section 52-418 of the Connecticut General Statutes) and judgment may be entered thereon by either party in accordance with applicable law in any court of competent jurisdiction. This arbitration provision shall be specifically enforceable. The arbitrators shall have no authority to modify any provision of this Agreement or to award a remedy for a dispute involving this Agreement other than a benefit specifically provided under or by virtue of the Agreement. If Executive prevails on any material issue which is the subject of such arbitration or lawsuit, the Company shall be responsible for all of the fees of the American Arbitration Association and the arbitrators and any expenses relating to the conduct of the arbitration (including the Company's and Executive's reasonable attorneys' fees and expenses). Otherwise, each party shall be responsible for its own expenses relating to the conduct of the arbitration (including reasonable attorneys' fees and expenses) and shall share the fees of the American Arbitration Association. 10. Notices. All notices and other communications required or permitted under this Agreement or necessary or convenient in connection herewith shall be in writing and shall be deemed to have been given when hand delivered or mailed by registered or certified mail, as follows (provided that notice of change of address shall be deemed given only when received): If to the Company, to: Northeast Utilities Service Company P.O. Box 270 Hartford, CT 06141-0270 Attention: Vice President, Secretary and General Counsel With a required copy to: Morgan, Lewis & Bockius 2000 One Logan Square Philadelphia, PA 19103-6993 Attention: Robert J. Lichtenstein, Esquire If to Executive, to: Robert P. Wax 14 Stratford Road West Hartford, CT 06117 With a required copy to: Shipman & Goodwin One American Row Hartford, CT 06103-2819 Attention: Brian Clemow, Esquire or to such other names or addresses as the Company or Executive, as the case may be, shall designate by notice to each other person entitled to receive notices in the manner specified in this Section. 11. Contents of Agreement; Amendment and Assignment. (a) This Agreement sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and cannot be changed, modified, extended or terminated except upon written amendment approved by the Board and executed on its behalf by a duly authorized officer and by Executive. (b) All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, executors, administrators, legal representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of Executive under this Agreement are of a personal nature and shall not be assignable or delegatable in whole or in part by Executive. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to Executive, expressly to assume and agree to perform this Agreement in the same manner and to the extent the Company would be required to perform if no such succession had taken place. 12. Severability. If any provision of this Agreement or application thereof to anyone or under any circumstances is adjudicated to be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect any other provision or application of this Agreement which can be given effect without the invalid or unenforceable provision or application and shall not invalidate or render unenforceable such provision or application in any other jurisdiction. If any provision is held void, invalid or unenforceable with respect to particular circumstances, it shall nevertheless remain in full force and effect in all other circumstances. 13. Remedies Cumulative; No Waiver. No remedy conferred upon a party by this Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to any other remedy given under this Agreement or now or hereafter existing at law or in equity. No delay or omission by a party in exercising any right, remedy or power under this Agreement or existing at law or in equity shall be construed as a waiver thereof, and any such right, remedy or power may be exercised by such party from time to time and as often as may be deemed expedient or necessary by such party in its sole discretion. 14. Beneficiaries/References. Executive shall be entitled, to the extent permitted under any applicable law, to select and change a beneficiary or beneficiaries to receive any compensation or benefit payable under this Agreement following Executive's death by giving the Company written notice thereof. In the event of Executive's death or a judicial determination of Executive's incompetence, reference in this Agreement to Executive shall be deemed, where appropriate, to refer to Executive's beneficiary, estate or other legal representative. 15. Miscellaneous. All section headings used in this Agreement are for convenience only. This Agreement may be executed in counterparts, each of which is an original. It shall not be necessary in making proof of this Agreement or any counterpart hereof to produce or account for any of the other counterparts. 16. Withholding. The Company may withhold from any payments under this Agreement all federal, state and local taxes as the Company is required to withhold pursuant to any law or governmental rule or regulation. Executive shall bear all expense of, and be solely responsible for, all federal, state and local taxes due with respect to any payment received under this Agreement. 17. Governing Law. This Agreement shall be governed by and interpreted under the laws of the State of Connecticut without giving effect to any conflict of laws provisions. 18. Adoption by Affiliates; Obligations. The obligations under this Agreement shall, in the first instance, be paid and satisfied by the Company; provided, however, that the Company will use its best efforts to cause NU and each entity in which NU (or its successors or assigns) now or hereafter holds, directly or indirectly, more than a 50 percent voting interest and that has at least fifty (50) employees on its direct payroll (an "Employer") to approve and adopt this Agreement and, by such approval and adoption, to be bound by the terms hereof as though a signatory hereto. If the Company shall be dissolved or for any other reason shall fail to pay and satisfy the obligations, each individual Employer shall thereafter shall be jointly and severally liable to pay and satisfy the obligations to Executive. 19. Establishment of Trust. The Company may establish an irrevocable trust fund pursuant to a trust agreement to hold assets to satisfy any of its obligations under this Agreement. Funding of such trust fund shall be subject to the Board's discretion, as set forth in the agreement pursuant to which the fund will be established. IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have executed this Agreement as of the date first above written. NORTHEAST UTILITIES SERVICE COMPANY /s/Robert P. Wax 2/25/97 By:/s/Bernard M. Fox 2/25/97 Executive EX-10.15 21 RECEIVABLES PURCHASE & SALE AGMT -CL&P Exhibit 10.49 Execution Copy U.S. $200,000,000 RECEIVABLES PURCHASE AND SALE AGREEMENT Dated as of September 30, 1997 Among CL&P RECEIVABLES CORPORATION as Seller THE CONNECTICUT LIGHT AND POWER COMPANY as Collection Agent and Originator CORPORATE ASSET FUNDING COMPANY, INC. as a Purchaser CITIBANK, N.A. as a Bank and CITICORP NORTH AMERICA, INC. as Agent TABLE OF CONTENTS ARTICLE I DEFINITIONS SECTION 1.01. Certain Defined Terms SECTION 1.02. Other Terms SECTION 1.03. Computation of Time Periods ARTICLE II AMOUNTS AND TERMS OF THE PURCHASES SECTION 2.01. Designated Obligors; Special Concentration Limits SECTION 2.02. Purchase Facility SECTION 2.03. Making Purchases from the Seller SECTION 2.04. Receivable Interest Percentage Computation SECTION 2.05. Fees SECTION 2.06. Settlement Procedures SECTION 2.07. Payments and Computations, Etc. SECTION 2.08. Increased Costs SECTION 2.09. Additional Yield on Receivable Interests Bearing a Eurodollar Rate SECTION 2.10. Security Interest ARTICLE III CONDITIONS OF PURCHASES SECTION 3.01. Conditions Precedent to Initial Purchase SECTION 3.02. Conditions Precedent to All Purchases ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Seller ARTICLE V GENERAL COVENANTS SECTION 5.01. Affirmative Covenants of the Seller and the Originator SECTION 5.02. Reporting Requirements of the Seller SECTION 5.03. Negative Covenants of the Seller SECTION 5.04. Special Covenants Regarding Corporate Separateness, Etc. ARTICLE VI ADMINISTRATION AND COLLECTION SECTION 6.01. Designation of Collection Agent SECTION 6.02. Duties of Collection Agent SECTION 6.03. Rights of the Agent SECTION 6.04. Responsibilities of the Seller and the Originator SECTION 6.05. Further Action Evidencing Purchases SECTION 6.06. Application of Collections SECTION 6.07. Indemnities by the Collection Agent ARTICLE VII EVENTS OF TERMINATION SECTION 7.01. Events of Termination ARTICLE VIII THE AGENT SECTION 8.01. Authorization and Action SECTION 8.02. Agent's Reliance, Etc. SECTION 8.03. CNAI and Affiliates SECTION 8.04. Purchasers' and Banks' Purchase Decisions ARTICLE IX ASSIGNMENT SECTION 9.01. Assignability ARTICLE X INDEMNIFICATION SECTION 10.01. Indemnities by the Seller ARTICLE XI MISCELLANEOUS SECTION 11.01. Amendments, Etc. SECTION 11.02. Notices, Etc. SECTION 11.03. No Waiver; Remedies. SECTION 11.04. Binding Effect. SECTION 11.05. GOVERNING LAW. SECTION 11.06. Costs, Expenses and Taxes. SECTION 11.07. No Proceedings SECTION 11.08. Confidentiality SECTION 11.09. Execution in Counterparts EXHIBIT A Special Concentration Limits EXHIBIT B Form of Seller Report EXHIBIT C Description of Tariffs EXHIBIT D Cancellation of Designation of Obligors and/or Special Concentration Limits EXHIBIT E Form of Opinion of Counsel for Seller EXHIBIT F Audit Scope RECEIVABLES PURCHASE AND SALE AGREEMENT Dated as of September 30, 1997 CL&P RECEIVABLES CORPORATION, a Connecticut corporation (the "Seller"), THE CONNECTICUT LIGHT AND POWER COMPANY, a Connecticut corporation, as Collection Agent and Originator, CORPORATE ASSET FUNDING COMPANY, INC., a Delaware corporation, CITIBANK, N.A. and CITICORP NORTH AMERICA INC., a Delaware corporation ("CNAI"), as agent (the "Agent") for the Purchasers and the Banks (as defined herein), agree as follows: PRELIMINARY STATEMENTS. (1) Certain terms which are capitalized and used throughout this Agreement (in addition to those defined above) are defined in Article I of this Agreement. (2) The Seller has acquired, and may continue to acquire Receivables from the Originator, either by purchase or by contribution to the capital of the Seller, as determined from time to time by the Seller and the Originator. The Seller is prepared to sell undivided fractional ownership interests in the Receivables (referred to herein as "Receivable Interests"). (3) The Conduit and the Banks are prepared to purchase such Receivable Interests from the Seller on the terms set forth herein. (4) CNAI has been requested and is prepared to act as Agent. NOW, THEREFORE, the parties agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Adverse Claim" means a lien, security interest, charge or encumbrance, or other right or claim of any Person. "Affiliate" when used with respect to a Person means any other Person controlling, controlled by or under common control with such Person. "Affiliated Obligor" means any Obligor which is an Affiliate of another Obligor. "Alternate Base Rate" means a fluctuating interest rate per annum as shall be in effect from time to time, which rate per annum shall at all times be equal to the higher of: (a) the rate of interest announced publicly by Citibank in New York, New York, from time to time as Citibank's base rate; or (b) 1/2 of one percent above the latest three-week moving average of secondary market morning offering rates in the United States for three-month certificates of deposit of major United States money market banks, such three-week moving average being determined weekly on each Monday (or, if such day is not a Business Day, on the next succeeding Business Day) for the three-week period ending on the previous Friday by Citibank on the basis of such rates reported by certificate of deposit dealers to and published by the Federal Reserve Bank of New York or, if such publication shall be suspended or terminated, on the basis of quotations for such rates received by Citibank from three New York certificate of deposit dealers of recognized standing, in either case adjusted to the nearest 1/4 of one percent or, if there is no nearest 1/4 of one percent, to the next higher 1/4 of one percent. "Applicable Percentage" means, for any Settlement Period, the rate per annum set forth below corresponding, as of the first Business Day of such Settlement Period, to the actual ratings for the Originator's long-term public senior debt on such date (or, if the two ratings do not correlate on any such date, the lower of the two ratings): Public Debt Rating by Standard & Poor's and Moody's Applicable Percentage BBB-/Baa3 or above 1.00% BB+/Ba1 1.25% BB/Ba2 1.50% BB-/Ba3 1.75% "Assignee Rate" for any Settlement Period for any Receivable Interest means an interest rate per annum equal to the Eurodollar Rate plus the Applicable Percentage for such Settlement Period; provided, however, that in case of: (i) any Settlement Period on or prior to the first day of which a Purchaser or Bank shall have notified the Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for such Purchaser or Bank to fund such Receivable Interest at the Assignee Rate set forth above (and such Purchaser or Bank shall not have subsequently notified the Agent that such circumstances no longer exist), (ii) any Settlement Period of one to (and including) 29 days, (iii) any Settlement Period as to which the Agent does not receive notice, by no later than 12:00 noon (New York City time) on the third Business Day preceding the first day of such Settlement Period, that the related Receivable Interest will not be funded by issuance of commercial paper, or (iv) any Settlement Period for a Receivable Interest the Capital of which allocated to the Purchasers or the Banks is less than $500,000, the "Assignee Rate" for such Settlement Period shall be an interest rate per annum equal to 0.25% per annum above the Alternate Base Rate in effect on the first day of such Settlement Period; provided further that the Agent and the Seller may agree in writing from time to time upon a different "Assignee Rate." "Average Dilution Ratio" means for any calendar month the average of the Dilution Ratios for the 12 most recently ended calendar months. "Average Maturity" means at any time that period of days equal to the average maturity of the Pool Receivables calculated by the Collection Agent in the then most recent Seller Report; provided that if the Agent shall determine that such calculation is incorrect, the Agent may recalculate such Average Maturity. "Bank Commitment" of any Bank means, (a) with respect to Citibank $100,000,000 or such amount as reduced by any assignment entered into between Citibank and other Banks; or (b) with respect to a Bank that has entered into an assignment with another Bank, the amount set forth therein as such Bank's Bank Commitment, in each case as such amount may be reduced by an assignment entered into between such Bank and an Eligible Assignee, and as may be further reduced (or terminated) pursuant to the next sentence. Any reduction (or termination) of the Purchase Limit pursuant to the terms of this Agreement shall reduce ratably (or terminate) each Bank's Bank Commitment. Notwithstanding the foregoing, with respect to each assignment entered into between Citibank and another Bank, so long as the aggregate amount of such assignments does not exceed $100,000,000, the Bank Commitment of Citibank shall be automatically increased, immediately following such assignment, to $100,000,000, and the Agent shall, concurrently with such assignment, notify the Seller of the Bank Commitment of the applicable assignee and of the new Bank Commitment of Citibank; provided, however, that in no event shall the aggregate Bank Commitments of all Banks exceed $200,000,000. "Banks" means Citibank and each Eligible Assignee that shall become a party to this Agreement pursuant to Section 9.01. "Budget Account" means an account of an Obligor with the Originator pursuant to which such Obligor is billed a fixed monthly fee for a fixed period of time at the end of which such Obligor's account with the Originator is adjusted. "Budget Account Credit Balance" means for any date the amount by which amounts paid by an Obligor pursuant to a Budget Account exceeds the amount for which such Obligor should have been billed by the Originator had such Obligor not been party to a Budget Account. "Business Day" means any day on which (i) banks are not authorized or required to close in New York City, and (ii) if this definition of "Business Day" is utilized in connection with the Eurodollar Rate, dealings are carried out in the London interbank market. "Capital" of any Receivable Interest means the original amount paid to the Seller for such Receivable Interest at the time of its Purchase by the Conduit or a Bank pursuant to this Agreement, in each case reduced from time to time by Collections distributed on account of such Capital pursuant to Section 2.06(d); provided that if such Capital shall have been reduced by any distribution and thereafter all or a portion of such distribution is rescinded or must otherwise be returned for any reason, such Capital shall be increased by the amount of such rescinded or returned distribution, as though it had not been made. "Citibank" means Citibank, N.A., a national banking association. "Collection Agent" means at any time the Person then authorized pursuant to Article VI to administer and collect Pool Receivables. "Collection Account" means Account # 9370121283 at Fleet National Bank, Hartford, Connecticut. "Collection Agent Fee" has the meaning specified in the Originator Purchase Agreement. "Collection Agent Fee Reserve" for any Receivable Interest at any time means the sum of (i) the unpaid Collection Agent Fee relating to such Receivable Interest accrued to such time plus (ii) an amount equal to (a) the Capital of such Receivable Interest on such date multiplied by (b) the product of (x) the percentage per annum at which the Collection Agent Fee is accruing on such date and (y) a fraction having the sum of the Average Maturity plus the Collection Delay Period (each as in effect at such date) as its numerator and 360 as its denominator. "Collection Delay Period" means 10 days or such other number of days as may be agreed to by the Agent and the Seller. "Collections" means, with respect to any Receivable, all cash collections and other cash proceeds of such Receivable, including, without limitation, all cash proceeds of Related Security with respect to such Receivable, and any Collection of such Receivable deemed to have been received pursuant to Section 2.06. "Commitment Termination Date" means the earliest of (a) September 29, 1998, unless, prior to such date (or the date so extended pursuant to this clause), upon the Seller's request, made not more than 90 nor less than 45 days prior to the then Commitment Termination Date, one or more Banks having 100% of the Purchase Limit shall in their sole discretion consent, which consent shall be given not more than 30 days prior to the then Commitment Termination Date, to the extension of the Commitment Termination Date to the date occurring not more than 360 days after the then Commitment Termination Date; provided, however, that any failure of any Bank to respond to the Seller's request for such extension shall be deemed a denial of such request by such Bank, (b) the Facility Termination Date and (c) the date determined pursuant to Section 7.01. "Concentration Limit" means, with respect to any Obligor, 2% (or such higher percentage as is agreed to by the Agent) of the Outstanding Balance of all Pool Receivables (a "Normal Concentration Limit"), or such other percentage of the Outstanding Balance of all Pool Receivables, or such amount as may be designated for any Obligor by the Seller and agreed to for such Obligor by the Agent, in a notice to the Agent in substantially the form of Exhibit A (such other percentage or amount for any Obligor being a "Special Concentration Limit"), subject to cancellation thereof pursuant to Section 2.01; provided, however, that, in the case of an Obligor with one or more Affiliated Obligors which is or are Designated Obligors, the Concentration Limit shall be calculated as if such Obligor and such one or more Affiliated Obligors were one Obligor. "Conduit" means Corporate Asset Funding Company, Inc. and any successor or assign thereof that is a receivables investment company which in the ordinary course of its business issues commercial paper or other securities to fund its acquisition and maintenance of receivables. "Contract" means the Tariffs and any agreement between the Originator and an Obligor, provided that such agreement does not vary the payment terms of such Obligor from those in the Tariffs or the Credit and Collection Policy. "Credit and Collection Policy" means those credit and collection policies and practices of the Originator in effect on the date hereof relating to the Receivables, as they may be modified in the manner permitted under Section 5.03(c). "Default Ratio" means the ratio (expressed as a percentage) computed as of the last day of each calendar month by dividing (i) the aggregate Outstanding Balance of all Pool Receivables that were Defaulted Receivables on such day or that would have been Defaulted Receivables on such day had they not been written off the books of the Originator or the Seller during such month by (ii) the aggregate Outstanding Balance of all Pool Receivables on such day. "Defaulted Receivable" means a Receivable: (i) as to which any payment, or part thereof, remains unpaid for 91 days or more from the original billing date for such payment and which does not relate to an Inactive Account, (ii) as to which the Obligor thereof, or any other Person obligated thereon or owning any Related Security in respect thereof, has taken any action, or suffered any event to occur, of the type described in Section 7.01(g), or (iii) which, consistent with the Credit and Collection Policy, would be written off the Originator's or the Seller's books as uncollectible. "Deferred Purchase Price" has the meaning specified in the Originator Purchase Agreement. "Delinquency Ratio" means the ratio (expressed as a percentage) computed as of the last day of each calendar month by dividing (i) the aggregate Outstanding Balance of all Pool Receivables that were Delinquent Receivables on such day by (ii) the aggregate Outstanding Balance of all Pool Receivables on such day. "Delinquent Receivable" means a Receivable that is not a Defaulted Receivable and: (i) as to which any payment, or part thereof, remains unpaid for 61 days or more from the original billing date for such payment; or (ii) which, consistent with the Credit and Collection Policy, would be classified as delinquent by the Originator or the Seller. "Designated Account" means an account in the name of, and owned by, CNAI, as Agent, designated by the Agent for the purpose of receiving collections of Pool Receivables directly from Obligors. "Designated Obligor" means, at any time, any Obligor unless the Seller or the Agent has, following three Business Days' notice in accordance with Section 2.01, advised the other that such Obligor shall not be considered a Designated Obligor. "Dilution" means any reduction in the Outstanding Balance of any Receivable, except for reductions resulting from payments or writeoffs with respect to such Receivable. "Dilution Horizon Factor" means the ratio (expressed as percentage) computed by dividing (i) the sum of (a) the aggregate Outstanding Balance of all Receivables created during the most recently ended calendar month and (b) the aggregate Outstanding Balance of Unbilled Receivables as determined on the last day of the most recently ended calendar month by (ii) the Net Receivables Pool Balance as of the last day of the most recently ended calendar month. "Dilution Ratio" means for any calendar month the greater of (i) the ratio (expressed as a percentage) of (A) the aggregate amount of Dilution with respect to the Receivables during such calendar month to (B) the aggregate original Outstanding Balance of all Receivables generated during the month preceding the most recently ended calendar month and (ii) 0.5%. "Dilution Volatility Factor" means, as of the last day of each calendar month, the product (expressed as a percentage) of (i) the amount by which (A) the highest Dilution Ratio for any of the twelve most recently ended calendar months exceeds (B) the average of the Dilution Ratios for the twelve most recently ended calendar months and (ii) a fraction equal to (A) the highest Dilution Ratio for any of the twelve most recently ended calendar months divided by (B) the average of the Dilution Ratios for the twelve most recently ended calendar months. "Eligible Assignee" means (a) CNAI, any of its Affiliates, any Person managed by Citibank or CNAI or any of their Affiliates or (b) any financial or other institution acceptable to the Agent. "Eligible Receivable" means, at any time and with respect to any Receivable Interest, a Receivable: (i) the Obligor of which is a United States resident and is not a government or a governmental subdivision or agency (including, without limitation, any such government, subdivision or agency that has the right to offset obligations to the Originator with tax-related claims of any kind), except that Receivables of governmental Obligors will be permitted to the extent that the aggregate Outstanding Balance of such Receivables does not exceed 15% of the aggregate Outstanding Balance of all Pool Receivables; (ii) the Obligor of which, at the time of the purchase of an undivided percentage ownership interest in such Receivable, is a Designated Obligor; (iii) which, at the time of the purchase of an undivided percentage ownership interest in such Receivable, is not a Delinquent Receivable or a Defaulted Receivable; (iv) which does not relate to an Inactive Account and which, according to the Contract related thereto, is required to be paid in full within 30 days of the original billing date therefor; (v) the Outstanding Balance of which, at the time of the purchase of an undivided percentage ownership interest in such Receivable, does not, when calculated substantially as provided in the Seller Report, exceed the Concentration Limit of the Obligor thereon; (vi) which arises under a Contract which has been duly authorized and which, together with such Receivable, is in full force and effect and constitutes the legal, valid and binding obligation of the Obligor of such Receivable enforceable against such Obligor in accordance with its terms and is not subject to any dispute, offset, counter-claim or defense whatsoever (except the discharge in bankruptcy of such Obligor); (vii) which, together with the Contract related thereto, does not contravene in any material respect any law, rule or regulation applicable thereto (including, without limitation, any law, rule or regulation relating to usury, consumer protection, truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy) and with respect to which none of the Seller, the Originator or the Obligor is in violation of any such law, rule or regulation in any material respect; (viii) which (A) satisfies all applicable requirements of the Credit and Collection Policy and (B) complies with such other reasonable criteria and requirements (other than those relating to the collectibility of such Receivable) as the Agent may from time to time specify to the Seller following 30 days' notice; (ix) which is an account receivable representing all or part of the sales price of merchandise, insurance or services, within the meaning of Section 3(c)(5) of the Investment Company Act of 1940, as amended; (x) a purchase of which with the proceeds of notes would constitute a "current transaction" within the meaning of Section 3(a)(3) of the Securities Act of 1933, as amended; (xi) which is an "account" within the meaning of Section 9-106 of the UCC of all applicable jurisdictions; (xii) which is denominated and payable only in United States dollars in the United States of America; and (xiii) as to which, at or prior to the time of purchase hereunder, the Agent has not notified the Seller that the Agent has determined, in its sole discretion, that such Receivable (or class of Receivables) is not acceptable for purchase hereunder. "ERISA" means the U.S. Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Eurodollar Rate" means, for any Settlement Period, an interest rate per annum equal to the rate per annum at which deposits in U.S. dollars are offered by the principal office of Citibank in London, England to prime banks in the London interbank market at 11:00 A.M. (London Time) two Business Days before the first day of such Settlement Period in an amount substantially equal to the Capital associated with such Settlement Period on such first day and for a period equal to such Settlement Period. "Eurodollar Rate Reserve Percentage" of any Purchaser or Bank for any Settlement Period in respect of which Yield is computed by reference to the Eurodollar Rate means the reserve percentage applicable two Business Days before the first day of such Settlement Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) (or if more than one such percentage shall be applicable, the daily average of such percentages for those days in such Settlement Period during which any such percentage shall be so applicable) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for such Purchaser or Bank with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or with respect to any other category of liabilities that includes deposits by reference to which the interest rate on Eurocurrency Liabilities is determined) having a term equal to such Settlement Period. "Event of Termination" has the meaning specified in Section 7.01. "Facility" means the willingness of the Conduit to consider, in its sole discretion pursuant to Article II, or the obligation of the Banks to make pursuant to Article II, the purchase from the Seller of undivided percentage interests in Pool Receivables by making Purchases of Receivable Interests or reinvestments from time to time. "Facility Termination Date" means the earlier of July 11, 2001 or the date of termination of the Facility pursuant to Section 2.02(c) or Section 7.01. "Fee Agreement" means the agreement of even date between the Seller and the Agent, as the same may be amended or restated from time to time, with respect to the fees to be paid by or on behalf of the Seller in connection with this Agreement. "Inactive Account" means an account of an Obligor which has been sent a final bill. "Incipient Event of Termination" means an event which would constitute an Event of Termination but for the requirement that notice be given or time elapse or both. "Liquidation Day" means, for any Receivable Interest, (i) each day during a Settlement Period for such Receivable Interest on which the conditions set forth in Section 3.02 are not satisfied, and (ii) each day which occurs on or after the Termination Date for such Receivable Interest. "Liquidation Fee" means, for any Settlement Period during which a Liquidation Day occurs, the amount, if any, by which (i) the additional Yield (calculated without taking into account any Liquidation Fee or any shortened duration of such Settlement Period) which would have accrued during such Settlement Period on the reductions of Capital of the Receivable Interest relating to such Settlement Period had such reductions remained as Capital exceeds (ii) the income, if any, received by the Purchasers' investing the proceeds of such reductions of Capital. "Loss and Dilution Percentage" means for any calendar month the greater of (i) the sum of (A) the product of (x) the highest of the Loss Ratios as of the last day of each of the twelve most recently ended calendar months, (y) the Loss Horizon Factor as of the last day of the most recently ended calendar month and (z) 1.6 plus (B) the product of (a) the Average Dilution Ratio for the most recently ended calendar month, (b) 1.6 and (c) the Dilution Horizon Factor as of the most recently ended calendar month plus (C) the product of (a) the Dilution Volatility Factor as of the last day of the most recently ended calendar month and (b) the Dilution Horizon Factor as of the last day of the most recently ended calendar month and (ii) the Minimum Percentage as of the last day of the most recently ended calendar month. "Loss and Dilution Reserve" means, for any Receivable Interest on any date, an amount equal to the Capital of such Receivable Interest at the close of business of the Collection Agent on such date multiplied by the Loss and Dilution Percentage on such date. "Loss Horizon Factor" means for any date the ratio (expressed as a percentage) computed as of the last day of the most recently ended calendar month by dividing (i) the aggregate Outstanding Balance of all Receivables created during the two most recently ended calendar months plus the Unbilled Receivables for the most recent calendar month by (ii) the Net Receivable Pool Balance as of such date. "Loss Ratio" means for any date the average of the ratios (expressed as a percentage) for each of the three most recently ended calendar months computed as of the last day of each such calendar month determined by dividing the sum of (i) the gross writeoffs for such calendar month, (ii) increases, if any, in the outstanding balance of accounts designated by the Originator as "hardship accounts" as of the last day of such calendar month over the outstanding balance of such accounts as of the last day of the preceding calendar month and (iii) additions to Inactive Accounts for such calendar month by the aggregate original Outstanding Balance of Receivables that were created during the fifth preceding calendar month. For purposes of this definition, "additions to Inactive Accounts" for any calendar month shall be (A) the outstanding balance of Inactive Accounts as of the last day of the most recently ended calendar month less (B) the difference between (x) the outstanding balance of Inactive Accounts as of the last day of the month preceding the most recently ended calendar month and (y) gross writeoffs for the most recently ended calendar month; provided, however, that if the amount calculated under this sentence shall, for any date, be a negative number, then, for purposes of calculating the Loss Ratio on such date, the amount set forth in clause (iii) above shall be zero. "Loss-to-Liquidation Ratio" means for any calendar month the ratio (expressed as a percentage) computed as of the last day of such calendar month by dividing (i) the aggregate Out-standing Balance of all Pool Receivables written off by the Collection Agent or the Seller, or which should have been written off by the Collection Agent or the Seller in accordance with its Credit and Collection Policy, during such calendar month by (ii) the aggregate amount of Collections of Pool Receivables actually received during such calendar month. "Minimum Percentage" means on any date the sum of (i) the product of (A) 4 and (B) the Normal Concentration Limit in effect on such date and (ii) the product of (A) the Dilution Horizon Factor on such date and (B) the Average Dilution Ratio on such date. "Moody's" means Moody's Investors Service, Inc. "Net Receivables Pool Balance" means at any time the Outstanding Balance of Eligible Receivables then in the Receivables Pool reduced by the sum of (i) the Outstanding Balance of such Eligible Receivables that are then Defaulted Receivables or Delinquent Receivables or arise from Inactive Accounts, (ii) the aggregate amount by which the Outstanding Balance of Eligible Receivables (other than Defaulted Receivables or Delinquent Receivables) of any Obligor or group of Obligors exceeds the product of (A) the Concentration Limit of such Obligor or group of Obligors multiplied by (B) the Outstanding Balance of the Receivables then in the Receivables Pool and (iii) the sum of all Budget Account Credit Balances. "Normal Concentration Limit" has the meaning specified in the definition of "Concentration Limit." "Obligor" means a Person obligated to make payments pursuant to a Contract. "Originator" means The Connecticut Light and Power Company, a Connecticut corporation. "Originator Purchase Agreement" means the Purchase and Contribution Agreement, dated the date of this Agreement, between the Originator, as seller, and the Seller, as purchaser, as the same may be amended, modified or restated from time to time. "Other Corporations" means the Originator and all of its Subsidiaries except the Seller. "Outstanding Balance" of any Receivable at any time means the then outstanding principal balance thereof. "Percentage" of any Bank means (i) with respect to Citibank the percentage set forth on the signature page to this Agreement, or such amount to which such percentage is reduced by an assignment entered into with an Eligible Assignee, and (b) with respect to a Bank that has entered into an assignment, the amount set forth therein as such Bank's Percentage, or such amount to which such percentage is reduced by an assignment entered into between such Bank and an Eligible Assignee. "Person" means an individual, partnership, corporation (including a business trust), joint stock company, limited liability company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof. "Pool Receivable" means a Receivable in the Receivables Pool. "Public Disclosure Documents" means (i) the Originator's Annual Report on Form 10-K for the year ending December 31, 1996, (ii) the Originator's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997 and June 30, 1997, Northeast Utilities' reports on Form 8-K dated January 20, 1997, February 20, 1997, February 28, 1997, April 11, 1997, June 26, 1997, July 22, 1997 and August 19, 1997 and (iv) the Originator's Registration Statement No. 333-30911 on Form S-1, as amended. "Purchase" means the purchase of a Receivable Interest from the Seller, in accordance with Section 2.03(a). "Purchase Limit" means $200,000,000, as such amount may be reduced pursuant to Section 2.02; provided, however, that at no time shall the Purchase Limit exceed the aggregate Bank Commitments in effect at such time. References to the unused portion of the Purchase Limit shall mean, at any time, the Purchase Limit, as then reduced pursuant to Section 2.02(c), minus the then outstanding Capital of Receivable Interests under this Agreement. "Purchaser" means the Conduit and all other owners by assignment or otherwise of a Receivable Interest (other than Banks) and, to the extent of the undivided interests so purchased, shall include any participants. "Purchaser Rate" for any Settlement Period for any Receivable Interest means, to the extent the Conduit funds such Receivable Interest for such Settlement Period by issuing commercial paper, the per annum rate equivalent to the weighted average of the per annum rates paid or payable by the Conduit from time to time as interest on or otherwise (by means of interest rate hedges or otherwise) in respect of those promissory notes issued by the Conduit that are allocated, in whole or in part, by the Agent (on behalf of the Conduit) to fund the purchase or maintenance of such Receivable Interest during such Settlement Period as determined by the Agent (on behalf of the Conduit) and reported to the Seller, which rates shall reflect and give effect to the commissions of placement agents and dealers in respect of such commercial paper notes, to the extent such commissions are allocated, in whole or in part, to such commercial paper notes by the Agent (on behalf of the Conduit); provided, however, that if any component of such rate is a discount rate, in calculating the 'Purchaser Rate' for such Settlement Period the Agent shall for such component use the rate resulting from converting such discount rate to an interest bearing equivalent rate per annum. "Receivable" means the accounts, general intangibles and other indebtedness (billed and unbilled) of an Obligor arising from the retail sale of electricity and related services by the Originator in Connecticut to such Obligor pursuant to a Contract as booked to Accounts 142 (excluding amounts booked to Account 142.04) and 173 as defined under the Federal Energy Regulatory Commission Chart of Accounts as utilized by the Originator, but excluding any obligation of such Obligor to pay finance charges and other amounts in the case of late payment. "Receivable Interest" means, at any time, an undivided percentage ownership interest in all Receivables in the Receivables Pool and in all Related Security with respect to such Pool Receivables and all Collections with respect to, and other proceeds of, such Pool Receivables equal to the Receivable Interest Percentage. "Receivable Interest Percentage" means, with respect to any Receivable Interest, a percentage equal to the following fraction: C + YR + LR + CAFR - ---------------------------- NRPB where: C = the Capital of such Receivable Interest at the time of computation. YR = the Yield Reserve of such Receivable Interest at the time of computation. LR = the Loss and Dilution Reserve of such Receivable Interest at the time of computation. CAFR = the Collection Agent Fee Reserve of such Receivable Interest at the time of computation. NRPB = the Net Receivables Pool Balance at the time of computation. "Receivables Pool" means at any time the aggregation of each then outstanding Receivable in respect of which the Obligor is a Designated Obligor at such time or was a Designated Obligor on the date of the initial creation of an interest in such Receivable under this Agreement. "Regulatory Authority" means each of the Connecticut Department of Public Utility Control, Federal Energy Regulatory Commission, and any successor commission thereto. "Related Security" means, with respect to any Receivable: (i) all security interests or liens and property subject thereto from time to time purporting to secure payment of such Receivable, whether pursuant to the Contract related to such Receivable or otherwise; (ii) all guarantees, indemnities, warranties, insurance policies and proceeds and premium refunds thereof and other agreements or arrangements of whatever character from time to time supporting or securing payment of such Receivable, whether pursuant to the Contract related to such Receivable or otherwise; and (iii) the Contract and all other books, records and other information (including, without limitation, computer programs, tapes, discs, punch cards, data processing software and related property and rights) relating to such Receivable and the related Obligor. "Seller Report" means a report in substantially the form of Exhibit B hereto and containing such additional information as the Agent may reasonably request from time to time, furnished by the Collection Agent to the Agent. "Settlement Date" means the third Business Day after the end of each Settlement Period during the term of this Agreement; provided that with respect to any Settlement Period for which Yield is computed by reference to the Assignee Rate and such rate is known prior to the last day of the Settlement Period, the Settlement Date shall be the last day of the Settlement Period. "Settlement Period" means: (a) in the case of any Settlement Period in respect of which Yield is computed by reference to the Purchaser Rate, each successive period commencing on the 19th day of each calendar month during the term of this Agreement and ending on the 18th day of the succeeding calendar month during the term of this Agreement; provided, however, that in the case of any Settlement Period for any Receivable Interest which commences before the Termination Date for such Receivable Interest and would otherwise end on a date occurring after such Termination Date, such Settlement Period shall end on such Termination Date and the duration of each Settlement Period which commences on or after the Termination Date for such Receivable Interest may be any period (including, without limitation, a period of one day) as shall be selected from time to time by the Agent; (b) in the case of any Settlement Period in respect of which Yield is computed by reference to the Assignee Rate, each successive period commencing on the 19th day of each calendar month during the term of this Agreement and ending on the 18th day of the succeeding calendar month during the term of this Agreement; provided, however, that any Settlement Period which is other than the monthly Settlement Period shall be of such duration as shall be selected by the Agent; and (c) in the case of any Settlement Period in respect of which Yield is computed by reference to the Alternate Base Rate, such Settlement Period shall be of such duration as shall be selected by the Agent. "Significant Subsidiary" means the Seller and any Subsidiary having total assets exceeding 10% of consolidated total assets of the Originator. "Special Concentration Limit" has the meaning specified in the definition of "Concentration Limit." "Standard & Poor's" means Standard & Poor's Ratings Group. "Subsidiary" means any corporation of which securities having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Seller or the Originator, as the case may be, or one or more Subsidiaries, or by the Seller or the Originator, as the case may be, and one or more Subsidiaries. "Supplemental Collection Account" means Account # 5044-3708 at Fleet National Bank, Hartford, Connecticut, which is the account to which Obligors are directed to make ACH payments on Receivables. "Tangible Net Worth" means at any time the excess of (i) the Outstanding Balance of all Receivables plus cash and cash equivalents of the Seller at such time minus (ii) the sum at such time of (a) the Outstanding Balance of such Receivables which have become Defaulted Receivables, (b) Capital, Yield Reserve, Loss and Dilution Reserve and Collection Agent Fee Reserve plus (c) the Deferred Purchase Price. "Tariffs" means the tariffs described in Exhibit C, which have been approved by the governing Regulatory Authority, as hereafter amended or modified by the governing Regulatory Authority, pursuant to which the Originator provides electricity to the Obligors and the Obligors are obligated to pay for such electricity. "Termination Date" for any Receivable Interest means (i) in the case of a Receivable Interest owned by a Purchaser, the earlier of (a) the Business Day which the Seller or the Agent so designates by notice to the other at least three Business Days (or such shorter period as is required under the circumstances, but in any event not less than one Business Day) in advance for such Receivable Interest and (b) the Facility Termination Date and (ii) in the case of a Receivable Interest owned by a Bank, the earlier of (a) the Business Day which the Seller so designates by notice to the Agent at least three Business Days (or such shorter period as is required under the circumstances, but in any event not less than one Business Day) in advance for such Receivable Interest and (b) the Commitment Termination Date. "Transaction Document" means any of this Agreement, the Originator Purchase Agreement and all other agreements and documents delivered and/or related hereto or thereto. "UCC" means the Uniform Commercial Code as from time to time in effect in the specified jurisdiction. "Unbilled Receivable" means a Receivable which has not yet been billed to an Obligor. "Yield" means: (i) for each Receivable Interest for any Settlement Period to the extent the Conduit will be funding such Receivable Interest during such Settlement Period through the issuance of commercial paper, PR x C x ED + LF ---- 360 (ii) for each Receivable Interest for any Settlement Period to the extent (x) the Purchasers will not be funding such Receivable Interest during such Settlement Period through the issuance of commercial paper or (y) the Banks will be funding such Receivable Interest, AR x C x ED + LF ---- 360 where: AR = the Assignee Rate for such Receivable Interest for such Settlement Period C = the Capital of such Receivable Interest during such Settlement Period ED = the actual number of days elapsed during such Settlement Period LF = the Liquidation Fee, if any, for such Receivable Interest for such Settlement Period PR = the Purchaser Rate for such Receivable Interest for such Settlement Period provided that no provision of this Agreement shall require the payment or permit the collection of Yield in excess of the maximum permitted by applicable law; and provided further that Yield for any Receivable Interest shall not be considered paid by any distribution to the extent that at any time all or a portion of such distribution is rescinded or must otherwise be returned for any reason. "Yield Reserve" for any Receivable Interest at any time means the sum of (i) the Liquidation Yield at such time for such Receivable Interest, and (ii) the then accrued and unpaid Yield for such Receivable Interest. For purposes of this definition, (a) "Liquidation Yield" means, for any Receivable Interest on any date, an amount equal to the Rate Variance Factor on such date multiplied by the product of (i) the Capital of such Receivable Interest on such date and (ii) the product of (a) the Assignee Rate for such Receivable Interest for a 30-day period deemed to commence on such date and (b) a fraction having the sum of the Average Maturity plus the Collection Delay Period (each as in effect at such date) as its numerator and 360 as its denominator; and (b) "Rate Variance Factor" means a number greater than one that reflects the potential variance in selected interest rates over a period of time designated by the Agent, as computed by the Collection Agent each month and set forth in the Seller Report in accordance with the provisions thereof; provided that the factors used in computing the "Rate Variance Factor" may be changed from time to time in accordance with industry standards upon at least five days' prior notice by the Agent to the Collection Agent. SECTION 1.02. Other Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles. All terms used in Article 9 of the UCC in effect in the State of New York and not specifically defined herein, are used herein as defined in such Article 9. References herein to Receivables "generated" or "created" during any period shall mean all Receivables billed during such period. SECTION 1.03. Computation of Time Periods. Unless otherwise stated in this Agreement, in the computation of a period of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding." ARTICLE II AMOUNTS AND TERMS OF THE PURCHASES SECTION 2.01. Designated Obligors; Special Concentration Limits. Either the Seller or the Agent may cancel the designation of an Obligor as a Designated Obligor or any Special Concentration Limit for any Obligor, by notice in substantially the form of Exhibit D delivered by it to the other at least three Business Days prior to the date on which such cancellation shall become effective. Such notice of cancellation shall be applicable only to Receivable Interests purchased on and after its effective date. SECTION 2.02. Purchase Facility. (a) On the terms and conditions hereinafter set forth, the Conduit may, in its sole discretion, and the Banks shall, ratably in accordance with their respective Bank Commitments, purchase Receivable Interests from the Seller by making Purchases through the Agent, for the benefit of the Conduit or the Banks, as the case may be, from time to time during the period from the date hereof to the Facility Termination Date (in the case of the Conduit) and to the Commitment Termination Date (in the case of the Banks). Under no circumstances shall the Conduit make any Purchase of a Receivable Interest, or the Banks be obligated to make any such Purchase if (i) after giving effect to such Purchase, the outstanding Capital of Receivable Interests owned by all Purchasers and all Banks would exceed the Purchase Limit or (ii) in the case of the Conduit, a notice of termination in whole of the Purchase Limit has been delivered to the Seller by the Agent and has become effective. Nothing in this Agreement shall be deemed to be or construed as a commitment by the Conduit to purchase, or a commitment by the Seller to sell, any Receivable Interest at any time. (b) The Agent, on behalf of the Purchasers, may, at any time, by written notice to the Seller terminate in whole the Purchase Limit, such termination to become effective at the close of business on the last day of the Settlement Period following the Settlement Period in which such notice is given. (c) The Seller may, upon at least five Business Days' notice to the Agent, terminate in whole or reduce in part the unused portion of the Purchase Limit; provided, however, that for purposes of this Section 2.02(c), the unused portion of the Purchase Limit shall be computed as the excess of (i) the Purchase Limit immediately prior to giving effect to such termination or reduction over (ii) the aggregate Capital of all Receivable Interests outstanding under this Agreement; provided, further, that each partial reduction shall be in the amount of at least $5,000,000 and shall be an integral multiple of $1,000,000. (d) Until the Agent gives the Seller the notice provided in Section 3.02(b)(iv), the Agent, on behalf of the Purchasers which own Receivable Interests, may have the Collections attributable to such Receivable Interests automatically reinvested pursuant to Section 2.06 in additional undivided percentage interests in the Pool Receivables by making an appropriate readjustment of the Receivable Interest Percentage. The Agent, on behalf of the Banks which own Receivable Interests, shall have the Collections attributable to such Receivable Interests automatically reinvested pursuant to Section 2.06 in additional undivided percentage interests in the Pool Receivables by making an appropriate readjustment of such Receivable Interest Percentage. (e) Interests in all Receivable in existence on the date of the initial Purchase (and all related security with respect to such Receivables) (collectively, the "Sold Receivables") have heretofore been sold to the Agent, on behalf of the Purchasers and the Banks, pursuant to the Original Purchase Agreement (as such term is defined in the Originator Purchase Agreement). The Seller, with the consent of the Agent and the Originator, hereby assumes, as of the date of the initial Purchase hereunder, all of the Originator's rights and obligations under the Original Purchase Agreement with respect to the Sold Receivables; the Seller, the Agent and the Conduit agree that from and after the initial Purchase hereunder the terms of the Seller's rights and obligations with respect to the Sold Receivables shall be governed by this Agreement and the Original Purchase Agreement shall terminate; and both the Seller and the Conduit agree that the purchase price for the initial Purchase hereunder shall be reduced by the aggregate purchase price received by the Originator with respect to the Sold Receivables under the Original Purchase Agreement. SECTION 2.03. Making Purchases from the Seller. (a) Each Purchase by the Conduit or the Banks shall be made on at least three Business Days' notice from the Seller to the Agent. Each such notice of a Purchase shall specify (i) the amount requested to be paid to the Seller (such amount, which shall not be less than $5,000,000, being referred to herein as the initial "Capital" of the Receivable Interest then being purchased) and (ii) the date of such Purchase (which shall be a Business Day). The Agent shall promptly thereafter transmit such request to the Conduit and the Banks. The Agent shall promptly thereafter verbally notify the Seller whether the Conduit has determined to make a Purchase and, if so, whether all of the terms specified by the Seller are acceptable to the Conduit. If the Conduit has determined not to make a proposed Purchase, the Agent shall promptly notify all of the Banks concurrently by telecopier, telex or cable specifying the date of such Purchase, each Bank's Percentage multiplied by the aggregate amount of Capital of the Receivable Interest being purchased and whether the Yield for such Receivable Interest is calculated based on the Eurodollar Rate (which may be selected only if such notice is given at least two Business Days prior to the purchase date) or the Alternate Base Rate. (b) On the date for the Purchase of a Receivable Interest, the Conduit or the Banks, as the case may be, shall, upon satisfaction of the applicable conditions set forth in Article III, make available to the Agent at its address specified on the signature page to this Agreement an amount equal to the initial Capital of such Receivable Interest in same day funds. After receipt by the Agent of such funds, the Agent will make such funds immediately available to the Seller at Fleet National Bank, Hartford, Connecticut, ABA # 011500010, Account # 9370212175, or at such other account as the Seller may notify the Agent in writing. (c) Effective on the date of each Purchase pursuant to this Section 2.03 and each reinvestment, the Seller hereby sells and assigns to the Agent, for the benefit of the parties making such Purchase, an undivided percentage ownership interest, to the extent of the Receivable Interest Percentage, in each Pool Receivable then existing and in the Related Security and Collections with respect thereto. (d) Notwithstanding the foregoing, a Bank shall not be obligated to make Purchases under this Section 2.03 at any time in an amount which would exceed such Bank's Bank Commitment less (in the case of any Bank other than Citibank) the outstanding and unpaid amount of any purchases made by such Bank under any asset purchase agreement related hereto. Each Bank's obligation shall be several, such that the failure of any Bank to make available to the Seller any funds in connection with any Purchase shall not relieve any other Bank of its obligation, if any, hereunder to make funds available on the date of such Purchase, but no Bank shall be responsible for the failure of any other Bank to make funds available in connection with any Purchase. SECTION 2.04. Receivable Interest Percentage Computation. The Receivable Interest Percentage shall be initially computed on the date of purchase of the applicable Receivable Interest. Thereafter until the Termination Date for such Receivable Interest, such Receivable Interest Percentage shall be automatically recomputed (or deemed to be recomputed) on each day other than a Liquidation Day. Any Receivable Interest Percentage, as computed (or deemed recomputed) as of the day immediately preceding the Termination Date for such Receivable Interest, shall there-after remain constant. Such Receivable Interest shall become zero when Capital thereof and Yield thereon shall have been paid in full, and all other amounts owed by the Seller hereunder to the Purchasers, the Banks or the Agent are paid and the Collection Agent shall have received the accrued Collection Agent Fee thereon. SECTION 2.05. Fees. (a) The Seller shall pay to the Agent certain fees in the amounts and on the dates set forth in the Fee Agreement. (b) In consideration of the purchase by the Purchaser and/or the Banks of Receivable Interests as herein provided, the Seller agrees to pay to the Collection Agent the Collection Agent Fee. The Collection Agent Fee shall be payable only from Collections pursuant to, and subject to the priority of payment set forth in, Section 2.06. SECTION 2.06. Settlement Procedures. (a) Collection of the Pool Receivables shall be administered by a Collection Agent, in accordance with the terms of Article VI of this Agreement. The Seller shall provide to the Collection Agent (if other than the Seller) on a timely basis all information needed for such administration, including notice of the occurrence of any Liquidation Day and current computations of the Receivable Interest Percentage. (b) Within two Business Days following its receipt of any item of payment with respect to the Pool Receivables (including, without limitation, cash, checks, money orders, wire transfers and automated clearing house payments), the Collection Agent shall deposit such item into the Collection Account. Except during the continuance of an Event of Termination or Incipient Event of Termination or as otherwise required in this Agreement, funds received in the Collection Account shall be transferred to an account designated by the Seller for the benefit of the Collection Agent. The Collection Agent shall, on each day on which it receives any such funds: (i) set aside on its books and hold in trust for the Purchasers or the Banks that hold such Receivable Interest out of the applicable Receivable Interest Percentage of such Collections an amount equal to the Yield and Collection Agent Fee accrued through such day for such Receivable Interest and not previously set aside; (ii) if such day is not a Liquidation Day for such Receivable Interest, reinvest with the Seller on behalf of the Purchasers or the Banks that hold such Receivable Interest the percentage of such Collections represented by such Receivable Interest Percentage, to the extent representing a return of Capital, by recomputation of such Receivable Interest Percentage pursuant to Section 2.04; (iii) if such day is a Liquidation Day for such Receivable Interest, set aside, hold in trust and segregate for the Purchasers or the Banks that hold such Receivable Interest the entire remainder of such percentage of Collections; provided that if amounts are set aside and held in trust on any Liquidation Day occurring prior to the Termination Date, and thereafter during such Settlement Period the conditions set forth in Section 3.02 are satisfied or waived by the Agent, such previously set aside amounts shall, to the extent representing a return of Capital, be reinvested in accordance with the preceding subsection (ii) on the day of such subsequent satisfaction or waiver of conditions; and (iv) during such times as amounts are required to be reinvested in accordance with the foregoing subsection (ii) or the proviso to subsection (iii), apply any Collections in excess of such amounts or in excess of the amounts that are required to be set aside pursuant to subsection (i) above to the payment of any "Purchase Price" (including any "Deferred Purchase Price", as such terms are defined in the Originator Purchase Agreement) then due and release the balance, if any, to the Seller. (c) On each Settlement Date, the Collection Agent, on behalf of the Seller, shall deposit funds equal to the lesser of (x) the Collections received or deemed received during the preceding Settlement Period which are held or required to be held for the benefit of the Purchasers or the Banks pursuant to Section 2.06(b) or 2.06(e) and (y) an amount sufficient to make the distributions set forth in clauses (i) and (ii) below in account #4070-3544 at Citibank or to such other account designated by the Agent therefor (provided, however, that so long as the Collection Agent is the Originator and no Event of Termination or Incipient Event of Termination has occurred, the Collection Agent may, on the last day of each month following each Settlement Date, retain from such funds an amount equal to the accrued Collection Agent Fee as of such Settlement Date, instead of including such amount in the deposit made on such Settlement Date.) Upon receipt of such funds, the Agent shall distribute them as follows: (i) if such distribution occurs on a day that is not a Liquidation Day, first to the Purchasers or the Banks that hold the relevant Receivable Interest in payment in full of all accrued Yield and then to the Collection Agent in payment in full of all accrued Collection Agent Fees; and (ii) if such distribution occurs on a Liquidation Day, first to the Purchasers or the Banks that hold the relevant Receivable Interest in payment in full of all accrued Yield, second to such Purchasers or Banks in reduction to zero of all Capital, third to such Purchasers, Banks or the Agent in payment of any other amounts owed by the Seller hereunder, and fourth to the Collection Agent in payment in full of all accrued Collection Agent Fee. After the Capital and Yield and Collection Agent Fee with respect to a Receivable Interest, and any other amounts payable by the Seller to the Purchasers, the Banks or the Agent hereunder, have been paid in full, all additional Collections with respect to such Receivable Interest shall revert to and be paid to the Seller for its own account. (e) For the purposes of this Section 2.06: (i) if on any day the Outstanding Balance of any Pool Receivable is reduced or adjusted as a result of any defective, rejected, returned, repossessed or foreclosed merchandise or services, or any cash discount, other promotional adjustment or other retroactive credit made by the Seller or the Originator, the Seller shall be deemed to have received on such day a Collection of such Pool Receivable in the amount of such reduction or adjustment; (ii) if on any day any of the representations or warranties in Section 4.01(i) is no longer true with respect to any Pool Receivable, the Seller shall be deemed to have received on such day a Collection of such Pool Receivable in full; and (iii) except as provided in paragraph (i) or (ii) of this subsection 2.06(e), or as otherwise required by applicable law or the relevant Contract, all Collections received from an Obligor of any Receivables shall be applied to the Receivables of such Obligor in the order of the age of such Receivables, starting with the oldest such Receivable, unless such Obligor designates its payment for application to specific Receivables. (f) If and to the extent that the Agent, any Purchaser or any Bank shall be required for any reason to pay over to an Obligor any amount received on its behalf hereunder, such amount shall be deemed not to have been so received but rather to have been retained by the Seller and, accordingly, such Purchaser, the Agent or such Bank, as the case may be, shall have a claim against the Seller for such amount, payable when and to the extent that any distribution from or on behalf of such Obligor is made in respect thereof. SECTION 2.07. Payments and Computations, Etc. (a) All amounts to be paid or deposited by the Seller or the Collection Agent hereunder shall be paid or deposited in accordance with the terms hereof no later than 11:00 A.M. (New York City time) on the day when due in lawful money of the United States of America in immediately available funds at the office of Citibank specified on the signature page hereto. (b) The Seller shall, to the extent permitted by applicable law, pay interest to the Agent on any amount not paid by the Seller when required to be paid by it hereunder, at an interest rate per annum equal to the Alternate Base Rate, payable on demand; provided, however, that such interest rate shall not at any time exceed the maximum rate permitted by applicable law. Such interest shall be for the account of, and shall be distributed to, the Purchasers or the Banks, as the case may be, ratably in accordance with their respective interests in such overdue amount and shall be paid by the Seller free and clear of and without deduction for any taxes of any kind whatsoever. (c) All computations of interest under subsection (b) above and all computations of fees hereunder shall be made on the basis of a year of 360 days for the actual number of days (including the first but excluding the last day) elapsed. Whenever any payment or deposit to be made hereunder shall be stated to be due on a day other than a Business Day, such payment or deposit shall be made on the next succeeding Business Day and such extension of time shall in such case be included in the computation of such payment or deposit. SECTION 2.08. Increased Costs. (a) If CNAI, any Purchaser, any Bank, any entity which enters into a commitment to purchase Receivable Interests or interests therein, or any of their respective Affiliates (each an "Affected Person") determines that compliance with any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) affects or would affect the amount of the capital required or expected to be maintained by such Affected Person and such Affected Person determines that the amount of such capital is increased by or based upon the existence of any commitment to make purchases of or otherwise to maintain the investment in Pool Receivables or interests therein related to this Agreement or to the funding thereof and other commitments of the same type, then, upon demand by such Affected Person (with a copy to the Agent), the Seller shall immediately pay to the Agent for the account of such Affected Person (as a third-party beneficiary), from time to time as specified by such Affected Person, additional amounts sufficient to compensate such Affected Person in the light of such circumstances, to the extent that such Affected Person reasonably determines such increase in capital to be allocable to the existence of any of such commitments. A certificate as to such amounts submitted to the Seller and the Agent by such Affected Person shall be conclusive and binding for all purposes, absent manifest error. (b) If, due to either (i) the introduction of or any change in or in the interpretation of any law or regulation or (ii) compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to any Purchaser or Bank of agreeing to purchase or purchasing, or maintaining the ownership of Receivable Interests in respect of which Yield is computed by reference to a Eurodollar Rate, then, upon demand by such Purchaser or Bank (with a copy to the Agent), the Seller shall immediately pay to the Agent, for the account of such Purchaser or Bank (as a third-party beneficiary), from time to time as specified by such Purchaser or Bank, additional amounts sufficient to compensate such Purchaser or Bank for such increased costs. A certificate as to such amounts submitted to the Seller and the Agent by such Purchaser or Bank shall be conclusive and binding for all purposes, absent manifest error. SECTION 2.09. Additional Yield on Receivable Interests Bearing a Eurodollar Rate. The Seller shall pay to any Purchaser or Bank, so long as such Purchaser or Bank shall be required under regulations of the Board of Governors of the Federal Reserve System to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency Liabilities, additional Yield on the unpaid Capital of each Receivable Interest of such Purchaser or Bank during each Settlement Period in respect of which Yield is computed by reference to the Eurodollar Rate, for such Settlement Period, at a rate per annum equal at all times during such Settlement Period to the remainder obtained by subtracting (i) the Eurodollar Rate for such Settlement Period from (ii) the rate obtained by dividing such Eurodollar Rate referred to in clause (i) above by that percentage equal to 100% minus the Eurodollar Rate Reserve Percentage of such Purchaser or Bank for such Settlement Period, payable on each date on which Yield is payable on such Receivable Interest. Such additional Yield shall be determined by such Purchaser or Bank and notice thereof given to the Seller through the Agent within 30 days after any Yield payment is made with respect to which such additional Yield is requested. A certificate as to such additional Yield submitted to the Seller and the Agent by such Purchaser or Bank shall be conclusive and binding for all purposes, absent manifest error. SECTION 2.10. Security Interest. As collateral security for the performance by the Seller of all the terms, covenants and agreements on the part of the Seller (whether as Seller or otherwise) to be performed under this Agreement or any document delivered in connection with this Agreement in accordance with the terms thereof, including the punctual payment when due of all obligations of the Seller hereunder or thereunder, whether for indemnification payments, fees, expenses or otherwise, the Seller hereby assigns to the Agent for its benefit and the ratable benefit of the Purchasers and the Banks, and hereby grants to the Agent for its benefit and the ratable benefit of the Purchasers and the Banks, a security interest in, all of the Seller's right, title and interest in and to (a) the Originator Purchase Agreement, including, without limitation, (i) all rights of the Seller to receive moneys due or to become due under or pursuant to the Originator Purchase Agreement, (ii) all security interests and property subject thereto from time to time purporting to secure payment of monies due or to become due under or pursuant to the Originator Purchase Agreement, (iii) all rights of the Seller to receive proceeds of any insurance, indemnity, warranty or guaranty with respect to the Originator Purchase Agreement, (iv) claims of the Seller for damages arising out of or for breach of or default under the Originator Purchase Agreement and (v) the right of the Seller to compel performance and otherwise exercise all remedies thereunder, (b) all Receivables, the Related Security with respect thereto and the Collections and all other assets, including, without limitation, accounts, instruments and general intangibles (as those terms are defined in the UCC) owned by the Seller and not otherwise purchased or scheduled to be purchased under this Agreement and (c) to the extent not included in the foregoing, all proceeds of any and all of the foregoing. ARTICLE III CONDITIONS OF PURCHASES SECTION 3.01. Conditions Precedent to Initial Purchase. The initial Purchase hereunder is subject to the conditions precedent that the Agent shall have received on or before the date of such Purchase the following, each in form and substance satisfactory to the Agent: (a) A copy of the resolutions of the Board of Directors of each of the Seller and the Originator authorizing this Agreement and the Originator Purchase Agreement and the other documents to be delivered by it hereunder and thereunder and the transactions contemplated hereby and thereby, certified by its Secretary or Assistant Secretary. (b) A certificate of the Secretary or Assistant Secretary of each of the Seller and the Originator certifying the names and true signatures of the officers authorized on its behalf to sign this Agreement and the Originator Purchase Agreement and the other documents to be delivered by it hereunder and thereunder (on which certificate the Agent, the Purchasers and the Banks may conclusively rely unless and until such time as the Agent shall receive from the Seller or the Originator a replacement certificate meeting the requirements of this subsection (b)). (c) Acknowledgment copies or time stamped receipt copies of proper Financing Statements (Form UCC-1), duly filed on or before the date of such initial Purchase under the UCC of all appropriate jurisdictions or any comparable law that the Agent may deem necessary or desirable in order to perfect the ownership and security interests in all Receivables and Related Security contemplated by this Agreement and the Originator Purchase Agreement. (d) Acknowledgment copies or time stamped receipt copies of proper Financing Statements (Form UCC-3), if any, necessary to release all security interests and other rights of any person in (i) the Receivables and Related Security previously granted by the Seller or the Originator and (ii) the collateral security referred to in Section 2.10 previously granted by the Seller. (e) Certified copies of requests for information or copies (Form UCC-11) (or a similar search report certified by a party acceptable to the Agent), dated a date reasonably near to the date of the initial Purchase, listing all effective financing statements which name the Seller or the Originator (under its present name and any previous name) as debtor and which are filed in the jurisdictions in which filings were made pursuant to subsection (c) above, together with copies of such financing statements (none of which, other than the financing statements filed pursuant to subsection (c), shall cover any Receivables, Related Security or Contracts or the collateral security referred to in Section 2.10). (f) The Fee Agreement referred to in Section 2.05. (g) A favorable opinion or opinions of counsel for the Seller and the Originator, in substantially the form of Exhibit E and as to such other matters as the Agent may reasonably request. (h) A favorable opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP, counsel for the Agent, as the Agent may reasonably request. (i) A letter agreement with Fleet National Bank acknowledging the Agent's dominion and control over the Collection Account, duly executed by Fleet National Bank, the Originator and the Seller. (j) A letter agreement acknowledging the Agent's dominion and control over the Supplemental Collection Account, duly executed by the Originator and the Seller. (k) An executed copy of the Originator Purchase Agreement. (l) A copy of the by-laws of the Seller, certified by the Secretary or Assistant Secretary of the Seller. (m) A copy of the certificate or articles of incorporation of the Seller, certified as of a recent date by the Secretary of State or other appropriate official of the state of its organization, and a certificate as to the good standing of the Seller from such Secretary of State or other official, dated as of a recent date. SECTION 3.02. Conditions Precedent to All Purchases. Each Purchase (including the initial Purchase) and each reinvestment hereunder shall be subject to the further conditions precedent that: (a) the Collection Agent shall have prepared and forwarded to the Agent, for each Purchaser and each Bank, on or prior to the 18th day of each month, a Seller Report related to each Receivable Interest owned by such Purchaser or Bank as of the close of business of the Seller on the last day of the preceding Settlement Period and containing such additional information as may be reasonably requested by the Agent; (b) on the date of such Purchase or reinvestment the following statements shall be true, except that the statement in clause (iv) below is required to be true only if such Purchase or reinvestment is by a Purchaser (and the Seller by accepting a payment of Capital shall be deemed to have certified that): (i) the representations and warranties contained in Section 4.01 of this Agreement are correct on and as of such date as though made on and as of such date, (ii) no event has occurred and is continuing, or would result from such Purchase, which constitutes an Event of Termination or Incipient Event of Termination, (iii) on such date, all of the Originator's long-term public senior debt securities are rated at least BB- by Standard & Poor's or Ba3 by Moody's, (iv) the Agent shall not have given the Seller at least one Business Day's notice that the Purchasers have terminated new Purchases of Receivable Interests or reinvestments therein, and (v) the Originator shall have sold or contributed to the Seller, pursuant to the Originator Purchase Agreement, all Pool Receivables then outstanding; and (c) the Agent shall have received such other approvals, opinions or documents as the Agent may reasonably request. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Seller. The Seller represents and warrants as follows: (a) The Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Connecticut. (b) The execution, delivery and performance by the Seller of the Transaction Documents and the other instruments and documents to be delivered by it hereunder, and the transactions contemplated hereby and thereby, including the Seller's use of the proceeds of Purchases and reinvestments, are within the Seller's corporate powers, have been duly authorized by all necessary corporate action, do not contravene (i) the Seller's charter and by-laws, (ii) any law, rule or regulation applicable to the Seller, (iii) any contractual restriction binding on or affecting the Seller or its property or (iv) any order, writ, judgment, award, injunction or decree binding on or affecting the Seller or its property, and (except as contemplated hereby) do not result in or require the creation of any lien, security interest or other charge or encumbrance upon or with respect to any of its properties; and no transaction contemplated hereby requires compliance with any bulk sales act or similar law. Each of the Transaction Documents to which the Seller is a party has been duly executed and delivered by the Seller. (c) No authorization, approval, declaration, order or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Seller of the Transaction Documents to which the Seller is a party or any other document or instrument to be delivered hereunder except for such as have been accomplished and except for the filing of the UCC Financing Statements referred to in Article III, all of which, at the time required in Article III, shall have been duly made and shall be in full force and effect. (d) Each of the Transaction Documents to which the Seller is a party constitutes the legal, valid and binding obligation of the Seller enforceable against the Seller in accordance with its terms. (e) This Agreement evidences the transfer to the Agent, for the benefit of the Purchasers and the Banks, as the case may be, of legal and equitable title to, and ownership of, an undivided percentage ownership interest in Receivables to the extent of the applicable Receivable Interest Percentage. (f) The consolidated balance sheet of the Originator as at December 31, 1996, and the related statements of income and retained earnings of the Originator for the year then ended (the "Financial Statements"), copies of which have been furnished to the Agent, fairly present the financial condition of the Originator and its Subsidiaries as of such date and the results of the operations of the Originator and its Subsidiaries for the period ended on such date, all in accordance with generally accepted accounting principles consistently applied, and since December 31, 1996 there has not occurred any event which may materially adversely affect the collectibility of the Pool Receivables or the ability of the Originator to collect Pool Receivables or otherwise perform its obligations under this Agreement. The opening pro forma balance sheet of the Seller as at September 30, 1997, giving effect to the initial Purchase to be made under this Agreement, a copy of which has been furnished to the Agent, fairly presents the financial condition of the Seller as at such date, in accordance with generally accepted accounting principles, and since September 30, 1997 there has not occurred any event which may materially adversely affect the collectibility of the Pool Receivables or the ability of the Seller to collect Pool Receivables or otherwise perform its obligations under this Agreement. (g) There are no actions, suits or proceedings pending, or to the knowledge of the Seller or the Originator threatened, against or affecting the Originator or any Significant Subsidiary, or the property of the Originator or of any Significant Subsidiary, except as otherwise disclosed in the Financial Statements and the Public Disclosure Documents, in any court, or before any arbitrator of any kind, or before or by any governmental body, which may materially adversely affect the collectibility of the Receivables Pool or the ability of the Seller or the Originator to collect Pool Receivables or otherwise perform their respective obligations under the Transaction Documents. Neither the Originator nor any Significant Subsidiary is in default with respect to any order of any court, arbitrator or governmental body except for defaults, if any, which are not material to the business or operations of the Originator or any Significant Subsidiary. (h) No proceeds of any Purchase or reinvestment will be used by the Seller to acquire any security in any transaction which is subject to Section 13 or 14 of the Securities Exchange Act of 1934, as amended. (i) Each Pool Receivable (i) at the time that the Purchasers or the Banks initially purchase an undivided percentage ownership interest in such Pool Receivable from the Seller, is owned by the Seller free and clear of any Adverse Claim and (ii) together with the Contract related thereto, at all times after such time is free and clear of any Adverse Claim except as otherwise specifically provided hereunder. Upon each Purchase of a Receivable Interest and each reinvestment, the Agent, for the benefit of the Purchasers or the Banks, as the case may be, will acquire a valid and perfected first priority undivided percentage ownership interest (to the extent of such Receivable Interest) in each Pool Receivable then existing or thereafter arising and in the Related Security (to the extent able to be perfected by filing), related Contract and (subject to Section 9-306 of the UCC) Collections with respect thereto free and clear of any Adverse Claim except as provided hereunder; and no effective financing statement or other instrument similar in effect covering any such Receivable or the Related Security, related Contract and Collections with respect thereto is on file in any recording office, or otherwise effective, except such as may be filed in favor of the Agent in accordance with this Agreement and those filed by the Seller pursuant to the Originator Purchase Agreement. (j) No Seller Report (if prepared by the Seller, or any Person with which the Seller has subcontracted pursuant to Section 6.01, or to the extent that information contained therein is supplied by the Seller or such other Person), information, exhibit, financial statement, document, book, record or report furnished or to be furnished by the Seller to the Agent, any Purchaser or any Bank in connection with this Agreement is inaccurate in any material respect or omits to state a material fact or any fact necessary to make the statements contained therein not materially misleading. (k) The chief place of business and chief executive office of the Seller and the offices where the Seller keeps all its books, records and documents evidencing Pool Receivables or the related Contracts are located at the address specified in Section 5.01(f), in jurisdictions where all action required by Section 6.05 has been taken and completed. (l) The Seller has not (i) extended, modified or waived any of the terms of any Contract giving rise to a Pool Receivable or (ii) made any change in its Credit and Collection Policy except, in either case, as permitted by Section 5.03(c). (m) Each Purchase of a Receivable Interest hereunder and each reinvestment will constitute (i) a "current transaction" within the meaning of Section 3(a)(3) of the Securities Act of 1933, as amended, and (ii) a purchase or other acquisition of notes, drafts, acceptances, open accounts receivable or other obligations representing part or all of the sales price of merchandise, insurance or services within the meaning of Section 3(c)(5) of the Investment Company Act of 1940, as amended. (n) On any date, the Net Receivables Pool Balance will not be less than 105% of the sum of Capital, Yield Reserve, Collection Agent Fee Reserve and Loss and Dilution Reserve for all Receivable Interests on such date; provided that no breach of the representation contained in this subsection (n) shall be deemed to have occurred if the condition set forth herein shall be cured within three Business Days after the Seller shall become aware of such condition. (o) Neither the Seller nor the Originator is known by or uses any tradename or doing-business-as name in the origination or collection of any of the Receivables. (p) The Seller was incorporated on September 5, 1997, and did not engage in any business activities prior to the date of this Agreement. The Seller has no Subsidiaries. (q) (i) The fair value of the property of the Seller is greater than the total amount of liabilities, including contingent liabilities, of the Seller, (ii) the present fair salable value of the assets of the Seller is not less than the amount that will be required to pay all probable liabilities of the Seller on its debts as they become absolute and matured, (iii) the Seller does not intend to, and does not believe that it will, incur debts or liabilities beyond the Seller's abilities to pay such debts and liabilities as they mature and (iv) the Seller is not engaged in a business or a transaction, and is not about to engage in a business or a transaction, for which the Seller's property would constitute unreasonably small capital. (r) With respect to each Pool Receivable as to which any Receivable Interest is outstanding, the Seller either (i) received such Pool Receivable as a contribution to the capital of the Seller by the Originator or (ii) purchased such Pool Receivable from the Originator in exchange for payment (made by the Seller to the Originator in accordance with the provisions of the Originator Purchase Agreement) of cash, Deferred Purchase Price, or a combination thereof in an amount which constitutes fair consideration and reasonably equivalent value. Each such sale referred to in clause (ii) of the preceding sentence was not made for or on account of an antecedent debt owed by the Originator to the Seller and no such sale is or may be voidable or subject to avoidance under any section of the Federal Bankruptcy Code. ARTICLE V GENERAL COVENANTS SECTION 5.01. Affirmative Covenants of the Seller and the Originator. Until the latest of the Facility Termination Date, the Commitment Termination Date, the date that the Capital and Yield with respect to all Receivable Interests shall be paid in full or the date all other amounts owed by the Seller hereunder to the Purchasers, the Banks or the Agent are paid in full, the Seller and the Originator will each, unless the Agent shall otherwise consent in writing: (a) Compliance with Laws, Etc. Comply in all material respects with all applicable laws, rules, regulations and orders with respect to it, its business and properties and all Pool Receivables, Related Security and related Contracts, except to the extent any such failure to comply is being contested in good faith by appropriate proceedings or any such failure would not have a material adverse effect on the collectibility of the Receivables Pool or the ability of the Seller or the Originator to perform their respective obligations under this Agreement and the related documents. (b) Preservation of Corporate Existence. Preserve and maintain its corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified in good standing as a foreign corporation in each jurisdiction where the failure to preserve and maintain such existence, rights, franchises, privileges and qualification would materially adversely affect the interests of any Purchaser, any Bank or the Agent hereunder or in the Pool Receivables, or the ability of the Seller or the Collection Agent to perform their respective obligations under this Agreement. (c) Audits. At any time and from time to time during regular business hours as requested by the Agent, permit the Agent, or its agents or representatives (including independent public accountants, which may be the Seller's or the Originator's independent public accountants), (i) to conduct periodic audits of the Pool Receivables, the Related Security and the related books and records and collections systems of the Seller or the Originator, as the case may be, (ii) to examine and make copies of and abstracts from all books, records and documents (including, without limitation, computer tapes and disks) in the possession or under the control of the Seller or the Originator, as the case may be, relating to Pool Receivables and the Related Security, including, without limitation, the related Contracts, and (iii) to visit the offices and properties of the Seller or the Originator, as the case may be, for the purpose of examining such materials described in clause (ii) above, and to discuss matters relating to Pool Receivables and the Related Security or the Seller's or the Originator's performance under the Transaction Documents or under the Contracts with any of the officers or employees of the Seller or the Originator, as the case may be, having knowledge of such matters. In addition, upon the Agent's request at least once per year, the Seller will, at its expense, appoint independent public accountants (which may be the Originator's regular independent public accountants, Arthur Andersen, LLP, or other major nationally recognized independent public accountants), or utilize the Agent's representatives or auditors, to prepare and deliver to the Agent a written report with respect to the Pool Receivables and the Credit and Collection Policy (including, in each case, the systems, procedures and records relating thereto) on a scope and in a form set forth in Exhibit F hereto or in such other form as may be reasonably requested by the Agent. In connection herewith and unless otherwise required by applicable law, the Agent agrees to maintain the confidentiality of all results of such inspections (except that the Agent shall have no obligation or confidentiality in respect of any information which may be generally available to the public or becomes available to the public through no fault of the Agent). (d) Keeping of Records and Books of Account. Maintain and implement, or cause to be maintained and implemented, administrative and operating procedures (including, without limitation, an ability to recreate records evidencing Pool Receivables and related Contracts in the event of the destruction of the originals thereof), and keep and maintain, or cause to be kept and maintained, all documents, books, records and other information reasonably necessary or advisable for the collection of all Pool Receivables (including, without limitation, records adequate to permit the daily identification of each Pool Receivable and all Collections of and adjustments to each existing Pool Receivable). (e) Performance and Compliance with Receivables and Contracts. At its expense timely and fully perform and comply with all material provisions, covenants and other promises required to be observed by it under the Contracts related to the Pool Receivables. (f) Location of Records. Keep its chief place of business and chief executive office, and the offices where it keeps its records concerning the Pool Receivables and all Contracts related thereto (and all original documents relating thereto), at the address of the Seller or the Originator, as the case may be, set forth under its name on the signature pages to this Agreement or (i) in the case of such records and Contracts, at the Originator's offices in Wethersfield, Connecticut or (ii) upon 30 days' prior written notice to the Agent, at such other locations in a jurisdiction where all action required by Section 6.05 shall have been taken and completed. (g) Credit and Collection Policies. Comply in all material respects with the Credit and Collection Policy in regard to each Pool Receivable and the related Contract. (h) Collections. Take all actions necessary to ensure that all items of payment with respect to Pool Receivables (including, without limitation, cash, checks, money orders, wire transfers and automated clearing house payments) are deposited in the Collection Account within two Business Days following receipt thereof. (i) Supplemental Collection Account. Within 30 days after the date hereof, obtain the agreement of Fleet National Bank to the letter agreement relating to the Supplemental Collection Account referred to in Section 3.01(j). SECTION 5.02. Reporting Requirements of the Seller. Until the latest of the Facility Termination Date, the Commitment Termination Date, the date that the Capital and Yield with respect to all Receivable Interests shall be paid in full or the date all other amounts owed by the Seller hereunder to the Purchasers, the Banks or the Agent are paid in full, the Seller will, unless the Agent shall otherwise consent in writing, furnish or cause to be furnished to the Agent: (a) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Originator a copy of the Originator's Quarterly Report on Form 10-Q for such quarter; (b) as soon as available and in any event within 105 days after the end of each fiscal year of the Originator a copy of the Originator's Annual Report on Form 10-K, for such fiscal year; (c) upon request by the Agent, copies of all reports which the Originator sends to any holders of its publicly held securities and copies of all reports and registration statements which the Originator files with the Securities and Exchange Commission or any national securities exchange; (d) promptly after the filing or receiving thereof, copies of all reports and notices with respect to any Reportable Event (as defined in Article IV of ERISA) which the Originator or any Significant Subsidiary files under ERISA with the Internal Revenue Service or the Pension Benefit Guaranty Corporation or the U.S. Department of Labor or which the Originator or any Significant Subsidiary receives from any of the foregoing in each case in respect of the assessment of withdrawal liability or event or condition which could, in the aggregate, result in the imposition of liability on the Originator in excess of $10,000,000; (e) as soon as possible and in any event within five days after an officer of the Seller obtains knowledge of the occurrence of an Event of Termination or an Incipient Event of Termination, the statement of the chief financial officer or chief accounting officer or the Treasurer or an Assistant Treasurer of the Seller setting forth the details of such Event of Termination or Incipient Event of Termination and the action that the Seller proposes to take with respect thereto; (f) upon the request of the Agent, a list of the Receivables in which each Purchaser and each Bank has purchased an undivided percentage ownership interest hereunder; (g) promptly, from time to time, such other information, documents, records or reports respecting the Receivables or Related Security or the conditions or operations, financial or otherwise, of the Originator or any Significant Subsidiary as the Agent may from time to time reasonably request in order to protect any Purchaser's, any Bank's or the Agent's interests under or contemplated by this Agreement; (h) on or prior to the 18th day of each month, such Seller Reports and other reports, information, documents, books or records as the Agent may reasonably request; (i) promptly after the Seller obtains knowledge thereof, notice of any "Event of Termination" or "Facility Termination Date" under the Originator Purchase Agreement; (j) so long as any Capital shall be outstanding, as soon as possible and in any event no later than the day of occurrence thereof, notice that the Originator has stopped selling or contributing to the Seller, pursuant to the Originator Purchase Agreement, all newly arising Pool Receivables; (k) at the time of the delivery of the financial statements provided for in clauses (a) and (b) of this paragraph, a certificate of the chief financial officer or chief accounting officer or the treasurer or an assistant treasurer of the Seller to the effect that, to the best of such officer's knowledge, no Event of Termination has occurred and is continuing or, if any Event of Termination has occurred and is continuing, specifying the nature and extent thereof; and (l) promptly after receipt thereof, copies of all notices received by the Seller from the Originator under the Originator Purchase Agreement. SECTION 5.03. Negative Covenants of the Seller. Until the latest of the Facility Termination Date, the Commitment Termination Date, the date that the Capital and Yield with respect to all Receivable Interests shall be paid in full or the date all other amounts owed by the Seller hereunder to the Purchasers, the Banks or the Agent are paid in full, the Seller will not, without the written consent of the Agent: (a) Sales, Liens, Etc. Except as otherwise provided herein, sell, assign (by operation of law or otherwise) or otherwise dispose of, or create or suffer to exist any Adverse Claim upon or with respect to, the Seller's undivided interest in any Pool Receivable, Related Security, related Contract or Collections, or upon or with respect to any lock-box account to which any Collections of any Pool Receivable are sent, or assign any right to receive income in respect thereof. (b) Extension or Amendment of Receivables. Except in conformance with the Credit and Collection Policy, extend, amend or otherwise modify the terms of any Pool Receivable, or amend, modify or waive any term or condition of any Contract related thereto if such action might reduce or impair the rights of any Purchaser, any Bank or the Agent with respect to any Pool Receivable or the collectibility or value of any Pool Receivable. (c) Change in Business or Contracts or Credit and Collection Policy. Make any change in the character of its business or its Contracts or Credit and Collection Policy, which change would, in any case, impair the collectibility of any Pool Receivable. (d) No Actions Against Obligors. Commence or settle any legal action to enforce collection of any Pool Receivable except in conformance with the Credit and Collection Policy. (e) Deposits to Designated Accounts. Deposit or otherwise credit, or cause or fail to use commercially reasonable efforts to prevent from being so deposited or credited, to any Designated Account cash or cash proceeds other than Collections of Pool Receivables. SECTION 5.04. Special Covenants Regarding Corporate Separateness, Etc. The Seller and the Originator each acknowledges that the Agent, each Purchaser and each Bank is entering into the transactions contemplated hereby in reliance on the separate legal identity of the Seller. In accordance with such reliance, the Seller hereby agrees that until the latest of the Facility Termination Date, the Commitment Termination Date, the date that the Capital and Yield with respect to all Receivable Interests shall be paid in full or the date all other amounts owed by the Seller hereunder to the Purchasers, the Banks or the Agent are paid in full, the Seller shall: (a) Corporate Separateness. (i) At all times maintain at least one independent director who (x) is not currently and has not been during the five years preceding the date of this Agreement an officer, director or employee of an Affiliate of the Seller or any Other Corporation, (y) is not a current or former officer or employee of the Seller and (z) is not a stockholder of any Other Corporation or any of their respective Affiliates. (ii) Not direct or participate in the management of any of the Other Corporations' operations. (iii) Have stationery and other business forms and a telephone number separate from that of the Other Corporations. (iv) At all times be adequately capitalized in light of its contemplated business. (v) At all times provide for its own operating expenses and liabilities from its own funds. (vi) (A) Except as contemplated hereby, maintain its assets and transactions separately from those of the Other Corporations and reflect such assets and transactions in financial statements separate and distinct from those of the Other Corporations and evidence such assets and transactions by appropriate entries in books and records separate and distinct from those of the Other Corporations; (B) hold itself out to the public under the Seller's own name as a legal entity separate and distinct from the Other Corporations; and (C) not hold itself out as having agreed to pay, or as being liable, primarily or secondarily, for, any obligations of the Other Corporations. (vii) Not maintain any joint account with any Other Corporation or become liable as a guarantor or otherwise with respect to any debt or contractual obligation of any Other Corporation. (viii) Not make any payment or distribution of assets with respect to any obligation of any Other Corporation or grant an Adverse Claim on any of its assets to secure any obligation of any Other Corporation. (ix) Not make loans, advances or otherwise extend credit to any of the Other Corporations except as contemplated hereby and by the Originator Purchase Agreement. (x) Hold regular duly noticed meetings of its Board of Directors and make and retain minutes of such meetings. (xi) Have bills of sale (or similar instruments of assignment) (except with respect to purchases of Receivables) and, if appropriate, UCC-1 financing statements, with respect to all assets purchased from any of the Other Corporations. (xii) Not engage in any transaction with any of the Other Corporations, except as permitted by this Agreement and as contemplated by the Originator Purchase Agreement. (xiii) Comply with (and cause to be true and correct) each of the facts and assumptions contained in Part A on pages 3-6 of the true sale and non-consolidation opinion of Day, Berry & Howard delivered pursuant to Section 3.01(g) and designated as Exhibit E to this Agreement. (b) Originator Purchase Agreement. Not amend, waive or modify any provision of the Originator Purchase Agreement or waive the occurrence of any "Event of Termination" under the Originator Purchase Agreement, without in each case the prior written consent of the Agent. The Seller will perform all of its obligations under the Originator Purchase Agreement in all material respects and will enforce the Originator Purchase Agreement in accordance with its terms in all material respects. (c) Nature of Business. Not engage in any business other than the purchase of Receivables, Related Security and Collections from the Originator and the transactions contemplated by this Agreement or create or form any Subsidiary. (d) Mergers, Etc. Not merge with or into or consolidate with or into, or convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions), all or substantially all of its assets (whether now owned or hereafter acquired) to, or acquire all or substantially all of the assets or capital stock or other ownership interest of, or enter into any joint venture or partnership agreement with, any Person, other than as contemplated by this Agreement and the Originator Purchase Agreement. (e) Distributions, Etc. Not declare or make any dividend payment or other distribution of assets, properties, cash, rights, obligations or securities on account of any shares of any class of capital stock of the Seller, or return any capital to its shareholders as such, or purchase, retire, defease, redeem or otherwise acquire for value or make any payment in respect of any shares of any class of capital stock of the Seller or any warrants, rights or options to acquire any such shares, now or hereafter outstanding; provided, however, that the Seller may declare and pay cash dividends on its capital stock to its shareholders so long as (i) no Event of Termination shall then exist or would occur as a result thereof, (ii) such dividends are in compliance with all applicable law including the law of the state of Connecticut, and (iii) such dividends have been approved by all necessary and appropriate corporate action of the Seller. (f) Debt. Not incur any debt, other than any debt incurred pursuant to this Agreement and the Originator Purchase Agreement, including the Deferred Purchase Price. (g) Certificate of Incorporation. Not amend or delete Articles Third, Fourth, Sixth or Seventh of its certificate of incorporation. (h) Tangible Net Worth. Maintain Tangible Net Worth at all times equal to at least 3% of the Outstanding Balance of the Receivables at such time. ARTICLE VI ADMINISTRATION AND COLLECTION SECTION 6.01. Designation of Collection Agent. The servicing, administration and collection of the Pool Receivables shall be conducted by such Person (the "Collection Agent") so designated from time to time in accordance with this Section 6.01. Until the Agent gives notice to the Seller of a designation of a new Collection Agent, the Originator is hereby designated as, and hereby agrees to perform the duties and obligations of, the Collection Agent pursuant to the terms hereof. The Agent, at any time after the occurrence of an Event of Termination or Incipient Event of Termination, upon notice to the Seller, may designate as Collection Agent any Person (including itself) to succeed the Originator or any successor Collection Agent, on the condition in each case that any such Person so designated agrees in writing (a) to perform the duties and obligations of the Collection Agent pursuant to the terms hereof and (b) to adhere to the provisions of Section 11.07, which agreement shall survive the termination of this Agreement or such writing. For purposes of satisfying the condition contained in the preceding sentence, the Agent hereby agrees that if and when it shall designate itself as the Collection Agent it shall perform the duties and obligations of the Collection Agent pursuant to the terms hereof. The Collection Agent may subcontract with Northeast Utilities Service Company and may, upon 45 days' notice to the Seller, with the prior consent of the Agent, subcontract with any other Person for the administration and collection of the Pool Receivables, provided that the Collection Agent shall remain liable for the performance of the duties and obligations of the Collection Agent pursuant to the terms hereof. In performing its duties as Collection Agent, the Collection Agent shall exercise the same care and apply the same policies as it would exercise and apply if it owned such Receivables and shall act in the best interests of the Seller, the Purchasers and the Banks. SECTION 6.02. Duties of Collection Agent. (a) The Collection Agent shall (unless the Agent directs otherwise) take or cause to be taken only such actions as shall be necessary or customary to collect each Pool Receivable from time to time, all in accordance with applicable laws, rules and regulations, with reasonable care and diligence, and solely in accordance with the Credit and Collection Policy. The Seller and the Agent hereby appoint the Collection Agent, from time to time designated pursuant to Section 6.01, as agent for themselves and for the Purchasers and the Banks to enforce their respective rights and interests in and under the Pool Receivables, the Related Security and the related Contracts and to monitor the Seller's compliance with the terms and conditions set forth in this Agreement. (b) The Collection Agent shall not extend, amend or otherwise modify the terms of any Pool Receivable or amend, modify or waive any term or condition of any Contract related thereto, or commence or settle any legal action to enforce collection of any Pool Receivable, except in conformance with the Credit and Collection Policy. (c) Upon the Agent's request following the occurrence of any Event of Termination or Incipient Event of Termination, the Seller shall deliver to the Collection Agent, and the Collection Agent shall hold in trust, keep confidential and legend appropriately for the Seller and the Agent, acting on behalf of each Purchaser and each Bank, in accordance with their respective interests, all computer tapes or disks which evidence or relate to Pool Receivables and all documents, instruments and other records which evidence or relate to Pool Receivables. (d) The Collection Agent shall as soon as practicable upon demand deliver to the Seller all documents, instruments and other records (including, without limitation, computer tapes or disks) in its possession which evidence or relate to Receivables of the Seller other than Pool Receivables, and copies of documents, instruments and other records in its possession which evidence or relate to Pool Receivables. (e) The Collection Agent shall, at any time and from time to time at the written request of the Agent, furnish to the Agent (within five Business Days after any such request) a calculation of the amounts set aside for the Purchasers and the Banks pursuant to Section 2.06(b). (f) The Collection Agent shall, to the extent permitted by applicable law, pay interest to the Agent on any amount not paid by the Collection Agent when required to be paid by it hereunder, at an interest rate per annum equal to the Alternate Base Rate, payable on demand; provided, however, that such interest rate shall not at any time exceed the maximum rate permitted by applicable law. Such interest shall be for the account of, and shall be distributed to, the Purchasers and the Banks, as the case may be, entitled thereto ratably in accordance with their respective interests in such overdue amount and shall be paid by the Collection Agent free and clear of and without deduction for any taxes of any kind whatsoever. (g) The Collection Agent's authorization under this Agreement shall terminate, after the Facility Termination Date and Commitment Termination Date, upon receipt by each Purchaser and each Bank which has purchased a Receivable Interest of the allocable Capital and Yield and upon payment in full of all other amounts payable to the Agent, each Purchaser, each Bank and the Collection Agent under this Agreement. SECTION 6.03. Rights of the Agent. (a) The Agent is hereby authorized, at any time, upon notice to the Seller after the occurrence of an Event of Termination or Incipient Event of Termination, to direct the Obligors of Pool Receivables, or any of them (and the Seller shall at the Agent's request and at the Seller's expense, direct such Obligors), to make payment of all amounts payable under any Pool Receivable directly to the Designated Account. Further, the Agent (upon notice to the Seller and at the Seller's expense) may, at any time after the occurrence of an Event of Termination or Incipient Event of Termination, notify the Obligors of Pool Receivables, or any of them, of the ownership of Receivable Interests by the Purchasers and the Banks. (b) At any time after the occurrence of an Event of Termination or Incipient Event of Termination: (i) The Agent may direct the Obligors of Pool Receivables, or any of them, that payment of all amounts payable under any Pool Receivable be made directly to the Agent or its designee. (ii) The Seller shall, at the Agent's request and at the Seller's expense, give notice of the ownership of Receivable Interests by the Agent, for the benefit of the Purchasers and the Banks to each such Obligor and direct that payments be made directly to the Agent or its designee. (iii) The Seller and the Originator shall, at the Agent's request and at the Seller's expense, (A) assemble all of the documents, instruments and other records (including, without limitation, computer tapes and disks) which evidence or relate to the Pool Receivables, and the related Contracts and Related Security, or which are otherwise necessary or desirable to collect such Pool Receivables, and shall make the same available to the Agent at a place selected by the Agent or its designee, and (B) segregate all cash, checks and other instruments received by it from time to time constituting Collections of Pool Receivables in a manner acceptable to the Agent and shall, promptly upon receipt, remit all such cash, checks and instruments, duly endorsed or with duly executed instruments of transfer, to the Agent or its designee. (iv) Each of the Seller, each Purchaser and each Bank hereby authorizes the Agent to take any and all steps in the Seller's name and on behalf of the Seller necessary or desirable, in the determination of the Agent, to collect all amounts due under any and all Pool Receivables, including, without limitation, endorsing the Seller's name on checks and other instruments representing Collections of Pool Receivables and enforcing such Pool Receivables and the related Contracts and taking action or causing action to be taken with respect to any Related Security, including with respect to transferring possession of the same to the Agent or its designee. SECTION 6.04. Responsibilities of the Seller and the Originator. Anything herein to the contrary notwithstanding: (a) The Seller and the Originator shall remain responsible and liable to perform all of their respective duties and obligations under the Contracts related to the Pool Receivables, to the extent set forth therein; the Seller and the Originator shall perform their respective obligations under the Contracts related to the Pool Receivables to the same extent as if Receivable Interests had not been sold; (b) The exercise by the Agent of any of its rights hereunder shall not release the Seller or the Originator from any of their respective duties or obligations with respect to any Pool Receivables or under the Contacts related to the Pool Receivables; (c) Neither the Agent nor any Purchaser or Bank shall have any obligation or liability with respect to any Pool Receivables or related Contracts, nor shall any of them be obligated to perform any of the obligations of the Seller or the Originator thereunder; (d) In the event of any conflict between the provisions of Article VI of this Agreement and Article VI of the Originator Purchase Agreement, the provisions of this Agreement shall control; and (e) The Seller shall promptly notify the Agent of any claim or threatened claim probable, in the opinion of the management of the Seller, to result in any liability referred to in Article X. SECTION 6.05. Further Action Evidencing Purchases. (a) Each of the Seller and the Originator agrees that from time to time, at its expense, it will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or that the Agent may reasonably request in order to perfect, protect or more fully evidence the Receivable Interests purchased by the Purchasers or the Banks hereunder, or to enable any of them or the Agent to exercise or enforce any of their respective rights hereunder. Without limiting the generality of the foregoing, the Originator will upon the request of the Agent: (i) execute and file such financing or continuation statements, or amendments thereto or assignments thereof, and such other instruments or notices, as may be necessary or appropriate; (ii) following the occurrence of any Event of Termination, mark conspicuously each invoice evidencing each Pool Receivable and the related Contract with a legend, acceptable to the Agent, evidencing that an undivided percentage ownership interest in such Receivable has been sold in accordance with this Agreement; and (iii) mark its master data processing records evidencing such Pool Receivables and related Contracts with such legend. (b) The Seller hereby authorizes the Agent to file or cause to be filed one or more financing or continuation statements, and amendments thereto and assignments thereof, relative to all or any of the Pool Receivables and the Related Security now existing or hereafter arising without the signature of the Seller where permitted by law. (c) If the Seller fails to perform any of its agreements or obligations under this Agreement, the Agent may (but shall not be required to) itself perform, or cause performance of, such agreement or obligation, and the expenses of the Agent incurred in connection therewith shall be payable by the Seller as provided in Section 11.06. SECTION 6.06. Application of Collections. Any payment by an Obligor in respect of any indebtedness owed by it to the Seller shall, except as otherwise specified by such Obligor or otherwise required by contract or law and unless otherwise instructed by the Agent, be applied as a Collection of any Pool Receivable or Receivables of such Obligor to the extent of any amounts then due and payable thereunder before being applied to any other indebtedness of such Obligor. SECTION 6.07. Indemnities by the Collection Agent. Without limiting any other rights that the Agent, any Purchaser, any Bank or any of their respective Affiliates (each, a "Special Indemnified Party") may have hereunder or under applicable law, and in consideration of its appointment as Collection Agent, the Collection Agent hereby agrees to indemnify each Special Indemnified Party from and against any and all claims, losses and liabilities (including reasonable attorneys' fees) (all of the foregoing being collectively referred to as "Special Indemnified Amounts") arising out of or resulting from any of the following (excluding, however, (a) Special Indemnified Amounts to the extent resulting from gross negligence or willful misconduct on the part of such Special Indemnified Party, (b) recourse for uncollectible Receivables or (c) any income taxes or any other tax or fee measured by income incurred by such Special Indemnified Party arising out of or as a result of this Agreement or the ownership of Receivable Interests or in respect of any Receivable or any Contract): (i) any representation or warranty or statement made or deemed made by the Collection Agent under or in connection with this Agreement which shall have been incorrect in any material respect when made; (ii) the failure by the Collection Agent to comply with any applicable law, rule or regulation with respect to any Pool Receivable or Contract; or the failure of any Pool Receivable or Contract to conform to any such applicable law, rule or regulation; (iii) the failure to have filed, or any delay in filing, financing statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any Receivables in, or purporting to be in, the Receivables Pool, the Contracts and the Related Security and Collections in respect thereof, whether at the time of any purchase or reinvestment or at any subsequent time; (iv) any failure of the Collection Agent to perform its duties or obligations in accordance with the provisions of this Agreement; (v) the commingling of Collections of Pool Receivables at any time by the Collection Agent with other funds; (vi) any action or omission by the Collection Agent reducing or impairing the rights of the Purchasers or the Banks with respect to any Pool Receivable or the value of any Pool Receivable; (vii) any Collection Agent Fees or other costs and expenses payable to any replacement Collection Agent, to the extent in excess of the Collection Agent Fees payable to the Collection Agent hereunder; or (viii) any claim brought by any Person other than a Special Indemnified Party arising from any activity by the Collection Agent or its Affiliates in servicing, administering or collecting any Receivable. ARTICLE VII EVENTS OF TERMINATION SECTION 7.01. Events of Termination. If any of the following events ("Events of Termination") shall occur and be continuing: (a) The Collection Agent (if other than the Agent or its designee) (i) shall fail to perform or observe any term, covenant or agreement hereunder (other than as referred to in clause (ii) of this Section 7.01(a)) and such failure shall remain unremedied for three Business Days or (ii) shall fail to make any payment or deposit to be made by it hereunder when due; or (b) The Seller or the Originator shall fail (i) to transfer to the Agent when requested by the Agent any rights pursuant to this Agreement which it has as Collection Agent, (ii) to perform or observe any term, covenant or agreement contained in Section 5.03(e) or Section 6.03(a), (iii) to make any payment required under Section 10.01 or (iv) to turn over to the Collection Agent the amounts referred to in Sections 2.06(e)(i) and (ii); or (c) Any representation or warranty made or deemed made by the Seller or the Collection Agent (or any of their respective officers) under or in connection with this Agreement, any other Transaction Document, any Seller Report or any other information or report delivered by the Seller or the Collection Agent pursuant hereto or any Transaction Document shall prove to have been incorrect in any material respect when made or deemed made or delivered; or (d) The Seller or the Originator shall fail to perform or observe any other term, covenant or agreement contained in this Agreement on its part to be performed or observed and any such failure shall remain unremedied for 10 days after written notice thereof shall have been given to the Seller or the Originator by the Agent; or (e) The Seller or the Originator shall fail to pay the principal of or interest on any obligation of the Seller or the Originator for borrowed money in an outstanding amount of $10,000,000 or more when due, whether by acceleration, by required prepayment or otherwise, for a period longer than any period of grace provided in such obligation, or fail to perform any other term, condition or covenant contained in any such obligation, the effect of which is to cause, or to permit the holder of such obligation or others on its behalf to cause, such obligation then to become due prior to its stated maturity, unless such failure shall have been cured or effectively waived; or (f) Any Purchase of a Receivable Interest pursuant hereto or any reinvestment shall for any reason, except to the extent permitted by the terms hereof, cease to create a valid and perfected first priority undivided percentage ownership interest to the extent of such Receivable Interest in each applicable Pool Receivable and the Related Security and Collections with respect thereto; or this Agreement shall for any reason cease to evidence the transfer to the owner thereof of legal and equitable title to, and ownership of, an undivided percentage ownership interest in Pool Receivables and Related Security to the extent of the applicable Receivable Interest; or the security interest created pursuant to Section 2.10 shall for any reason cease to be a valid and perfected first priority security interest in the collateral security referred to in that section; or (g) (i) The Originator or any of its Significant Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Originator or any of its Significant Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property and, if instituted against the Originator or any of its Significant Subsidiaries, either such proceeding shall not be stayed or dismissed for 60 days or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against it or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property) shall occur; or (ii) the Originator or any of its Significant Subsidiaries shall take any corporate action to authorize any of the actions set forth in clause (i) above in this subsection (g); or (h) The Delinquency Ratio shall at any time exceed 7%, the Default Ratio shall at any time exceed 8% or the Loss-To-Liquidation Ratio shall at any time exceed 2%; or (i) The Net Receivables Pool Balance shall at any time be less than 105% of the sum of Capital, Yield Reserve, Collection Agent Fee Reserve and Loss and Dilution Reserve for all Receivable Interests at such time and such condition shall continue for three Business Days after the Seller shall become aware of such condition; or (j) There shall have occurred any event which may materially adversely affect the ability of the Seller or the Originator to perform its obligations under this Agreement or the collectibility of the Pool Receivables; or (k) An "Event of Termination" or "Facility Termination Date" shall occur under the Originator Purchase Agreement, or the Originator Purchase Agreement shall cease to be in full force and effect; or (l) All of the outstanding capital stock of the Seller shall cease to be owned, directly or indirectly, by the Originator; then, and in any such event, the Agent may, by notice to the Seller, take either or both of the following actions: (x) designate the Facility Termination Date or the Commitment Termination Date; and (y) designate a Person to succeed the Originator as the Collection Agent (if the Originator is then serving as the Collection Agent) pursuant to Section 6.01; provided, that, automatically upon the occurrence of any event (without any requirement for the passage of time or the giving of notice) described in paragraph (g) of this Section 7.01, the Facility Termination Date and the Commitment Termination Date shall occur, the Originator (if the Originator is then serving as the Collection Agent) shall cease to be the Collection Agent and the Agent or its designee shall become the Collection Agent. Upon any such declaration or designation by the Agent, or upon such automatic termination, the Agent, each Purchaser and each Bank shall have, in addition to the rights and remedies which they may have under this Agreement, all other rights and remedies provided after default under the UCC of the applicable jurisdiction or jurisdictions and other applicable laws, which rights shall be cumulative. ARTICLE VIII THE AGENT SECTION 8.01. Authorization and Action. Each Purchaser and each Bank hereby appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto. SECTION 8.02. Agent's Reliance, Etc. Neither the Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them as Agent under or in connection with this Agreement (including, without limitation, any action taken or omitted to be taken by it or them on behalf of the Purchasers or the Banks if designated as Collection Agent pursuant to Section 6.01), except for its or their own gross negligence or willful misconduct. Without limiting the foregoing, the Agent: (i) may consult with legal counsel (including counsel for the Seller or the Originator), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (ii) makes no warranty or representation to any Purchaser or any Bank (whether written or oral) and shall not be responsible to any Purchaser or any Bank for any statements, warranties or representations (whether written or oral) made in or in connection with this Agreement; (iii) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement on the part of the Seller or the Collection Agent or to inspect the property (including the books and records) of the Seller or the Collection Agent; (iv) shall not be responsible to any Purchaser or any Bank for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; and (v) shall incur no liability under or in respect of this Agreement by acting upon any notice (including notice by telephone), consent, certificate or other instrument or writing (which may be by telecopier or telex) believed by it to be genuine and signed or sent by the proper party or parties. SECTION 8.03. CNAI and Affiliates. The obligation of Citibank to Purchase Receivable Interests or make reinvestments under this Agreement may be satisfied by CNAI or any of its Affiliates. With respect to any Receivable Interest or interest therein owned by it, CNAI shall have the same rights and powers under this agreement as any Bank and may exercise the same as though it were not the Agent. CNAI and any of its Affiliates may generally engage in any kind of business with the Seller, the Originator or any Obligor, any of their respective Affiliates and any Person who may do business with or own securities of the Seller, the Originator or any Obligor or any of their respective Affiliates, all as if CNAI were not the Agent and without any duty to account therefor to any Purchaser or any Bank. SECTION 8.04. Purchasers' and Banks' Purchase Decisions. Each Purchaser and each Bank acknowledges that it has, independently and without reliance upon the Agent, any of its Affiliates or any other Purchaser or Bank and based on such documents and information as it has deemed appropriate, made its own evaluation and decision to enter into this Agreement and, if it so determines, to purchase Receivable Interests hereunder. Each Purchaser and each Bank also acknowledges that it will, independently and without reliance upon the Agent, any of its Affiliates or any other Purchaser or Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own decisions in taking or not taking action under this Agreement. ARTICLE IX ASSIGNMENT SECTION 9.01. Assignability. (a) Purchasers. This Agreement and the Purchasers' rights and obligations herein (including ownership of each Receivable Interest) shall be assignable by the Purchasers and their successors and assigns. Each assignor of a Receivable Interest or any interest therein shall notify the Agent and the Seller of any such assignment. Each assignor of a Receivable Interest or any interest therein may, in connection with the assignment or participation, disclose to the assignee or participant any information relating to the Seller, including the Receivables, furnished to such assignor by or on behalf of the Seller or by the Agent; provided that, prior to any such disclosure, the assignee or participant agrees to preserve the confidentiality of any confidential information relating to the Seller received by it from any of the foregoing entities. (b) Banks. Each Bank may assign to any Eligible Assignee or to any other Bank all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Bank Commitment and any Receivable Interests or interests therein owned by it). The parties to each such assignment shall execute and deliver an assignment to the Agent. In addition, Citibank or any of its Affiliates may assign any of its rights (including, without limitation, rights to payment of Capital and Yield) under this Agreement to any Federal Reserve Bank without notice to or consent of the Seller or the Agent. (c) Agent. This Agreement and the rights and obligations of the Agent herein shall be assignable by the Agent and its successors and assigns. (d) Seller. The Seller may not assign its rights or obligations hereunder or any interest herein without the prior written consent of the Agent. ARTICLE X INDEMNIFICATION SECTION 10.01. Indemnities by the Seller. Without limiting any other rights that the Agent, any Purchaser, any Bank or any of their respective Affiliates (each an "Indemnified Party") may have hereunder or under applicable law, the Seller hereby agrees to indemnify each Indemnified Party from and against any and all damages, losses, claims, liabilities and related costs and expenses, including reasonable attorneys' fees and disbursements (collectively, "Indemnified Amounts"), awarded against or incurred by any of them arising out of or as a result of this Agreement or the ownership of Receivable Interests or in respect of any Receivable or any Contract, excluding, however, (a) Indemnified Amounts to the extent resulting from gross negligence or willful misconduct on the part of such Indemnified Party, (b) recourse (except as otherwise specifically provided in this Agreement) for uncollectible Receivables or (c) any taxes based on or measured by the income of any Indemnified Party incurred by such Indemnified Party arising out of or as a result of this Agreement or the ownership of Receivable Interests or in respect of any Receivable or any Contract. Without limiting or being limited by the foregoing, the Seller shall pay on demand to each Indemnified Party any and all amounts necessary to indemnify such Indemnified Party from and against any and all Indemnified Amounts relating to or resulting from any of the following: (i) any Receivable, at the time of the transfer of an undivided percentage ownership interest therein, not being an Eligible Receivable; (ii) reliance on any representation or warranty made or deemed made by the Seller (or any of its officers) under or in connection with this Agreement, any Seller Report, the other Transaction Documents or any other information or report delivered by the Seller pursuant hereto which shall have been false or incorrect in any material respect when made or deemed made; (iii) the failure by the Seller or the Originator to comply with any applicable law, rule or regulation with respect to any Pool Receivable, Related Security or the related Contract, or the nonconformity of any Pool Receivable, Related Security or the related Contract with any such applicable law, rule or regulation; (iv) the failure to vest in the Agent, for the benefit of the Purchasers or the Banks, as the case may be, or to transfer to the Agent, for the benefit of the Purchasers or the Banks, as the case may be, (a) legal and equitable title to, and ownership of, an undivided percentage ownership interest, to the extent of each Receivable Interest owned by it hereunder, in the Receivables in, or purporting to be in, the Receivables Pool for such Receivable Interest, or (b) a perfected security interest as provided in Section 2.10, in each case free and clear of any Adverse Claim; (v) the failure to file, or any delay in filing, financing statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any Receivables in, or purporting to be in, the Receivables Pool for any Receivable Interest, any Contract or Related Security whether at the time of any Purchase or reinvestment or at any subsequent time; (vi) any dispute, claim, offset or defense of the Obligor (other than discharge in bankruptcy of the Obligor) to the payment of any Receivable in, or purporting to be in, the Receivables Pool (including, without limitation, a defense based on such Receivables or the related Contract not being a legal, valid and binding obligation of such Obligor enforce-able against it in accordance with its terms), or any other claim resulting from the sale of the merchandise or services related to such Receivable or the furnishing or failure to furnish such merchandise or services or relating to collection activities with respect to such Receivable (if such collection activities were performed by the Seller or any of its Affiliates acting as Collection Agent); (vii) any failure of the Seller to perform its duties or obligations in accordance with the provisions hereof or to perform its duties and obligations under the Contracts; (viii) any products liability claim or personal injury or property damage suit or other similar or related claim or action of whatever sort arising out of or in connection with merchandise or services which are the subject of any Contract; (ix) the commingling of Collections of Pool Receivables at any time with any funds (provided that this paragraph (ix) will not cover commingling that occurs after such Collections have been either (1) deposited or otherwise paid over to the Agent for the account of the Purchasers or the Banks in accordance with this Agreement or (2) received by CNAI or any of its Affiliates acting as Collection Agent); (x) any investigation, litigation or proceeding related to this Agreement or the use of proceeds of Purchases or the ownership of Pool Receivables or in respect of any Pool Receivable or any Contract; (xi) any failure of the Seller or the Originator to comply with its respective covenants contained in Section 5.01; or (xii) any claim brought by any Person other than an Indemnified Party arising from any activity by the Seller or any Affiliate of the Seller in servicing, administering or collecting any Receivable. ARTICLE XI MISCELLANEOUS SECTION 11.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement nor consent to any departure by the Seller or the Originator therefrom shall in any event be effective unless the same shall be in writing and signed by the Agent, as agent for the Purchasers and the Banks (and, in the case of any amendment, also signed by the Seller and the Originator), and then such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by the Collection Agent in addition to the Agent, affect the rights or duties of the Collection Agent under this Agreement. This Agreement contains a final and complete integration of all prior expressions by the parties hereto with respect to the subject matter hereof and shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof, superseding all prior oral or written understandings. SECTION 11.02. Notices, Etc. All notices and other communications hereunder shall, unless otherwise stated herein, be in writing (which shall include facsimile communication) and faxed or delivered, to each party hereto, at its address set forth under its name on the signature pages hereof or at such other address as shall be designated by such party in a written notice to the other parties hereto. Notices and communications by facsimile shall be effective when sent (and shall be followed by hard copy sent by regular mail), and notices and communications sent by other means shall be effective when received. SECTION 11.03. No Waiver; Remedies. No failure on the part of the Agent, any Purchaser or any Bank to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 11.04. Binding Effect. (a) This Agreement shall be binding upon and inure to the benefit of the Seller, the Originator, the Agent, the Purchasers, the Banks and their respective successors and assigns. (b) This Agreement shall create and constitute the continuing agreement of the parties hereto in accordance with its terms, and shall remain in full force and effect until the Facility Termination Date; provided, however, that (i) the rights of the Purchasers and the Banks to collect the Capital and Yield in respect of the Receivable Interests owned by them, (ii) the rights and remedies of the Purchasers and the Banks with respect to any breach of any representation and warranty made by the Seller pursuant to Article IV or Section 3.02, (iii) the indemnification provisions of Article X and Section 11.06, (iv) the rights of the Agent and the Collection Agent to be paid the fees, costs and expenses provided for hereunder and (v) the agreement set forth in Section 11.07 shall be continuing and shall survive any termination of this Agreement. SECTION 11.05. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT THE PERFECTION OF THE INTERESTS OF THE PURCHASERS AND THE BANKS IN THE RECEIVABLES, OR REMEDIES HEREUNDER IN RESPECT THEREOF, ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. SECTION 11.06. Costs, Expenses and Taxes. (a) In addition to the rights of indemnification granted under Article X hereof, the Seller agrees to pay on demand all reasonable costs and expenses in connection with the preparation, execution, delivery and administration (including periodic auditing and the other activities contemplated in Section 5.01(c)) of this Agreement and the other documents to be delivered hereunder, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Agent, with respect thereto and with respect to advising the Agent, CNAI, the Conduit, Citibank and their respective Affiliates as to their respective rights and remedies under this Agreement, and all reasonable costs and expenses, if any (including reasonable counsel fees and expenses), of the Agent, CNAI, the Purchasers, the Banks and their respective Affiliates, in connection with the enforcement of this Agreement and the other documents to be delivered hereunder. (b) In addition, the Seller shall pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing, recording or enforcement of this Agreement or the other documents to be delivered hereunder, and agrees to save each Indemnified Party harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees. SECTION 11.07. No Proceedings. Each of the Seller, the Originator, the Agent, the Collection Agent, each Purchaser, each Bank, each assignee of a Receivable Interest or any interest therein and each entity which enters into a commitment to purchase Receivable Interests or interests therein hereby agrees that it will not institute against the Conduit any proceeding of the type referred to in Section 7.01(g) so long as any commercial paper or other senior indebtedness issued by the Conduit shall be outstanding or there shall not have elapsed one year plus one day since the last day on which any such commercial paper or other senior indebtedness shall have been outstanding. SECTION 11.08. Confidentiality. (a) By the Seller and the Originator. Unless otherwise required by applicable law (including, without limitation, the order of any governmental authority having jurisdiction and authority to issue such order or upon the request or demand of, or in connection with any investigation, proceeding or audit by, any governmental authority, if such request or demand shall have the force of law or be made in connection with the exercise of such authority's regulatory functions), the Seller and the Originator agree to maintain the confidentiality of this Agreement (and all drafts thereof) in communications with third parties and otherwise; provided, however, that the Agreement may be disclosed to third parties to the extent such disclosure is (i) required in connection with a sale of securities of the Originator, (ii) made solely to persons who are legal counsel for the purchaser or underwriter of such securities, (iii) limited in scope to the provisions of Articles V, VII, X and, to the extent defined terms are used in Articles V, VII and X, such terms defined in Article I of this Agreement, (iv) made pursuant to a written agreement of confidentiality in form and substance reasonably satisfactory to the Agent, (v) to the Seller's or the Originator's legal counsel and accountants if they agree to hold it confidential or (vi) with respect to information generally available to the public or which becomes available to the public through no fault of the Seller or the Originator. (b) By the Agent. Unless otherwise required by applicable law (including, without limitation, the order of any governmental authority having jurisdiction and authority to issue such order or upon the request or demand of, or in connection with any investigation, proceeding or audit by, any governmental authority or rating agency, if such request or demand shall have the force of law or be made in connection with the exercise of such authority's regulatory functions or such agency's normal functions), the Agent agrees to maintain the confidentiality of any information provided to the Agent by the Seller or the Originator; provided, however, that such information may be disclosed to third parties to the extent such disclosure is (i) made pursuant to a written agreement of confidentiality in form and substance reasonably satisfactory to the Seller and the Originator or (ii) to the Agent's legal counsel and accountants if they agree to hold it confidential or (iii) with respect to information generally available to the public or which becomes available to the public through no fault of the Agent. SECTION 11.09. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by facsimile shall be effective as delivery of a manually executed counterpart of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. SELLER: CL&P RECEIVABLES CORPORATION By: s/s Robert C. Aronson Name: Robert C. Aronson Title: Assistant Treasurer 107 Selden Street Berlin, Connecticut 06037 Attention: Assistant Treasurer Facsimile No.: (860) 665-5457 ORIGINATOR AND COLLECTION AGENT: THE CONNECTICUT LIGHT AND POWER COMPANY By s/s David R. McHale Name: David R. McHale Title: Assistant Treasurer 107 Selden Street Berlin, Connecticut 06037 Attention: Assistant Treasurer Facsimile No.: 860-665-5457 PURCHASER: CORPORATE ASSET FUNDING COMPANY, INC. By: Citicorp North America, Inc. as Attorney-in-Fact By s/s R. P. DiLeo Name: R. P. DiLeo Title: Vice President 450 Mamaroneck Avenue Harrison, NY 10528 Attention: Corporate Asset Funding Facsimile No. 914-899-7890 BANK: CITIBANK, N.A. By: s/s R. P. DiLeo Name: R. P. DiLeo Title: Attorney-in-Fact Percentage: 100% 450 Mamaroneck Avenue Harrison, N.Y. 10528 Facsimile No. 914-899-7890 AGENT: CITICORP NORTH AMERICA, INC., as Agent By s/s R. P. DiLeo Name: R. P. DiLeo Title: Vice President 450 Mamaroneck Avenue Harrison, N.Y. 10528 Attention: Corporate Asset Funding Facsimile No. 914-899-7890 EXHIBIT A SPECIAL CONCENTRATION LIMITS Date: , 19 Citicorp North America, Inc., as Agent 450 Mamaroneck Avenue Harrison, New York 10528 Attention: Corporate Asset Funding Department Reference is made to the Receivables Purchase and Sale Agreement, dated as of September 30, 1997 (the terms defined therein being used herein as therein defined) among CL&P Receivables Corporation, The Connecticut Light and Power Company, Corporate Asset Funding Company, Inc., Citibank, N.A. and Citicorp North America, Inc., as Agent. The Seller hereby designates for the Designated Obligor[s] named below the Special Concentration Limit[s] set forth below opposite [its] [their respective] name[s]: Designated Obligor Special Concentration Limit s/s s/s s/s s/s [etc.] CL&P RECEIVABLES CORPORATION By s/s Name: Title: The undersigned hereby approves the above Special Concentration Limit[s], as of the date hereof. CITICORP NORTH AMERICA, INC. as Agent By s/s Name: Title: EXHIBIT B FORM OF SELLER REPORT EXHIBIT C DESCRIPTION OF TARIFFS 1. The retail rates charged by the Originator to Obligors, as approved from time to time by the Connecticut Department of Public Utility Control. 2. The Connecticut Light and Power Company Rules and Regulations, effective July 1, 1993, applicable to its retail rate accounts as approved by the Connecticut Department of Public Utility Control. EXHIBIT D CANCELLATION OF DESIGNATION OF OBLIGORS AND/OR SPECIAL CONCENTRATION LIMITS Date: , 19 [Citicorp North America, Inc., as Agent 450 Mamaroneck Avenue Harrison, New York 10528 Attention: Corporate Asset Funding] [CL&P Receivables Corporation 107 Selden Street Berlin, Connecticut] Reference is made to the Receivables Purchase and Sale Agreement, dated as of September 30, 1997 (the "Receivables Agreement"; the terms defined therein being used herein as therein defined) among CL&P Receivables Corporation, The Connecticut Light and Power Company, Corporate Asset Funding Company, Inc., Citibank, N.A. and Citicorp North America, Inc., as Agent. Pursuant to Section 2.01 of the Receivables Agreement, the undersigned hereby cancels, effective as of the date occurring three days after the date hereof, the designation of [each of] the following Obligor[s] as a Designated Obligor: 1. 2. 3. (etc.) The undersigned hereby cancels, effective as of the date occurring three days after the date hereof, the Special Concentration Limit of each of the following Obligor[s]: 1. 2. 3. (etc.) and thus as of the date occurring three days after the date hereof the Normal Concentration Limit shall apply to the above Obligor[s]. [CITICORP NORTH AMERICA, INC., as Agent] [CL&P RECEIVABLES CORPORATION] By s/s Name: Title: EXHIBIT E FORM OF OPINION OF COUNSEL FOR THE SELLER EXHIBIT F AUDIT SCOPE I. Review of 2-3 monthly Seller Reports A. Agree numerical amounts to source documents B. Recalculate percentages and ratios C. Review customer concentrations (cross-agings) D. Review write-off activity E. Review AR eligibility F. Review the aging of outstanding invoices II. Perform a verification of receivable activity for sample Seller Report A. Monthly activity 1. Sales 2. Collections 3. Write-offs 4. Debit and Credit memos B. Statistical analysis 1. Turnover 2. Dilution 3. Loss-to-liquidation III. If available, supply copy of most recent review of accounting controls EX-10.16 22 PURCHASE AND CONTRIBUTION AGMT - CL&P Exhibit 10.49.1 Execution Copy PURCHASE AND CONTRIBUTION AGREEMENT Dated as of September 30, 1997 Between THE CONNECTICUT LIGHT AND POWER COMPANY As Seller and CL&P RECEIVABLES CORPORATION as Purchaser TABLE OF CONTENTS PRELIMINARY STATEMENTS ARTICLE I DEFINITIONS SECTION 1.01. Certain Defined Terms Adverse Claim Affiliate Alternate Base Rate Business Day Collection Agent Collection Agent Fee Collections Contract Contributed Receivable Credit and Collection Policy Debt Defaulted Receivable Deferred Purchase Price Designated Account Discount ERISA Event of Termination Facility Facility Termination Date Inactive Account Incipient Event of Termination Indemnified Amounts Invested Amount Obligor Original Purchase Agreement Outstanding Balance Person Public Disclosure Documents Purchase Purchase Date Purchased Receivable Receivable Regulatory Authority Related Security Sale Agreement Seller Report Settlement Date Settlement Period Significant Subsidiary Sold Receivable Subsidiary Tariffs Transferred Receivable UCC SECTION 1.02. Other Terms ARTICLE II AMOUNTS AND TERMS OF PURCHASES AND CONTRIBUTIONS SECTION 2.01. Facility SECTION 2.02. Making Purchases SECTION 2.03. Collections SECTION 2.04. Settlement Procedures SECTION 2.05. Payments and Computations, Etc. SECTION 2.06. Contributions ARTICLE III CONDITIONS OF PURCHASES SECTION 3.01. Conditions Precedent to Initial Purchase from the Seller SECTION 3.02. Conditions Precedent to All Purchases ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Seller ARTICLE V COVENANTS SECTION 5.01. Covenants of the Seller SECTION 5.02. Grant of Security Interest SECTION 5.03. Covenant of the Seller and the Purchaser ARTICLE VI ADMINISTRATION AND COLLECTION SECTION 6.01. Designation of Collection Agent SECTION 6.02. Duties of Collection Agent SECTION 6.03. Collection Agent Fee SECTION 6.04. Certain Rights of the Purchaser SECTION 6.05. Rights and Remedies SECTION 6.06. Transfer of Records to Purchaser ARTICLE VII EVENTS OF TERMINATION SECTION 7.01. Events of Termination ARTICLE VIII INDEMNIFICATION SECTION 8.01. Indemnities by the Seller ARTICLE IX MISCELLANEOUS SECTION 9.01. Amendments, Etc. SECTION 9.02. Notices, Etc. SECTION 9.03. No Waiver; Remedies SECTION 9.04. Binding Effect; Assignability SECTION 9.05. Costs, Expenses and Taxes SECTION 9.06. No Proceedings SECTION 9.07. Confidentiality SECTION 9.08. GOVERNING LAW SECTION 9.09. Third Party Beneficiary SECTION 9.10. Execution in Counterparts PURCHASE AND CONTRIBUTION AGREEMENT Dated as of September 30, 1997 THE CONNECTICUT LIGHT AND POWER COMPANY, a Connecticut corporation (the "Seller"), and CL&P RECEIVABLES CORPORATION, a Connecticut corporation (the "Purchaser"), agree as follows: PRELIMINARY STATEMENTS. (1) Certain terms which are capitalized and used throughout this Agreement (in addition to those defined above) are defined in Article I of this Agreement. (2) The Seller has and will have Receivables that it wishes to sell to the Purchaser from time to time, and the Purchaser is prepared to purchase such Receivables on the terms set forth herein. (3) The Seller also wishes to contribute Receivables not sold to the capital of the Purchaser on the terms set forth herein. NOW, THEREFORE, the parties agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Adverse Claim" means a lien, security interest, charge or encumbrance, or other right or claim of any Person. "Affiliate" when used with respect to a Person means any other Person controlling, controlled by or under common control with such Person. "Alternate Base Rate" means a fluctuating interest rate per annum as shall be in effect from time to time, which rate per annum shall be at all times equal to the higher of: (a) the rate of interest announced publicly by Citibank, N.A. in New York, New York, from time to time as Citibank, N.A.'s base rate; and (b) 1/2 of one percent above the latest three-week moving average of secondary market morning offering rates in the United States for three-month certificates of deposit of major United States money market banks, such three-week moving average being determined weekly on each Monday (or, if such day is not a Business Day, on the next succeeding Business Day) for the three-week period ending on the previous Friday by Citibank, N.A. on the basis of such rates reported by certificate of deposit dealers to and published by the Federal Reserve Bank of New York or, if such publication shall be suspended or terminated, on the basis of quotations for such rates received by Citibank, N.A. from three New York certificate of deposit dealers of recognized standing selected by Citibank, N.A., in either case adjusted to the nearest 1/4 of one percent or, if there is no nearest 1/4 of one percent, to the next higher 1/4 of one percent. "Business Day" means any day on which banks are not authorized or required to close in New York City. "Collection Agent" means at any time the Person then authorized pursuant to Section 6.01 to service, administer and collect Transferred Receivables. "Collection Agent Fee" has the meaning specified in Section 6.03. "Collections" means, with respect to any Receivable, all cash collections and other cash proceeds of such Receivable, including, without limitation, all cash proceeds of Related Security with respect to such Receivable, and all funds deemed to have been received by the Seller or any other Person as a Collection pursuant to Section 2.04. "Contract" means the Tariffs and any agreement between the Seller and an Obligor; provided that such agreement does not vary the payment terms of such Obligor from those in the Tariffs or the Credit and Collection Policy. "Contributed Receivable" has the meaning specified in Section 2.06. "Credit and Collection Policy" means those credit and collection policies and practices of the Seller in effect on the date of this Agreement relating to the Receivables, as modified in compliance with Section 5.01(f). "Debt" means (i) indebtedness for borrowed money, (ii) obligations evidenced by bonds, debentures, notes or other similar instruments, (iii) obligations to pay the deferred purchase price of property or services, (iv) obligations as lessee under leases which shall have been or should be, in accordance with generally accepted accounting principles, recorded as capital leases, (v) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (i) through (iv) above, and (vi) liabilities in respect of unfunded vested benefits under plans covered by Title IV of ERISA. "Defaulted Receivable" means a Receivable: (i) as to which any payment, or part thereof, remains unpaid for 91 days or more from the original billing date for such payment and which does not relate to an Inactive Account; (ii) as to which the Obligor thereof, or any other Person obligated thereon or owning any Related Security in respect thereof, has taken any action, or suffered any event to occur, of the type described in Section 7.01(g); or (iii) which, consistent with the Credit and Collection Policy, would be written off as uncollectible. "Deferred Purchase Price" means the portion of the Purchase Price of Purchased Receivables purchased on any Purchase Date which is not paid in cash under Section 2.02, which portion, when added to the cumulative amount of all previous Deferred Purchase Prices (after giving effect to any payments made on account thereof) shall not exceed the lesser of (a) $100,000,000 and (b) 15% of the Outstanding Balance of the Transferred Receivables. "Designated Account" means an account in the name of, and owned by, the Purchaser or its designee, designated for the purpose of receiving collections of Transferred Receivables directly from Obligors. "Discount" means, in respect of any Purchase, 1.65% of the Outstanding Balance of the Receivables that are the subject of such Purchase; provided, however, that the foregoing Discount may be revised by agreement of the parties hereto to reflect changes in collection experience and the Purchaser's cost of funds. "ERISA" means the U.S. Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "Event of Termination" has the meaning specified in Section 7.01. "Facility" means the willingness of the Purchaser to consider making Purchases of Receivables from the Seller from time to time pursuant to the terms of this Agreement. "Facility Termination Date" means the earliest of (i) July 11, 2001, (ii) the date of termination of the Facility pursuant to Section 7.01 and (iii) the date which either the Purchaser or the Seller designates by at least two Business Days' notice to the other party hereto. "Inactive Account" means an account of an Obligor which has been sent a final bill. "Incipient Event of Termination" means an event which would constitute an Event of Termination but for the requirement that notice be given or time elapse or both. "Indemnified Amounts" has the meaning specified in Section 8.01. "Invested Amount" means the sum of amounts paid by the Purchaser to the Seller for each Purchase of Receivables from the Seller pursuant to Section 2.02, reduced from time to time by Collections of such Receivables actually received by the Purchaser in excess of the applicable portion of the Discount representing yield (assumed to be 0.8% unless otherwise mutually agreed); provided, however, that such Invested Amount shall not be reduced by any Collections to the extent that at any time such Collections are rescinded or must otherwise be returned for any reason. "Obligor" means a Person obligated to make payments pursuant to a Contract. "Original Purchase Agreement" means the Receivables Purchase and Sale Agreement, dated as of July 11, 1996, among the Seller, Corporate Asset Funding Company, Inc., Citibank, N.A., and Citicorp North America, Inc., as agent. "Outstanding Balance" of any Receivable at any time means the then outstanding principal balance thereof. "Person" means an individual, partnership, corporation (including a business trust), joint stock company, limited liability company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof. "Public Disclosure Documents" means (i) the Seller's Annual Report on Form 10-K for the year ending December 31, 1996, (ii) the Seller's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997 and June 30, 1997, (iii) Northeast Utilities' reports on Form 8-K dated January 20, 1997, February 20, 1997, February 28, 1997, April 11, 1997, June 26, 1997, July 22, 1997 and August 19, 1997 and (iv) the Seller's Registration Statement No. 333-30911 on Form S-1, as amended. "Purchase" means a purchase by the Purchaser of Receivables from the Seller pursuant to Article II. "Purchase Date" means each day on which a Purchase is made pursuant to Article II. "Purchase Price" means with respect to a Purchase of Receivables the amount paid for such Receivables in cash or by Deferred Purchase Price and shall be equal to the Outstanding Balance of such Receivables minus the Discount for such Purchase of Receivables. "Purchased Receivable" means any Receivable included in a Purchase pursuant to Section 2.02. "Receivable" means the accounts, general intangibles and other indebtedness (billed and unbilled) of an Obligor arising from the retail sale of electricity and related services by the Seller in Connecticut to such Obligor pursuant to a Contract as booked to Accounts 142 (excluding amounts booked to Account 142.04) and 173 as defined under the Federal Energy Regulatory Commission Chart of Accounts as utilized by the Seller, but excluding any obligation of such Obligor to pay finance charges and other amounts in the case of late payment. "Regulatory Authority" means each of the Connecticut Department of Public Utility Control, Federal Energy Regulatory Commission, and any successor commission thereto. "Related Security" means with respect to any Receivable: (i) all security interests or liens and property subject thereto from time to time purporting to secure payment of such Receivable, whether pursuant to the Contract related to such Receivable or otherwise; (ii) all guarantees, indemnities, warranties, insurance policies and proceeds and premium refunds thereof and other agreements or arrangements of whatever character from time to time supporting or securing payment of such Receivable whether pursuant to the Contract related to such Receivable or otherwise; and (iii) the Contract and all other books, records and other information (including, without limitation, computer programs, tapes, discs, punch cards, data processing software and related property and rights) relating to such Receivable and the related Obligor. "Sale Agreement" means that certain Receivables Purchase and Sale Agreement, dated as of the date hereof, among the Purchaser, as seller, the Conduit (as defined therein), as purchaser, Citibank, N.A., Citicorp North America, Inc., as agent, and the Seller, as collection agent and originator, as amended or restated from time to time. "Seller Report" means a report, in form and substance satisfactory to the Purchaser, furnished by the Collection Agent to the Purchaser pursuant to Section 6.02(b). "Settlement Date" means the second Business Day after the end of each Settlement Period during the term of this Agreement; provided, however, that following the occurrence of an Event of Termination, Settlement Dates shall occur on such days as are selected from time to time by the Purchaser or its designee in a written notice to the Collection Agent. "Settlement Period" means each period of time during the term of this Agreement selected by the Purchaser to coincide with the "Settlement Periods" under the Sale Agreement. "Significant Subsidiary" means the Purchaser and any Subsidiary having total assets exceeding 10% of consolidated total assets of the Seller. "Sold Receivable" has the meaning specified in Section 2.02(a). "Subsidiary" means any corporation of which securities having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Seller or the Purchaser, as the case may be, or one or more Subsidiaries, or by the Seller or the Purchaser, as the case may be, and one or more Subsidiaries. "Tariffs" means the tariffs described in Exhibit A, which have been approved by the governing Regulatory Authority, as hereafter amended or modified by the governing Regulatory Authority, pursuant to which the Seller provides electricity to the Obligors and the Obligors are obligated to pay for such electricity. "Transferred Receivable" means a Purchased Receivable or a Contributed Receivable. "UCC" means the Uniform Commercial Code as from time to time in effect in the specified jurisdiction. SECTION 1.02. Other Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles. All terms used in Article 9 of the UCC in the State of New York, and not specifically defined herein, are used herein as defined in such Article 9. ARTICLE II AMOUNTS AND TERMS OF PURCHASES AND CONTRIBUTIONS SECTION 2.01. Facility. On the terms and conditions hereinafter set forth and without recourse (except to the extent specifically provided herein), the Seller may at its option sell or contribute to the Purchaser all Receivables originated by it from time to time and the Purchaser may at its option purchase or accept as a capital contribution from the Seller all Receivables of the Seller from time to time during the period from the date hereof to the Facility Termination Date. SECTION 2.02. Making Purchases. (a) Initial Purchase. The Seller shall give the Purchaser at least one Business Day's notice of its request for the initial Purchase hereunder, and such request for the initial Purchase shall specify the date of such Purchase (which shall be a Business Day)and the proposed Purchase Price for such Purchase. The Purchaser shall promptly notify the Seller whether it has determined to make such Purchase. On the date of such Purchase, the Purchaser shall, upon satisfaction of the applicable conditions set forth in Article III, pay the Purchase Price for such Purchase in the manner provided in Section 2.02(c); provided, however, that because interests in all Receivables in existence on the date of the initial Purchase (and all Related Security with respect to such Receivables) (collectively, the "Sold Receivables") have heretofore been sold by the Seller to the Agent pursuant to the Original Purchase Agreement and the Purchaser is assuming the Seller's rights and obligations with respect to the Sold Receivables pursuant to the Sale Agreement, the purchase price payable for the initial Purchase of Receivables hereunder shall be reduced by the aggregate purchase price received by the Seller with respect to the Sold Receivables under the Original Purchase Agreement. (b) Subsequent Purchases. On each Business Day following the date of the initial Purchase, unless either party shall notify the other party to the contrary, the Seller shall sell to the Purchaser and the Purchaser shall purchase from the Seller all Receivables originated by the Seller which have not previously been sold or contributed to the Purchaser; provided, however, that the Seller may, at its option on any Purchase Date, contribute all or any of such Receivables to the Purchaser pursuant to Section 2.06, instead of selling such Receivables to the Purchaser pursuant to this Section 2.02(b). On the date of each such Purchase, the Purchaser shall, upon satisfaction of the applicable conditions set forth in Article III, pay the Purchase Price for such Purchase in the manner provided in Section 2.02(c). (c) Payment of Purchase Price. The Purchase Price for each Purchase shall be paid on the Purchase Date therefor by means of one or both of the following: (a) a deposit in same day funds to the Seller's account designated by the Seller or (b) an increase in the Deferred Purchase Price (subject at all times to the limitations contained in the definition thereof). The allocation of the Purchase Price between such methods of payment shall be subject in each instance to the approval of the Purchaser and the Seller. (d) Ownership of Receivables and Related Security. On each Purchase Date, after giving effect to each Purchase and any contribution of Receivables, the Purchaser shall own all Receivables originated by the Seller as of such date (including Receivables which have been previously sold or contributed to the Purchaser hereunder). The Purchase or contribution of any Receivable shall include all Related Security with respect to such Receivable. (e) Assignment and Assumption of Interests Under the Original Purchase Agreement. The Seller hereby transfers and assigns to the Purchaser as a capital contribution, and the Purchaser hereby assumes, in each case as of the date of the initial Purchase hereunder, all of the Seller's remaining rights and obligations with respect to all Sold Receivables, and the Purchaser hereby agrees that all such rights and obligations shall be governed by the terms of the Sale Agreement. SECTION 2.03. Collections. (a) The Collection Agent shall, on each Settlement Date, deposit into an account of the Purchaser or the Purchaser's designee all Collections of Transferred Receivables then held by the Collection Agent. (b) In the event that the Seller believes that Collections which are not Collections of Transferred Receivables have been deposited into an account of the Purchaser or the Purchaser's designee, the Seller shall so advise the Purchaser and, on the Business Day following such identification, the Purchaser shall remit, or shall cause to be remitted to the Seller, all Collections so deposited which are identified, to the Purchaser's satisfaction, not to be Collections of Transferred Receivables. (c) At any time when all amounts then due from the Purchaser under the Sale Agreement have been paid in full and all amounts required to be set aside by the Purchaser or the Collection Agent under the Sale Agreement have been so set aside, all Collections of Transferred Receivables received by the Purchaser shall be applied first to the reduction of the principal amount of any Deferred Purchase Price before any such amount is applied to the purchase of additional Receivables. SECTION 2.04. Settlement Procedures. (a) If on any day the Outstanding Balance of any Transferred Receivable is reduced or adjusted as a result of any defective, rejected, returned, repossessed or foreclosed merchandise or services or any cash discount or other adjustment made by the Seller, or any set-off or dispute in respect of any claim by the Obligor thereof against the Seller (whether such claim arises out of the same or a related transaction or an unrelated transaction but excluding adjustments, reductions or cancellations in respect of such Obligor's bankruptcy), the Seller shall be deemed to have received on such day a Collection of such Transferred Receivable in the amount of such reduction or adjustment. If the Seller is not the Collection Agent, the Seller shall pay to the Collection Agent on or prior to the next Settlement Date all amounts deemed to have been received pursuant to this subsection. (b) Upon discovery by the Seller or the Purchaser of a breach of any of the representations and warranties made by the Seller in Section 4.01(j) with respect to any Transferred Receivable, such party shall give prompt written notice thereof to the other party, as soon as practicable and in any event within three Business Days following such discovery. The Seller shall, upon not less than two Business Days' notice from the Purchaser or its assignee or designee, repurchase such Transferred Receivable on the next succeeding Settlement Date for a repurchase price equal to the Outstanding Balance of such Transferred Receivable. Each repurchase of a Transferred Receivable shall include the Related Security with respect to such Transferred Receivable. The proceeds of any such repurchase shall be deemed to be a Collection in respect of such Transferred Receivable. If the Seller is not the Collection Agent, the Seller shall pay to the Collection Agent on or prior to the next Settlement Date the repurchase price required to be paid pursuant to this subsection. (c) Except as stated in subsection (a) or (b) of this Section 2.04 or as otherwise required by law or the underlying Contract, all Collections from an Obligor of any Transferred Receivable shall be applied to the Receivables of such Obligor in the order of the age of such Receivables, starting with the oldest such Receivable, unless such Obligor designates its payment for application to specific Receivables. SECTION 2.05. Payments and Computations, Etc. (a) All amounts to be paid or deposited by the Seller or the Collection Agent hereunder shall be paid or deposited no later than 11:00 A.M. (New York City time) on the day when due in same day funds to the Purchaser's account at Fleet National Bank, Hartford, Connecticut, ABA # 011500010, Account # 9370212183, or to such other account as the Purchaser may designate in writing to the Seller from time to time. (b) The Seller shall, to the extent permitted by law, pay to the Purchaser interest on any amount not paid or deposited by the Seller (whether as Collection Agent or otherwise) when due hereunder at an interest rate per annum equal to the Alternate Base Rate, payable on demand; provided, however, that such interest rate shall not at any time exceed the maximum rate permitted by applicable law. (c) All computations of interest and all computations of fees hereunder shall be made on the basis of a year of 360 days for the actual number of days (including the first but excluding the last day) elapsed. Whenever any payment or deposit to be made hereunder shall be due on a day other than a Business Day, such payment or deposit shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of such payment or deposit. SECTION 2.06. Contributions. The Seller may from time to time at its option, by notice to the Purchaser, contribute Receivables to the Purchaser as a capital contribution. On the date of each such contribution and after giving effect thereto, the Purchaser shall own the Receivables so contributed (collectively, the "Contributed Receivables") and all Related Security with respect thereto. The foregoing notwithstanding, on the date of the initial Purchase hereunder the Seller agrees to contribute to the Purchaser all Receivables which are not included in such initial Purchase as provided in Section 2.02(e). ARTICLE III CONDITIONS OF PURCHASES SECTION 3.01. Conditions Precedent to Initial Purchase from the Seller. The initial Purchase of Receivables from the Seller hereunder is subject to the conditions precedent that the Purchaser shall have received on or before the date of such Purchase the following, each (unless otherwise indicated) dated such date, in form and substance satisfactory to the Purchaser: (a) Certified copies of the resolutions of the Board of Directors of the Seller approving this Agreement and certified copies of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement. (b) A certificate of the Secretary or Assistant Secretary of the Seller certifying the names and true signatures of the officers of the Seller authorized to sign this Agreement and the other documents to be delivered by it hereunder. (c) Acknowledgment copies of proper financing statements or time stamped receipt copies, duly filed on or before the date of the initial Purchase or other similar instruments or documents, as the Purchaser may deem necessary or desirable under the UCC of all appropriate jurisdictions or other applicable law to perfect the Purchaser's ownership of and security interest in the Transferred Receivables and Related Security and Collections with respect thereto. (d) Acknowledgment copies or time stamped receipt copies of proper instruments, if any, necessary to release all security interests and other rights of any Person in the Transferred Receivables, Contracts or Related Security previously granted by the Seller. (e) Completed requests for information, dated on or before the date of such initial Purchase, listing all effective financing statements filed in the jurisdictions referred to in subsection (c) above that name the Seller as debtor, together with copies of such other financing statements (none of which, other than the financing statements filed pursuant to subsection (c), shall cover any Transferred Receivables, Contracts or Related Security). SECTION 3.02. Conditions Precedent to All Purchases. Each Purchase (including the initial Purchase) shall be subject to the further conditions precedent that: (a) on or prior to the date of such Purchase, the Collection Agent shall have delivered to the Purchaser, in form and substance satisfactory to the Purchaser, a completed Seller Report for the most recently ended reporting period for which information is required pursuant to Section 6.02(b) and containing such additional information as may reasonably be requested by the Purchaser; (b) the Seller shall have marked its master data processing records and all other relevant records evidencing all Transferred Receivables and all other relevant records evidencing the Transferred Receivables which are the subject of such Purchase with a legend, acceptable to the Purchaser, stating that such Receivables, the Related Security and Collections with respect thereto, have been sold or contributed in accordance with this Agreement; (c) on the date of such Purchase the following statements shall be true (and the Seller, by accepting the amount of such Purchase, shall be deemed to have certified that): (i) the representations and warranties contained in Section 4.01 are correct on and as of the date of such Purchase as though made on and as of such date, (ii) no event has occurred and is continuing, or would result from such Purchase, that constitutes an Event of Termination or would constitute an Incipient Event of Termination and (iii) the Purchaser shall not have delivered to the Seller a notice fixing the Facility Termination Date on or prior to the date of such Purchase; and (d) the Purchaser shall have received such other approvals, opinions or documents as the Purchaser may reasonably request. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Seller. The Seller represents and warrants as follows: (a) The Seller is a corporation duly incorporated, validly existing and in good standing under the laws of Connecticut, and is duly qualified to do business, and is in good standing, in every jurisdiction where the nature of its business requires it to be so qualified, unless the failure to so qualify would not have a material adverse effect on (i) the interests of the Purchaser hereunder, (ii) the collectibility of the Transferred Receivables or (iii) the ability of the Seller or the Collection Agent to perform its respective obligations hereunder. (b) The execution, delivery and performance by the Seller of this Agreement and the other documents to be delivered by it hereunder, including the Seller's sale and contribution of Receivables hereunder and the Seller's use of the proceeds of Purchases, (i) are within the Seller's corporate powers, (ii) have been duly authorized by all necessary corporate action, (iii) do not contravene (A) the Seller's charter or by-laws, (B) any law, rule or regulation applicable to the Seller, (C) any contractual restriction binding on or affecting the Seller or its property or (D) any order, writ, judgment, award, injunction or decree binding on or affecting the Seller or its property and (iv) do not result in or require the creation of any lien, security interest or other charge or encumbrance upon or with respect to any of its properties (except for the transfer of the Seller's interest in the Transferred Receivables pursuant to this Agreement). This Agreement has been duly executed and delivered by the Seller. (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Seller of this Agreement or any other document to be delivered hereunder except for such as have been accomplished and except for the filing of the UCC Financing Statements referred to in Article III, all of which, at the time required in Article III, shall have been duly made and shall be in full force and effect. (d) This Agreement constitutes the legal, valid and binding obligation of the Seller enforceable against the Seller in accordance with its terms. (e) Each sale and contribution made pursuant to this Agreement will constitute a valid sale, transfer, and assignment in fee simple of the Transferred Receivables to the Purchaser, enforceable against creditors of, and purchasers from, the Seller. The Seller shall have no remaining property interest in any Transferred Receivable. (f) The balance sheets of the Seller and its subsidiaries as at December 31, 1996, and the related statements of income and retained earnings of the Seller and its subsidiaries for the fiscal year then ended (the "Financial Statements"), copies of which have been furnished to the Purchaser, fairly present the financial condition of the Seller and its subsidiaries as at such date and the results of the operations of the Seller and its subsidiaries for the period ended on such date, all in accordance with generally accepted accounting principles consistently applied. (g) Except as disclosed in the Financial Statements and the Public Disclosure Documents, there is no pending or threatened action, suit or proceeding against or affecting the Seller or any of its subsidiaries before any court, governmental agency or arbitrator which may materially adversely affect the financial condition or operations of the Seller or any of its subsidiaries or the ability of the Seller to perform its obligations under this Agreement, or which purports to affect the legality, validity or enforceability of this Agreement. (h) No proceeds of any Purchase will be used to acquire any security in any transaction which is subject to Section 13 or 14 of the Securities Exchange Act of 1934, as amended. (i) No transaction contemplated hereby requires compliance with any bulk sales act or similar law. (j) Each Transferred Receivable, together with the Related Security, is a bona fide obligation of the Obligor purported to be liable thereon and is owned (prior to its sale or contribution hereunder) by the Seller free and clear of any Adverse Claim (other than any Adverse Claim arising solely as the result of any action taken by the Purchaser). When the Purchaser makes a Purchase or acquires by contribution any Transferred Receivable, it shall acquire valid and perfected first priority ownership of each Transferred Receivable and the Related Security and Collections with respect thereto free and clear of any Adverse Claim (other than any Adverse Claim arising solely as the result of any action taken by the Purchaser), and no effective financing statement or other instrument similar in effect covering any Transferred Receivable, any interest therein, the Related Security or Collections with respect thereto is on file in any recording office except such as may be filed in favor of the Purchaser in accordance with this Agreement or in connection with any Adverse Claim arising solely as the result of any action taken by the Purchaser. (k) Each Seller Report prepared by the Seller (or, if not prepared by the Seller, to the extent that information contained therein is supplied by the Seller), information, exhibit, financial statement, document, book, record or report furnished or to be furnished at any time by the Seller to the Purchaser in connection with this Agreement is or will be accurate in all material respects as of its date or (except as otherwise disclosed to the Purchaser at such time) as of the date so furnished, and no such document contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements contained therein, in the light of the circumstances under which they were made, not misleading. (l) The principal place of business and chief executive office of the Seller and the office where the Seller keeps its records concerning the Transferred Receivables are located at the address or addresses referred to in Section 5.01(b). (m) The Seller is not known by and does not use any tradename or doing-business-as name in the origination or collection of any of the Receivables. (n) With respect to any program used by the Seller in the servicing of the Receivables, no sublicensing agreement is necessary in connection with the designation of a new Collection Agent pursuant to Section 6.01 so that such new Collection Agent shall have the benefit of such programs (it being understood, however, that the Collection Agent, if other than the Seller, shall be required to be bound by a confidentiality agreement reasonably acceptable to the Seller). (o) The transfers of Transferred Receivables by the Seller to the Purchaser pursuant to this Agreement, and all other transactions between the Seller and the Purchaser, have been and will be made in good faith and without intent to hinder, delay or defraud creditors of the Seller. ARTICLE V COVENANTS SECTION 5.01. Covenants of the Seller. From the date hereof until the first day following the Facility Termination Date on which all of the Transferred Receivables are either collected in full or become Defaulted Receivables, the Seller will: (a) Compliance with Laws, Etc. Comply in all material respects with all applicable laws, rules, regulations and orders and preserve and maintain its corporate existence, rights, franchises, qualifications and privileges except to the extent that the failure so to comply with such laws, rules and regulations or the failure so to preserve and maintain such existence, rights, franchises, qualifications, and privileges would not materially adversely affect the collectibility of the Transferred Receivables or the ability of the Seller to perform its obligations under this Agreement. (b) Offices, Records and Books of Account. (i) Keep its principal place of business and chief executive office and the office where it keeps its records concerning the Transferred Receivables and all Contracts related thereto (and all original documents relating thereto), at the address of the Seller set forth under its name on the signature page to this Agreement or (x) in the case of such records and Contracts, at the Seller's offices in Wethersfield, Connecticut or (y) upon 30 days' prior written notice to the Purchaser, at any other locations in jurisdictions where all actions required by Section 5.01(i) shall have been taken and completed; (ii) maintain and implement administrative and operating procedures (including, without limitation, an ability to recreate records evidencing Transferred Receivables and related Contracts in the event of the destruction of the originals thereof), and keep and maintain all documents, books, records and other information reasonably necessary or advisable for the collection of all Transferred Receivables (including, without limitation, records adequate to permit the daily identification of each new Transferred Receivable and all Collections of and adjustments to each existing Transferred Receivable); and (iii) make a notation in its books and records, including its computer files, indicating that the Transferred Receivables have been sold or contributed to the Purchaser hereunder. (c) Performance and Compliance with Contracts and Credit and Collection Policy. At its expense, timely and fully perform and comply with all material provisions, covenants and other promises required to be observed by it under the Contracts related to the Transferred Receivables, and timely and fully comply in all material respects with the Credit and Collection Policy in regard to each Transferred Receivable and the related Contract. (d) Sales, Liens, Etc. Except for the sales and contributions of Receivables contemplated herein, not sell, assign (by operation of law or otherwise) or otherwise dispose of, or create or suffer to exist any Adverse Claim upon or with respect to, any Transferred Receivable, Related Security, related Contract or Collections, or upon or with respect to any account to which any Collections of any Transferred Receivable are sent, or assign any right to receive income in respect thereof. (e) Extension or Amendment of Transferred Receivables. Except as provided in Section 6.02(c), not extend, amend or otherwise modify the terms of any Transferred Receivable, or amend, modify or waive any term or condition of any Contract related thereto. (f) Change in Business or Credit and Collection Policy. Not make any change in the character of its business or in the Credit and Collection Policy that would, in either case, materially adversely affect the collectibility of the Transferred Receivables or the ability of the Seller to perform its obligations under this Agreement. (g) Audits. From time to time during regular business hours as reasonably requested by the Purchaser or its assigns, permit the Purchaser, or its agents, representatives or assigns, (i) to examine and make copies of and abstracts from all books, records and documents (including, without limitation, computer tapes and disks) in the possession or under the control of the Seller relating to Transferred Receivables and the Related Security, including, without limitation, the related Contracts, and (ii) to visit the offices and properties of the Seller for the purpose of examining such materials described in clause (i) above, and to discuss matters relating to Transferred Receivables and the Related Security or the Seller's performance hereunder or under the Contracts with any of the officers or employees of the Seller responsible for such matters; provided, that the Purchaser and its assignees shall be required to maintain the confidentiality of any such examinations, records and discussions. (h) Collections. (i) At the request of the Purchaser, made at any time after the occurrence of an Event of Termination or Incipient Event of Termination, immediately deposit or cause to be deposited all Collections to a Designated Account; and (ii) use reasonable commercial efforts to not deposit or otherwise credit, or cause or permit to be so deposited or credited, to any Designated Account cash or cash proceeds other than Collections of Transferred Receivables. (i) Further Assurances. (i) From time to time, at its expense, promptly execute and deliver all further instruments and documents, and take all further actions, that may be necessary or desirable, or that the Purchaser or its assignee may reasonably request, to perfect, protect or more fully evidence the sale and contribution of Receivables under this Agreement, or to enable the Purchaser or its assignee to exercise and enforce its respective rights and remedies under this Agreement, including, without limitation, upon the request of the Purchaser or its assignee, (A) executing and filing such financing or continuation statements, or amendments thereto, and such other instruments and documents, that may be necessary or desirable to perfect, protect or evidence such Transferred Receivables; and (B) subject to the last sentence of Section 5.01(g), delivering to the Purchaser copies of all Contracts relating to the Transferred Receivables and all records relating to such Contracts and the Transferred Receivables, whether in hard copy or in magnetic tape or diskette format (which if in magnetic tape or diskette format shall be compatible with the Purchaser's computer equipment). In connection with the foregoing, the Seller hereby authorizes the Purchaser or its assignee to file financing or continuation statements, and amendments thereto and assignments thereof, relating to the Transferred Receivables and the Related Security, the related Contracts and the Collections with respect thereto without the signature of the Seller where permitted by law. The Purchaser or assignees making any such filing shall provide a copy thereof to the Seller. A photocopy or other reproduction of this Agreement shall be sufficient as a financing statement where permitted by law. (ii) Perform its obligations under the Contracts related to the Transferred Receivables to the same extent as if the Transferred Receivables had not been sold or transferred. (j) Reporting Requirements. Provide to the Purchaser the following: (i) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Seller a copy of the Seller's Quarterly Report on Form 10-Q for such quarter; (ii) as soon as available and in any event within 105 days after the end of each fiscal year of the Seller a copy of the Seller's Annual Report on Form 10-K, for such fiscal year; (iii) upon request by the Purchaser, copies of all reports which the Seller sends to any holders of its publicly held securities and copies of all reports and registration statements which the Seller files with the Securities and Exchange Commission or any national securities exchange; (iv) promptly after the filing or receipt thereof, copies of all reports and notices with respect to any Reportable Event (as defined in Article IV of ERISA) which the Seller or any Significant Subsidiary files under ERISA with the Internal Revenue Service or the Pension Benefit Guaranty Corporation or the U.S. Department of Labor or which the Seller or any Significant Subsidiary receives from any of the foregoing in each case in respect of the assessment of withdrawal liability or event or condition which could, in the aggregate, result in the imposition of liability on the Seller in excess of $10,000,000; (v) as soon as possible and in any event within five days after an officer of the Seller obtains knowledge of the occurrence of an Event of Termination or an Incipient Event of Termination, the statement of the chief financial officer or chief accounting officer or the treasurer or an assistant treasurer of the Seller setting forth the details of such Event of Termination or Incipient Event of Termination and the action that the Seller proposes to take with respect thereto; (vi) upon the request of the Purchaser, a list of the Receivables which the Purchaser has purchased hereunder; (vii) promptly, from time to time, such other information, documents, records or reports respecting the Receivables or Related Security or the conditions or operations, financial or otherwise, of the Seller or any significant Subsidiary as the Purchaser may from time to time reasonably request in order to protect the Purchaser's interests under or contemplated by this Agreement; (viii) on or prior to the 18th day of each month, such Seller Reports and other reports, information, documents, books or records as the Purchaser may reasonably request; (ix) at the time of the delivery of the financial statements provided for in clauses (i) and (ii) of this paragraph, a certificate of the chief financial officer or chief accounting officer or the treasurer or an assistant treasurer of the Seller to the effect that, to the best of such officer's knowledge, no Event of Termination has occurred and is continuing or, if any Event of Termination has occurred and is continuing, specifying the nature and extent thereof; (x) at least ten Business Days prior to any change in the Seller's name, a notice setting forth the new name and the effective date thereof; and (xi) such other information respecting the Transferred Receivables or the condition or operations, financial or otherwise, of the Seller as the Purchaser may from time to time reasonably request. (k) Separate Conduct of Business. (i) Maintain separate corporate records and books of account from those of the Purchaser; (ii) except as otherwise contemplated hereby, ensure that all oral and written communications, including without limitation, letters, invoices, purchase orders, contracts, statements and applications, will be made solely in its own name; (iii) have stationery and other business forms and a telephone number separate from those of the Purchaser; (iv) not hold itself out as having agreed to pay, or as being liable for, the obligations of the Purchaser; (v) not engage in any transaction with the Purchaser except as contemplated by this Agreement or as permitted by the Sale Agreement; (vi) continuously maintain as official records the resolutions, agreements and other instruments underlying the transactions contemplated by this Agreement; and (vii) disclose on its annual financial statements (A) the effects of the transactions contemplated by this Agreement in accordance with generally accepted accounting principles, (B) that the Seller has acquired the Receivables from the Purchaser and (C) that the Seller is a separate corporate entity with creditors who have purchased or otherwise received ownership and security interests in the Seller's assets. SECTION 5.02. Grant of Security Interest. To secure all obligations of the Seller arising in connection with this Agreement, and each other agreement entered into in connection with this Agreement, whether now or hereafter existing, due or to become due, direct or indirect, or absolute or contingent, including, without limitation, Indemnified Amounts, payments on account of Collections received or deemed to be received, and any other amounts due the Purchaser hereunder, the Seller hereby assigns and grants to Purchaser, a security interest in all of the Seller's right, title and interest now or hereafter existing in, to and under all Receivables which do not constitute Transferred Receivables, the Related Security and all Collections with regard thereto. SECTION 5.03. Covenant of the Seller and the Purchaser. The Seller and the Purchaser have structured this Agreement with the intention that each Purchase or contribution of Receivables hereunder be treated as a sale or contribution of such Receivables by the Seller to the Purchaser for all purposes. The Seller and the Purchaser shall record each Purchase or contribution as a sale, purchase or contribution, as the case may be, on its books and records, and reflect each Purchase and contribution in its financial statements as a sale, purchase or contribution, as the case may be. In the event that, contrary to the mutual intent of the Seller and the Purchaser, any Purchase of Receivables hereunder is not characterized as a sale or contribution, the Seller shall, effective as of the date hereof, be deemed to have granted (and the Seller hereby does grant) to the Purchaser a first priority security interest in and to any and all Transferred Receivables and the proceeds thereof to secure the repayment of all amounts advanced to the Seller hereunder with accrued interest thereon, and this Agreement shall be deemed to be a security agreement. ARTICLE VI ADMINISTRATION AND COLLECTION SECTION 6.01. Designation of Collection Agent. The servicing, administration and collection of the Transferred Receivables shall be conducted by such Person (the "Collection Agent") so designated hereunder from time to time. Until the Purchaser or its assignee gives notice to the Seller of the designation of a new Collection Agent, the Seller is hereby designated as, and hereby agrees to perform the duties and obligations of, the Collection Agent pursuant to the terms hereof. The Seller agrees that such notice may be given at any time in the Purchaser's or assignee's discretion after the occurrence of an Event of Termination or Incipient Event of Termination. Upon the Seller's receipt of such notice, the Seller agrees that it will terminate its activities as Collection Agent hereunder in a manner which the Purchaser (or its designee) believes will facilitate the transition of the performance of such activities to the new Collection Agent, and the Seller shall use its best efforts to assist the Purchaser (or its designee) to take over the servicing, administration and collection of the Transferred Receivables, including, without limitation, providing access to and copies of all computer tapes or disks and other documents or instruments that evidence or relate to Transferred Receivables maintained in its capacity as Collection Agent and access to all employees and officers of the Seller responsible with respect thereto. The Purchaser at any time after giving such notice may designate as Collection Agent any Person (including itself) to succeed the Seller or any successor Collection Agent, if such Person shall consent and agree to the terms hereof. The Collection Agent may subcontract with Northeast Utilities Service Company and may, with the prior consent of the Purchaser, subcontract with any other Person for the servicing, administration or collection of Transferred Receivables. Any such subcontract shall not affect the Collection Agent's liability for performance of its duties and obligations pursuant to the terms hereof. SECTION 6.02. Duties of Collection Agent. (a) The Collection Agent shall take or cause to be taken all such actions as may be necessary or advisable to collect each Transferred Receivable from time to time, all in accordance with applicable laws, rules and regulations, with reasonable care and diligence, and in accordance with the Credit and Collection Policy. The Purchaser hereby appoints the Collection Agent, from time to time designated pursuant to Section 6.01, as agent to enforce its ownership and other rights in the Transferred Receivables, the Related Security and the Collections with respect thereto. In performing its duties as Collection Agent, the Collection Agent shall exercise the same care and apply the same policies as it would exercise and apply if it owned the Transferred Receivables and shall act in the best interests of the Purchaser and its assignees. (b) On or before the 18th day of each month, the Collection Agent shall prepare and forward to the Purchaser a Seller Report, relating to all then outstanding Transferred Receivables, and the Related Security and Collections with respect thereto, in each case, as of the close of business of the Collection Agent on the last day of the immediately preceding month. (c) The Collection Agent may not extend, amend or otherwise modify the terms of any Transferred Receivable or amend, modify or waive any term or condition of any Contract related thereto, or commence or settle any legal action to enforce collection of any Transferred Receivable, except in conformance with the Credit and Collection Policy. (d) The Seller shall deliver to the Collection Agent, and the Collection Agent shall hold in trust for the Seller and the Purchaser in accordance with their respective interests, all documents, instruments and records (including, without limitation, computer tapes or disks) which evidence or relate to Transferred Receivables. (e) The Collection Agent shall, as soon as practicable following receipt, turn over to the Seller any cash collections or other cash proceeds received with respect to Receivables not constituting Transferred Receivables, less, in the event the Seller is not the Collection Agent, all reasonable and appropriate out-of-pocket costs and expenses of the Collection Agent of servicing, collecting and administering the Receivables to the extent not covered by the Collection Agent Fee received by it. (f) The Collection Agent also shall perform the other obligations of the "Collection Agent" set forth in this Agreement with respect to the Transferred Receivables. SECTION 6.03. Collection Agent Fee. The Purchaser shall pay to the Collection Agent a periodic collection fee (the "Collection Agent Fee") in an amount equal to the greater of (i) 1/4 of 1% per annum on the average daily outstanding Invested Amount with respect to the Purchased Receivables, or (ii) 110% of the reasonable costs and expenses of the Collection Agent attributable to collecting the Invested Amount with respect to the Purchased Receivables. Such fee shall be payable in arrears on each Settlement Date, commencing November 21, 1997, for the period from the preceding Settlement Date to such Settlement Date; provided, however, that so long as the Seller is the Collection Agent, such fee may be paid on the last day of the month in which such Settlement Date occurs. SECTION 6.04. Certain Rights of the Purchaser. (a) The Purchaser may, at any time after the occurrence of an Event of Termination or Incipient Event of Termination, give notice of ownership and/or direct the Obligors of Transferred Receivables and any Person obligated on any Related Security, or any of them, that payment of all amounts payable under any Transferred Receivable shall be made directly to the Purchaser or its designee or directly to the Designated Account. (b) The Seller shall, at any time upon the Purchaser's request and at the Seller's expense after the occurrence of an Event of Termination or Incipient Event of Termination, give notice of such ownership to each Obligor of Transferred Receivables and direct that payments of all amounts payable under such Transferred Receivables be made directly to the Purchaser or its designee or directly to the Designated Account. (c) At the Purchaser's request after the occurrence of an Event of Termination or Incipient Event of Termination, and at the Seller's expense, the Seller and the Collection Agent shall (A) assemble all of the documents, instruments and other records (including, without limitation, computer tapes and disks) that evidence or relate to the Transferred Receivables, and the related Contracts and Related Security, or that are otherwise necessary or desirable to collect the Transferred Receivables, and make the same available to the Purchaser at a place selected by the Purchaser or its designee and (B) segregate all cash, checks and other instruments received by it from time to time constituting Collections of Transferred Receivables in a manner acceptable to the Purchaser and, promptly upon receipt, remit all such cash, checks and instruments, duly endorsed or with duly executed instruments of transfer, to the Purchaser or its designee. The Purchaser shall also have the right to make copies of all such documents, instruments and other records at any time, subject to the last sentence of Section 5.01(g). (d) The Seller authorizes the Purchaser, after the occurrence of an Event of Termination or Incipient Event of Termination, to take any and all steps in the Seller's name and on behalf of the Seller that are necessary or desirable, in the determination of the Purchaser, to collect amounts due under the Transferred Receivables, including, without limitation, endorsing the Seller's name on checks and other instruments representing Collections of Transferred Receivables and enforcing the Transferred Receivables and the Related Security and related Contracts. SECTION 6.05. Rights and Remedies. (a) If the Seller or the Collection Agent fails to perform any of its obligations under this Agreement, the Purchaser may (but shall not be required to) itself perform, or cause performance of, such obligation, and, if the Seller (as Collection Agent or otherwise) fails to so perform, the costs and expenses of the Purchaser incurred in connection therewith shall be payable by the Seller as provided in Section 8.01 or Section 9.04 as applicable. (b) The Seller shall perform all of its obligations under the Contracts related to the Transferred Receivables to the same extent as if the Seller had not sold or contributed Receivables hereunder and the exercise by the Purchaser of its rights hereunder shall not relieve the Seller from such obligations or its obligations with respect to the Transferred Receivables. The Purchaser shall not have any obligation or liability with respect to any Transferred Receivables or related Contracts, nor shall the Purchaser be obligated to perform any of the obligations of the Seller thereunder. (c) The Seller shall cooperate with the Collection Agent in collecting amounts due from Obligors in respect of the Transferred Receivables. (d) The Seller hereby grants to the Collection Agent an irrevocable power of attorney, with full power of substitution, coupled with an interest, to take in the name of the Seller all steps necessary or advisable to endorse, negotiate or otherwise realize on any writing or other right of any kind held or transmitted by the Seller or transmitted or received by Purchaser (whether or not from the Seller) in connection with any Transferred Receivable. SECTION 6.06. Transfer of Records to Purchaser. Each Purchase and contribution of Receivables hereunder shall include the transfer to the Purchaser of all of the Seller's right, title to and interest in the records relating to such Receivables and shall include the right to use the Seller's computer software system to access and create such records. Such right shall be without royalty or payment of any kind, is coupled with an interest, and shall be irrevocable until all of the Transferred Receivables are either collected in full or become Defaulted Receivables. The Seller shall take such action requested by the Purchaser, from time to time hereafter, that may be necessary or appropriate to ensure that the Purchaser has an enforceable ownership interest in the records relating to the Transferred Receivables and rights (whether by ownership, license, sublicense or otherwise) to the use of the Seller's computer software system to access and create such records. In recognition of the Seller's need to have access to the records transferred to the Purchaser hereunder, the Purchaser hereby grants to the Seller the right to access such records in connection with any activity arising in the ordinary course of the Seller's business or in performance of its duties as Collection Agent, provided that (i) the Seller shall not disrupt or otherwise interfere with the Purchaser's use of and access to such records during such period and (ii) the Seller consents to the assignment and delivery of the records (including any information contained therein relating to the Seller or its operations) to any assignees or transferees of the Purchaser provided they agree to hold such records confidential. ARTICLE VII EVENTS OF TERMINATION SECTION 7.01. Events of Termination. If any of the following events ("Events of Termination") shall occur and be continuing: (a) The Collection Agent (if the Seller or any of its Affiliates) (i) shall fail to perform or observe any term, covenant or agreement under this Agreement (other than as referred to in clause (ii) of this subsection (a)) and such failure shall remain unremedied for three Business Days or (ii) shall fail to make when due any payment or deposit to be made by it under this Agreement; or (b) The Seller shall fail (i) to transfer to the Purchaser when requested any rights pursuant to this Agreement which the Seller then has as Collection Agent, or (ii) to make any payment required under Section 2.04(a) or 2.04(b); or (c) Any representation or warranty made or deemed made by the Seller (or any of its officers) under or in connection with this Agreement or any Seller Report or any other information or report delivered by the Seller pursuant to this Agreement shall prove to have been incorrect or untrue in any material respect when made or deemed made or delivered; or (d) The Seller shall fail to perform or observe any other term, covenant or agreement contained in this Agreement on its part to be performed or observed and any such failure shall remain unremedied for 10 days after written notice thereof shall have been given to the Seller by the Purchaser; or (e) The Seller shall fail to pay any principal of or premium or interest on any of its Debt which is outstanding in a principal amount of at least $10,000,000 in the aggregate when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Debt and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Debt; or any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), redeemed, purchased or defeased, or an offer to repay, redeem, purchase or defease such Debt shall be required to be made, in each case prior to the stated maturity thereof; or (f) Any Purchase or contribution of Receivables hereunder, the Related Security and the Collections with respect thereto shall for any reason cease to constitute valid and perfected ownership of such Receivables, Related Security and Collections free and clear of any Adverse Claim; or (g) The Seller or any of its Significant Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Seller or any of its Significant Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of 60 days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property) shall occur; or the Seller or any of its Significant Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this subsection (g); or (h) An Event of Termination shall have occurred under the Sale Agreement; or (i) There shall have occurred any event which may materially adversely affect the collectibility of the Transferred Receivables or the ability of the Seller to collect Transferred Receivables or otherwise perform its obligations under this Agreement; then, and in any such event, the Purchaser may, by notice to the Seller, take either or both of the following actions: (x) declare the Facility Termination Date to have occurred (in which case the Facility Termination Date shall be deemed to have occurred) and (y) without limiting any right under this Agreement to replace the Collection Agent, designate another Person to succeed the Seller as the Collection Agent; provided, that, automatically upon the occurrence of any event (without any requirement for the passage of time or the giving of notice) described in paragraph (g) of this Section 7.01, the Facility Termination Date shall occur, the Seller (if it is then serving as the Collection Agent) shall cease to be the Collection Agent, and the Purchaser (or its assigns or designees) shall become the Collection Agent. Upon any such declaration or designation or upon such automatic termination, the Purchaser shall have, in addition to the rights and remedies under this Agreement, all other rights and remedies with respect to the Receivables provided after default under the UCC and under other applicable law, which rights and remedies shall be cumulative. ARTICLE VIII INDEMNIFICATION SECTION 8.01. Indemnities by the Seller. Without limiting any other rights which the Purchaser may have hereunder or under applicable law, the Seller hereby agrees to indemnify the Purchaser and its assigns and transferees (each, an "Indemnified Party") from and against any and all damages, claims, losses, liabilities and related costs and expenses, including reasonable attorneys' fees and disbursements (all of the foregoing being collectively referred to as "Indemnified Amounts"), awarded against or incurred by any Indemnified Party arising out of or as a result of: (i) the characterization in any Seller Report or other statement made by the Seller of any Receivable as an Eligible Receivable (as defined in the Sale Agreement) which is not an Eligible Receivable as of the date of such Seller Report or statement; (ii) any representation or warranty or statement made or deemed made by the Seller (or any of its officers) under or in connection with this Agreement, which shall have been false or incorrect in any material respect when made; (iii) the failure by the Seller to comply with any applicable law, rule or regulation with respect to any Transferred Receivable, Related Security or the related Contract; or the nonconformity of any Transferred Receivable, Related Security or the related Contract with any such applicable law, rule or regulation; (iv) the failure to vest in the Purchaser absolute ownership of the Receivables that are, or that purport to be, the subject of a Purchase or contribution under this Agreement and the Related Security and Collections in respect thereof, free and clear of any Adverse Claim; (v) the failure of the Seller to have filed, or any delay in filing, financing statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any Receivables that are, or that purport to be, the subject of a Purchase or contribution under this Agreement and the Related Security and Collections in respect thereof, whether at the time of any Purchase or contribution or at any subsequent time; (vi) any dispute, claim, offset or defense of any Obligor (other than discharge in bankruptcy of such Obligor) to the payment of any Receivable that is, or that purports to be, the subject of a Purchase or contribution under this Agreement (including, without limitation, a defense based on such Receivable or the related Contract not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms), or any other claim resulting from the sale of the merchandise or services related to such Receivable or the furnishing or failure to furnish such merchandise or services or relating to collection activities with respect to such Receivable (if such collection activities were performed by the Seller acting as Collection Agent) except to the extent that such dispute, claim, offset or defense results solely from actions or failures to act of the Purchaser or its assigns; (vii) any failure of the Seller, as Collection Agent or otherwise, to perform its duties or obligations in accordance with the provisions hereof or to perform its duties or obligations under any Contract related to a Transferred Receivable; (viii) any products liability claim or personal injury or property damage suit or other similar or related claim or action of whatever sort arising out of or in connection with merchandise or services which are the subject of any Contract; (ix) the commingling of Collections of Transferred Receivables by the Seller or a designee of the Seller, as Collection Agent or otherwise, at any time with other funds of the Seller or an Affiliate of the Seller; (x) any investigation, litigation or proceeding related to this Agreement or the use of proceeds of Purchases or the ownership of Transferred Receivables, the Related Security, or Collections with respect thereto or in respect of any Transferred Receivable, Related Security or Contract, except to the extent any such investigation, litigation or proceeding relates to a possible matter involving an Indemnified Party for which neither the Seller nor any of its Affiliates is at fault; (xi) any failure of the Seller to comply with its covenants contained in Section 5.01; (xii) any Collection Agent Fees or other costs and expenses payable to any replacement Collection Agent, to the extent in excess of the Collection Agent Fees payable to the Seller hereunder; or (xiii) any claim brought by any Person other than an Indemnified Party arising from any activity by the Seller or any Affiliate of the Seller in servicing, administering or collecting any Transferred Receivable. It is expressly agreed and understood by the parties hereto (i) that the foregoing indemnification is not intended to, and shall not, constitute a guarantee of the collectibility or payment of the Transferred Receivables and (ii) that nothing in this Section 8.01 shall require the Seller to indemnify any Person (A) for Receivables which are not collected, not paid or uncollectible on account of the insolvency, bankruptcy, or financial inability to pay of the applicable Obligor, (B) for damages, losses, claims or liabilities or related costs or expenses resulting from such Person's gross negligence or willful misconduct, or (C) for any income taxes or franchise taxes incurred by such Person arising out of or as a result of this Agreement or in respect of any Transferred Receivable or any Contract. ARTICLE IX MISCELLANEOUS SECTION 9.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement or consent to any departure by the Seller therefrom shall in any event be effective unless the same shall be in writing signed by the Purchaser and, in the case of any amendment, also signed by the Seller, and then such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. This Agreement contains a final and complete integration of all prior expressions by the parties hereto with respect to the subject matter hereof and shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof, superseding all prior oral or written understandings. SECTION 9.02. Notices, Etc. All notices and other communications hereunder shall, unless otherwise stated herein, be in writing (which shall include facsimile communication) and faxed or delivered, to each party hereto, at its address set forth under its name on the signature pages hereof or at such other address as shall be designated by such party in a written notice to the other parties hereto. Notices and communications by facsimile shall be effective when sent (and shall be followed by hard copy sent by regular mail), and notices and communications sent by other means shall be effective when received. SECTION 9.03. No Waiver; Remedies. No failure on the part of the Purchaser to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 9.04. Binding Effect; Assignability. (a) This Agreement shall be binding upon and inure to the benefit of the Seller, the Purchaser and their respective successors and assigns; provided, however, that the Seller may not assign its rights or obligations hereunder or any interest herein without the prior written consent of the Purchaser. In connection with any sale or assignment by the Purchaser of all or a portion of the Transferred Receivables, the buyer or assignee, as the case may be, shall, to the extent of its purchase or assignment, have all rights of the Purchaser under this Agreement (as if such buyer or assignee, as the case may be, were the Purchaser hereunder) except to the extent specifically provided in the agreement between the Purchaser and such buyer or assignee, as the case may be. (b) This Agreement shall create and constitute the continuing obligations of the parties hereto in accordance with its terms, and shall remain in full force and effect until such time, after the Facility Termination Date, when all of the Transferred Receivables are either collected in full or become Defaulted Receivables; provided, however, that rights and remedies with respect to any breach of any representation and warranty made by the Seller pursuant to Article IV and the provisions of Article VIII and Sections 9.05, 9.06 and 9.07 shall be continuing and shall survive any termination of this Agreement. SECTION 9.05. Costs, Expenses and Taxes. (a) In addition to the rights of indemnification granted to the Purchaser pursuant to Article VIII hereof, the Seller agrees to pay on demand all costs and expenses in connection with the preparation, execution and delivery of this Agreement and the other documents and agreements to be delivered hereunder, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Purchaser with respect thereto and with respect to advising the Purchaser as to its rights and remedies under this Agreement, and the Seller agrees to pay all costs and expenses, if any (including reasonable counsel fees and expenses), in connection with the enforcement of this Agreement and the other documents to be delivered hereunder excluding, however, any costs of enforcement or collection of Transferred Receivables. (b) In addition, the Seller agrees to pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of this Agreement or the other documents or agreements to be delivered hereunder, and the Seller agrees to save each Indemnified Party harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees. SECTION 9.06. No Proceedings. The Seller hereby agrees that it will not institute against the Purchaser any proceeding of the type referred to in Section 7.01(g) so long as there shall not have elapsed one year plus one day since the later of (i) the Facility Termination Date and (ii) the date on which all of the Transferred Receivables are either collected in full or become Defaulted Receivables. SECTION 9.07. Confidentiality. Unless otherwise required by applicable law, each party hereto agrees to maintain the confidentiality of this Agreement in communications with third parties and otherwise; provided that this Agreement may be disclosed to (i) third parties to the extent such disclosure is made pursuant to a written agreement of confidentiality in form and substance reasonably satisfactory to the other party hereto, and (ii) such party's legal counsel and auditors and the Purchaser's assignees, if they agree in each case to hold it confidential. SECTION 9.08. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CONNECTICUT (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF). SECTION 9.09. Third Party Beneficiary. Each of the parties hereto hereby acknowledges that the Purchaser may assign all or any portion of its rights under this Agreement and that such assignees may (except as otherwise agreed to by such assignees) further assign their rights under this Agreement, and the Seller hereby consents to any such assignments. All such assignees, including parties to the Sale Agreement in the case of assignment to such parties, shall be third party beneficiaries of, and shall be entitled to enforce the Purchaser's rights and remedies under, this Agreement to the same extent as if they were parties thereto, except to the extent specifically limited under the terms of their assignment. SECTION 9.10. Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by facsimile shall be effective as delivery of a manually executed counterpart of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. SELLER: THE CONNECTICUT LIGHT AND POWER COMPANY By s/s David R. McHale Name: David R. McHale Title: Assistant Treasurer 107 Selden Street Berlin, Connecticut 06037 Attention: Assistant Treasurer Facsimile No.: 860-665-5457 PURCHASER: CL&P RECEIVABLES CORPORATION By: s/s Robert C. Aronson Name: Robert C. Aronson Title: Assistant Treasurer 107 Selden Street Berlin, Connecticut 06037 Attention: Assistant Treasurer Facsimile No.: (860) 665-5457 EXHIBIT A TARIFFS 1. The retail rates charged by the Seller to Obligors, as approved from time to time by the Connecticut Department of Public Utility Control. 2. The Connecticut Light and Power Company Rules and Regulations, effective July 1, 1993, applicable to its retail rate accounts as approved by the Connecticut Department of Public Utility Control. EX-10.17 23 RECEIVABLES PURCHASE AGMT - WMECO Exhibit 10.50 U.S. $40,000,000 RECEIVABLES PURCHASE AGREEMENT Dated as of May 22, 1997 Among WMECO RECEIVABLES CORPORATION, as the Seller and WESTERN MASSACHUSETTS ELECTRIC COMPANY as initial Servicer and MONTE ROSA CAPITAL CORPORATION as the Purchaser and UNION BANK OF SWITZERLAND, NEW YORK BRANCH as the Agent TABLE OF CONTENTS Section ARTICLE I DEFINITIONS 1.01. Certain Defined Terms 1.02. Other Terms 1.03. Computation of Time Periods ARTICLE II THE RECEIVABLES FACILITY 2.01. Purchases and Maintenance of Percentage Interests 2.02. Termination or Reduction of the Purchase Limit 2.03. Percentage Interests 2.04. Selection of Purchase Periods 2.05. Non-Liquidation Settlement Procedures 2.06. Liquidity Shortfall Event; Partial Liquidations 2.07. Liquidation Settlement Procedures 2.08. Deemed Collections of Receivables 2.09. Payments and Computations, Etc. 2.10. Fees 2.11. Breakage Fee and Indemnity 2.12. Sharing of Payments, Etc. 2.13. Eurodollar Rate Protection; Illegality 2.14. Increased Costs; Capital Adequacy 2.15. Taxes 2.16. Security Interest ARTICLE III CONDITIONS OF PURCHASES 3.01. Conditions Precedent to Initial Purchase 3.02. Conditions Precedent to All Purchases and Reinvestments ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.01. Representations and Warranties of the Seller 4.02. Representations and Warranties of the Servicer ARTICLE V GENERAL COVENANTS OF THE SELLER, WMECO AND THE SERVICER 5.01. General Seller Covenants 5.02. Servicer Covenants 5.03. Separate Corporate Existence of the Seller ARTICLE VI ADMINISTRATION, COLLECTION AND MONITORING OF RECEIVABLES 6.01. Appointment and Designation of the Servicer 6.02. Collection of Receivables by the Servicer; Extensions and Amendments of Receivables 6.03. Distribution and Application of Collections 6.04. Segregation of Collections 6.05. Other Rights of the Agent 6.06. Records; Maintenance of General Trial Balance; Audits 6.07. Receivables Reporting 6.08 Collections 6.09. UCC Matters; Protection and Perfection of Percentage Interests 6.10. Obligations of the Seller with Respect to Receivables ARTICLE VII EVENTS OF TERMINATION 7.01. Events of Termination ARTICLE VIII THE AGENT 8.01. Authorization and Action 8.02. UCC Filings 8.03. Agent's Reliance, Etc. 8.04. Agent and Affiliates 8.05. Purchase Decision 8.06. Indemnification 8.07. Successor Agent ARTICLE IX INDEMNIFICATION 9.01. Indemnities by the Seller 9.02 Indemnities by WMECO ARTICLE X MISCELLANEOUS 10.01. Amendments and Waivers 10.02. Notices, Etc. 10.03. No Waiver; Remedies 10.04. Binding Effect; Assignability 10.05. Term of this Agreement 10.06. GOVERNING LAW; SUBMISSION TO JURISDICTION 10.07. Costs, Expenses and Taxes 10.08. No Proceedings 10.09. Execution in Counterparts; Severability; Integration 10.10. WAIVER OF TRIAL BY JURY 10.11. Section Headings 10.12. Confidentiality LIST OF SCHEDULES AND EXHIBITS SCHEDULES SCHEDULE I Condition Precedent Documents SCHEDULE II Intentionally Omitted SCHEDULE III Tradenames, Fictitious Names and "Doing Business As" Names SCHEDULE IV Location of the Seller's Chief Executive Office, Principal Place of Business and Books and Records EXHIBITS EXHIBIT A Form of Assignment and Acceptance EXHIBIT B Methodology re: Unbilled Receivables EXHIBIT C-1 Form of Bank Notice for Lock-Box Bank EXHIBIT C-2 Form of Bank Notice for bank at which the Collection Account is maintained EXHIBIT D Form of Investor Report EXHIBIT E-1 Forms of Opinions of Internal Counsel for WMECO EXHIBIT E-2 Form of Opinion of Outside Counsel for WMECO EXHIBIT E-3 Form of Opinion of Outside Counsel for the Seller EXHIBIT F Form of Officer's Certificate THIS RECEIVABLES PURCHASE AGREEMENT (the "Agreement") is made as of May 22, 1997, among: (1) WMECO RECEIVABLES CORPORATION, a Connecticut corporation (the "Seller"); (2) WESTERN MASSACHUSETTS ELECTRIC COMPANY, a Massachusetts corporation, as initial Servicer hereunder ("WMECO"); (3) MONTE ROSA CAPITAL CORPORATION, a Delaware corporation (the "Purchaser"); and (4) UNION BANK OF SWITZERLAND, NEW YORK BRANCH ("UBS"), as agent (the "Agent"). IT IS AGREED as follows: ARTICLE I DEFINITIONS SECTION 1.01. Certain Defined Terms. (a) Certain capitalized terms used throughout this Agreement are defined above or in this Section 1.01. (b) As used in this Agreement and its Exhibits, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined). "Active Receivable" means a Receivable which is not an Inactive Receivable. "Adverse Claim" means a lien, security interest, charge, encumbrance or other right or claim of any Person. "Affected Party" has the meaning assigned to that term in Section 2.14. "Affiliate" when used with respect to a Person means any other Person controlling, controlled by or under common control with such Person; provided, however, that neither the Agent, UBS, any of UBS's branches or agencies, the Purchaser nor any subsidiary of the Purchaser, shall be deemed to be an affiliate of the Seller or of WMECO. "Agent's Account" means a special account (account number USDDAC1 282626) in the name of the Agent maintained at the Agent's main office at New York, New York or such other account as may be designated from time to time by the Agent upon at least five Business Days' prior written notice to the Seller and the Servicer. "Alternative Rate" means, with respect to any Percentage Interest for any Purchase Period, an interest rate per annum equal to the Eurodollar Rate; provided, however, that the "Alternative Rate" for such Percentage Interest for such Purchase Period shall be the Base Rate in effect from time to time during such Purchase Period if (i) such Purchase Period is a period of 1 to 29 days or (ii) the Purchase Price allocated to such Percentage Interest is less than $1,000,000; and provided, further, that at all times following the occurrence of an Event of Termination, the "Alternative Rate" shall be the sum of (a) the Base Rate in effect from time to time, plus (b) 2.0%. "Assignment and Acceptance" means an assignment and acceptance entered into by an Owner and an assignee pursuant to Section 10.04, substantially in the form of Exhibit A. "Bank Notice" means a notice (a) from the Seller or WMECO to any Lock-Box Bank, in substantially the form of Exhibit C-1 or in such other form as is acceptable to the Agent, or (b) from the Purchaser to the bank at which the Collection Account is maintained, in substantially the form of Exhibit C-2 or in such other form as is acceptable to the Agent. "Base Rate" means, on any date, a fluctuating rate of interest per annum equal to the highest of: (a) the Prime Rate; (b) 0.50% above the latest three-week moving average of secondary market morning offering rates in the United States for three-month certificates of deposit of major United States money market banks, such three-week moving average being determined weekly on each Monday (or, if such day is not a Business Day, on the next succeeding Business Day) for the three-week period ending on the previous Friday by the Agent on the basis of such rates reported by certificate of deposit dealers to and published by the Federal Reserve Bank of New York or, if such publication shall be suspended or terminated, on the basis of quotations for such rates received by the Agent from three New York certificate of deposit dealers of recognized standing selected by the Agent, in either case, adjusted to the nearest 1/4 of one percent or, if therein is no nearest 1/4 of one percent, to the next higher 1/4 of one percent; and (c) the Federal Funds Rate, plus 0.50%. "Benefit Plan" means any employee benefit plan as defined in Section 3(2) of ERISA in respect of which the Seller or WMECO or any ERISA Affiliate of the Seller or WMECO is, or at any time during the immediately preceding six years was, an "employer" as defined in Section 3(5) of ERISA. "Breakage Fee" has the meaning assigned to that term in Section 2.11. "Business Day" means a day of the year (other than a Saturday or a Sunday) on which (i) banks are required to be open in New York City and (ii) if the term "Business Day" is used in connection with the Eurodollar Rate, dealings in Dollar deposits are carried on in the London interbank Eurodollar market. "Change in Late Stage Delinquencies" means the amount, computed as of each Cut-Off Date as follows: (i) determine the sum of (A) the Outstanding Balance of Active Receivables which remain unpaid for more than 120 days past the original billing date plus (B) the Outstanding Balance for Inactive Receivables which remain unpaid for a period up to 30 days past the final billing date (hereinafter referred to as "Late Stage Delinquencies"); (ii) determine the average Late Stage Delinquencies for the twelve most recent months, as calculated in the twelve most recent Investor Reports; (iii) subtract the amount determined pursuant to clause (ii) from the amount determined pursuant to clause (i), which amount shall be the "Change in Late Stage Delinquencies" for such Cut-Off Date; provided, that if the amount determined pursuant to clause (iii) is less than zero, the Change in Late Stage Delinquencies for such Cut-Off Date shall equal zero. "Change of Control" means (a) the failure of WMECO to own directly, beneficially and of record, free and clear of all Adverse Claims, one hundred percent (100%) of the outstanding shares of capital stock of the Seller on a fully diluted basis; or (b) any Person, or two or more Persons acting in concert, shall acquire beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission) of 20% or more of the outstanding voting shares of WMECO. "Code" means the Internal Revenue Code of 1986, as amended. "Collateral" has the meaning assigned to that term in Section 2.16. "Collateral Trustee" means that Person acting as "Trustee" under (and as defined in) the Security Agreement. "Collection Account" means the account number 9369390302 maintained at Fleet Bank N.A. in the name of the Purchaser, or such other account as is designated as the Collection Account pursuant to Section 4.01(j). "Collection Date" means the date following the Termination Date on which all Percentage Interests have been reduced to zero in accordance with Section 2.03(a) and the Agent and the Owners have received all amounts due to them in connection with this Agreement. "Collections" means, with respect to any Receivable, all cash collections and other cash proceeds of such Receivable, including, without limitation, all cash proceeds of Related Security with respect to such Receivable, any collection of such Receivable deemed to have been received pursuant to Section 2.08 and all payments required to be made by the Seller pursuant to Section 2.06 or the last sentence of Section 2.08. "Commercial Paper Note" means any promissory note issued by the Purchaser having an original maturity of 270 days or less (including the date of issuance thereof). "Concentration Limit" means, for any Reported Group on any Cut-Off Date, 2.0% (or, if an Obligor identified in clause (i) of the definition of "Reported Group" has a long term credit rating of at least AA- by Standard & Poor's and Aa3 by Moody's, the Concentration Limit for such Obligor's Reported Group shall mean 100%) of the Purchase Limit on such Cut-Off Date or such other amount or percentage ("Special Concentration Limit") for any such Reported Group designated by the Agent in a writing delivered to the Seller from time to time. "Coverage Ratio" means, on any date of determination, the ratio of (x) the sum of (i) the Net Receivables Pool Balance plus (ii) the available funds on deposit in the Collection Account to (y) the sum of the Utilized Amounts for all Percentage Interests, in each case, as of such date. "CP Disruption Event" means, at any time for any reason whatsoever, the Purchaser shall be unable to raise, or shall be precluded or prohibited from raising, funds through the issuance of Commercial Paper Notes in the United States' commercial paper market at such time. "CP Rate" means with respect to any Purchase Period for any Percentage Interest, the per annum rate equivalent to the "weighted average cost" (as defined below) related to the issuance of Commercial Paper Notes that are allocated, in whole or in part, by the Purchaser (or by the Agent) to fund or maintain such Percentage Interest, all other Percentage Interests held by the Purchaser hereunder and all interests in receivables or other financial assets of "Other Pool Sellers" (as defined below) held by the Purchaser; provided, however, that if any component of such rate is a discount rate, in calculating the "CP Rate" for such Percentage Interest for such Purchase Period, the Purchaser shall for such component use the rate resulting from converting such discount rate to an interest bearing equivalent rate per annum. As used in this definition, (i) "Other Pool Sellers' means all other sellers which transfer interests (including security interests) in receivables or other financial assets to the Purchaser to the extent that such interests in receivables or other financial assets are aggregated with the Percentage Interests held by the Purchaser hereunder and funded on a pooled basis by the Purchaser, and (ii) the Purchaser's "weighted average cost" shall consist of (x) the actual interest rate paid to purchasers of the Commercial Paper Notes (which rate shall reflect and give effect to the commissions of placement agents and dealers in respect of the Commercial Paper Notes, to the extent such commissions are allocated, in whole or in part, to such Commercial Paper Notes by the Purchaser (or by the Agent)), (y) the costs associated with the issuance of Commercial Paper Notes, and (z) the cost of other borrowings by the Purchaser (other than under any Liquidity Agreement), including to fund small or odd dollar amounts that are not easily accommodated in the commercial paper market; and provided, further, that at all times following the occurrence of an Event of Termination, the "CP Rate" for any Percentage Interest shall be the Alternative Rate in effect from time to time. "Credit and Collection Policy" means those credit and collection policies and practices of WMECO and the Seller relating to Receivables, as delivered to the Agent prior to the date hereof, as modified in compliance with this Agreement. "Cut-Off Date" means the last day of a calendar month. "Dealer Fees" means with respect to any Purchase Period for any Percentage Interest, the rate set forth in a fee letter executed among the Seller, the Agent and the Purchaser. "Debt" of any Person means (i) indebtedness of such Person for borrowed money, (ii) obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) obligations (other than ordinary trade payables) of such Person to pay the deferred purchase price of property or services, (iv) obligations of such Person as lessee under leases which shall have been or should be, in accordance with GAAP, recorded as capital leases, (v) obligations secured by an Adverse Claim upon property or assets owned by such Person, even though such Person has not assumed or become liable for the payment of such obligations and (vi) obligations of such Person under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (i) through (iv) above. "Defaulted Receivable" means a Receivable: (i) as to which, with respect to Active Receivables, any payment, or part thereof, remains unpaid for more than 90 days from the billing date for such payment, (ii) as to which, the Obligor thereon shall generally not be able to pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors, or any proceeding shall be instituted by or against such Obligor seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property, or (iii) which, consistent with the Credit and Collection Policy, has been or should be written off as uncollectible on the books of WMECO or the Seller. "Delinquency Ratio" means the ratio (expressed as a percentage) computed as of each Cut-Off Date by dividing (i) the aggregate Outstanding Balance of all Receivables that became Delinquent Receivables during the month ending on such Cut-Off Date, by (ii) the aggregate Outstanding Balance of all Receivables on such date. "Delinquent Receivable" means an Active Receivable that is not a Defaulted Receivable and as to which any payment or part thereof remains unpaid for more than 60 days from the original billing date for such payment. "Designated Obligor" means, at any time, each Obligor; provided, however, that any Obligor shall cease to be a Designated Obligor upon three Business Days' notice from the Agent to the Seller. "Dilution Factors" means, with respect to the Receivables, any credits, rebates, discounts, allowances, disputes, chargebacks, allowances for early payments and other allowances or adjustments granted in accordance with the usual practices of WMECO and the Seller. "Dilution Ratio" means the ratio (expressed as a percentage) computed as of each Cut-Off Date by dividing (i) the aggregate reduction as a result of any of the Dilution Factors in the aggregate original principal balance of the Receivables during such month, by (ii) the amount of Collections (other than deemed Collections) received during such month. "Dilution Reserve Percentage" means, on any day for any Percentage Interest, the greater of (i) 1.00% and (ii) 2.0 times the average Dilution Ratio for the three consecutive months ending on the most recent Cut-Off Date. "Dividend" means any dividend or distribution (in cash, property or obligations) on any shares of any class of the Seller's capital stock or warrants, options or other rights with respect to shares of any class of the Seller's capital stock. "Dollars" or "$" means lawful money of the United States. "Eligible Receivable" means, at any time, a Receivable: (i) the Obligor of which is a Designated Obligor, is a United States resident, and is not an Affiliate of any of the parties hereto; (ii) which is not a Defaulted Receivable, a Delinquent Receivable, an Inactive Receivable or a Hardship Receivable; and if such Receivable is owed by an Obligor in a Reported Group, the Obligors in such Reported Group are not the Obligors of any Defaulted Receivables or of any Delinquent Receivables in the aggregate amount of 25% or more of the aggregate Outstanding Balance of all Receivables of Obligors in such Reported Group; (iii) which (A) is required to be paid in full immediately upon the Obligor's receipt of the original invoice therefor, (B) constitutes the legal, valid and binding obligation of the Obligor of such Receivable, enforceable against such Obligor in accordance with its terms and (C) is not subject to any right of rescission, dispute, offset, counterclaim or defense whatsoever; (iv) (A) which is an "account" within the meaning of Section 9-106 of the UCC of all applicable jurisdictions, (B) which has been invoiced by WMECO unless such Receivable is an Unbilled Receivable, (C) as to which all action required to be taken in connection therewith by WMECO for the Obligor to become obligated to pay the same has been taken, except that Unbilled Receivables shall not have been invoiced, (D) is denominated and payable only in Dollars in the United States and (E) no portion of which is payable on account of sales, excise or similar taxes; (v) which arises in the ordinary course of WMECO's business in connection with the sale of electricity and/or related services; (vi) the sale, assignment or transfer of which by WMECO to the Seller or by the Seller to the Purchaser (including, without limitation, the sale of an undivided percentage interest therein) does not contravene or conflict with any applicable laws, rules or regulations or any contractual or other restriction, limitation or encumbrance or require the consent of any Person; (vii) which has not been compromised, adjusted or modified (including by extension of time or payment or the granting of any discounts, allowances or credits) for reasons related to the credit of the Obligor of such Receivable; (viii) which, together with any contract related thereto, does not contravene in any material respect any laws, rules or regulations applicable thereto (including, without limitation, laws, rules and regulations relating to truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy) and with respect to which no party to any contract related thereto, if applicable, is in violation of any such law, rule or regulation in any material respect; (ix) which (A) satisfies all applicable requirements of the Credit and Collection Policy and (B) complies with such other criteria and requirements as the Agent may from time to time specify to the Seller following thirty days' notice; (x) as to which the Agent has not notified the Seller that the Agent has determined, in its sole discretion, that such Receivable (or class of Receivables) is not acceptable for purchase hereunder; (xi) which is neither evidenced by any promissory note, draft, bond, debenture or other instrument nor payable pursuant to any contract which creates a security interest in goods; (xii) the Obligor of which is located outside of Indiana, Minnesota or New Jersey unless WMECO, the Servicer and the Seller have qualified to do business in such state or has filed a Notice of Business Activities Report or equivalent report with such state for the then current year; and (xiii) which is free and clear from all liens (other than liens expressly permitted by this Agreement) and (except as provided herein) as to which the Seller has good and marketable title. "ERISA" means, on any day, the U.S. Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "ERISA Affiliate" means (i) any corporation which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Seller or WMECO; (ii) a trade or business (whether or not incorporated) under common control (within the meaning of Section 414(c) of the Code) with the Seller or WMECO or (iii) a member of the same affiliated service group (within the meaning of Section 414(m) of the Code) as the Seller or WMECO, any corporation described in clause (i) above or any trade or business described in clause (ii) above. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Eurodollar Rate" means, with respect to any Percentage Interest for any Purchase Period, the per annum rate of interest determined by the Agent to be equal to the sum of (a) 0.85% and (b) the rate (rounded upward, if necessary, to the nearest whole multiple of 1/16th of one percent per annum) for deposits in Dollars for a period approximating such Purchase Period which appears on the Reuters Screen LIBO Page as of 11:00 A.M. (London time) on the second Business Day before (and for value on) the first day of such Purchase Period, divided by the remainder of one minus the Eurodollar Reserve Percentage (expressed as a decimal) applicable during such Purchase Period. "Eurodollar Reserve Percentage" means, with respect to any Purchase Period for any Percentage Interest, the reserve percentage (rounded upwards, if necessary, to the nearest 1/16th of one percent per annum) applicable during such Purchase Period (or, if more than one such percentage shall be so applicable during such Purchase Period, the daily average of such percentages for those days in such Purchase Period during which any such percentages shall be in effect) under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for banks or other financial institutions subject to such regulations with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term equal to such Purchase Period. "Event of Termination" has the meaning assigned to that term in Section 7.01. "Excess Government Exposure" means, at any time, the excess (if any) of (x) the aggregate Outstanding Balance of Receivables owed by Obligors that are governments or governmental subdivisions or agencies, over (y) 6.0% of the aggregate Purchase Limit at such time. "Excess Reported Group Exposure" means at any time the amount computed as follows: (i) for each Reported Group, determine the excess (if any) of (x) the aggregate Outstanding Balance of Eligible Receivables owed by Obligors in such Reported Group as of the most recent Cut-Off Date, over (y) the Concentration Limit for such Reported Group, determined as of such Cut-Off Date, and (ii) determine the sum of the amounts determined pursuant to clause (i) with respect to all Reported Groups, which sum shall be the "Excess Reported Group Exposure". "Excluded Representations" means (i) the last sentence of Section 5.1(e) of the Purchase and Sale Agreement and (ii) the last sentence of Section 5.1(f) of the Purchase and Sale Agreement. "Excluded Taxes" means, with respect to any Person, (i) net income taxes imposed on such Person by the United States, (ii) net income and franchise taxes imposed on such Person by the jurisdiction in which such Person is organized or maintains its booking office for the transactions contemplated hereby, or (iii) net income or franchise taxes imposed on such Person by a political subdivision of the jurisdictions referred to in clause (ii). "Federal Funds Rate" means, for any period, a fluctuating per annum interest rate for each day during such period equal to the weighted average of the rates quoted on overnight Federal funds transactions with UBS for such day by three Federal funds brokers of recognized standing selected by it. "GAAP" means, at any particular time, generally accepted accounting principles as in effect at such time in the United States of America, consistently applied. "General Trial Balance" means the accounts receivable trial balance computer tape, containing (i) a list of Obligors and the invoiced Receivables respectively owed by such Obligors, (ii) the aged Outstanding Balances of each such Obligor's Receivables, determined as of the most recent Cut-Off Date, and (iii) the aggregate balances of Unbilled Receivables owed by Obligors, as allocated to WMECO's residential, commercial or industrial classes and determined as of the most recent Cut-Off Date, in substantially the form delivered by WMECO to the Agent in connection with its September 11, 1996 Receivables Purchase and Sale Agreement. "Gross Charge-Off Ratio" means, on any day, the ratio (expressed as a percentage) determined by dividing (i) the Outstanding Balance of Receivables which, consistent with the Credit and Collection Policy, were or should have been written off the books of WMECO or the Seller as uncollectible during the month ending on the most recent Cut-Off Date, by (ii) the amount of Collections (other than deemed Collections) received during such month. "Gross Loss Proxy" means, on any day, the sum of (i) the Outstanding Balance of Receivables which, consistent with the Credit and Collection Policy, were or should have been written off the books of WMECO or the Seller as uncollectible during the month ending on the most recent Cut-Off Date plus (ii) the Change in Late Stage Delinquencies as of such Cut-Off Date. "Gross Loss Proxy Ratio" means, on any day, the ratio (expressed as a percentage) determined by dividing (i) the Gross Loss Proxy calculated as of the most recent Cut-Off Date, by (ii) the Outstanding Balance of Receivables billed during the month ending five months prior to such Cut-Off Date. "Hardship Receivable" means a Receivable with respect to an account which WMECO has classified as "hardship" in accordance with the Credit and Collection Policy. "Holder" has the meaning assigned thereto in Section 10.12(b). "Inactive Receivable" means a Receivable owed by an Obligor whose electrical service has been discontinued by WMECO and to which WMECO has rendered a final bill. "Independent Director" means an individual who (i) is not a stockholder (whether direct, indirect or beneficial), customer or supplier of WMECO or any of its affiliates; (ii) is not a director, officer, employee, affiliate or associate of WMECO or any of its affiliates (other than the Seller and a special purpose, bankruptcy remote subsidiary of The Connecticut Light and Power Company formed (or to be formed) in connection with the securitization of that company's trade receivables); (iii) is not a person related to any person referred to in clauses (i) or (ii); (iv) is not a trustee, conservator or receiver for any affiliates of WMECO; and (v) has (A) prior experience as an independent director for a corporation whose charter documents required the unanimous consent of all independent directors thereof before such corporation could consent to the institution of bankruptcy or insolvency proceedings against it or could file a petition seeking relief under any applicable federal or state law relating to bankruptcy and (B) at least three years of employment experience with one or more entities that provide, in the ordinary course of their respective businesses, advisory, management or placement services to issuers of securitization or structured finance instruments, agreements or securities. "Investor Report" means a report, in substantially the form of Exhibit D, furnished by the Servicer to the Agent for each Owner pursuant to Section 6.07. "Issuer" means any Person whose principal business consists of issuing commercial paper notes, medium-term promissory notes or other securities (including, without limitation, the Commercial Paper Notes) to fund its acquisition and maintenance of receivables, accounts, instruments, chattel paper, general intangibles and other similar assets. "Liquidation Servicing Fee" means, for any Percentage Interest at any time, an amount equal to the product of (i) the Purchase Price of such Percentage Interest and (ii) the product of (A) the highest percentage per annum of the Servicing Fee set forth in Section 2.10(b) and (B) a fraction, the numerator of which equals 2.0 times the Weighted Average Maturity and the denominator of which equals 360. "Liquidation Yield" means, for any Percentage Interest on any date, an amount equal to the product of (i) the Purchase Price of such Percentage Interest and (ii) the product of (A) highest Yield Rate applicable to any Percentage Interest (or, if higher, the Base Rate for such Percentage Interest) on such date and (B) a fraction, the numerator of which equals 2.0 times the Weighted Average Maturity and the denominator of which equals 360 (or, if using the Base Rate as the applicable Yield Rate, 365 or (in the case of a leap year) 366). "Liquidity Agreement" means any credit agreement, loan agreement, stand-by credit agreement or loan agreement, letter of credit facility or other instrument, document or agreement providing for loans, advances or other extensions of credit from certain Liquidity Lenders parties thereto to the Purchaser to either provide liquidity support for the Commercial Paper Notes issued by the Purchaser in connection with this Agreement or to fund the acquisition and/or maintenance by the Purchaser of Percentage Interests. "Liquidity Facility Termination Date" means any day upon which the commitments of the Liquidity Lenders to make loans, advances or other extensions of credit to the Purchaser under or pursuant to any Liquidity Agreement to which such Liquidity Lenders are parties shall be terminated for any reason (whether at the stated maturity or earlier) or shall otherwise cease to be in full force and effect. "Liquidity Lender" means any of the financial institutions from time to time parties to, and extending credit commitments to the Purchaser under, any Liquidity Agreement. "Liquidity Shortfall Event" means the occurrence of any of the following events: (i) any Liquidity Lender defaults on, or is unable for any reason whatsoever to perform in respect of, its commitment under the Liquidity Agreement to which it is a party; or (ii) any Liquidity Lender shall cease to be rated at least A-1+ by Standard & Poor's and P-1 by Moody's, and such downgraded Liquidity Lender has not been replaced or substituted by a Replacement Bank within 30 days after such Liquidity Lender was so downgraded. "Lock-Box Account" means an account maintained at a Lock-Box Bank for the purpose of receiving Collections in accordance with Section 6.08. "Lock-Box Bank" means any of the banks or other financial institutions designated by the Agent, following an Event of Termination, to receive payments in respect of Receivables. "Loss Horizon Ratio" means the ratio (expressed as a percentage) computed as of each Cut-Off Date by dividing (i) the sum of (A) the Outstanding Balance of Receivables billed during the three months ending on such Cut-Off Date plus (B) the product of 0.50 times the Outstanding Balance of Receivables billed during the month ending three months prior to such Cut-Off Date, by (ii) the Outstanding Balance of Eligible Receivables as of such Cut-Off Date. "Loss Reserve" means, at any time for any Percentage Interest, an amount equal to LRP x (PP + YR) --------- 1 - LRP where: LRP = the Loss Reserve Percentage for such Percentage Interest at such time. PP = the Purchase Price of such Percentage Interest at such time. YR = the Yield Reserve for such Percentage Interest at such time. "Loss Reserve Percentage" means, on any day for any Percentage Interest, the greatest of (i) the product of (A) the Gross Loss Proxy Ratio calculated as of the most recent Cut-Off Date, times (B) the Loss Horizon Ratio as of the most recent Cut-Off Date, (C) times 2.00, (ii) five times the percentage which the Concentration Limit (without giving effect to any Special Concentration Limit) bears to the then aggregate Purchase Price of all Percentage Interests and (iii) 10%. "Loss-to-Liquidation Ratio" means the ratio (expressed as a percentage) computed as of each Cut-Off Date by dividing (i) the aggregate Outstanding Balance of all Receivables that became Defaulted Receivables during the month ending on such Cut-Off Date, by (ii) the aggregate amount of Collections actually received during such month. "Material Adverse Effect" means a material adverse effect on (i) the operations of the Seller, WMECO or the Servicer, (ii) the ability of the Seller, WMECO or the Servicer to perform its obligations hereunder or under any other Transaction Document or (iii) the credit quality, enforceability or collectibility of the Receivables. "Moody's" means Moody's Investors Service, Inc. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA which is or was at any time during the current year or the immediately preceding five years contributed to by the Seller, WMECO or any ERISA Affiliate on behalf of its employees. "Net Receivables Pool Balance" means, at any time, (i) the aggregate Outstanding Balance of all Eligible Receivables at such time, minus (ii) the Excess Reported Group Exposure, minus (iii) the Excess Government Exposure. "Obligor" means a Person obligated to make payments to WMECO, which obligation arises in connection with WMECO's sale of electricity and/or related services. "Original Balance" means, for any Receivable, the original principal balance of such Receivable at its creation. "Outstanding Balance" means for any Receivable at any time, the then outstanding principal balance thereof; provided, that the Outstanding Balance of any Unbilled Receivables shall be calculated in accordance with Exhibit B. "Owner" means, with respect to each Percentage Interest, upon its purchase, the Purchaser; provided, however, that upon any assignment thereof pursuant to Section 10.04, the assignee shall be the Owner of such Percentage Interest (or portion thereof) so assigned, and the assignor shall cease to be the Owner of such Percentage Interest (or portion thereof) so assigned. "Parent" means Northeast Utilities, a Massachusetts business trust. "Payment Center" means a retail outlet or other company that accepts payments from Obligors in respect of Receivables, provided that (i) such outlet or entity has been instructed to deposit such payments on each day to an account of a payment intermediary, and (ii) such payment intermediary shall have agreed to wire such payments on each day to the Collection Account (and to no other account). "Percentage Interest" means, at any time, an undivided percentage ownership interest at such time in (i) each and every Receivable existing on the date such Percentage Interest shall have been purchased and in each and every Receivable existing or arising after such date but prior to the Termination Date, (ii) all Related Security with respect to each such Receivable, (iii) all Collections with respect to each such Receivable, (iv) the Seller's rights and remedies under the Purchase and Sale Agreement, and (v) all proceeds of any of the foregoing. Such undivided percentage interest for such Percentage Interest shall be computed by dividing the Utilized Amount of such Percentage Interest at such time by the Net Receivables Pool Balance at such time. Each Percentage Interest shall be determined from time to time pursuant to the provisions of Section 2.03(a). "Person" means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, bank, financial institution, trust, unincorporated association, joint venture, government (or any agency or political subdivision thereof) or other entity. "Prime Rate" means the per annum rate of interest announced publicly by UBS in New York, New York as its prime rate, such rate to change as and when such announced rate changes. The Prime Rate is not intended to be the lowest rate of interest charged by UBS in connection with extensions of credit to debtors. "Public Disclosure Documents" means (i) WMECO's Annual Report on Form 10-K for the year ending December 31, 1996, (ii) WMECO's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and (iii) Parent's reports on Form 8-K dated January 17, 1997, January 20, 1997, February 20, 1997, February 28, 1997, March 19, 1997 and April 11, 1997. "Purchase and Sale Agreement" means the Purchase and Sale Agreement, dated as of May 22, 1997, among the Seller and WMECO, as the same may be amended, supplemented or modified from time to time with the prior written consent of the Agent. "Purchase Limit" means at any time $40,000,000, as such amount may be reduced pursuant to Section 2.02 or Section 2.06(a); provided, however, that at all times on and after the Termination Date, the "Purchase Limit" shall mean the aggregate Purchase Price for all Percentage Interests. "Purchase Period" means, with respect to any Percentage Interest, a period selected by the Agent, after consultation with the Owner(s) of such Percentage Interest; provided, however, that: (a) with respect to any Percentage Interest the purchase or maintenance of which is funded other than through the issuance of Commercial Paper Notes, the Purchase Period shall be any number of days up to (and including) 29 or one, two or three months; and (b) with respect to any Percentage Interest the purchase or maintenance of which is funded through the issuance of Commercial Paper Notes, the Purchase Period shall be any number of days up to (and including) 270; Each Purchase Period in respect of any Percentage Interest shall commence, initially, on the date of purchase by the Purchaser of such Percentage Interest and thereafter on the last day of the immediately preceding Purchase Period. Notwithstanding anything contained herein to the contrary (i) any Purchase Period which would otherwise end on a day which is not a Business Day shall be extended to the immediately succeeding Business Day; provided, however, that if Yield in respect of such Percentage Interest allocated to such Purchase Period is computed by reference to the Eurodollar Rate and such succeeding Business Day is in the next calendar month, then such Purchase Period shall end on the immediately preceding Business Day, (ii) any Purchase Period which commences before the Termination Date and would otherwise end on a date occurring after the Termination Date shall end on the Termination Date, (iii) any Purchase Period as to which Yield accrues at the CP Rate may be terminated at the election of, and upon notice thereof to the Seller and each Owner of the Percentage Interests allocated thereto by, the Agent at any time upon the occurrence and during the continuance of any CP Disruption Event, and (iv) whenever any Purchase Period as to which Yield accrues at the Eurodollar Rate commences on the last Business Day in a month or on a day for which there is no numerical corresponding day in the month in which such Purchase Period ends, such Purchase Period shall end on the last Business Day of the month in which such Purchase Period ends. "Purchase Price" of any Percentage Interest means the amount paid to the Seller for such Percentage Interest at the time of its acquisition by a Purchaser pursuant to Section 2.01, reduced from time to time by Collections received and distributed to the Owners on account of such Purchase Price pursuant to Sections 2.06 or 2.07 or the last sentence of Section 2.08; provided, however, that such Purchase Price of such Percentage Interest shall not be reduced by any distribution of any portion of Collections if at any time such distribution is rescinded or must be returned for any reason. "Purchaser" means Monte Rosa Capital Corporation or, upon the assignment of all of its rights, title, interests, obligations and liabilities as the Purchaser hereunder in accordance with Section 10.04 (or, in the case of any subsequent Purchaser, upon the assignment of all of such subsequent Purchaser's rights, title, interests, obligations and liabilities as the Purchaser hereunder in accordance with Section 10.04), such other Issuer to which such assignment was so made; provided, however, that upon any such assignment by any Issuer (including Monte Rosa Capital Corporation) of all of its rights, title, interests, obligations and liabilities as the Purchaser hereunder, such Issuer shall cease to be the Purchaser hereunder. "Receivable" has the meaning set forth in Appendix A to the Purchase and Sale Agreement. "Records" means all documents, books, records and other information (including without limitation, computer programs, tapes, disks, punch cards, data processing software and related property and rights) maintained by the Seller, WMECO or the Servicer with respect to the Receivables and the related Obligors. "Reinvested Collections" has the meaning assigned to that term in Section 2.05. "Reinvestment Termination Date" means that Business Day which the Seller designates as the Reinvestment Termination Date by notice to the Agent at least three Business Days prior to such Business Day or, if any of the conditions precedent in Section 3.02 are not satisfied, that Business Day which the Agent designates as the Reinvestment Termination Date by notice to the Seller at least one Business Day prior to such Business Day. "Related Security" means with respect to any Receivable: (i) all of the Seller's right, title and interest in the Purchase and Sale Agreement and under each other Transaction Document; (ii) all security interests or liens and the Seller's interest in the property subject thereto from time to time purporting to secure payment of such Receivable, whether pursuant to a contract related to such Receivable or otherwise; (iii) the assignment to the Agent, for the benefit of any Owner, of all UCC financing statements covering any collateral securing payment of such Receivable; (iv) all guarantees, letters of credit, indemnities, warranties, insurance policies and proceeds and premium refunds thereof and other agreements or arrangements of whatever character from time to time supporting or securing payment of such Receivable whether pursuant to a contract related to such Receivable or otherwise; (v) all Records; and (vi) all proceeds of the foregoing. "Replacement Bank" has the meaning assigned to that term in Section 2.06(a). "Reported Group" means, on any Cut-Off Date, the Obligors identified by the following process, as described in the most recent Investor Report: (i) in the Investor Reports delivered in each July and January of each year, WMECO shall indicate each of the ten Obligors that, as of the preceding April 30 or October 31, as the case may be, were billed for the highest aggregate amounts of Receivables during the twelve month period ending on such date; (ii) for each Obligor described in clause (i), WMECO shall, to the best of its knowledge and ability in accordance with its practices and procedures in effect on the date hereof, identify those of such Obligor's Affiliates that are also Obligors (determined as of such Cut-Off Date); and (iii) group each Obligor described in clause (i) with its Affiliates described in clause (ii), each of which groups shall collectively constitute a "Reported Group". "Required Rating" means at any time BB by Standard & Poor's and Ba2 by Moody's. "Required Owners" means, at any time, those Owners owning Percentage Interests, the aggregate outstanding Purchase Price of which exceeds 50% of the aggregate outstanding Purchase Price of all Percentage Interests outstanding hereunder. "Restricted Payments" has the meaning set forth in Section 5.01(j). "Reuters Screen LIBO Page" means the display page so designated as page "LIBO" on the Reuters Monitor Money Rates Service (or such other page as may replace the LIBO page on such service for the purpose of displaying London interbank offered rates of major banks). "Scheduled Termination Date" means September 4, 2001. "Security Agreement" means that certain Collateral Trust and Security Agreement of even date herewith among the Purchaser and the Collateral Trustee, as the same may be amended, supplemented or otherwise modified from time to time. "Security Deposit" means a deposit of money by an Obligor with (or for the account of) WMECO to secure the payment of the Receivables owed by such Obligor. "Seller Confidential Information" means information regarding the operations or financial condition of Parent, WMECO, the Seller or their respective subsidiaries (including, without limitation, information regarding the Obligors and the Receivables). "Servicer" means at any time the Person then authorized pursuant to Article VI to service, administer and collect Receivables. "Servicer Default" means the Agent, in its reasonable discretion, determines that an event has occurred that would reasonably materially and adversely affect (i) the Servicer's operations, (ii) the Servicer's ability to service the Receivables or (iii) the credit quality, collectibility or enforceability of the Receivables. "Servicing Fee" means a fee equal to one percent (1.0%) per annum of the average daily amount of the aggregate Outstanding Balance of the Receivables (as determined by the Agent). Such fee shall be allocated among the Percentage Interests on each day proportionately according to the Purchase Price for each Percentage Interest. Such fee shall be payable for the period from the date hereof until the latest of (i) the Termination Date, (ii) the date on which all Percentage Interests are reduced to zero, payable on the last day of each Purchase Period for such Percentage Interest, or (iii) the date on which all Receivables sold or contributed under the Purchase and Sale Agreement have been collected or written off; provided, however, that, upon three Business Days' notice to the Agent, the Servicer (if other than WMECO or an Affiliate of WMECO) may elect to be paid, as such fee, another percentage per annum of the average daily amount of Purchase Price of each Percentage Interest, but in no event in excess of 110% of the costs and expenses referred to in Section 6.03. "Servicing Fee Reserve" means, with respect to any Percentage Interest at any time, the sum of (i) the Liquidation Servicing Fee for such Percentage Interest at such time, plus (ii) the unpaid Servicing Fee relating to such Percentage Interest accrued to such time. "Servicing Fee Reserve Percentage" means, on any day for any Percentage Interest, the ratio (expressed as a percentage) computed by dividing (i) the Servicing Fee Reserve related to such Percentage Interest by (ii) the Purchase Price for such Percentage Interest. "Settlement Date" means, with respect to any Purchase Period for any Percentage Interest, the last day of such Purchase Period. "Special Concentration Limit" has the meaning assigned to that term in the definition of "Concentration Limit". "Standard & Poor's" means Standard & Poor's Rating Services, a division of The McGraw-Hill Companies, Inc. "Subject Party" has the meaning assigned thereto in Section 10.12(b). "Termination Date" means the earliest of (i) the Reinvestment Termination Date, (ii) the date of termination of the Purchase Limit pursuant to Section 2.02, (iii) the date of the declaration or automatic occurrence of the Termination Date pursuant to Section 7.01, (iv) the occurrence of a Liquidity Facility Termination Date, and (v) the Scheduled Termination Date. "Total Reserve Percentage" means, on any day for any Percentage Interest, the sum of (i) the Loss Reserve Percentage for such Percentage Interest at such time, (ii) the Dilution Reserve Percentage for such Percentage Interest at such time, (iii) the Yield Reserve Percentage for such Percentage Interest at such time and (iv) the Servicing Fee Reserve Percentage for such Percentage Interest at such time. "Total Reserves" means, at any time for any Percentage Interest, an amount equal to TRP x (PP + YR) --------- 1 - LRP where: TRP = the Total Reserve Percentage for such Percentage Interest at such time. LRP = the Loss Reserve Percentage for such Percentage Interest at such time. PP = the Purchase Price of such Percentage Interest at such time. YR = the Yield Reserve for such Percentage Interest at such time. "Transaction Documents" has the meaning set forth in Appendix A to the Purchase and Sale Agreement. "Transition Event" means the occurrence of any of the following: (i) an Event of Termination, (ii) the reduction of the Coverage Ratio to below 102%, (iii) the Termination Date, and (iv) WMECO's senior secured debt shall be rated BB or lower by Standard & Poor's or Ba2 or lower by Moody's. "UCC" means the Uniform Commercial Code as from time to time in effect in the specified jurisdiction. "Unbilled Receivable" means a bona fide, enforceable obligation of a customer for the customer's metered use of electricity that will be billed by WMECO or the Servicer during WMECO's next monthly billing cycle for that customer. "United States" means the United States of America. "Unmatured Termination Event" means an event which, with the giving of notice or lapse of time or both, will become an Event of Termination. "Utilized Amount" means, for any Percentage Interest at any time, the sum of (i) the aggregate Purchase Price of such Percentage Interest at such time and (ii) the Total Reserves for such Percentage Interest at such time. "Weighted Average Maturity" means on any day, the number of days equal to (i) 30.0 times (ii) the average of the aggregate Outstanding Balances of Receivables on the two most recent Cut-Off Dates, divided by (iii) Newly Generated Receivables. For purposes of this definition, "Newly Generated Receivables" means, on any day, the amount equal to the sum of (i) the Outstanding Balance of Receivables billed during the month ending on the most recent Cut-Off Date, plus (ii) the difference between (A) the Outstanding Balance of Unbilled Receivables as of the most recent Cut-Off Date minus (B) the Outstanding Balance of Unbilled Receivables as of the second most recent Cut-Off Date. "WMECO" means Western Massachusetts Electric Company, a Massachusetts corporation, and its permitted successors and assigns. "WMECO Obligations" has the meaning set forth in Appendix A to the Purchase and Sale Agreement. "WRC Purchase Price" has the meaning set forth in Appendix A to the Purchase and Sale Agreement. "Yield" means for each Percentage Interest during any Purchase Period, the product of YRT x PP x ED --- DIY where: PP = the Purchase Price of such Percentage Interest during such Purchase Period, ED = the actual number of days elapsed during such Purchase Period, YRT = the Yield Rate for such Percentage Interest for such Purchase Period, and DIY = the number of days in the year for purposes of calculating Yield, which number shall be 360 in all cases other than if the applicable Yield Rate for such Percentage Interest shall be the Base Rate, in which case, such number shall be 365 or, in the case of a leap year, 366, and provided, however, that (i) no provision of this Agreement shall require the payment or permit the collection of Yield in excess of the maximum permitted by applicable law and (ii) Yield for any Percentage Interest shall not be considered paid by any distribution if at any time such distribution is rescinded or must otherwise be returned for any reason. "Yield Rate" for any Purchase Period for any Percentage Interest means: (i) to the extent the purchase or the maintenance of such Percentage Interest is funded other than through the issuance of Commercial Paper Notes, a rate equal to the applicable Alternative Rate for such Purchase Period, and (ii) to the extent the purchase or maintenance of such Percentage Interest is funded through the issuance of Commercial Paper Notes, a rate equal to the CP Rate, as applicable, for such Purchase Period; provided, however, that notwithstanding anything contained herein to the contrary, upon the assignment of any Percentage Interest (or any portion thereof) by the Purchaser to any other Owner, the Yield Rate at which such Percentage Interest shall thereafter accrue Yield shall be the Alternative Rate. "Yield Reserve" means, for any Percentage Interest at any time, the sum of (i) the Liquidation Yield for such Percentage Interest, and (ii) the aggregate amount of all Yield accrued and to accrue during any applicable Purchase Period (as determined by the Agent in good faith) with respect to such Percentage Interest. "Yield Reserve Percentage" means, on any day for any percentage Interest, the ratio (expressed as a percentage) computed by dividing (i) the Yield Reserve related to such Percentage Interest by (ii) the Purchase Price for such Percentage Interest. SECTION 1.02. Other Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. All terms used in Article 9 of the UCC in the State of New York, and not specifically defined herein, are used herein as defined in such Article 9. SECTION 1.03. Computation of Time Periods. Unless otherwise stated in this Agreement, in the computation of a period of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding." ARTICLE II THE RECEIVABLES FACILITY SECTION 2.01. Purchases and Maintenance of Percentage Interests. (a) On the terms and conditions hereinafter set forth, the Purchaser hereby agrees to purchase Percentage Interests from the Seller from time to time during the period from the date hereof until (but not including) the Termination Date; provided, however, that nothing in this Agreement shall be deemed or construed as a commitment by the Purchaser or any Owner to fund the purchase or maintenance of Percentage Interests through the issuance of Commercial Paper Notes, and it is hereby expressly acknowledged and agreed that such funding is, and shall continue to be, wholly discretionary on the part of the Purchaser and all applicable Owners. Under no circumstances shall the Purchaser make any such purchase if, after giving effect to such purchase, the aggregate Purchase Price of all Percentage Interests hereunder would exceed the Purchase Limit. (b) Each purchase of a Percentage Interest hereunder shall be made on notice from the Seller to the Agent (who shall notify the Purchaser) given not later than 11:00 A.M. (New York City time) on the second Business Day before the date of such requested purchase. Each such notice of a proposed purchase of a Percentage Interest shall be by telephone, telecopier, telex or cable and shall specify the following with respect to each such Percentage Interest: (A) the aggregate initial Purchase Price of the Percentage Interest so requested to be purchased, which Purchase Price shall not be less than $1,000,000 and shall be an integral multiple of $100,000; (B) the date of such proposed purchase (which day must be a Business Day); and (C) whether the Alternative Rate or the CP Rate is requested with respect to such Percentage Interest. Any notice of a requested purchase as set forth above shall become effective and shall be binding on the Seller when given by the Seller. Promptly upon its receipt of such notice from the Agent, the Purchaser shall notify the Agent and the Seller as to whether, in the case of any requested purchase to be funded through the issuance of Commercial Paper, it is willing to make such a purchase. (c) On the date of such purchase, the Purchaser shall, upon the satisfaction of the applicable conditions set forth in Article III, make available to the Seller in same day funds, at Fleet National Bank, Hartford, Connecticut, ABA 011500010, Account 9370211519, the aggregate Purchase Price of such Percentage Interest. The Purchaser shall allocate such Purchase Price to such Purchase Periods as it shall select in accordance with the terms of this Agreement. (d) At least two (2) Business Days prior to the last day of each Purchase Period, the Seller shall notify the Agent (who shall then notify the Purchaser) as to the following with respect to the succeeding allocation of the Purchase Price allocated to such Purchase Period then ending, (A) whether the Alternative Rate or the CP Rate is requested with respect to such Purchase Price and (B) if more than one rate is requested, the requested allocation of the Purchase Price as among such rates; provided that the Purchase Price allocated to each rate must be in a minimum amount of $1,000,000 and in integral multiples of $100,000, except for any such Purchase Price allocated to the Base Rate, which Purchase Price may be allocated thereto in any amount. Such notice shall be given by telephone, telecopier, telex or cable. If and to the extent the Purchaser elects to make such Yield Rate(s) available to the Seller (such election to be submitted to the Agent and the Seller, then, upon the expiration of the then current Purchase Period, the Purchaser shall reallocate the Purchase Price previously allocated to such Purchase Period to such other Purchase Periods as the Agent shall select in accordance with the terms hereof, each accruing Yield at the applicable Yield Rate requested in accordance with this Section 2.01(d). Notwithstanding anything contained in this Section 2.01(d) to the contrary, in the event that: (i) the Seller shall fail to give such notice with respect to any Purchase Period then ending; or (ii) in any case where the requested Yield Rate is the CP Rate, the Purchaser elects not to make the requested Yield Rate available with respect to the Purchase Price allocated to such Purchase Period then ending (such election to be promptly submitted to the Agent and the Seller), and, in any such case, the Purchaser and Seller shall fail to otherwise agree before the last day of such Purchase Period, then the Yield Rate to be applicable to the Purchase Price allocated to such Purchase Period then ending shall be either the CP Rate or the Alternative Rate, as the relevant Owner of such affected Percentage Interest may elect, and such Purchase Price shall be allocated to such Purchase Periods as shall be selected by the Agent in accordance with the terms hereof, but in any event not to exceed five days. (e) If at any time after the occurrence and during the continuance of any CP Disruption Event, the Agent elects to terminate any Purchase Period accruing Yield at the CP Rate, the Purchase Price allocated to such terminated Purchase Period shall be allocated to a new Purchase Period to be designated by the Agent (but in no event to exceed 5 days) and shall accrue Yield at the Alternative Rate. (f) The Purchaser shall notify the Agent and the Seller, promptly after the commencement of any Purchase Period of the amount of the Purchase Price allocated to such Purchase Period, the duration of such Purchase Period, and the Yield Rate applicable to such Purchase Period. SECTION 2.02. Termination or Reduction of the Purchase Limit. The Seller may, upon at least five Business Days' notice to the Agent, terminate in whole or reduce in part the unused portion of the Purchase Limit; provided, however, that each partial reduction of the Purchase Limit shall be in an aggregate amount equal to $1,000,000 or an integral multiple thereof. SECTION 2.03. Percentage Interests. (a) Each Percentage Interest shall be initially computed as of the opening of business of the Servicer on the date of its purchase. Thereafter until the Termination Date, such Percentage Interest shall be automatically recomputed as of (i) the opening of business of the Servicer on any day on which the aggregate Purchase Price of all Percentage Interests hereunder is increased and (ii) the close of business of the Servicer on each day. A Percentage Interest shall become zero only when the Purchase Price thereof, all Yield thereon, all fees and other amounts owing to the Owner thereof in connection with this Agreement and all Servicing Fees in respect thereof shall have been paid in full. Each Percentage Interest shall remain constant from the time as of which any such computation or recomputation is made until the time as of which the next such recomputation, if any, shall be made. From and after the Termination Date, each Percentage Interest shall remain constant until it becomes zero as set forth in the third sentence of this Section 2.03(a). (b) The Agent shall maintain books and records in which shall be recorded (i) the date and amount of each purchase of a Percentage Interest hereunder and the Owners thereof, (ii) the date and amount of and parties to any assignment of rights and obligations hereunder pursuant to Section 10.04, (iii) the amount of any Yield, fees or other amount due and payable or to become due from the Seller or WMECO to the Agent, any Owner or the Servicer hereunder and (iv) the amount and date of any reduction in the Purchase Price of any Percentage Interest. The entries made in the Agent's books and records as described in this Section 2.03(b) shall be conclusive and binding for all purposes absent manifest error. SECTION 2.04. Selection of Purchase Periods. Except as expressly provided otherwise in this Agreement, the Agent, after consultation with the Purchaser or the applicable Owner(s), shall designate the duration of all Purchase Periods (subject to the restrictions set forth in the definition of "Purchase Period" set forth in Section 1.01) to which any Purchase Price is to be allocated hereunder and shall allocate Purchase Price accruing Yield on the same basis (i.e., at the Alternative Rate or the CP Rate) to such Purchase Periods in such proportions as the Purchaser or the applicable Owner(s), as the case may be, shall, in their sole discretion, direct. Notwithstanding anything in this Agreement to the contrary, the outstanding Purchase Price of all Percentage Interests shall at all times be allocated to a Purchase Period. SECTION 2.05. Non-Liquidation Settlement Procedures. On each day prior to the Termination Date, the Servicer shall: out of Collections in respect of each Percentage Interest received on such day, (i) set aside on its books and hold in trust for the Owner of such Percentage Interest an amount equal to the Yield and Servicing Fee accrued through such day for such Percentage Interest and not so previously set aside, (ii) set aside on its books and pay to the Agent and the Owners amounts then due to them hereunder including without limitation Section 10.07 that have not been paid and (iii) subject to Section 3.02, reinvest the remainder of such Collections (such reinvested portion of Collections being "Reinvested Collections"), for the benefit of such Owner, by recomputation of such Percentage Interest pursuant to Section 2.03 as of the end of such day and the payment of such remainder to the Seller or such other Person as the Seller shall direct; provided that if for any reason any portion of such remaining Collections cannot be so reinvested (including, without limitation, the inability to satisfy the conditions in Section 3.02) or are not to be reinvested pursuant to Section 2.06(b), the Servicer shall set aside such portion on its books and hold such portion in trust for the Owner of such Percentage Interest. The recomputed Percentage Interest shall constitute the percentage ownership interest in the Receivables on such day held by such Owner. On each Settlement Date in respect of each Purchase Period for each Percentage Interest to occur prior to the Termination Date (and, if the Agent shall so request following a Transition Event, on each Business Day during such Purchase Period), the Servicer shall deposit to the Agent's Account the amounts set aside as described in the first sentence of this Section 2.05 other than (unless the Agent shall specify otherwise) amounts set aside for Servicing Fee (which amounts the Servicer shall retain for its own account). It is understood that funds reinvested as provided in clause (iii) of such sentence shall not be so deposited. Upon receipt of such funds by the Agent, the Agent shall distribute them first, to the Owner of such Percentage Interest in full payment of the accrued Yield for such Percentage Interest and any other amounts then due to such Owner hereunder, second, to the Servicer in full payment of the accrued Servicing Fee payable with respect to such Percentage Interest, and third to the partial liquidation of the Owners' Percentage Interests as contemplated by Section 2.06. SECTION 2.06. Liquidity Shortfall Event; Partial Liquidations. (a) Immediately upon the occurrence of a Liquidity Shortfall Event, the Purchase Limit hereunder shall be automatically reduced by (1) in the case of a Liquidity Shortfall Event of the type described in clause (i) of the definition thereof, the aggregate amount of any such defaulting or downgraded Liquidity Lender's unused commitment under the Liquidity Agreements to which it is a party; provided, however, that with respect to any such Liquidity Shortfall Event of the type described in clause (i) of the definition thereof, if such defaulting Liquidity Lender is replaced by or is substituted with another bank or other financial institution acceptable to the Purchaser (a "Replacement Bank") under the applicable Liquidity Agreement(s) within 30 days after the occurrence of such a Liquidity Shortfall Event, then the Purchase Limit may be reinstated to the extent of such Replacement Bank's unused commitment under such Liquidity Agreement (but not to exceed the original Purchase Limit hereunder); and provided, further, that notwithstanding anything contained in this Agreement to the contrary, the Purchaser shall have no obligation to replace or substitute any such defaulting or downgraded Liquidity Lender with a Replacement Bank under any Liquidity Agreement, or (2) in the case of a Liquidity Shortfall Event of the type described in clause (ii) of the definition thereof, the amount of the liquidity deficiency determined by the Agent to exist as of such date as a result of such Liquidity Shortfall Event. In addition, within 30 days after the occurrence of any such Liquidity Shortfall Event, the Seller, either through the payment of such amount to the Agent for deposit in the Agent's Account or through a partial liquidation in accordance with Section 2.06(b), shall reduce the outstanding Purchase Price of all Percentage Interests (to be determined after the occurrence of such Liquidity Shortfall Event) by such an amount, if any, as may be necessary to reduce the aggregate outstanding Purchase Price of all Percentage Interests to an amount which is equal to or less than the Purchase Limit as so reduced. (b) The Seller shall be entitled at any time during the term of this Agreement to request a partial liquidation of the Percentage Interests such that the aggregate outstanding Purchase Price of all Percentage Interests shall be reduced to an amount designated by the Seller in such request. Any such partial liquidation shall be conducted by remitting Collections that are not Reinvested Collections to the Agent in accordance with the terms and provisions to be mutually acceptable to the Servicer, the Agent, the Required Owners and the Collateral Trustee. (c) If on any day the Coverage Ratio is less than 102%, the Seller (either through a payment to the Agent for deposit in the Agent's Account or through a partial liquidation in accordance with Section 2.06(b)), shall make the payment required to be made pursuant to the last sentence of Section 2.08. SECTION 2.07. Liquidation Settlement Procedures. On the Termination Date and on each day thereafter, the Servicer shall set aside and hold in trust for each Owner of each Percentage Interest, the Collections in respect of such Percentage Interest received on such day. On each Settlement Date in respect of each Purchase Period for each Percentage Interest to occur on or after the Termination Date (and, if both the Termination Date and a Transition Event shall have occurred and the Agent shall so request, on each other Business Day during such Purchase Period), the Servicer shall deposit to the Agent's Account the amounts set aside pursuant to the preceding sentence with respect to such Percentage Interest, together with any remaining amounts set aside pursuant to Section 2.05 prior to the Termination Date, but not to exceed the sum of (a) the accrued Yield for such Percentage Interest, (b) the Purchase Price of such Percentage Interest, (c) the aggregate of all other amounts owed by the Seller to the Owner of such Percentage Interest in connection with this Agreement and (d) the accrued Servicing Fee payable with respect to such Percentage Interest. The Agent shall distribute the funds so received to the Owner of such Percentage Interest first, in full payment of the accrued Yield for such Percentage Interest (including, without limitation, the Breakage Fee, if any for such Percentage Interest then due and payable pursuant to the terms hereof), second, to the extent a Servicer other than WMECO or an Affiliate of WMECO has been designated by the Agent, in payment of the accrued Servicing Fee payable to such Servicer with respect to such Percentage Interest, third, in reduction (to zero) of the Purchase Price of such Percentage Interest, and fourth, in full payment of any other amounts owed by the Seller or the Servicer to such Owner in connection with this Agreement. The Agent shall distribute any remaining funds to the Servicer (if WMECO or an Affiliate of WMECO) in payment of the accrued Servicing Fee payable to such Person with respect to such Percentage Interest. If there shall be insufficient funds on deposit for the Agent to distribute funds in payment in full of the aforementioned amounts, the Agent shall distribute funds, first, in payment of the accrued Yield for such Percentage Interest (but, in the case of the Breakage Fee for such Percentage Interest, only to the extent the Agent shall elect to pay such Breakage Fee from Collections attributable to such Percentage Interest under this Section 2.07 rather than from other funds pursuant to Section 2.11), second, to the extent a Servicer other than WMECO or an Affiliate of WMECO has been designated by the Agent, in payment of the accrued Servicing Fee payable to such Person with respect to such Percentage Interest, third, in reduction of Purchase Price of such Percentage Interest, fourth, in payment of other amounts payable to such Owner, and fifth, to the Servicer (if WMECO or an Affiliate of WMECO), in payment of the accrued Servicing Fee payable to such Person with respect to such Percentage Interest. Following the Collection Date, the Servicer shall pay to the Seller any remaining Collections set aside and held by the Servicer pursuant to the first sentence of this Section 2.07. SECTION 2.08. Deemed Collections of Receivables. If on any day the Outstanding Balance of any Receivable is either (a) reduced or adjusted as a result of any defective, rejected, returned, repossessed or foreclosed merchandise, any defective, disputed, or rejected services, any discount or any other adjustment made or performed by the Seller or any other Person (including, without limitation, those described in the definition of "Dilution Factors") or (b) reduced or cancelled as a result of a setoff in respect of any claim by the Obligor thereof against the Seller or any other Person (whether such claim arises out of the same or a related transaction or an unrelated transaction), the Seller shall be deemed to have received on such day a Collection of such Receivable in the amount of such reduction, cancellation or adjustment. If on any day any of the representations or warranties in Section 4.01(f) are no longer true with respect to a Receivable, the Seller shall be deemed to have received on such day a Collection of such Receivable in full. If on any day the representation and warranty in Section 4.01(g) is no longer true the Seller shall immediately pay to the Agent, for the benefit of the Owners, an amount sufficient to make such representation true and accurate. SECTION 2.09. Payments and Computations, Etc. (a) All amounts to be paid or deposited by the Seller, WMECO or the Servicer hereunder shall be paid or deposited in accordance with the terms hereof no later than 11:00 A.M. (New York City time) on the day when due in lawful money of the United States in immediately available funds to the Agent's Account. Each of the Seller, WMECO and the Servicer shall, to the extent permitted by law, pay to the Agent interest on all amounts not paid or deposited by it when due hereunder at 2.0% per annum above the Base Rate as then in effect, payable on demand; provided, however, that such interest rate shall not at any time exceed the maximum rate permitted by applicable law. Such interest shall be retained by the Agent except to the extent that such failure to make a timely payment or deposit has continued beyond the date for distribution by the Agent of such overdue amount to the Owner of a Percentage Interest, in which case such interest accruing after such date shall be for the account of, and distributed by the Agent to the Owners ratably in accordance with their respective interests in such overdue amount. All computations of interest and all computations of Yield, Liquidation Yield, and fees hereunder shall be made on the basis of a year of 360 days (other than with respect to any of the foregoing computations made with respect to the Base Rate, which computations shall be made on the basis of a 365 or, in the case of a leap year, 366-day year) for the actual number of days (including the first but excluding the last day) elapsed. (b) Whenever any payment hereunder shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of Yield, interest or any fee payable hereunder, as the case may be; provided, however, that, if such extension would cause payment of Yield on, or Purchase Price of, any Percentage Interest on which Yield accrues at the Eurodollar Rate to be made in the next following month, such payment shall be made on the next preceding Business Day. (c) If any purchase of a Percentage Interest requested by the Seller and approved by the Purchaser and the Agent pursuant to Section 2.01(b) or any selection of a subsequent Purchase Period and applicable Yield Rate for any Percentage Interest requested by the Seller and approved by the Agent pursuant to Section 2.01(d) is, for any reason whatsoever, not made or effectuated, as the case may be, on the date specified therefor, the Seller shall indemnify the relevant Owner against any loss, cost or expense incurred by such Owner, including, without limitation, any loss (including loss of anticipated profits, net of anticipated profits in the reemployment of such funds in the manner determined by such Owner), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Owner to fund or maintain such Percentage Interest during such Purchase Period. SECTION 2.10. Fees. (a) The Seller shall pay, or cause WMECO to pay, the Purchaser and the Agent certain fees in the amounts and on the dates set forth in a fee letter executed among the Seller, the Agent and the Purchaser. (b) In consideration of the purchase by the Owners of Percentage Interests as herein provided, the Seller agrees to pay the Servicing Fee and certain other amounts, including without limitation certain indemnities provided in Article IX, relating to the cost of servicing the Receivables; provided that such fee shall be payable only from Collections pursuant to, and subject to the priority of payment set forth in, Sections 2.05 and 2.07. SECTION 2.11. Breakage Fee and Indemnity. (a) In the event there shall occur a reduction of the Purchase Price of any Percentage Interest or the termination of the Purchase Period to which such Purchase Price was allocated, in either case, prior to the date upon which the applicable Purchase Period was originally scheduled to end, whether pursuant to Section 2.04, 2.06, 2.07, 2.08, 7.01 or otherwise, the Seller shall pay to the Agent, for the benefit of the Owner of such Percentage Interest, upon such Owner's demand therefor, a fee (the "Breakage Fee") equal to, in the case of any reduction of the Purchase Price allocated to a Purchase Period or the early termination of any such Purchase Period, the excess, if any, of (1) the Yield that would have accrued during the remainder of such Purchase Period subsequent to the date of such reduction or termination on that portion of the Purchase Price allocated to such Purchase Period which is so reduced or terminated early (such amount being the "Reduction Amount"), had not such reduction or termination occurred, over (2) the sum of (a) to the extent the Reduction Amount is allocated to another Purchase Period or Purchase Periods, the Yield actually accrued on that portion of the Reduction Amount so allocated during the remainder of such Purchase Period(s), and (b) to the extent the Reduction Amount is not allocated to another Purchase Period, the income, if any, actually received by such Owner from investing the portion of the Reduction Amount not so allocated. (b) In addition to paying the Breakage Fee as aforesaid, the Seller shall indemnify and hold the Owners harmless for all losses, costs, liabilities and expenses which such Owner may incur as a result of the early reduction of the Purchase Price allocated to any Purchase Period or the early termination of any such Purchase Period and in respect of which such Owner is not compensated by the payment of the applicable Breakage Fee in respect thereof. SECTION 2.12. Sharing of Payments, Etc. If any Owner shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of setoff, or otherwise) on account of Percentage Interests owned by it (other than pursuant to Section 2.10(a), 2.14, 2.15 or 9.01 and other than as a result of the differences in the timing of the applications of Collections pursuant to Section 2.05, 2.06 or 2.07) in excess of its ratable share of payments on account of Percentage Interests obtained by all of the Owners, such Owner shall forthwith purchase from the other Owners such participations in the Percentage Interests owned by them as shall be necessary to cause such purchasing Owner to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Owner, such purchase from each Owner shall be rescinded and each such Owner shall repay to the purchasing Owner the purchase price paid by such purchasing Owner for such participation to the extent of such recovery, together with an amount equal to such Owner's ratable share (according to the proportion of (a) the amount of such Owner's required payment to (b) the total amount so recovered from the purchasing Owner) of any interest or other amount paid or payable by the purchasing Owner in respect of the total amount so recovered. SECTION 2.13. Eurodollar Rate Protection; Illegality. (a) If the Agent is unable to obtain on a timely basis the information necessary to determine the Eurodollar Rate for any Percentage Interest for any Purchase Period in respect of which Yield is to accrue at the Eurodollar Rate, then (i) the Agent shall forthwith notify the Purchaser, the Owners and the Seller that the interest rate cannot be determined for such Percentage Interest for such Purchase Period, and (ii) while such circumstances exist, the Agent shall not allocate the Purchase Price of any additional Percentage Interest purchased during such period or reallocate the Purchase Price allocated to any Purchase Period ending during such period, to any Purchase Period in respect of which Yield is to accrue at the Eurodollar Rate. (b) If, with respect to any Percentage Interest which accrues Yield at the Eurodollar Rate, the Purchaser or any of the applicable Owners thereof, as the case may be, notifies the Agent that it is unable to obtain matching deposits in the London interbank market to fund its purchase or maintenance of such Percentage Interest or that the Eurodollar Rate applicable to such Percentage Interest for any Purchase Period will not adequately reflect the cost to the Purchaser or such Owner, as the case may be, of funding or maintaining its respective Percentage Interest for such Purchase Period, then the Agent shall forthwith so notify the Seller, whereupon the Agent shall not, while such circumstances exist, allocate the Purchase Price of any additional Percentage Interest purchased during such period or reallocate the Purchase Price allocated to any Purchase Period ending during such period, to any Purchase Period in respect of which Yield is to accrue at the Eurodollar Rate. (c) Notwithstanding any other provision of this Agreement, if the Purchaser or any Owner shall notify the Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for the Purchaser or such Owner, as the case may be, to fund its purchases or maintenance of Percentage Interests at the Eurodollar Rate, then (i) as of the effective date of such notice from the Purchaser or such Owner, as the case may be, to the Agent, the obligation or ability of the Purchaser or such Owner, as the case may be, to fund its purchase or maintenance of Percentage Interests at the Eurodollar Rate shall be suspended until the Purchaser or such Owner, as the case may be, notifies the Agent that the circumstances causing such suspension no longer exist and (ii) the Purchase Price of each Percentage Interest of the Purchaser or such Owner allocated to a Purchase Period which accrues interest at the Eurodollar Rate shall either (a) if the Purchaser or such Owner, as the case may be, may lawfully continue to maintain such Percentage Interest until the last day of the applicable Purchase Period, be reallocated on the last day of such Purchase Period to another Purchase Period in respect of which the Purchase Price allocated thereto accrues Yield at a Yield Rate other than the Eurodollar Rate or (b) if the Purchaser or such Owner, as the case may be, shall determine that it may not lawfully continue to maintain such Percentage Interest until the end of the applicable Purchase Period (at which time it may be reallocated to another Purchase Period in accordance with Section 2.01(d) and this Section 2.13(c)), be deemed to accrue Yield at the Base Rate from the effective date of such notice until the end of such Purchase Period. SECTION 2.14. Increased Costs; Capital Adequacy. (a) If, due to either (i) the introduction of or any change (other than any change by way of imposition or increase of reserve requirements included in the Eurodollar Reserve Percentage) in or in the interpretation of, any law or regulation or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to the Agent, any Owner or any Affiliate thereof (each of which shall be an "Affected Party") of agreeing to make, making or funding purchases of and/or reinvestments in Percentage Interests hereunder or maintaining Percentage Interests hereunder, then the Seller shall from time to time, upon demand by such Affected Party, pay to such Affected Party additional amounts sufficient to compensate such Affected Party for any such increased costs. (b) If either (i) the introduction of, or any change in or in the interpretation of, any law or regulation or (ii) the compliance by any Affected Party with any guideline or request from any central bank or other governmental authority issued after the date of this Agreement (whether or not having the force of law), affects or would affect the amount of capital required or expected to be maintained by such Affected Party, and such Affected Party determines that the amount of such capital is increased by or based upon its obligations hereunder or its purchasing and maintaining Percentage Interests hereunder or, in each case, under similar financial arrangements of this type, then, upon demand by such Affected Party (with a copy of such demand to the Agent), the Seller shall pay to the Agent for the account of such Affected Party, from time to time as specified by such Affected Party, additional amounts sufficient to compensate such Affected Party in the light of such circumstances, to the extent that such Affected Party reasonably determines such increase in capital to be allocable to such Affected Party's obligations hereunder or its purchasing, funding or maintaining Percentage Interests hereunder. (c) If as a result of any event or circumstance similar to those described in Section 2.14(a) or 2.14(b), any Affected Party is required to compensate a bank or other financial institution providing liquidity support, credit enhancement or other similar support to such Affected Party in connection with this Agreement or the funding or maintenance of purchases of Percentage Interests hereunder, then upon demand by such Affected Party (with a copy of such demand to the Agent), the Seller shall pay to such Affected Party such additional amount or amounts as may be necessary to reimburse such Affected Party for any amounts paid by it. (d) In determining any amount provided for in this Section 2.14, the Affected Party may use any reasonable averaging and attribution methods. Any Affected Party making a claim under this Section 2.14 shall submit to the Seller a certificate as to such additional or increased cost or reduction, which certificate shall be conclusive absent demonstrable error. SECTION 2.15. Taxes. (a) Any and all payments by the Seller or the Servicer hereunder shall be made, in accordance with Section 2.09, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of the Purchaser, each Owner and the Agent, Excluded Taxes for such Person (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes". If the Seller or the Servicer shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Owner or the Agent, (i) the Seller shall make an additional payment to such Owner or the Agent, as the case may be, in an amount sufficient so that, after making all required deductions (including deductions applicable to additional sums payable under this Section 2.15), such Owner or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Seller or the Servicer, as the case may be, shall make such deductions and (iii) the Seller or the Servicer, as the case may be, shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) In addition, the Seller agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement (hereinafter referred to as "Other Taxes"). (c) The Seller will indemnify each Owner and the Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.15) paid by such Owner or the Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto; provided that an Owner or the Agent, as appropriate, making a demand for indemnity payment shall provide the Seller, at its address referred to in Section 10.02, with a certificate from the relevant taxing authority or from a responsible officer of such Owner or the Agent stating or otherwise evidencing that such Owner or the Agent has made payment of such Taxes or Other Taxes and will provide a copy of or extract from documentation, if available, furnished by such taxing authority evidencing assertion or payment of such Taxes or Other Taxes. This indemnification shall be made within ten days from the date such Owner or the Agent (as the case may be) makes written demand therefor. (d) Within 30 days after the date of any payment of Taxes or Other Taxes, the Seller or the Servicer, as the case may be, will furnish to the Agent, at its address referred to in Section 10.02, appropriate evidence of payment thereof. (e) The Agent and each Owner that is not created or organized under the laws of the United States or a political subdivision thereof shall, to the extent that it may then do so under applicable laws and regulations, deliver to the Seller (with, in the case of each Owner, a copy to the Agent) (i) within 15 days after the date hereof, or, if later, the date on which such Owner becomes an Owner pursuant to Section 10.04 hereof, two (or such other number as may from time to time be prescribed by applicable laws or regulations) duly completed copies of IRS Form 4224 or Form 1001 (or any successor forms or other certificates or statements which may be required from time to time by the relevant United States taxing authorities or applicable laws or regulations), as appropriate, to permit the Seller to make payments hereunder for the account of the Agent or such Owner, as the case may be, without deduction or withholding of United States federal income or similar taxes and (ii) upon the obsolescence of, or after the occurrence of any event requiring a change in, any form or certificate previously delivered pursuant to this Section 2.15(e), copies (in such numbers as may from time to time be prescribed by applicable laws or regulations) of such additional, amended or successor forms, certificates or statements as may be required under applicable laws or regulations to permit the Seller to make payments hereunder for the account of the Agent or such Owner, as the case may be, without deduction or withholding of United States federal income or similar taxes. (f) For any period with respect to which an Owner or the Agent has failed to provide the Seller with the appropriate form, certificate or statement described in Section 2.15(e) (other than if such failure is due to a change in law occurring after the date of this Agreement), the Agent or such Owner, as the case may be, shall not be entitled to indemnification under Section 2.15(a), 2.15(b) or 2.15(c) with respect to Taxes imposed by the United States. (g) Within 30 days of the written request of the Seller therefor, the Agent and each Owner, as appropriate, shall execute and deliver to the Seller such certificates, forms or other documents which can be furnished consistent with the facts and which are reasonably necessary to assist the Seller in applying for refunds of taxes remitted hereunder. (h) If, in connection with an agreement or other document providing liquidity support, credit enhancement or other similar support to any Owner in connection with this Agreement or the funding or maintenance of purchases of Percentage Interests hereunder, such Owner is required to compensate a bank or other financial institution in respect of taxes under circumstances similar to those described in this Section 2.15 then, within ten days after demand by such Owner, the Seller shall pay to such Owner such additional amount or amounts as may be necessary to reimburse such Owner for any amounts paid by it. (i) Without prejudice to the survival of any other agreement of the Seller hereunder, the agreements and obligations of the Seller contained in this Section 2.15 shall survive the termination of this Agreement. SECTION 2.16. Security Interest. The Seller hereby grants to the Purchaser, for its own benefit and for the ratable benefit of the Agent and each of the Owners, a security interest in (i) all of the Seller's interests in the Purchase and Sale Agreement and each other Transaction Document, the Receivables, the Related Security, and the Collections, (ii) the Collection Account and all funds therein and all investments and other items therein or attributable thereto, and (iii) all proceeds of the foregoing (the items described in items (i), (ii) and (iii) being the "Collateral"), to secure payment of all fees and expenses, indemnity obligations and all other obligations owed hereunder to the Agent and/or the Owners by the Seller or the Servicer (whether such obligations are now existing or hereafter arising). It is understood and agreed that this Section 2.16 does not secure or guaranty the obligations of an Obligor to pay any Receivable. The immediately preceding sentence shall not limit the extent to which any other provision of this Agreement creates a claim against the Seller, WMECO or the Servicer in respect of any Receivable (for reasons other than the Obligor's credit problems), or limit the extent to which the Collateral secures such claim. ARTICLE III CONDITIONS OF PURCHASES SECTION 3.01. Conditions Precedent to Initial Purchase. The initial purchase hereunder is subject to the condition precedent that the Agent shall have received on or before the date of such purchase the items listed in Schedule I, each (unless otherwise indicated) dated as of the date of delivery (provided that such date is no later than the date of the initial purchase), in form and substance satisfactory to the Agent and the Purchasers. SECTION 3.02. Conditions Precedent to All Purchases and Reinvestments. Each purchase (including the initial purchase) from the Seller by the Purchaser and the right of the Servicer to reinvest in Eligible Receivables on behalf of the Purchaser those Collections allocable to a Percentage Interest pursuant to Section 2.05 shall be subject to the further conditions precedent that: (a) with respect to any such purchase (other than the initial purchase), on or prior to the date of such purchase, the Servicer shall have delivered to the Agent, in form and substance satisfactory to the Agent, a completed Investor Report dated within ten days prior to the date of such purchase and containing such additional information as may be reasonably requested by the Agent; (b) on the date of such purchase or reinvestment the following statements shall be true and the Seller by accepting the amount of such purchase or by receiving the proceeds of such reinvestment shall be deemed to have certified that: (i) The representations and warranties contained in Section 4.01 and Section 4.02 are correct on and as of such day as though made on and as of such date, and (ii) The representations and warranties of WMECO under Section 5.1 of the Purchase and Sale Agreement (other than Excluded Representations) are correct on and as of such date as though made on and as of such date; and (iii) No event or condition has occurred and is continuing, or would result from such purchase or reinvestment, which would (a) cause the Termination Date to occur or (b) constitute an Event of Termination or would constitute an Event of Termination but for the requirement that notice be given or time elapse or both, and (iv) WMECO's senior secured debt shall be rated at least the Required Rating, and (v) No law or regulation shall prohibit, and no order, judgment or decree of any federal, state or local court or governmental body, agency or instrumentality shall prohibit or enjoin, the making of such purchase or reinvestment by the Purchaser or any applicable Owner in accordance with the provisions hereof, and (c) the Agent shall have received such other approvals, opinions or documents as the Agent may reasonably request. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Seller. The Seller represents and warrants as follows: (a) The Seller is a corporation duly incorporated, validly existing and in good standing under the laws of Connecticut and is duly qualified to do business, and is in good standing, in every other jurisdiction in which the failure to be so qualified could reasonably be expected to have a Material Adverse Effect. (b) The execution, delivery and performance by the Seller of this Agreement and all other Transaction Documents to be delivered by it, including the Seller's use of the proceeds of purchases and reinvestments, are within the Seller's corporate powers, have been duly authorized by all necessary corporate action, do not contravene (i) the Seller's charter or by-laws, (ii) any law, rule or regulation applicable to the Seller, (iii) any contractual restriction binding on or affecting the Seller or its property or (iv) any order, writ, judgment, award, injunction or decree binding on or affecting the Seller or its property, and do not result in or require the creation of any lien, security interest or other charge or encumbrance upon or with respect to any of its properties (other than in favor of the Agent for the benefit of the Owners with respect to the Receivables and the Related Security and Collections associated therewith); and no transaction contemplated hereby requires compliance with any bulk sales act or similar law. This Agreement and each of the other Transaction Documents to which it is a party have been duly executed and delivered by the Seller. (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Seller of this Agreement, any Transaction Document or any other document or instrument to be delivered hereunder, except for (i) such items that have been obtained and are in full force and effect and (ii) the filing of the UCC financing statements described in Schedule I. (d) This Agreement and each other Transaction Document or instrument delivered by it hereunder constitute the legal, valid and binding obligation of the Seller enforceable against the Seller in accordance with its terms. (e) No proceeds of any sale of Percentage Interests will be used by it to acquire any security in any transaction which is subject to Section 13 or 14 of the Securities Exchange Act of 1934, as amended. (f) Each Receivable, together with any contract related thereto, and the Collateral shall, at all times, be owned by the Seller free and clear of any Adverse Claim except as created by this Agreement, and upon each purchase and reinvestment, the Owner making such purchase or reinvestment, as the case may be, shall acquire a valid and perfected first priority undivided percentage ownership interest to the extent of the pertinent Percentage Interest in each Receivable then existing or thereafter arising and in the Related Security (other than Security Deposits) and Collections with respect thereto, free and clear of any Adverse Claim except as provided hereunder. No effective financing statement or other instrument similar in effect covering any Receivable, the Related Security, the Collections or the Collateral with respect thereto shall at any time be on file in any recording office except such as may be filed in favor of the Purchaser relating to this Agreement or the Purchase and Sale Agreement. (g) At all times on or prior to the Termination Date, the Coverage Ratio shall equal or exceed 102%. (h) No Investor Report, information, exhibit, financial statement, document, book, record or report furnished or to be furnished by the Seller or the Servicer to the Agent or any Owner in connection with this Agreement is or will be inaccurate in any material respect as of the date it is or shall be dated or (except as otherwise disclosed to the Agent or such Owner, as the case may be, at such time) as of the date so furnished, and no such document contains or will contain any material misstatement of fact or omits or shall omit to state a material fact or any fact necessary to make the statements contained therein not misleading. Any Receivable described as an Eligible Receivable in any Investor Report or such other information, exhibit, financial statement, document, book, record or report satisfies the requirements of the definition of "Eligible Receivable." WMECO and the Servicer have management information systems that are adequate to generate reliable statistical information with respect to the Receivables, including such information as is required to be delivered pursuant to the terms of this Agreement. (i) The principal place of business and chief executive office of the Seller and WMECO and the offices where the Seller and WMECO keeps all of the Records are located at the addresses specified in Schedule IV (or at such other locations as to which the notice and other requirements specified in Section 6.09 shall have been satisfied). WMECO has places of business in more than one town in Massachusetts. (j) All Obligors have been (or, in the case of Obligors with respect to Unbilled Receivables, will be) instructed to make all payments in respect of Receivables to WMECO's post office box in Hartford, Connecticut or to a Payment Center, and such payments are (i) processed by the Servicer in Wethersfield, Connecticut and (ii) deposited to the Collection Account within one Business Day of the Servicer's receipt thereof. The Seller will make commercially reasonable efforts to prevent funds other than Collections from being deposited to the Collection Account. (k) All Obligors (other than Obligors in respect of Unbilled Receivables) are listed on the General Trial Balance. The methodology for determining the Outstanding Balance of Unbilled Receivables is accurately described in Exhibit B, and such description does not omit any fact necessary to make the statements contained therein not misleading. The Outstanding Balance of Unbilled Receivables shall be calculated in accordance with the methodology described in Exhibit B. (l) Except as described in Schedule III, neither the Seller nor WMECO has any trade names, fictitious names, assumed names or "doing business as" names other than (with respect to WMECO only) those names with respect to which it has satisfied its obligations under Section 6.09. (m) The Seller's pro forma balance sheet as of the date of this Agreement, certified by its chief financial officer, chief accounting officer, Treasurer or Assistant Treasurer, copies of which have been furnished to the Purchaser and the Agent, fairly presents the Seller's assets and liabilities at such date. (n) The terms of the Receivables have not been extended or modified, except as permitted under the Credit and Collection Policy. (o) The Credit and Collection Policy has not been materially changed in any way which might reasonably lead to a Material Adverse Effect. (p) No use of any proceeds of any sale of Percentage Interests by the Seller will conflict with or contravene any of Regulations G, T, U and X promulgated by the Board of Governors of the Federal Reserve System. (q) The Seller has (i) obtained legal and equitable title to the Receivables and Related Security and has the legal right to sell such Receivables and such Related Security free and clear of any Adverse Claims (other than in favor of the Agent either directly or as the assignee of the Seller) and (ii) given reasonably equivalent value to WMECO for such transfer, and no such transfer shall have been made on account of an antecedent debt owed by WMECO to the Seller or shall be voidable under any Section of the Bankruptcy Reform Act of 1978 (11 U.S.C. Sections 101 et seq.), as amended (the "Bankruptcy Code"). (r) On the date of the first purchase hereunder (both before and after giving effect to the purchase on such date), each of the Seller and WMECO have assets which are greater than its liabilities, and is able to pay its debts as they become due. (s) The authorized capital stock of the Seller consists of twenty thousand (20,000) shares of common stock, without par value ("Seller Common Stock"), one hundred shares of which are currently issued and outstanding. All of such outstanding shares of Seller Common Stock are validly issued, fully paid and nonassessable and are owned (beneficially and of record) by WMECO. SECTION 4.02. Representations and Warranties of the Servicer. The Servicer represents and warrants as follows: (a) The Servicer is a corporation duly incorporated, validly existing and in good standing under the laws of Massachusetts and is duly qualified to do business, and is in good standing, in every other jurisdiction in which the failure to be so qualified could reasonably be expected to have a Material Adverse Effect. (b) The execution, delivery and performance by the Servicer of this Agreement and all other documents to be delivered by it hereunder are within the Servicer's corporate powers, have been duly authorized by all necessary corporate action, do not contravene (i) the Servicer's charter or by-laws, (ii) any law, rule or regulation applicable to the Servicer, (iii) any contractual restriction binding on or affecting the Servicer or its property or (iv) any order, writ, judgment, award, injunction or decree binding on or affecting the Servicer or its property, and do not result in or require the creation of any lien, security interest or other charge or encumbrance upon or with respect to any of its properties. The Agreement has been duly executed and delivered by the Servicer. (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Servicer of this Agreement or any other document or instrument to be delivered hereunder. (d) This Agreement and each other document or instrument delivered by it hereunder constitutes the legal, valid and binding obligation of the Servicer enforceable against the Servicer in accordance with its terms. (e) No Investor Report (if prepared by the Servicer, or to the extent that information contained therein is supplied by the Servicer), information, exhibit, financial statement, document, book, record or report furnished or to be furnished by the Servicer to the Agent or any Owner in connection with this Agreement is or will be inaccurate in any material respect as of the date it is or shall be dated or (except as otherwise disclosed to the Agent or such Owner, as the case may be, at such time) as of the date so furnished, and no such document contains or will contain any material misstatement of fact or omits or shall omit to state a material fact or any fact necessary to make the statements contained therein not misleading. (f) All Obligors (other than Obligors in respect of Unbilled Receivables) are listed on the General Trial Balance. The methodology for determining the Outstanding Balance of Unbilled Receivables is accurately described in Exhibit B, and such description does not omit any fact necessary to make the statements contained therein not misleading. The Outstanding Balance of Unbilled Receivables shall be calculated in accordance with the methodology described in Exhibit B. (g) The terms of the Receivables have not been extended or modified, except as permitted under the Credit and Collection Policy. (h) The Credit and Collection Policy has not been materially changed in any way which might reasonably lead to a Material Adverse Effect. (i) The Servicer has management information systems that are adequate to generate reliable statistical information with respect to the Receivables, including such information as is required to be delivered pursuant to the terms of this Agreement. (j) Each Receivable, together with any contract related thereto, and the Collateral shall, at all times, be owned by the Seller free and clear of any Adverse Claim except as created by this Agreement, and upon each purchase and reinvestment, the Owner making such purchase or reinvestment, as the case may be, shall acquire a valid and perfected first priority undivided percentage interest to the extent of the pertinent Percentage Interest in each Receivable then existing or thereafter arising and in the Related Security (other than Security Deposits) and Collections with respect thereto, free and clear of any Adverse Claim except as provided hereunder. No effective financing statement or other instrument similar in effect covering any Receivable, the Related Security, the Collections or the Collateral with respect thereto shall at any time be on file in any recording office except such as may be filed in favor of the Seller or the Purchaser relating to this Agreement or the Purchase and Sale Agreement. ARTICLE V GENERAL COVENANTS OF THE SELLER, WMECO AND THE SERVICER SECTION 5.01. General Seller Covenants. The Seller covenants as follows: (a) Compliance with Laws; Preservation of Corporate Existence. The Seller will comply in all material respects with all applicable laws, and all governmental rules, regulations and orders and preserve and maintain its corporate existence, rights, franchises, qualifications and privileges, in each case to the extent that the failure to do so could reasonably be expected to cause a Material Adverse Effect. (b) Sales, Liens, Etc. Except as otherwise provided herein or in any other Transaction Document, the Seller will not sell, assign (by operation of law or otherwise) or otherwise dispose of, or create or suffer to exist any Adverse Claim upon or with respect to, any Receivable, the related contract (if any), any Collections, any Related Security or the Collateral, or upon or with respect to any other account to which any Collections of any Receivable are sent, or assign any right to receive income in respect thereof. (c) General Reporting Requirements. The Seller will provide (or cause the Servicer to provide) to the Agent (in sufficient copies for each Owner) the following: (i) as soon as available and in any event within 50 days after the end of each of the first three quarters of each fiscal year of the Seller, the balance sheet and income statement of the Seller in reasonable detail and duly certified (subject to year-end adjustments) by the chief financial officer, chief accounting officer, Treasurer or Assistant Treasurer of the Seller as having been prepared in accordance with GAAP and on a basis consistent with the financial statements referred to in Section 6.1(d) of the Purchase and Sale Agreement; (ii) as soon as available and in any event within 105 days after the end of each fiscal year of the Seller, the balance sheet and income statement of the Seller, in reasonable detail and duly certified by the chief financial officer, chief accounting officer, Treasurer or Assistant Treasurer of WMECO and the Seller as having been prepared in accordance with GAAP and on a basis consistent with the financial statements referred to in Section 6.1(d) of the Purchase and Sale Agreement; (iii) promptly after the filing or receiving thereof, copies of all reports and notices with respect to any Reportable Event defined in Article IV of ERISA which the Seller files under ERISA with the Internal Revenue Service or the Pension Benefit Guaranty Corporation or the U.S. Department of Labor or which the Seller receives from such Corporation; (iv) as soon as possible and in any event within two days after the occurrence of each Event of Termination or Unmatured Termination Event, a statement of the chief financial officer, chief accounting officer, Treasurer or any Assistant Treasurer of the Seller setting forth details of such Event of Termination or Unmatured Termination Event, and the action which the Seller has taken and proposes to take with respect thereto; provided, that in the case of an event described in Section 7.01(g), such statement shall be provided to the Agent immediately; (v) promptly following the Agent's request therefor, such other information respecting the Receivables or the conditions or operations, financial or otherwise, of the Parent, the Seller, WMECO, the Servicer or any of their subsidiaries as the Agent may from time to time reasonably request in writing in order to protect the interests of the Agent or any Owner in connection with this Agreement; and (vi) together with the quarterly and annual financial statements of the Seller to be delivered pursuant to the immediately preceding clauses (i) and (ii) respectively, a certificate from the Seller's chief financial officer, chief accounting officer, Treasurer or any Assistant Treasurer, in the case of the quarterly financial statements, and independent certified public accountants, in the case of the annual financial statements, stating, in each case, (a) that such Person is familiar with the terms of the Transaction Documents and that in examining such financial statements, such Person did not become aware of any fact or condition which would constitute an Event of Termination, except for those, if any, described in reasonable detail or Unmatured Termination Event in such certificate and (b) that, as of the date of such financial statements, the representations and warranties of the Seller set forth in Section 4.01(g) are true and correct. (d) Merger, Etc. (i) The Seller will not merge or consolidate with, or convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions), all or substantially all of its assets (whether now owned or hereafter acquired), or acquire all or substantially all of the assets or capital stock or other ownership interest of any Person. (ii) The Seller will not make, incur or suffer to exist an investment in, equity contribution to, loan, credit or advance to, or payment obligation in respect of the deferred purchase price of property from, any other Person, except for advances to WMECO permitted by Section 5.01(j). (iii) The Seller will not create any direct or indirect subsidiary or otherwise acquire direct or indirect ownership of any equity interests in any other Person. (e) ERISA Matters. The Seller will not (i) engage in any prohibited transaction (as defined in Section 4975 of the Code and Section 406 of ERISA) for which an exemption is not available or has not previously been obtained from the United States Department of Labor; (ii) permit to exist any accumulated funding deficiency (as defined in Section 302(a) of ERISA and Section 412(a) of the Code) or funding deficiency with respect to any Benefit Plan other than a Multiemployer Plan; (iii) fail to make any payments to any Multiemployer Plan that the Seller may be required to make under the agreement relating to such Multiemployer Plan or any law pertaining thereto; (iv) terminate any Benefit Plan so as to result in any liability; or (v) permit to exist any occurrence of any reportable event described in Title IV of ERISA which represents a material risk of a liability of the Seller under ERISA or the Code, if such prohibited transactions, accumulated funding deficiencies, payments, terminations and reportable events occurring within any fiscal year of the Seller, in the aggregate, involve a payment of money or an incurrence of liability by the Seller under Title IV of ERISA in an amount in excess of $5,000,000. (f) Marking of Records. At its expense, the Seller will mark (or cause the Servicer to mark) its master data processing records relating to the Receivables so that reports generated from such records include the following legend: THE RECEIVABLES DESCRIBED HEREIN HAVE BEEN SOLD TO WMECO RECEIVABLES CORPORATION PURSUANT TO A PURCHASE AND SALE AGREEMENT, DATED AS OF MAY 22, 1997, AS AMENDED OR SUPPLEMENTED FROM TIME TO TIME, BETWEEN WESTERN MASSACHUSETTS ELECTRIC COMPANY AND WMECO RECEIVABLES CORPORATION; AND UNDIVIDED, FRACTIONAL OWNERSHIP INTERESTS IN THE RECEIVABLES DESCRIBED HEREIN HAVE BEEN SOLD BY WMECO RECEIVABLES CORPORATION TO MONTE ROSA CAPITAL CORPORATION PURSUANT TO A RECEIVABLES PURCHASE AGREEMENT, DATED AS OF MAY 22, 1997, AS AMENDED OR SUPPLEMENTED FROM TIME TO TIME, AMONG WMECO RECEIVABLES CORPORATION, WESTERN MASSACHUSETTS ELECTRIC COMPANY, MONTE ROSA CAPITAL CORPORATION AND UNION BANK OF SWITZERLAND, NEW YORK BRANCH, AS THE AGENT. (g) The Seller will cause the representation in Section 4.01(j) to be true at all times. (h) Change in Transaction Documents. The Seller shall not amend, modify, waive or terminate, or suffer to exist any matured or unmatured default under, any terms or conditions of any of the Transaction Documents to which it is a party without the consent of the Agent. (i) Performance and Enforcement of Transaction Documents. The Seller shall timely perform the obligations required to be performed by it under each of the Transaction Documents. The Seller shall not (i) exercise any of its rights under the Purchase and Sale Agreement in a manner that could prejudice the rights or interests of the Agent or the Owners in any way, (ii) exercise any of its rights or remedies under the Purchase and Sale Agreement during the continuance of an Event of Termination or Unmatured Termination Event, or (iii) initiate any action against WMECO in connection with the Purchase and Sale Agreement, unless in each case the Agent shall have given its prior written consent. If instructed by the Agent, the Seller shall exercise any right or remedy available to it, or initiate any action thereunder, pursuant to the Purchase and Sale Agreement or under applicable law. (j) Restricted Payments. (i) Except in accordance with this Section 5.01(k), the Seller shall not (A) purchase or redeem any shares of its capital stock, (B) declare or pay any Dividend or set aside any funds for any such purpose, (C) prepay, purchase or redeem any subordinated indebtedness of the Seller, (D) lend or advance any funds or (E) pay the deferred WRC Purchase Price or repay any other loans or advances to, for or from WMECO or any of its Affiliates (other than the Seller). Actions of the type described in this clause (i) are herein collectively called "Restricted Payments". (ii) Subject to the limitations set forth in clause (iii) below, the Seller may make Restricted Payments so long as such Restricted Payments are made only to WMECO and only in one or more of the following ways: (A) the Seller may make cash payments or deemed payments (including prepayments) on the WRC Purchase Price in accordance with the terms of the Purchase and Sale Agreement; and (B) if no amounts are then outstanding with respect to the WRC Purchase Price or in regards to any fees, including Servicing Fees, the Seller may (1) declare and pay Dividends and (2) permit to be outstanding WMECO's obligations to return funds under Section 3.1 of the Purchase and Sale Agreement. (iii) the Seller shall not pay, make or declare any Restricted Payment (including any Dividend) if, after giving effect thereto, (x) any Event of Termination or Unmatured Termination Event shall have occurred and be continuing, (y) the Termination Date has occurred, or (z) the Coverage Ratio shall be less than 102%. (k) Priority of Payments. The Seller shall apply Collections in respect of the Receivables which are payable to the Seller pursuant to Section 2.05 and 2.07 to make payments in the following order of priority: first, the payment of its expenses (including, without limitation, amounts payable to the Owners and the Agent hereunder), second, to the extent permitted pursuant to subsection (k) above, the payment of the outstanding WRC Purchase Price, and fourth, other legal and valid corporate purposes. (l) Restrictions on Transaction Documents. The Seller shall not enter into, execute and deliver, or otherwise become bound by, any agreement, instrument, document or other arrangement that restricts the right of the Seller to amend, supplement, amend and restate or otherwise modify, or to extend or renew, or to waive any right under, this Agreement or any other Transaction Document. (m) Debt. The Seller shall not (i) create, incur or permit to exist, any Debt of the Seller or (ii) cause or permit to be issued for its account any letters of credit or bankers' acceptances, except in each case for Debt and other liabilities incurred pursuant to the Transaction Documents. (n) Segregation. The Seller shall use commercially reasonable efforts to prevent the deposit into the Collection Account of any funds other than Collections. SECTION 5.02. Servicer Covenants. The Servicer covenants as follows: (a) Compliance with Laws; Preservation of Corporate Existence. The Servicer will comply in all material respects with all applicable laws, and all governmental rules, regulations and orders and preserve and maintain its corporate existence, rights, franchises, qualifications and privileges, in each case to the extent that the failure to do so could reasonably be expected to cause a Material Adverse Effect. (b) Merger, etc. The Servicer will not merge or consolidate with, or convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions), all or substantially all of its assets (whether now owned or hereafter acquired), or acquire all or substantially all of the assets or capital stock or other ownership interest of any Person (any such transaction, acquisition or other action hereinafter referred to as a "Reorganization"), except that the Servicer may enter into a Reorganization if the following conditions are satisfied: (i) the survivor (such term referring to the survivor of a merger or consolidation as well as the acquirer of assets, capital stock or other ownership interests) of such Reorganization is organized under the laws of, and is resident in, the United States or one of the states therein; (ii) the senior secured debt of such survivor shall be rated at least BBB- by Standard & Poor's and Baa3 by Moody's; (iii) if the Servicer is not the survivor of the Reorganization, such survivor shall have assumed all of the obligations of the Servicer under or in connection with this Agreement pursuant to an agreement in form and substance satisfactory to the Agent; (iv) if the Servicer is not the survivor of the Reorganization, the Agent shall have received opinions of counsel satisfactory to the Agent with respect to the matters described in the forms of opinion attached hereto as Exhibits E-1 and E-2, mutatis mutandis, and any modifications or additions to Uniform Commercial Code filings or other security arrangements requested by the Agent shall have been completed; and (v) each of Standard & Poor's and Moody's shall have confirmed that such merger or consolidation will not cause the ratings of the Purchaser's commercial paper notes to be reduced or withdrawn. (c) Marking of Records. At its expense, the Servicer will mark its master data processing records relating to the Receivables so that reports generated from such records include the legend described in Section 5.01(f). (d) Restrictions on Transaction Documents. The Servicer shall not enter into, execute and deliver, or otherwise become bound by, any agreement, instrument, document or other arrangement that restricts the right of the Servicer to amend, supplement, amend and restate or otherwise modify, or to extend or renew, or to waive any right under, this Agreement or any other Transaction Document. (e) Segregation. The Servicer shall use commercially reasonable efforts to prevent the deposit into the Collection Account of any funds other than Collections. If the Servicer receives notice that funds other than Collections have been deposited in the Collection Account at a time when a WMECO Obligation is in default, as provided in Section 7.2(b) of the Purchase and Sale Agreement the Servicer shall deliver such amount to the Agent to pay such WMECO Obligation and to otherwise secure payment of the WMECO Obligations. The Agent shall hold such amount until all WMECO Obligations (whether fixed or contingent) are paid in full. If the Servicer receives such notice at a time when no WMECO Obligation is in default, the Servicer shall promptly remit such amount to WMECO. (f) Payment Instructions. The Servicer will cause the representation in Section 4.01(j) to be correct at all times, except that the location of the post office box and/or processing described in such Section, and the identity of the Collection Account, may be changed with the consent of the Agent, upon 30 days' prior written notice to the Agent, if (i) the requirements of Section 6.09 are satisfied, (ii) the Collection Account continues to be a single-purpose account for the deposit of Collections, (iii) the Collection Account continues to be in the name of the Purchaser, and under the exclusive ownership and control of the Purchaser, and (iv) the bank at which the Collection Account is maintained shall have received, executed and returned a Bank Notice. SECTION 5.03. Separate Corporate Existence of the Seller. WMECO and the Seller hereby acknowledge that the Owners and the Agent are entering into the transactions contemplated by this Agreement in reliance upon the Seller's identity as a legal entity separate from WMECO. Therefore, from and after the date hereof, the Seller and WMECO shall take all reasonable steps to continue the Seller's identity as a separate legal entity and to make it apparent to third Persons that the Seller is an entity with assets and liabilities distinct from those of WMECO and any other Person, and is not a division of WMECO or any other Person. Without limiting the generality of the foregoing and in addition to and consistent with the covenant set forth in Section 5.01(a), the Seller and WMECO shall take such actions and WMECO shall cause the Seller to take such actions, as shall be required in order that: (a) The Seller will be a limited purpose corporation whose primary activities are restricted in its certificate of incorporation to acquiring Receivables from WMECO, entering into agreements for the servicing of such Receivables, selling undivided percentage interests in Receivables hereunder, and conducting such other activities as it deems necessary or appropriate to carry out its primary activities; (b) Not less than two members of the Seller's Board of Directors shall be Independent Directors. The Seller's Board of Directors shall not approve, or take any other action to cause, the commencement of a voluntary case or other proceeding with respect to the Seller under any applicable bankruptcy, insolvency, reorganization, debt arrangement, dissolution or other similar law, or the appointment of or taking possession by, a receiver, liquidator, assignee, trustee, custodian, or other similar official for the Seller unless, in each case, all of the Independent Directors shall approve the taking of such action in writing prior to the taking of such action. The Independent Directors' fiduciary duty shall be to the Seller (and its creditors) and, to the extent permitted by applicable law, not to the Seller's shareholders in respect of any decision of the type described in the preceding sentence. In the event an Independent Director resigns or otherwise ceases to be a director of the Seller, there shall be selected a replacement Independent Director, and no act of the Seller requiring the unanimous consent of its Board of Directors shall be taken until a replacement Independent Director shall have been so selected and elected. The Seller's certificate of incorporation shall reflect the requirements of this Section 5.03(b); (c) No Independent Director shall at any time serve as a trustee in bankruptcy for WMECO or any of its Affiliates (other than the Seller); (d) All employees, consultants and agents of the Seller will be compensated from the Seller's own bank accounts for services provided to the Seller except as provided herein in respect of fees payable to the Servicer. The Seller will engage no agents other than a Servicer for the Receivables, which Servicer will be fully compensated for its services to the Seller by payment of the fees payable to the Servicer hereunder; (e) The Seller will contract with the Servicer to perform for the Seller all operations required on a daily basis to service its Receivables. The Seller will pay the Servicer the Servicing Fee provided for herein. The Seller will not incur any material indirect or overhead expenses for items shared between the Seller and WMECO or any of its Affiliates (other than the Seller) which are not reflected in the fees payable to the Servicer hereunder. To the extent, if any, that the Seller and WMECO or any of its Affiliates (other than the Seller) share items of expenses not reflected in the fees payable to the Servicer hereunder, such as legal, auditing and other professional services, such expenses will be allocated to the extent practical on the basis of actual use or the value of services rendered, and otherwise on a basis reasonably related to the actual use or the value of services rendered, it being understood that WMECO shall pay all expenses relating to the preparation, negotiation, execution and delivery of this Agreement and each other Transaction Document, including, without limitation, legal, commitment, agency and other fees; (f) The Seller's operating expenses will be paid by the Seller from its own assets and not by WMECO or any of its Affiliates (other than the Seller); (g) The Seller will have its own stationery and telephone number; (h) The Seller's books and records will be maintained separately from those of WMECO and each of its Affiliates (other than the Seller); (i) The Seller will have its own financial statements prepared and any financial statement of WMECO or any of its Affiliates (other than the Seller) which is consolidated to include the Seller will contain detailed notes clearly indicating that (A) the Seller has acquired the Receivables from WMECO, and (B) the Seller is a separate corporate entity with creditors who have purchased and otherwise received ownership and security interests in the Seller's assets; (j) The Seller's assets and liabilities will be maintained in a manner that facilitates their identification and segregation from those of WMECO or any of its Affiliates (other than the Seller); (k) The Seller will strictly observe corporate formalities in its dealings with WMECO and each of its Affiliates, and funds or other assets of the Seller will not be commingled with those of WMECO or any of its Affiliates (other than the Seller). The Seller shall not maintain joint bank accounts or other depository accounts to which WMECO or any of its Affiliates (other than the Seller) has independent access (other than WMECO in its capacity as Servicer). None of the Seller's funds will at any time be pooled with any funds of WMECO or any of its Affiliates (other than the Seller); (l) The Seller will maintain arm's length relationships with WMECO and each of its Affiliates (other than the Seller). If WMECO or any of its Affiliates (other than the Seller) renders or otherwise furnishes services to the Seller, such Person will be compensated by the Seller at market rates for such services. Neither the Seller, on the one hand, nor WMECO or any of its Affiliates (other than the Seller), on the other hand, will be or will hold itself out to be responsible for the debts of the other or the decisions or actions respecting the daily business and affairs of the other; and (m) The Seller and WMECO will each hold themselves out to the public as separate entities and conduct business solely in its own name. ARTICLE VI ADMINISTRATION, COLLECTION AND MONITORING OF RECEIVABLES SECTION 6.01. Appointment and Designation of the Servicer. The Seller, the Purchaser, the Owners and the Agent hereby appoint the Person (the "Servicer") designated by the Agent from time to time pursuant to this Section 6.01, as their agent to service, administer and collect the Receivables and otherwise to enforce their respective rights and interests in and under the Receivables, the Related Security and any contracts between the Seller and an Obligor. The Servicer's authorization under this Agreement shall terminate on the Collection Date. Until the Agent gives notice to the Seller of a designation of a new Servicer, WMECO is hereby designated as, and hereby agrees to perform the duties and obligations of, the Servicer pursuant to the terms hereof. The Agent may, upon the occurrence of a Servicer Default or other Event of Termination, designate as Servicer any Person to succeed WMECO any successor Servicer, on the condition in each case that any such Person so designated shall agree to perform the duties and obligations of the Servicer pursuant to the terms hereof. The Seller agrees that any Servicer may take any and all steps in the Seller's name and on behalf of the Seller necessary or desirable, in the determination of the Servicer, to collect all amounts due under any and all Receivables, including, without limitation, endorsing the Seller's name on checks and other instruments representing Collections and enforcing such Receivables and any related contracts. The Seller will, upon the request of the Agent, execute such powers of attorney and other instruments as may be necessary to facilitate the foregoing. The Servicer may, with the prior consent of the Agent (which consent is hereby given with respect to Northeast Utilities Service Company), subcontract with any other Person for servicing, administering or collecting the Receivables, provided that the Servicer shall remain liable for the performance of the duties and obligations of the Servicer pursuant to the terms hereof. Notwithstanding anything to the contrary contained in this Agreement, the Servicer, if not WMECO or an Affiliate of WMECO, shall have no obligation to collect, enforce or take any other action described in this Article VI with respect to any receivable or other indebtedness owing to the Seller that is not a Receivable other than to deliver to the Seller the collections and documents with respect to any such receivable or other indebtedness as described in Sections 6.03 and 6.06(b). SECTION 6.02. Collection of Receivables by the Servicer; Extensions and Amendments of Receivables. The Servicer shall take or cause to be taken all such actions as may be necessary or advisable to collect each Receivable from time to time, all in accordance with applicable laws, rules and regulations, with reasonable care and diligence, and in accordance with the Credit and Collection Policy; provided, however, that, notwithstanding anything to the contrary contained herein, (a) the Agent shall have the absolute and unlimited right (subject to applicable requirements of law) to direct the Servicer (whether the Servicer is WMECO or otherwise) to commence or settle any legal action, to enforce collection of any Receivable or to foreclose upon or repossess any Related Security and (b) the Servicer shall not make the Agent or any Owner a party to any litigation without the express written consent of the Agent or such Owner, as the case may be. Provided that the Termination Date shall not have occurred, the Servicer may, in accordance with the Credit and Collection Policy, (a) extend the maturity or adjust the Outstanding Balance of any Defaulted Receivable as the Servicer may determine to be appropriate to maximize Collections thereof, provided, that no such extension or adjustment shall affect the characterization of such Receivable as being a Defaulted Receivable, and (b) adjust the Outstanding Balance of any Receivable to reflect the reductions or cancellations described in the first sentence of Section 2.08. Except as otherwise permitted pursuant to the preceding sentence, the Servicer will not extend, amend or otherwise modify the terms of any Receivable, or, if there exists a contract related to any Receivable, amend, modify or waive any term or condition of any such contract. SECTION 6.03. Distribution and Application of Collections. The Servicer shall set aside on its books for the account of the Seller and each Owner their respective allocable shares of the Collections of Receivables in accordance with Sections 2.05, 2.06, 2.07 and 2.08; provided, however, that if required by Section 2.05, 2.06 or 2.07 or otherwise instructed by the Agent following a Transition Event, the Servicer shall segregate such Collections in accordance with Section 6.04. The Servicer shall as soon as practicable following receipt turn over to the Seller the collections of any receivable or other indebtedness owing to the Seller which is not a Receivable, less, in the event the Seller is not the Servicer, all reasonable and appropriate out-of-pocket costs and expenses of such Servicer of servicing, collecting and administering any such receivable or other indebtedness to the extent not covered by the Servicing Fee received by it. Any payment by an Obligor in respect of any indebtedness owed by it to the Seller shall, except as otherwise specified by such Obligor or otherwise required by contract or law or by instruction of the Agent, be applied as a Collection of any Receivable of such Obligor (in the order of the age of such Receivables, starting with the oldest such Receivable) to the extent of any amounts then due and payable thereunder before being applied to any other receivable or other indebtedness (other than a Receivable) of such Obligor. SECTION 6.04. Segregation of Collections. The Servicer shall not be required (unless required by Section 2.05, 2.06 or 2.07 or otherwise instructed by the Agent following a Transition Event) to segregate the funds constituting the Owners' portion of daily Collections prior to the remittance thereof in accordance with Sections 2.05, 2.06, 2.07 and 2.08. If so instructed by the Agent following a Transition Event, the Servicer shall (a) on the first Business Day following its receipt thereof, segregate and deposit with a bank designated by the Agent (which may be the Agent) each Owner's allocable share of Collections of Receivables received by the Servicer; provided, that on any date before the Termination Date, such segregation shall not apply to Reinvested Collections, and (b) if so requested by the Agent, provide payment instructions to such bank as directed by the Agent. SECTION 6.05. Other Rights of the Agent. At any time following the occurrence of an Event of Termination or the designation of a Servicer other than WMECO pursuant to Section 6.01: (a) The Agent may or, at the request of the Agent, the Seller and the Servicer shall (in either case, at the Seller's expense) direct the Obligors of Receivables, or any of them, to pay all amounts payable under any Receivable directly to the Agent or its designee; and (b) The Seller and the Servicer shall, at the Agent's request and at the Seller's expense, (i) assemble all Records and make the same available to the Agent or its designee at a place selected by the Agent or its designee, and (ii) segregate all cash, checks and other instruments received by it from time to time constituting Collections of Receivables in a manner acceptable to the Agent and, promptly following receipt, remit all such cash, checks and instruments, duly endorsed or with duly executed instruments of transfer, to the Agent or its designee. SECTION 6.06. Records; Maintenance of General Trial Balance; Audits. (a) The Seller and the Servicer will maintain and implement administrative and operating procedures (including, without limitation, an ability to recreate records evidencing the Receivables in the event of the destruction of the originals thereof), and keep and maintain all documents, books, records and other information reasonably necessary or advisable for the collection of all Receivables (including, without limitation, records adequate to permit the identification of each Receivable and all Collections thereof and adjustments thereto). The Seller will (and will cause the Servicer to) mark all master data processing records so that reports generated from such records include the legend described in Section 5.01(f). (b) The Servicer shall hold all Records in trust for the Seller and each Owner in accordance with their respective interests. Subject to the receipt of contrary instructions from the Agent, WMECO will, upon the designation of a Servicer other than WMECO, deliver (or cause the Servicer to deliver) all Records to such Servicer; provided, however, that the Servicer shall as soon as practicable upon demand deliver to WMECO all records and documents in its possession relating to receivables and other indebtedness owing to the Seller other than Receivables, and copies of all Records in its possession relating to Receivables. (c) Neither the Servicer nor the Seller will make any change or modification to the form of the General Trial Balance which is adverse to the interests of the Purchaser or the Owners. The Servicer will apply all Collections to the applicable Receivables as provided in Section 6.03 and modify the General Trial Balance to reflect such Collections, in each case, within one Business Day following the earliest date on which such Collections are received by the Servicer or the Seller or (following the occurrence of an Event of Termination and the establishment of Lock-Box Accounts pursuant to Section 6.08) deposited in a Lock-Box Account. The Servicer will post each new invoiced Receivable on the General Trial Balance on the day such Receivable is billed. If at any time the Servicer fails or otherwise ceases to generate the General Trial Balance, the Agent shall have the right to reconstruct the General Trial Balance so that a determination of the Percentage Interests can be made pursuant to Section 2.03. The Seller and the Servicer each agree to cooperate with such reconstruction of the General Trial Balance, including, without limitation, the delivery to the Agent, upon the Agent's request, of copies of all Records. The Seller shall reimburse the Agent for all costs and expenses incurred in connection with such reconstruction of the General Trial Balance. (d) The Seller, WMECO and the Servicer each will, from time to time during regular business hours as reasonably requested by the Agent, permit the Agent, or its agents or representatives, (i) to examine and make copies of and abstracts from all Records and (ii) to visit the offices and properties of the Seller, WMECO or the Servicer for the purpose of examining such Records and to discuss matters relating to the Receivables or the Seller's, WMECO's or the Servicer's performance hereunder with any of the officers or employees of the Seller, WMECO or the Servicer, as the case may be, having knowledge of such matters. SECTION 6.07. Receivables Reporting. Starting with the first month commencing after the date hereof and continuing through (and including) the month in which the Collection Date occurs, the Servicer shall on or before the eighteenth calendar day of each month (or if such eighteenth day is not a Business Day, on the Business Day immediately preceding such eighteenth day), prepare and forward to the Agent for each Owner, an Investor Report relating to all Percentage Interests, as of the close of business of the Servicer on the last day of the immediately preceding month, which report will include (without limitation) (i) the information required to compute each element of the Coverage Ratio and (ii) the aggregate amount billed by WMECO to each Obligor in a Reported Group. SECTION 6.08 Collections. The Seller will instruct all Obligors to cause all Collections to be paid to the Servicer and if the Seller receives any Collections, the Seller will remit such Collections to the Servicer (including, without limitation, any Collections deemed to have been received pursuant to Section 2.08) within one Business Day following the Seller's receipt thereof. The Seller will not make any change in its instructions to Obligors regarding payments to be made to the Seller or the Servicer, unless the Agent shall have received at least ten Business Days' prior written notice of such change and all actions reasonably requested by the Agent to protect and perfect the interest of the Agent and the Owners in the Collections of the Receivables have been taken and completed. If requested to do so following a Transition Event, the Seller shall instruct the Obligors to cause all Collections to be paid to a Lock-Box Bank for deposit into a Lock-Box Account and deliver a Bank Notice to such Lock-Box Bank. Such notice shall transfer to the Agent exclusive ownership and control of such Lock-Box Account. The Seller hereby agrees to take any further action necessary that the Agent may reasonably request to effect such transfer. Without limiting the foregoing, on or prior to the date of the initial purchase of a Percentage Interest hereunder, (i) the Seller shall cause to be established the Collection Account, in the name of the Purchaser, (ii) the Purchaser shall give a Bank Notice to the bank at which the Collection Account is maintained and (iii) the Seller shall cause such bank to execute such notice and return it to the Purchaser. Such notice shall give the bank standing instructions to remit funds on deposit in the Collection Account to the Servicer, unless the Purchaser, or the Agent on behalf of the Purchaser, instructs otherwise, which instruction may only be delivered upon the occurrence of a Transition Event. SECTION 6.09. UCC Matters; Protection and Perfection of Percentage Interests. (a) With respect to each Receivable and the Related Security therefor (excluding Security Deposits), the Seller shall (i) acquire such Receivable and Related Security pursuant to and in accordance with the terms of the Purchase and Sale Agreement, (ii) take all action necessary to perfect, protect and more fully evidence the Seller's ownership interest in such Receivables and Related Security, including, without limitation, (A) filing and maintaining effective financing statements (Form UCC-1) or similar forms against WMECO in all necessary or appropriate filing offices, and filing continuation statements, amendments or assignments with respect thereto in such filing offices, and (B) executing or causing to be executed such other instruments or notices as may be necessary or appropriate and (iii) take all additional action that the Agent reasonably may request in order to perfect, protect and more fully evidence the interest of the parties to this Agreement in such Receivables and Related Security. (b) The Seller will keep its principal place of business and chief executive office, and the office where it keeps the Records, at the addresses of the Seller specified in Schedule V or, upon 30 days' prior written notice to the Agent, at such other locations within the United States where all actions reasonably requested by the Agent, to protect and perfect the interest of the Agent and the Owners in the Receivables, the Related Security (excluding Security Deposits) relating thereto, the Collections relating thereto and the Collateral, have been taken and completed. The Seller will not make any change to its corporate name or use any tradenames, fictitious names, assumed names or "doing business as" names other than those described in Schedule III, unless prior to the effective date of any such name change or use, the Seller delivers to the Agent such executed financing statements as the Agent may request to reflect such name change or use, together with such other documents and instruments as the Agent may reasonably request in connection therewith. The Seller agrees that from time to time, at its expense, it will promptly execute and deliver all further instruments and documents, and take all further action that the Agent may reasonably request in order to perfect, protect or more fully evidence the interests of the Owners in the Receivables, the Related Security (excluding Security Deposits) relating thereto, Collections relating thereto and the Collateral, or to enable any of them or the Agent to exercise or enforce any of their respective rights hereunder. Without limiting the generality of the foregoing, the Seller will upon the request of the Agent execute and file such financing or continuation statements, or amendments thereto or assignments thereof, and such other instruments or notices, as may be necessary or appropriate or as the Agent may request. The Seller hereby authorizes the Purchaser to file one or more financing or continuation statements, and amendments thereto and assignments thereof, relative to all or any of the Receivables, the Related Security, the Collections and the Collateral now existing or hereafter arising without the signature of the Seller where permitted by law. A carbon, photographic or other reproduction of this Agreement or any financing statement covering the Receivables, the Related Security and Collections relating thereto and the Collateral (or, in each case, any part thereof) shall be sufficient as a financing statement. The Seller shall, upon the request of the Agent at any time after a Transition Event and at the Seller's expense, notify the Obligors of Receivables, or any of them, of the Owners' interests therein. If the Seller fails to perform any of its agreements or obligations under this Section 6.09, the Agent may (but shall not be required to) itself perform, or cause performance of, such agreement or obligation, and the expenses of the Agent incurred in connection therewith shall be payable by the Seller upon the Agent's demand therefor. For purposes of enabling the Agent to exercise its rights described in the preceding sentence and elsewhere in this Article VI, the Seller and the Owners hereby authorize the Agent to take any and all steps in the Seller's name and on behalf of the Seller and the Owners necessary or desirable, in the determination of the Agent, to collect all amounts due under any and all Receivables, including, without limitation, endorsing the Seller's name on checks and other instruments representing Collections and enforcing rights with respect to such Receivables and any related contracts. In addition, to the extent that any Receivables Interest is intended to be or is likely to be outstanding five years or more after the date of this Agreement, the Seller shall provide, within six months (but not later than the 30th day) prior to the expiration of such five year period (and, if applicable, each subsequent five year period), or more frequently as the Agent reasonably deems advisable, an opinion of counsel to the Seller as to the continuing validity and perfection of the Agent's and the Owners' interests in the Receivables and the Related Security (excluding Security Deposits) and Collections relating thereto. SECTION 6.10. Obligations of the Seller with Respect to Receivables. The Seller will cause WMECO to (a) at its expense, regardless of any exercise by the Agent or any Owner of its rights hereunder, timely and fully perform and comply with all material provisions, covenants and other promises required to be observed by it under any contracts or other agreements related to the Receivables to the same extent as if the Receivables had not been sold under the Purchase and Sale Agreement and the Percentage Interests had not been sold hereunder and (b) pay when due any taxes (other than Excluded Taxes), including without limitation, sales and excise taxes, payable in connection with the Receivables. In no event shall the Agent or any Owner have any obligation or liability with respect to any Receivables or related contracts, if applicable, nor shall any of them be obligated to perform any of the obligations of the Seller or WMECO thereunder. The Seller and the Servicer will timely and fully comply in all material respects with the Credit and Collection Policy in regard to each Receivable and any related contract. Neither the Seller nor the Servicer will make any change in the character of its business or in the Credit and Collection Policy, which change would, in either case, impair the credit quality, enforceability or collectibility of any Receivable. ARTICLE VII EVENTS OF TERMINATION SECTION 7.01. Events of Termination. If any of the following events ("Events of Termination") shall occur: (a) (i) The Servicer (if other than the Agent) shall fail to perform or observe any term, covenant or agreement hereunder (other than as referred to in clause (ii) of this Section 7.01(a)) and such failure shall remain unremedied for five Business Days after written notice thereof shall have been given by the Agent to the Servicer or (ii) the Servicer (if other than the Agent), WMECO or the Seller shall fail to make any payment or deposit to be made by it hereunder when due; or (b) Any representation or warranty made or deemed to be made by either the Seller, WMECO or the Servicer (or any of its respective officers) under or in connection with this Agreement or any other Transaction Document or any Investor Report or other information or report delivered pursuant hereto shall prove to have been false or incorrect in any material respect when made or deemed to have been made and shall not have been remedied for a period of five Business Days after written notice thereof shall have been given by the Agent to the Seller; or (c) WMECO shall fail to perform or observe any term, covenant or agreement contained in the Transaction Documents on its part to be performed or observed and such failure shall continue unremedied for five Business Days after written notice thereof shall have been given by the Agent to WMECO; or (d) The Seller or the Servicer shall fail to perform or observe any other term, covenant or agreement contained in this Agreement on its part to be performed or observed and any such failure shall remain unremedied for five Business Days after written notice thereof shall have been given by the Agent to the Seller or the Servicer; or (e) The Seller or WMECO shall fail to pay any principal of or premium or interest on any Debt (which, in the case of WMECO, is in an aggregate amount exceeding $10,000,000), when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; or any other default under any agreement or instrument relating to any such Debt or any other event, shall occur and shall continue after the applicable grace period, if any, specified in such agreement or instrument if the effect of such default or event is to accelerate, or to permit the acceleration of, the maturity of such Debt; or any such Debt shall be declared to be due and payable or required to be prepaid (other than by a regularly scheduled required prepayment) prior to the stated maturity thereof; or (f) Any purchase of a Percentage Interest or reinvestment of Collections shall for any reason, except to the extent permitted by the terms hereof, cease to create a valid and perfected first priority undivided percentage ownership interest to the extent of such Percentage Interest in each Receivable and the Related Security (excluding Security Deposits) and Collections with respect thereto, or any other Adverse Claim shall attach to any Receivables, Related Security or Collections and, provided that the attachment of any such Adverse Claim securing payment of taxes, assessments or governmental charges shall not constitute an Event of Termination unless it shall remain outstanding for fifteen days; or (g) (i) The Seller, WMECO or the Servicer (if other than the Agent) shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Seller, WMECO or the Servicer (if other than the Agent) seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property; or (ii) the Seller, WMECO or the Servicer (if other than the Agent) shall take any corporate action to authorize any of the actions set forth in clause (i) above in this Section 7.01(g); or (h) The Loss-to-Liquidation Ratio for any month shall exceed 6.75%, or the average Loss-to-Liquidation Ratio for any six consecutive months shall exceed 5.25%, or the Delinquency Ratio for any month shall exceed 6.25%, or the Gross Charge-Off Ratio for any month shall exceed 2.50%, or the average Dilution Ratio for any three consecutive months shall exceed 1.00%, or the Weighted Average Maturity for any month shall exceed 60.0 days; or (i) WMECO's senior secured debt shall not be rated at least the Required Rating, or there shall have occurred any event which has a Material Adverse Effect; or (j) (i) A regulatory, tax or accounting body has ordered that the activities of the Purchaser or any Affiliate of the Purchaser contemplated hereby be terminated or (ii) as a result of any other event or circumstance, the activities of the Purchaser contemplated hereby may reasonably be expected to cause the Purchaser, the financial institution then acting as the administrator or the manager for the Purchaser, or any of their respective Affiliates to suffer materially adverse regulatory, accounting or tax consequences; or (k) the Purchaser shall be unable to issue Commercial Paper Notes for sixty consecutive days; or (l) Any Event of Default under (and as defined in) either of the Liquidity Agreements shall occur or a Liquidity Facility Termination Date shall have occurred; or (m) The Coverage Ratio shall be less than 102% for two Business Days; or (n) A Change of Control shall occur; or (o) a Servicer Default shall have occurred; or (p) WMECO or the Seller shall have given notice that it desires to terminate the Purchase and Sale Agreement pursuant to Section 8.1 thereof, or the Purchase and Sale Termination Date shall otherwise occur; or (q) Any litigation (including, without limitation, derivative actions), arbitration proceedings or governmental proceedings is pending against the Seller, the Receivables or the Related Security, which has a reasonable likelihood of having an adverse determination that would have a Material Adverse Effect; then, and in any such event, the Agent may, or at the direction of the Required Owners shall, by notice to the Seller declare the Termination Date to have occurred, except that, in the case of any event described in clause (i) of Section 7.01(g), above, the Termination Date shall be deemed to have occurred automatically upon the occurrence of such event. Upon any such declaration or automatic occurrence, the Agent and the Owners shall have, in addition to all other rights and remedies under this Agreement or otherwise, all other rights and remedies provided under the UCC of the applicable jurisdiction and other applicable laws, which rights shall be cumulative. ARTICLE VIII THE AGENT SECTION 8.01. Authorization and Action. Each Owner hereby accepts the appointment of and authorizes the Agent to take such action as agent on its behalf and to exercise such powers as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto. In addition, each of the Owners and the Agent acknowledge that the Purchaser has entered into the Security Agreement pursuant to which certain rights of the Purchaser hereunder were pledged to the Collateral Trustee, and the Agent hereby agrees to take, or refrain from taking, such actions under or in connection with this Agreement as the Collateral Trustee shall from time to time direct in accordance with the terms of the Security Agreement. Notwithstanding anything contained herein to the contrary, the Agent shall not be required to take any action which exposes it to personal liability or which is contrary to this Agreement or to applicable law. The Agent agrees to give (i) to each Owner, prompt notice of each notice given to it by the Seller, or by it to the Seller, pursuant to the terms of this Agreement and (ii) to the Collateral Trustee, prompt notice of the occurrence hereunder of any Event of Termination or the Termination Date. The appointment and authority of the Agent hereunder shall terminate on the Collection Date. The Agent hereby further acknowledges that to the extent it receives or holds any funds or other amounts or property to which the Purchaser would be entitled, the Agent shall receive and/or hold such funds as agent for the Collateral Trustee under and in accordance with the Security Agreement. Notwithstanding anything to the contrary, the Collateral Trustee is an intended beneficiary of the provisions of this Section 8.01, and no amendment, supplement or other modification to this Section which would adversely affect the interest of the Collateral Trustee under this Section shall be effective without the Collateral Trustee's consent. SECTION 8.02. UCC Filings. The Owners, WMECO and the Seller expressly recognize and agree that the Agent may be listed as the assignee or secured party of record on the various UCC filings required to be made hereunder in order to perfect the transfer of the Percentage Interests from the Purchaser to the other Owners, that such listing shall be for administrative convenience only in creating a record or nominee owner to take certain actions hereunder on behalf of such Owners and that such listing will not affect in any way the status of such Owners as the beneficial Owners of the Percentage Interests. In addition, such listing shall impose no duties on the Agent other than those expressly and specifically undertaken in accordance with this Article VIII. In furtherance of the foregoing, each Owner shall be entitled to enforce its rights created under this Agreement without the need to conduct such enforcement through the Agent except as provided herein. SECTION 8.03. Agent's Reliance, Etc. Neither the Agent nor any of its directors, officers, agents or employees shall be liable to any Owner for any action taken or omitted to be taken by it or them as Agent under or in connection with this Agreement (including, without limitation, the Agent's servicing, administering or collecting Receivables as Servicer pursuant to Article VI), except for its or their own gross negligence or willful misconduct. Without limiting the foregoing, the Agent: (i) may consult with legal counsel (including counsel for the Seller), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (ii) makes no warranty or representation to any Owner and shall not be responsible to any Owner for any statements, warranties or representations made in or in connection with this Agreement; (iii) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement on the part of the Seller or to inspect the property (including the books and records) of the Seller; (iv) shall not be responsible to any Owner for the due execution, legality, validity, enforceability, genuineness, sufficiency, or value of this Agreement, or any other instrument or document furnished pursuant hereto; and (v) shall incur no liability under or in respect of this Agreement by acting upon any notice (including notice by telephone), consent, certificate or other instrument or writing (which may be by telex) believed by it to be genuine and signed or sent by the proper party or parties. SECTION 8.04. Agent and Affiliates. To the extent that the Agent or any of its Affiliates shall become an Owner hereunder, the Agent or such Affiliate, in such capacity, shall have the same rights and powers under this Agreement as would any Owner hereunder and may exercise the same as though it were not the Agent. The Agent and its Affiliates may generally engage in any kind of business with the Seller or any Obligor, any of their respective Affiliates and any Person who may do business with or own securities of the Seller or any Obligor or any of their respective Affiliates, all as if it were not the Agent hereunder and without any duty to account therefor to the Owners. SECTION 8.05. Purchase Decision. The Purchaser acknowledges that it has, independently and without reliance upon the Agent or any other Owner and based on such documents and information as it has deemed appropriate, made its own evaluation and decision to enter into this Agreement and, if it so determines, to purchase Percentage Interests hereunder. Each Owner acknowledges and agrees that it will, independently and without reliance upon the Agent, the Purchaser or any other Owner, and based on such documents and information as it shall deem appropriate at the time, make its own decisions in taking or not taking action under or in connection with this Agreement. SECTION 8.06. Indemnification. Each Owner agrees to indemnify the Agent (to the extent not reimbursed by the Seller or the Servicer), ratably according to its share of the aggregate outstanding Purchase Price of all Percentage Interests from time to time, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agreement or any action taken or omitted by the Agent under this Agreement; provided, however, that an Owner shall not be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, or disbursements resulting from the Agent's gross negligence or willful misconduct. Without limitation of the generality of the foregoing, each Owner agrees to reimburse the Agent, ratably according to its share of the aggregate outstanding Purchase Price of all Percentage Interests from time to time, promptly upon demand, for any out-of-pocket expenses (including reasonable counsel fees) incurred by the Agent in connection with the administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement. The Agent hereby agrees that any amount owing to it by the Purchaser pursuant to this Section 8.06 shall not be due and payable until the earliest date on which the Agent would be entitled to initiate proceedings of the type described in Section 10.08 against the Purchaser, it being understood, however, that the Purchaser may at any time prepay any amount owing to the Agent pursuant to this Section 8.06. The indemnities contained in this Section 8.06 shall be continuing and shall survive the termination of this Agreement. SECTION 8.07. Successor Agent. The Agent may resign at any time by giving thirty days' notice thereof to the Owners, the Seller and the Servicer. Upon any such resignation, the Owners shall have the right to appoint a successor Agent approved by the Seller (which approval will not be unreasonably withheld or delayed). If no successor Agent shall have been so appointed by the Owners and accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of the Owners, appoint a successor Agent approved by the Seller (which approval will not be unreasonably withheld or delayed), which successor Agent shall be (a) either (i) a commercial bank having a combined capital and surplus of at least $1,000,000,000 or (ii) an Affiliate of such an institution and (b) experienced in the types of transactions contemplated by this Agreement. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all of the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article VIII (including, without limitation, the indemnities set forth in Section 8.06) shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. ARTICLE IX INDEMNIFICATION SECTION 9.01. Indemnities by the Seller. Without limiting any other rights which the Agent, any Owner or any of their respective Affiliates may have hereunder or under applicable law, the Seller hereby agrees to indemnify the Agent, each Owner, and each of their respective Affiliates from and against any and all damages, losses, claims, liabilities and related costs and expenses, including reasonable attorneys' fees and disbursements (all of the foregoing being collectively referred to as "Indemnified Amounts") awarded against or incurred by any of them arising out of or as a result of this Agreement or the ownership of Percentage Interests or in respect of any Receivable or any related contract, excluding, however, (i) Indemnified Amounts to the extent resulting from gross negligence or willful misconduct on the part of the Agent, such Owner or such Affiliate, (ii) recourse (except as otherwise specifically provided in this Agreement) for uncollectible Receivables or (iii) Excluded Taxes. Without limiting the foregoing, the Seller shall indemnify the Agent, each Owner and each of their respective Affiliates for Indemnified Amounts relating to or resulting from: (i) the transfer of an ownership interest in any Receivable to any Person other than the Purchaser; (ii) reliance on any representation or warranty made or deemed made by the Servicer (so long as the Servicer is WMECO or an Affiliate of WMECO), WMECO or the Seller (or any of their officers) under or in connection with this Agreement or any other Transaction Document, which shall have been false or incorrect in any material respect when made or deemed made or delivered; (iii) the failure by the Servicer (so long as the Servicer is WMECO or an Affiliate of WMECO), WMECO or the Seller to comply with any term, provision or covenant contained in this Agreement or any agreement executed in connection with this Agreement, or with any applicable law, rule or regulation with respect to any Receivable, the related contract, if any, or the Related Security, or the nonconformity of any Receivable, the related contract, if any, or the Related Security with any such applicable law, rule or regulation; (iv) the failure to vest and maintain vested in each Owner or to transfer to each Owner, legal and equitable title to and ownership of, an undivided percentage ownership interest, to the extent of each Percentage Interest owned by it hereunder, in the Receivables, together with all Collections and Related Security relating thereto, free and clear of any Adverse Claim whether existing at the time of the purchase of such Percentage Interest or at any time thereafter; (v) the failure of the Coverage Ratio to equal or exceed 102% at all times on or prior to the Termination Date; (vi) the failure of WMECO or the Seller to file, or any delay in filing, financing statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any Receivables or Related Security, whether at the time of any purchase of a Percentage Interest or at any subsequent time; (vii) any dispute, claim, offset or defense (other than discharge in bankruptcy of the Obligor) of the Obligor to the payment of any Receivable (including, without limitation, a defense based on such Receivable or the related contract, if any, not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms), or any other claim resulting from the sale of the merchandise or services related to such Receivable or the furnishing or failure to furnish such merchandise or services; (viii) any failure of the Seller, WMECO or the Servicer (so long as the Servicer is WMECO or an Affiliate of WMECO) to perform its duties or obligations in accordance with the provisions of this Agreement or any other Transaction Document or to perform its duties under any contracts related to the Receivables; (ix) any products liability claim or personal injury or property damage suit or other similar or related claim or action of whatever sort arising out of or in connection with merchandise or services which are the subject of any Receivable, related contract or Related Security; or (x) the failure to pay when due any taxes (other than Excluded Taxes), including without limitation, sales, excise or personal property taxes payable in connection with any of the Receivables; or (xi) any repayment by the Agent or any Owner of any amount previously distributed in reduction of Purchase Price which the Agent or such Owner believes in good faith is required to be made; or (xii) the commingling of Collections of Receivables at any time with other funds (including without limitation any commingling in the Collection Account that occurs notwithstanding the Seller's commercially reasonable efforts to prevent it); or (xiii) any investigation, litigation or proceeding related to this Agreement or the use of proceeds of purchases or reinvestments or the ownership of Percentage Interests or in respect of any Receivable, Related Security or related contract, if any; or (xiv) any inability to obtain any judgment in, or utilize the court or other adjudication system of, any state in which an Obligor may be located as a result of the failure of the Seller, WMECO or the Servicer to qualify to do business or file any notice of business activity report or any similar report; or (xv) any failure of the Seller to give reasonably equivalent value to WMECO in consideration of the purchase by the Seller from WMECO of any Receivable, or any attempt by any Person to void any such transfer under statutory provisions or common law or equitable action, including, without limitation, any provision of the Bankruptcy Code; or (xvi) any claim involving environmental liability that relates to any property that has been, is now or hereafter will be owned, leased, operated or otherwise used by Seller, WMECO or the Servicer. Any amounts subject to the indemnification provisions of this Section 9.01 shall be paid by the Seller to the Agent within two Business Days following the Agent's written demand therefor. SECTION 9.02 Indemnities by WMECO. Without limiting any other rights which the Agent, any Owner or any of their respective Affiliates may have hereunder or under applicable law, WMECO (in its capacity as the parent of Seller and as Servicer) hereby agrees to indemnify the Agent, each Owner, and each of their respective Affiliates from and against all Indemnified Amounts awarded against or incurred by any of them arising out of or as a result of any of the following: (i) reliance on any representation or warranty made or deemed made by the Servicer (or any of their officers) under or in connection with this Agreement or any other Transaction Document, which shall have been false or incorrect in any material respect when made or deemed made or delivered; (ii) the failure by the Servicer to comply with the term, provision or covenant contained in this Agreement, any other Transaction Document or any other agreement executed in connection with this Agreement, or with any applicable law, rule or regulation with respect to any Receivable, the related contract, if any, or the Related Security, or the nonconformity of any Receivable, the related contract, if any, or the Related Security with any such applicable law, rule or regulation; (iii) the failure to vest and maintain vested in each Owner or to transfer to each Owner, legal and equitable title to and ownership of, an undivided percentage ownership interest, to the extent of each Percentage Interest owned by it hereunder, in the Receivables, together with all Collections and Related Security relating thereto, free and clear of any Adverse Claim whether existing at the time of the purchase of such Percentage Interest or at any time thereafter; (iv) the failure of the Coverage Ratio to equal or exceed 102% at all times on or prior to the Termination Date; (v) the failure to file, or any delay in filing, financing statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any Receivables or Related Security, whether at the time of any purchase of a Percentage Interest or at any subsequent time; (vi) any failure of the Servicer to perform its duties or obligations under any contracts related to the Receivables; (vii) the commingling of Collections of Receivables at any time with other funds (including without limitation any such commingling that occurs in the Collection Account that occurs notwithstanding the Servicer's commercially reasonable efforts to prevent it); or (viii) the failure of a Lock-Box Bank or the bank at which the Collection Account is maintained (if other than Union Bank of Switzerland) to remit any amounts held in the Lock-Box Account or Collection Account, as the case may be, pursuant to the instructions of the Servicer, the Seller or the Agent, whether by reason of the exercise of set-off rights or otherwise. Any amounts subject to the indemnification provisions of this Section 9.02 shall be paid by the Servicer to the Agent within two Business Days following the Agent's demand therefor. ARTICLE X MISCELLANEOUS SECTION 10.01. Amendments and Waivers. (a) Except as provided in Section 10.01(b), no amendment or modification of any provision of this Agreement shall be effective without the written agreement of WMECO, the Seller, the Agent, the Required Owners and, to the extent expressly required pursuant to Section 8.01, the Collateral Trustee, and no termination or waiver of any provision of this Agreement or consent to any departure therefrom by the Seller shall be effective without the written concurrence of the Agent and the Required Owners. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. (b) Notwithstanding the provisions of Section 10.01(a), (i) the written consent of each Owner shall be required for any amendment, modification or waiver (A) reducing the Purchase Price of, or the Yield on, the Percentage Interests for any Purchase Period, (B) postponing any date for any payment of the Purchase Price of, or the Yield on, the Percentage Interests for any Purchase Period, (C) reducing the percentage specified in the definition of "Required Owners" or (D) modifying the provisions of this Section 10.01, (ii) the written consent of the Purchaser shall be required for any amendment, modification or waiver increasing the Purchase Limit or reducing any fees or other amounts payable to the Purchaser hereunder for its own account, and (iii) the written consent of the Agent shall be required for any amendment, modification or waiver of any provision of this Agreement affecting the indemnities to, or the rights, duties and obligations of, the Agent or reducing any fees or other amounts payable to the Agent hereunder for its own account. SECTION 10.02. Notices, Etc. All notices and other communications provided for hereunder shall, unless otherwise stated herein, be in writing (including telex communication and communication by facsimile copy) and mailed, telexed, transmitted or delivered, as to each party hereto, at its address set forth under its name on the signature pages hereof or specified in such party's Assignment and Acceptance or at such other address as shall be designated by such party in a written notice to the other parties hereto. All such notices and communications shall be effective, upon receipt, or in the case of (a) notice by mail, three days after being deposited in the United States mails, first class postage prepaid, (b) notice by overnight courier, one Business Day after being deposited with a national overnight courier service, (c) notice by telex, when telexed against receipt of answerback, or (d) notice by facsimile copy, when confirmation of receipt is obtained, except that notices and communications pursuant to Article II shall not be effective until received. SECTION 10.03. No Waiver; Remedies. No failure on the part of the Agent or any Owner to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 10.04. Binding Effect; Assignability. This Agreement shall be binding upon and inure to the benefit of WMECO, the Seller, the Servicer, the Agent, the Owners and their respective successors and permitted assigns. This Agreement and each Owner's rights and obligations hereunder and interest herein shall be assignable in whole or in part (including by way of the sale of participation interests therein) by such Owner and its successors and assigns; provided, however, that the Purchaser may only assign its rights and obligations as the "Purchaser" hereunder (as distinguished from its rights and obligations as an "Owner" hereunder), in whole, to another Issuer acceptable to the Purchaser, and, upon such assignment, such assigning Purchaser shall cease to be the Purchaser hereunder. Neither WMECO, the Seller nor the Servicer may assign any of its rights and obligations hereunder or any interest herein without the prior written consent of the Owners and the Agent. The parties to each assignment or participation made pursuant to this Section 10.04 shall execute and deliver to the Agent for its acceptance and recording in its books and records, an Assignment and Acceptance or a participation agreement or other transfer instrument reasonably satisfactory in form and substance to the Agent and the Seller, and which shall provide that the parties thereto agree to be bound by Section 10.12 of this Agreement. Each such assignment or participation shall be effective as of the date specified in the applicable Assignment and Acceptance or other agreement or instrument only after the execution, delivery, acceptance and recording as described in the preceding sentence. The Agent shall notify the Seller of any assignment or participation thereof made pursuant to this Section 10.04. The Purchaser or any Owner may, in connection with any assignment or participation or any proposed assignment or participation pursuant to this Section 10.04, disclose to the assignee or participant or proposed assignee or participant who agrees to abide by the provisions of Section 10.12 any information relating to the Seller and the Percentage Interests furnished to such Owner by or on behalf of the Seller or the Servicer. Notwithstanding the fact that the Purchaser or any Owner, as a result of its having assigned all of its remaining rights, interests, duties and obligations hereunder, shall cease to be the Purchaser or an Owner for purposes hereof, such assigning Purchaser or Owner, as the case may be, shall continue to be entitled to all rights of indemnity and reimbursement from the Seller under this Agreement for any indemnifiable or reimbursable costs, expenses or liabilities incurred or arising out or in connection with such Person's acting as the Purchaser or an Owner under this Agreement. SECTION 10.05. Term of this Agreement. This Agreement, including, without limitation, each of the Seller's and the Servicer's obligation to observe its respective covenants set forth in Articles V and VI, shall remain in full force and effect until the Collection Date; provided, however, that the rights and remedies with respect to any breach of any representation and warranty made or deemed made by the Seller or the Servicer pursuant to Articles III and IV and the indemnification and payment provisions of Articles IX and Article X shall be continuing and shall survive any termination of this Agreement. SECTION 10.06. GOVERNING LAW; SUBMISSION TO JURISDICTION. (A) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE INTERESTS OF THE OWNERS IN THE RECEIVABLES, THE RELATED SECURITY AND THE COLLECTIONS, OR THE REMEDIES HEREUNDER IN RESPECT THEREOF, ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. (B) EACH OF WMECO, THE SELLER AND THE SERVICER HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK, NEW YORK FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OF THE OTHER INSTRUMENTS, DOCUMENTS OR AGREEMENTS EXECUTED IN CONNECTION HEREWITH, OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH OF WMECO, THE SELLER AND THE SERVICER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. NOTHING IN THIS SECTION 10.06 SHALL AFFECT THE RIGHT OF THE AGENT OR ANY OF THE OWNERS TO BRING ANY ACTION OR PROCEEDING AGAINST WMECO, THE SELLER, THE SERVICER OR ANY OF ITS RESPECTIVE PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION. SECTION 10.07. Costs, Expenses and Taxes. (a) In addition to the rights of indemnification granted to the Agent, the Owners and their Affiliates under Article IX hereof, the Seller agrees to pay on demand all out-of-pocket costs and expenses of the Purchasers and the Agent incurred in connection with the preparation, execution, delivery, administration (including periodic auditing and amounts paid to any Lock-Box Bank or the bank at which the Collection Account is maintained in respect of disallowed items, fees and charges or for any other reason), amendment, modification or syndication of, or any waiver or consent issued in connection with, this Agreement and the other Transaction Documents, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Agent and the Purchasers with respect thereto and with respect to advising the Agent and the Purchasers as to their respective rights and remedies under this Agreement and the other documents to be delivered hereunder or in connection herewith, and all costs and expenses, if any (including reasonable counsel fees and expenses), incurred by the Agent or the Owners in connection with the enforcement of this Agreement and the other documents to be delivered hereunder or in connection herewith. (b) In addition, the Seller shall pay on demand any and all commissions (other than Dealer Fees included in the definition of "CP Rate") of placement agents and dealers in respect of Commercial Paper Notes issued to fund the purchase or maintenance of any Percentage Interest and any and all stamp, sales, excise and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of this Agreement or the other documents to be delivered hereunder. (c) In addition, the Seller shall pay on demand all other costs, expenses and taxes (excluding income taxes) incurred by the Purchaser or any general or limited partner or shareholder of the Purchaser ("Other Costs"), including, without limitation, the cost of auditing the Purchaser's books by certified public accountants, the cost of rating the Purchaser's Commercial Paper Notes by independent financial rating agencies, the taxes (excluding income taxes) resulting from the Purchaser's operations, and the reasonable fees and out-of-pocket expenses of counsel for the Purchaser or any counsel for any general or limited partner or shareholder of the Purchaser with respect to (i) advising such Person as to its rights and remedies under this Agreement and the other documents to be delivered hereunder or in connection herewith, (ii) the enforcement of this Agreement and the other documents to be delivered hereunder or in connection herewith or matters relating to the Purchaser's operations, and (iii) advising such Person as to the issuance of the Purchaser's Commercial Paper Notes and acting in connection with such issuance. SECTION 10.08. No Proceedings. Each of WMECO, the Seller, the Servicer, the Agent and the Owners hereby agrees that it will not institute against, or join any other Person in instituting against, the Purchaser or any subsidiary of the Purchaser any proceedings of the type referred to in clause (i) of Section 7.01(g) so long as any Commercial Paper Notes or other debt securities issued by the Purchaser or any of its subsidiaries shall be outstanding or there shall not have elapsed one year and one day since the last day on which any such Commercial Paper Notes shall have been outstanding. SECTION 10.09. Execution in Counterparts; Severability; Integration. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. This Agreement contains the final and complete integration of all prior expressions by the parties hereto with respect to the subject matter hereof and shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof, superseding all prior oral or written understandings other than the fee letters described in Section 2.10(a). Each of WMECO, the Seller and the Servicer acknowledges and agrees that it is not intended to have, and shall not assert, any rights, benefits, causes of action or remedies under or in connection with any instrument, document or agreement to which it is not a party, or any of the transactions contemplated thereby or in respect of any acts or omissions by any of the parties thereto, in each case, whether relating specifically to the transactions contemplated hereby or otherwise, including, without limitation, any Liquidity Agreements. SECTION 10.10. WAIVER OF TRIAL BY JURY. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE AGENT, THE OWNERS, WMECO, THE SELLER AND THE SERVICER EACH IRREVOCABLY WAIVES ALL RIGHT OF TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED AND/OR DELIVERED IN CONNECTION HEREWITH OR ANY MATTER ARISING HEREUNDER OR THEREUNDER. SECTION 10.11. Section Headings. Section headings in this Agreement are included herein for convenience of reference only and shall not affect in any way the interpretation of any of the provisions hereof. SECTION 10.12. Confidentiality. (a) Confidentiality of Agreement Information. Each of WMECO, the Seller and the Servicer agrees to maintain the confidentiality of this Agreement (and all drafts thereof) and not to disclose this Agreement or such drafts to third parties (other than to its directors, officers, employees, accountants or counsel); provided, however, that the Agreement may be disclosed to third parties to the extent such disclosure is: (i) (A) required in connection with a sale of securities of the Seller, (B) made solely to persons who are legal counsel for the purchaser or underwriter of such securities, and (C) limited in scope to the provisions of Articles V, VII, X and, to the extent defined terms are used in Articles V, VII and X, such terms defined in Article I of this Agreement; (ii) such disclosure is made pursuant to a written agreement of confidentiality in form and substance reasonably satisfactory to the Agent; (iii) with respect to information generally available to the public through no fault of WMECO, the Seller or Servicer; (iv) to any federal or state regulatory authority having jurisdiction over WMECO, the Seller or the Servicer; or (v) to any other Person to which such delivery or disclosure may be necessary or appropriate (A) in compliance with any law, rule, regulation or order applicable to the Seller or the Servicer, or (B) in response to any subpoena or other legal process. (b) Confidentiality of Seller Confidential Information. Each of the Purchaser, the Agent and each Owner (each, a "Subject Party") agrees to maintain the confidentiality of the Seller Confidential Information and not to disclose the Seller Confidential Information to third parties (other than to its directors, officers, employees, accountants or counsel); provided, however, that the Seller Confidential Information may be disclosed to third parties to the extent such disclosure is: (i) to another Subject Party; (ii) with respect to information generally available to the public through no fault of such Subject Party; (iii) to any holder of a Commercial Paper Note (a "Holder") and any placement agent with respect to Commercial Paper Notes, or in the case of general information regarding the nature, basic terms and status of the Purchaser's commercial paper program (including, without limitation, the amount and nature of the Purchase Limit, the Percentage Interests, the nature of the Receivables, the nature and amount of the required reserves and the performance of the Receivables pool), to any prospective Holder; (iv) to any party providing credit enhancement or liquidity facilities or any other facilities to any of the Owners, any proposed assignee or transferee of a Percentage Interest or any part thereof; (v) to any federal or state regulatory authority having jurisdiction over the Purchaser, any Owner or the Agent; (vi) to any internationally recognized rating agency in connection with the rating by such agency of an Owner; or (vii) to any other Person to which such delivery or disclosure may be necessary or appropriate (A) in compliance with any law, rule, regulation or order applicable to the Purchaser, any Owner or the Agent, (B) in response to any subpoena or other legal process, or (C) in order to protect or enforce an Owner's investment in the Percentage Interests. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. WMECO RECEIVABLES CORPORATION, as the Seller By: s/s Robert C. Aronson Title: Assistant Treasurer 107 Selden Street Berlin, CT 06037 Facsimile No.: (860) 665-5457 Confirmation No.: (860) 665-5317 Attention: David McHale Assistant Treasurer WESTERN MASSACHUSETTS ELECTRIC COMPANY By: s/s David R. McHale Title: Assistant Treasurer 174 Brush Hill Avenue West Springfield, Massachusetts Facsimile No.: (413) 787-9363 Confirmation No.: (413) 785-2293 Attention: David McHale Assistant Treasurer With a copy to: 107 Selden Street Berlin, CT 06037 Facsimile No.: (860) 665-5457 Confirmation No.: (860) 665-3249 Attention: David McHale Assistant Treasurer UNION BANK OF SWITZERLAND, NEW YORK BRANCH, as Agent By: s/s Rick Persaud Title: Assistant Vice President By: s/s Marino Zenios Title: Vice President Corporate & Institutional Banking 299 Park Avenue New York, New York 10171 Attention: Asset Securitization Group- J. Fred Moore Facsimile No.: (212) 821-3890 Confirmation No.: (212) 821-3294 MONTE ROSA CAPITAL CORPORATION, as the Purchaser By: Union Bank of Switzerland, New York Branch, as its attorney-in-fact By s/s James F. Moore Title: Assistant Treasurer By s/s Desmond Deis Title: Assistant Treasurer c/o Union Bank of Switzerland, New York Branch 299 Park Avenue New York, New York 10171 Attention: Asset Securitization Group- J. Fred Moore Facsimile No.: (212) 821-3890 Confirmation No.: (212) 821-3294 SCHEDULE I CONDITION PRECEDENT DOCUMENTS As required by Section 3.01 of the Agreement, each of the following items must be delivered to the Agent prior to the date of the initial purchase of a Percentage Interest: (a) A copy of this Agreement duly executed by the Seller, WMECO, the Servicer, the Purchaser and the Agent; (b) a copy of each other Transaction Document executed by the parties hereto; (c) Separate certificates of the Secretary or Assistant Secretary of the Seller and the Clerk or Assistant Clerk of WMECO, certifying (i) the names and true signatures of the incumbent officers of the Seller or WMECO, as the case may be, authorized to sign this Agreement and the other documents to be delivered by it hereunder (on which certificates the Agent and the Owners may conclusively rely until such time as the Agent shall receive from the Seller or WMECO, as the case may be, a revised certificate meeting the requirements of this paragraph (b)), (ii) that the copy of the certificate of incorporation of the Seller or WMECO, as the case may be, attached thereto is a complete and correct copy and that such certificate of incorporation has not been amended, modified or supplemented and is in full force and effect, (iii) that the copy of the by-laws of the Seller or WMECO, as the case may be, attached thereto is a complete and correct copy and that such by-laws have not been amended, modified or supplemented and are in full force and effect, (iv) the resolutions of the Seller's or WMECO's, as the case may be, board of directors approving and authorizing the execution, delivery and performance by the Seller or WMECO, as the case may be, of this Agreement and the documents related thereto and (v) in the case of such certificate of the Clerk or Assistant Clerk of WMECO, that the copy of its servicing agreement with Northeast Utilities Service Company attached thereto is a complete and correct copy and that such agreement has not been amended, modified or supplemented and is valid, enforceable and in full force and effect; (d) Articles/Certificate of Incorporation of each of the Seller and WMECO, certified by the Secretary of State of the state of its incorporation no more than 20 days prior to the effective date of this Agreement. (e) Good standing certificates for each of the Seller and WMECO issued by the Secretary of State of the state of its incorporation, and dated no more than 20 days prior to the effective date of this Agreement; (f) Acknowledgment copies of proper financing statements (the "Facility Financing Statements"), dated a date reasonably near to the date of the initial purchase of Percentage Interests, (i) describing the Receivables, the Related Security and Collections relating thereto and the assets described in Section 1.7 of the Purchase and Sale Agreement and naming WMECO as the seller/debtor, the Seller as buyer/secured party and the Purchaser as assignee, and (ii) describing the assets included in the definition of Percentage Interest or Section 2.16 and naming the Seller as debtor and the Purchaser as secured party, or other, similar instruments or documents, as may be necessary or, in the opinion of the Agent or any Owner, desirable under the UCC of all appropriate jurisdictions or any comparable law to perfect the Owners' interests in all Receivables and Related Security; (g) A pay out letter and related releases (excluding proper financing statements) with respect to the September, 1996 securitization transaction between WMECO, the Purchaser and the Agent; and acknowledgment copies of proper financing statements, if any, necessary to release all other security interests and other rights of any Person in the Receivables and Related Security previously granted by the Seller or WMECO; (h) Certified copies of requests for information or copies (or a similar search report certified by a party acceptable to the Agent), dated a date reasonably near to the date of the initial purchase of Percentage Interests, listing all effective financing statements (including the Facility Financing Statements) which name the Seller or WMECO (under its present name and any previous name) as debtor and which are filed in the jurisdictions in which the Facility Financing Statements were filed, together with copies of such financing statements (none of which, other than the Facility Financing Statements, shall cover any Receivables, Related Security, Collections or other Collateral); (i) An officer's certificate, dated the date of such initial purchase, in the form of Exhibit F, executed by an appropriate officer of WMECO; (j) An opinion of internal counsel to WMECO, in substantially the form of Exhibit E-1 and as to such other matters as the Agent may reasonably request; (k) Opinions of outside counsel to WMECO, in substantially the form of Exhibit E-2 and as to such other matters as the Agent may reasonably request; (l) An opinion of counsel to the Seller, in substantially the form of Exhibit E-3 and as to such other matters as the Agent may reasonably request; (m) A copy of each of the Liquidity Agreements related to this Agreement, executed by each of the Liquidity Lenders thereunder, the Purchaser and UBS, as the Liquidity Agent, together with all other instruments, documents and agreements required to be delivered thereunder; (n) [Intentionally Deleted] (o) The Public Disclosure Documents and such other financial reports as may be requested by the Agent or the Purchaser; (p) Letters from both Standard & Poor's and Moody's, confirming that the execution and delivery of this Agreement will not cause the ratings of the Purchaser's commercial paper notes to be reduced or withdrawn; (q) A Bank Notice, executed by the Purchaser and the bank at which the Collection Account is maintained, evidencing the Collection Account opened in the name of the Purchaser and complying with all of the other requirements of Section 6.08; and a written agreement of each payment intermediary, executed for the benefit of the Owners, pursuant to which such payment intermediary agrees to transfer Collections received in the Payment Centers to the Collection Account each day; (r) An Investor Report, dated as of the Cut-Off date immediately preceding such initial purchase; (s) A copy of the Credit and Collection Policy, certified by an appropriate officer of the Company as correct and complete; (t) A certification from an appropriate officer of WMECO (which may be combined with the certificate described in clause (i) above) (i) as to the execution and delivery by each of the parties thereto of the Purchase and Sale Agreement and all documents, agreements and instruments contemplated thereby (which evidence shall include copies, either original or facsimile, of each of such documents, instruments and agreements), (ii) that each of the conditions precedent to the execution and delivery of the Purchase and Sale Agreement has been satisfied to the Agent's satisfaction, (iii) that WMECO shall have contributed not less than $5,000,000 to the capital of Seller, including a pro forma balance sheet of Seller as of the date of the proposed initial purchase hereunder, certified to be true and correct by an executive officer of Seller, and (iv) that the initial purchases under the Purchase and Sale Agreement have been consummated; (u) A certificate from an officer of the Seller (in form satisfactory to the Agent) to the effect that the Trigger Conditions (as defined on the Purchase and Sale Agreement) do not exist after giving effect to the occurrences described in clause (t) above; and (v) A copy, certified as true and complete by an appropriate officer of WMECO, of the authorizations granted the Securities and Exchange Commission and the Massachusetts Department of Public Utilities with respect to the transactions contemplated by the Transaction Documents. SCHEDULE II [INTENTIONALLY OMITTED] SCHEDULE III TRADENAMES, FICTITIOUS NAMES AND "DOING BUSINESS AS" NAMES NONE SCHEDULE IV LOCATIONS OF SELLER'S AND WMECO'S CHIEF EXECUTIVE OFFICE AND PRINCIPAL PLACE OF BUSINESS AND LOCATIONS OF BOOKS AND RECORDS I. Seller 107 Selden Street Berlin, Connecticut 06037 II. WMECO Executive Office Address: 174 Brush Hill Avenue West Springfield, Massachusetts 01090-0010 Principal Administrative Office Address: 107 Selden Street Berlin, Connecticut 06037 Processing Office Address: 176 Cumberland Avenue Wethersfield, Connecticut 06109 EXHIBIT A FORM OF ASSIGNMENT AND ACCEPTANCE This ASSIGNMENT AND ACCEPTANCE, dated . 19 , is by and between , a ("Assignor"), and ("Assignee"). Reference is made to the Receivables Purchase Agreement, dated as of May 22, 1997 (the "Receivables Purchase Agreement"), among Western Massachusetts Electric Company, WMECO Receivables Corporation, Monte Rosa Capital Corporation and Union Bank of Switzerland, New York Branch (the "Agent"). Capitalized terms used but not defined herein shall have the meanings assigned to them in the Receivables Purchase Agreement. The Assignor hereby sells, assigns, transfers and conveys to the Assignee all of its right, title and interest in, to and under 1 (the "Transferred Percentage Interests") in accordance with Section 10.04 of the Receivables Purchase Agreement. From and after the date hereof, the Assignee shall have all of the rights, and be subject to all of the obligations, of the Assignor with respect to the Transferred Percentage Interests. The Agent shall be informed by both the Assignor and the Assignee of such assignment, and shall duly so note on its records; provided, however, that the failure of the Agent duly to so note shall not void or otherwise impair this Assignment and Acceptance or limit the Assignee's obligations under the Receivables Purchase Agreement with respect to the Transferred Percentage Interests. Without limiting the foregoing, the Assignee shall be bound by the provisions of Section 10.12 of the Receivables Purchase Agreement. THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE RECEIVABLES PURCHASE AGREEMENT AND THE INTERNAL LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be duly executed and delivered as of the date first above written. [ASSIGNOR] By: Name: Title: [ASSIGNEE] By: Name: Title: 1 [Specify Percentage Interest, or portion thereof, being assigned] EXHIBIT B METHODOLOGY RE: UNBILLED RECEIVABLES Total monthly generation ("MWHR") less a loss factor of around 8% (currently adjusted annually according to business practices) plus prior months unbilled MWHRs minus the current months billings in MWHRs equals the current months unbilled MWHRs. The unbilled MWHRs are allocated by class of customer (Residential, Commercial, Industrial and Street lights) based on actual MWHRs billed by class and then an average price per MWHR, which is calculated based on actual revenues by class divided by actual sales in MWHRs by class, is applied. EXHIBIT C-1 FORM OF BANK NOTICE FOR LOCK-BOX BANK [Letterhead of the WMECO] , 19 [Name and Address of Bank] Re: Western Massachusetts Electric Company Lock-Box No. Account No. Gentlemen: We hereby notify you that we have transferred exclusive ownership and control of our lock-box number (the "Lock-Box") and the corresponding account number (the "Account") maintained with you to Union Bank of Switzerland, New York Branch, 299 Park Avenue, New York, New York 10171 (the "Agent"). We hereby irrevocably instruct you to collect the monies, checks, instruments and other items of payment mailed to the Lock-Box and deposit into the Lock-Box Account all such monies, checks, instruments and other items of payment (unless otherwise instructed by the Agent), and to make all payments to be made by you out of or in connection with the Account directly to Union Bank of Switzerland, New York Branch, 299 Park Avenue, New York, New York 10171, account number , for the account of the Agent, unless you have received contrary instructions from the Agent. If you have received such contrary instructions, you shall be required to make such payments in accordance with such instructions. We also hereby notify you that the Agent shall be irrevocably entitled to exercise any and all rights in respect of or in connection with the Lock-Box and the Account, including, without limitation, the right to specify when payments are to be made out of or in connection with the Lock-Box and the Account. The monies, checks, instruments and other items of payment mailed to the Lock-Box and the funds deposited into the Account will not be subject to deduction, set-off, banker's lien, or any other right in favor of any person other than the Agent. Please agree to the terms of, and acknowledge receipt of, this notice by signing in the space provided below on two copies hereof sent herewith and send one such signed copy to the Agent, at its address referred to above, Attention: Asset Securitization Group, and send the other signed copy to the undersigned at its address at , Attention: . Very truly yours, WESTERN MASSACHUSETTS ELECTRIC COMPANY By s/s Title: Agreed and acknowledged: [NAME OF BANK] By s/s Title: EXHIBIT C-2 FORM OF BANK NOTICE FOR BANK AT WHICH THE COLLECTION ACCOUNT IS MAINTAINED [Letterhead of the Purchaser] , 19 [Name and Address of Bank] Re: Union Bank of Switzerland, as agent (the "Agent") under the Receivables Purchase Agreement, dated as of May 22, 1997, among WMECO Receivables Corporation, Western Massachusetts Electric Company ("WMECO"), Monte Rosa Capital Corporation (the "Purchaser") and the Agent. Gentlemen: By your execution of this letter (where indicated below) you confirm that the Purchaser has exclusive ownership and control of account number (the "Account") maintained with you. We hereby instruct you to transfer all available funds in the Account on each business day to WMECO's account number at , unless you have received contrary instructions from the Purchaser or the Agent, on behalf of the Purchaser. If you have received such contrary instructions, you shall be required to transfer funds in the Account only in accordance with such instructions. You also hereby confirm that the Purchaser or the Agent, on behalf of the Purchaser, shall be irrevocably entitled to exercise any and all rights in respect of or in connection with the Account, including, without limitation, the right to specify when payments are to be made out of or in connection with the Account. The funds deposited into the Account will not be subject to deduction, set-off, banker's lien, or any other right in favor of any person other than the Purchaser. Please agree to the terms of, and acknowledge receipt of, this notice by signing in the space provided below on two copies hereof sent herewith and send one such signed copy to WMECO, at its address at 107 Selden Street, Berlin, Connecticut 06037, Attention: David McHale, and send the other signed copy to the undersigned, care of the Agent at the Agent's address at 299 Park Avenue, New York, New York 10171, Attention: Asset Securitization Group. Very truly yours, MONTE ROSA CAPITAL CORPORATION By: Union Bank of Switzerland, New York Branch, as its attorney-in-fact By s/s Title: By s/s Title: Agreed and acknowledged: [NAME OF BANK] By s/s Title: EXHIBIT D FORM OF INVESTOR REPORT Attached. EXHIBIT E-1 FORMS OF OPINIONS OF INTERNAL COUNSEL FOR WMECO ATTACHED EXHIBIT E-2 FORM OF OPINION OF OUTSIDE COUNSEL FOR WMECO ATTACHED EXHIBIT E-3 FORM OF OPINION OF OUTSIDE COUNSEL FOR THE SELLER ATTACHED OFFICER'S CERTIFICATE I, , of Western Massachusetts Electric Company, a Massachusetts corporation ("WMECO") hereby certify pursuant to Section 3.01 and Schedule I(i) of the Receivables Purchase and Sale Agreement, dated as of May 22, 1997, among WMECO, as initial Servicer, WMECO Receivables Corporation ("WRC"), as Seller, Monte Rosa Capital Corporation, as Purchaser ("MRCC"), and Union Bank of Switzerland, New York Branch, as Agent (the "Receivables Purchase Agreement") (capitalized terms used but not defined herein have the meanings set forth in the Receivables Purchase Agreement), that, on the date hereof: (a) the representations and warranties contained in Section 4.01 and Section 4.02 of the Receivables Purchase Agreement are true and correct in all material respects on the date hereof, except to the extent that such representations relate solely to an earlier date (in which case, such representations and warranties were true and correct in all material respects and as of such date), (b) the conditions precedent to the initial purchase under the Receivables Purchase Agreement, as listed in Schedule I (per Section 3.01) of the Receivables Purchase Agreement, have been performed or complied with on or before the date hereof, (c) no event has occurred and is continuing, or would result from the purchase from WMECO by MRCC of Percentage Interests under the Receivables Purchase Agreement, that would: (i) cause the Termination Date to occur or (ii) constitute an Event of Termination or would constitute an Event of Termination but for the requirement that notice be given or time elapse or both, (d) except as disclosed in the Public Disclosure Documents, since December 31, 1996, there has been no material adverse change in the operations or consolidated financial condition of the Parent or WMECO from that shown in the financial statements described in Section 4.01 of the Receivables Purchase Agreement, (e) the Collection Account, which is maintained in the name of the Purchaser, complies with the requirements of Section 6.08 of the Receivables Purchase Agreement, (f) WMECO holds all of the issued and outstanding shares of WRC and has contributed at least $5,000,000 (in the form of Receivables) to WRC as capital. Attached hereto is a pro forma balance sheet of the Seller after giving effect to the initial funding under the Receivables Purchase Agreement, (g) attached hereto is a correct and complete copy of the Credit and Collection Policy, (h) the Trigger Conditions do not exist and will not result from WMECO's sale and contribution of Receivables to WRC on the Initial Closing Date (as defined in the Purchase and Sale Agreement), and (i) attached hereto are true and complete copies of the authorizations granted by the Securities and Exchange Commission and the Massachusetts Department of Public Utilities with respect to the transactions contemplated by the Transaction Documents. IN WITNESS WHEREOF, I have signed this certificate as of this 22nd day of May, 1997. Name: Title: EX-10.18 24 RECEIVABLES PURCHASE AND SALE AGREEMENT-WMECO Exhibit 10.50.1 PURCHASE AND SALE AGREEMENT Dated as of May 22, 1997 among WMECO RECEIVABLES CORPORATION, as purchaser hereunder and WESTERN MASSACHUSETTS ELECTRIC COMPANY, as the Seller and as the initial Servicer TABLE OF CONTENTS ARTICLE I AGREEMENT TO PURCHASE AND SELL 1.1 Agreement To Purchase and Sell 1.2 Timing of Purchases 1.3 Consideration for Purchases 1.4 Contributions 1.5 The "Purchase and Sale Termination Date" 1.6 Servicer 1.7 True Sales; Security Interests 1.8 Application of Collections 1.9 Obligations of WMECO with Respect to the Receivables 1.10 Subordination ARTICLE II CALCULATION OF WRC PURCHASE PRICE 2.1 Calculation of WRC Purchase Price ARTICLE III PAYMENT OF WRC PURCHASE PRICE 3.1 Purchase Price Payment 3.2 Settlement as to Specific Receivables and Dilution ARTICLE IV CONDITIONS OF PURCHASES AND SALES 4.1 Conditions Precedent to Initial Purchase 4.2 Certification as to Representations and Warranties 4.3 Conditions Precedent to Initial Sale ARTICLE V REPRESENTATIONS AND WARRANTIES OF WMECO 5.1 WMECO Representations and Warranties ARTICLE VI COVENANTS OF WMECO 6.1 General Covenants ARTICLE VII ADDITIONAL RIGHTS AND OBLIGATIONS IN RESPECT OF THE RECEIVABLES 7.1 Rights of WRC 7.2 Responsibilities of WMECO 7.3 UCC Matters; Protection and Perfection of Percentage Interests ARTICLE VIII PURCHASE AND SALE TERMINATION 8.1 Termination 8.2 Remedies ARTICLE IX INDEMNIFICATION 9.1 Indemnities by WMECO ARTICLE X MISCELLANEOUS 10.1 Amendments, etc. 10.2 Notices, etc. 10.3 No Waiver; Cumulative Remedies 10.4 Binding Effect; Assignability 10.5 GOVERNING LAW; SUBMISSION TO JURISDICTION 10.6 Costs, Expenses and Taxes 10.7 Waiver of Jury Trial 10.8 Captions and Cross References; Incorporation by Reference 10.9 Execution in Counterparts; Severability; Integration 10.10 Reliance on Corporate Separateness 10.11 Term of this Agreement 10.12 No Proceedings 10.13 Confidentiality APPENDIX A Definitions EXHIBIT A - Form of WMECO Sale and Transfer Certificate EXHIBIT B - Office Locations EXHIBIT C - Trade Names PURCHASE AND SALE AGREEMENT THIS PURCHASE AND SALE AGREEMENT (this "Agreement"), dated as of May 22, 1997, is among WESTERN MASSACHUSETTS ELECTRIC COMPANY, a Massachusetts corporation ("WMECO"), as Seller and as the initial Servicer, and WMECO RECEIVABLES CORPORATION, a Connecticut corporation, as purchaser hereunder ("WRC"). Definitions Unless otherwise indicated, certain terms that are capitalized and used throughout this Agreement are defined in Appendix A. All references herein to months are to calendar months unless otherwise expressly indicated. Recitals 1. WRC is a special purpose corporation, all of the issued and outstanding shares of which are owned by WMECO. 2. WMECO generates Receivables in the ordinary course of its business. 3. WMECO, in order to finance its business, wishes to sell Receivables to WRC, and WRC is willing, on the terms and subject to the conditions set forth herein, to purchase Receivables from WMECO. 4. WMECO and WRC each intends this transaction to be a true sale of Receivables by WMECO to WRC providing WRC with the full benefits of ownership of the Receivables, and WMECO and WRC do not intend the transactions hereunder to be, or for any purpose to be, characterized as a loan from WRC to WMECO. 5. WRC intends to sell Percentage Interests in the Receivables from time to time pursuant to the Receivables Purchase Agreement. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereto agree as follows: ARTICLE I AGREEMENT TO PURCHASE AND SELL 1.1 Agreement To Purchase and Sell. On the terms and subject to the conditions set forth in this Agreement (including Article IV), WMECO agrees to sell to WRC, and WRC agrees to purchase from WMECO, from time to time on or after the Initial Closing Date, but before the Purchase and Sale Termination Date, all of WMECO's right, title and interest in and to: (a) each Receivable that was owing on the closing of WMECO's business on the day preceding the Initial Closing Date (other than Contributed Receivables); (b) each Receivable created by WMECO from and including the closing of WMECO's business on the day preceding the Initial Closing Date, to and including the Purchase and Sale Termination Date (other than Contributed Receivables); (c) all rights to, but not the obligations under, all Related Security; (d) all monies due or to become due with respect to the Receivables described in clauses (a) and (b); and (e) all proceeds (as defined in the applicable UCC) of Receivables and Related Security described in clauses (a), (b) and (c) above, including, without limitation, all Collections and other funds which either are received by WMECO, WRC or the Servicer from or on behalf of the Obligors in payment of any amounts owed in respect of the Receivables, or are applied to such amounts owed by the Obligors (including, without limitation, insurance payments that WMECO applies in the ordinary course of its business to amounts owed in respect of any Receivable). The items described in clauses (c), (d) and (e) above are collectively called the "Related Assets". All purchases hereunder shall be made without recourse, but shall be made pursuant to, and in reliance upon, the representations, warranties and covenants of WMECO set forth in this Agreement and each other Transaction Document. No obligation or liability to any Obligor on any Receivable is intended to be assumed by WRC hereunder, and any such assumption is expressly disclaimed. WRC's foregoing commitment to purchase Receivables is herein called the "Facility." 1.2 Timing of Purchases. (a) Initial Closing Date Purchases. WMECO's entire right, title and interest in (i) each Receivable that existed on the closing of WMECO's business on the day preceding the Initial Closing Date (other than Contributed Receivables), and (ii) all Related Assets with respect thereto automatically shall be deemed to be sold to WRC on the Initial Closing Date. (b) Regular Purchases. Commencing on the Initial Closing Date, until the Purchase and Sale Termination Date, each Receivable originated by WMECO (other than Contributed Receivables) and the Related Assets with respect thereto shall be sold to WRC immediately (and without further action) upon the creation of such Receivable. 1.3 Consideration for Purchases. On the terms and subject to the conditions set forth in this Agreement, WRC agrees to make WRC Purchase Price payments to WMECO in accordance with Article III. 1.4 Contributions. From time to time, upon written notice to WRC and the Agent, WMECO may elect to contribute Receivables to WRC. Any such contribution shall be effective concurrently with the origination of the Receivables to be contributed and shall include the Related Assets with respect thereto. 1.5 The "Purchase and Sale Termination Date" shall be the date of the termination of this Agreement pursuant to Section 8.1. 1.6 Servicer. WMECO shall act as the initial Servicer of the Receivables as provided herein and in the Receivables Purchase Agreement. WMECO shall perform its obligations as Servicer under the Receivables Purchase Agreement, and WRC shall pay to the Servicer the Servicing Fee. WRC may, upon notice to WMECO, with the prior written consent of the Purchaser and the Agent, designate any Person to succeed WMECO as the Servicer. Upon any such designation of any Person to succeed WMECO or any successor Servicer pursuant hereto, WMECO agrees that it will terminate its activities as the Servicer hereunder in a manner which WRC and the Agent believe will facilitate the transition of the performance of such activities to the new Servicer. Under the terms of the Receivables Purchase Agreement, WRC undertakes certain liabilities with respect to the Servicer's performance. Such undertakings shall not impair any claim WRC may have against the Servicer under the Transaction Documents for the Servicer's breach thereof. 1.7 True Sales; Security Interests. (a) WMECO and WRC intend the transfers of Receivables hereunder to be true sales by WMECO to WRC that are absolute and irrevocable and that provide WRC with the full benefits of ownership of the Receivables, and neither WMECO nor WRC intends the transactions contemplated hereunder to be, or for any purpose to be characterized as, loans from WRC to WMECO. It is, further, not the intention of the parties hereto that the conveyance of the Specified Assets be deemed a grant of a security interest in the Specified Assets by WMECO to WRC to secure a debt or other obligation of WMECO. However, in the event that, notwithstanding the intent of the parties, any Specified Assets are property of WMECO's estate, then (i) this Agreement also shall be deemed to be and hereby is a security agreement within the meaning of the UCC, and (ii) the conveyance by WMECO provided for in this Agreement shall be deemed to be a grant by WMECO to WRC of, and WMECO hereby grants to WRC, a security interest in and to all of WMECO's right, title and interest in, to and under the Specified Assets to secure (1) the rights of WRC and its assigns hereunder and (2) a loan by WRC to WMECO in the amount of the related WRC Purchase Price of such assets. WMECO and WRC shall, to the extent consistent with this Agreement, take such actions as may be necessary to ensure that, if this Agreement were deemed to create a security interest in the Specified Assets, such security interest would be deemed to be a perfected security interest of first priority in favor of WRC under applicable law and will be maintained as such throughout the term of this Agreement. It is understood and agreed that this Section 1.7(a) does not secure or guaranty the obligations of an Obligor to pay any Receivable. The immediately preceding sentence shall not limit the extent to which any other provision of this Agreement creates a claim against WMECO in respect of any Receivable (for reasons other than the Obligor's credit problems), or limit the extent to which the Specified Assets secure such claim. (b) To secure the WMECO Obligations, WMECO hereby grants to WRC, for its own benefit and the benefit of its assigns, a security interest in all right, title and interest (if any) of WMECO in the Collection Account and all items therein or attributable thereto (including without limitation all funds, interest, dividends, moneys, investments, securities and any other property received, receivable or otherwise distributed in respect of or in exchange for any or all of the foregoing). WMECO and WRC shall, to the extent consistent with this Agreement, take such actions as may be necessary to ensure that such security interest is a perfected security interest of first priority in favor of WRC under applicable law and will be maintained as such throughout the term of this Agreement. It is understood and agreed that this Section 1.7 (b) does not secure or guaranty the obligations of an Obligor to pay any Receivable. The immediately preceding sentence shall not limit the extent to which any other provision of this Agreement creates a claim against WMECO in respect of any Receivable (for reasons other than the Obligor's credit problems), or limit the extent of the collateral securing such claim. 1.8 Application of Collections. Any payment by an Obligor in respect of any indebtedness owed by it to WMECO shall, except as otherwise specified by such Obligor or otherwise required by contract or law or by instruction of the Agent, be applied as a Collection of any Receivable of such Obligor (in the order of the age of such Receivables, starting with the oldest such Receivable) to the extent of any amounts then due and payable thereunder before being applied to any other receivable or other indebtedness (other than a Receivable) of such Obligor. 1.9 Obligations of WMECO with Respect to the Receivables. WMECO will (a) at its expense, regardless of any exercise by WRC or its assigns of its rights hereunder, timely and fully perform and comply with all material provisions, covenants and other promises required to be observed by it under any contracts or other agreements related to the Receivables to the same extent as if the Receivables had not been sold hereunder and (b) pay when due any taxes (other than Excluded Taxes), including without limitation, sales and excise taxes, payable in connection with the Receivables. In no event shall WRC or its assigns have any obligation or liability with respect to any Receivables or related contracts, if applicable, nor shall any of them be obligated to perform any of the obligations of WMECO thereunder. WMECO will timely and fully comply in all material respects with the Credit and Collection Policy in regard to each Receivable and any related contract. WMECO will not make any change in the character of its business or in the Credit and Collection Policy, which change would, in either case, impair the credit quality, enforceability or collectibility of any Receivable. 1.10 Subordination. (a) The payment and performance of the Subordinated Obligations is hereby subordinated to the Senior Obligations of WRC and, except as set forth in this Section 1.10, WMECO will not ask, demand, sue for, take or receive from WRC, by setoff or in any other manner, the whole or any part of any Subordinated Obligations, unless and until such Senior Obligations shall have been fully paid and satisfied (the temporary reduction of outstanding Senior Obligations not being deemed to constitute full payment or satisfaction thereof). (b) Notwithstanding clause (a) above and subject to clause (c) below, WRC may pay the WRC Purchase Price and other Restricted Payments as provided in Section 3.1 (all such payments being herein called "Permitted Payments"). (c) Prior to payment in full by WRC of its Senior Obligations, WMECO shall have no right to sue for or otherwise exercise any remedies with respect to any Permitted Payment, or otherwise take any action against WRC or WRC's property with respect to any Permitted Payment. (d) Should any payment or distribution be received by WMECO upon or with respect to the Subordinated Obligations (other than Permitted Payments) prior to the satisfaction of all of the Senior Obligations, WMECO shall receive and hold the same in trust, as trustee, for the benefit of the holders of Senior Obligations, and shall forthwith deliver the same to the Agent (in the form received, except where endorsement or assignment by WMECO is necessary), for application to the Senior Obligations, whether or not then due. (e) In the event of any Bankruptcy Proceeding with respect to WRC, (i) WMECO shall promptly file a claim or claims, in the form required in such Bankruptcy Proceeding, for the full outstanding amount of the Subordinated Obligations, and shall use commercially reasonable efforts to cause such claim or claims to be approved and all payments or other distributions in respect thereof to be made directly to the Agent (for the benefit of the holders of Senior Obligations) until all Senior Obligations shall have been paid and performed in full and in cash, and (ii) WMECO shall not be subrogated to the rights of any such holder to receive payments or distributions from WRC until one year and one day after payment in full and in cash of all Senior Obligations. (f) If at any time any payment (in whole or in part) made with respect to any Senior Obligation is rescinded or must be restored or returned (whether in connection with any Bankruptcy Proceeding or otherwise), the subordination provisions contained in this Section 1.10 shall continue to be effective or shall be reinstated, as the case may be, as though such payment had not been made. (g) The subordination provisions contained in this Section 1.10 shall not be impaired by amendment or modification to the Transaction Documents or any lack of diligence in the enforcement, collection or protection of, or realization on, the Senior Obligations or any security therefor. ARTICLE II CALCULATION OF WRC PURCHASE PRICE 2.1 Calculation of WRC Purchase Price. (a) The purchase price (the "WRC Purchase Price") for each Receivable and its Related Assets shall equal the Outstanding Balance of such Receivable multiplied by the Discount Percentage. (b) The initial "Discount Percentage" shall equal 98.88%. The Discount Percentage shall be redetermined and set forth in the Investor Reports for each March, June, September and December. Each change in the Discount Percentage shall be effective for purchases commencing on the first day of the month following the month in which such Investor Report is delivered. The Discount Percentage shall equal the result of (i) 100% minus (ii) the sum of (x) the discount rate equivalent of a per annum interest rate equal to the sum of 1.25% plus WRC's weighted average cost of funds (excluding Contributed Receivables and other equity capital) during the preceding three Measurement Periods, plus (y) the percentage equivalent of a ratio computed by dividing (A) the aggregate Outstanding Balance of Receivables that were written off during the preceding three Measurement Periods by (B) the sum of the Collections during such three preceding Measurement Periods. ARTICLE III PAYMENT OF WRC PURCHASE PRICE 3.1 Purchase Price Payment. (a) On the Initial Closing Date, WRC shall pay WMECO the WRC Purchase Price for the Receivables and Related Assets sold on that date. Otherwise, on each Adjustment Date WRC and WMECO shall settle as to the WRC Purchase Price for Receivables and Related Assets sold during the related Measurement Period. Notwithstanding such monthly settlement arrangement, on each Business Day the Servicer will, on behalf of WRC, transfer to WMECO (for WMECO's own account except as provided in Section 3.1(b)) all Collections (other than Collections required to be used for other purposes under the Receivables Purchase Agreement) received on each Business Day and such Collections shall be applied by WMECO to any outstanding WRC Purchase Price. On each Adjustment Date, the Servicer, WRC and WMECO shall determine the aggregate amount of such transfers made during the related Measurement Period and the aggregate WRC Purchase Price for Receivables and Related Assets sold during that Measurement Period. The amounts transferred shall then be deemed to have been applied: first, as a payment of deferred WRC Purchase Price for Receivables sold during any earlier Measurement Period and their Related Assets; and second, as a payment of the aggregate WRC Purchase Price for Receivables sold during the related Measurement Period and their Related Assets. (b) Any portion of the WRC Purchase Price for Receivables and Related Assets sold during any Measurement Period which is not paid pursuant to priority second above shall be treated as deferred WRC Purchase Price and shall be payable from time to time as provided in subsection (a); provided that any unpaid deferred WRC Purchase Price shall be due and payable on the date that falls nine months after the Purchase and Sale Termination Date. If it is determined on any Adjustment Date that Collections paid by the Servicer to WMECO pursuant to Section 3.1(a) during the related Measurement Period exceeded the sum of (i) the WRC Purchase Price payable for such Measurement Period plus (ii) amounts owed by WRC at the start of such Measurement Period for WRC Purchase Price accrued during previous Measurement Periods, WMECO shall remit such excess to WRC in immediately available funds on the next succeeding Business Day following WRC's request therefor. WRC may also elect to declare a dividend (in an amount up to such excess) to WMECO, subject to such restrictions as are set forth in Section 5.01(k) of the Receivables Purchase Agreement. (c) The Servicer (based on information provided to it by WRC) shall at all times maintain information sufficient to determine the net amount owed by WRC to WMECO, or by WMECO to WRC, in respect of such WRC Purchase Price; provided, that nothing in this Section 3.1 shall be construed to require the Servicer or any Affiliate thereof to deliver to WMECO, WRC or the Agent, a report setting forth any calculation under this Section 3.1, except (i) for the delivery of an Investor Report in accordance with Section 6.07 of the Receivables Purchase Agreement and (ii) to the extent requested by WRC or the Agent (x) at any time after the occurrence and during the continuance of a Servicer Default or a Transition Event, or (y) on the Termination Date. 3.2 Settlement as to Specific Receivables and Dilution. (a) If on the day of any purchase or contribution of Receivables from WMECO hereunder, any of the representations or warranties relating to title set forth in Section 5.1(h) is not true with respect to such Receivable, then subject to subsection (c) below, the WRC Purchase Price that otherwise would be paid to WMECO with respect to Receivables subsequently generated by WMECO shall be decreased by an amount equal to the Outstanding Balance of such Receivable; provided, that if WRC thereafter receives payment on account of Collections due with respect to such Receivable, WRC promptly shall deliver such funds to WMECO. (b) If, on any day, the Outstanding Balance of any Receivable purchased or contributed hereunder is reduced or adjusted on account of any defective, rejected, returned, repossessed or foreclosed merchandise, any defective, disputed or rejected services, any discount or any other adjustment made or performed by WMECO or any other Person (including, without limitation, those described in the definition of "Dilution Factors") or as a result of a setoff in respect of any claim by the Obligor thereof against WMECO or any of its Affiliates (whether such claim arises out of the same or a related transaction or an unrelated transaction) as indicated on the books of WRC (or, for periods prior to the Initial Closing Date, the books of WMECO), then, subject to subsection (c) below, the WRC Purchase Price that otherwise would be paid to WMECO with respect to Receivables subsequently generated by WMECO shall be decreased by the amount of such net reduction. (c) If any decrease is required in the WRC Purchase Price of subsequently generated Receivables pursuant to subsection (a) or (b) above at any time (i) when an Event of Termination (or an event or condition that would constitute an Event of Termination but for the requirement that notice be given or time elapse or both) exists or (ii) on or after the Purchase and Sale Termination Date, then, in lieu of such reduction, the amount by which the WRC Purchase Price should have been so reduced shall be deposited by WMECO in same day funds into the Collection Account for application by the Servicer to the same extent as if Collections of the applicable Receivable in such amount had actually been received on such date. (d) Each Investor Report (other than the Investor Report delivered on the Initial Closing Date) shall include, in respect of the Receivables previously generated by WMECO (including the Contributed Receivables), a calculation of the aggregate reductions described in subsection (a) or (b) of this Section 3.2 relating to such Receivables since the last Investor Report delivered hereunder. ARTICLE IV CONDITIONS OF PURCHASES AND SALES 4.1 Conditions Precedent to Initial Purchase. The initial purchase hereunder is subject to the condition precedent that WRC shall have received, on or before the Initial Closing Date, the following, each (unless otherwise indicated) dated the Initial Closing Date or such earlier date satisfactory to WRC and the Agent, and each in form and substance satisfactory to WRC: (a) A copy of this Agreement duly executed by WMECO; (b) A certificate of the Clerk or Assistant Clerk of WMECO, certifying (i) the names and true signatures of the incumbent officers of WMECO authorized to sign this Agreement and the other documents to be delivered by it hereunder, (ii) that the copy of the certificate of incorporation of WMECO attached thereto is a complete and correct copy and that such certificate of incorporation has not been amended, modified or supplemented and is in full force and effect, (iii) that the copy of the by-laws of WMECO, attached thereto, is a complete and correct copy and that such by-laws have not been amended, modified or supplemented and are in full force and effect, (iv) the resolutions of WMECO's board of directors approving and authorizing the execution, delivery and performance by WMECO of this Agreement and the documents related thereto and (v) that the copy of its servicing agreement with Northeast Utilities Service Company attached thereto is a complete and correct copy and that such agreement has not been amended, modified or supplemented and is valid, enforceable and in full force and effect; (c) Articles/Certificate of Incorporation of WMECO, certified by the Secretary of State of Massachusetts no more than 20 days prior to the effective date of this Agreement. (d) Good standing certificates for WMECO issued by the Secretary of State of Massachusetts, and dated no more than 20 days prior to the effective date of this Agreement; (e) Originals of such financing statements (Form UCC-1) that have been duly executed and name WMECO as the debtor/seller and WRC as the secured party/purchaser (and the Purchaser, as assignee of WRC) as may be necessary or, in WRC's or the Agent's reasonable opinion, desirable under the UCC of all appropriate jurisdictions or any comparable law of all appropriate jurisdictions to perfect WRC's ownership and/or security interest in the Receivables, the Related Assets and the assets described in Section 1.7 ; (f) Acknowledgment copies (or in the case of releases executed by the Agent or the Purchaser, executed copies) of proper UCC filings, if any, necessary to release all security interests and other rights of any Person in the Receivables and Related Assets previously granted by WMECO; (g) A written search report from a Person satisfactory to WRC listing all effective financing statements that name WMECO as debtor or assignor and that are filed in the jurisdictions in which filings were made pursuant to the foregoing subsection (e), together with copies of such financing statements (none of which, except for those described in the foregoing subsection (e), shall cover any Receivables, Related Assets or assets of the type described in Section 1.7 except for those in respect of which appropriately executed termination statements shall have been delivered to the Agent at the Closing), and tax and judgment lien search reports from a Person satisfactory to WRC showing no evidence of such liens filed against WMECO; (h) A favorable opinion of Day, Berry & Howard, counsel to WMECO, in form and substance satisfactory to the Agent and WRC; (i) Evidence (i) of the execution and delivery by each of the parties thereto of each of the Transaction Documents to be executed and delivered in connection herewith and (ii) that each of the conditions precedent to the execution, delivery and effectiveness of the Transaction Documents has been satisfied to WRC's satisfaction; (j) A certificate from an officer of WMECO to the effect that the Servicer and WMECO have placed on the most recent, and have taken all steps reasonably necessary to ensure that there shall be placed on each subsequent, data processing report that it generates which are of the type that a proposed purchaser or lender would use to evaluate the Receivables, the following legend (or the substantive equivalent thereof): "THE RECEIVABLES DESCRIBED HEREIN HAVE BEEN SOLD TO WMECO RECEIVABLES CORPORATION PURSUANT TO A PURCHASE AND SALE AGREEMENT, DATED AS OF MAY 22, 1997, AS AMENDED OR SUPPLEMENTED FROM TIME TO TIME, BETWEEN WESTERN MASSACHUSETTS ELECTRIC COMPANY AND WMECO RECEIVABLES CORPORATION; AND UNDIVIDED, FRACTIONAL OWNERSHIP INTERESTS IN THE RECEIVABLES DESCRIBED HEREIN HAVE BEEN SOLD BY WMECO RECEIVABLES CORPORATION TO MONTE ROSA CAPITAL CORPORATION PURSUANT TO A RECEIVABLES PURCHASE AGREEMENT, DATED AS OF MAY 22, 1997, AS AMENDED OR SUPPLEMENTED FROM TIME TO TIME, AMONG WMECO RECEIVABLES CORPORATION, WESTERN MASSACHUSETTS ELECTRIC COMPANY, MONTE ROSA CAPITAL CORPORATION AND UNION BANK OF SWITZERLAND, NEW YORK BRANCH, AS THE AGENT"; (k) The Public Disclosure Documents and such other financial reports as may be requested by the Agent, WRC or the Purchaser; (l) A copy of the Credit and Collection Policy, certified by an appropriate officer of WMECO as correct and complete; (m) A transition agreement, in form and substance satisfactory to the Agent, terminating the existing receivables purchase agreement among WMECO, the Purchaser and the Agent; and (n) Such other documents as WRC or the Agent shall reasonably request. 4.2 Certification as to Representations and Warranties. WMECO, by accepting the WRC Purchase Price related to each purchase of Receivables (including any portion thereof paid to WMECO on a daily basis pursuant to Section 3.1), shall be deemed to have certified that the representations and warranties contained in Article V (other than, in the case of any purchase after the date hereof, the Excluded Representations) are true and correct on and as of such day, with the same effect as though made on and as of such day. 4.3 Conditions Precedent to Initial Sale. The initial sale hereunder is subject to the condition precedent that WMECO shall have received, on or before the Initial Closing Date, (i) a copy of this Agreement duly executed by WRC, and (ii) such other documents as WMECO shall reasonably request; provided that WMECO's acceptance of any WRC Purchase Price shall be conclusive evidence that such conditions have been satisfied. ARTICLE V REPRESENTATIONS AND WARRANTIES OF WMECO 5.1 WMECO Representations and Warranties. In order to induce WRC to enter into this Agreement and to make purchases hereunder, WMECO hereby makes the representations and warranties set forth in this Article V: (a) WMECO is a corporation duly incorporated, validly existing and in good standing under the laws of Massachusetts and is duly qualified to do business, and is in good standing, in every other jurisdiction in which the failure to be so qualified could reasonably be expected to have a Material Adverse Effect. (b) The execution, delivery and performance by WMECO of this Agreement and all other Transaction Documents, including WMECO's use of the proceeds of sales hereunder and reinvestments, are within WMECO's corporate powers, have been duly authorized by all necessary corporate action, do not contravene (i) WMECO's charter or by-laws, (ii) any law, rule or regulation applicable to WMECO, (iii) any contractual restriction binding on or affecting WMECO or its property or (iv) any order, writ, judgment, award, injunction or decree binding on or affecting WMECO or its property, and do not result in or require the creation of any lien, security interest or other charge or encumbrance upon or with respect to any of its properties (other than in favor of WRC or the Purchaser with respect to the Receivables and the Related Security and Collections associated therewith); and no transaction contemplated hereby requires compliance with any bulk sales act or similar law. This Agreement has been duly executed and delivered by WMECO. (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by WMECO of this Agreement or any other Transaction Document or instrument to be delivered hereunder, except for such filings as have been made and such approvals as have been obtained and except for the filing of the UCC financing statements referred to in Article IV. (d) This Agreement and each other Transaction Document or instrument delivered by it hereunder constitutes the legal, valid and binding obligation of WMECO enforceable against WMECO in accordance with its terms. (e) The consolidated balance sheets of each of the Parent and WMECO as at December 31, 1996, and the related statements of income, shareholders' equity and cash flows for the fiscal year then ended, copies of which have been furnished to the Agent, fairly present the consolidated financial condition of the Parent and WMECO and their consolidated subsidiaries as at such date and the consolidated results of the operations of the Parent, WMECO and their consolidated subsidiaries for the period ended on such date, all in accordance with GAAP. Since December 31, 1996, except as disclosed in the Public Disclosure Documents, there has been no change in any such condition or operations which has had, or could reasonably be expected to have, a Material Adverse Effect. Since December 31, 1996, except as disclosed in the Public Disclosure Documents, there has been no change in any such condition or operations that has had, or reasonably could be expected to have, a material adverse effect on the operations or financial condition of the Parent. (f) Except as disclosed in the Public Disclosure Documents, (i) there is no pending or threatened action or proceeding affecting the Parent, WMECO or any of their subsidiaries before any court, governmental agency or arbitrator that has had, or reasonably could be expected to have, a Material Adverse Effect, (ii) none of the Parent, WMECO or any of their subsidiaries is in default with respect to any order of any court, arbitrator or governmental body except defaults, if any, which are not material (and cannot reasonably be expected to become material) to the business or operations of WMECO or any of its subsidiaries and which have not had (and cannot reasonably be expected to have) a Material Adverse Effect, and (iii) no other condition exists that has caused, or could reasonably be expected to cause, a Material Adverse Effect. Except as disclosed in the Public Disclosure Documents, (i) there is no pending or threatened action or proceeding affecting the Parent or any of its subsidiaries before any court, governmental agency or arbitrator that has had, or could reasonably be expected to have, a Material Parent Effect, and (ii) neither the Parent nor any of its subsidiaries is in default with respect to any order of any court, arbitrator or governmental body. (g) No proceeds of any sale of Receivables hereunder will be used by WMECO to acquire any security in any transaction which is subject to Section 13 or 14 of the Securities Exchange Act of 1934, as amended. (h) Each Receivable, together with any contract related thereto, and the Specified Assets shall, at all times prior to its sale or contribution hereunder, be owned by WMECO free and clear of any Adverse Claim except as created by this Agreement, and upon each purchase or contribution hereunder, WRC shall acquire valid and perfected first priority ownership of each Receivable then being sold or contributed and in the Related Security (other than Security Deposits) and Collections with respect thereto, free and clear of any Adverse Claim except as provided hereunder and in the Receivables Purchase Agreement. No Adverse Claim arising against or through WMECO shall at any time attach, or be purported to attach, to Receivables transferred to WRC or Related Security or Collections with respect thereto. No effective financing statement or other instrument similar in effect covering any Receivable, the Related Security, the Collections or the Specified Assets with respect thereto shall at any time be on file in any recording office except such as may be filed in favor of WRC or the Purchaser. (i) No Investor Report, information, exhibit, financial statement, document, book, record or report furnished or to be furnished by WMECO to the Agent or WRC in connection with this Agreement or the Receivables Purchase Agreement is or will be inaccurate in any material respect as of the date it is or shall be dated or (except as otherwise disclosed to the Agent or WRC, as the case may be, at such time) as of the date so furnished, and no such document contains or will contain any material misstatement of fact or omits or shall omit to state a material fact or any fact necessary to make the statements contained therein not misleading. Any Receivable described as an Eligible Receivable in any Investor Report or such other information, exhibit, financial statement, document, book, record or report satisfies the requirements of the definition of "Eligible Receivable" in the Receivables Purchase Agreement. WMECO has management information systems that are adequate to generate reliable statistical information with respect to the Receivables, including such information as is required to be delivered pursuant to the terms of this Agreement. (j) The principal place of business and chief executive office of WMECO and the offices where WMECO keeps all of the Records are located at the addresses specified in Exhibit B (or at such other locations as to which the notice and other requirements specified in Section 7.3 shall have been satisfied). WMECO has places of business in more than one town in Massachusetts. (k) All Obligors have been (or, in the case of Obligors with respect to Unbilled Receivables, will be) instructed to make all payments in respect of Receivables to WMECO's post office box in Hartford, Connecticut or to a Payment Center, and such payments are (i) processed by the Servicer in Wethersfield, Connecticut and (ii) deposited to the Collection Account within one Business Day of the Servicer's receipt thereof. WMECO will make commercially reasonable efforts to prevent funds other than Collections from being deposited to the Collection Account. (l) All Obligors (other than Obligors in respect of Unbilled Receivables) are listed on the General Trial Balance. WMECO's methodology for determining the Outstanding Balance of Unbilled Receivables is accurately described in Exhibit B of the Receivables Purchase Agreement and such description does not omit any fact necessary to make the statements contained therein not misleading. The Outstanding Balance of Unbilled Receivables shall be calculated in accordance with the methodology described in Exhibit B of the Receivables Purchase Agreement. (m) Except as described in Exhibit C, WMECO has no trade names, fictitious names, assumed names or "doing business as" names other than those names with respect to which it has satisfied its obligations under Section 7.3. (n) On the date of each purchase hereunder (both before and after giving effect to the purchase on such date), WMECO will have assets which are greater than the amount of its liabilities, and will be able to pay its debts as they become due. (o) The terms of the Receivables have not been extended or modified, except as permitted under the Credit and Collection Policy. (p) The Credit and Collection Policy has not been materially changed in any way which might reasonably lead to a Material Adverse Effect. (q) No sale or contribution of any Receivables or any Related Security to WRC by WMECO has been made on account of an antecedent debt owed by WMECO to WRC or constitutes a fraudulent transfer or fraudulent conveyance or is otherwise void or voidable under similar laws or principles, the doctrine of equitable subordination or for any other reason. The transfers of Receivables and Related Security by WMECO to WRC pursuant to this Agreement, and all other transactions between WMECO and WRC, have been and will be made in good faith and without intent to hinder, delay or defraud creditors of WMECO, and WMECO acknowledges that it has received and will receive reasonably equivalent value for the purchases by (and contributions to) WRC of Receivables and Related Security hereunder. The purchase and contribution of Receivables and Related Security by WRC from WMECO constitutes a true sale or contribution of such Receivables and Related Security under applicable state law. (r) No use of any proceeds of any sale of Specified Assets by WMECO will conflict with or contravene any of Regulations G, T, U and X promulgated by the Board of Governors of the Federal Reserve System. ARTICLE VI COVENANTS OF WMECO 6.1 General Covenants. WMECO covenants as follows: (a) Compliance with Laws; Preservation of Corporate Existence. WMECO will comply in all material respects with all applicable laws, and all governmental rules, regulations and orders and preserve and maintain its corporate existence, rights, franchises, qualifications and privileges, in each case to the extent that the failure to do so could reasonably be expected to cause a Material Adverse Effect. (b) Location of Records. WMECO will keep its principal place of business and chief executive office, and the offices where it keeps its records concerning or related to Receivables, at the address(es) referred to in Exhibit B or, upon 30 days' prior written notice to WRC and the Agent, at such other locations in jurisdictions where all action required by Section 7.3 shall have been taken and completed. (c) Sales, Liens, Etc. Except as otherwise provided herein, WMECO will not sell, assign (by operation of law or otherwise) or otherwise dispose of, or create or (except as provided by the Receivables Purchase Agreement) suffer to exist any Adverse Claim upon or with respect to, any Receivable, the related contract (if any), any Collections, any Related Security or the Specified Assets, or upon or with respect to any other account to which any Collections of any Receivable are sent, or assign any right to receive income in respect thereof. (d) General Reporting Requirements. WMECO will provide (or cause the Servicer to provide) to the Agent (in sufficient copies for each Owner) and WRC the following: (i) as soon as available and in any event within 50 days after the end of each of the first three quarters of each fiscal year of WMECO, a copy of WMECO's Quarterly Report on Form 10-Q submitted to the Securities and Exchange Commission with respect to such quarter, containing financial statements in reasonable detail and duly certified (subject to year-end audit adjustments) by the chief financial officer, chief accounting officer, Treasurer or Assistant Treasurer of WMECO as having been prepared in accordance with GAAP and on a basis consistent with the financial statements referred to in Section 5.1(e); and (ii) as soon as available and in any event within 105 days after the end of each fiscal year of WMECO, a copy of WMECO's Annual Report on Form 10-K submitted to the Securities and Exchange Commission with respect to such year, containing financial statements certified by a nationally-recognized independent public accountant; (iii) promptly after the sending or filing thereof, copies of all reports which WMECO sends to any of its public securityholders and copies of all reports and registration statements which WMECO files with the Securities and Exchange Commission or any national securities exchange other than registration statements relating to employee benefit plans and to registrations of securities for selling securityholders; (iv) promptly after the filing or receiving thereof, copies of all reports and notices with respect to any Reportable Event defined in Article IV of ERISA which WMECO or any subsidiary of WMECO files under ERISA with the Internal Revenue Service or the Pension Benefit Guaranty Corporation or the U.S. Department of Labor or which WMECO or any subsidiary of WMECO receives from such corporation; (v) as soon as possible and in any event within two days after the occurrence of each Event of Termination or each event which, with the giving of notice or lapse of time or both, would constitute an Event of Termination, a statement of the chief financial officer, chief accounting officer, Treasurer or any Assistant Treasurer of WMECO setting forth details of such Event of Termination or other event, and the action which WMECO has taken and proposes to take with respect thereto; provided, that in the case of an event described in Section 7.01(g) of the Receivables Purchase Agreement such statement shall be provided to the Agent immediately; (vi) promptly following the Agent's request therefor, such other information respecting the Receivables or the conditions or operations, financial or otherwise, of the Parent, WMECO, the Servicer or any of their subsidiaries as the Agent may from time to time reasonably request in writing in order to protect the interests of the Agent or WRC in connection with this Agreement; (vii) to the extent not otherwise provided pursuant to the immediately foregoing clauses (i)-(vi), promptly after the sending or receipt thereof, copies of all reports and notices (other than routine borrowing requests and confirmations under established lines) which WMECO sends to or receives from any creditor or group of creditors of WMECO or any representative or agent for any creditor or group of creditors of WMECO, in each case, in respect of which the Debt owing to such creditor or group of creditors exceeds $10,000,000 in the aggregate; and (viii) together with the quarterly and annual financial statements to be delivered by WMECO pursuant to the immediately preceding clauses (i) and (ii) respectively, a certificate from WMECO's chief financial officer, chief accounting officer, Treasurer or any Assistant Treasurer, in the case of the quarterly financial statements, and independent certified public accountants, in the case of the annual financial statements, stating, in each case, that such Person is familiar with the terms of this Agreement and each other Transaction Document and that in examining such financial statements, such Person did not become aware of any fact or condition which would constitute (or which with the giving of notice or passage of time, or both, would constitute) an Event of Termination, except for those, if any, described in reasonable detail in such certificate. (e) Merger, Etc. WMECO will not merge or consolidate with, or convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions), all or substantially all of its assets (whether now owned or hereafter acquired), or acquire all or substantially all of the assets or capital stock or other ownership interest of any Person (any such transaction, acquisition or other action hereinafter referred to as a "Reorganization"), except that WMECO may enter into a Reorganization if the following conditions are satisfied: (i) the survivor (such term referring to the survivor of a merger or consolidation as well as the acquirer of assets, capital stock or other ownership interests) of such Reorganization is organized under the laws of, and is resident in, the United States or one of the states therein; (ii) the senior secured debt of such survivor shall be rated at least BBB- by Standard & Poor's and Baa3 by Moody's; (iii) if WMECO is not the survivor of the Reorganization, such survivor shall have assumed all of the obligations of WMECO under or in connection with the Transaction Documents pursuant to an agreement in form and substance satisfactory to the Agent; (iv) if WMECO is not the survivor of the Reorganization, the Agent shall have received opinions of counsel satisfactory to the Agent with respect to the matters covered by the opinions delivered pursuant to Section 4.1(g) and (h), and any modifications or additions to Uniform Commercial Code filings or other security arrangements requested by the Agent shall have been completed; and (v) each of Standard & Poor's and Moody's shall have confirmed that such merger or consolidation will not cause the ratings of the Purchaser's commercial paper notes to be reduced or withdrawn. (f) ERISA Matters. WMECO will not (i) engage or permit any ERISA Affiliate to engage in any prohibited transaction (as defined in Section 4975 of the Code and Section 406 of ERISA) for which an exemption is not available or has not previously been obtained from the United States Department of Labor; (ii) permit to exist any accumulated funding deficiency (as defined in Section 302(a) of ERISA and Section 412(a) of the Code) or funding deficiency with respect to any Benefit Plan other than a Multiemployer Plan; (iii) fail to make any payments to any Multiemployer Plan that WMECO or any ERISA Affiliate may be required to make under the agreement relating to such Multiemployer Plan or any law pertaining thereto; (iv) terminate any Benefit Plan so as to result in any liability; or (v) permit to exist any occurrence of any reportable event described in Title IV of ERISA which represents a material risk of a liability of WMECO or any ERISA Affiliate under ERISA or the Code, if such prohibited transactions, accumulated funding deficiencies, payments, terminations and reportable events occurring within any fiscal year of WMECO, in the aggregate, involve a payment of money or an incurrence of liability by WMECO or any ERISA Affiliate under Title IV of ERISA in an amount in excess of $5,000,000. (g) Marking of Records. At its expense, WMECO will mark (or cause the Servicer to mark) its master data processing records relating to the Receivables so that reports generated from such records include the following legend: "THE RECEIVABLES DESCRIBED HEREIN HAVE BEEN SOLD TO WMECO RECEIVABLES CORPORATION PURSUANT TO A PURCHASE AND SALE AGREEMENT, DATED AS OF MAY 22, 1997, AS AMENDED OR SUPPLEMENTED FROM TIME TO TIME, BETWEEN WESTERN MASSACHUSETTS ELECTRIC COMPANY AND WMECO RECEIVABLES CORPORATION; AND UNDIVIDED, FRACTIONAL OWNERSHIP INTERESTS IN THE RECEIVABLES DESCRIBED HEREIN HAVE BEEN SOLD BY WMECO RECEIVABLES CORPORATION TO MONTE ROSA CAPITAL CORPORATION PURSUANT TO A RECEIVABLES PURCHASE AGREEMENT, DATED AS OF MAY 22, 1997, AS AMENDED OR SUPPLEMENTED FROM TIME TO TIME, AMONG WMECO RECEIVABLES CORPORATION, WESTERN MASSACHUSETTS ELECTRIC COMPANY, MONTE ROSA CAPITAL CORPORATION AND UNION BANK OF SWITZERLAND, NEW YORK BRANCH, AS THE AGENT"; (h) Payment Instructions. WMECO will cause the representation in Section 5.1(k) to be true at all times, except that the location of the post office box and/or processing described in Section 5.1(k), and the identity of the Collection Account, may be changed with the consent of the Agent, upon 30 days' prior written notice to the Agent, if (i)the requirements of Section 7.3 are satisfied, (ii) the Collection Account continues to be a single-purpose account for the deposit of Collections, (iii) the Collection Account continues to be in the name of the Purchaser, and under the exclusive ownership and control of the Purchaser, and (iv) the bank at which the Collection Account is maintained shall have received, executed and returned a Bank Notice. If at any time WMECO receives any Collections, WMECO shall remit such Collections immediately to the Collection Account. (i) Separate Corporate Existence of WRC. WMECO shall take such actions as shall be required in order that: (i) WRC's operating expenses will be paid by WRC from its own assets and not by WMECO or any of its Affiliates (other than WRC); (ii) WMECO's books and records will be maintained separately from those of WRC; (iii) WRC will have its own financial statements prepared, and any financial statement of WMECO which is consolidated to include WRC will contain detailed notes clearly stating that (A) all of WRC's assets are owned by WRC, and (B) WRC is a separate corporate entity with creditors who have purchased and otherwise received ownership and security interests in WRC's assets; (iv) WMECO will strictly observe corporate formalities in its dealing with WRC, and funds or other assets of WRC will not be commingled with those of WMECO; (v) WMECO will maintain arm's-length relationships with WRC, and WMECO will be compensated at market rates for any services it renders or otherwise furnishes to WRC; and (vi) WMECO will not be, and will not hold itself out to be, responsible for the debts of WRC or the decisions or actions in respect of the daily business and affairs of WRC. (j) Certain Agreements Regarding Receivables. (i) Except as otherwise permitted in Section 6.02 of the Receivables Purchase Agreement, WMECO will not purport to (i) reduce the Outstanding Balance of any Receivable, (ii) otherwise extend, amend or modify the terms of any Receivable in any material respect, or (iii) amend, modify or waive, in any material respect, any term or condition of any contract related thereto (which term or condition relates to payments under, or the enforcement of, such contract). (ii) WMECO will not make any change in the character of its business or materially alter its Credit and Collection Policy, which change would, in either case, materially change the credit standing required of Obligors or potential Obligors or impair, in any material respect, the collectibility of the Receivables generated by it. (iii) WMECO will not take any action to cause or permit any Receivable generated by it to become evidenced by any "instrument" or "chattel paper" (as defined in the applicable UCC) unless such "instrument" or "chattel paper" shall be delivered to WRC (which in turn shall deliver the same to the Purchaser (or the Agent on its behalf)). (iv) WMECO will not make any changes in its instructions to Obligors regarding Collections or change the bank at which the Collection Account is maintained unless the requirements of Section 6.09 of the Receivables Purchase Agreement have been met. (k) Accounting of Purchases. In its financial statements, WMECO will account for the transactions contemplated hereby as sales of the Specified Assets by WMECO to WRC. ARTICLE VII ADDITIONAL RIGHTS AND OBLIGATIONS IN RESPECT OF THE RECEIVABLES 7.1 Rights of WRC. WMECO hereby authorizes WRC, the Servicer or their respective successors, assigns or designees to take any and all steps in WMECO's name necessary or desirable, in their respective determination, to collect all amounts due under any and all Receivables, including, without limitation, endorsing the name of WMECO on checks and other instruments representing Collections and enforcing such Receivables and the provisions of any related contracts that concern payment and/or enforcement of rights to payment. 7.2 Responsibilities of WMECO. Anything herein to the contrary notwithstanding: (a) If requested by WRC or the Agent to do so following the occurrence of a Transition Event, WMECO shall direct, all Obligors to make payments of Receivables directly to a Lock-Box Account (or to wire payments of Receivables directly to a Lock-Box Account) at a Lock-Box Bank, and WMECO shall deliver to such Lock-Box Bank a Bank Notice. WMECO shall, upon the request of the Agent at any time after a Transition Event and at WMECO's expense, notify any or all of the Obligors of the Owners' interests therein. If WMECO shall fail to give any such direction or notice promptly following the direction of WRC or the Agent, WRC or the Agent may (but shall not be required to) itself give such notice, and the expenses of WRC or the Agent incurred in connection therewith shall be payable by WMECO or the Agent on demand therefor by WRC or the Agent. (b) WMECO shall use commercially reasonable efforts to prevent funds other than Collections in the Collection Account. In the event WMECO is aware that any other amount is so deposited in the Collection Account, WMECO shall promptly notify WRC, the Agent and the Servicer. If the Servicer receives such notice at a time when a WMECO Obligation is in default, the Servicer shall deliver such amount to the Agent to pay such WMECO Obligation and to otherwise secure payment of the WMECO Obligations. The Agent shall hold such amount until all WMECO Obligations (whether fixed or contingent) are paid in full. If the Servicer receives such notice at a time when no WMECO Obligation is in default, the Servicer shall promptly remit such amount to WMECO. (c) WMECO agrees to transfer directly to the Collection Account, within one Business Day of receipt thereof, any Collections or any other payment with respect to the Receivables or Related Security that it receives, in the form so received, and agrees that all such Collections and payments shall be deemed to be received in trust for WRC and its assigns (including the Purchaser and the Agent) and such Collections shall be maintained and segregated separate and apart from all other funds and moneys of WMECO until delivery of such Collections and payments to the Collection Account for allocation in accordance with Article II of the Receivables Purchase Agreement; (d) WMECO shall perform its obligations hereunder, and the exercise by WRC or its designee of its rights hereunder shall not relieve WMECO from such obligations. (e) Neither WRC, the Servicer, the Purchaser nor the Agent shall have any obligation or liability to any Obligor or any other third Person with respect to any Receivables, contracts related thereto or any other related agreements, nor shall WRC, the Servicer, the Purchaser or the Agent be obligated to perform any of the obligations of WMECO thereunder. (f) WMECO hereby grants to the Servicer an irrevocable power of attorney, with full power of substitution, coupled with an interest, to take in the name of WMECO all steps necessary or advisable to endorse, negotiate or otherwise realize on any document or other right of any kind held or transmitted by WMECO or transmitted or received by WRC (whether or not from WMECO) in connection with any Receivable. WMECO shall execute and deliver such additional documents as WRC or the Agent shall reasonably request to evidence the power of attorney created by this Section. 7.3 UCC Matters; Protection and Perfection of Percentage Interests. WMECO will keep its principal place of business and chief executive office, and the office where it keeps the Records, at the addresses of the Seller specified in Exhibit B or, upon 30 days' prior written notice to the Agent, at such other locations within the United States where all actions reasonably requested by the Agent to protect and perfect the interest of WRC, the Agent and the Owners in the Receivables, the Related Security (excluding Security Deposits) relating thereto, the Collections and the Specified Assets, have been taken and completed. WMECO will not make any change to its corporate name or use any tradenames, fictitious names, assumed names or "doing business as" names other than those described in Exhibit C, unless prior to the effective date of any such name change or use, WMECO delivers to the Agent such executed financing statements as the Agent may request to reflect such name change or use, together with such other documents and instruments as the Agent may reasonably request in connection therewith. WMECO agrees that from time to time, at its expense, it will promptly execute and deliver all further instruments and documents, and take all further action that WRC or the Agent may reasonably request in order to perfect, protect or more fully evidence the interests of WRC, the Agent or the Owners in the Specified Assets, or to enable any of them to exercise or enforce any of their respective rights hereunder or under any other Transaction Document. Without limiting the generality of the foregoing, WMECO will upon the request of WRC or the Agent execute and file such financing or continuation statements, or amendments thereto or assignments thereof, and such other instruments or notices, as may be necessary or appropriate or as WRC or the Agent may request. WMECO hereby authorizes WRC or the Purchaser to file one or more financing or continuation statements, and amendments thereto and assignments thereof, relative to all or any of the Specified Assets now existing or hereafter arising without the signature of WMECO where permitted by law. A carbon, photographic or other reproduction of this Agreement or any financing statement covering the Specified Assets (or, in each case, any part thereof) shall be sufficient as a financing statement where permitted by applicable law. If WMECO fails to perform any of its agreements or obligations under this Section 7.3, WRC or the Agent may (but shall not be required to) itself perform, or cause performance of, such agreement or obligation, and the expenses of WRC or the Agent incurred in connection therewith shall be payable by WMECO upon demand by WRC or the Agent therefor. For purposes of enabling WRC and the Agent to exercise their rights described in the preceding sentence and elsewhere in this Agreement, WMECO hereby authorizes WRC and the Agent to take any and all steps in WMECO's name and on behalf of WMECO necessary or desirable, in the determination of WRC or the Agent, to collect all amounts due under any and all Receivables, including, without limitation, endorsing WMECO's name on checks and other instruments representing Collections and enforcing rights with respect to Receivables and any related contracts. In addition, to the extent that any Receivables are likely to be outstanding five years or more after the date of this Agreement, WMECO shall provide, within six months (but not later than the 30th day) prior to the expiration of such five year period (and, if applicable, each subsequent five year period), or more frequently as WRC or the Agent reasonably deems advisable, an opinion of counsel to WMECO as to the continuing validity and perfection of interests of WRC, the Agent and the Owners in the Specified Assets. ARTICLE VIII PURCHASE AND SALE TERMINATION 8.1 Termination. (a) Optional Termination. Upon at least 10 days' prior written notice to the other party hereto and the Agent, WMECO or WRC may declare the Purchase and Sale Termination Date to have occurred; provided that WMECO shall have paid to the Agent (for WRC's account) all obligations incurred by WRC under Section 2.11 of the Receivables Purchase Agreement in connection with, or as a direct or indirect consequence of, such declaration. (b) Upon the occurrence of the Termination Date under the Receivables Purchase Agreement, the Purchase and Sale Termination Date shall be deemed to have occurred, without further action by any Person; provided that (unless an Event of Termination under Section 7.01(g) of the Receivables Purchase Agreement shall have occurred) the parties hereto may elect, by written notice to the Agent, to continue to sell Receivables hereunder following the occurrence of an Event of Termination. (c) If the Trigger Conditions exist for a period of more than five consecutive Business Days, the Purchase and Sale Termination Date shall be deemed to have occurred, without further action by any Person. The "Trigger Conditions" shall exist on any day if, after giving effect to any increase in (or payments on) the outstanding amount of the deferred WRC Purchase Price on such day, the sum of (x) the remaining unpaid balance of the deferred WRC Purchase Price plus (y) the aggregate Purchase Price of all Percentage Interests would exceed 91% of the aggregate Outstanding Balance of all Receivables. 8.2 Remedies. Upon any termination of the Facility pursuant to Section 8.1, WRC shall have, in addition to all other rights and remedies under this Agreement or otherwise, all other rights and remedies provided under the UCC of each applicable jurisdiction and other applicable laws, which rights shall be cumulative. Without limiting the foregoing, the occurrence of the Purchase and Sale Termination Date shall not deny WRC any remedy in addition to termination of the Facility to which WRC may be otherwise appropriately entitled, whether at law or equity. ARTICLE IX INDEMNIFICATION 9.1 Indemnities by WMECO. Without limiting any other rights which WRC may have hereunder or under applicable law, WMECO hereby agrees to indemnify WRC and each of its officers, directors, employees and agents and their respective successors, transferees and assigns (each of the foregoing Persons being individually called a "Purchase and Sale Indemnified Party"), forthwith on demand, from and against any and all damages, losses, claims, judgments, liabilities and related costs and expenses, including reasonable attorneys' fees and disbursements (all of the foregoing being collectively called "Purchase and Sale Indemnified Amounts") awarded against or incurred by any of them arising out of or as a result of this Agreement, any other Transaction Document, the ownership or funding of any Receivable or other asset described in Section 1.1, or arising out of the claims asserted against a Purchase and Sale Indemnified Party relating to the transactions contemplated herein or therein or the use of proceeds herefrom or therefrom, excluding, however, (i) Purchase and Sale Indemnified Amounts to the extent resulting from gross negligence or willful misconduct on the part of any Purchase and Sale Indemnified Party, (ii) recourse (except as otherwise specifically provided in this Agreement) for uncollectible Receivables, or (iii) Excluded Taxes. Without limiting the foregoing, WMECO indemnifies each Purchase and Sale Indemnified Party for Purchase and Sale Indemnified Amounts relating to or resulting from: (a) the transfer by WMECO of an interest in any Receivable to any Person other than WRC; (b) reliance on any representation or warranty made by WMECO (or any of its officers) under or in connection with this Agreement or any other Transaction Document, or any information or report delivered by WMECO pursuant hereto or thereto which shall have been false or incorrect in any material respect when made or deemed made or delivered; (c) the failure by WMECO to comply with any term, provision or covenant contained in this Agreement or any other Transaction Documents, or with any applicable law, rule or regulation with respect to any Receivable or a related contract, if any, or the Related Security, or the nonconformity of any Receivable or related contract, if any, or the Related Security, with any such applicable law, rule or regulation; (d) the failure to vest and maintain vested in WRC or to transfer to WRC legal and equitable title to and ownership of the Receivables and the Collections and Related Security with respect thereto, free and clear of any Adverse Claim (other than the interests of the Agent and the Owners created by the Receivables Purchase Agreement), whether existing at the time of the purchase of such Receivables or at any time thereafter; (e) the failure to file, or any delay in filing, financing statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any Receivables and Related Security, whether at the time of any purchase or at any subsequent time; (f) any dispute, claim, offset or defense (other than discharge in bankruptcy of the Obligor) of an Obligor to the payment of any Receivable (including, without limitation, a defense based on such Receivable or a related contract, if any, not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms), or any other claim resulting from the services related to any such Receivable or the furnishing of or failure to furnish such services; (g) any failure of WMECO, individually or as the Servicer, to perform its duties or obligations in accordance with the provisions of any contracts related to the Receivables; (h) any and all amounts paid or payable by WRC pursuant to Sections 2.09(c), 2.10(a), 2.11, 2.13, 2.14, 2.15 and 10.07 of the Receivables Purchase Agreement; (i) any product liability claim or personal injury or property damage suit or similar or related claim or action arising out of or in connection with services or merchandise that are the subject of any Receivable or any other lawsuit or claim relating to any Receivable, related contract or Related Security; (j) the failure to pay when due any taxes (other than Excluded Taxes), including without limitation, any sales, excise or personal property taxes payable in connection with any of the Receivables; (k) any repayment by WRC, the Agent or any Owner of any amount previously distributed which WRC, the Agent or such Owner believes in good faith is required to be made; (l) the commingling of Collections of Receivables at any time with other funds (including without limitation any commingling in the Collection Account that occurs notwithstanding WMECO's commercially reasonable efforts to prevent it); (m) any investigation, litigation or proceeding related to this Agreement or the use of proceeds of purchases or the ownership of any Receivable, Related Security or related contract, if any; (n) the failure of a Lock-Box Bank or the bank at which the Collection Account is maintained (if other than Union Bank of Switzerland) to remit any amounts held in the Lock-Box Account or Collection Account, as the case may be, pursuant to the instructions of the Servicer, WRC or the Agent, whether by reason of the exercise of set-off rights or otherwise; (o) any inability to obtain any judgment in, or utilize the court or other adjudication system of, any state in which an Obligor may be located as a result of the failure of WMECO to qualify to do business or file any notice of business activity report or any similar report; (p) any attempt by any Person to void any transfer of any Receivable or Related Security from WMECO to WRC hereunder under statutory provisions or common law or equitable action, including, without limitation, any provision of the Bankruptcy Reform Act of 1978 (18 U.S.C. Section 101 et seq.), as amended; (q) any claim involving environmental liability that relates to any property that has been, is now or hereafter will be owned, leased, operated or otherwise used by WMECO; and (r) any violation of any provision of ERISA, the engaging by WMECO or any ERISA Affiliate in any prohibited transaction for which WMECO or such affiliate may be liable for excise taxes under the Code or otherwise liable under ERISA and for which an exemption is not available or has not been previously obtained from the United States Department of Labor, the existence of any accumulated funding deficiency, as defined in Section 302(a) of ERISA and Section 412(a) of the Code, with respect to any Benefit Plan other than a Multiemployer Plan; the failure by WMECO or any ERISA Affiliate to make a payment to any Multiemployer Plan that WMECO or any ERISA Affiliate is required to make or any other contribution failure with respect to any Benefit Plan sufficient to give rise to a lien under Section 302(f) of ERISA, the termination by WMECO or any ERISA Affiliate of any Benefit Plan or the withdrawal by WMECO or any ERISA Affiliate from any Multiemployer Plan; any attempt by the Pension Benefit Guaranty Corporation to terminate any Benefit Plan. If for any reason the indemnification provided above in this Section 9.1 is unavailable to a Purchase and Sale Indemnified Party or is insufficient to hold such Purchase and Sale Indemnified Party harmless, then WMECO shall contribute to the amount paid or payable by such Purchase and Sale Indemnified Party to the maximum extent permitted under applicable law. ARTICLE X MISCELLANEOUS 10.1 Amendments, etc. (a) Subject to Section 5.01(i) of the Receivables Purchase Agreement, the provisions of this Agreement may from time to time be amended, modified or waived, if such amendment, modification or waiver is in writing and consented to by WRC, the Servicer and WMECO (with respect to an amendment) or by WRC (with respect to a waiver or consent by it). (b) No failure or delay on the part of WRC, the Servicer, WMECO or any third party beneficiary in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No notice to or demand on WRC, the Servicer or WMECO in any case shall entitle it to any notice or demand in similar or other circumstances. No waiver or approval by WRC or the Servicer under this Agreement shall, except as may otherwise be stated in such waiver or approval, be applicable to subsequent transactions. No waiver or approval under this Agreement shall require any similar or dissimilar waiver or approval thereafter to be granted hereunder. (c) The Transaction Documents contain a final and complete integration of all prior expressions by the parties hereto with respect to the subject matter thereof and shall constitute the entire agreement among the parties hereto with respect to the subject matter thereof, superseding all prior oral or written understandings. 10.2 Notices, etc. All notices and other communications provided for hereunder shall, unless otherwise stated herein, be in writing (including communication by facsimile copy) and mailed, transmitted or delivered, as to each party hereto, at its address set forth under its name on the signature pages hereof or at such other address as shall be designated by such party in a written notice to the other parties hereto. All such notices and communications shall be effective, upon receipt, or in the case of (a) notice by mail, three days after being deposited in the United States mails, first class postage prepaid, (b) notice by overnight courier, one Business Day after being deposited with a national overnight courier service, or (c) notice by facsimile copy, when confirmation of receipt is obtained. 10.3 No Waiver; Cumulative Remedies. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Without limiting the foregoing, WMECO hereby authorizes WRC, at any time and from time to time, to the fullest extent permitted by law, to setoff, against any obligations of WMECO to WRC arising in connection with the Transaction Documents (including without limitation amounts payable pursuant to Section 9.1) that are then due and payable or that are not then due and payable but are accruing in respect of any then current Measurement Period, any and all indebtedness at any time owing by WRC to or for the credit or the account of WMECO. 10.4 Binding Effect; Assignability. (a) This Agreement shall be binding upon and inure to the benefit of WRC and WMECO and their respective successors and permitted assigns. WMECO may not assign any of its rights hereunder or any interest herein without the prior written consent of WRC and the Agent, except as otherwise herein specifically provided. This Agreement shall create and constitute the continuing obligations of the parties hereto in accordance with its terms, and shall remain in full force and effect until such time as the parties hereto shall agree. The rights and remedies with respect to any breach of any representation and warranty made by WMECO pursuant to Article V and the indemnification and payment provisions of Article IX and Section 10.6 shall be continuing and shall survive any termination of this Agreement. (b) Without limiting the foregoing, WMECO hereby acknowledges and agrees that WRC has transferred an undivided ownership interest, and has granted a security interest, to the Agent and the Purchaser in all its right, title and interest under this Agreement and the assets transferred pursuant hereto. In furtherance of the foregoing, WMECO hereby agrees that: (i) the Agent, the Purchaser and their respective successors and assigns shall be entitled to the benefit of all representations and warranties, covenants and agreements of WMECO contained in this Agreement, and (ii) the Agent, the Purchaser and their respective successors and assigns may exercise directly any of the rights and remedies provided under this Agreement, or under applicable law or otherwise in respect of any obligation of WMECO to WRC hereunder, to the same extent as WRC might have done. 10.5 GOVERNING LAW; SUBMISSION TO JURISDICTION. (A) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE INTERESTS OF WRC IN THE RECEIVABLES, THE RELATED SECURITY AND THE COLLECTIONS, OR THE REMEDIES HEREUNDER IN RESPECT THEREOF, ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. (B) EACH OF THE PARTIES HERETO HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK, NEW YORK FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OF THE OTHER TRANSACTION DOCUMENTS, OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. NOTHING IN THIS SECTION 10.5 SHALL AFFECT THE RIGHT OF WRC OR ITS SUCCESSORS AND ASSIGNS TO BRING ANY ACTION OR PROCEEDING AGAINST WMECO OR ANY OF ITS RESPECTIVE PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION. 10.6 Costs, Expenses and Taxes. In addition to the rights of indemnification granted to WRC under Article IX hereof, WMECO agrees to pay on demand all out-of-pocket costs and expenses of WRC and the Agent incurred in connection with the preparation, execution, delivery, administration (including periodic auditing and amounts paid to any Lock-Box Bank or the bank at which the Collection Account is maintained in respect of disallowed items, fees or charges or for any other reason), amendment, modification or syndication of, or any waiver or consent issued in connection with, this Agreement and the other Transaction Documents, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for WRC or the Agent with respect thereto and with respect to advising WRC or the Agent as to its respective rights and remedies under this Agreement and the other documents to be delivered hereunder or in connection herewith, and all costs and expenses, if any (including reasonable counsel fees and expenses), incurred by WRC or the Agent in connection with the enforcement of this Agreement and the other documents to be delivered hereunder or in connection herewith. 10.7 Waiver of Jury Trial. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH PARTY HERETO IRREVOCABLY WAIVES ALL RIGHT OF TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, ANY OTHER TRANSACTION DOCUMENT, OR ANY MATTER ARISING HEREUNDER OR THEREUNDER. 10.8 Captions and Cross References; Incorporation by Reference. The various captions (including, without limitation, the table of contents) in this Agreement are included for convenience only and shall not affect the meaning or interpretation of any provision of this Agreement. Unless otherwise specified herein, references in this Agreement to any Section or Exhibit are to such Section or Exhibit of this Agreement, as the case may be. Appendix A and the Exhibits hereto are hereby incorporated by reference into and made a part of this Agreement. 10.9 Execution in Counterparts; Severability; Integration. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. This Agreement contains the final and complete integration of all prior expressions by the parties hereto with respect to the subject matter hereof and shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof, superseding all prior oral or written understandings. Each of the parties hereto acknowledges and agrees that it is not intended to have, and shall not assert, any rights, benefits, causes of action or remedies under or in connection with any instrument, document or agreement to which it is not a party, or any of the transactions contemplated thereby or in respect of any acts or omissions by any of the parties thereto, in each case, whether relating specifically to the transactions contemplated hereby or otherwise. 10.10 Reliance on Corporate Separateness. WMECO acknowledges that the Purchaser and the Agent are entering into the Receivables Purchase Agreement in reliance upon WRC's identity as a legal entity separate from WMECO. 10.11 Term of this Agreement. This Agreement, including, without limitation, WMECO's obligation to observe its respective covenants set forth in Article VII, shall remain in full force and effect until the Collection Date; provided, however, that the rights and remedies with respect to any breach of any representation and warranty made or deemed made by WMECO pursuant to Article V and the indemnification and payment provisions of Articles IX and Article X shall be continuing and shall survive any termination of this Agreement. 10.12 No Proceedings. WMECO hereby agrees that it will not institute against, or join any other Person in instituting against, WRC or any subsidiary of WRC any proceedings of the type referred to in clause (i) of Section 7.01(g) of the Receivables Purchase Agreement so long as any Commercial Paper Notes or other debt securities issued by the Purchaser or any of its subsidiaries shall be outstanding or there shall not have elapsed one year and one day since the last day on which any such Commercial Paper Notes shall have been outstanding. 10.13 Confidentiality. (a) Confidentiality of Agreement Information. Each of WMECO and WRC agrees to maintain the confidentiality of this Agreement and all other Transaction Documents (and all drafts thereof) and not to disclose this Agreement and all other Transaction Documents or such drafts to third parties (other than to its directors, officers, employees, accountants or counsel); provided, however, that the Agreement and all other Transaction Documents may be disclosed to third parties to the extent such disclosure is: (i) (A) required in connection with a sale of securities of WMECO, (B) made solely to persons who are legal counsel for the purchaser or underwriter of such securities, and (C) limited in scope to the provisions of Articles V, VII, X of the Receivables Purchase Agreement or Articles VI, VIII, X and, to the extent defined terms are used in such Articles, such terms defined in Article I of the Receivables Purchase Agreement or Appendix A of this Agreement; (ii) made pursuant to a written agreement of confidentiality in form and substance reasonably satisfactory to the Agent; (iii) with respect to information generally available to the public through no fault of WMECO or WRC; (iv) to any federal or state regulatory authority having jurisdiction over WMECO or WRC; or (v) to any other Person to which such delivery or disclosure may be necessary or appropriate (A) in compliance with any law, rule, regulation or order applicable to WMECO or WRC, or (B) in response to any subpoena or other legal process. (b) Confidentiality of WMECO Confidential Information. WRC agrees to maintain the confidentiality of the Seller Confidential Information and not to disclose the Seller Confidential Information to third parties (other than to its directors, officers, employees, accountants or counsel); provided, however, that the Seller Confidential Information may be disclosed to third parties to the extent such disclosure is: (i) to the Purchaser, the Agent and each Owner; (ii) with respect to information generally available to the public through no fault of WRC; (iii) to any holder of a Commercial Paper Note (a "Holder") and any placement agent with respect to Commercial Paper Notes, or in the case of general information regarding the nature, basic terms and status of the Purchaser's commercial paper program to any prospective Holder; (iv) to any party providing credit enhancement or liquidity facilities or any other facilities to any of the Owners, any proposed assignee or transferee of a Percentage Interest or any part thereof; (v) to any federal or state regulatory authority having jurisdiction over WRC, the Purchaser, any Owner or the Agent; (vi) to any internationally recognized rating agency in connection with the rating by such agency of an Owner; or (vii) to any other Person to which such delivery or disclosure may be necessary or appropriate (A) in compliance with any law, rule, regulation or order applicable to WRC, the Agent or any Owner, (B) in response to any subpoena or other legal process, or (C) in order to protect or enforce an Owner's investment in the Percentage Interests. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. WESTERN MASSACHUSETTS ELECTRIC COMPANY By: s/s David D. McHale Name: David D. McHale Title: Assistant Treasurer Address: 174 Brush Hill Avenue West Springfield, Massachusetts Attention: David McHale Assistant Treasurer Facsimile: (413) 787-9363 Confirmation: (413) 785-2293 with a copy to: 107 Selden Street Berlin, CT 06037 Attention: David McHale, Assistant Treasurer Facsimile: (860) 665-5457 Confirmation: (860) 665-3249 WMECO RECEIVABLES CORPORATION By: s/s Robert C. Aronson Name: Robert C. Aronson Title: Assistant Treasurer Address: 107 Selden Street Berlin, CT 06037 Attention: Treasurer Facsimile: (860) 665-5457 Confirmation: (860) 665-5317 APPENDIX A DEFINITIONS This is Appendix A to the Purchase and Sale Agreement dated as of May 22, 1997, between WESTERN MASSACHUSETTS ELECTRIC COMPANY, individually and as the initial Servicer, and WMECO RECEIVABLES CORPORATION, as the Purchaser (as amended, supplemented or otherwise modified from time to time, the "Purchase and Sale Agreement"). 1.1. Definitions. As used in the Purchase and Sale Agreement, the following terms have the meanings as indicated: "Adverse Claim" has the meaning set forth in the Receivables Purchase Agreement. "Adjustment Date" means, with respect to any Measurement Period, a day selected by the Servicer (which day will not be more than ten Business Days after the end of such period). "Affiliate" has the meaning set forth in the Receivables Purchase Agreement. "Agent" has the meaning set forth in the preamble to the Receivables Purchase Agreement. "Bank Notice" has the meaning set forth in the Receivables Purchase Agreement. "Bankruptcy Proceeding" means a proceeding of the type described in Section 7.01(g) of the Receivables Purchase Agreement. "Benefit Plan" has the meaning set forth in the Receivables Purchase Agreement. "Business Day" means a day of the year (other than a Saturday or a Sunday) on which banks are required to be open in New York. "Code" means the Internal Revenue Code of 1986, as amended. "Collection Account" has the meaning set forth in the Receivables Purchase Agreement. "Collection Date" has the meaning set forth in the Receivables Purchase Agreement. "Collections" has the meaning set forth in the Receivables Purchase Agreement. "Commercial Paper Notes" has the meaning set forth in the Receivables Purchase Agreement. "Contributed Receivables" means all Receivables transferred by WMECO to WRC in accordance with Section 1.4 of the Purchase and Sale Agreement. "Credit and Collection Policy" has the meaning set forth in the Receivables Purchase Agreement. "Debt" has the meaning set forth in the Receivables Purchase Agreement. "Dilution Factors" has the meaning set forth in the Receivables Purchase Agreement. "Discount Percentage" is defined in Section 2.1 of the Purchase and Sale Agreement. "ERISA" has the meaning set forth in the Receivables Purchase Agreement. "ERISA Affiliate" has the meaning set forth in the Receivables Purchase Agreement. "Event of Termination" has the meaning set forth in the Receivables Purchase Agreement. "Excluded Taxes" has the meaning set forth in the Receivables Purchase Agreement. "Facility" has the meaning set forth in Section 1.1 of the Purchase and Sale Agreement. "GAAP" has the meaning set forth in the Receivables Purchase Agreement. "General Trial Balance" has the meaning set forth in the Receivables Purchase Agreement. "Initial Closing Date" means a Business Day (prior to the Reinvestment Termination Date) selected by WMECO on two Business Days' prior written notice to WRC and the Agent. "Investor Report" has the meaning set forth in the Receivables Purchase Agreement. "Lock-Box Account" has the meaning set forth in the Receivables Purchase Agreement. "Lock-Box Bank" has the meaning set forth in the Receivables Purchase Agreement. "Material Adverse Effect" has the meaning set forth in the Receivables Purchase Agreement. "Material Parent Effect" means a material adverse effect on the operations or financial condition of (i) Parent or (ii) Parent and its subsidiaries. "Measurement Date" means (i) the Initial Closing Date and (ii) the first day of each calendar month following thereafter. "Measurement Period" means the period from and including a Measurement Date to but excluding the next Measurement Date. "Multiemployer Plan" has the meaning specified in the Receivables Purchase Agreement. "Net Receivables Pool Balance" has the meaning specified in the Receivables Purchase Agreement. "Obligations" means all obligations of WRC, the Servicer (so long as the Servicer is WMECO or an Affiliate of WMECO) and WMECO arising in connection with the Transaction Documents, in each case howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due. "Obligor" has the meaning specified in the Receivables Purchase Agreement. "Outstanding Balance" has the meaning set forth in the Receivables Purchase Agreement. "Owners" has the meaning set forth in the Receivables Purchase Agreement. "Parent" has the meaning set forth in the Receivables Purchase Agreement. "Payment Center" has the meaning set forth in the Receivables Purchase Agreement. "Percentage Interest" has the meaning set forth in the Receivables Purchase Agreement. "Permitted Payments" has the meaning set forth in Section 1.10 of the Purchase and Sale Agreement. "Person" means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, bank, financial institution, trust, unincorporated association, joint venture, government (or any agency or political subdivision thereof) or other entity. "Public Disclosure Documents" has the meaning set forth in the Receivables Purchase Agreement. "Purchase and Sale Indemnified Amounts" has the meaning set forth in Section 9.1 of the Purchase and Sale Agreement. "Purchase and Sale Indemnified Party" has the meaning set forth in Section 9.1 of the Purchase and Sale Agreement. "Purchase and Sale Termination Date" has the meaning set forth in Section 8.1 of the Purchase and Sale Agreement. "Purchase and Sale Termination Event" has the meaning set forth in Section 8.1 of the Purchase and Sale Agreement. "Purchase Price" has the meaning set forth in the Receivables Purchase Agreement. "Purchaser" has the meaning set forth in the Receivables Purchase Agreement. "Receivable" means the billed and unbilled indebtedness of any Obligor owed (prior to giving effect to the transfer contemplated hereby) to WMECO, whether constituting an account, chattel paper, instrument or general intangible, as booked to Accounts 142.01 and 173 under the Federal Energy Regulatory Commission Chart of Accounts as utilized by WMECO, but excluding the right to payment of any interest or finance charges or taxes with respect thereto. "Receivables Purchase Agreement" means the Receivables Purchase Agreement dated as of May 22, 1997 among WRC, WMECO as the initial Servicer thereunder, the Purchaser and UBS, as the Agent, as amended, supplemented or otherwise modified from time to time. "Records" means all documents, books, records and other information (including without limitation, computer programs, tapes, disks, punch cards, data processing software and related property and rights) maintained by WMECO with respect to the Receivables and the related Obligors. "Reinvestment Termination Date" has the meaning set forth in the Receivables Purchase Agreement. "Related Assets" is defined in Section 1.1. "Related Security" means, with respect to any Receivable: (a) all security interests or liens (and property subject thereto) from time to time purporting to secure payment of such Receivable, whether pursuant to a contract related to such Receivable or otherwise; (b) all guarantees, letters of credit, indemnities, warranties, insurance policies and proceeds and premium refunds thereof and other agreements or arrangements of whatever character from time to time supporting or securing payment of such Receivable whether pursuant to a contract related to such Receivable or otherwise; (c) all Records; and (d) all proceeds of the foregoing. "Restricted Payments" has the meaning set forth in the Receivables Purchase Agreement. "Security Deposit" has the meaning set forth in the Receivables Purchase Agreement. "Seller Confidential Information" has the meaning set forth in the Receivables Purchase Agreement. "Senior Obligations" means all Obligations which may now or hereafter be owing to the Agent, the Owners or the Persons described in Section 9.1 of the Receivables Purchase Agreement. "Servicer" has the meaning set forth in the Receivables Purchase Agreement. "Servicer Default" has the meaning set forth in the Receivables Purchase Agreement. "Servicing Fee" has the meaning set forth in the Receivables Purchase Agreement. "Specified Assets" means the Receivables and the Related Assets. "Subordinated Obligations" means all Obligations of WRC which may now or hereafter be owing to WMECO and its successors or assigns (including without limitation the obligation to pay WRC Purchase Price). "Termination Date" has the meaning set forth in the Receivables Purchase Agreement. "Transaction Documents" means the Receivables Purchase Agreement, the fee letter referred to in Section 2.10 of the Receivables Purchase Agreement, the WMECO Sale and Transfer Certificate, the Purchase and Sale Agreement, and all other instruments, certificates, agreements, reports or documents delivered under or in connection with the Receivables Purchase Agreement or the Purchase and Sale Agreement (except any Liquidity Agreement (as defined in the Receivables Purchase Agreement)), as any of the foregoing may be amended, supplemented, amended and restated, or otherwise modified from time to time in accordance with the Purchase and Sale Agreement and the Receivables Purchase Agreement. "Transition Event" has the meaning set forth in the Receivables Purchase Agreement. "Trigger Conditions" has the meaning set forth in Section 8.1(c) of the Purchase and Sale Agreement. "UBS" has the meaning set forth in the Receivables Purchase Agreement. "UCC" means the Uniform Commercial Code as from time to time in effect in the applicable jurisdiction or jurisdictions. "Unbilled Receivable" has the meaning set forth in the Receivables Purchase Agreement. "WMECO" means Western Massachusetts Electric Company, a Massachusetts corporation, its permitted successors and assigns. "WMECO Obligations" means all obligations of WMECO (as Seller or as Servicer) under or in connection with the Transaction Documents (including without limitation all indemnity obligations), whether now existing or hereafter arising. "WMECO Sale and Transfer Certificate" means the sale and transfer certificate, in substantially the form of Exhibit A to the Purchase and Sale Agreement, evidencing WRC's ownership of the Receivables, as the same may be amended, supplemented, amended and restated, or otherwise modified from time to time in accordance with the Purchase and Sale Agreement. "WRC" means WMECO Receivables Corporation, a Connecticut corporation, its permitted successors and assigns. "WRC Purchase Price" has the meaning set forth in Section 2.1 of the Purchase and Sale Agreement. 1.2. Other Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. All terms used in Article 9 of the UCC in the State of New York, and not specifically defined herein, are used herein as defined in such Article 9. 1.3. Computation of Time Periods. Unless otherwise stated in this Agreement, in the computation of a period of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding." 1.4 "Other Definitional Provisions" (a) Each term defined in the singular form in Sections 1.1 or elsewhere in this Appendix A, shall mean the plural thereof when the plural form of such term is used herein or in any Transaction Document or other document delivered pursuant thereto, and each term defined in the plural form in Sections 1.1 shall mean the singular thereof when the singular form of such term is used herein or therein; (b) The words "hereof," "herein," "hereunder" and similar terms when used in this Appendix A or in any Transaction Document shall refer thereto as a whole and not to any particular provision thereof, and article, section, subsection, schedule and exhibit references in any Transaction Document are references to articles, sections, subsections, schedules and exhibits to such Transaction Document unless otherwise specified. EXHIBIT A to Purchase and Sale Agreement FORM OF WMECO SALE AND TRANSFER CERTIFICATE EXHIBIT B to Purchase and Sale Agreement LOCATIONS OF WRC'S AND WMECO'S CHIEF EXECUTIVE OFFICE AND PRINCIPAL PLACE OF BUSINESS AND LOCATIONS OF BOOKS AND RECORDS I. WRC 107 Selden Street Berlin, Connecticut 06037 II. WMECO Executive Office Address: 174 Brush Hill Avenue West Springfield, Massachusetts 01090-0010 Principal Administrative Office Address: 107 Selden Street Berlin, Connecticut 06037 Processing Office Address: 176 Cumberland Avenue Wethersfield, Connecticut 06109 EXHIBIT C to Purchase and Sale Agreement TRADENAMES, FICTITIOUS NAMES AND "DOING BUSINESS AS" NAMES Northeast Utilities Wholesale Power Co. Northfield Mountain Energy Co. EX-10.19 25 AMEND. NO. 1 TO MASTER LEASE AGMT Exhibit 10.51.1 AMENDMENT NO. 1 TO MASTER LEASE AGREEMENT THIS AMENDMENT NO. 1 TO MASTER LEASE AGREEMENT (the "Amendment" ) is made as of the 29th day of August, 1997, by and between GENERAL ELECTRIC CAPITAL CORPORATION, FOR ITSELF AND AS AGENT FOR CERTAIN PARTICIPANTS ( "Lessor" ), and THE CONNECTICUT LIGHT AND POWER COMPANY ( "Lessee" ). The parties have heretofore entered into that certain Master Lease Agreement dated as of June 21, 1996 (the "Lease" ). Pursuant to the Lease, the parties have executed those certain Equipment Schedules Nos. 001 and 002, each dated June 21, 1996 (the "Equipment Schedules" ). The parties desire to amend the Lease and the Equipment Schedules as hereinafter set forth. NOW, THEREFORE, in consideration of the sum of Ten Dollars ($10.00) in hand paid, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. The Lease is amended as follows: (a) In Section IV(b), each reference to "chief financial officer" is changed to "Treasurer, Assistant Treasurer or any Vice President." (b) In Section XVI(c)(2), Clauses (ii) and (iii) are deleted and the following substituted in lieu thereof: "(ii) 0.31:1.00 for fiscal year 1997, and (iii) 0.32:1.00 for fiscal year 1998 and each fiscal year thereafter." (c) In Section XVI(c)(3), Clauses (i) and (ii) are deleted and the following substituted in lieu thereof: "(i) 1.25:1.00 for the fourth quarter of fiscal year 1997, (ii) 1.50:1.00 for the first and second quarters of fiscal year 1998, (iii) 2.00:1.00 for the third quarter of fiscal year 1998, (iv) 2.50:1.00 for the fourth quarter of fiscal year 1998, (v) 2.50:1.00 for the first and second quarters of fiscal year 1999, and (vi) 3.50:1.00 for the third and fourth quarters of fiscal year 1999 and each fiscal year thereafter." (d) Section XVII(b) is amended by adding the following language to the end thereof: ", and (not later than August 31, 1997) Lessee shall purchase and grant to Lessor a first priority security interest in two certificates of deposit issued by KeyBank National Association or such other commercial bank as reasonably is acceptable to Lessor, each in the original principal amount of Seven Million Five Hundred Thousand Dollars ($7,500,000.00) for an initial term of six (6) months providing for automatic renewal upon the expiration of the initial and subsequent renewal terms (collectively, the "Certificates of Deposit" ) and all proceeds and replacements thereof (the "Collateral" ), and Lessee shall cause such Certificates of Deposit to be delivered to Lessor to be held as collateral security hereunder and shall execute and deliver to Lessor a Collateral Assignment Agreement in substantially the form attached hereto as Exhibit No. 2, such Uniform Commercial Code financing statements (to be filed at Lessee's expense) and other documents and instruments as reasonably may be required by Lessor to perfect the security interest of Lessor in the Collateral. At its option, Lessee may notify Lessor to renew the Certificates of Deposit for a period other than six (6) months but not less than one (1) month and, provided that no Default has then occurred, Lessor agrees to renew the Certificates of Deposit for the term specified by Lessee. At such time as Lessee's credit rating by Standard & Poor's Ratings Group, a Division of McGraw-Hill, Inc. ( "S&P" ) is BBB- or better or by Moody's Investors Service, Inc. ( "Moody's" ) is Baa3 or better, then Lessor shall release one of the Certificates of Deposit and shall terminate its security interest therein. At such time as Lessee's credit rating by both S&P is BBB- or better and by Moody's is Baa3 or better, then Lessor shall release the second Certificate of Deposit and shall terminate its security interest therein." 2. The Equipment Schedules are amended by deleting the second sentence of the definition of the term "Interest Rate" in Paragraph C, and substituting the following in lieu thereof: "If during the Basic Term, Lessee's credit rating for senior secured debt is downgraded or upgraded by either Standard & Poor s Ratings Group, a Division of McGraw-Hill, Inc. ( "S&P" ) or Moody's Investors Service, Inc. ( "Moody's"), then the Interest Rate shall mean that percentage per annum calculated as the sum of (x) the LIBOR Rate redetermined monthly, plus (y) one hundred (100) basis points if Lessee carries both a S&P BBB and Moody's Baa2 credit rating; one hundred twenty-five (125) basis points if Lessee carries both a S&P BBB- and Moody's Baa3 credit rating; one hundred fifty-five (155) basis points if Lessee carries either a S&P BB+ or higher credit rating, or Moody's Ba1 or higher credit rating (but does not satisfy either of the combined credit rating standards previously set forth in this clause (y)); one hundred eighty (180) basis points if Lessee carries either a S&P BB or Moody's Ba2 credit rating; two hundred five (205) basis points if Lessee carries either a S&P BB- or Moody's Ba3 credit rating; and two hundred thirty (230) basis points if Lessee carries either a S&P B+ or lower credit rating or Moody's B1 or lower credit rating." 3. The effectiveness of the amendments set forth herein is conditioned upon payment by Lessee to Lessor of a fee in the amount of $161,023.00. Except as expressly set forth herein, the terms and conditions of the Lease and the Equipment Schedules remain unmodified and in full force and effect. 4. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CONNECTICUT (WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES OF SUCH STATE), INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. IN WITNESS WHEREOF, the parties have caused this Amendment No. 1 to Master Lease Agreement to be executed by their duly authorized representatives of the date first above written. LESSOR: LESSEE: GENERAL ELECTRIC CAPITAL THE CONNECTICUT LIGHT AND POWER CORPORATION, FOR ITSELF AND COMPANY AS AGENT FOR CERTAIN PARTICIPANTS By: /s/Dennis Grove By: /s/David R. McHale Name: Dennis Grove Name: David R. McHale Title: Credit Manager Title: Assistant Treasurer EXHIBIT NO. 2 COLLATERAL ASSIGNMENT AGREEMENT THE CONNECTICUT LIGHT AND POWER COMPANY ("Lessee") does hereby assign, pledge and grant a security interest to GENERAL ELECTRIC CAPITAL CORPORATION, FOR ITSELF AND AS AGENT FOR CERTAIN PARTICIPANTS, its successors and assigns ("Lessor"), in all of its right, title and interest in and to the Certificates of Deposit referenced in Schedule A now or hereafter attached hereto, and all additions, substitutions, replacements and renewals thereof (the "Certificates"), issued by KeyBank National Association (the "Financial Institution"), together with all funds (including principal and accrued interest) now and at any time hereafter represented by the Certificates and all rights, powers and privileges incident to the Certificates, and all proceeds (cash and non-cash) thereof (but without power of disposition) (the "Collateral") as security and collateral for (i) the prompt payment of all indebtedness, liabilities and obligations of the Lessee to Lessor due or becoming due under that certain Master Lease Agreement dated as of June 21, 1996 (and any extensions, amendments, modifications or supplements thereto) (the "Lease"), by and between Lessor, as lessor, and the Lessee, as lessee, and (ii) the prompt performance as and when due of all terms, conditions and provisions of the Lease (hereafter collectively referred to as the "Obligations"). Lessor is hereby authorized to execute at any time and from time to time on behalf of the Lessee, so long as the collateral assignment effected herein remains effective, all of the powers, privileges and rights incident to or granted with ownership of the Certificates, including, without limitation, the right to renew the Certificates or to extend their maturities upon any terms satisfactory to Lessor which are substantially similar to the terms of the original Certificates of Deposit and at such interest rates as are generally offered by the Financial Institution for certificates of deposit in the amount and for the term of the renewal Certificates of Deposit. At the end of the initial six (6) month term of the Certificates of Deposit, and at the end of each subsequent renewal thereof, at its option, Lessee may notify Lessor to renew the Certificates of Deposit for any period other than six (6) months, but not less than one (1) month. The Lessee hereby consents that at any time and from time to time and with or without further consideration, Lessor may, without notice to and further consent of the Lessee and without in any manner affecting, impairing, lessening and releasing this Assignment, renew, extend, change the manner, time, place and terms of payment or, sell, exchange, release, surrender, realize upon, modify, waive, grant indulgences with respect to and otherwise deal with in any manner: (a) all or any part of the Obligations; (b) all or any part of any property at any time securing all or any part of the Obligations; and (c) any party (including, without limitation, the Lessee) at any time primarily or secondarily liable for all or any part of the Obligations. Notwithstanding this Assignment, all interest accruing with respect to the Certificates shall be paid directly by the Financial Institution to the Lessee, unless and until Lessor provides written notice to the Financial Institution of the occurrence of an Event of Default (as hereinafter defined). After the occurrence of a Default (as such term is defined in the Lease) (an "Event of Default"), Lessor may and is hereby authorized to endorse, present for payment, redeem, demand for, withdraw and receive from the Financial Institution, and the Financial Institution is hereby authorized and directed to pay to Lessor, any and all funds now or hereafter represented by the Certificates at such times and in such amounts as Lessor, in its sole discretion, shall determine for the purpose of applying the same to the payment of the Obligations pursuant to Section XI(b) of the Lease. Lessor may at any time and from time to time take any and all actions with respect to the Certificates (and the funds represented thereby) as authorized herein, by the terms of the Lease or by law, including (without limitation) exercising the rights of a secured party with respect to the Collateral. This Assignment is to remain in full force and effect until notice in writing is given to the Financial Institution by Lessor that such Assignment has been terminated, and until the Financial Institution receives such notice it is hereby authorized and directed to pay only to Lessor any funds now or hereafter represented by the Certificates. In making payment of such funds, the Financial Institution may conclusively rely upon the endorsement on the Certificates of any officer of Lessor, and under no circumstances shall the Financial Institution be required to determine whether any conditions of payment to Lessor have been satisfied. Lessor agrees to cause the Financial Institution and any successor thereto to execute the Acknowledgment in substantially the form attached hereto as Exhibit A. Dated as of August 29, 1997. THE CONNECTICUT LIGHT AND POWER COMPANY Lessee By:/s/David R. McHale(SEAL) Name:David R. McHale Title:Assistant Treasurer LESSOR ACCEPTS THE FOREGOING ASSIGNMENT AND AGREES TO REASSIGN TO THE LESSEE THE INTEREST ASSIGNED HEREIN UPON THE INDEFEASIBLE SATISFACTION IN FULL OF THE OBLIGATIONS. GENERAL ELECTRIC CAPITAL CORPORATION, FOR ITSELF AND AS AGENT FOR CERTAIN PARTICIPANTS By:/s/Dennis Grove(SEAL) Name:Dennis Grove Title:Credit Manager ACKNOWLEDGMENT Receipt of the above Agreement and authorization and instruction to pay GENERAL ELECTRIC CAPITAL CORPORATION, FOR ITSELF AND AS AGENT FOR CERTAIN PARTICIPANTS ("Lessor"), is hereby acknowledged and accepted; and for valuable consideration the undersigned agrees (1) not to offset against any such payment to Lessor any amount owed by any other person to the undersigned; (2) not to issue a replacement for the Certificates or otherwise to take any action with respect to the Certificates inconsistent with the security interest of Lessor without the express written consent of Lessor; (3) to pay to Lessee, by wire transfer to such account as may be specified in writing by Lessee, by wire transfer to such account as may be specified in writing by Lessee, from time to time, all interest accruing with respect to the Certificates, unless and until Lessor provides written notice to us of the occurrence of an Event of Default, and (without the prior written consent of Lessor) not to pay to Lessee any other funds now or hereafter represented by the Certificates or to honor any instructions received from Lessee with respect to the Certificates; and (4) to pay to Lessor any and all funds now or hereafter represented by the Certificates upon demand by Lessor in accordance with the terms of the Certificates. Our records reflect no other assignment of the described Certificates. The present balance of all funds represented by the Certificates is $15,000,000.00. The undersigned agrees to provide a written computation of the interest payments made to Lessee hereunder not later than two (2) days after any such payment, such to be sent to: Ms. Donna Kramer, Northeast Utilities Service Company, P.O. Box 270, Hartford, Connecticut 06141-0270. KEYBANK NATIONAL ASSOCIATION Financial Institution By:/s/Gerald N. Scalzetto(SEAL) Name:Gerald N. Scalzetto Title:Vice President Schedule A to Collateral Assignment Agreement Certificate of Deposit No. 20733150 in the original principal amount of $7,500,000.00; issue date: September 3, 1997; initial maturity date: March 3, 1998, term renewing per instruction of Lessor. Certificate of Deposit No. 20733168 in the original principal amount of $7,500,000.00; issue date: September 3, 1997; initial maturity date: March 3, 1998, term renewing per instruction of Lessor. EX-13.1 26 ANNUAL REPORT Financial and Statistical Table of Contents - -------------------------------------------------------------------------------- 12 Management's Discussion and Analysis 22 Company Report 22 Report of Independent Public Accountants 23 Consolidated Financial Statements 31 Notes to Consolidated Financial Statements and related schedules Northeast Utilities 1997 Annual Report 11 Management's Discussion and Analysis - -------------------------------------------------------------------------------- Financial Condition - -------------------------------------------------------------------------------- Overview The length of the ongoing outages at the three Millstone nuclear plants (Millstone) and the high costs of the recovery efforts weakened NU's 1997 earnings, balance sheet and cash flows and will continue to have an adverse impact on NU's financial condition until the units are returned to service. NU's earnings fell sharply in 1997 for the second consecutive year, primarily as a result of costs associated with the ongoing Millstone outages. NU lost $1.05 per common share in 1997, compared with a profit of 1 cent a share in 1996 and $2.24 a share in 1995. The poorer financial results in 1997 were due primarily to the fact that all three Millstone units were off line for the entire year in 1997 and spending associated with the recovery efforts was significantly higher in 1997 than it was in 1996. Millstone 3 operated for nearly three months in 1996 and Millstone 2 for nearly two months. As a result, the cost of replacing power ordinarily generated by the Millstone units rose by approximately $80 million in 1997. The total operation and maintenance (O&M) costs at Millstone were approximately $163 million higher in 1997. The higher Millstone costs have caused the NU system, primarily The Connecticut Light and Power Company (CL&P) and Western Massachusetts Electric Company (WMECO), to focus closely on maintaining adequate liquidity and reducing nonnuclear O&M costs. In 1997 and early 1998, CL&P and WMECO successfully sold $260 million in first mortgage bonds and renegotiated more than $400 million of bank credit lines. Additionally, nonnuclear O&M expenses in 1997 were reduced by about $50 million from 1996. Tight cost controls will continue to be essential in 1998 to CL&P's and WMECO's efforts to meet the financial covenants contained in their $313.75 million revolving credit arrangement. In 1998, management expects Millstone-related expenses to fall significantly, assuming Millstone 3 and Millstone 2 are returned to service at dates close to current estimates, although the O&M expenses at Millstone 3 and Millstone 2 will be considerably higher than before the station was placed on the Nuclear Regulatory Commission's (NRC's) watch list. The actual level of 1998 nuclear spending at Millstone will depend on when the units return to operation and the cost of restoring them to service. The company hopes to restart Millstone 3, the newest and largest unit at the site, in the early spring of 1998 and Millstone 2 three to four months after Millstone 3. The company cannot restart the Millstone units until it receives formal approval from the NRC. As part of an effort to reduce spending in 1998, Millstone 1 has been placed in extended maintenance status. Management will review its options with respect to Millstone 1 in 1998, including restart, early retirement and other options. Rate reductions in all three states served by NU's operating companies are likely to offset a portion of the benefit of lower Millstone-related costs. On December 1, 1997, Public Service Company of New Hampshire (PSNH) rates were reduced 6.87 percent as a result of an interim rate order issued by the New Hampshire Public Utilities Commission (NHPUC). On March 1, 1998, CL&P rates were reduced by approximately 1.4 percent to reflect the removal of Millstone 1 from rates, and additional noncash reductions were made to revenue requirements as a result of an interim rate order issued by the Connecticut Department of Public Utility Control (DPUC). Also on March 1, 1998, WMECO reduced retail rates by 10 percent in compliance with industry restructuring legislation passed in November 1997 by the Massachusetts Legislature. Rate cases involving CL&P and PSNH may result in additional rate adjustments later in 1998. CL&P's revenues could be further reduced if substantial delays in restarting Millstone 3 and Millstone 2 result in a DPUC decision to remove those units from rates. In addition to focusing on maintaining liquidity, management also must attend to industry restructuring efforts throughout the NU system's service territory. A temporary restraining order issued by a U.S. District Court is currently blocking the NHPUC from implementing a February 1997 restructuring order that would have resulted in a write-off by PSNH of more than $400 million. Management hopes to negotiate an alternative restructuring proposal in 1998 that will produce significant PSNH rate reductions and allow retail customers to choose their electric suppliers, but still give PSNH and North Atlantic Energy Corporation (NAEC) an opportunity to maintain an adequate financial condition and earn fair returns on their investments. The 1997 Massachusetts legislation allowed full retail choice on March 1, 1998. WMECO expects to recover fully its stranded costs through a combination of securitization and divestiture of its nonnuclear generating assets. In Connecticut, restructuring legislation is being considered in the legislative session that began in February 1998. Restructuring also is likely to cause other NU subsidiaries to auction their nuclear and/or nonnuclear generating units. Despite these potential requirements, management believes that it could be advantageous for the NU system to remain in the generation business, which could be accomplished by acquiring ownership interests in facilities inside and outside New England. 12 Northeast Utilities 1997 Annual Report - -------------------------------------------------------------------------------- NU's earnings in 1997 also were affected by a $25 million reserve for anticipated losses on the sale of investments by Charter Oak Energy, Inc., NU's independent power development subsidiary. Presently, NU is New England's largest electric utility system with 1.7 million customers in Connecticut, New Hampshire and Massachusetts. In 1997, NU experienced modest economic growth in its retail sales that was offset by the effects of mild winter weather. In 1998, management expects that the regional economy will continue to experience modest growth. Millstone - -------------------------------------------------------------------------------- Outages The NU system has a 100 percent ownership interest in Millstone 1 and 2 and a 68 percent ownership interest in Millstone 3. Millstone 1, 2 and 3 have been out of service since November 4, 1995, February 21, 1996, and March 30, 1996, respectively. Subsequent to its January 31, 1996, announcement that Millstone had been placed on its watch list, the NRC stated that the units cannot return to service until independent, third-party verification teams have reviewed the actions taken to improve the design, configuration and employee concerns issues that prompted the NRC to place the units on its watch list. The actual date of the return to service for each of the units is dependent upon the completion of independent inspections, reviews by the NRC and a vote by the NRC commissioners. In January 1998, NU declared Millstone 3 physically ready for restart, which meant that almost all of the restart-required physical work had been completed in the plant. The NRC currently is conducting a series of inspections to determine, among other things, whether the plant has effective leadership and corrective action and employee concerns programs. The Independent Corrective Action Verification Program, an NRC-ordered independent review of the plant's design and licensing bases, is expected to be completed in March 1998. In 1997, the NU system's share of nonfuel O&M costs expensed for Millstone totaled approximately $566 million, including $73 million reserved for future restart costs. The 1997 costs are net of $63 million of costs which were reserved in 1996. In 1996, the NU system's share of nonfuel O&M costs expensed for Millstone totaled approximately $403 million, including $63 million reserved for future restart costs. Management will continue to evaluate the costs to be incurred in 1998 to determine whether adjustments to the existing reserves are required. Replacement power costs attributable to the Millstone outages totaled approximately $340 million in 1997 compared to $260 million expensed in 1996. These costs for 1998 are forecasted to average approximately $9 million per month for Millstone 3, $9 million per month for Millstone 2 and $6 million per month for Millstone 1 while the plants are out of service. CL&P, WMECO and PSNH have been, and will continue to be, expensing all of the costs to restart the units including replacement power and nonfuel O&M expenses. See "Connecticut Rate Matters" for issues related to the recovery of Millstone 1 costs. NU and its subsidiaries are involved in several class action lawsuits and other litigation in connection with their nuclear operations. See the "Notes to Consolidated Financial Statements," Note 7B, for further information on this litigation. Millstone 1 Management will review its options with respect to Millstone 1 during 1998. The issues that management will consider in evaluating its options include the costs to restart the unit, the economic benefits of the unit's continued operation and certain Connecticut state law issues. In the CL&P four year rate review proceeding (discussed in detail under "Rate Matters"), the DPUC noted that CL&P may not be able to recover its remaining investment in Millstone 1 if the DPUC were to determine that the unit had been prematurely shut down due to management imprudence. Additionally, there is a Connecticut statute which may limit CL&P's ability to collect decommissioning charges in the future if Millstone 1 were to be prematurely retired. CL&P's net unrecovered Millstone 1 plant cost and the unrecovered decommissioning costs at December 31, 1997, were approximately $216 million and $198 million, respectively. Capacity During 1996 and continuing into 1997, the NU system companies took measures to improve their capacity position, including obtaining additional generating capacity, improving the availability of NU's generating units and improving the NU system's transmission capability. During 1997, NU spent approximately $58 million to ensure the availability of adequate generating capacity in Connecticut and Massachusetts, of which $40 million was expensed. In 1998, NU does not anticipate the need to take additional measures to ensure adequate generating capacity. Northeast Utilities 1997 Annual Report 13 - -------------------------------------------------------------------------------- Liquidity and Capital Resources - -------------------------------------------------------------------------------- Cash provided from operations decreased approximately $438 million in 1997, compared to 1996, primarily due to higher cash expenditures related to the Millstone outages, and the pay down in 1997 of the 1996 year end accounts payable balance. The 1996 year end accounts payable balance was relatively high due to costs related to a severe December storm and costs associated with the Millstone outages that had been incurred but not yet paid by the end of 1996. Net cash used for financing activities decreased approximately $224 million, primarily due to suspension of the NU common dividend early in 1997 and an increase in short-term borrowings. CL&P and WMECO established facilities in 1996 under which they may sell, from time to time, up to $200 million and $40 million, respectively, of their accounts receivable and accrued utility revenues. As of December 31, 1997, CL&P and WMECO sold approximately $70 million and $20 million of receivables, respectively, to third- party purchasers. NU's, CL&P's and WMECO's three-year revolving credit agreement was amended in May 1997 (the Credit Agreement). Under the Credit Agreement, CL&P and WMECO are able to borrow up to approximately $225 million and $90 million, respectively, subject to a total borrowing limit of $313.75 million for all three borrowers. NU will be able to borrow up to $50 million when NU, CL&P and WMECO have each maintained a consolidated operating income to consolidated interest expense ratio of at least 2.50 to 1 for two consecutive fiscal quarters. Currently, the companies cannot meet this requirement. At December 31, 1997, CL&P and WMECO had $35 million and $15 million outstanding, respectively, under the Credit Agreement. In February 1998, because of borrowing restrictions on NU in the Credit Agreement, NU entered into a separate $25 million, 364-day revolving credit facility with one bank. Each major subsidiary of NU finances its own needs. Neither CL&P nor WMECO has any financing agreements containing cross defaults based on financial defaults by NU, PSNH or NAEC. Similarly, neither PSNH nor NAEC has any financing agreements containing cross defaults based on financial defaults by NU, CL&P or WMECO. Nevertheless, it is possible that investors will take negative operating results or regulatory developments at one company in the NU system into account when evaluating other companies in the NU system. That could, as a practical matter and despite the contractual and legal separations among the NU companies, negatively affect each company's access to financial markets. In December 1997 and January 1998, Moody's Investors Service (Moody's) and Standard & Poor's (S&P), respectively, downgraded the senior secured debt of CL&P, WMECO and NU, as well as the preferred stock of CL&P and WMECO. This was the fourth time Moody's and S&P have downgraded CL&P and WMECO securities since the Millstone units went on the NRC watch list in 1996. All of the NU system's securities are rated below investment grade and remain under review for further downgrade. Although CL&P and WMECO do not have any plans to issue debt in the near term, rating agency downgrades generally increase the future cost of borrowing funds because lenders will want to be compensated for increased risk. Additionally, this could affect the terms and ability of the NU system companies to extend existing agreements. The downgrade by Moody's of WMECO's first mortgage bonds to Ba2 in December 1997 brought those ratings to a level at which the sponsor of WMECO's accounts receivable program can take various actions, in its discretion, which would have the practical effect of limiting WMECO's ability to utilize the facility. The WMECO accounts receivable program could be terminated if WMECO's first mortgage bond credit ratings experience one more level of downgrade. CL&P's accounts receivables program could be terminated if its senior secured debt is downgraded two more steps from its current ratings. The NU system companies' ability to borrow under their financing arrangements is dependent on their satisfaction of contractual borrowing conditions. The financial covenants that must be satisfied to permit CL&P and WMECO to borrow under the Credit Agreement are particularly restrictive and become more restrictive throughout 1998. Spending levels in 1998, particularly for the first half of the year while the Millstone units are expected to be out of service, will be constrained to levels intended to assure that the financial covenants in CL&P's and WMECO's Credit Agreement are satisfied. However, there is no assurance that these financial covenants will be met as the system may encounter additional unexpected costs from such areas as storms, reduced revenues from regulatory actions or the effect of weather on sales levels. 14 Northeast Utilities 1997 Annual Report - -------------------------------------------------------------------------------- If the return to service of Millstone 3 or Millstone 2 is delayed substantially beyond the present restart estimates, if some borrowing facilities become unavailable because of difficulties in meeting borrowing conditions or renegotiating extensions, if the system encounters additional significant costs, or any other significant deviations from management's current assumptions, the currently available borrowing facilities could be insufficient to meet all of the NU system's cash requirements. In those circumstances, management would take even more stringent actions to reduce costs and cash outflows and would attempt to take other actions to obtain additional sources of funds. The availability of these funds would be dependent upon the general market conditions and the NU system's credit and financial condition at that time. Restructuring - -------------------------------------------------------------------------------- The NU system companies continue to operate under cost-of-service based regulation, however, future rates and the recovery of strandable costs are issues under various restructuring initiatives in each of the NU system companies' service territories. Strandable costs are expenditures or commitments that have been made to meet public service obligations with the expectation that they would be recovered from customers in the future. The NU system companies have exposure to strandable costs for their investments in high-cost nuclear generating plants, state-mandated purchased power obligations and significant regulatory assets. The NU system companies' exposure to strandable investments and purchased power obligations exceeds their shareholder's equity. The NU system's financial strength and resulting ability to compete in a restructured environment will be negatively affected if the NU system companies are unable to recover their past investments and commitments. Even if the NU system companies are given the opportunity to recover a large portion of their strandable costs, earnings prospects in a restructured environment will be affected in ways which cannot be estimated at this time. The NU system companies are seeking to mitigate the impacts of restructuring by proposing stable, lower rates while pursuing customer choice options and full recovery of their strandable costs. The NU system companies' strategy to recover strandable costs includes efforts to promote state legislation that will authorize the issuance of rate reduction bonds that would refinance these investments and which would be repaid through non-bypassable charges to customers. Management is unable to predict the ultimate outcome of these initiatives which will be subject to regulatory and legislative approvals. Management believes it is entitled to full recovery of its prudently incurred costs, including regulatory assets and other strandable costs. See the "Notes to Consolidated Financial Statements," Note 7A, for the potential accounting impacts of restructuring. New Hampshire In February 1997, the NHPUC issued orders to restructure the state's electric utility industry and set interim stranded cost charges for PSNH. In the orders, the NHPUC announced a departure from cost-based ratemaking and adopted a market-priced approach to stranded cost recovery. PSNH, NU, NAEC, and Northeast Utilities Service Company (NUSCO) filed for a temporary restraining order, preliminary and permanent injunctive relief and a declaratory judgment in the United States District Court of New Hampshire. The case subsequently was transferred to the United States District Court of Rhode Island (District Court) where a temporary restraining order was granted, staying, indefinitely, the enforcement of the NHPUC's restructuring orders as they affected PSNH. Certain appeals to the preliminary ruling have been denied and proceedings in the District Court are expected to resume. The NHPUC conducted rehearing proceedings in 1997 to decide the appropriate methodology to be used to determine PSNH's interim stranded costs and to set PSNH's interim stranded cost charges utilizing the determined methodology. The NHPUC has not indicated when it will issue a decision in these proceedings. On December 15, 1997, the NHPUC officially announced that industry restructuring would not take place on January 1, 1998. As part of the rehearing proceedings, PSNH proposed a new methodology to quantify its stranded costs. Under this proposal, PSNH would divest its owned generation and purchased power obligations via auction. To the extent that the auction fails to produce sufficient revenues to cover the net book value of owned generation and contractual payment obligations of purchased power, the difference would be recovered from customers through a non-bypassable distribution charge. The new proposal also relies upon securitization of certain assets to further reduce rates. On February 20, 1998, PSNH forwarded a settlement offer to representatives from the state of New Hampshire that was consistent with PSNH's proposal in the rehearing proceedings including, among other things, a 20 percent rate reduction at the beginning of 1999, an auction of PSNH's nonnuclear generating units and securtization of approximately $1.15 billion of PSNH's stranded costs. Northeast Utilities 1997 Annual Report 15 - -------------------------------------------------------------------------------- Massachusetts On November 25, 1997, Massachusetts enacted a comprehensive electric utility industry restructuring bill. The bill provides that each Massachusetts electric company, including WMECO, will decrease its rates by 10 percent and allow all its customers to choose their electric supplier on March 1, 1998. The statute requires a further 5 percent rate reduction, adjusted for inflation, by September 1, 1999. In addition, the legislation provides, among other things, for: (i) recovery of strandable costs through a "transition charge" to customers, subject to review by the Department of Telecommunications and Energy (DTE), formerly the Department of Public Utilities (DPU, collectively the DTE), (ii) a possible limitation on WMECO's return on equity should its transition cost charge go above a certain level, (iii) securitization of allowed strandable costs, and (iv) divestiture of nonnuclear generation. WMECO hopes it will be able to complete securitization in 1998. The statute also provides that an electric company must transfer or separate ownership of generation, transmission and distribution facilities into independent affiliates or functionally separate such facilities within 30 business days after federal approval. Additionally, marketing companies formed by an electric company are to be separate from the electric company and separate from generation, transmission or distribution affiliates. On December 31, 1997, WMECO filed its restructuring plan with the DTE consistent with the Massachusetts restructuring legislation. The plan sets out the process by which WMECO, as of March 1, 1998, initiated a 10 percent rate reduction for all customer rate classes and allowed customers to choose their energy supplier. WMECO intends to mitigate its strandable costs through several steps, including divesting WMECO's nonnuclear generating plants at an auction to be held as soon as June 30, 1998, and securitization of approximately $500 million of stranded costs. NU intends to participate through a nonregulated affiliate in the competitive bid process for WMECO's generation resources. Any proceeds in excess of book value received from the divestiture of these units will be used to mitigate stranded costs. As required by the legislation, WMECO will continue to operate and maintain the transmission and local distribution network and deliver electricity to all customers. On February 20, 1998, the DTE issued an order approving, in all material respects, WMECO's restructuring plan on an interim basis. A final decision is expected in 1998. Because WMECO is obligated to reduce rates on March 1, 1998, before the means of financing for restructuring are completed, WMECO's cash flows and financial condition will be negatively affected. These impacts would become significant if there are material delays in, or significantly reduced proceeds from, the divestiture of nonnuclear generation and securitization. Connecticut Massachusetts and New Hampshire have been at the forefront of the restructuring movement in New England with very different approaches as previously discussed. In Connecticut, legislators have proposed broad restructuring legislation which will be considered in the spring of 1998. Rate Matters - -------------------------------------------------------------------------------- Connecticut In July 1996, the DPUC approved a rate settlement agreement with CL&P (the Settlement). Under the Settlement, CL&P froze base rates until at least December 31, 1997, and agreed to accelerate the amortization of regulatory assets during the period that the rate freeze remains in effect. The Settlement provided that CL&P's target return on equity (ROE) would be 10.7 percent but did not alter CL&P's allowed ROE of 11.7 percent. If CL&P's actual ROE for a calendar year exceeds 10.7 percent after the target regulatory asset amortization ($68 million in 1997) and after adjustment for any incremental NRC billings and any rate disallowances for nuclear operations, then CL&P shall retain two-thirds of any surplus and use the remaining one-third to provide a reduction in bills. CL&P's actual ROE, as adjusted, fell below the target ROE for 1996 and 1997 and, therefore, the accelerated amortization of regulatory assets was reduced to the minimum amounts allowed under the Settlement ($73 million in 1996 and $54 million in 1997). For each full year that the rate freeze remains in effect, CL&P agreed to amortize an additional $44 million of regulatory assets. On July 30, 1997, the DPUC issued a decision in its prudence review of nuclear cost recovery issues disallowing CL&P's recovery of all of the replacement power costs associated with the ongoing outages at Millstone. CL&P has expensed, and will continue to expense, replacement power costs for the Millstone outages as they are incurred. 16 Northeast Utilities 1997 Annual Report - -------------------------------------------------------------------------------- The DPUC is required to review a utility's rates every four years if there has not been a rate proceeding during such period. In 1997, the DPUC conducted such a review of CL&P's rates, including an analysis of the possibility of removing one or more of the Millstone nuclear units from CL&P's rate base. On December 31, 1997, the DPUC issued its ruling in this matter. The decision did not effect a change in CL&P's rates, but set forth findings and conclusions that could be used to do so in additional proceedings. The most significant conclusion was that Millstone 1 should be removed from CL&P's rate base, which would cause an annual revenue reduction of approximately $30.5 million. The decision stated that the DPUC would open an interim rate case immediately to remove Millstone 1 from CL&P's rates and simultaneously to remove an additional $110.5 million of other expenses from rates related to perceived overearnings. In February 1998, the DPUC issued a decision reducing CL&P's rates by approximately 1.4 percent to reflect the removal of Millstone 1 from rates. This reduction reflects the removal from rates of O&M, depreciation and investment return related to Millstone 1, net of replacement power costs. In addition, the decision requires CL&P to accelerate the amortization of regulatory assets by $110.5 million, which includes the $44 million from the 1996 Settlement. The interim rate reduction became effective on March 1, 1998. CL&P also was directed to file a full rate case on June 1, 1998, to address potential overearnings amounting to an additional $150 million in 1998. The effective date of any rate order will be September 28, 1998. In addition, the DPUC has scheduled a hearing for April 1, 1998, to determine the status of Millstone 3 and Millstone 2. A similar restart status hearing is anticipated for June 1, 1998. If the units are not operating by those dates, the DPUC will consider their removal from rates. The DPUC also will consider CL&P's analyses of the economic benefits of the continued operation of Millstone 1 and Millstone 2 in the context of CL&P's next integrated resource planning proceeding, which begins in April 1998. New Hampshire PSNH's Rate Agreement provides for seven base rate increases and a comprehensive fuel and purchased power adjustment clause (FPPAC). In June 1996, the final base rate increase of 5.5 percent went into effect. Although the FPPAC continues for an additional four years beyond the end of the fixed rate period, there is uncertainty regarding how it will function after that time. On May 2, 1997, PSNH made a rate filing with the NHPUC requesting base rates to remain at their current level after May 31, 1997. By order dated November 6, 1997, the NHPUC ordered a temporary rate reduction for PSNH at a revenue level 6.87 percent lower than current rates. The NHPUC also set an interim return on equity of 11 percent. The temporary rates became effective December 1, 1997. A final decision, which will be reconciled to July 1, 1997, is not expected to be issued until September 1998. A portion of this reduction was offset by an increase to rates through the FPPAC. On February 10, 1998, the NHPUC ordered an FPPAC rate for the period December 1, 1997, through May 31, 1998, which increased customer bills by approximately 6 percent. This rate continues to defer recovery of a substantial portion of costs for the future. In addition, recovery of the Seabrook deferred return (approximately $127 million annually) is scheduled to begin in June 1998. See the "Notes to Consolidated Financial Statements," Note 1K, for further information on the FPPAC. Massachusetts In April 1996, the DTE approved a settlement (the Agreement) that included the continuation through February 1998 of a 2.4 percent rate reduction instituted in June 1994. Additionally, the Agreement terminated certain pending and potential reviews of WMECO's generating plant performance and accelerated its amortization of strandable generation assets by approximately $6 million in 1996 and $10 million in 1997. On August 20, 1997, WMECO filed with the DTE a joint motion for approval of a settlement agreement with the Massachusetts Attorney General for a fuel adjustment clause (FAC) which would allow for a lower rate to WMECO customers for the billing months of September 1997 through February 1998. WMECO is not recovering replacement power costs during this period and has indicated that it would not seek recovery of any replacement power costs associated with the Millstone outages. WMECO has been expensing and will continue to expense these costs. The Massachusetts restructuring legislation effectively eliminates the FAC, effective March 1, 1998. Northeast Utilities 1997 Annual Report 17 - -------------------------------------------------------------------------------- Nuclear Decommissioning - -------------------------------------------------------------------------------- Connecticut Yankee The NU system has a 49 percent ownership interest in the Connecticut Yankee nuclear generating facility (CY or the plant). On December 4, 1996, the Board of Directors of Connecticut Yankee Atomic Power Company voted unanimously to cease permanently the production of power at the plant. The decision to retire CY from commercial operation was based on an economic analysis of the costs of operating it compared to the costs of closing it and incurring replacement power costs over the remaining period of the plant's operating license, which would have expired in 2007. The economic analysis showed that closing the plant and incurring replacement power costs produced substantial savings. CY has undertaken a number of regulatory filings intended to implement the decommissioning. In late December 1996, CY filed an amendment to its power contracts with the FERC to clarify the obligations of its purchasing utilities following the decision to cease power production. At December 31, 1997, NU's share of these obligations was approximately $304 million, including the cost of decommissioning and the recovery of existing assets. Management expects that CL&P, PSNH and WMECO each will continue to be allowed to recover such FERC approved costs from their customers. Accordingly, NU has recognized its share of the estimated costs as a regulatory asset, with a corresponding obligation, on its balance sheet. Maine Yankee The NU system has a 20 percent ownership interest in the Maine Yankee (MY) nuclear generating facility. On August 6, 1997, the Board of Directors of Maine Yankee Atomic Power Company (MYAPC) voted unanimously to retire MY. On January 14, 1998, FERC released a draft order on the MYAPC application to amend its power contracts with the owner/purchasers and revise its decommissioning and other charges. FERC has accepted the proposed application for filing and made the amendments and the proposed charges under the contracts effective on January 15, 1998, subject to refund after hearings. At December 31, 1997, the NU system's share of the estimated remaining obligation, including decommissioning, amounted to approximately $173 million. Under the terms of the contracts with MYAPC, the shareholders' sponsor companies, including CL&P, PSNH and WMECO, are responsible for their proportionate share of the costs of the unit, including decommissioning. Management expects that CL&P, PSNH and WMECO will be allowed to recover these costs from their customers. Accordingly, NU has recognized these costs as a regulatory asset, with a corresponding obligation on its balance sheet. Millstone and Seabrook NU's estimated cost to decommission its shares of the Millstone plants and Seabrook is approximately $1.48 billion in year end 1997 dollars. These costs are being recognized over the lives of the respective units with a portion currently being recovered through rates. As of December 31, 1997, the market value of the contributions already made to the decommissioning trusts, including their investment returns, was approximately $503 million. See the "Notes to Consolidated Financial Statements," Note 2, for further information on nuclear decommissioning, including the NU system's share of costs to decommission the other regional nuclear generating units. Environmental Matters - -------------------------------------------------------------------------------- NU's subsidiaries are potentially liable for environmental cleanup costs at a number of sites inside and outside their service territories. To date, the future estimated environmental remediation liability has not been material with respect to the earnings or financial position of the NU system. At December 31, 1997, NU's subsidiaries had recorded an environmental reserve of approximately $16 million. See the "Notes to Consolidated Financial Statements," Note 7C, for further information on environmental matters. Year 2000 Issue - -------------------------------------------------------------------------------- The Year 2000 issue exists because many computer systems and applications currently use two-digit date fields to designate a year. As the change of the century occurs, date-sensitive systems may recognize the year 2000 as 1900, or not recognize it at all. This inability to recognize or properly treat the year 2000 may cause NU's systems to process critical financial and operational information incorrectly. The company has assessed and continues to assess the impact of the Year 2000 issue on its operating and reporting systems. The assessment of the nuclear operating systems is continuing and is expected to be completed in the summer of 1998. The NU system will utilize both internal and external resources to reprogram or replace and test the software for Year 2000 modifications. The total estimated remaining cost of the Year 2000 project is $37 million and is being funded through operating cash flows. This estimate does not include any costs for the replacement or repair of equipment or devices that may be identified during the assessment process. The majority of these costs will be expensed as incurred over the next two years. To date, the company has 18 Northeast Utilities 1997 Annual Report - -------------------------------------------------------------------------------- incurred and expensed approximately $4 million related to the assessment of, and preliminary efforts in connection with, its Year 2000 project. The costs of the project and the date on which the company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those plans. If the NU system's remediation plan is not successful, there could be a significant disruption of the NU system's operations. Risk-Management Instruments - -------------------------------------------------------------------------------- The following discussion about the NU system's risk-management activities includes forward looking statements that involve risk and uncertainties. Actual results could differ materially from those projected in the forward looking statements. This analysis presents the hypothetical loss in earnings related to the fuel price and interest rate market risks not covered by the risk-management instruments at December 31, 1997. The NU system uses swaps, collars, puts and calls to manage the market risk exposures associated with changes in fuel prices and variable interest rates. The NU system does not use these risk-management instruments for speculative purposes. For more information on NU's use of risk-management instruments, see the "Notes to Consolidated Financial Statements," Notes 1O and 8. Fuel Price Risk-Management Instruments In the generation of electricity, the most significant variable cost component is the cost of fuel. Typically, most of CL&P's fuel purchases are protected by a regulatory fuel price adjustment clause. However, for a specific, well-defined volume of fuel that is excluded from the fuel price adjustment clause (unprotected volume), CL&P employs fuel price risk-management instruments to protect itself against the risk of rising fuel prices, thereby limiting fuel costs and protecting its profit margins. These risks are created by the sale of long-term, fixed-price electricity contracts to wholesale customers and the purchase or generation of replacement power related to the ongoing Millstone nuclear outages. At December 31, 1997, CL&P had outstanding agreements with a total notional value of approximately $327 million. The settlement amounts associated with the instruments reduced fuel expense by approximately $8 million. CL&P has had experience using various fuel price risk-management instruments since 1994, most of which have been in the form of fuel price swaps. At December 31, 1997, approximately 30 percent of the unprotected volume was covered by fuel price risk-management instruments (hedge ratio) for 1997. This effectively fixed or bounded the fuel cost and thus eliminated the market price risk for this covered volume of fuel. At December 31, 1997, CL&P had a hedge ratio of 44 percent for 1998. At December 31, 1997, the 56 percent uncovered volume of fuel for 1998, as a result of not being hedged, is subject to changes in actual market prices. Therefore, assuming a hypothetical 10 percent increase in the average 1997 price of fuel in 1998, the result would be a negative pretax impact on earnings of approximately $12.4 million. This analysis is based on the broad assumption that the entire uncovered volume of fuel remains constant and will be purchased on the spot market. This assumption is subject to change as the uncovered volume of fuel likely will change during the next year. Other assumptions used in this analysis, projections of the fuel mix, the amount of long-term sales contracts or the projected Millstone restart dates, also are subject to change. Interest Rate Risk-Management Instruments Several NU subsidiaries hold variable rate long-term notes, exposing the NU system to interest rate risk. In order to hedge some of this risk, interest rate risk-management instruments have been entered into on NAEC's $200 million variable rate note, effectively fixing the interest on this note at 7.823 percent. The remaining variable notes remain unhedged. At December 31, 1997, NU had a hedge ratio on its long-term variable rate notes of 21 percent, which is expected to be the same for 1998. The remaining 79 percent of NU's variable notes are unhedged and, as a result, are subject to actual market rates for 1998. Thus, a 10 percent increase in market interest rates above the 1997 weighted average variable rate during 1998 would result in a $3.6 million pretax annual decrease in earnings. For purposes of this analysis, the hedge ratio for long-term variable rate notes is calculated by dividing the amount of the hedged long-term note by the total of all long-term variable notes held at December 31, 1997. Northeast Utilities 1997 Annual Report 19 - -------------------------------------------------------------------------------- Results of Operations - -------------------------------------------------------------------------------- The components of significant income statement variances for the past two years are provided in the table below. The relative magnitude of how revenues earned in 1997 and retained earnings were used by NU's continuing operations in 1997 is illustrated in the chart on page 21.
- ------------------------------------------------------------------------------------------ Income Statement Variances (Millions of Dollars) - ------------------------------------------------------------------------------------------ 1997 over/(under) 1996 1996 over/(under) 1995 Amount Percent Amount Percent - ------------------------------------------------------------------------------------------ Operating revenues $ 43 1% $ 42 1% Fuel, purchased and net interchange power 154 13 230 25 Other operation (50) (4) 191 20 Maintenance 86 21 127 44 Amortization of regulatory assets, net 8 7 (6) (5) Federal and state income taxes (72) (a) (192) (73) Deferred nuclear plants return (other and borrowed funds) (3) (13) (13) (36) Other income, net (69) (a) 20 (a) Interest on long-term debt (3) (1) (30) (10) Other interest (4) (53) 1 15 Preferred dividends of subsidiaries (3) (10) (6) (14) Net income (138) (a) (281) (99) - ------------------------------------------------------------------------------------------
(a) Percentage greater than 100 Operating Revenues Total operating revenues increased in 1997, primarily due to higher fuel recoveries and higher conservation recoveries. Fuel recoveries increased $32 million, primarily due to higher fuel revenues for CL&P as a result of a lower fuel rate in 1996. Conservation recoveries increased by $17 million, primarily due to a 1996 reserve for overrecoveries of CL&P demand-side management costs. Retail kilowatt hour sales were 0.3 percent lower in 1997 as a result of mild winter weather. Total operating revenues increased in 1996, primarily due to higher retail sales, regulatory decisions and higher other revenues, partially offset by lower fuel recoveries and lower wholesale revenues. Retail sales increased 1.6 percent ($40 million), primarily due to modest economic growth in 1996. Regulatory decisions increased revenues by $22 million, primarily due to retail rate increases for CL&P in mid-1995 and PSNH in mid-1995 and 1996, partially offset by 1996 reserves for CL&P overrecoveries of demand-side management costs. Other revenues increased $31 million and included higher recognition in 1996 of reimbursable conservation services and higher transmission revenues. Fuel recoveries decreased $40 million, primarily due to lower FPPAC revenues for PSNH as a result of a customer refund ordered by the NHPUC, partially offset by higher base fuel revenues for PSNH as a result of the PSNH rate increases. Wholesale revenues decreased $13 million, primarily due to higher recognition in 1995 of lump-sum payments for the termination of a CL&P long-term contract and capacity sales contracts that expired in 1995. Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense increased in 1997, primarily due to replacement power costs associated with the Millstone outages and the expensing in 1997 of replacement power costs incurred in 1996. Fuel, purchased and net interchange power expense increased in 1996, primarily due to replacement power costs associated with the Millstone outages and the write-off of the generation utilization adjustment clause (GUAC) balance under the CL&P Settlement. 20 Northeast Utilities 1997 Annual Report - -------------------------------------------------------------------------------- Other Operation and Maintenance Other operation and maintenance expenses increased in 1997, primarily due to higher costs associated with the Millstone restart effort ($163 million, including a net increase of $10 million in reserves for future costs), higher costs as a result of Seabrook outages ($23 million) and higher capacity charges from Maine Yankee ($16 million), partially offset by lower recognition of nuclear refueling outage costs primarily as a result of the 1996 CL&P Rate Settlement ($72 million), lower capacity charges from Connecticut Yankee as a result of a property tax refund ($35 million), lower administrative and general expenses ($41 million) primarily due to lower pensions and benefit costs, and lower storm expenses. Other operation and maintenance expenses increased in 1996, primarily due to higher costs associated with the Millstone restart effort ($179 million, including $63 million of reserves for future costs) and 1996 costs to ensure adequate generating capacity in Connecticut ($39 million). In addition, 1996 costs reflect higher storm and reliability expenditures, higher recognition of conservation expenses and higher marketing costs. Amortization of Regulatory Assets, Net Amortization of regulatory assets, net increased in 1997, primarily due to the completion of the CL&P cogeneration deferrals in 1996, increased amortization in 1997, and the beginning of the amortization of NAEC's Seabrook deferred return in December 1997, partially offset by the completion of CL&P's Seabrook amortization and WMECO's Millstone 3 amortization in 1996. Amortization of regulatory assets, net decreased in 1996, primarily due to the completion of the Millstone 3 phase-in plans in 1995, partially offset by lower CL&P cogeneration deferrals and the accelerated amortization of regulatory assets as a result of the 1996 CL&P Settlement. Federal and State Income Taxes Federal and state income taxes decreased in 1997, primarily due to lower book taxable income. Federal and state income taxes decreased in 1996, primarily due to lower book taxable income, partially offset by 1995 tax benefits from a favorable tax ruling and the expiration of the 1991 federal statute of limitations. Income tax expense totaled approximately $70 million in 1996, despite relatively low pretax earnings, due to the tax effect of differences for certain items, particularly depreciation and the amortization of PSNH acquisition costs. Deferred Nuclear Plants Return The change in deferred nuclear plants return in 1997 was not significant. Deferred nuclear plants return decreased in 1996, primarily due to additional Seabrook investment being phased into rates, partially offset by a one-time adjustment to NAEC's Seabrook deferred return balance of approximately $5 million in 1995. Other Income, Net Other income, net decreased in 1997, primarily due to a $25 million reserve for anticipated losses on the sale of investments by Charter Oak Energy (COE), equity losses on COE investments, costs associated with the accounts receivable facility, nonutility marketing and advertising costs and lower miscellaneous income. Other income, net increased in 1996, primarily due to higher interest income on temporary cash investments in 1996, the 1995 write-down of CL&P's wholesale investment in Millstone 3 and a 1995 increase to the environmental reserve. Interest on Long-Term Debt The change in interest on long-term debt in 1997 was not significant. Interest on long-term debt decreased in 1996, primarily due to reacquisitions and retirements of long-term debt in 1995. Other Interest Other interest expense decreased in 1997 due to 1996 interest expense associated with an FPPAC refund for PSNH. Preferred Dividends of Subsidiaries The change in preferred dividends of subsidiaries was not significant in 1997. Preferred dividends of subsidiaries decreased in 1996, primarily due to a 1995 charge to earnings for premiums on redeemed preferred stock and a reduction in preferred stock levels. - -------------------------------------------------------------------------------- 1997 Use of Revenue and Retained Earnings - -------------------------------------------------------------------------------- [The following table was originally a pie chart in the printed materials.] Energy Costs 32% Nonfuel Operation and Maintenance Expenses 28% Depreciation, Amortization and Other Expenses 13% Wages and Benefits 12% Interest Charges 7% Taxes 6% Common and Preferred Dividends 2% - -------------------------------------------------------------------------------- Northeast Utilities 1997 Annual Report 21 Company Report - -------------------------------------------------------------------------------- The consolidated financial statements of Northeast Utilities and subsidiaries and other sections of this Annual Report were prepared by the company. These financial statements, which were audited by Arthur Andersen LLP, were prepared in accordance with generally accepted accounting principles using estimates and judgment, where required, and giving consideration to materiality. The company has endeavored to establish a control environment that encourages the maintenance of high standards of conduct in all of its business activities. The company maintains a system of internal controls over financial reporting which is designed to provide reasonable assurance to the company's management and Board of Trustees regarding the preparation of reliable, published financial statements. The system is supported by an organization of trained management personnel, policies and procedures, and a comprehensive program of internal audits. Through established programs, the company regularly communicates to its management employees their internal control responsibilities and policies prohibiting conflict of interest. The Audit Committee of the Board of Trustees is composed entirely of outside trustees. This committee meets periodically with management, the internal auditors and the independent auditors to review the activities of each and to discuss audit matters, financial reporting and the adequacy of internal controls. Because of inherent limitations in any system of internal controls, errors or irregularities may occur and not be detected. The company believes, however, that its system of internal accounting controls and control environment provide reasonable assurance that its assets are safeguarded from loss or unauthorized use and that its financial records, which are the basis for the preparation of all financial statements, are reliable. Report of Independent Public Accountants - -------------------------------------------------------------------------------- To the Board of Trustees and Shareholders of Northeast Utilities: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Northeast Utilities (a Massachusetts trust) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, common shareholders' equity, cash flows and income taxes for each of the three years in the period ended December 31, 1997. 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 Northeast Utilities and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Hartford, Connecticut February 20, 1998 22 Northeast Utilities 1997 Annual Report Consolidated Statements of Income - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------- For the Years Ended December 31, - --------------------------------------------------------------------------------------------- (Thousands of Dollars, except share information) 1997 1996 1995 - --------------------------------------------------------------------------------------------- Operating Revenues ............................... $ 3,834,806 $ 3,792,148 $ 3,750,560 - --------------------------------------------------------------------------------------------- Operating Expenses: Operation -- Fuel, purchased and net interchange power ..... 1,293,518 1,139,848 909,244 Other ......................................... 1,107,097 1,157,278 966,845 Maintenance ...................................... 501,693 415,532 288,927 Depreciation ..................................... 354,329 359,507 354,293 Amortization of regulatory assets, net ........... 130,900 122,573 128,413 Federal and state income taxes (See Consolidated Statements of Income Taxes).. 8,596 68,261 261,287 Taxes other than income taxes .................... 253,637 257,577 249,463 - --------------------------------------------------------------------------------------------- Total operating expenses ...................... 3,649,770 3,520,576 3,158,472 - --------------------------------------------------------------------------------------------- Operating Income ................................. 185,036 271,572 592,088 - --------------------------------------------------------------------------------------------- Other Income: Deferred nuclear plants return -- other funds .... 7,288 8,988 14,196 Equity in earnings of regional nuclear generating and transmission companies .................... 11,306 13,155 13,208 Other, net ....................................... (38,473) 30,932 10,954 Minority interest in income of subsidiary ........ (9,300) (9,300) (8,732) Income taxes ..................................... 10,702 (1,747) (683) - --------------------------------------------------------------------------------------------- Other (loss)/income, net ...................... (18,477) 42,028 28,943 - --------------------------------------------------------------------------------------------- Income before interest charges ................ 166,559 313,600 621,031 - --------------------------------------------------------------------------------------------- Interest Charges: Interest on long-term debt ....................... 282,095 285,463 315,862 Other interest ................................... 3,561 7,649 6,666 Deferred nuclear plants return -- borrowed funds.. (13,675) (15,119) (23,310) - --------------------------------------------------------------------------------------------- Interest charges, net ......................... 271,981 277,993 299,218 - --------------------------------------------------------------------------------------------- (Loss)/Income after interest charges .......... (105,422) 35,607 321,813 Preferred Dividends of Subsidiaries .............. 30,286 33,776 39,379 - --------------------------------------------------------------------------------------------- Net (Loss)/Income ................................ $ (135,708) $ 1,831 $ 282,434 ============================================================================================= (Loss)/Earnings Per Common Share ................. $ (1.05) $ 0.01 $ 2.24 ============================================================================================= Common Shares Outstanding (average) .............. 129,567,708 127,960,382 126,083,645 =============================================================================================
The accompanying notes are an integral part of these financial statements. Northeast Utilities 1997 Annual Report 23 Consolidated Balance Sheets - --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------- At December 31, - ---------------------------------------------------------------------------------------------- (Thousands of Dollars) 1997 1996 - ---------------------------------------------------------------------------------------------- Assets Utility Plant, at cost: Electric (Note 1H) ........................................... $ 9,869,561 $ 9,685,155 Other ........................................................ 186,130 192,303 - ---------------------------------------------------------------------------------------------- 10,055,691 9,877,458 Less: Accumulated provision for depreciation ................. 4,330,599 3,979,864 - ---------------------------------------------------------------------------------------------- 5,725,092 5,897,594 Unamortized PSNH acquisition costs (Note 1J) .................... 402,285 491,709 Construction work in progress ................................... 141,077 146,438 Nuclear fuel, net ............................................... 194,704 196,424 - ---------------------------------------------------------------------------------------------- Total net utility plant ...................................... 6,463,158 6,732,165 - --------------------------------------------------------------------------------------------- Other Property and Investments: Nuclear decommissioning trusts, at market ....................... 502,749 403,544 Investments in regional nuclear generating companies, at equity.. 86,955 85,340 Investments in transmission companies, at equity ................ 19,635 21,186 Investments in Charter Oak Energy, Inc. ......................... -- 57,188 Other, at cost .................................................. 95,362 43,372 - ---------------------------------------------------------------------------------------------- 704,701 610,630 - ---------------------------------------------------------------------------------------------- Current Assets: Cash and cash equivalents ....................................... 143,403 194,197 Investments in securitizable assets (Note 6) .................... 230,905 -- Receivables, less accumulated provision for uncollectible accounts of $2,052,000 in 1997 and $17,062,000 in 1996 (Note 6) ............................................. 214,914 477,021 Accrued utility revenues (Note 6) .............................. 36,885 127,162 Fuel, materials and supplies, at average cost ................... 212,721 211,414 Recoverable energy costs, net -- current portion ................ 59,959 1,804 Investments in Charter Oak Energy, Inc. held for sale (Note 7G).. 33,391 -- Prepayments and other ........................................... 38,495 55,318 - ---------------------------------------------------------------------------------------------- 970,673 1,066,916 - ---------------------------------------------------------------------------------------------- Deferred Charges: Regulatory assets (Note 1H) ..................................... 2,173,278 2,221,839 Unamortized debt expense ........................................ 38,758 38,146 Other ........................................................... 63,844 72,052 - ---------------------------------------------------------------------------------------------- 2,275,880 2,332,037 - ---------------------------------------------------------------------------------------------- Total Assets .................................................... $ 10,414,412 $ 10,741,748 ==============================================================================================
The accompanying notes are an integral part of these financial statements. 24 Northeast Utilities 1997 Annual Report Consolidated Balance Sheets (continued) - --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------- At December 31, - ---------------------------------------------------------------------------------------------- (Thousands of Dollars) 1997 1996 - ---------------------------------------------------------------------------------------------- Capitalization and Liabilities Capitalization: (See Consolidated Statements of Capitalization) Common shareholders' equity (See Note (a) -- Consolidated Statements of Common Shareholders' Equity): Common shares, $5 par value -- authorized 225,000,000 shares; 136,842,170 shares issued and 130,182,736 shares outstanding in 1997 and 136,051,938 shares issued and 128,444,373 shares outstanding in 1996 ........................................ $ 684,211 $ 680,260 Capital surplus, paid in ..................................... 932,493 940,446 Deferred contribution plan -- employee stock ownership plan (ESOP) ................................................ (154,141) (176,091) Retained earnings ............................................ 664,678 832,520 - ---------------------------------------------------------------------------------------------- Total common shareholders' equity ............................ 2,127,241 2,277,135 Preferred stock not subject to mandatory redemption ............. 136,200 136,200 Preferred stock subject to mandatory redemption ................. 245,750 276,000 Long-term debt .................................................. 3,645,659 3,613,681 - ---------------------------------------------------------------------------------------------- Total capitalization ......................................... 6,154,850 6,303,016 - ---------------------------------------------------------------------------------------------- Minority Interest in Consolidated Subsidiaries .................. 100,000 99,972 - ---------------------------------------------------------------------------------------------- Obligations Under Capital Leases (Note 4) ....................... 30,427 186,860 - ---------------------------------------------------------------------------------------------- Current Liabilities: Notes payable to banks .......................................... 50,000 38,750 Long-term debt and preferred stock-- current portion ............ 274,810 319,503 Obligations under capital leases-- current portion .............. 177,304 19,305 Accounts payable ................................................ 402,870 507,139 Accrued taxes ................................................... 46,016 7,050 Accrued interest ................................................ 30,786 51,386 Accrued pension benefits ........................................ 77,186 99,699 Nuclear compliance (Note 7B) .................................... 73,000 63,200 Other ........................................................... 88,396 98,570 - ---------------------------------------------------------------------------------------------- 1,220,368 1,204,602 - ---------------------------------------------------------------------------------------------- Deferred Credits: Accumulated deferred income taxes ............................... 1,954,357 2,044,123 Accumulated deferred investment tax credits ..................... 158,837 168,444 Deferred contractual obligations (Note 2) ....................... 525,076 440,495 Other ........................................................... 270,497 294,236 - ---------------------------------------------------------------------------------------------- 2,908,767 2,947,298 - ---------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 7) Total Capitalization and Liabilities ............................ $ 10,414,412 $ 10,741,748 ==============================================================================================
The accompanying notes are an integral part of these financial statements. Northeast Utilities 1997 Annual Report 25 Consolidated Statements of Cash Flows - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------- For the Years Ended December 31, - -------------------------------------------------------------------------------------------------- (Thousands of Dollars) 1997 1996 1995 - -------------------------------------------------------------------------------------------------- Operating Activities: (Loss)/Income before preferred dividends of subsidiaries ...... $(105,422) $ 35,607 $ 321,813 Adjustments to reconcile to net cash from operating activities: Depreciation .............................................. 354,329 359,507 354,293 Deferred income taxes and investment tax credits, net ..... 22,381 45,730 164,208 Deferred nuclear plants return, net of amortization ....... (13,781) (14,948) 71,788 Amortization of deferred demand-side management costs, net ................................... 38,029 26,941 (937) Recoverable energy costs, net of amortization ............. (54,102) (14,289) (27,874) Amortization of PSNH acquisition costs .................... 56,557 56,884 55,547 Amortization of deferred cogeneration costs, net .......... 32,700 25,957 (55,341) Deferred nuclear refueling outage, net of amortization .... (36,514) 51,831 (29,569) Other sources of cash ..................................... 141,041 164,915 147,348 Other uses of cash ........................................ (86,202) (41,589) (67,838) Changes in working capital: Receivables and accrued utility revenues .................. 262,384 (31,992) (72,081) Fuel, materials and supplies .............................. (1,307) (10,834) (10,518) Accounts payable .......................................... (104,269) 188,101 38,096 Accrued taxes ............................................. 38,966 (68,168) 17,686 Sale of receivables and accrued utility revenues (Note 6).. 90,000 -- -- Investments in securitizable assets (Note 6) .............. (230,905) -- -- Nuclear compliance, net (Note 7B) ......................... 9,800 63,200 -- Other working capital (excludes cash) ..................... (36,464) (21,383) (2,458) - -------------------------------------------------------------------------------------------------- Net cash flows from operating activities ...................... 377,221 815,470 904,163 - -------------------------------------------------------------------------------------------------- Financing Activities: Issuance of common shares ..................................... 6,502 10,622 31,976 Issuance of long-term debt .................................... 260,000 222,150 225,100 Issuance of Monthly Income Preferred Securities ............... -- -- 100,000 Net increase/(decrease) in short-term debt .................... 11,250 (60,250) (91,000) Reacquisitions and retirements of long-term debt .............. (288,793) (248,142) (425,500) Reacquisitions and retirements of preferred stock ............. (25,000) (36,500) (140,675) Cash dividends on preferred stock ............................. (30,286) (33,776) (39,379) Cash dividends on common shares ............................... (32,134) (176,277) (221,701) - -------------------------------------------------------------------------------------------------- Net cash flows used for financing activities .................. (98,461) (322,173) (561,179) - -------------------------------------------------------------------------------------------------- Investment Activities: Investment in plant: Electric and other utility plant .......................... (233,399) (222,829) (231,408) Nuclear fuel .............................................. (6,852) (14,529) (18,261) - -------------------------------------------------------------------------------------------------- Net cash flows used for investments in plant .................. (240,251) (237,358) (249,669) Investment in nuclear decommissioning trusts .................. (61,046) (65,716) (60,642) Other investment activities, net .............................. (28,257) (25,064) (30,761) - -------------------------------------------------------------------------------------------------- Net cash flows used for investments ........................... (329,554) (328,138) (341,072) - -------------------------------------------------------------------------------------------------- Net (Decrease)/Increase in Cash for the Period ................ (50,794) 165,159 1,912 Cash and cash equivalents -- beginning of period .............. 194,197 29,038 27,126 - -------------------------------------------------------------------------------------------------- Cash and cash equivalents -- end of period .................... $ 143,403 $ 194,197 $ 29,038 - -------------------------------------------------------------------------------------------------- Supplemental Cash Flow Information: Cash paid/(refunded) during the year for: Interest, net of amounts capitalized .......................... $ 291,335 $ 268,129 $ 321,148 ================================================================================================== Income taxes .................................................. $ (26,387) $ 64,189 $ 108,928 ================================================================================================== Increase in obligations: Niantic Bay Fuel Trust and other capital leases ........... $ 3,475 $ 3,524 $ 41,388 ==================================================================================================
The accompanying notes are an integral part of these financial statements. 26 Northeast Utilities 1997 Annual Report Consolidated Statements of Shareholders' Equity - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------- Deferred Contribution Common Capital Surplus, Plan -- ESOP Retained Shares (a) Paid In (Note 5D) Earnings (b) Total - ----------------------------------------------------------------------------------------------------------------------- (Thousands of Dollars) Balance at January 1, 1995 ................. $671,051 $904,371 $(213,324) $946,988 $2,309,086 - ----------------------------------------------------------------------------------------------------------------------- Net income for 1995 ..................... 282,434 282,434 Cash dividends on common shares -- $1.76 per share .................... (221,701) (221,701) Loss on retirement of preferred stock ... (381) (381) Issuance of 1,400,940 common shares, $5 par value ....................... 7,005 24,971 31,976 Allocation of benefits -- ESOP .......... 70 15,172 15,242 Capital stock expenses, net ............. 6,896 6,896 - ----------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 ............... 678,056 936,308 (198,152) 1,007,340 2,423,552 - ----------------------------------------------------------------------------------------------------------------------- Net income for 1996 ..................... 1,831 1,831 Cash dividends on common shares -- $1.38 per share .................... (176,277) (176,277) Loss on retirement of preferred stock ... (374) (374) Issuance of 440,772 common shares, $5 par value ....................... 2,204 8,418 10,622 Allocation of benefits -- ESOP .......... (8,103) 22,061 13,958 Capital stock expenses, net ............. 3,077 3,077 Currency translation adjustments ........ 746 746 - ----------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 ............... 680,260 940,446 (176,091) 832,520 2,277,135 - ----------------------------------------------------------------------------------------------------------------------- Net loss for 1997 ....................... (135,708) (135,708) Cash dividends on common shares -- $0.25 per share .................... (32,134) (32,134) Issuance of 790,232 common shares, $5 par value ....................... 3,951 2,551 6,502 Allocation of benefits -- ESOP .......... (12,238) 21,950 9,712 Capital stock expenses, net ............. 2,592 2,592 Currency translation adjustments ........ (858) (858) - ----------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 ............... $684,211 $932,493 $(154,141) $664,678 $2,127,241 =======================================================================================================================
(a) NU issued 8,430,910 warrants as part of its acquisition of PSNH. These warrants, which expired on June 5, 1997, entitled the holder to purchase one share of NU common stock at an exercise price of $24 per share. As of June 5, 1997, 464,678 shares had been purchased through the exercise of warrants. (b) Certain consolidated subsidiaries have dividend restrictions imposed by their long-term debt agreements. These restrictions also limit the amount of retained earnings available for NU common dividends. At December 31, 1997, these restrictions totaled approximately $559.6 million. The accompanying notes are an integral part of these financial statements. Northeast Utilities 1997 Annual Report 27 Consolidated Statements of Capitalization - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------- At December 31, - -------------------------------------------------------------------------------------------------------------------------- (Thousands of Dollars) 1997 1996 - -------------------------------------------------------------------------------------------------------------------------- Common Shareholders' Equity (See Consolidated Balance Sheets) ................................ $2,127,241 $2,277,135 - -------------------------------------------------------------------------------------------------------------------------- Cumulative Preferred Stock of Subsidiaries: $25 par value -- authorized 36,600,000 shares at December 31, 1997 and 1996; 4,840,000 shares outstanding in 1997 and 5,840,000 shares outstanding in 1996 $50 par value -- authorized 9,000,000 shares at December 31, 1997 and 1996; 5,424,000 shares outstanding in 1997 and 1996 $100 par value -- authorized 1,000,000 shares at December 31, 1997 and 1996; 200,000 shares outstanding in 1997 and 1996 - -------------------------------------------------------------------------------------------------------------------------- Dividend Rates Current Redemption Prices (a) Current Shares Outstanding - -------------------------------------------------------------------------------------------------------------------------- Not Subject to Mandatory Redemption: $50 par value -- $1.90 to $3.28 $50.50 to $54.00 2,324,000 .......... 116,200 116,200 $100 par value -- $7.72 $103.51 200,000 .......... 20,000 20,000 - -------------------------------------------------------------------------------------------------------------------------- Total Preferred Stock Not Subject to Mandatory Redemption .................................... 136,200 136,200 - -------------------------------------------------------------------------------------------------------------------------- Subject to Mandatory Redemption: (b) $25 par value -- $1.90 to $2.65 $25.00 to $25.64 4,840,000 .......... 121,000 146,000 $50 par value -- $2.65 to $3.615 $51.00 to $52.41 3,100,000 .......... 155,000 155,000 - -------------------------------------------------------------------------------------------------------------------------- Total Preferred Stock Subject to Mandatory Redemption ........................................ 276,000 301,000 - -------------------------------------------------------------------------------------------------------------------------- Less: Preferred Stock to be redeemed within one year ......................................... 30,250 25,000 - -------------------------------------------------------------------------------------------------------------------------- Preferred Stock Subject to Mandatory Redemption, net ......................................... 245,750 276,000 - -------------------------------------------------------------------------------------------------------------------------- Long-Term Debt: (c) First Mortgage Bonds -- Maturity Interest Rates - -------------------------------------------------------------------------------------------------------------------------- 1997 5.75% to 7.625% ............................................................. -- 207,988 1998 6.50% to 9.17% .............................................................. 199,800 199,800 1999 5.50% to 7.25% .............................................................. 279,000 279,000 2000 5.75% to 6.875% ............................................................. 260,000 260,000 2001 7.375% to 7.875% ............................................................ 220,000 160,000 2002 7.75% to 9.05% .............................................................. 580,000 400,000 2004 6.125% ...................................................................... 140,000 140,000 2019-2023 7.375% to 7.50% ............................................................. 120,000 120,000 2024-2025 7.375% to 8.50% ............................................................. 430,000 430,000 - -------------------------------------------------------------------------------------------------------------------------- Total First Mortgage Bonds ............................................................... 2,228,800 2,196,788 - -------------------------------------------------------------------------------------------------------------------------- Other Long-Term Debt -- (d) Pollution Control Notes and Other Notes -- 2000 Adjustable Rate (e) and 7.67% ............................................... 218,033 224,182 2005-2006 8.38% to 8.58% .............................................................. 194,000 210,000 2013-2018 Adjustable Rate ............................................................. 33,400 33,400 2020 Adjustable Rate ............................................................. 15,300 15,300 2021-2022 7.50% to 7.65% and Adjustable Rate .......................................... 552,485 552,485 2028 Adjustable Rate ............................................................. 369,300 369,300 2031 Adjustable Rate ............................................................. 62,000 62,000 - -------------------------------------------------------------------------------------------------------------------------- Total Pollution Control Notes and Other Notes ............................................ 1,444,518 1,466,667 Fees and interest due for spent nuclear fuel disposal costs (Note 1P) ........................ 205,502 195,023 Other ........................................................................................ 18,513 57,169 - -------------------------------------------------------------------------------------------------------------------------- Total Other Long-Term Debt ................................................................... 1,668,533 1,718,859 - -------------------------------------------------------------------------------------------------------------------------- Unamortized premium and discount, net ........................................................ (7,113) (7,463) - -------------------------------------------------------------------------------------------------------------------------- Total Long-Term Debt ......................................................................... 3,890,220 3,908,184 Less: Amounts due within one year ........................................................... 244,561 294,503 - -------------------------------------------------------------------------------------------------------------------------- Long-Term Debt, net .......................................................................... 3,645,659 3,613,681 - -------------------------------------------------------------------------------------------------------------------------- Total Capitalization ......................................................................... $6,154,850 $6,303,016 ==========================================================================================================================
The accompanying notes are an integral part of these financial statements. 28 Northeast Utilities 1997 Annual Report Notes to Consolidated Statements of Capitalization - -------------------------------------------------------------------------------- (a) Each of these series is subject to certain refunding limitations for the first five years after issuance. Redemption prices reduce in future years. (b) Changes in Preferred Stock Subject to Mandatory Redemption: - -------------------------------------------------------------------------------- (Thousands of Dollars) - -------------------------------------------------------------------------------- Balance at January 1, 1995 ................................. $ 379,675 Reacquisitions and Retirements .......................... (75,675) - ------------------------------------------------------------------------------- Balance at December 31, 1995 ............................... 304,000 Reacquisitions and Retirements .......................... (3,000) - ------------------------------------------------------------------------------- Balance at December 31, 1996 ............................... 301,000 Reacquisitions and Retirements .......................... (25,000) - ------------------------------------------------------------------------------- Balance at December 31, 1997 ............................... $ 276,000 =============================================================================== The minimum sinking-fund requirements of the series subject each year to mandatory redemption aggregate approximately $30.3 million in 1998, $46.3 million each year in 1999, 2000 and 2001 and $21.3 million in 2002. In case of default on sinking-fund payments, no payments may be made on any junior stock by way of dividends or otherwise (other than in shares of junior stock) so long as the default continues. If a subsidiary is in arrears in the payment of dividends on any outstanding shares of preferred stock, the subsidiary is prohibited from redeeming or purchasing less than all of the outstanding preferred stock. (c) Long-term debt maturities and cash sinking-fund requirements, excluding fees and interest due for spent nuclear fuel disposal costs, on debt outstanding at December 31, 1997, for the years 1998 through 2002 are approximately $244.6 million, $375.9 million, $557.8 million, $313.2 million and $375.4 million, respectively. In addition, there are annual one percent sinking- and improvement-fund requirements of approximately $1.5 million each year for 1998 and 1999 and $900 thousand each year for 2000 through 2002 for certain series of Western Massachusetts Electric Company (WMECO) first mortgage bonds. The WMECO sinking- and improvement-fund requirements may be satisfied by the deposit of cash or bonds or by certification of property additions. The one percent sinking- and improvement-fund requirements for The Connecticut Light and Power Company (CL&P) first mortgage bonds are no longer required, as of 1997, as determined by a majority of bond holders. Essentially all utility plant of CL&P, WMECO, Public Service Company of New Hampshire (PSNH) and North Atlantic Energy Corporation (NAEC), wholly owned subsidiaries of NU, is subject to the liens of each company's respective first mortgage bond indenture. NAEC's first mortgage bonds also are secured by payments made to NAEC by PSNH under the terms of the Seabrook Power Contracts. CL&P and WMECO have secured $369.3 million of pollution-control notes with second mortgage liens on Millstone 1, junior to the liens of their respective first mortgage bond indentures. CL&P and WMECO have issued $225 million and $90 million, respectively, of first mortgage bonds as collateral to enable them to borrow under a three-year revolving credit agreement. At December 31, 1997, CL&P and WMECO had $35 million and $15 million, respectively, in borrowings under this agreement. PSNH's Revolving Credit Facility has a second lien, junior to the lien of its first mortgage bond indenture, on all PSNH property located in New Hampshire, which will expire in April 1999. At December 31, 1997, PSNH had no borrowings under the Revolving Credit Facility. For further information on these borrowing facilities, see Note 3, "Short-Term Debt." CL&P has $62 million of tax-exempt Pollution Control Revenue Bonds (PCRBs) with a bond insurance and liquidity facility secured by first mortgage bonds. Concurrent with the issuance of PSNH's Series A and B first mortgage bonds, PSNH entered into financing arrangements with the Business Finance Authority (BFA) of the state of New Hampshire. Pursuant to these arrangements, the BFA issued seven series of PCRBs and loaned the proceeds to PSNH. At December 31, 1997, $516.5 million of the PCRBs were outstanding. PSNH's obligation to repay each series of PCRBs is secured by a series of first mortgage bonds that were issued under its indenture. Each such series of first mortgage bonds contains terms and provisions with respect to maturity, principal payment, interest rate and redemption that correspond to those of the applicable series of PCRBs. For financial reporting purposes, these bonds would not be considered outstanding unless PSNH fails to meet its obligations under the PCRBs. (d) The average effective interest rates on the variable-rate pollution control notes ranged from 3.4 percent to 5.6 percent for 1997 and 3.2 percent to 5.5 percent for 1996. (e) Interest-rate management instruments with financial institutions effectively fix the interest rate of NAEC's $200 million variable-rate bank note at 7.823 percent. For further information, see Note 8, "Market Risk Management." Northeast Utilities 1997 Annual Report 29 Consolidated Statements of Income Taxes - --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------- For the Years Ended December 31, - ---------------------------------------------------------------------------------------------------------- (Thousands of Dollars) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- The components of the federal and state income tax provisions (credited)/charged to operations are: Current income taxes: Federal ............................................................ $ (22,760) $ 13,500 $ 53,862 State .............................................................. (1,727) 10,778 43,900 - ---------------------------------------------------------------------------------------------------------- Total current ......................................................... (24,487) 24,278 97,762 - ---------------------------------------------------------------------------------------------------------- Deferred income taxes, net: Federal ............................................................ 43,777 70,117 167,091 State .............................................................. (11,801) (14,793) 7,224 - ---------------------------------------------------------------------------------------------------------- Total deferred ........................................................ 31,976 55,324 174,315 - ---------------------------------------------------------------------------------------------------------- Investment tax credits, net ........................................... (9,595) (9,594) (10,107) - ---------------------------------------------------------------------------------------------------------- Total income tax (credit)/expense ..................................... $ (2,106) $ 70,008 $ 261,970 ========================================================================================================== The components of total income tax expense are classified as follows: Income taxes charged to operating expenses ......................... $ 8,596 $ 68,261 $ 261,287 Other income taxes ................................................. (10,702) 1,747 683 - ---------------------------------------------------------------------------------------------------------- Total income tax (credit)/expense ..................................... $ (2,106) $ 70,008 $ 261,970 - ---------------------------------------------------------------------------------------------------------- Deferred income taxes comprise the tax effects of temporary differences as follows: Depreciation, leased nuclear fuel, settlement credits and disposal costs ................................................. $ 32,932 $ 18,401 $ 82,318 Energy adjustment clauses .......................................... 5,916 (8,268) 26,851 Nuclear plant deferrals ............................................ 13,989 (15,549) 2,666 Contractual settlements ............................................ 1,754 2,513 (9,496) Bond redemptions ................................................... (4,260) (4,685) 9,224 Amortization of New Hampshire regulatory settlement ................ 11,501 11,501 11,501 Deferred tax asset associated with net operating losses ............ -- 96,756 57,543 Nuclear compliance reserves ........................................ (5,697) (26,102) -- Demand-side management ............................................. (12,169) (14,954) 765 State net operating loss carryforward .............................. (7,670) -- -- Other .............................................................. (4,320) (4,289) (7,057) - ---------------------------------------------------------------------------------------------------------- Deferred income taxes, net ............................................ $ 31,976 $ 55,324 $ 174,315 ========================================================================================================== A reconciliation between income tax expense and the expected tax expense at 35 percent of pretax income: Expected federal income tax ........................................... $ (37,635) $ 36,965 $ 204,324 Tax effect of differences: Depreciation ....................................................... 22,049 24,337 25,639 Deferred nuclear plants return ..................................... (2,551) (3,146) (4,969) Amortization of regulatory assets .................................. 5,498 7,910 20,389 Amortization of PSNH acquisition costs ............................. 31,298 31,410 31,522 Seabrook intercompany loss ......................................... (4,616) (7,503) (13,048) Investment tax credit amortization ................................. (9,595) (9,594) (10,107) State income taxes, net of federal benefit ......................... (8,463) (2,610) 33,231 Sale of Seabrook 2 steam generator ................................. -- (2,516) -- Adjustment for prior years' taxes .................................. (1,712) (962) (20,312) Employee stock ownership plan ...................................... (4,648) (4,007) (2,192) Dividends received deduction ....................................... (1,563) (3,027) (3,936) Loss reserve on sale of investment ................................. 8,750 -- -- Other, net ......................................................... 1,082 2,751 1,429 - ---------------------------------------------------------------------------------------------------------- Total income tax (credit)/expense ..................................... $ (2,106) $ 70,008 $ 261,970 ==========================================================================================================
The accompanying notes are in integral part of these financial statements. 30 Northeast Utilities 1997 Annual Report Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies A. About Northeast Utilities Northeast Utilities (NU or the company) is the parent company of the Northeast Utilities system (the NU system). The NU system furnishes franchised retail electric service in Connecticut, New Hampshire and western Massachusetts through four wholly owned subsidiaries: CL&P, PSNH, WMECO and Holyoke Water Power Company (HWP). A fifth wholly owned subsidiary, NAEC, sells all of its entitlement to the capacity and output of the Seabrook nuclear power plant (Seabrook) to PSNH. In addition to its franchised retail service, the NU system furnishes firm and other wholesale electric services to various municipalities and other utilities, and participates in limited retail access programs, providing off-system retail electric service. The NU system serves about 30 percent of New England's electric needs and is one of the 25 largest electric utility systems in the country as measured by revenues. Several wholly owned subsidiaries of NU provide support services for the NU system companies and, in some cases, for other New England utilities. Northeast Utilities Service Company (NUSCO) provides centralized accounting, administrative, information resources, engineering, financial, legal, operational, planning, purchasing and other services to the NU system companies. Northeast Nuclear Energy Company (NNECO) acts as agent for the NU system companies and other New England utilities in operating the Millstone nuclear generating facilities. North Atlantic Energy Service Corporation (NAESCO) has operational responsibility for Seabrook. Three other subsidiaries construct, acquire or lease some of the property and facilities used by the NU system companies. In addition, CL&P and WMECO each have established a special purpose subsidiary whose business consists of the purchase and resale of receivables. Charter Oak Energy, Inc. (COE), HEC, Inc. (HEC), Mode 1 Communications, Inc. (Mode 1), and Select Energy, Inc., (formerly NUSCO Energy Partners, Inc.) are other NU system companies which engage in a variety of activities. Directly and through subsidiaries, COE has investments in cogeneration, small-power production and other forms of nonutility generation as permitted under the Public Utility Regulatory Policy Act, and in exempt wholesale generators and foreign utility companies as permitted under the Energy Policy Act of 1992 (Energy Act). These investments are accounted for on either a cost or equity basis based upon COE's level of participation. NU has put COE up for sale. For further information regarding the sale of COE, see Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), and Note 7G, "Commitments and Contingencies -- Sale of COE." HEC provides energy management services for the NU system's and other utilities' commercial, industrial and institutional electric customers. Mode 1 and Select Energy, Inc. develop and invest in telecommunications and in energy-related activities, respectively. B. Presentation The consolidated financial statements of the company include the accounts of all wholly owned subsidiaries. Significant intercompany transactions have been eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications of prior years' data have been made to conform with the current year's presentation. C. Public Utility Regulation NU is registered with the Securities and Exchange Commission (SEC) as a holding company under the Public Utility Holding Company Act of 1935 (1935 Act). NU and its subsidiaries are subject to the provisions of the 1935 Act. Arrangements among the NU system companies, outside agencies and other utilities covering interconnections, interchange of electric power and sales of utility property are subject to regulation by the Federal Energy Regulatory Commission (FERC) and/or the SEC. The operating subsidiaries are subject to further regulation for rates, accounting and other matters by the FERC and/or applicable state regulatory commissions. For information regarding proposed changes in the nature of industry regulation, see Note 7A, "Commitments and Contingencies -- Restructuring and Rate Matters." D. New Accounting Standards The Financial Accounting Standards Board (FASB) issued two new accounting standards in February 1997: Statement of Financial Accounting Standards (SFAS) 128, "Earnings per Share" and SFAS 129, "Disclosure of Information about Capital Structure." SFAS 128 establishes standards for computing and presenting earnings per share (EPS) and is effective for 1997. The adoption of SFAS 128 did not have a material impact on the company's EPS calculation and presentation. SFAS 129 establishes standards for disclosing information about an entity's capital structure. NU's current disclosures are consistent with the requirements of SFAS 129. Northeast Utilities 1997 Annual Report 31 - -------------------------------------------------------------------------------- During June 1997, the FASB issued SFAS 130, "Report ing Comprehensive Income" and SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 130 establishes standards for the reporting and disclosure of comprehensive income. To date, the NU system companies have not had material transactions that would be required to be reported as comprehensive income. SFAS 131 determines the standards for reporting and disclosing qualitative and quantitative information about a company's operating segments. This information includes segment profit or loss, certain segment revenue and expense items and segment assets and a reconciliation of these segment disclosures to corresponding amounts in the company's general purpose financial statements. The NU system currently evaluates management performance using a cost-based budget, and the information required by SFAS 131 is not available. Therefore, these disclosure requirements are not applicable. Management believes that the implementation of SFAS 130 and SFAS 131 will not have a material impact on NU's current disclosures. See Note 6, "Sale of Customer Receivables and Accrued Utility Revenues," and Note 7C, "Commitments and Contingencies -- Environmental Matters," for information on other newly issued accounting and reporting standards related to those specific areas. E. Investments and Jointly Owned Electric Utility Plant Regional Nuclear Generating Companies: CL&P, PSNH and WMECO own common stock of four regional nuclear generating companies (Yankee companies). The NU system's investments in the Yankee companies are accounted for on the equity basis due to NU's ability to exercise significant influence over their operating and financial policies. The Yankee companies, with the NU system's equity investments and ownership interests are: - -------------------------------------------------------------------------------- (Thousands of Dollars Except for Percentages) - -------------------------------------------------------------------------------- Connecticut Yankee Atomic Power Company (CYAPC) ....................... $54,671 49.0% Yankee Atomic Electric Company (YAEC) .............................. 8,020 38.5 Maine Yankee Atomic Power Company (MYAPC) ....................... 15,699 20.0 Vermont Yankee Nuclear Power Corporation (VYNPC) ................... 8,565 16.0 - ------------------------------------------------------------------------------- Total Equity Investment ........................ $86,955 ================================================================================ Each Yankee company owns a single nuclear generating unit. Under the terms of the contracts with the Yankee companies, the shareholders-sponsors are responsible for their proportionate share of the costs of each unit, including decommissioning. The energy and capacity costs from VYNPC and nuclear decommissioning costs of the Yankee companies that have been shut down are billed as purchased power to CL&P, PSNH and WMECO. The electricity produced by the Vermont Yankee nuclear generating facility (VY) is committed substantially on the basis of ownership interests and is billed pursuant to contractual agreements. YAEC's, CYAPC's and MYAPC's nuclear power plants were shut down permanently on February 26, 1992, December 4, 1996, and August 6, 1997, respectively. Under ownership agreements with the Yankee companies, CL&P, PSNH and WMECO may be asked to provide direct or indirect financial support for one or more of the companies. For more information on the Yankee companies, see Note 2, "Nuclear Decommissioning," and Note 7F, "Commitments and Contingencies -- Long-Term Contractual Arrangements." Millstone: CL&P and WMECO together own 100 percent of both Millstone 1, a 660-megawatt (MW) nuclear generating unit and Millstone 2, a 870-MW nuclear generating unit. CL&P, PSNH and WMECO together have a 68.02 percent joint ownership interest in Millstone 3, a 1,154-MW nuclear generating unit. The three Millstone units are out of service. NU hopes to return Millstone 3 to service in early spring of 1998 and Millstone 2 three to four months after Millstone 3. Millstone 1 has been placed in extended maintenance status. Management is reviewing its options with respect to Millstone 1, including restart, early retirement and other options. In a draft ruling issued in February 1998, the Connecticut Department of Public Utility Control (DPUC) determined that Millstone 1 was no longer "used and useful" and ordered it removed from rate base. In 1996, one of the joint owners of Millstone 3, Vermont Electric Generation and Transmission Cooperative, Inc. (VEG&T), filed for bankruptcy. The subsequent liquidation resulted in the offering of VEG&T's 0.035 percent share of Millstone 3 for sale to the joint owners of Millstone 3. None of the non-NU joint owners accepted the offer. During 1998, CL&P expects to make the necessary regulatory filings to acquire ownership of VEG&T's share of Millstone 3. For more information regarding the DPUC's action, see the MD&A. For more information regarding the Millstone units see Note 2, "Nuclear Decommissioning," and Note 7B, "Commitments and Contingencies -- Nuclear Performance." 32 Northeast Utilities 1997 Annual Report - -------------------------------------------------------------------------------- Seabrook 1: CL&P and NAEC together have a 40.04 percent joint ownership interest in Seabrook 1, a 1,148-MW nuclear generating unit. NAEC sells all of its share of the power generated by Seabrook 1 to PSNH under two long-term contracts (the Seabrook Power Contracts). Plant-in-service and the accumulated provision for depreciation for the NU system's share of the three Millstone units and Seabrook 1 are as follows: - -------------------------------------------------------------------------------- At December 31, - -------------------------------------------------------------------------------- (Millions of Dollars) 1997 1996 - -------------------------------------------------------------------------------- Plant-in-service Millstone 1 .............................................. $ 478.7 $ 474.7 Millstone 2 .............................................. 857.1 851.8 Millstone 3 .............................................. 2,404.3 2,402.4 Seabrook 1 ............................................... 897.5 892.4 Accumulated provision for depreciation Millstone 1 .............................................. $ 212.1 $ 196.6 Millstone 2 .............................................. 306.7 275.8 Millstone 3 .............................................. 695.1 633.3 Seabrook 1 ............................................... 150.0 131.7 ================================================================================ The NU system's share of Millstone and Seabrook 1 expenses are included in the corresponding operating expenses on the accompanying Consolidated Statements of Income. Hydro-Quebec: NU has a 22.66 percent equity ownership interest, totaling approximately $19.6 million, in two companies that transmit electricity imported from the Hydro-Quebec system in Canada. The two companies own and operate transmission and terminal facilities which have the capability of importing up to 2,000 MW from the Hydro-Quebec system. See Note 7F, "Commitments and Contingencies -- Long-Term Contractual Arrangements," for additional information. F. Depreciation The provision for depreciation is calculated using the straight-line method based on estimated remaining lives of depreciable utility plant-in-service, adjusted for salvage value and removal costs, as approved by the appropriate regulatory agency. Except for major facilities, depreciation rates are applied to the average plant-in-service during the period. Major facilities are depreciated from the time they are placed in service. When plant is retired from service, the original cost of plant, including costs of removal, less salvage, is charged to the accumulated provision for depreciation. The depreciation rates for the several classes of electric plant-in-service are equivalent to a composite rate of 3.8 percent in 1997, 1996 and 1995. See Note 2, "Nuclear Decommissioning," for information on nuclear plant decommissioning. The NU system's nonnuclear generating facilities have limited service lives. Plant may be retired in place or dismantled based upon expected future needs, the economics of the closure and environmental concerns. The costs of closure and removal are incremental costs and, for financial reporting purposes, are accrued over the life of the asset as part of depreciation. At December 31, 1997 and 1996, the accumulated provision for depreciation included approximately $83.2 million and $77.3 million, respectively, accrued for the cost of removal, net of salvage for nonnuclear generation property. G. Revenues Other than revenues under fixed-rate agreements nego-tiated with certain wholesale, commercial and industrial customers and limited retail access programs, utility revenues are based on authorized rates applied to each customer's use of electricity. In general, rates can be changed only through a formal proceeding before the appropriate regulatory commission. Regulatory commissions also have authority over the terms and conditions of nontraditional rate-making arrangements. At the end of each accounting period, CL&P, PSNH and WMECO accrue an estimate for the amount of energy delivered but unbilled. For information on rate proceedings and their potential impact on CL&P and PSNH, see the MD&A. H. Regulatory Accounting and Assets The accounting policies of the operating companies and the accompanying consolidated financial statements conform to generally accepted accounting principles applicable to rate-regulated enterprises and reflect the effects of the ratemaking process in accordance with SFAS 71, "Accounting for the Effects of Certain Types of Regulation." Assuming a cost-of-service based regulatory structure, regulators may permit incurred costs, normally treated as expenses, to be deferred and recovered through future revenues. Through their actions, regulators also may reduce or eliminate the value of an asset, or create a liability. If any portion of the operating companies' operations were no longer subject to the provisions of SFAS 71, as a result of a change in the cost-of-service based regulatory structure or the effects of competition, the company would be required to write off all of its related regulatory assets and liabilities unless there is a formal transition plan which provides for the recovery, through established rates, for the collection of approved stranded costs and to maintain the cost-of-service basis for the remaining regulated operations. At the time of transition, the operating companies would be required to determine any impairment to the carrying costs of deregulated plant and inventory assets. Northeast Utilities 1997 Annual Report 33 - -------------------------------------------------------------------------------- Management anticipates that restructuring programs will be implemented within each of the NU system operating companies' respective jurisdictions during the next few years. In a restructured environment, the companies' generation businesses no longer will be rate regulated on a cost-of-service basis. The majority of NU's regulatory assets are related to its generation business. The staff of the SEC has had concerns regarding the appropriateness of the utilities' ability to continue application of SFAS 71 for the generation portion of their business in a restructured environment. The SEC referred the issue to the Emerging Issues Task Force (EITF) of the FASB which reached a consensus and issued "Deregulation of the Pricing of Electricity-Issues Related to the Application of FASB Statements No. 71 and 101" (EITF 97-4). The EITF concluded: (1) the future recognition of regulatory assets for the portion of the business that no longer qualifies for application of SFAS 71 depends on the regulators' treatment of the recovery of those costs and other stranded assets from cash flows of other portions of the business still considered to be regulated, and (2) a utility should discontinue the application of SFAS 71 when a legislative and regulatory plan has been enacted, which would include transition plans into a competitive environment, and when the stranded costs which are subject to future rate recovery are determined. EITF 97-4 became effective in August 1997. Electric utility industry restructuring within the state of Massachusetts will be effective March 1, 1998. WMECO has submitted its proposed restructuring plan to the Massachusetts Department of Telecommunications and Energy (DTE), formerly the Massachusetts Department of Public Utilities. If the DTE approves the plan in its current form, WMECO would discontinue the application of SFAS 71. However, the restructuring legislation enacted by the state of Massachusetts specifically provides for future deferrals and the cost recovery of generation-related assets as contemplated under the plan. As such, WMECO is not expected to have to write off either its generation-related assets or related regulatory assets. WMECO's generation-related regulatory assets were valued at approximately $188 million at December 31, 1997. The issue of restructuring the electric utility industry in New Hampshire is currently the focus of negotiations and proceedings within the federal and state court systems. Management believes that PSNH's use of regulatory accounting remains appropriate while this issue remains in litigation. The Connecticut General Assembly is addressing a proposal for electric industry restructuring in the state of Connecticut during 1998. As the terms and conditions to be contained within the restructuring plan cannot be determined at this time, management believes that its use of regulatory accounting within this jurisdiction remains appropriate. The company expects that its transmission and distribution business within each of its jurisdictions will continue to be rate regulated on a cost-of-service basis and, accordingly, CL&P, WMECO and PSNH will continue to apply SFAS 71 to this portion of their business. For further information on the NU system companies' respective regulatory environments and the potential impacts of restructuring, see Note 7A, "Commitments and Contingencies -- Restructuring and Rate Matters" and the MD&A. SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," requires the evaluation of long-lived assets, including regulatory assets, for impairment when certain events occur or when conditions exist that indicate the carrying amounts of assets may not be recoverable. SFAS 121 requires that any long-lived assets which are no longer probable of recovery through future revenues be revalued based on estimated future cash flows. If this revaluation is less than the book value of the asset, an impairment loss would be charged to earnings. Management continues to believe it is probable that the operating companies will recover their investments in long-lived assets through future revenues. This conclusion may change in the future as the implementation of restructuring plans within the NU system companies' respective jurisdictions will generally require the formation of separate generation entities that will be subject to competitive market conditions. As a result, the NU system companies will be required to assess the carrying amounts of their long-lived assets in accordance with SFAS 121. The components of the NU system companies' regulatory assets are as follows: - -------------------------------------------------------------------------------- At December 31, - -------------------------------------------------------------------------------- (Thousands of Dollars) 1997 1996 - -------------------------------------------------------------------------------- Income taxes, net (Note1I) ......................... $ 938,564 $1,012,343 Recoverable energy costs, net (Note 1K) ................................... 324,809 328,863 Deferred costs -- nuclear plants (Note 1L) ................................ 199,753 185,078 Unrecovered contractual obligations (Note 2) ............................ 515,076 435,495 Deferred demand-side management costs (Note 1M) ...................... 52,100 90,129 Cogeneration costs (Note 1N) ....................... 33,505 66,205 Seabrook deferral (Note 1L) ........................ 8,376 -- Other .............................................. 101,095 103,726 - -------------------------------------------------------------------------------- $2,173,278 $2,221,839 ================================================================================ 34 Northeast Utilities 1997 Annual Report - -------------------------------------------------------------------------------- I. Income Taxes The tax effect of temporary differences (differences between the periods in which transactions affect income in the financial statements and the periods in which they affect the determination of taxable income) is accounted for in accordance with the ratemaking treatment of the applicable regulatory commissions. See the Consolidated Statements of Income Taxes for the components of income tax expense. The tax effect of temporary differences, including timing differences accrued under previously approved accounting standards, that give rise to the accumulated deferred tax obligation is as follows: - -------------------------------------------------------------------------------- At December 31, - -------------------------------------------------------------------------------- (Thousands of Dollars) 1997 1996 - -------------------------------------------------------------------------------- Accelerated depreciation and other plant-related differences ................................. $ 1,567,597 $ 1,640,068 Net operating loss carryforwards ............................... (102,492) (94,149) Regulatory assets -- income tax gross up ......................... 395,619 423,363 Other .......................................... 93,633 74,841 - ------------------------------------------------------------------------------- $ 1,954,357 $ 2,044,123 =============================================================================== At December 31, 1997, PSNH had a net operating loss (NOL) carryforward of approximately $293 million that can be used against PSNH's federal taxable income and which, if unused, expires between the years 2000 and 2006. CL&P had a state of Connecticut NOL carryforward of approximately $131 million that can be used against CL&P and its affiliates' combined Connecticut taxable income and which, if unused, expires in the year 2002. PSNH also had Investment Tax Credit (ITC) carryforwards of $40 million which, if unused, expire between the years 1998 and 2004. For a portion of the carryforward amounts indicated above, the reorganization of PSNH under Chapter 11 of the United States Bankruptcy Code limits the annual amount of PSNH NOL and ITC carryforwards that may be used. Approximately $31 million of the NOL and $9 million of the ITC carryforwards are subject to this limitation. J. Unamortized PSNH Acquisition Costs The unamortized PSNH acquisition costs represent the aggregate value placed by the 1989 rate agreement with the state of New Hampshire (Rate Agreement) on PSNH's assets in excess of the net book value of PSNH's non-Seabrook assets, plus the $700 million value assigned to Seabrook by the Rate Agreement, as part of the bankruptcy resolution on June 5, 1992 (Acquisition Date). The Rate Agreement provides for the recovery through rates, with a return, of the unamortized PSNH acquisition costs. The Rate Agreement provides that $425 million of the unamortized PSNH acquisition costs be amortized over the first seven years after PSNH's May 16, 1991 reorganization from bankruptcy (Reorganization Date) with the remaining amount to be amortized over the 20-year period after the Reorganization Date. The unrecovered balance of PSNH acquisition costs at December 31, 1997, was approximately $402.3 million. In accordance with the Rate Agreement, approximately $32.9 million of this amount will be recovered through rates by June 1, 1998, and the remaining amount of approximately $369.4 million will be recovered through rates by 2011. As of December 31, 1997, PSNH has collected approximately $591 million of acquisition costs through rates. K. Recoverable Energy Costs Energy Act: Under the Energy Act, CL&P, PSNH, WMECO and NAEC are assessed for their proportionate shares of the costs of decontaminating and decommissioning uranium enrichment plants owned by the United States Department of Energy (D&D assessment). The Energy Act requires that regulators treat D&D assessments as a reasonable and necessary current cost of fuel, to be fully recovered in rates like any other fuel cost. CL&P, PSNH, WMECO and NAEC are currently recovering these costs through rates. As of December 31, 1997, the company's total D&D deferrals were approximately $63.7 million. CL&P: During 1997, CL&P implemented an energy adjustment clause (EAC) under which fuel prices above or below base-rate levels are charged or credited to customers. The EAC replaced CL&P's fuel adjustment and generation utilization adjustment clauses and is designed to reconcile and adjust the difference between actual fuel costs and the fuel revenue collected through base rates on a six-month basis. For the period January 1, 1997 through June 30, 1997, CL&P agreed to a zero EAC rate. For the period July 1, 1997 through December 31, 1997, the DPUC approved an EAC rate through which CL&P recovered approximately $11.5 million of deferred fuel costs. While this proceeding did not include provisions for the recovery of approximately $18 million of costs related to the early closing of CYAPC's nuclear generating unit, it did allow for the recovery of costs, subject to refund, related to the closure of MYAPC's nuclear generating unit. CL&P has appealed the DPUC's ruling related to CYAPC replacement power costs. During December 1997, the DPUC approved an EAC rate for the period January 1, 1998 through June 30, 1998. During this period, CL&P will recover approximately $27.9 million of deferred fuel costs. Northeast Utilities 1997 Annual Report 35 - -------------------------------------------------------------------------------- At December 31, 1997, CL&P's net recoverable energy costs, excluding current net recoverable energy costs, were approximately $104.8 million, which includes approximately $50.1 million of costs related to CL&P's share of the D&D assessment. PSNH: The Rate Agreement includes a comprehensive fuel and purchased power adjustment clause (FPPAC) permitting PSNH to pass through to retail customers, for a ten-year period that began in May 1991, the retail portion of differences between the fuel and purchased power costs assumed in the Rate Agreement and PSNH's actual costs, which include the costs related to the Seabrook Power Contracts and the Clean Air Act Amendment. The cost components of the FPPAC are subject to a prudence review by the New Hampshire Public Utilities Commission (NHPUC). Under the Rate Agreement, the deferred Seabrook return is being deferred by PSNH and subsequently will be billed and collected by PSNH through the FPPAC. PSNH began to defer the amount of these costs on December 1, 1997, and will continue to do so for the period from December 1, 1997 through May 31, 1998. Beginning on June 1, 1998, these costs will be recovered from PSNH customers over a 36-month period. At December 31, 1997, PSNH has deferred approximately $8.4 million of these costs. On February 10, 1998, the NHPUC established a FPPAC rate for the period December 1, 1997 through May 31, 1998. The new FPPAC rate increased customer billings by approximately six percent. This rate continues to defer a substantial portion of these costs. At December 31, 1997, PSNH's net recoverable energy costs, excluding current net recoverable energy costs, were approximately $191.7 million. This amount includes approximately $172.9 million of deferred small power producer costs. WMECO: WMECO has a fuel adjustment clause (FAC) which includes energy costs along with capacity and transmission charges and credits that result from short-term transactions with other utilities and from certain FERC-approved contracts among the NU system's operating companies. The Massachusetts restructuring legislation will effectively eliminate the FAC, effective March 1, 1998. On August 20, 1997, WMECO filed with the DTE a joint motion for approval of a settlement agreement with the Massachusetts Attorney General which allowed WMECO to recover approximately $15.3 million of fuel costs for the period September 1997 through February 1998. At December 31, 1997, WMECO's net recoverable energy costs were approximately $26.3 million, which includes approximately $11.3 million of costs related to WMECO's share of the D&D assessment. For further information on recoverable energy costs, see the MD&A. L. Deferred Costs -- Nuclear Plants As of May 1, 1996, NAEC phased into rates 100 percent of the recoverable portion of its investment in Seabrook 1. This plan is in compliance with SFAS 92, "Regulated Enterprises -- Accounting for Phase-in Plans." From the Acquisition Date through November 1997, NAEC recorded $203.9 million of deferred return on its investment in Seabrook 1. At November 30, 1997, NAEC's utility plant included $84.1 million of deferred return that was transferred as part of the Seabrook plant assets to NAEC on the Acquisition Date. Beginning on December 1, 1997, the deferred return, including the portion transferred to NAEC, is currently being billed through the Seabrook Power Contracts to PSNH and will be fully recovered from customers by May 2001. M. Demand-Side Management (DSM) CL&P's DSM costs are recovered in base rates through a Conservation Adjustment Mechanism. CL&P is allowed to recover DSM costs in excess of costs reflected in base rates over periods ranging from approximately four to ten years. During April 1997, the DPUC approved CL&P's DSM budget of $36 million for 1997. In October 1997, CL&P and other interested parties filed a stipulation with the DPUC requesting that the DPUC approve certain programs and establish a budget level of $32.7 million for 1998 and $28.8 million for 1999. The $52.1 million of DSM costs on CL&P's books as of December 31, 1997, currently being collected, will be fully recovered by 2000. N. CL&P Cogeneration Costs Beginning on July 1, 1996, the deferred cogeneration balance of approximately $86 million is being amortized over a five year period. An additional $9 million of amortization was applied to the deferred balance in 1997, as required under a settlement agreement which CL&P reached with the DPUC. CL&P continues to apply any savings associated with the renegotiation of a certain contract with a cogeneration facility to the deferred balance. Under current expectations, CL&P expects complete amortization of the deferred balance by December 31, 1998. At December 31, 1997, CL&P's deferred cogeneration costs balance was approximately $33.5 million. O. Market Risk-Management Policies The company utilizes market risk-management instruments, including swaps, collars, puts and calls, to hedge well-defined risks associated with variable interest rates and changes in 36 Northeast Utilities 1997 Annual Report - -------------------------------------------------------------------------------- fuel prices. To qualify for hedge treatment, the underlying hedged item must expose the company to risks associated with market fluctuations and the market risk-management instrument used must be designated as a hedge and must reduce the company's exposure to market fluctuations throughout the period. Amounts receivable or payable under fuel-price management instruments are recognized in operating revenues when realized. Amounts receivable or payable under interest-rate management instruments are accrued and offset against interest expense. The company does not use market risk-management instruments for speculative purposes. For further information, see Note 8, "Market Risk Management." P. Spent Nuclear Fuel Disposal Costs Under the Nuclear Waste Policy Act of 1982, CL&P, PSNH, WMECO and NAEC must pay the United States Department of Energy (DOE) for the disposal of spent nuclear fuel and high-level radioactive waste. The DOE is responsible for the selection and development of repositories for, and the disposal of, spent nuclear fuel and high-level radioactive waste. Fees for nuclear fuel burned on or after April 7, 1983, are billed currently to customers and paid to the DOE on a quarterly basis. For nuclear fuel used to generate electricity prior to April 7, 1983 (prior-period fuel), payment must be made prior to the first delivery of spent fuel to the DOE. Until such payment is made, the outstanding balance will continue to accrue interest at the three-month Treasury Bill Yield Rate. At December 31, 1997, fees due to the DOE for the disposal of prior-period fuel were approximately $205.5 million, including interest costs of $123.4 million. The DOE was originally scheduled to begin accepting delivery of spent fuel in 1998. However, delays in identifying a permanent storage site have continually postponed plans for the DOE's long-term storage and disposal site. Extended delays or a default by the DOE could lead to consideration of costly alternatives. The company has primary responsibility for the interim storage of its spent nuclear fuel. Current capability to store spent fuel at Millstone 1, 2 and Seabrook are estimated to be adequate until the years 2004 for Millstone 1 and 2 and 2010 for Seabrook. Storage facilities for Millstone 3 are expected to be adequate for the projected life of the unit. Meeting spent fuel storage requirements beyond these periods could require new and separate storage facilities, the costs for which have not been determined. 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 contractual obligation to begin accepting spent nuclear fuel no later than January 31, 1998. Currently, the DOE has not taken the spent nuclear fuel as scheduled and, as a result, may have to pay contract damages. The ultimate outcome of this legal proceeding is uncertain at this time. Q. Cash and Cash Equivalents Cash and cash equivalents includes cash on hand and short-term cash investments which are highly liquid in nature and have original maturities of three months or less. 2. Nuclear Decommissioning Millstone and Seabrook: The NU system's nuclear power plants have service lives that are expected to end during the years 2010 through 2026. Upon retirement, these units must be decommissioned. Current decommissioning studies concluded that complete and immediate dismantlement at retirement continues to be the most viable and economic method of decommissioning the three Millstone units and Seabrook 1. Decommissioning studies are reviewed and updated periodically to reflect changes in decommissioning requirements, costs, technology and inflation. The estimated cost of decommissioning Millstone 1 and 2, in year-end 1997 dollars, is $482.6 million and $432.2 million, respectively. The NU system's ownership share of the estimated cost of decommissioning Millstone 3 and Seabrook 1 in year-end 1997 dollars, is $377.4 million and $189.4 million, respectively. The Millstone units and Seabrook 1 decommissioning costs will be increased annually by their respective escalation rates. Nuclear decommissioning costs are accrued over the expected service life of the units and are included in depreciation expense on the Consolidated Statements of Income. Nuclear decommissioning costs amounted to $48.8 million in 1997, $47.8 million in 1996 and $38.9 million in 1995. Nuclear decommissioning, as a cost of removal, is included in the accumulated provision for depreciation on the Consolidated Balance Sheets. At December 31, 1997 and 1996, the balance in the accumulated reserve for depreciation amounted to $540.8 million and $435.7 million, respectively. CL&P and WMECO have established external decommissioning trusts through a trustee for their portions of the costs of decommissioning Millstone 1, 2 and 3. PSNH makes payments to an independent decommissioning trust for its portion of the costs of decommissioning Millstone 3. CL&P's and NAEC's portions of the cost of decommissioning Seabrook 1 are paid to an independent decommissioning financing fund managed by the state of New Hampshire. Funding of the estimated decommissioning costs assumes levelized collections for the Millstone units and escalated collections for Seabrook 1 and after-tax earnings on the Millstone and Seabrook decommissioning funds of approximately 5.5 percent and 6.5 percent, respectively. Northeast Utilities 1997 Annual Report 37 - -------------------------------------------------------------------------------- As of December 31, 1997, CL&P, PSNH and WMECO collected through rates $277.9 million, $2.6 million and $59.7 million, respectively, toward the future decommissioning costs of their share of the Millstone units, of which $302.6 million has been transferred to external decommissioning trusts. As of December 31, 1997, CL&P and NAEC (including payments made prior to the Acquisition Date by PSNH) paid approximately $2.9 million and $21.1 million, respectively, into Seabrook 1's decommissioning financing fund. Earnings on the decommissioning trusts and financing fund increase the decommissioning trust balance and the accumulated reserve for depreciation. Unrealized gains and losses associated with the decommissioning trusts and financing fund also impact the balance of the trusts and the accumulated reserve for depreciation. Changes in requirements or technology, the timing of funding or dismantling or adoption of a decommissioning method other than immediate dismantlement would change decommissioning cost estimates and the amounts required to be recovered. CL&P, PSNH and WMECO attempt to recover sufficient amounts through their allowed rates to cover their expected decommissioning costs. Only the portion of currently estimated total decommissioning costs that has been accepted by regulatory agencies is reflected in rates of the NU system companies. Based on present estimates and assuming its nuclear units operate to the end of their respective license periods, the NU system expects that the decommissioning trusts and financing fund will be substantially funded when the units are retired from service. Millstone 1 has been placed in extended maintenance status while management is reviewing its options with respect to the unit. These include restart, early retirement and other options. Relating to management's consideration of the option to immediately retire Millstone 1 are certain Connecticut state law issues. In its four-year rate review proceeding, the DPUC noted that CL&P may not be able to obtain its remaining investment in Millstone 1 if it were to determine that the unit had been prematurely shut down due to management imprudence. Additionally, there is a Connecticut statute which may limit CL&P's ability to collect future decommissioning charges related to Millstone 1 if Millstone 1 were to be terminated before the end of its expected life. At December 31, 1997, CL&P's net unrecovered Millstone 1 plant costs were $215.7 million and the remaining unrecovered decommissioning costs were approximately $198 million. Yankee Companies: VYNPC owns and operates a nuclear generating unit with a service life that is expected to end in 2012. The NU system's ownership share of estimated costs, in year-end 1997 dollars, of decommissioning this unit is $80.8 million. On August 6, 1997, the board of directors of MYAPC voted unanimously to cease permanently the production of power at its nuclear generating facility (MY). The NU system companies had relied on MY for approximately one percent of their capacity. During November 1997, MYAPC filed an amendment to its power contracts clarifying the obligations of its purchasing utilities following the decision to cease power production. During January 1998, the FERC accepted the amendments and proposed rates, subject to refund. At December 31, 1997, the remaining estimated obligation, including decommissioning, amounted to approximately $867.2 million, of which the NU system's share was approximately $173.4 million. On December 4, 1996, the board of directors of CYAPC voted unanimously to cease permanently the production of power at its nuclear generating plant (CY). During 1996, the NU system companies had relied on CY for approximately three percent of their capacity. During late December 1996, CYAPC filed an amendment to its power contracts clarifying the obligations of its purchasing utilities following the decision to cease power production. On February 27, 1997, the FERC approved an order for hearing which, among other things, accepted CYAPC's contract amendment. The new rates became effective March 1, 1997, subject to refund. At December 31, 1997, the remaining estimated obligation, including decommissioning, amounted to $619.9 million, of which the NU system's share was approximately $303.7 million. YAEC is in the process of decommissioning its nuclear facility. At December 31, 1997, the estimated remaining costs, including decommissioning, amounted to $124.4 million, of which the NU system's share was approximately $47.9 million. Under the terms of the contracts with MYAPC, CYAPC and YAEC, the shareholder-sponsor companies, including CL&P, WMECO and PSNH, are responsible for their proportionate share of the costs of the units, including decommissioning. Management expects that CL&P, PSNH and WMECO each will continue to be allowed to recover these costs from their customers. Accordingly, CL&P, PSNH and WMECO have recognized these costs as regulatory assets, with corresponding obligations. 38 Northeast Utilities 1997 Annual Report - -------------------------------------------------------------------------------- Proposed Accounting: The staff of the SEC has questioned certain current accounting practices of the electric utility industry, including NU, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating units in the financial statements. In response to these questions, the FASB has agreed to review the accounting for closure and removal costs, including decommissioning. If current electric utility industry accounting practices for nuclear power plant decommissioning are changed, the annual provision for decommissioning could increase relative to 1997, and the estimated cost for decommissioning could be recorded as a liability (rather than as accumulated depreciation), with recognition of an increase in the cost of the related nuclear power plant. Management believes that the operating companies each will continue to be allowed to recover decommissioning costs through rates. 3. Short-Term Debt Limits: The amount of short-term borrowings that may be incurred by the NU system's utility companies is subject to periodic approval by either the SEC under the 1935 Act or by their respective state regulators. SEC authorization allowed CL&P, WMECO and NAEC, as of January 1, 1998, to incur total short-term borrowings up to a maximum of $375 million, $150 million and $60 million, respectively. In addition, the charter of WMECO contains a provision which restricts the total amount of unsecured debt that it may borrow at any one time. As of January 1, 1998, this charter provision allowed WMECO to incur unsecured borrowings, whether short-term or long-term, up to a maximum of approximately $114 million. PSNH was authorized under a waiver from the NHPUC to incur short-term borrowings up to a maximum of $125 million effective May 1997. Credit Agreements: In May 1997, because of the potential for NU and CL&P to violate their various financial ratio tests, NU amended the three-year revolving credit agreement (Credit Agreement) with a group of 12 banks. Under the amended Credit Agreement, CL&P and WMECO are able to borrow, subject to the availability of first mortgage bond collateral, up to $313.75 million and $150 million, respectively. At December 31, 1997, CL&P and WMECO have issued first mortgage bonds to enable borrowings under this facility up to a maximum of $225 million and $90 million, respectively. NU, which cannot issue first mortgage bonds, will be able to borrow up to $50 million if NU consolidated, CL&P and WMECO each meet certain interest coverage tests for two consecutive quarters. In addition, CL&P and WMECO each must meet certain minimum quarterly financial ratios to access the Credit Agreement. Both CL&P and WMECO satisfied these tests for the quarter ending December 31, 1997. The overall limit for all of the borrowing system companies under the entire Credit Agreement is $313.75 million. The companies are obligated to pay a facility fee of .50 percent per annum of each bank's total commitment under this Credit Agreement, which will expire in November 1999. At December 31, 1997 and 1996, there were $50 million and $27.5 million, respectively, in borrowings under this Credit Agreement. In February 1998, because of borrowing restrictions on NU in the amended Credit Agreement, NU entered into a separate $25 million 364-day revolving credit facility (Credit Facility) with one bank. NU is obligated to pay a facility fee of .625 percent per annum on the unused commitment. In addition to the Credit Agreement and Credit Facility, NU, CL&P, WMECO, HWP and The Rocky River Realty Company (RRR) have various revolving credit lines through separate bilateral credit agreements. Under this facility, four banks maintain commitments to the respective companies totaling $56.25 million. NU, CL&P and WMECO may borrow up to the aggregate $56.25 million, whereas HWP and RRR may borrow up to their SEC or board authorized short-term debt limit of $5 million and $22 million, respectively. Under the terms of this facility, the companies are obligated to pay a facility fee of .15 percent per annum of each bank's total commitment. These commitments will expire in December 1998. At December 31, 1997 and 1996, there were no borrowings and $11.3 million in borrowings, respectively, under this facility. PSNH has a $125 million revolving credit agreement that will expire in April 1999. The revolving credit agreement is with a group of 16 banks. PSNH is obligated to pay a facility fee of .50 percent per annum on the commitment of $125 million. At December 31, 1997 and 1996, there were no borrowings under the facility. Under the credit facilities discussed above, with the exception of the $25 million NU Credit Facility, the NU system companies may borrow funds on a short-term revolving basis under their respective agreements, using either fixed-rate loans or standby loans. Fixed rates are set using competitive bidding. Standby loans are based upon several alternative variable rates. Loans advanced under the $25 million NU Credit Facility are on a standby basis only. The weighted average annual interest rate on the NU system companies' notes payable to banks outstanding on December 31, 1997 and 1996 was 6.95 percent and 8.3 percent, respectively. Maturities of short-term debt obligations were for periods of three months or less. For further information on short-term debt, including the ability to access these agreements, see the MD&A. Northeast Utilities 1997 Annual Report 39 - -------------------------------------------------------------------------------- 4. Leases CL&P and WMECO may finance up to $400 million of nuclear fuel for Millstone 1 and 2 and their respective shares of the nuclear fuel for Millstone 3 under the Niantic Bay Fuel Trust (NBFT) capital lease agreement which is scheduled to expire July 31, 1998. The NBFT capital lease agreement, which was amended in February 1998, requires CL&P and WMECO to secure their obligation to repay the NBFT with up to $90 million of first mortgage bonds. CL&P and WMECO will issue these bonds by May 1998. CL&P and WMECO make quarterly lease payments for the cost of nuclear fuel consumed in the reactors based on a units-of-production method at rates which reflect estimated kilowatt hours of energy provided plus financing costs associated with the fuel in the reactors. Upon permanent discharge from the reactors, ownership of the nuclear fuel transfers to CL&P and WMECO. The NU system companies also have entered into lease agreements, some of which are capital leases, for the use of data processing and office equipment, vehicles, gas turbines, nuclear control room simulators and office space. The provisions of these lease agreements generally provide for renewal options. Capital lease rental payments charged to operating expense were $19.0 million in 1997, $28.2 million in 1996 and $75.9 million in 1995. Interest included in capital lease rental payments was $13.6 million in 1997, $14.1 million in 1996 and $15.0 million in 1995. Operating lease rental payments charged to expense were $17.3 million in 1997, $18.3 million in 1996 and $20.9 million in 1995. Future minimum rental payments, excluding executory costs such as property taxes, state use taxes, insurance and maintenance, under long-term noncancelable leases, as of December 31, 1997, are: - -------------------------------------------------------------------------------- (Thousands of Dollars) - -------------------------------------------------------------------------------- Capital Operating Year Leases Leases - -------------------------------------------------------------------------------- 1998 ................................................... $181,000 $ 25,800 1999 ................................................... 8,500 23,200 2000 ................................................... 7,900 21,000 2001 ................................................... 5,800 16,500 2002 ................................................... 3,200 8,000 After 2002 ............................................. 54,900 26,600 - -------------------------------------------------------------------------------- Future minimum lease payments ...................................... 261,300 $121,100 ======== - -------------------------------------------------------------------------------- Less amount representing interest ............................... 53,300 - -------------------------------------------------------------------------------- Present value of future minimum lease payments .............................. $208,000 ================================================================================ 5. Employee Benefits A. Pension Benefits The NU system's subsidiaries participate in a uniform noncontributory defined benefit retirement plan covering all regular NU system employees. Benefits are based on years of service and the employees' highest eligible compensation during 60 consecutive months of employment. Total pension (credit)/cost, part of which was (credited)/charged to utility plant, approximated $(22.5) million in 1997, $9.1 million in 1996 and $0.4 million in 1995. Pension (credit)/costs for 1997, 1996 and 1995 included approximately $(2.6) million, $7.8 million and $6.8 million, respectively, related to workforce reduction programs. Currently, the subsidiaries annually fund an amount at least equal to that which will satisfy the requirements of the Employee Retirement Income Security Act and the Internal Revenue Code. Pension costs are determined using market-related values of pension assets. Pension assets are invested primarily in domestic and international equity securities and bonds. The components of net pension (credit)/cost are: - -------------------------------------------------------------------------------- For the Years Ended December 31, - -------------------------------------------------------------------------------- (Thousands of Dollars) 1997 1996 1995 - -------------------------------------------------------------------------------- Service cost ............................ $ 32,298 $ 43,206 $ 35,771 Interest cost ........................... 98,621 94,722 89,351 Return on plan assets ................... (337,198) (232,604) (310,997) Net amortization ........................ 183,752 103,745 186,310 - ------------------------------------------------------------------------------- Net pension (credit)/cost ........................ $ (22,527) $ 9,069 $ 435 =============================================================================== For calculating pension costs, the following assumptions were used: - -------------------------------------------------------------------------------- For the Years Ended December 31, - -------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Discount rate .................................... 7.75% 7.50% 8.25% Expected long-term rate of return ................................ 9.25 8.75 8.50 Compensation/progression rate .......................................... 4.75 4.75 5.00 =============================================================================== 40 Northeast Utilities 1997 Annual Report - -------------------------------------------------------------------------------- The following table represents the plan's funded status reconciled to the Consolidated Balance Sheets: - -------------------------------------------------------------------------------- At December 31, - -------------------------------------------------------------------------------- (Thousands of Dollars) 1997 1996 - -------------------------------------------------------------------------------- Accumulated benefit obligation including vested benefits at December 31, 1997 and 1996 of $(1,003,157,000) and $(943,696,000), respectively .................. $(1,106,850) $(1,037,908) - ------------------------------------------------------------------------------- Projected benefit obligation .................................... $(1,392,833) $(1,321,146) Market value of plan assets ...................... 1,919,414 1,660,404 - ------------------------------------------------------------------------------- Market value in excess of projected benefit obligation .................. 526,581 339,258 Unrecognized transition amount ........................................ (10,562) (12,105) Unrecognized prior service cost .................. 29,711 31,802 Unrecognized net gain ............................ (622,916) (458,654) - ------------------------------------------------------------------------------- Accrued pension liability ........................ $ (77,186) $ (99,699) =============================================================================== The following actuarial assumptions were used in calculating the plan's year-end funded status: - -------------------------------------------------------------------------------- At December 31, - -------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------- Discount rate .............................................. 7.25% 7.75% Compensation/progression rate .............................. 4.25 4.75 ================================================================================ B. Postretirement Benefits Other Than Pensions The NU system's subsidiaries provide certain health care benefits, primarily medical and dental, and life insurance benefits through a benefit plan to retired employees (referred to as SFAS 106 benefits). These benefits are available for employees retiring from the NU system who have met specified service requirements. For current employees and certain retirees, the total SFAS 106 benefit is limited to two times the 1993 per-retiree health care cost. The SFAS 106 obligation has been calculated based on this assumption. Total SFAS 106 benefit costs, part of which were deferred or charged to utility plant, approximated $28.3 million in 1997, $39.2 million in 1996 and $44.1 million in 1995. NU's subsidiaries are funding SFAS 106 postretirement costs through external trusts. The subsidiaries are funding, on an annual basis, amounts that have been rate-recovered and which also are tax deductible under the Internal Revenue Code. The trust assets are invested primarily in equity securities and bonds. The components of health care and life insurance cost are: - -------------------------------------------------------------------------------- For the Years Ended December 31, - -------------------------------------------------------------------------------- (Thousands of Dollars) 1997 1996 1995 - -------------------------------------------------------------------------------- Service cost ............................... $ 5,746 $ 7,457 $ 7,137 Interest cost .............................. 20,556 22,698 24,693 Return on plan assets ...................... (21,452) (9,330) (7,812) Amortization of unrecognized transition obligation ................... 15,134 15,134 15,134 Other amortization, net .................... 8,327 3,194 4,924 - ------------------------------------------------------------------------------- Net health care and life insurance cost .......................... $ 28,311 $ 39,153 $ 44,076 =============================================================================== For calculating SFAS 106 benefit costs, the following assumptions were used: - -------------------------------------------------------------------------------- For the Years Ended December 31, - -------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Discount rate ....................................... 7.75% 7.50% 8.00% Long-term rate of return -- Health assets, net of tax ........................ 6.00 5.25 5.00 Life assets ...................................... 9.25 8.75 8.50 =============================================================================== The following table represents the plan's funded status reconciled to the Consolidated Balance Sheets: - -------------------------------------------------------------------------------- At December 31, - -------------------------------------------------------------------------------- (Thousands of Dollars) 1997 1996 - -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation of: Retirees ............................................ $(214,624) $(226,774) Fully eligible active employees ......................................... (529) (323) Active employees not eligible to retire ............................ (70,806) (78,985) - ------------------------------------------------------------------------------- Total accumulated postretirement benefit obligation .................................. (285,959) (306,082) Market value of plan assets ............................ 129,434 105,086 - ------------------------------------------------------------------------------- Accumulated postretirement benefit obligation in excess of plan assets ...................................... (156,525) (200,996) Unrecognized transition obligation .......................................... 227,015 242,149 Unrecognized net gain .................................. (70,391) (41,457) - ------------------------------------------------------------------------------- Prepaid/(accrued) postretirement benefit obligation .................................. $ 99 $ (304) =============================================================================== Northeast Utilities 1997 Annual Report 41 - -------------------------------------------------------------------------------- The following actuarial assumptions were used in calculating the plan's year-end funded status: - -------------------------------------------------------------------------------- At December 31, - -------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------- Discount rate ................................................ 7.25% 7.75% Health care cost trend rate (a) .............................. 5.76 7.23 ================================================================================ (a) The annual growth in per capita cost of covered health care benefits was assumed to decrease to 4.40 percent by 2001. The effect of increasing the assumed health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997, by $16.1 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $1.3 million. The trust holding the health plan assets is subject to federal income taxes at a 39.6 percent tax rate. CL&P, PSNH and WMECO currently are recovering SFAS 106 costs through rates. C. 401(k) Savings Plan NU maintains a 401(k) Savings Plan for substantially all NU system employees. This savings plan provides for employee contributions up to specified limits. The company matches, with company stock, employee contributions up to a maximum of three percent of eligible compensation. The matching contributions made by the company were $12.0 million for 1997, $11.8 million for 1996 and $12.1 million for 1995. D. ESOP NU maintains an ESOP for purposes of allocating shares to employees participating in the NU system's 401(k) plan. Under this arrangement, NU issued unsecured notes during 1991 and 1992 totaling $250 million, the proceeds of which were lent to the ESOP trust for purchase of approximately 10.8 million newly issued NU common shares (ESOP shares). NU makes principal and interest payments on the ESOP notes at the same rate that ESOP shares are allocated to employees. In 1997 and 1996, the ESOP trust issued approximately 948,000 and 953,000 of NU common shares, respectively, to satisfy plan obligations to employees totaling approximately $21.9 million and $22.1 million, respectively. These costs were charged to the 401(k) plan. As of December 31, 1997 and 1996, the total allocated ESOP shares were 4,140,751 and 3,192,620, respectively, and total unallocated ESOP shares were 6,659,434 and 7,607,565, respectively. The fair market value of unallocated ESOP shares as of December 31, 1997 and 1996 was approximately $78.7 million and $99.8 million, respectively. During 1997, the ESOP trust used approximately $3 million in dividends and $41 million in contributions from NU to meet principal and interest payments on ESOP notes. During March 1997, NU's Board of Trustees suspended the quarterly dividend on NU's common shares indefinitely, beginning with the second quarter of 1997. Future principal and interest payments on ESOP notes will be fully supported by contributions from NU until the dividend is restored. E. Stock-Based Compensation During 1997, certain key officers of the company were awarded nonvested stock grants, totaling 25,700 shares, under which the officers pay nothing to receive these shares. These officers must stay in employment of the company for a specified period to receive the shares. During 1996, the same key officers of the company were awarded nonvested stock grants, for a total of approximately 43,000 shares, for which again no payment was required. Under the 1996 programs, certain shares became vested immediately with certain restrictions and others became vested upon the meeting of specified performance goals within a limited time period. Dividends accruing on the shares of each award are reinvested in additional shares subject to the same provisions and restrictions. Under these programs, approximately 3,400 shares were vested at December 31, 1997, and December 31, 1996. During August 1997, the company's Board of Trustees approved the granting of 500,000 stock options to the new Chief Executive Officer to purchase common shares of NU common stock. The exercise price of these options is $9.625 per share, which equaled the fair value of the company's common stock at the date of grant. The exercise period for the options granted is ten years from the date of grant, with vesting from the date of grant as follows: 50 percent after two years, 75 percent after three years and 100 percent after four years. The company accounts for its nonvested stock grants and stock options using the intrinsic-value based method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," (APB 25) under which approximately $238 thousand and $136 thousand of compensation costs were recognized in 1997 and 1996, respectively, for the nonvested stock grants. No compensation costs have been recognized for the stock options award as the exercise price was equal to the market value of the stock on the date of grant. In October 1995 the FASB issued SFAS 123, "Accounting for Stock-Based Compensation," which defines a fair-value based method of accounting for stock-based compensation. SFAS 123 allows companies to continue accounting for stock-based compensation using APB 25 but requires pro forma net income and earnings per share disclosures as if the fair-value based method of accounting under SFAS 123 had been used. 42 Northeast Utilities 1997 Annual Report - -------------------------------------------------------------------------------- Had compensation costs of the options award been determined under the fair value alternative method as stated in SFAS 123, the company's pro forma net loss for the year ended December 31, 1997, would have been increased by approximately $73 thousand. The resulting pro forma impact on the company's loss per share for the year was not material. The fair value of the options as of the date of grant was determined using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 6.41 percent, expected life of 10.0 years, expected volatility of 31.89 percent and a dividend yield of 7.42 percent. 6. Sale of Customer Receivables and Accrued Utility Revenues During 1996, CL&P and WMECO entered into agreements to sell up to $200 million and $40 million, respectively, of undivided ownership interests in eligible customer receivables and accrued utility revenues (receivables). The FASB issued SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," in June 1996. SFAS 125 became effective on January 1, 1997, and establishes, in part, criteria for concluding whether a transfer of financial assets in exchange for consideration should be accounted for as a sale or as a secured borrowing. By October 31, 1997, both CL&P and WMECO had restructured their respective sales agreements to comply with the conditions of SFAS 125 and account for transactions occurring under these programs as sales of assets. CL&P and WMECO have each established a special purpose, wholly owned subsidiary whose business consists of the purchase and resale of receivables. For receivables sold, both CL&P and WMECO have retained collection responsibilities as agent for the purchaser under each company's respective agreements. As collections reduce previously sold receivables, new receivables may be sold. At December 31, 1997, approximately $70 million and $20 million of receivables had been sold to third-party purchasers by CL&P and WMECO, respectively, through the use of each company's special purpose, wholly owned subsidiary, CL&P Receivables Corporation (CRC) and WMECO Receivables Corporation (WRC). All receivables transferred to both CRC and WRC are assets owned by CRC and WRC and are not available to pay CL&P's or WMECO's creditors. For CRC's and WRC's respective sales agreements with the third-party purchasers, the receivables were sold with limited recourse. Both CRC's and WRC's respective sales agreements provide for a formula-based loss reserve in which additional receivables may be assigned to the third-party purchasers for costs such as bad debt. The third-party purchasers absorb the excess amount in the event that actual loss experience exceeds the loss reserve. At December 31, 1997, approximately $7.2 million and $3.0 million of assets had been designated as collateral by CRC and WRC, respectively. These amounts represent the formula-based amount of credit exposure at December 31, 1997. Historical losses for bad debt for both CL&P and WMECO have been substantially less. During December 1997, Moody's Investors Service downgraded the rating on WMECO's first mortgage bonds. This downgrade brought WMECO's bond ratings to a level at which the sponsor of WMECO's accounts receivable program can take various actions, in its discretion, which would have the practical effect of limiting WMECO's ability to utilize the facility. To date, the sponsor has not notified WMECO that it will elect to exercise those rights, and the program is functioning in its normal mode. The WMECO accounts receivable program could be terminated if WMECO's first mortgage bond credit ratings experience one more level of downgrade. CL&P's accounts receivable program could be terminated if its senior secured debt is downgraded two more steps from its current ratings. Concentrations of credit risk to the respective purchasers under each company's agreements with respect to the receivables are limited due to CL&P's and WMECO's diverse customer base within their respective service territories. For additional information on accounts receivable programs and CL&P's and WMECO's ability to utilize these programs, see the MD&A. Northeast Utilities 1997 Annual Report 43 - -------------------------------------------------------------------------------- 7. Commitments and Contingencies A. Restructuring and Rate Matters New Hampshire: The 1996 restructuring legislation that the NHPUC is charged with implementing provides that the NHPUC may not adopt a restructuring plan that imposes a severe financial hardship on a utility. Management believes that PSNH is entitled to full recovery of its prudently incurred costs, including regulatory assets and other strandable costs. It bases this belief both on the general nature of public utility industry cost-of-service based regulation and the specific circumstances of the resolution of PSNH's previous bankruptcy proceedings and its acquisition by NU, including the recoveries provided by the Rate Agreement and related agreements. On February 28, 1997, the NHPUC issued its decision related to restructuring the state's electric utility industry and setting interim stranded cost charges for PSNH pursuant to legislation enacted in New Hampshire in 1996. In the decision, the NHPUC announced a departure from cost-based ratemaking and instead adopted a market-priced approach to ratemaking and stranded cost recovery. Accordingly, unless the NHPUC modifies its position or the litigation described below results in necessary modifications to the final plan which leads management to conclude that the ratemaking approach utilized in the NHPUC's restructuring decision will not go into effect, PSNH no longer will be subject to the provisions of SFAS 71. That would result in PSNH writing off from its balance sheet substantially all of its regulatory assets. The amount of the potential write-off triggered by the order is currently estimated at over $400 million, after taxes. PSNH does not believe that under the decision, it would be required to recognize any additional loss resulting from the impairment of the value of its other long-lived assets under the provisions of SFAS 121. On March 3, 1997, PSNH, NU, NAEC and NUSCO filed for a temporary restraining order, preliminary and permanent injunctive relief and for declaratory judgment in the United States District Court for New Hampshire (District Court). The case was subsequently transferred to Rhode Island. On March 10, 1997, the Chief Judge of the Rhode Island federal court issued a temporary restraining order which stayed the NHPUC's February 28, 1997, decision to the extent it established a rate-setting methodology that is not designed to recover PSNH's costs of providing service and would require PSNH to write off any regulatory assets. During 1997, a mediation process ended without a resolution. The District Court had suspended the procedural schedule associated with this court proceeding pending the resolution of appeals of certain preliminary rulings by the U.S. Circuit Court of Appeals for the First Circuit (First Circuit). On February 3, 1998, the First Circuit denied the appeals taken by would-be intervenors in PSNH's federal court proceeding concerning the NHPUC's final plan on restructuring. The First Circuit affirmed a previous court decision stating that the opposing interests in this case were adequately represented by the NHPUC or by PSNH. As a result of this decision, the proceedings in the District Court may resume. On February 17, 1998, the NHPUC filed a petition for rehearing with the First Circuit. The temporary restraining order issued by the District Court in March 1997 will remain in effect until further orders by either court. During 1997, the NHPUC reopened its proceeding to reconsider certain limited matters in its restructuring orders. The scope of the PSNH-specific rehearing proceedings included alternative rate-setting methodologies proposed by the intervenors; to decide the appropriate methodology to be used to determine PSNH's interim stranded costs; and to set PSNH's interim stranded cost charges utilizing the determined methodology. In testimony filed with the NHPUC in November 1997, PSNH proposed a new methodology to quantify its strandable costs. Under this proposal, PSNH would divest all owned generation and purchased-power obligations via auction. To the extent that the auction fails to produce sufficient revenues to cover the net book value of owned generation and contractual payment obligations of purchased power, the difference would be recovered from customers through a non-bypassable distribution charge. The new proposal also relies upon securitization of certain assets to further reduce rates. On December 15, 1997, the NHPUC officially announced that industry restructuring would not take place on January 1, 1998. Management believes that industry restructuring will not take place in New Hampshire until the courts resolve the issues brought before them, or the parties involved reach a settlement. 44 Northeast Utilities 1997 Annual Report - -------------------------------------------------------------------------------- PSNH and NAEC are parties to a variety of financing agreements providing that the credit thereunder can be terminated or accelerated if they do not maintain specified minimum ratios of common equity to capitalization (as defined in each agreement). In addition, PSNH and NAEC are parties to a variety of financing agreements providing in effect that the credit thereunder can be terminated or accelerated if there are actions taken, either by PSNH or NAEC or by the state of New Hampshire, that deprive PSNH and/or NAEC of the benefits of the Rate Agreement and/or the Seabrook Power Contracts. If the NHPUC's February 28, 1997 decision were to become effective, it would, unless PSNH and NAEC receive waivers from their respective lenders, result in (i) write-offs that would cause PSNH's common equity to fall below the contractual minimums, (ii) reductions in income that would cause PSNH's income to fall below the contractual minimums, (iii) potential violation of the contractual provisions with respect to actions depriving PSNH and NAEC of the benefits of the Rate Agreement and (iv) the potential for cross defaults to other PSNH and NAEC financing documents. Substantially all of PSNH's and NAEC's debt obligations would be affected. If these events transpired and if the creditors holding PSNH and NAEC debt obligations decide to exercise their rights to demand payment, then either creditors or PSNH and NAEC could initiate proceedings under Chapter 11 of the bankruptcy laws. As a result of the NHPUC decision and the potential consequences discussed above, the reports of our auditors on the individual financial statements of PSNH and NAEC contain explanatory paragraphs. Those explanatory paragraphs indicate that a substantial doubt exists currently about the ability of PSNH and NAEC to continue as going concerns. The accounts of PSNH and NAEC are included in the accompanying consolidated financial statements on the basis of a going concern. While the effect of the implementation of that decision would have a material adverse impact on NU's financial position, results of operations and cash flows, it would not in and of itself result in defaults under borrowing or other financial agreements of NU or its other subsidiaries. On May 2, 1997, PSNH made a rate filing with the NHPUC. For information regarding this rate proceeding, see the MD&A. Massachusetts: During November 1997, the state of Massachusetts enacted a comprehensive electric utility industry restructuring bill (legislation). On December 31, 1997, WMECO filed its restructuring plan with the DTE, as required by the legislation. The WMECO restructuring plan describes the process by which WMECO will, beginning March 1, 1998, initiate a ten percent rate reduction for all customer rate classes and allow customers to choose their energy supplier. As part of the plan, the DTE authorized recovery of certain strandable, above-market costs (strandable costs). The legislation gives the DTE the authority to determine the amount of strandable costs that will be eligible for recovery by utilities. Costs which will qualify as strandable costs and be eligible for recovery include, but are not limited to, certain above-market costs associated with generating facilities, costs associated with long-term commitments to purchase power at above-market prices from small power producers and nonutility generators, and regulatory assets and associated liabilities related to the generation portion of WMECO's business. Under the statute, if a distribution company claims that it is unable to meet a price reduction of ten percent initially and 15 percent by September 1, 1999, the distribution company may so state to the DTE and the DTE is provided with the authority to "explore all possible mechanisms and options within the limits of the constitution" to achieve the mandated rate reductions. The statute indicates that allowing a substitute company to provide standard offer service is one option that can be considered by the DTE. The costs of transitioning to competition will be mitigated through several steps, including divesting WMECO's nonnuclear generating assets at an auction to be held as soon as June 1998, and securitization of approximately $500 million in strandable costs by September 30, 1998. NU presently expects to participate, through a competitive affiliate, in the competitive bid process for WMECO's generation resources. Any net proceeds in excess of book value received from the divestiture of these units will be used to mitigate strandable costs. As required by the legislation, WMECO will continue to operate and maintain its transmission and local distribution network and deliver electricity to all customers. As noted above, the legislation has authorized Massachusetts utilities to finance a portion of the strandable costs through securitization, using rate reduction bonds. A separate transition charge will be collected over the life of the bonds to recover principal, interest and issuance costs. Northeast Utilities 1997 Annual Report 45 - -------------------------------------------------------------------------------- WMECO's ability to recover its strandable costs will depend on several factors, which include, but are not limited to, continuous recovery of the costs over the transitional period supported by the legislation, the aggregate amount of strandable costs which the company will be allowed to recover and the market price of electricity. Management believes that the company will recover its strandable costs. However, a change in one or more of these factors could affect the recovery of strandable costs and may result in a loss to the company. Connecticut: Although CL&P continues to operate under cost-of-service based regulation, legislative restructuring initiatives during 1997 and 1998 in its jurisdiction has created some uncertainty with respect to future rates and the recovery of strandable investments and certain future costs such as purchase power obligations. Management is unable to predict the ultimate outcome of restructuring initiatives, however, it continues to believe that it is probable that CL&P will fully recover its prudently incurred costs, including regulatory assets and strandable investments based on the general nature of public utility cost-of-service regulation. For further information on restructuring, see Note 1H, "Summary of Significant Accounting Policies -- Regulatory Accounting and Assets" and the MD&A. The DPUC is required to review a utility's rates every four years if there has not been a rate proceeding during such period. The DPUC has conducted such a review. For information regarding this review and other rate matters, see the MD&A. FERC Rate Proceedings: For information regarding the FERC rate proceedings for CYAPC and MYAPC, see Note 2, "Nuclear Decommissioning." B. Nuclear Performance Millstone: The three Millstone units are managed by NNECO. Millstone 1, 2 and 3 have been out of service since November 4, 1995, February 21, 1996, and March 30, 1996, respectively, and are on the Nuclear Regulatory Commission's (NRC) watch list. The company has restructured its nuclear organization and is currently implementing comprehensive plans to restart the units. Subsequent to its January 31, 1996, announcement that Millstone had been placed on its watch list, the NRC stated that the units cannot return to service until independent, third-party verification teams have reviewed the actions taken to improve the design, configuration and employee concerns issues that prompted the NRC to place the units on its watch list. The actual date of the return to service for each of the units is dependent upon the completion of independent inspections and reviews by the NRC and a vote by the NRC commissioners. NU hopes to return Millstone 3 to service in early spring of 1998 and Millstone 2 three to four months after Millstone 3. Millstone 1 is currently in extended maintenance status. In 1997, NU's share of nonfuel O&M costs expensed for Millstone totaled $566 million, including $73 million reserved for future restart costs. Budgeted nuclear spending levels at Millstone for 1998 will be reduced from 1997 levels, although they will be considerably higher than before the station was placed on the NRC's watch list. The actual level of 1998 spending will depend on when the units return to operation and the cost of restoring them to service. The total cost to restart the units cannot be precisely estimated at this time. Management will continue to evaluate the costs to be incurred in 1998 to determine whether adjustments to the existing reserves are required. Management cannot predict when the NRC will allow any of the Millstone units to return to service and thus cannot precisely estimate the total replacement power costs the companies ultimately will incur. Replacement power costs incurred by NU attributable to the Millstone outages averaged approximately $28 million per month during 1997, and for 1998 are projected to average approximately $9 million per month for Millstone 3, $9 million per month for Millstone 2 and $6 million per month for Millstone 1 while the plants remain out of service. CL&P, WMECO and PSNH will continue to expense their replacement power costs in 1998. Based on the current estimates of expenditures and restart dates, management believes the NU system has sufficient resources to fund the restoration of the Millstone units and related replacement power costs. If the return to service of Millstone 3 or 2 is delayed substantially beyond the present restart estimates, if some financing facilities become unavailable because of difficulties in meeting borrowing conditions or renegotiating extensions, if CL&P and WMECO encounter additional significant costs or if any other significant deviations from management's assumptions occur, CL&P and WMECO could be unable to meet their cash requirements. In those circumstances, management would take even more stringent actions to reduce costs and cash outflows and attempt to obtain additional sources of funds. The availability of these funds would be dependent upon general market conditions and CL&P's and WMECO's respective credit and financial conditions at that time. For information concerning the ability of CL&P and WMECO to access its borrowing facilities, see the MD&A. Litigation: Several class-action lawsuits have been filed against the company and certain present and former officers and employees of NU in connection with the company's nuclear operations. Management cannot estimate the potential outcome of these suits, but believes these suits are without merit and intends to defend itself vigorously in all these actions. 46 Northeast Utilities 1997 Annual Report - -------------------------------------------------------------------------------- CL&P and WMECO, through NNECO as agent, operate Millstone 3 at cost, and without profit, under a sharing agreement that obligates them to utilize good utility operating practice and requires the joint owners to share the risk of employee negligence and other risks of operation and maintenance pro-rata in accordance with their ownership shares. This agreement also provides that CL&P and WMECO would be liable only for damages to the non-NU owners for a deliberate violation of the agreement pursuant to authorized corporate action. On August 7, 1997, the non-NU owners of Millstone 3 filed demands for arbitration with CL&P and WMECO as well as lawsuits in Massachusetts Superior Court against NU and its current and former trustees. The non-NU owners raise a number of contract, tort and statutory claims arising out of the operation of Millstone 3. The arbitrations and lawsuits seek to recover compensatory damages, punitive damages, treble damages and attorneys' fees. Owners representing approximately two-thirds of the non-NU interests in Millstone 3 claimed compensatory damages in excess of $200 million. In addition, one of the lawsuits seeks to restrain NU from disposing of its shares of the stock of WMECO and HWP, pending the outcome of the lawsuit. Management cannot estimate the potential outcome of these suits but believes there is no legal basis for the claims and intends to defend against them vigorously. To date, no reserves have been established for this litigation. At December 31, 1997, the costs related to this litigation were estimated to be approximately $100 million for incremental O&M costs and approximately $100 million for replacement power costs. These costs are likely to increase as long as Millstone 3 remains out of service. The Connecticut Municipal Electric Energy Cooperative (CMEEC) and CL&P have been negotiating since May 1996 over issues related to the operation of Millstone 1 and 2. CMEEC has failed to make payments on its accrued obligations since October 1996, claiming that CL&P materially breached its contractual obligations. CL&P has denied the allegations and requested payment. The matter has gone to arbitration which has been scheduled for July 1998. CL&P has filed an application with the Connecticut Superior Court in Hartford requesting the court to grant interim relief to CL&P. CL&P has asked the court to enforce the contract provisions by ordering CMEEC to pay the outstanding obligations under the contract (approximately $25 million) and to continue making payments (approximately $1.8 million per month) during the arbitration process. On December 9, 1997, the Superior Court judge issued a decision denying CL&P's request for an interim payment order. Management cannot predict the outcome of this litigation and has taken steps to assert its legal rights. CL&P has requested reargument, in order to present evidence, and has requested that the Connecticut Superior Court vacate its order. CL&P is prepared to appeal to a higher court, if necessary, after the reargument. C. Environmental Matters The NU system is subject to regulation by federal, state and local authorities with respect to air and water quality, the handling and disposal of toxic substances and hazardous and solid wastes, and the handling and use of chemical products. The NU system has an active environmental auditing and training program and believes that it is in substantial compliance with current environmental laws and regulations. However, the NU system is subject to certain pending enforcement actions and governmental investigations in the environmental area. Management cannot predict the outcome of these enforcement actions and investigations. Environmental requirements could hinder the construction of new generating units, transmission and distribution lines, substations and other facilities. Changing environmental requirements could also require extensive and costly modifications to the NU system's existing generating units and transmission and distribution systems, and could raise operating costs significantly. As a result, the NU system may incur significant additional environmental costs, greater than amounts included in cost of removal and other reserves, in connection with the generation and transmission of electricity and the storage, transportation and disposal of byproducts and wastes. The NU system also may encounter significantly increased costs to remedy the environmental effects of prior waste handling activities. The cumulative long-term cost impact of increasingly stringent environmental requirements cannot be estimated accurately. The NU system has recorded a liability based upon currently available information for what it believes are its estimated environmental remediation costs that the NU system's subsidiaries expect to incur for waste disposal sites. In most cases, additional future environmental cleanup costs are not reasonably estimable due to a number of factors, including the unknown magnitude of possible contamination, the appropriate remediation methods, the possible effects of future legislation or regulation and the possible effects of technological changes. At December 31, 1997, the net liability recorded by the NU system for its estimated environmental remediation costs, excluding any possible insurance recoveries or recoveries from third parties, amounted to approximately $16.2 million, which management has determined to be the most probable amount within the range of $16.2 million to $28.0 million. Northeast Utilities 1997 Annual Report 47 - -------------------------------------------------------------------------------- During 1997, NU adopted Statement of Position 96-1, "Environmental Remediation Liabilities" (SOP). The principal objective of the SOP is to improve the manner in which existing authoritative accounting literature is applied by entities to specific situations of recognizing, measuring and disclosing environmental remediation liabilities. The adoption of the SOP resulted in an increase of approximately $1.5 million to NU's environmental reserve in 1997. The NU system cannot estimate the potential liability for future claims, including environmental remediation costs, that may be brought against it. However, considering known facts, existing laws and regulatory practices, management does not believe the matters disclosed above will have a material effect on the NU system's financial position or future results of operations. D. Nuclear Insurance Contingencies Under certain circumstances, in the event of a nuclear incident at one of the nuclear facilities in the country covered by the federal government's third-party liability indemnification program, an owner of a nuclear unit could be assessed in proportion to its ownership interest in each of its nuclear units up to $75.5 million. Payments of this assessment would be limited to $10.0 million in any one year per nuclear incident based upon the owner's pro rata ownership interest in each of its nuclear units. In addition, the owner would be subject to an additional five percent or $3.8 million, in proportion to its ownership interests in each of its nuclear units, if the sum of all claims and costs from any one nuclear incident exceeds the maximum amount of financial protection. Based upon its ownership interests in Millstone 1, 2 and 3 and in Seabrook 1, the NU system's maximum liability, including any additional assessments, would be $244.2 million per incident, of which payments would be limited to $30.8 million per year. In addition, through power purchase contracts with MYAPC, VYNPC and CYAPC, the NU system would be responsible for up to an additional $67.4 million per incident, of which payments would be limited to $8.5 million per year. Insurance has been purchased to cover the primary cost of repair, replacement or decontamination of utility property resulting from insured occurrences. The NU system is subject to retroactive assessments if losses exceed the accumulated funds available to the insurer. The maximum potential assessment against the system with respect to losses arising during the current policy year is approximately $17.1 million under the primary property insurance program. Insurance has been purchased to cover certain extra costs incurred in obtaining replacement power during prolonged accidental outages and the excess cost of repair, replacement or decontamination or premature decommissioning of utility property resulting from insured occurrences. The NU system is subject to retroactive assessments if losses exceed the accumulated funds available to the insurer. The maximum potential assessments against the NU system with respect to losses arising during current policy years are approximately $13.8 million under the replacement power policies and $24.6 million under the excess property damage, decontamination and decommissioning policies. The cost of a nuclear incident could exceed available insurance proceeds. Insurance has been purchased aggregating $200 million on an industry basis for coverage of worker claims. All participating reactor operators insured under this coverage are subject to retrospective assessments of $3 million per reactor. The maximum potential assessment against the NU system with respect to losses arising during the current policy period is approximately $13.0 million. Effective January 1, 1998, a new worker policy was purchased which is not subject to retrospective assessments. E. Construction Program The construction program is subject to periodic review and revision by management. The NU system companies currently forecast construction expenditures of approximately $2.0 billion for the years 1998-2002, including $267 million for 1998. In addition, the NU system companies estimate that nuclear fuel requirements, including nuclear fuel financed through the NBFT, will be approximately $360.7 million for the years 1998-2002, including $60.6 million for 1998. See Note 4, "Leases," for additional information about the financing of nuclear fuel. F. Long-Term Contractual Arrangements Yankee Companies: The NU system companies rely on VY for approximately 1.7 percent of their capacity under long-term contracts. Under the terms of their agreements, the NU system companies pay their ownership (or entitlement) shares of costs, which include depreciation, O&M expenses, taxes, the estimated cost of decommissioning and a return on invested capital. These costs are recorded as purchased power expense and are recovered through the companies' rates. The total cost of purchases under contracts with VYNPC amounted to $24.2 million in 1997, $25.5 million in 1996 and $25.3 million in 1995. 48 Northeast Utilities 1997 Annual Report - -------------------------------------------------------------------------------- The other Yankee generating facilities, MY, CY and Yankee Rowe, were permanently shut down as of August 6, 1997, December 4, 1996, and February 26, 1992, respectively. See Note 1E, "Summary of Significant Accounting Policies -- Investments and Jointly Owned Electric Utility Plant," for further information on the Yankee companies, and Note 2, "Nuclear Decommissioning," regarding the related decommissioning obligations. Nonutility Generators: CL&P, PSNH and WMECO have entered into various arrangements for the purchase of capacity and energy from nonutiltiy generators (NUGs). These arrangements have terms from 10 to 30 years, currently expiring in the years 1998 through 2028, and require the companies to purchase energy at specified prices or formula rates. For the twelve month period ending December 31, 1997, approximately 14 percent of NU system electricity requirements was met by NUGs. The total cost of purchases under these arrangements amounted to $447.6 million in 1997, $441.6 million in 1996 and $434.7 million in 1995. These costs may be deferred for eventual recovery through rates. New Hampshire Electric Cooperative: PSNH entered into a buy-back agreement to purchase the capacity and energy of the New Hampshire Electric Cooperative, Inc.'s (NHEC) share of Seabrook 1 and to pay all of NHEC's Seabrook 1 costs for a ten-year period, which began on July 1, 1990. The total cost of purchases under this agreement was $23.4 million in 1997, $14.6 million in 1996 and $15.8 million in 1995. The total cost of these purchases has been collected through the FPPAC in accordance with the Rate Agreement. In connection with the agreement, NHEC agreed to continue as a firm-requirements customer of PSNH for 15 years. Hydro-Quebec: Along with other New England utilities, CL&P, PSNH, WMECO and HWP have entered into agreements to support transmission and terminal facilities to import electricity from the Hydro-Quebec system in Canada. CL&P, PSNH, WMECO and HWP are obligated to pay, over a 30-year period ending in 2020, their proportionate shares of the annual O&M and capital costs of these facilities. Estimated Annual Costs: The estimated annual costs of the NU system's significant long-term contractual arrangements are as follows: - -------------------------------------------------------------------------------- (Millions of Dollars) 1998 1999 2000 2001 2002 - -------------------------------------------------------------------------------- VYNPC .................................. $ 28.7 $ 28.9 $ 27.7 $ 30.3 $ 31.5 NUGs ................................... 455.5 471.1 477.5 488.5 498.9 NHEC ................................... 30.0 30.0 14.6 -- -- Hydro-Quebec ........................... 32.6 31.6 30.9 30.0 29.3 ================================================================================ For additional information regarding the recovery of purchased power costs, see Note 1K, "Summary of Significant Accounting Policies -- Recoverable Energy Costs." G. Sale of COE During 1997, the NU Board of Trustees approved the offering for sale of COE. COE's revenues and earnings historically have not been material to NU. During the fourth quarter of 1997, management established a reserve of $25 million to reflect the anticipated loss from the sale of a COE investment. NU had a net investment in COE of approximately $33.4 million and $57.2 million, as of December 31, 1997 and 1996, respectively. 8. Market Risk Management Fuel Price Management: CL&P uses swap, collar, put and call instruments with financial institutions to hedge against some of the fuel price risk created by long-term negotiated energy contracts and nuclear replacement power generation and fuel purchases. These agreements minimize exposure associated with rising fuel prices by managing a portion of CL&P's cost of fuel for these negotiated energy contracts and nuclear replacement power generation and fuel purchases. As of December 31, 1997, CL&P had outstanding agreements with a total notional value of approximately $327 million, and a negative mark-to-market position of approximately $21 million. The terms of the agreements require CL&P to post cash collateral with its counterparties in the event of negative mark-to-market positions and lowered credit ratings. The amount of the collateral is to be returned to CL&P when the mark-to-market position becomes positive, when CL&P meets specified credit ratings or when an agreement ends and all open positions are properly settled. At December 31, 1997, cash collateral in the amount of $15.4 million was posted under these terms. Northeast Utilities 1997 Annual Report 49 - -------------------------------------------------------------------------------- Interest Rate Management: NAEC uses swap instruments with financial institutions to hedge against interest rate risk associated with its $200 million variable-rate bank note. The interest-rate management instruments employed eliminate the exposure associated with rising interest rates, and effectively fix the interest rate for this borrowing arrangement. Under the agreements, NAEC exchanges quarterly payments based on a differential between a fixed contractual interest rate and the three-month LIBOR rate at a given time. As of December 31, 1997, NAEC had outstanding agreements with a total notional value of $200 million and a positive mark-to-market position of approximately $104 thousand. Credit Risk: These agreements have been made with various financial institutions, each of which is rated "A3" or better by Moody's rating group. Each respective company will be exposed to credit risk on their respective market risk-management instruments if the counterparties fail to perform their obligations. However, management anticipates that the counterparties will be able to fully satisfy their obligations under the agreements. 9. Minority Interest in Consolidated Subsidiary CL&P Capital LP (CL&P LP, a subsidiary of CL&P) had previously issued $100 million of cumulative 9.3 percent Monthly Income Preferred Securities (MIPS), Series A. CL&P has the sole ownership interest in CL&P LP, as a general partner, and is the guarantor of the MIPS securities. Subsequent to the MIPS issuance, CL&P LP loaned the proceeds of the MIPS issuance, along with CL&P's $3.1 million capital contribution, back to CL&P in the form of an unsecured debenture. CL&P consolidates CL&P LP for financial reporting purposes. Upon consolidation, the unsecured debenture is eliminated, and the MIPS securities are accounted for as minority interests. 10. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each of the following financial instruments: Cash and nuclear decommissioning trusts: The carrying amounts approximate fair value. SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," requires investments in debt and equity securities to be presented at fair value. As a result of this requirement, the investments held in the NU system companies' nuclear decommissioning trusts were adjusted to market by approximately $69.6 million as of December 31, 1997, and $31.4 million as of December 31, 1996, with corresponding offsets to the accumulated provision for depreciation. The amounts adjusted in 1997 and in 1996 represent cumulative gross unrealized holding gains. The cumulative gross unrealized holding losses were immaterial for both 1997 and 1996. Preferred stock and long-term debt: The fair value of the system's fixed-rate securities is based upon the quoted market price for those issues or similar issues. Adjustable rate securities are assumed to have a fair value equal to their carrying value. The carrying amounts of the system's financial instruments and the estimated fair values are as follows: - -------------------------------------------------------------------------------- At December 31, 1997 - -------------------------------------------------------------------------------- Carrying Fair (Thousands of Dollars) Amount Value - -------------------------------------------------------------------------------- Preferred stock not subject to mandatory redemption ......................... $ 136,200 $ 79,141 Preferred stock subject to mandatory redemption ............................ 276,000 255,180 Long-term debt -- First Mortgage Bonds ............................ 2,228,800 2,210,423 Other long-term debt ............................ 1,668,533 1,691,362 MIPS ............................................... 100,000 100,760 ================================================================================ - -------------------------------------------------------------------------------- At December 31, 1997 - -------------------------------------------------------------------------------- Carrying Fair (Thousands of Dollars) Amount Value - -------------------------------------------------------------------------------- Preferred stock not subject to mandatory redemption ......................... $ 136,200 $ 127,045 Preferred stock subject to mandatory redemption ............................ 301,000 264,304 Long-term debt -- First Mortgage Bonds ............................ 2,196,788 2,163,031 Other long-term debt ............................ 1,718,859 1,741,818 MIPS ............................................... 100,000 108,520 ================================================================================ The fair values shown above have been reported to meet disclosure requirements and do not purport to represent the amounts at which those obligations would be settled. 50 Northeast Utilities 1997 Annual Report Consolidated Statements of Quarterly Financial Data - -------------------------------------------------------------------------------- (Unaudited)
- ------------------------------------------------------------------------------------------------ 1997 Quarter Ended (a) - ------------------------------------------------------------------------------------------------ (Thousands of Dollars, except per share data) March 31 June 30 September 30 December 31 - ------------------------------------------------------------------------------------------------ Operating Revenues ............................ $ 975,368 $903,323 $977,127 $978,988 ================================================================================================ Operating Income .............................. $ 86,006 $ 6,120 $ 25,448 $ 67,462 ================================================================================================ Net Income/(Loss) ............................. $ 17,505 $(64,439) $(51,745) $(37,029) ================================================================================================ Earnings/(Loss) Per Common Share .............. $ 0.14 $ (0.50) $ (0.40) $ (0.29) ================================================================================================ 1996 ================================================================================================ Operating Revenues ............................ $1,028,202 $871,904 $955,518 $936,524 ================================================================================================ Operating Income/(Loss) ....................... $ 133,261 $ 81,819 $ 68,032 $(11,540) ================================================================================================ Net Income/(Loss) ............................. $ 65,502 $ 11,666 $ 1,033 $(76,370) ================================================================================================ Earnings/(Loss) Per Common Share .............. $ 0.51 $ 0.09 $ 0.01 $ (0.60) ================================================================================================
Consolidated Generation Statistics
- ------------------------------------------------------------------------------------ 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------ Source of Electric Energy: (kWh-millions) Nuclear -- Steam (b) .............. 3,778 9,405 18,235 19,443 22,965 Fossil -- Steam ................... 13,155 9,188 9,162 8,292 7,676 Hydro -- Conventional ............. 1,260 1,544 1,099 1,239 1,140 Hydro -- Pumped Storage ........... 959 1,217 1,209 1,195 1,269 Internal Combustion ............... 184 206 37 13 8 Energy Used for Pumping ........... (1,327) (1,668) (1,674) (1,629) (1,749) - ------------------------------------------------------------------------------------ Net Generation .................... 18,009 19,892 28,068 28,553 31,309 - ------------------------------------------------------------------------------------ Purchased and Net Interchange ..... 24,377 22,111 14,256 14,028 10,499 Company Use and Unaccounted for ... (2,802) (2,473) (2,706) (2,535) (2,591) - ------------------------------------------------------------------------------------ Net Energy Sold ................... 39,584 39,530 39,618 40,046 39,217 ==================================================================================== System Capability -- MW (b)(c) .... 8,312.0 8,894.0 8,394.8 8,494.8 7,795.3 System Peak Demand -- MW .......... 6,455.5 5,946.9 6,358.2 6,338.5 6,191.0 Nuclear Capacity -- MW (b)(c) ..... 2,785.0 3,117.8 3,239.6 3,272.6 3,110.0 Nuclear Contribution to Total Energy Requirements (%) (b) ..... 13.0 28.0 52.0 54.0 62.1 Nuclear Capacity Factor (%) (d) ... 19.6 38.0 69.9 67.5 80.8 ====================================================================================
(a) Reclassifications of prior data have been made to conform with the current presentation. (b) Includes the NU system's entitlements in regional nuclear generating companies, net of capacity sales and purchases. (c) Millstone 1, 2 and 3 have been out of service since November 4, 1995, February 21, 1996, and March 30, 1996, respectively. The company has restructured its nuclear organization and is currently implementing comprehensive plans to restart the units. The actual date of the return to service for each of the units is dependent upon the completion of independent inspections and reviews by the NRC and a vote by the NRC commissioners. NU hopes to return Millstone 3 to service in early spring of 1998 and Millstone 2 three to four months after Millstone 3. Millstone 1 is currently in extended maintenance status. (d) Represents the average capacity factor for the nuclear units operated by the NU system. Northeast Utilities 1997 Annual Report 51 Selected Consolidated Financial Data - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------ (Thousands of Dollars, except percentages and per share data) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ Balance Sheet Data: Net Utility Plant (a) ................. $ 6,463,158 $ 6,732,165 $ 7,000,837 $ 7,282,421 $ 7,439,159 Total Assets .......................... 10,414,412 10,741,748 10,559,574 10,584,880 10,668,164 Total Capitalization (b) .............. 6,429,660 6,622,519 6,820,624 7,035,989 7,309,898 Obligations Under Capital Leases (b) .. 207,731 206,165 230,482 239,121 243,760 - ------------------------------------------------------------------------------------------------------------------ Income Data: Operating Revenues .................... $ 3,834,806 $ 3,792,148 $ 3,750,560 $ 3,642,742 $ 3,629,093 Net (Loss)/Income ..................... (135,708) 1,831 282,434 286,874 249,953(c) - ------------------------------------------------------------------------------------------------------------------ Common Share Data: (Loss)/Earnings per Share ............. $(1.05) $0.01 $2.24 $2.30 $2.02(c) Dividends per Share (d) ............... $0.25 $1.38 $1.76 $1.76 $1.76 Number of Shares Outstanding -- Average .............. 129,567,708 127,960,382 126,083,645 124,678,192 123,947,631 Market Price -- High .................. $14 1/4 $25 1/4 $25 3/8 $25 3/4 $28 7/8 Market Price -- Low ................... $7 5/8 $9 1/2 $21 $20 3/8 $22 Market Price -- Closing (end of year).. $11 13/16 $13 1/8 $24 1/4 $21 5/8 $23 3/4 Book Value per Share (end of year) .... $16.34 $17.73 $19.08 $18.47 $17.89 Rate of Return Earned on Average Common Equity (%) ................... (6.2) 0.1 12.0 12.7 11.4 Market-to-Book Ratio (end of year) .... 0.7 0.8 1.3 1.2 1.3 - ------------------------------------------------------------------------------------------------------------------ Capitalization: Common Shareholders' Equity ........... 33% 34% 36% 33% 30% Preferred Stock (b)(e) ................ 6 7 7 9 9 Long-Term Debt (b) .................... 61 59 57 58 61 - ------------------------------------------------------------------------------------------------------------------ Total Capitalization .................. 100% 100% 100% 100% 100% ==================================================================================================================
(a) Includes the reclassification of the unamortized PSNH acquisition costs to net utility plant. (b) Includes portions due within one year. (c) Includes the cumulative effect of change in accounting for municipal property tax expense, which increased earnings for common shares and earnings per common share by $51.7 million and $0.42, respectively. (d) Quarterly dividends were suspended effective March 25, 1997. (e) Excludes $100 million of Monthly Income Preferred Securities. 52 Northeast Utilities 1997 Annual Report Consolidated Sales Statistics - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 (a) 1993 - --------------------------------------------------------------------------------------------------------------------------- Revenues: (thousands) Residential ....................... $1,499,394 $1,501,465 $1,469,988 $1,430,239 $1,385,818 Commercial ........................ 1,266,449 1,246,822 1,230,608 1,173,808(b) 1,043,125 Industrial ........................ 560,782 565,900 583,204 559,801(b) 649,876 Other Utilities ................... 329,764 315,577 303,004 330,801 383,129 Streetlighting and Railroads ...... 48,867 48,053 47,510 45,943 45,480 Non-Franchised Sales .............. 21,476 8,360 -- -- -- Miscellaneous ..................... 47,446 23,513 50,353 44,140 60,008 - --------------------------------------------------------------------------------------------------------------------------- Total Electric .................. 3,774,178 3,709,690 3,684,667 3,584,732 3,567,436 Other ............................. 60,628 82,458 65,893 58,010 61,657 - --------------------------------------------------------------------------------------------------------------------------- Total ........................... $3,834,806 $3,792,148 $3,750,560 $3,642,742 $3,629,093 =========================================================================================================================== Sales: (kWh - millions) Residential ....................... 12,099 12,241 12,005 12,231 11,988 Commercial ........................ 12,091 12,012 11,737 11,649(b) 10,304 Industrial ........................ 6,801 6,820 6,842 6,729(b) 7,572 Other Utilities ................... 8,034 8,032 8,718 9,123 9,046 Streetlighting and Railroads ...... 318 319 316 314 307 Non-Franchised Sales .............. 241 50 -- -- -- - --------------------------------------------------------------------------------------------------------------------------- Total ........................... 39,584 39,474 39,618 40,046 39,217 =========================================================================================================================== Customers: (average) Residential ....................... 1,535,134 1,532,015 1,526,127 1,513,987 1,503,182 Commercial ........................ 159,350 157,347 156,652 154,703(b) 155,487 Industrial ........................ 7,804 7,792 7,861 7,813(b) 6,272 Other ............................. 3,929 3,916 3,878 3,818 3,793 - --------------------------------------------------------------------------------------------------------------------------- Total ........................... 1,706,217 1,701,070 1,694,518 1,680,321 1,668,734 =========================================================================================================================== Average Annual Use per Residential Customer (kWh) .. 7,898 8,005 7,880(c) 8,152 7,987 =========================================================================================================================== Average Annual Bill per Residential Customer ........ $ 978.72 $ 980.19 $ 964.88(c) $ 953.23 $ 923.32 =========================================================================================================================== Average Revenue per kWh: Residential ....................... 12.39(cents) 12.27(cents) 12.24(cents) 11.69(cents) 11.56(cents) Commercial ........................ 10.47 10.38 10.49 10.08 10.12 Industrial ........................ 8.25 8.30 8.52 8.32 8.58 ===========================================================================================================================
(a) Effective January 1, 1994, the accounting for unbilled revenues was revised to report unbilled revenues by customer class. (b) Effective January 1, 1994, approximately 1,300 customers previously classified as commercial customers were reclassified to industrial customers. (c) Effective January 1, 1996, the amounts shown reflect billed and unbilled sales. 1995 has been restated to reflect this change. Northeast Utilities 1997 Annual Report 53 Northeast Utilities System Officers* - -------------------------------------------------------------------------------- As of February 24, 1998 Chairman, President and Chief Executive Officer Michael G. Morris Group Presidents Bruce D. Kenyon Nuclear Group Hugh C. MacKenzie Retail Business Group Executive Vice Presidents Ted C. Feigenbaum Nuclear Group John H. Forsgren Chief Financial Officer Senior Vice Presidents Cheryl W. Grise Chief Administrative Officer Robert P. Wax Secretary and General Counsel Vice Presidents David B. Amerine Nuclear Engineering and Support David H. Boguslawski Energy Delivery Michael H. Brothers Nuclear Operations Gregory B. Butler Governmental Affairs Ronald G. Chevalier Fossil/Hydro Engineering and Operations David M. Goebel+ Nuclear Oversight Barry Ilberman Human Resources and General Services John B. Keane Treasurer Mary Jo Keating Corporate Communications Keith R. Marvin Chief Information Officer John T. Muro Retail Marketing John W. Noyes Business Strategy John J. Roman Controller Frank C. Rothen Nuclear Work Services Frank P. Sabatino Wholesale Marketing Lisa J. Thibdaue Rates, Regulatory Affairs and Compliance Dennis E. Welch Environmental, Safety and Ethics Roger C. Zaklukiewicz Transmission and Distribution Other Officer Bruce L. Drawbridge Director of Services -- NAESCO Electric Operating Company Officers William T. Frain, Jr. President and Chief Operating Officer -- PSNH Robert G. Abair Vice President and Chief Administrative Officer -- WMECO Robert J. Kost Vice President-Western Region -- CL&P Kerry J. Kuhlman Vice President-Central Region -- CL&P Gary A. Long Vice President-Customer Service and Economic Development -- PSNH Paul E. Ramsey Vice President-Customer Operations -- PSNH Richard L. Tower Vice President-Eastern Region -- CL&P Assistant Controllers Deborah L. Canyock Management Information and Budgeting Services Lori A. Mahler Accounting Services Michael J. Mahoney Rate Regulation Assistant Treasurers Robert C. Aronson Treasury Operations David R. McHale Finance Assistant Secretaries and Clerks Theresa Hopkins Allsop Robert A. Bersak -- PSNH O. Kay Comendul Thomas V. Foley, Clerk -- HWP Patricia A. Wood, Clerk -- WMECO Margaret L. Morton HEC Inc., Officers Thomas W. Philbin President H. Donald Burbank Vice President -- Customer Service David S. Dayton Vice President Linda A. Jensen Vice President -- Finance, Treasurer and Clerk James B. Redden Vice President -- Operations * All officers shown are for Northeast Utilities Service Company, unless otherwise indicated. + Mr. Goebel resigned from the company effective March 12, 1998. 54 Northeast Utilities 1997 Annual Report Northeast Utilities Officers and Trustees - -------------------------------------------------------------------------------- As of February 24, 1998 Officers Michael G. Morris Chairman of the Board, President and Chief Executive Officer Bruce D. Kenyon President -- Nuclear Group Hugh C. MacKenzie President -- Retail Business Group John H. Forsgren Executive Vice President and Chief Financial Officer Robert P. Wax Senior Vice President Secretary and General Counsel John B. Keane Vice President and Treasurer John J. Roman Vice President and Controller Theresa Hopkins Allsop Assistant Secretary O. Kay Comendul Assistant Secretary Robert C. Aronson Assistant Treasurer -- Treasury Operations David R. McHale Assistant Treasurer -- Finance Trustees Cotton Mather Cleveland (B, C, D, G) President Mather Associates (a firm specializing in human resources and organizational development) William F. Conway (A,G) President William F. Conway & Associates, Inc. (a managing consulting firm to the nuclear power industry) John F. Curley (B, F) Private Investor E. Gail de Planque (A, E, G) Former Commissioner United States Nuclear Regulatory Commission Elizabeth T. Kennan (A, B, D, E, F) President Emeritus Mount Holyoke College Michael G. Morris (E, F) Chairman of the Board, President and Chief Executive Officer Northeast Utilities William J. Pape II (B, C, G) Publisher Waterbury Republican-American (newspaper) Robert E. Patricelli (B, F) Chairman, President and Chief Executive Officer Women's Health USA, Inc. (provides women's health care services) John F. Swope (A, C, E) Attorney John F. Turner (A, C, D, G) President and Chief Executive Officer The Conservation Fund (a national nonprofit organization dedicated to land and water conservation and economic development) A - Audit Committee B - Compensation Committee C - Corporate Affairs Committee D - Corporate Governance Committee E - Executive Committee F - Finance Committee G - Nuclear Committee Northeast Utilities 1997 Annual Report 55 Shareholder Information - -------------------------------------------------------------------------------- Shareholders As of January 31, 1998, there were 98,923 common shareholders of record of Northeast Utilities holding an aggregate of 136,849,710 common shares. Common Share Information The common shares of Northeast Utilities are listed on the New York Stock Exchange. The ticker symbol is "NU," although it is frequently presented as "Noeast Util" and/or "NE Util," in various financial publications. The high and low sales prices and dividends paid for the past two years, by quarters, are shown in the chart below. Quarterly Dividend Year Quarter High Low Per Share - ----------------------------------------------------------- 1997 First $14 1/4 $7 5/8 $0.25 Second 9 7/8 7 3/4 0.00 Third 10 3/16 9 0.00 Fourth 13 15/16 9 1/2 0.00 1996 First $25 1/4 $19 $0.44 Second 20 1/4 11 7/8 0.44 Third 13 3/8 11 1/2 0.25 Fourth 13 1/2 9 1/2 0.25 Dividend Reinvestment Plan The company has a Dividend Reinvestment Plan under which common shareholders may purchase additional common shares. Northeast Utilities Service Company, Shareholder Services, P.O. Box 5006, Hartford, Connecticut 06102-5006, is the company's dividend-paying agent and administers its Dividend Reinvestment Plan. Transfer Agents and Registrars Northeast Utilities Service Company Shareholder Services P.O. Box 5006 Hartford, Connecticut 06102-5006 State Street Bank and Trust Company Corporate Stock Transfer Department P.O. Box 8200 Boston, Massachusetts 02266-8200 Annual Meeting The Annual Meeting of Shareholders of Northeast Utilities will be held at 10:30 a.m. on May 12, 1998, at the Wayfarer Inn, Bedford, New Hampshire. Form 10-K Northeast Utilities will provide shareholders a copy of its 1997 Annual Report to the Securities and Exchange Commission on Form 10-K, including the financial statements and schedules thereto, without charge, upon receipt of a written request sent to: Theresa Hopkins Allsop Assistant Secretary Northeast Utilities P.O. Box 270 Hartford, Connecticut 06141-0270 - -------------------------------------------------------------------------------- Northeast Utilities is the parent company of the NU system (collectively referred to as NU). NU is among the 25 largest electric utility systems in the country and the largest in New England, with about 9,015 employees serving approximately 1.7 million customers in Connecticut, New Hampshire and western Massachusetts. Current NU subsidiaries are listed below: Electric Operating Subsidiaries The Connecticut Light and Power Company Holyoke Water Power Company Public Service Company of New Hampshire Western Massachusetts Electric Company North Atlantic Energy Corporation Nonutility Subsidiaries Charter Oak Energy, Inc. (independent power production) HEC Inc. (energy management) Mode 1 Communications, Inc. (telecommunications) Select Energy, Inc. (diversification activities) Support Subsidiaries North Atlantic Energy Service Corporation (Seabrook nuclear operations) Northeast Nuclear Energy Company (Millstone nuclear operations) Northeast Utilities Service Company (systemwide service) Realty Subsidiaries The Quinnehtuk Company The Rocky River Realty Company - -------------------------------------------------------------------------------- 56 Northeast Utilities 1997 Annual Report EX-13.2 27 ANNUAL REPORT FOR CLP 1997 Annual Report The Connecticut Light and Power Company and Subsidiaries Index Contents Page Consolidated Balance Sheets....................................... 2-3 Consolidated Statements of Income................................. 4 Consolidated Statements of Cash Flows............................. 5 Consolidated Statements of Common Stockholder's Equity............ 6 Notes to Consolidated Financial Statements........................ 7 Report of Independent Public Accountants.......................... 41 Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 42 Selected Financial Data........................................... 54 Statements of Quarterly Financial Data............................ 54 Statistics........................................................ 55 Preferred Stockholder and Bondholder Information.................. Back Cover PART I. FINANCIAL INFORMATION THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------- At December 31, 1997 1996 - ----------------------------------------------------------------------------------------- (Thousands of Dollars) ASSETS - ------ Utility Plant, at original cost: Electric (Note 1H)....................................... $ 6,411,018 $ 6,283,736 Less: Accumulated provision for depreciation.......... 2,902,673 2,665,519 ------------- ------------- 3,508,345 3,618,217 Construction work in progress............................ 93,692 95,873 Nuclear fuel, net........................................ 135,076 133,050 ------------- ------------- Total net utility plant.............................. 3,737,113 3,847,140 ------------- ------------- Other Property and Investments: Nuclear decommissioning trusts, at market................ 369,162 296,960 Investments in regional nuclear generating companies, at equity.................................... 58,061 56,925 Other, at cost........................................... 66,625 16,565 ------------- ------------- 493,848 370,450 ------------- ------------- Current Assets: Cash..................................................... 459 404 Notes receivable from affiliated companies............... - 109,050 Investments in securitizable assets (Note 10)............ 205,625 - Receivables, less accumulated provision for uncollectible accounts of $300,000 in 1997 and of $13,240,000 in 1996 (Note 10)................... 50,671 226,112 Accounts receivable from affiliated companies............ 3,150 3,481 Taxes receivable......................................... 70,311 40,134 Accrued utility revenues (Note 10)....................... - 78,451 Fuel, materials and supplies, at average cost............ 81,878 79,937 Recoverable energy costs, net--current portion........... 28,073 25,436 Prepayments and other.................................... 79,632 63,344 ------------- ------------- 519,799 626,349 ------------- ------------- Deferred Charges: Regulatory assets (Note 1H).............................. 1,292,818 1,370,781 Unamortized debt expense................................. 19,286 17,033 Other.................................................... 18,359 12,283 ------------- ------------- 1,330,463 1,400,097 ------------- ------------- Total Assets......................................... $ 6,081,223 $ 6,244,036 ============= =============
The accompanying notes are an integral part of these financial statements. THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------- At December 31, 1997 1996 - ---------------------------------------------------------------------------------------- (Thousands of Dollars) CAPITALIZATION AND LIABILITIES - ------------------------------ Capitalization: Common stock--$10 par value. Authorized 24,500,000 shares; outstanding 12,222,930 shares in 1997 and 1996................................ $ 122,229 $ 122,229 Capital surplus, paid in................................ 641,333 639,657 Retained earnings....................................... 385,823 551,410 ------------- ------------- Total common stockholder's equity.............. 1,149,385 1,313,296 Cumulative preferred stock-- $50 par value - authorized 9,000,000 shares; outstanding 5,424,000 shares in 1997 and 1996; $25 par value - authorized 8,000,000 shares; outstanding no shares in 1997 and 1996 Not subject to mandatory redemption.................... 116,200 116,200 Subject to mandatory redemption........................ 151,250 155,000 Long-term debt.......................................... 2,023,316 1,834,405 ------------- ------------- Total capitalization........................... 3,440,151 3,418,901 ------------- ------------- Minority Interest in Consolidated Subsidiary (Note 13).... 100,000 100,000 ------------- ------------- Obligations Under Capital Leases (Note 2)................. 18,042 143,347 ------------- ------------- Current Liabilities: Notes payable to banks.................................. 35,000 - Notes payable to affiliated company..................... 61,300 - Long-term debt and preferred stock--current portion................................................ 23,761 204,116 Obligations under capital leases--current portion................................................ 140,076 12,361 Accounts payable........................................ 124,427 160,945 Accounts payable to affiliated companies................ 92,963 78,481 Accrued taxes........................................... 33,017 28,707 Accrued interest........................................ 14,650 31,513 Nuclear compliance (Note 11B)........................... 58,700 50,500 Other................................................... 23,495 34,433 ------------- ------------- 607,389 601,056 ------------- ------------- Deferred Credits: Accumulated deferred income taxes....................... 1,324,066 1,365,641 Accumulated deferred investment tax credits............. 127,713 135,080 Deferred contractual obligations (Note 3)............... 348,406 305,627 Other................................................... 115,456 174,384 ------------- ------------- 1,915,641 1,980,732 ------------- ------------- Commitments and Contingencies (Note 11) Total Capitalization and Liabilities........... $ 6,081,223 $ 6,244,036 ============= =============
The accompanying notes are an integral part of these financial statements. THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
- ----------------------------------------------------------------------------------------- For the Years Ended December 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------- (Thousands of Dollars) Operating Revenues................................... $2,465,587 $2,397,460 $2,387,069 ----------- ----------- ----------- Operating Expenses: Operation -- Fuel, purchased and net interchange power....... 977,543 831,079 608,600 Other........................................... 734,620 778,174 614,382 Maintenance........................................ 355,772 300,005 192,607 Depreciation....................................... 238,667 247,109 242,496 Amortization of regulatory assets, net............. 61,648 57,432 54,217 Federal and state income taxes (Note 8)............ (62,856) (20,174) 178,346 Taxes other than income taxes...................... 172,592 174,062 172,395 ----------- ----------- ----------- Total operating expenses..................... 2,477,986 2,367,687 2,063,043 ----------- ----------- ----------- Operating (Loss)/Income.............................. (12,399) 29,773 324,026 ----------- ----------- ----------- Other Income: Equity in earnings of regional nuclear generating companies............................. 5,672 6,619 6,545 Other, net......................................... (1,856) 20,710 14,585 Minority interest in income of subsidiary (Note 13) (9,300) (9,300) (8,732) Income taxes....................................... 7,573 160 (2,978) ----------- ----------- ----------- Other income, net............................ 2,089 18,189 9,420 ----------- ----------- ----------- (Loss)/Income before interest charges........ (10,310) 47,962 333,446 ----------- ----------- ----------- Interest Charges: Interest on long-term debt......................... 132,127 127,198 124,350 Other interest..................................... 1,940 1,001 3,880 ----------- ----------- ----------- Interest charges, net........................ 134,067 128,199 128,230 ----------- ----------- ----------- Net (Loss)/Income.................................... $ (144,377) $ (80,237) $ 205,216 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------- For the Years Ended December 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------------- (Thousands of Dollars) Operating Activities: Net(Loss)/Income............................................ $(144,377) $ (80,237) $ 205,216 Adjustments to reconcile to net cash from operating activities: Depreciation.............................................. 238,667 247,109 242,496 Deferred income taxes and investment tax credits, net..... (13,821) (60,773) 49,520 Deferred nuclear plants return, net of amortization....... (281) 7,746 95,559 Amortization of deferred demand-side-management costs, net 38,029 26,941 (937) Recoverable energy costs, net of amortization............. (9,533) (35,567) (16,169) Amortization of deferred cogeneration costs, net.......... 32,700 25,957 (55,341) Deferred nuclear refueling outage, net of amortization ... (45,333) 45,643 (20,712) Other sources of cash..................................... 64,013 75,552 86,956 Other uses of cash........................................ (50,136) (23,862) (53,745) Changes in working capital: Receivables and accrued utility revenues.................. 184,223 (22,378) (33,032) Fuel, materials and supplies.............................. (1,941) (11,455) (4,479) Accounts payable.......................................... (22,036) 83,951 9,605 Accrued taxes............................................. 4,310 (23,561) 25,855 Sale of receivables and accrued utility revenues (Note 10) 70,000 - - Investment in securitizable assets (Note 10)............. (205,625) - - Nuclear compliance, net (Note 11B)........................ 8,200 50,500 - Other working capital (excludes cash)..................... (74,266) (5,385) (1,869) ---------- ---------- ---------- Net cash flows from operating activities...................... 72,793 300,181 528,923 ---------- ---------- ---------- Financing Activities: Issuance of long-term debt.................................. 200,000 222,000 - Issuance of Monthly Income Preferred Securities....................................... - - 100,000 Net increase/(decrease) in short-term debt.................. 96,300 (51,750) (127,000) Reacquisitions and retirements of long-term debt............ (204,116) (14,329) (10,866) Reacquisitions and retirements of preferred stock........... - - (125,000) Cash dividends on preferred stock........................... (15,221) (15,221) (21,185) Cash dividends on common stock.............................. (5,989) (138,608) (164,154) ---------- ---------- ---------- Net cash flows from/(used for) financing activities........... 70,974 2,092 (348,205) ---------- ---------- ---------- Investment Activities: Investment in plant: Electric utility plant.................................... (155,550) (140,086) (131,858) Nuclear fuel.............................................. (702) 553 (1,543) ---------- ---------- ---------- Net cash flows used for investments in plant................ (156,252) (139,533) (133,401) Investment in NU system money pool.......................... 109,050 (109,050) - Investment in nuclear decommissioning trusts................ (45,314) (50,998) (47,826) Other investment activities, net............................ (51,196) (2,625) 581 ---------- ---------- ---------- Net cash flows used for investments........................... (143,712) (302,206) (180,646) ---------- ---------- ---------- Net Increase In Cash For The Period........................... 55 67 72 Cash - beginning of period.................................... 404 337 265 ---------- ---------- ---------- Cash - end of period.......................................... $ 459 $ 404 $ 337 ========== ========== ========== Supplemental Cash Flow Information: Cash paid/(refunded) during the year for: Interest, net of amounts capitalized........................ $ 145,962 $ 114,458 $ 117,074 ========== ========== ========== Income taxes................................................ $ (22,338) $ 77,790 $ 137,706 ========== ========== ========== Increase in obligations: Niantic Bay Fuel Trust and other capital leases............. $ 2,815 $ 2,855 $ 33,537 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
- ------------------------------------------------------------------------------------ Capital Retained Common Surplus, Earnings Stock Paid In (a) Total - ------------------------------------------------------------------------------------ (Thousands of Dollars) Balance at January 1, 1995.......... $122,229 $632,117 $ 765,724 $1,520,070 Net income for 1995............. 205,216 205,216 Cash dividends on preferred stock......................... (21,185) (21,185) Cash dividends on common stock.. (164,154) (164,154) Loss on the retirement of preferred stock............... (125) (125) Capital stock expenses, net..... 5,864 5,864 --------- --------- ---------- ----------- Balance at December 31, 1995........ 122,229 637,981 785,476 1,545,686 Net loss for 1996............... (80,237) (80,237) Cash dividends on preferred stock......................... (15,221) (15,221) Cash dividends on common stock.. (138,608) (138,608) Capital stock expenses, net..... 1,676 1,676 --------- --------- ---------- ----------- Balance at December 31, 1996........ 122,229 639,657 551,410 1,313,296 Net loss for 1997............... (144,377) (144,377) Cash dividends on preferred stock......................... (15,221) (15,221) Cash dividends on common stock.. (5,989) (5,989) Capital stock expenses, net..... 1,676 1,676 --------- --------- ---------- ----------- Balance at December 31, 1997........ $122,229 $641,333 $ 385,823 $1,149,385 ========= ========= ========== ===========
(a) The company has dividend restrictions imposed by its long-term debt agreements. At December 31, 1997, these restrictions totaled approximately $540 million. The accompanying notes are an integral part of these financial statements. The Connecticut Light and Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STAATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. ABOUT THE CONNECTICUT LIGHT AND POWER COMPANY The Connecticut Light and Power Company and subsidiaries (the company or CL&P), Western Massachusetts Electric Company (WMECO), Holyoke Water Power Company (HWP), Public Service Company of New Hampshire (PSNH) and North Atlantic Energy Corporation (NAEC) are the operating subsidiaries comprising the Northeast Utilities system (the NU system) and are wholly owned by Northeast Utilities (NU). The NU system furnishes franchised retail electric service in Connecticut, New Hampshire and western Massachusetts through CL&P, PSNH, WMECO and HWP. A fifth wholly owned subsidiary, NAEC, sells all of its entitlement to the capacity and output of the Seabrook nuclear power plant (Seabrook) to PSNH. In addition to its franchised retail service, the NU system furnishes firm and other wholesale electric services to various municipalities and other utilities, and participates in limited retail access programs, providing off-system retail electric service. The NU system serves about 30 percent of New England's electric needs and is one of the 25 largest electric utility systems in the country as measured by revenues. Other wholly owned subsidiaries of NU provide support services for the NU system companies and, in some cases, for other New England utilities. Northeast Utilities Service Company (NUSCO) provides centralized accounting, administrative, information resources, engineering, financial, legal, operational, planning, purchasing and other services to the NU system companies. Northeast Nuclear Energy Company (NNECO) acts as agent for the NU system companies and other New England utilities in operating the Millstone nuclear generating facilities. North Atlantic Energy Service Corporation (NAESCO) acts as agent for CL&P and NAEC and has operational responsibilities for Seabrook. In addition, CL&P and WMECO each have established a special purpose subsidiary whose business consists of the purchase and resale of receivables. B. PRESENTATION The consolidated financial statements of CL&P include the accounts of all wholly owned subsidiaries. Significant intercompany transactions have been eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications of prior years' data have been made to conform with the current year's presentation. All transactions among affiliated companies are on a recovery of cost basis which may include amounts representing a return on equity and are subject to approval by various federal and state regulatory agencies. For more information on significant subsidiaries of CL&P, see Note 10, "Sale of Customer Receivables and Accrued Utility Revenues," and Note 13, "Minority Interest in Consolidated Subsidiary." C. PUBLIC UTILITY REGULATION NU is registered with the Securities and Exchange Commission (SEC) as a holding company under the Public Utility Holding Company Act of 1935 (1935 Act). NU and its subsidiaries, including CL&P, are subject to the provisions of the 1935 Act. Arrangements among the NU system companies, outside agencies and other utilities covering interconnections, interchange of electric power and sales of utility property are subject to regulation by the Federal Energy Regulatory Commission (FERC) and/or the SEC. CL&P is subject to further regulation for rates, accounting and other matters by the FERC and/or applicable state regulatory commissions. For information regarding proposed changes in the nature of industry regulation, see Note 1H, "Summary of Significant Accounting Policies - Regulatory Accounting and Assets," and Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A). D. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS), SFAS 129, "Disclosure of Information about Capital Structure," in February 1997. SFAS 129 establishes standards for disclosing information about an entity's capital structure. CL&P's current disclosures are consistent with the requirements of SFAS 129. During June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income" and SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 130 establishes standards for the reporting and disclosure of comprehensive income. To date, CL&P has not had material transactions that would be required to be reported as comprehensive income. SFAS 131 determines the standards for reporting and disclosing qualitative and quantitative information about a company's operating segments. This information includes segment profit or loss, certain segment revenue and expense items and segment assets and a reconciliation of these segment disclosures to corresponding amounts in the company's general purpose financial statements. CL&P currently evaluates management performance using a cost-based budget and the information required by SFAS 131 is not available. Therefore, these disclosure requirements are not applicable. Management believes that the implementation of SFAS 130 and SFAS 131 will not have a material impact on CL&P's current disclosures. See Note 10, "Sale of Customer Receivables and Accrued Utility Revenues," and Note 11C, "Commitments and Contingencies - Environmental Matters," for information on other newly adopted accounting and reporting standards related to those specific areas. E. INVESTMENTS AND JOINTLY OWNED ELECTRIC UTILITY PLANT Regional Nuclear Generating Companies: CL&P owns common stock of four regional nuclear generating companies (Yankee companies). The Yankee companies, with CL&P's ownership interests are: Connecticut Yankee Atomic Power Company(CYAPC) ................. 34.5% Yankee Atomic Electric Company (YAEC) .......................... 24.5 Maine Yankee Atomic Power Company (MYAPC) ...................... 12.0 Vermont Yankee Nuclear Power Corporation (VYNPC) ............... 9.5 CL&P's investments in the Yankee companies are accounted for on the equity basis due to the company's ability to exercise significant influence over their operating and financial policies. CL&P's investments in the Yankee companies at December 31, 1997 are: (Thousands of Dollars) CYAPC ............................................. $38,358 YAEC .............................................. 5,128 MYAPC ............................................. 9,449 VYNPC ............................................. 5,126 $58,061 Each Yankee company owns a single nuclear generating unit. Under the terms of the contracts with the Yankee companies, the shareholders- sponsors are responsible for their proportionate share of the costs of each unit, including decommissioning. The energy and capacity costs from VYNPC and nuclear decommissioning costs of the Yankee companies that have been shut down are billed as purchased power to CL&P. The electricity produced by the Vermont Yankee nuclear generating facility (VY) is committed substantially on the basis of ownership interests and is billed pursuant to contractual agreements. YAEC's, CYAPC's and MYAPC's nuclear power plants were shut down permanently on February 26, 1992, December 4, 1996, and August 6, 1997, respectively. Under ownership agreements with the Yankee companies, CL&P may be asked to provide direct or indirect financial support for one or more of the companies. For more information on the Yankee companies, see Note 3, "Nuclear Decommissioning," and Note 11F, "Commitments and Contingencies - Long-Term Contractual Arrangements." Millstone 1: CL&P has an 81.0 percent joint ownership interest in Millstone 1, a 660-megawatt (MW) nuclear generating unit. As of December 31, 1997 and 1996, plant-in-service included approximately $387.7 million and $384.5 million, respectively, and the accumulated provision for depreciation included approximately $172.0 million and $159.4 million, respectively, for CL&P's share of Millstone 1. CL&P's share of Millstone 1 expenses is included in the corresponding operating expenses on the accompanying Consolidated Statements of Income. Millstone 2: CL&P has an 81.0 percent joint ownership interest in Millstone 2, an 870-MW nuclear generating unit. As of December 31, 1997 and 1996, plant-in-service included approximately $694.7 million and $690.4 million, respectively, and the accumulated provision for depreciation included approximately $249.1 million and $224.1 million, respectively, for CL&P's share of Millstone 2. CL&P's share of Millstone 2 expenses is included in the corresponding operating expenses on the accompanying Consolidated Statements of Income. Millstone 3: CL&P has a 52.93 percent joint ownership interest in Millstone 3, a 1,154-MW nuclear generating unit. As of December 31, 1997 and 1996, plant-in-service included approximately $1.9 billion each year and the accumulated provision for depreciation included approximately $552.7 million and $504.1 million, respectively, for CL&P's share of Millstone 3. CL&P's share of Millstone 3 expenses is included in the corresponding operating expenses on the accompanying Consolidated Statements of Income. The three Millstone units are out of service. NU hopes to return Millstone 3 to service in the early spring of 1998 and Millstone 2 three to four months after Millstone 3. Millstone 1 has been placed in extended maintenance status. Management is reviewing its options with respect to Millstone 1, including restart, early retirement and other options. In a draft ruling issued in February 1998, the Connecticut Department of Public Utility Control (DPUC) determined that Millstone 1 was no longer "used and useful" and ordered it removed from rate base. In 1996, one of the joint owners of Millstone 3, Vermont Electric Generation and Transmission Cooperative, Inc. (VEG&T), filed for bankruptcy. The subsequent liquidation resulted in the offering of VEG&T's 0.035 percent share of Millstone 3 for sale to the joint owners of Millstone 3. None of the non-NU joint owners accepted the offer. During 1998, CL&P expects to make the necessary regulatory filings to acquire ownership of VEG&T's share of Millstone 3. For more information regarding the DPUC's action, see the MD&A. For more information regarding the Millstone units see Note 3, "Nuclear Decommissioning," and Note 11B, "Commitments and Contingencies - Nuclear Performance." Seabrook 1: CL&P has a 4.06 percent joint ownership interest in Seabrook 1, a 1,148-MW nuclear generating unit. As of December 31, 1997 and 1996, plant-in-service included approximately $174.3 million and $173.7 million, respectively, and the accumulated provision for depreciation included approximately $33.9 million and $29.7 million, respectively, for CL&P's share of Seabrook 1. CL&P's share of Seabrook 1 expenses is included in the corresponding operating expenses on the accompanying Consolidated Statements of Income. F. DEPRECIATION The provision for depreciation is calculated using the straight-line method based on estimated remaining lives of depreciable utility plant- in-service, adjusted for salvage value and removal costs, as approved by the appropriate regulatory agency. Except for major facilities, depreciation rates are applied to the average plant-in-service during the period. Major facilities are depreciated from the time they are placed in service. When plant is retired from service, the original cost of plant, including costs of removal, less salvage, is charged to the accumulated provision for depreciation. The depreciation rates for the several classes of electric plant-in-service are equivalent to a composite rate of 3.8 percent in 1997 and 4.0 percent in 1996 and 1995. See Note 3, "Nuclear Decommissioning," for information on nuclear decommissioning. CL&P's nonnuclear generating facilities have limited service lives. Plant may be retired in place or dismantled based upon expected future needs, the economics of the closure and environmental concerns. The costs of closure and removal are incremental costs and, for financial reporting purposes, are accrued over the life of the asset as part of depreciation. At December 31, 1997 and 1996, the accumulated provision for depreciation included approximately $45.8 million and $43.0 million, respectively, accrued for the cost of removal, net of salvage for nonnuclear generation property. G. REVENUES Other than revenues under fixed-rate agreements negotiated with certain wholesale, commercial and industrial customers and limited retail access programs, utility revenues are based on authorized rates applied to each customer's use of electricity. In general, rates can be changed only through a formal proceeding before the appropriate regulatory commission. Regulatory commissions also have authority over the terms and conditions of nontraditional rate making arrangements. At the end of each accounting period, CL&P accrues an estimate for the amount of energy delivered but unbilled. For information on rate proceedings and their potential impact on CL&P, see the MD&A. H. REGULATORY ACCOUNTING AND ASSETS The accounting policies of CL&P and the accompanying consolidated financial statements conform to generally accepted accounting principles applicable to rate-regulated enterprises and reflect the effects of the ratemaking process in accordance with SFAS 71, "Accounting for the Effects of Certain Types of Regulation." Assuming a cost-of-service based regulatory structure, regulators may permit incurred costs, normally treated as expenses, to be deferred and recovered through future revenues. Through their actions, regulators also may reduce or eliminate the value of an asset, or create a liability. If any portion of CL&P's operations were no longer subject to the provisions of SFAS 71, as a result of a change in the cost-of-service based regulatory structure or the effects of competition, CL&P would be required to write off all of its related regulatory assets and liabilities unless there is a formal transition plan which provides for the recovery, through established rates, for the collection of approved stranded costs and to maintain the cost-of-service basis for the remaining regulated operations. At the time of transition, CL&P would be required to determine any impairment of the carrying costs of deregulated plant and inventory assets. Management anticipates that a restructuring program will be implemented within Connecticut during the next few years. In a restructured environment, CL&P's generation business no longer will be rate regulated on a cost-of-service basis. The majority of CL&P's regulatory assets are related to its generation business. The staff of the SEC has had concerns regarding the appropriateness of the utilities' ability to continue application of SFAS 71 for the generation portion of their business in a restructured environment. The SEC referred the issue to the Emerging Issues Task Force (EITF) of the FASB which reached a consensus and issued "Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71 and 101," (EITF 97-4). The EITF concluded: (1) the future recognition of regulatory assets for the portion of the business that no longer qualifies for application of SFAS 71 depends on the regulators' treatment of the recovery of those costs and other stranded assets from cash flows of other portions of the business still considered to be regulated, and (2) a utility should discontinue the application of SFAS 71 when a legislative and regulatory plan has been enacted, which would include transition plans into a competitive environment, and when the stranded costs which are subject to future rate recovery are determined. EITF 97-4 became effective in August 1997. The Connecticut General Assembly is addressing a proposal for electric industry restructuring in the state of Connecticut during 1998. As the terms and conditions to be contained within the restructuring plan cannot be determined at this time, management believes that its use of regulatory accounting remains appropriate. CL&P expects that its transmission and distribution business will continue to be rate-regulated on a cost-of-service basis and, accordingly, CL&P will continue to apply SFAS 71 to this portion of its business. For further information on CL&P's regulatory environment and the potential impacts of restructuring, see Note 11A, "Commitments and Contingencies - Restructuring and Rate Matters" and the MD&A. SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," requires the evaluation of long- lived assets, including regulatory assets, for impairment when certain events occur or when conditions exist that indicate the carrying amounts of assets may not be recoverable. SFAS 121 requires that any long-lived assets which are no longer probable of recovery through future revenues be revalued based on estimated future cash flows. If this revaluation is less than the book value of the asset, an impairment loss would be charged to earnings. Management continues to believe that it is probable that CL&P will recover its investments in long-lived assets through future revenues. This conclusion may change in the future as the implementation of restructuring plans in the state of Connecticut will generally require the formation of a separate generation entity that will be subject to competitive market conditions. As a result, CL&P will be required to assess the carrying amounts of its long-lived assets in accordance with SFAS 121. The components of CL&P's regulatory assets are as follows: At December 31, 1997 1996 (Thousands of Dollars) Income taxes, net (Note 1I) ................ $709,896 $ 753,390 Recoverable energy costs, net (Note 1J) ............................ 104,796 97,900 Deferred demand-side management costs (Note 1K) .......................... 52,100 90,129 Cogeneration costs (Note 1L) ............... 33,505 66,205 Unrecovered contractual obligations (Note 3) ..................... 338,406 300,627 Other ...................................... 54,115 62,530 $1,292,818 $1,370,781 I. INCOME TAXES The tax effect of temporary differences (differences between the periods in which transactions affect income in the financial statements and the periods in which they affect the determination of taxable income) is accounted for in accordance with the ratemaking treatment of the applicable regulatory commissions. See Note 8, "Income Tax Expense" for the components of income tax expense. The tax effect of temporary differences, including timing differences accrued under previously approved accounting standards, which give rise to the accumulated deferred tax obligation is as follows: At December 31, 1997 1996 (Thousands of Dollars) Accelerated depreciation and other plant-related differences ................ $1,056,690 $1,032,857 Regulatory assets - income tax gross up ................................. 304,276 313,420 Net operating loss carryforwards ........... (7,670) - Other ...................................... (29,230) 19,364 $1,324,066 $1,365,641 At December 31, 1997, CL&P had a state of Connecticut net operating loss carryforward of approximately $131 million which can be used against CL&P and its affiliates' combined Connecticut taxable income and which, if unused, expires in the year 2002. J. RECOVERABLE ENERGY COSTS Under the Energy Policy Act of 1992 (Energy Act), CL&P is assessed for its proportionate share of the costs of decontaminating and decommissioning uranium enrichment plants owned by the United States Department of Energy (D&D assessment). The Energy Act requires that regulators treat D&D assessments as a reasonable and necessary current cost of fuel, to be fully recovered in rates like any other fuel cost. CL&P is currently recovering these costs through rates. As of December 31, 1997, CL&P's total D&D deferrals were approximately $50.1 million. During 1997, CL&P implemented an energy adjustment clause (EAC) under which fuel prices above or below base-rate levels are charged or credited to customers. The EAC replaced CL&P's fuel adjustment and generation utilization adjustment clauses and is designed to reconcile and adjust the difference between actual fuel costs and the fuel revenue collected through base rates on a six-month basis. For the period January 1, 1997 through June 30, 1997, CL&P agreed to a zero EAC rate. For the period July 1, 1997 through December 31, 1997, the DPUC approved an EAC rate through which CL&P recovered approximately $11.5 million of deferred fuel costs. While this proceeding did not include provisions for the recovery of approximately $18 million of costs related to the early closing of CYAPC's nuclear generating unit, it did allow for the recovery of costs, subject to refund, related to the closure of MYAPC's nuclear generating unit. CL&P has appealed the DPUC's ruling related to CYAPC replacement power costs. During December 1997, the DPUC approved an EAC rate for the period January 1, 1998 through June 30, 1998. During this period, CL&P will recover approximately $27.9 million of deferred fuel costs. At December 31, 1997, CL&P's net recoverable energy costs, excluding current net recoverable energy costs, were approximately $104.8 million. For further information on recoverable energy costs, see the MD&A. K. DEMAND-SIDE MANAGEMENT (DSM) CL&P's DSM costs are recovered in base rates through a Conservation Adjustment Mechanism. CL&P is allowed to recover DSM costs in excess of costs reflected in base rates over periods ranging from approximately four to ten years. During April 1997, the DPUC approved CL&P's DSM budget of $36 million for 1997. In October 1997, CL&P and other interested parties filed a stipulation with the DPUC requesting that the DPUC approve certain programs and establish a budget level of $32.7 million for 1998 and $28.8 million for 1999. The $52.1 million of DSM costs on CL&P's books as of December 31, 1997, currently being collected, will be fully recovered by 2000. L. COGENERATION COSTS Beginning on July 1, 1996, the deferred cogeneration balance of approximately $86 million is being amortized over a five year period. An additional $9 million of amortization was applied to the deferred balance in 1997, as required under a settlement agreement which CL&P reached with the DPUC. CL&P continues to apply any savings associated with the renegotiation of a certain contract with a cogeneration facility to the deferred balance. Under current expectations, CL&P expects complete amortization of the deferred balance by December 31, 1998. At December 31, 1997, CL&P's deferred cogeneration costs balance was approximately $33.5 million. M. SPENT NUCLEAR FUEL DISPOSAL COSTS Under the Nuclear Waste Policy Act of 1982, CL&P must pay the United States Department of Energy (DOE) for the disposal of spent nuclear fuel and high-level radioactive waste. The DOE is responsible for the selection and development of repositories for, and the disposal of, spent nuclear fuel and high-level radioactive waste. Fees for nuclear fuel burned on or after April 7, 1983, are billed currently to customers and paid to the DOE on a quarterly basis. For nuclear fuel used to generate electricity prior to April 7, 1983 (prior-period fuel), payment must be made prior to the first delivery of spent fuel to the DOE. Until such payment is made, the outstanding balance will continue to accrue interest at the three-month Treasury Bill Yield Rate. At December 31, 1997, fees due to the DOE for the disposal of prior-period fuel were approximately $166.5 million, including interest costs of $99.9 million. The DOE was originally scheduled to begin accepting delivery of spent fuel in 1998. However, delays in identifying a permanent storage site have continually postponed plans for the DOE's long-term storage and disposal site. Extended delays or a default by the DOE could lead to consideration of costly alternatives. The company has primary responsibility for the interim storage of its spent nuclear fuel. Current capability to store spent fuel at Millstone 1 and 2 are estimated to be adequate until 2004 and at Seabrook until 2010. Storage facilities for Millstone 3 are expected to be adequate for the projected life of the unit. Meeting spent fuel storage requirements beyond these periods could require new and separate storage facilities, the costs for which have not been determined. 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 contractual obligation to begin accepting spent nuclear fuel no later than January 31, 1998. Currently, the DOE has not taken the spent nuclear fuel as scheduled and, as a result, may have to pay contract damages. The ultimate outcome of this legal proceeding is uncertain at this time. N. MARKET RISK-MANAGEMENT POLICIES CL&P utilizes market risk-management instruments, including swaps, collars, puts and calls, to hedge well-defined risks associated with changes in fuel prices. To qualify for hedge treatment, the underlying hedged item must expose CL&P to risks associated with market fluctuations and the market-risk management instrument used must be designated as a hedge and must reduce the company's exposure to market fluctuations throughout the period. Amounts receivable or payable under fuel-price management instruments are recognized in operating revenues when realized. CL&P does not use market risk-management instruments for speculative purposes. For further information, see Note 12, "Market Risk Management." 2. LEASES CL&P and WMECO may finance up to $400 million of nuclear fuel for Millstone 1 and 2 and their respective shares of the nuclear fuel for Millstone 3 under the Niantic Bay Fuel Trust (NBFT) capital lease agreement which is scheduled to expire July 31, 1998. The NBFT capital lease agreement, which was amended in February 1998, requires CL&P and WMECO to secure their obligation to repay the NBFT with up to $90 million of first mortgage bonds. CL&P and WMECO will issue these bonds by May 1998. CL&P and WMECO make quarterly lease payments for the cost of nuclear fuel consumed in the reactors based on a units-of-production method at rates which reflect estimated kilowatt hours of energy provided plus financing costs associated with the fuel in the reactors. Upon permanent discharge from the reactors, ownership of the nuclear fuel transfers to CL&P and WMECO. CL&P has also entered into lease agreements, some of which are capital leases, for the use of data processing and office equipment, vehicles, gas turbines, nuclear control room simulators and office space. The provisions of these lease agreements generally provide for renewal options. The following rental payments have been charged to expense: Year Capital Leases Operating Leases 1997................ $10,457,000 $19,749,000 1996................ 17,993,000 22,032,000 1995................ 56,307,000 23,793,000 Interest included in capital lease rental payments was $9,948,000 in 1997, $10,144,000 in 1996 and $10,587,000 in 1995. Future minimum rental payments, excluding executory costs such as property taxes, state use taxes, insurance and maintenance, under long-term noncancelable leases as of December 31, 1997, are: Year Capital Leases Operating Leases (Thousands of Dollars) 1998................ $142,500 $ 22,700 1999................ 2,900 21,300 2000................ 2,900 19,900 2001................ 2,900 14,400 2002................ 3,000 6,200 After 2002.......... 54,300 22,800 Future minimum lease payments.......... 208,500 $107,300 Less amount representing interest.......... 50,400 Present value of future minimum lease payments.... $158,100 Rocky River Reality Company (RRR) provides real estate support services, including the leasing of properties and facilities, used by NU system companies, including CL&P. During 1997, RRR repurchased certain notes that were secured by real estate leases between RRR as lessor and NUSCO as lessee. The repayment of these notes triggered the acceleration of rent and CL&P was subsequently billed by NUSCO and paid its proportionate share of the accelerated lease obligation. At December 31, 1997, CL&P has recorded long-term prepaid rent of approximately $11.1 million. This asset is being amortized on a straight line basis and will be fully amortized in 2017. 3. NUCLEAR DECOMMISSIONING Millstone and Seabrook: CL&P's nuclear power plants have service lives that are expected to end during the years 2010 through 2026. Upon retirement, these units must be decommissioned. Current decommissioning studies concluded that complete and immediate dismantlement at retirement continues to be the most viable and economic method of decommissioning the three Millstone units and Seabrook 1. Decommissioning studies are reviewed and updated periodically to reflect changes in decommissioning requirements, costs, technology and inflation. The estimated cost of decommissioning CL&P's ownership share of Millstone 1 and 2, in year-end 1997 dollars, is $390.9 million and $350.2 million, respectively. CL&P's ownership share of the estimated cost of decommissioning Millstone 3 and Seabrook 1 in year-end 1997 dollars, is $294.0 million and $19.2 million, respectively. The Millstone units and Seabrook 1 decommissioning costs will be increased annually by their respective escalation rates. Nuclear decommissioning costs are accrued over the expected service life of the units and are included in depreciation expense on the Consolidated Statements of Income. Nuclear decommissioning costs amounted to $37.8 million each year in 1997 and 1996 and $30.5 million in 1995. Nuclear decommissioning, as a cost of removal, is included in the accumulated provision for depreciation on the Consolidated Balance Sheets. At December 31, 1997 and 1996, the balance in the accumulated reserve for depreciation amounted to $407.3 million and $329.1 million, respectively. CL&P has established external decommissioning trusts through a trustee for its portion of the costs of decommissioning Millstone 1, 2 and 3. CL&P's portion of the cost of decommissioning Seabrook 1 is paid to an independent decommissioning financing fund managed by the state of New Hampshire. Funding of the estimated decommissioning costs assumes levelized collections for the Millstone units and escalated collections for Seabrook 1 and after-tax earnings on the Millstone and Seabrook decommissioning funds of approximately 5.5 percent and 6.5 percent, respectively. As of December 31, 1997, CL&P has collected through rates $277.9 million toward the future decommissioning costs of its share of the Millstone units, of which $240.3 million has been transferred to external decommissioning trusts. As of December 31, 1997, CL&P has paid approximately $2.9 million into Seabrook 1's decommissioning financing fund. Earnings on the decommissioning trusts and financing fund increase the decommissioning trust and the accumulated reserve for depreciation. Unrealized gains and losses associated with the decommissioning trusts and financing fund also impact the balance of the trusts and the accumulated reserve for depreciation. Changes in requirements or technology, the timing of funding or dismantling or adoption of a decommissioning method other than immediate dismantlement would change decommissioning cost estimates and the amounts required to be recovered. CL&P attempts to recover sufficient amounts through its allowed rates to cover its expected decommissioning costs. Only the portion of currently estimated total decommissioning costs that has been accepted by regulatory agencies is reflected in CL&P's rates. Based on present estimates and assuming its nuclear units operate to the end of their respective license periods, CL&P expects that the decommissioning trusts and financing fund will be substantially funded when the units are retired from service. Millstone 1 has been placed in extended maintenance status while management is reviewing its options with respect to the unit. These include restart, early retirement and other options. Relating to management's consideration of the option to immediately retire Millstone 1 are certain Connecticut state law issues. In its four-year rate review proceeding, the DPUC noted that CL&P may not be able to obtain its remaining investment in Millstone 1 if it were to determine that the unit had been prematurely shut down due to management imprudence. Additionally, there is a Connecticut statute which may limit CL&P's ability to collect future decommissioning charges related to Millstone 1 if Millstone 1 were to be terminated before the end of its expected life. At December 31, 1997, CL&P's net unrecovered Millstone 1 plant costs were $215.7 million and the remaining unrecovered decommissioning costs were approximately $198 million. Yankee Companies: VYNPC owns and operates a nuclear generating unit with a service life that is expected to end in 2012. CL&P's ownership share of estimated costs, in year-end 1997 dollars, of decommissioning this unit is $48.0 million. On August 6, 1997, the board of directors of MYAPC voted unanimously to cease permanently the production of power at its nuclear generating facility (MY). The NU system companies had relied on MY for approximately one percent of their capacity. During November 1997, MYAPC filed an amendment to its power contracts clarifying the obligations of its purchasing utilities following the decision to cease power production. During January 1998, the FERC accepted the amendments and proposed rates, subject to refund. At December 31, 1997, the remaining estimated obligation, including decommissioning, amounted to approximately $867.2 million, of which CL&P's share was approximately $104.0 million. On December 4, 1996, the board of directors of CYAPC voted unanimously to cease permanently the production of power at its nuclear generating plant (CY). During 1996, the NU system companies had relied on CY for approximately three percent of their capacity. During late December 1996, CYAPC filed an amendment to its power contracts clarifying the obligations of its purchasing utilities following the decision to cease power production. On February 27, 1997, the FERC approved an order for hearing which, among other things, accepted CYAPC's contract amendment. The new rates became effective March 1, 1997, subject to refund. At December 31, 1997, the remaining estimated obligation, including decommissioning, amounted to $619.9 million, of which CL&P's share was approximately $213.8 million. YAEC is in the process of decommissioning its nuclear facility. At December 31, 1997, the estimated remaining costs, including decommissioning, amounted to $124.4 million, of which CL&P's share was approximately $30.5 million. Under the terms of the contracts with MYAPC, CYAPC and YAEC, the shareholder-sponsor companies, including CL&P, are responsible for their proportionate share of the costs of the units, including decommissioning. Management expects that CL&P will continue to be allowed to recover these costs from its customers. Accordingly, CL&P has recognized these costs as regulatory assets with corresponding obligations. Proposed Accounting: The staff of the SEC has questioned certain current accounting practices of the electric utility industry, including CL&P, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating units in the financial statements. In response to these questions, the FASB has agreed to review the accounting for closure and removal costs, including decommissioning. If current electric utility industry accounting practices for nuclear power plant decommissioning are changed, the annual provision for decommissioning could increase relative to 1997, and the estimated cost for decommissioning could be recorded as a liability (rather than as accumulated depreciation), with recognition of an increase in the cost of the related nuclear power plant. Management believes that CL&P will continue to be allowed to recover decommissioning costs through rates. 4. SHORT-TERM DEBT Limits: The amount of short-term borrowings that may be incurred by CL&P is subject to periodic approval by either the SEC under the 1935 Act or by the DPUC. SEC authorization allowed CL&P, as of January 1, 1998, to incur total short-term borrowings up to a maximum of $375 million. Credit Agreements: In May 1997, because of the potential for NU and CL&P to violate their various financial ratio tests, NU amended the three-year revolving credit agreement (Credit Agreement) with a group of 12 banks. Under the amended Credit Agreement, CL&P and WMECO are able to borrow, subject to the availability of first mortgage bond collateral, up to $313.75 million and $150 million, respectively. At December 31, 1997, CL&P and WMECO have issued first mortgage bonds to enable borrowings under this facility up to a maximum of $225 million and $90 million, respectively. NU, which cannot issue first mortgage bonds, will be able to borrow up to $50 million if NU consolidated, CL&P and WMECO each meet certain interest coverage tests for two consecutive quarters. In addition, CL&P and WMECO each must meet certain minimum quarterly financial ratios to access the Credit Agreement. Both CL&P and WMECO satisfied these tests for the quarter ending December 31, 1997. The overall limit for all of the borrowing system companies under the entire Credit Agreement is $313.75 million. The companies are obligated to pay a facility fee of .50 percent per annum of each bank's total commitment under this Credit Agreement which will expire in November 1999. At December 31, 1997 and 1996, there were $50 million and $27.5 million, respectively, in borrowings under this Credit Agreement. Of these amounts, CL&P had $35 million borrowed in 1997 and nothing borrowed in 1996. In addition to the Credit Agreement, NU, CL&P, WMECO, HWP and RRR have various revolving credit lines through separate bilateral credit agreements. Under this facility, four banks maintain commitments to the respective companies totaling $56.25 million. NU, CL&P and WMECO may borrow up to the aggregate $56.25 million, whereas HWP and RRR may borrow up to their SEC or board authorized short-term debt limit of $5 million and $22 million, respectively. Under the terms of this facility, the companies are obligated to pay a facility fee of .15 percent per annum of each bank's total commitment. These commitments will expire in December 1998. At December 31, 1997 and 1996, there were no borrowings and $11.3 million in borrowings, respectively, under this facility, all of which had been borrowed by other NU system companies. Under the credit facilities discussed above, CL&P may borrow funds on a short-term revolving basis under its agreement, using either fixed-rate loans or standby loans. Fixed rates are set using competitive bidding. Standby loans are based upon several alternative variable rates. The weighted average annual interest rate on CL&P's notes payable to banks outstanding on December 31, 1997 was 6.95 percent. CL&P had no borrowings under these facilities at December 31, 1996. Money Pool: Certain subsidiaries of NU, including CL&P, are members of the Northeast Utilities System Money Pool (Pool). The Pool provides a more efficient use of the cash resources of the system, and reduces outside short-term borrowings. NUSCO administers the Pool as agent for the member companies. Short-term borrowing needs of the member companies are first met with available funds of other member companies, including funds borrowed by NU parent. NU parent may lend to the Pool but may not borrow. Funds may be withdrawn from or repaid to the Pool at any time without prior notice. Investing and borrowing subsidiaries receive or pay interest based on the average daily Federal Funds rate. Borrowings based on loans from NU parent, however, bear interest at NU parent's cost and must be repaid based upon the terms of NU parent's original borrowing. At December 31, 1997, CL&P had $61.3 million of borrowings outstanding from the Pool. At December 31, 1996, CL&P had no borrowings outstanding from the Pool. The interest rate on borrowings from the Pool on December 31, 1997 was 5.8 percent. Maturities of short-term debt obligations were for periods of three months or less. For further information on short-term debt, including the ability to access these agreements, see the MD&A. 5. PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION Details of preferred stock not subject to mandatory redemption are: December 31, Shares 1997 Outstanding Redemption December 31, December 31, Description Price 1997 1997 996 1995 (Thousands of Dollars) $1.90 Series of 1947.... $52.50 163,912 $ 8,196 $ 8,196 $ 8,196 $2.00 Series of 1947.... 54.00 336,088 16,804 16,804 16,804 $2.04 Series of 1949.... 52.00 100,000 5,000 5,000 5,000 $2.06 Series E of 1954.. 51.00 200,000 10,000 10,000 10,000 $2.09 Series F of 1955.. 51.00 100,000 5,000 5,000 5,000 $2.20 Series of 1949.... 52.50 200,000 10,000 10,000 10,000 $3.24 Series G of 1968.. 51.84 300,000 15,000 15,000 15,000 3.90% Series of 1949.... 50.50 160,000 8,000 8,000 8,000 4.50% Series of 1956.... 50.75 104,000 5,200 5,200 5,200 4.50% Series of 1963.... 50.50 160,000 8,000 8,000 8,000 4.96% Series of 1958.... 50.50 100,000 5,000 5,000 5,000 5.28% Series of 1967.... 51.43 200,000 10,000 10,000 10,000 6.56% Series of 1968.... 51.44 200,000 10,000 10,000 10,000 Total preferred stock not subject to mandatory redemption... $116,200 $116,200 $116,200 All or any part of each outstanding series of such preferred stock may be redeemed by CL&P at any time at established redemption prices plus accrued dividends to the date of redemption. 6. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION Details of preferred stock subject to mandatory redemption are: December 31, Shares 1997 Outstanding Redemption December 31, December 31, Description Price* 1997 1997 1996 1995 (Thousands of Dollars) 7.23% Series of 1992... $52.41 1,500,000 $ 75,000 $ 75,000 $ 75,000 5.30% Series of 1993... 51.00 1,600,000 80,000 80,000 80,000 155,000 155,000 155,000 Less preferred stock to be redeemed within one year....... 75,000 3,750 - - Total preferred stock subject to mandatory redemption............ $151,250 $155,000 $155,000 *Each of these series is subject to certain refunding limitations for the first five years after they were issued. Redemption prices reduce in future years. The following table details redemption and sinking fund activity for preferred stock subject to mandatory redemption: Minimum Annual Sinking-Fund Shares Reacquired Series Requirement 1997 1996 1995 (Thousand of Dollars) 9.00% Series of 1989 $ - - - 3,000,000 7.23% Series of 1992 (1) 3,750 - - - 5.30% Series of 1993 (2) 16,000 - - - (1) Sinking fund requirements commence September 1, 1998. (2) Sinking fund requirements commence October 1, 1999. The minimum sinking-fund provisions of the series subject to mandatory redemption, for the years 1998 through 2002, aggregate approximately $3.8 million in 1998, and $19.8 million for 1999 through 2002. There were no minimum sinking-fund provisions in 1997. In case of default on sinking- fund payments, no payments may be made on any junior stock by way of dividends or otherwise (other than in shares of junior stock) so long as the default continues. If CL&P is in arrears in the payment of dividends on any outstanding shares of preferred stock, CL&P would be prohibited from redeeming or purchasing less than all of the preferred stock outstanding. All or part of each of the series named above may be redeemed by CL&P at any time at established redemption prices plus accrued dividends to the date of redemption, subject to certain refunding limitations. 7. LONG-TERM DEBT Details of long-term debt outstanding are: December 31, 1997 1996 (Thousands of Dollars) First Mortgage Bonds: 7 5/8% Series UU due 1997........... $ - $ 193,288 6 1/2% Series T due 1998........... 20,000 20,000 7 1/4% Series VV due 1999........... 99,000 99,000 5 1/2% Series A due 1999........... 140,000 140,000 5 3/4% Series XX due 2000........... 200,000 200,000 7 7/8% Series A due 2001........... 160,000 160,000 7 3/4% Series C due 2002........... 200,000 - 6 1/8% Series B due 2004........... 140,000 140,000 7 3/8% Series TT due 2019........... 20,000 20,000 7 1/2% Series YY due 2023........... 100,000 100,000 8 1/2% Series C due 2024........... 115,000 115,000 7 7/8% Series D due 2024........... 140,000 140,000 7 3/8% Series ZZ due 2025........... 125,000 125,000 Total First Mortgage Bonds..... 1,459,000 1,452,288 Pollution Control Notes: Variable rate, due 2016-2022.......... 46,400 46,400 Variable tax exempt, due 2028-2031.... 377,500 377,500 Fees and interest due for spent fuel disposal costs (Note 1M)......... 166,458 157,968 Other................................... 86 10,915 Less amounts due within one year........ 20,011 204,116 Unamortized premium and discount, net... (6,117) (6,550) Long-term debt, net................... $2,023,316 $1,834,405 Long-term debt and cash sinking-fund requirements on debt outstanding at December 31, 1997 for the years 1998 through 2002 are approximately $20.0 million, $239.0 million, $200.0 million, $160.0 million and $200.0 million, respectively. The one-percent sinking- and improvement-fund requirements for CL&P first mortgage bonds are no longer required, as of 1997, as determined by a majority of bondholders. All or any part of each outstanding series of first mortgage bonds may be redeemed by CL&P at any time at established redemption prices plus accrued interest to the date of redemption, except certain series which are subject to certain refunding limitations during their respective initial five-year redemption periods. Essentially all of CL&P's utility plant is subject to the lien of its first mortgage bond indenture. As of December 31, 1997 and 1996, CL&P has secured $315.5 million of pollution control notes with second mortgage liens on Millstone 1, junior to the lien of its first mortgage bond indenture. The average effective interest rate on the variable-rate pollution control notes ranged from 3.6 percent to 3.7 percent for 1997 and from 3.4 percent to 3.6 percent for 1996. CL&P has $62 million of tax-exempt Pollution Control Revenue Bonds with a bond insurance and liquidity facility secured by First Mortgage Bonds. 8. INCOME TAX EXPENSE The components of the federal and state income tax provisions (credited)/ charged to operations are: For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars) Current income taxes: Federal............................... $(53,339) $ 30,650 $ 93,906 State................................. (3,270) 9,789 37,898 Total current....................... (56,609) 40,439 131,804 Deferred income taxes, net: Federal............................... 5,862 (38,680) 52,075 State................................. (12,316) (14,726) 5,085 Total deferred...................... (6,454) (53,406) 57,160 Investment tax credits, net............. (7,366) (7,367) (7,640) Total income tax (credit)/expense.................... $(70,429) $(20,334) $181,324 The components of total income tax expense are classified as follows: Income taxes charged to operating expenses.................... $(62,856) $(20,174) $178,346 Other income taxes...................... (7,573) (160) 2,978 Total income tax (credit)/expense........................ $(70,429) $(20,334) $181,324 Deferred income taxes are comprised of the tax effects of temporary differences as follows: For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars) Depreciation, leased nuclear fuel, settlement credits and disposal costs........................ $ 11,991 $ 3,981 $44,278 Energy adjustment clauses............... (14,039) (1,654) 23,302 Demand-side management.................. (12,408) (17,099) 1,310 Nuclear plant deferrals................. 14,007 (18,861) (8,055) Bond redemptions........................ (1,339) (1,789) (2,255) Contractual settlements................. 1,754 2,513 (9,496) Nuclear compliance reserves............. (4,759) (21,131) - Pension accruals........................ 6,524 2,944 5,382 State net operating loss carryforwards......................... (7,670) - - Other................................... (515) (2,310) 2,694 Deferred income taxes, net.............. $ (6,454) $(53,406) $57,160 A reconciliation between income tax expense and the expected tax expense at the applicable statutory rate is as follows: For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars) Expected federal income tax at 35 percent of pretax income........... $(75,182) $(35,931) $135,289 Tax effect of differences: State income taxes, net of federal benefit..................... (9,516) (3,209) 27,939 Depreciation.......................... 19,701 21,313 23,517 Deferred nuclear plants return........ (30) (444) (1,639) Amortization of regulatory assets .................. 3,901 8,601 20,218 Property tax.......................... - - (159) Investment tax credit amortization........................ (7,366) (7,367) (7,640) Adjustment for prior years' taxes............................... (10) - (10,442) Other, net............................ (1,927) (3,297) (5,759) Total income tax (credits)/expense..................... $(70,429) $(20,334) $181,324 9. EMPLOYEE BENEFITS A. PENSION BENEFITS The NU system's subsidiaries participate in a uniform noncontributory defined benefit retirement plan covering all regular NU system employees. Benefits are based on years of service and the employees' highest eligible compensation during 60 consecutive months of employment. CL&P's direct portion of the NU system's pension credit, part of which was credited to utility plant, approximated $22.5 million in 1997, $8.8 million in 1996 and $10.4 million in 1995. The company's pension (credit)/costs for 1997, 1996 and 1995 included approximately $(949) thousand, $2.8 million and $0.1 million, respectively, related to workforce reduction programs. Currently, CL&P annually funds an amount at least equal to that which will satisfy the requirements of the Employee Retirement Income Security Act and the Internal Revenue Code. Pension costs are determined using market-related values of pension assets. Pension assets are invested primarily in domestic and international equity securities and bonds. The components of net pension credit for CL&P are: For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars) Service cost....................... $ 7,888 $ 11,896 $ 7,543 Interest cost...................... 37,939 37,226 37,110 Return on plan assets.............. (148,830) (103,248) (138,582) Net amortization................... 80,507 45,300 83,516 Net pension credit................. $(22,496) $ (8,826) $(10,413) For calculating pension cost, the following assumptions were used: For the Years Ended December 31, 1997 1996 1995 Discount rate...................... 7.75% 7.50% 8.25% Expected long-term rate of return................... 9.25 8.75 8.50 Compensation/progression rate............................. 4.75 4.75 5.00 The following table represents the plan's funded status reconciled to the Consolidated Balance Sheets: At December 31, 1997 1996 (Thousands of Dollars) Accumulated benefit obligation, including vested benefits at December 31, 1997 and 1996 of $(420,499,000) and $(405,340,000), respectively...................... $(451,802) $(434,473) Projected benefit obligation........ $(531,564) $(514,989) Market value of plan assets......... 846,366 736,448 Market value in excess of projected benefit obligation................ 314,802 221,459 Unrecognized transition amount...... (6,445) (7,365) Unrecognized prior service costs.... 3,524 3,818 Unrecognized net gain............... (269,560) (198,088) Prepaid pension asset............... $ 42,321 $ 19,824 The following actuarial assumptions were used in calculating the plan's year-end funded status: At December 31, 1997 1996 Discount rate....................... 7.25% 7.75% Compensation/progression rate....... 4.25 4.75 B. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The NU system's subsidiaries provide certain health care benefits, primarily medical and dental, and life insurance benefits through a benefit plan to retired employees (referred to as SFAS 106 benefits). These benefits are available for employees retiring from the NU system who have met specified service requirements. For current employees and certain retirees, the total SFAS 106 benefit is limited to two times the 1993 per-retiree health care cost. The SFAS 106 obligation has been calculated based on this assumption. CL&P's direct portion of SFAS 106 costs, part of which were deferred or charged to utility plant, approximated $12.8 million in 1997, $17.9 million in 1996 and $20.7 million in 1995. During 1997 and 1996, CL&P funded SFAS 106 postretirement costs through external trusts. CL&P is funding, on an annual basis, amounts that have been rate-recovered and which also are tax deductible under the Internal Revenue Code. The trust assets are invested primarily in equity securities and bonds. The components of health care and life insurance cost are: For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars) Service cost ........................ $ 1,692 $ 2,270 $ 2,248 Interest cost ....................... 9,152 10,211 11,510 Return on plan assets ............... (7,755) (2,904) (1,015) Amortization of unrecognized transition obligation ............. 7,344 7,344 7,344 Other amortization, net ............. 2,370 956 602 Net health care and life insurance cost .................... $12,803 $17,877 $20,689 For calculating SFAS 106 benefit costs, the following assumptions were used: For the Years Ended December 31, 1997 1996 1995 Discount rate ....................... 7.75% 7.50% 8.00% Long-term rate of return - Health assets, net of tax ......... 6.00 5.25 5.00 Life assets ....................... 9.25 8.75 8.50 The following table represents the plan's funded status reconciled to the Consolidated Balance Sheets: At December 31, 1997 1996 (Thousands of Dollars) Accumulated postretirement benefit obligation of: Retirees ........................... $(102,282) $(109,299) Fully eligible active employees .... (219) (165) Active employees not eligible to retire ........................ (24,075) (27,913) Total accumulated postretirement benefit obligation ................ (126,576) (137,377) Market value of plan assets ......... 46,055 38,783 Accumulated postretirement benefit obligation in excess of plan assets ....................... (80,521) (98,594) Unrecognized transition amount ...... 110,162 117,506 Unrecognized net gain ............... (29,641) (18,912) Accrued postretirement benefit liability ......................... $ - $ - The following actuarial assumptions were used in calculating the plan's year-end funded status: At December 31, 1997 1996 Discount rate ....................... 7.25% 7.75% Health care cost trend rate (a) ..... 5.76 7.23 (a) The annual growth in per capita cost of covered health care benefits was assumed to decrease to 4.40 percent by 2001. The effect of increasing the assumed health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997, by $7.3 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $563 thousand. The trust holding the health plan assets is subject to federal income taxes at a 39.6 percent tax rate. CL&P currently is recovering SFAS 106 costs through rates. 10. SALE OF CUSTOMER RECEIVABLES AND ACCRUED UTILITY REVENUES During 1996, CL&P entered into an agreement to sell up to $200 million of undivided ownership interests in eligible customer receivables and accrued utility revenues (receivables). The FASB issued SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," in June 1996. SFAS 125 became effective on January 1, 1997, and establishes, in part, criteria for concluding whether a transfer of financial assets in exchange for consideration should be accounted for as a sale or as a secured borrowing. During October 1997, CL&P restructured its sales agreement to comply with the conditions of SFAS 125 and account for transactions occurring under this program as sales of assets. CL&P has established a special purpose, wholly owned subsidiary whose business consists of the purchase and resale of receivables. For receivables sold, CL&P has retained collection responsibilities as agent for the purchaser under CL&P's agreement. As collections reduce previously sold receivables, new receivables may be sold. At December 31, 1997, approximately $70 million of receivables had been sold to a third-party purchaser by CL&P through the use of CL&P's special purpose, wholly owned subsidiary, CL&P Receivables Corporation (CRC). All receivables transferred to CRC are assets owned by CRC and are not available to pay CL&P's creditors. For CRC's sales agreement with its third-party purchaser, the receivables are sold with limited recourse. CRC's sales agreement provides for a formula-based loss reserve in which additional receivables may be assigned to the third-party purchaser for costs such as bad debt. The third-party purchaser absorbs the excess amount in the event that actual loss experience exceeds the loss reserve. At December 31, 1997, approximately $7.2 million of assets had been designated as collateral by CRC. This amount represents the formula-based amount of credit exposure at December 31, 1997. Historical losses for bad debt for CL&P have been substantially less. CL&P's accounts receivable program could be terminated if its senior secured debt is downgraded two more steps from its current ratings. Concentrations of credit risk to the purchaser under the company's agreement with respect to the receivables are limited due to CL&P's diverse customer base within its service territory. For additional information on the accounts receivable program and CL&P's ability to utilize this program, see the MD&A. 11. COMMITMENTS AND CONTINGENCIES A. RESTRUCTURING AND RATE MATTERS Although CL&P continues to operate under cost-of-service based regulation, legislative restructuring initiatives during 1997 and 1998 in its jurisdiction has created some uncertainty with respect to future rates and the recovery of strandable investments and certain future costs such as purchase power obligations. Management is unable to predict the ultimate outcome of restructuring initiatives, however, it continues to believe that it is probable that CL&P will fully recover its prudently incurred costs, including regulatory assets and strandable investments based on the general nature of public utility cost-of-service regulation. For further information on restructuring, see Note 1H, "Summary of Significant Accounting Policies - Regulatory Accounting and Assets," and the MD&A. The DPUC is required to review a utility's rates every four years if there had not been a rate proceeding during such period. The DPUC has conducted such a review. For information regarding this review and other rate matters, see the MD&A. For information regarding the FERC rate proceedings for CYAPC and MYAPC, see Note 3, "Nuclear Decommissioning." B. NUCLEAR PERFORMANCE Millstone: The three Millstone units are managed by NNECO. Millstone 1, 2 and 3 have been out of service since November 4, 1995, February 21, 1996, and March 30, 1996, respectively, and are on the Nuclear Regulatory Commission's (NRC) watch list. NU has restructured its nuclear organization and is currently implementing comprehensive plans to restart the units. Subsequent to its January 31, 1996 announcement that Millstone had been placed on its watch list, the NRC stated that the units cannot return to service until independent, third-party verification teams have reviewed the actions taken to improve the design, configuration and employee concerns issues that prompted the NRC to place the units on its watch list. The actual date of the return to service for each of the units is dependent upon the completion of independent inspections and reviews by the NRC and a vote by the NRC commissioners. NU hopes to return Millstone 3 to service in the early spring of 1998 and Millstone 2 three to four months after Millstone 3. Millstone 1 is currently in extended maintenance status. In 1997, CL&P's share of nonfuel O&M costs expensed for Millstone totaled $455 million, including $59 million reserved for future restart costs. Budgeted nuclear spending levels at Millstone for 1998 will be reduced from 1997 levels, although they will be considerably higher than before the station was placed on the NRC's watch list. The actual level of 1998 spending will depend on when the units return to operation and the cost of restoring them to service. The total cost to restart the units cannot be precisely estimated at this time. Management will continue to evaluate the costs to be incurred in 1998 to determine whether adjustments to the existing reserves are required. Management cannot predict when the NRC will allow any of the Millstone units to return to service and thus cannot precisely estimate the total replacement power costs CL&P will ultimately incur. Replacement power costs incurred by CL&P attributable to the Millstone outages averaged approximately $23 million per month during 1997, and for 1998 are projected to average approximately $7 million per month for Millstone 3, $7 million per month for Millstone 2 and $5 million per month for Millstone 1 while the plants remain out of service. CL&P will continue to expense its replacement power costs in 1998. Based on the current estimates of expenditures and restart dates, management believes the NU system has sufficient resources to fund the restoration of the Millstone units and related replacement power costs. If the return to service of Millstone 3 or 2 is delayed substantially beyond the present restart estimates, if some financing facilities become unavailable because of difficulties in meeting borrowing conditions or renegotiating extensions, if CL&P and WMECO encounter additional significant costs or if any other significant deviations from management's assumptions occur, CL&P and WMECO could be unable to meet their cash requirements. In those circumstances, management would take even more stringent actions to reduce costs and cash outflows and attempt to obtain additional sources of funds. The availability of these funds would be dependent upon general market conditions and CL&P's and WMECO's respective credit and financial conditions at that time. For information concerning the ability of CL&P to access its borrowing facilities, see the MD&A. Litigation: CL&P and WMECO, through NNECO as agent, operate Millstone 3 at cost, and without profit, under a sharing agreement that obligates them to utilize good utility operating practice and requires the joint owners to share the risk of employee negligence and other risks of operation and maintenance pro-rata in accordance with their ownership shares. This agreement also provides that CL&P and WMECO would be liable only for damages to the non-NU owners for a deliberate violation of the agreement pursuant to authorized corporate action. On August 7, 1997, the non-NU owners of Millstone 3 filed demands for arbitration with CL&P and WMECO as well as lawsuits in Massachusetts Superior Court against NU and its current and former trustees. The non-NU owners raise a number of contract, tort and statutory claims arising out of the operation of Millstone 3. The arbitrations and lawsuits seek to recover compensatory damages, punitive damages, treble damages and attorneys' fees. Owners representing approximately two- thirds of the non-NU interests in Millstone 3 claimed compensatory damages in excess of $200 million. In addition, one of the lawsuits seeks to restrain NU from disposing of its shares of the stock of WMECO and HWP, pending the outcome of the lawsuit. Management cannot estimate the potential outcome of these suits but believes there is no legal basis for the claims and intends to defend against them vigorously. To date, no reserves have been established for this litigation. At December 31, 1997, the NU system's costs related to this litigation were estimated to be approximately $100 million for incremental O&M costs and approximately $100 million for replacement power costs. These costs are likely to increase as long as Millstone 3 remains out of service. The Connecticut Municipal Electric Energy Cooperative (CMEEC) and CL&P have been negotiating since May 1996 over issues related to the operation of Millstone 1 and 2. CMEEC has failed to make payments on its accrued obligations since October 1996, claiming that CL&P materially breached its contractual obligations. CL&P has denied the allegations and requested payment. The matter has gone to arbitration which has been scheduled for July 1998. CL&P has filed an application with the Connecticut Superior Court in Hartford requesting the court to grant interim relief to CL&P. CL&P has asked the court to enforce the contract provisions by ordering CMEEC to pay the outstanding obligations under the contract (approximately $25 million) and to continue making payments (approximately $1.8 million per month) during the arbitration process. On December 9, 1997, the Superior Court judge issued a decision denying CL&P's request for an interim payment order. Management cannot predict the outcome of this litigation and has taken steps to assert its legal rights. CL&P has requested reargument, in order to present evidence, and has requested that the Connecticut Superior Court vacate its order. CL&P is prepared to appeal to a higher court, if necessary, after the reargument. C. ENVIRONMENTAL MATTERS The NU system is subject to regulation by federal, state and local authorities with respect to air and water quality, the handling and disposal of toxic substances and hazardous and solid wastes, and the handling and use of chemical products. The NU system has an active environmental auditing and training program and believes that it is in substantial compliance with current environmental laws and regulations. However, the NU system is subject to certain pending enforcement actions and governmental investigations in the environmental area. Management cannot predict the outcome of these enforcement actions and investigations. Environmental requirements could hinder the construction of new generating units, transmission and distribution lines, substations and other facilities. Changing environmental requirements could also require extensive and costly modifications to CL&P's existing generating units and transmission and distribution systems, and could raise operating costs significantly. As a result, CL&P may incur significant additional environmental costs, greater than amounts included in cost of removal and other reserves, in connection with the generation and transmission of electricity and the storage, transportation and disposal of byproducts and wastes. CL&P may also encounter significantly increased costs to remedy the environmental effects of prior waste handling activities. The cumulative long-term cost impact of increasingly stringent environmental requirements cannot be estimated accurately. CL&P has recorded a liability based upon currently available information for what it believes are its estimated environmental remediation costs that it expects to incur for waste disposal sites. In most cases, additional future environmental cleanup costs are not reasonably estimable due to a number of factors, including the unknown magnitude of possible contamination, the appropriate remediation methods, the possible effects of future legislation or regulation and the possible effects of technological changes. At December 31, 1997, the net liability recorded by CL&P for its estimated environmental remediation costs, excluding any possible insurance recoveries or recoveries from third parties, amounted to approximately $6.4 million, which management has determined to be the most probable amount within the range of $6.4 million to $16.4 million. During 1997, CL&P adopted Statement of Position 96-1, "Environmental Remediation Liabilities" (SOP). The principal objective of the SOP is to improve the manner in which existing authoritative accounting literature is applied by entities to specific situations of recognizing, measuring and disclosing environmental remediation liabilities. The adoption of the SOP resulted in an increase of approximately $395 thousand to CL&P's environmental reserve in 1997. CL&P cannot estimate the potential liability for future claims, including environmental remediation costs, that may be brought against it. However, considering known facts, existing laws and regulatory practices, management does not believe the matters disclosed above will have a material effect on CL&P's financial position or future results of operations. D. NUCLEAR INSURANCE CONTINGENCIES Under certain circumstances, in the event of a nuclear incident at one of the nuclear facilities in the country covered by the federal government's third-party liability indemnification program, an owner of a nuclear unit could be assessed in proportion to its ownership interest in each of its nuclear units up to $75.5 million. Payments of this assessment would be limited to $10.0 million in any one year per nuclear incident based upon the owner's pro rata ownership interest in each of its nuclear units. In addition, the owner would be subject to an additional five percent or $3.8 million, in proportion to its ownership interests in each of its nuclear units, if the sum of all claims and costs from any one nuclear incident exceeds the maximum amount of financial protection. Based upon its ownership interests in Millstone 1, 2 and 3 and in Seabrook 1, CL&P's maximum liability, including any additional assessments, would be $173.6 million per incident, of which payments would be limited to $21.9 million per year. In addition, through power purchase contracts with MYAPC, VYNPC, and CYAPC, CL&P would be responsible for up to an additional $44.4 million per incident, of which payments would be limited to $5.6 million per year. Insurance has been purchased to cover the primary cost of repair, replacement or decontamination of utility property resulting from insured occurrences. CL&P is subject to retroactive assessments if losses exceed the accumulated funds available to the insurer. The maximum potential assessment against CL&P with respect to losses arising during the current policy year is approximately $11.5 million under the primary property insurance program. Insurance has been purchased to cover certain extra costs incurred in obtaining replacement power during prolonged accidental outages and the excess cost of repair, replacement or decontamination or premature decommissioning of utility property resulting from insured occurrences. CL&P is subject to retroactive assessments if losses exceed the accumulated funds available to the insurer. The maximum potential assessments against CL&P with respect to losses arising during current policy years are approximately $9.5 million under the replacement power policies and $15.6 million under the excess property damage, decontamination and decommissioning policies. The cost of a nuclear incident could exceed available insurance proceeds. Insurance has been purchased aggregating $200 million on an industry basis for coverage of worker claims. All participating reactor operators insured under this coverage are subject to retrospective assessments of $3 million per reactor. The maximum potential assessment against CL&P with respect to losses arising during the current policy period is approximately $8.9 million. Effective January 1, 1998, a new worker policy was purchased which is not subject to retrospective assessments. E. CONSTRUCTION PROGRAM The construction program is subject to periodic review and revision by management. CL&P currently forecasts construction expenditures of approximately $1.3 billion for the years 1998-2002, including $164.9 million for 1998. In addition, CL&P estimates that nuclear fuel requirements, including nuclear fuel financed through the NBFT, will be approximately $247.7 million for the years 1998-2002, including $37.6 million for 1998. See Note 2, "Leases," for additional information about the financing of nuclear fuel. F. LONG-TERM CONTRACTUAL ARRANGEMENTS Yankee Companies: CL&P, WMECO and PSNH rely on VY for approximately 1.7 percent of their capacity under long-term contracts. Under the terms of their agreements, the NU system companies pay their ownership (or entitlement) shares of costs which include depreciation, O&M expenses, taxes, the estimated cost of decommissioning and a return on invested capital. These costs are recorded as purchased power expense and are recovered through the company's rates. CL&P's total cost of purchases under contracts with VYNPC amounted to $14.1 million in 1997, $14.8 million in 1996 and $14.7 million in 1995. The other Yankee generating facilities, MY, CY and Yankee Rowe, were permanently shutdown as of August 6, 1997, December 4, 1996 and February 26, 1992, respectively. See Note 1E, "Summary of Significant Accounting Policies - Investments and Jointly Owned Electric Utility Plant," for further information on the Yankee companies, and Note 3, "Nuclear Decommissioning," regarding the related decommissioning obligations. Nonutility Generators: CL&P has entered into various arrangements for the purchase of capacity and energy from nonutility generators (NUGs). These arrangements have terms from 10 to 30 years, currently expiring in the years 2001 through 2028, and require CL&P to purchase energy at specified prices or formula rates. For the 12-month period ending December 31, 1997, approximately 14 percent of NU system electricity requirements was met by NUGs. CL&P's total cost of purchases under these arrangements amounted to $283.2 million in 1997, $279.5 million in 1996 and $282.2 million in 1995. These costs may be deferred for eventual recovery through rates. Hydro-Quebec: Along with other New England utilities, CL&P, PSNH, WMECO and HWP have entered into agreements to support transmission and terminal facilities to import electricity from the Hydro-Quebec system in Canada. CL&P is obligated to pay, over a 30-year period ending in 2020, its proportionate share of the annual O&M and capital costs of these facilities. Estimated Annual Costs: The estimated annual costs of CL&P's significant long-term contractual arrangements are as follows: 1998 1999 2000 2001 2002 (Millions of Dollars) VYNPC ............. $ 16.8 $ 16.9 $ 16.2 $ 17.7 $ 18.4 NUGs ............. 281.0 291.5 290.9 295.5 299.6 Hydro-Quebec ...... 18.5 17.9 17.6 17.1 16.7 For additional information regarding the recovery of purchased power costs, see Note 1J, "Summary of Significant Accounting Policies - Recoverable Energy Costs." 12. MARKET RISK MANAGEMENT CL&P uses swap, collar, put and call instruments with financial institutions to hedge against some of the fuel price risk created by long-term negotiated energy contracts and nuclear replacement power generation and fuel purchases. These agreements minimize exposure associated with rising fuel prices by managing a portion of CL&P's cost of fuel for these negotiated energy contracts and nuclear replacement power generation and fuel purchases. As of December 31, 1997, CL&P had outstanding agreements with a total notional value of approximately $327 million, and a negative mark-to-market position of approximately $21 million. The terms of the agreements require CL&P to post cash collateral with its counterparties in the event of negative mark-to-market positions and lowered credit ratings. The amount of the collateral is to be returned to CL&P when the mark-to-market position becomes positive, when CL&P meets specified credit ratings or when an agreement ends and all open positions are properly settled. At December 31, 1997, cash collateral in the amount of $15.4 million was posted under these terms, which is included in other, at cost, on the accompanying Consolidated Balance Sheets. These agreements have been made with various financial institutions, each of which is rated "A1" or better by Moody's rating group. CL&P will be exposed to credit risk on its fuel price management instruments if the counterparties fail to perform their obligations. However, management anticipates that the counterparties will be able to fully satisfy their obligations under the agreements. 13. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY CL&P Capital LP (CL&P LP, a subsidiary of CL&P) had previously issued $100 million of cumulative 9.3 percent Monthly Income Preferred Securities (MIPS), Series A. CL&P has the sole ownership interest in CL&P LP, as a general partner, and is the guarantor of the MIPS securities. Subsequent to the MIPS issuance, CL&P LP loaned the proceeds of the MIPS issuance, along with CL&P's $3.1 million capital contribution, back to CL&P in the form of an unsecured debenture. CL&P consolidates CL&P LP for financial reporting purposes. Upon consolidation, the unsecured debenture is eliminated and the MIPS securities are accounted for as minority interests. 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each of the following financial instruments: Cash and nuclear decommissioning trusts: The carrying amounts approximate fair value. SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," requires investments in debt and equity securities to be presented at fair value. As a result of this requirement, the investments held in CL&P's nuclear decommissioning trusts were adjusted to market by approximately $49.2 million as of December 31, 1997, and $22.3 million as of December 31, 1996, with corresponding offsets to the accumulated provision for depreciation. The amounts adjusted in 1997 and 1996 represent cumulative gross unrealized holding gains. The cumulative gross unrealized holding losses were immaterial for both 1997 and 1996. Preferred stock and long-term debt: The fair value of CL&P's fixed rate securities is based upon the quoted market price for those issues or similar issues. Adjustable rate securities are assumed to have a fair value equal to their carrying value. The carrying amounts of CL&P's financial instruments and the estimated fair values are as follows: Carrying Fair At December 31, 1997 Amount Value (Thousands of Dollars) Preferred stock not subject to mandatory redemption................ $ 116,200 $ 62,889 Preferred stock subject to mandatory redemption................... 155,000 135,600 Long-term debt - First Mortgage Bonds................... 1,459,000 1,435,772 Other long-term debt................... 590,443 590,443 MIPS..................................... 100,000 100,760 Carrying Fair At December 31, 1996 Amount Value (Thousands of Dollars) Preferred stock not subject to mandatory redemption................ $ 116,200 $ 111,845 Preferred stock subject to mandatory redemption................... 155,000 120,900 Long-term debt - First Mortgage Bonds................... 1,452,288 1,410,665 Other long-term debt................... 592,783 592,783 MIPS ...................................... 100,000 108,520 The fair values shown above have been reported to meet disclosure requirements and do not purport to represent the amounts at which those obligations would be settled. To the Board of Directors of The Connecticut Light and Power Company: We have audited the accompanying consolidated balance sheets of The Connecticut Light and Power Company and Subsidiaries (a Connecticut corporation and a wholly owned subsidiary of Northeast Utilities) as of December 31, 1997 and 1996, and the related consolidated statements of income, common stockholder's equity and cash flows for each of the three years in the period ended December 31, 1997. 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 The Connecticut Light and Power Company and Subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Hartford, Connecticut February 20, 1998 THE CONNECTICUT LIGHT AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section contains management's assessment of CL&P's (the company) financial condition and the principal factors having an impact on the results of operations. The company is a wholly-owned subsidiary of Northeast Utilities (NU). This discussion should be read in conjunction with the company's consolidated financial statements and footnotes. FINANCIAL CONDITION OVERVIEW The length of the ongoing outages at the three Millstone nuclear plants (Millstone) and the high costs of the recovery efforts weakened CL&P's 1997 net income, balance sheet and cash flows and will continue to have an adverse impact on the company's financial condition until the units are returned to service. CL&P had a net loss of approximately $144 million in 1997, compared to a net loss of approximately $80 million in 1996. The poorer financial results in 1997 were due primarily to the fact that all three Millstone units were off line for the entire year in 1997 and spending associated with the recovery efforts was significantly higher in 1997 than it was in 1996. Millstone 3 operated for nearly three months in 1996 and Millstone 2 for nearly two months. As a result, the cost of replacing power ordinarily generated by the Millstone units rose by approximately $65 million in 1997. The total operation and maintenance (O&M) costs at Millstone were approximately $133 million higher in 1997. The higher Millstone costs have caused CL&P to focus closely on maintaining adequate liquidity and reducing nonnuclear O&M costs. In June 1997, CL&P successfully sold $200 million in first mortgage bonds. CL&P's access to $225 million of revolving credit lines was renegotiated in the first half of 1997. Also helping to maintain liquidity was the renegotiation in early 1998 of a $100 million credit line used by Niantic Bay Fuel Trust (NBFT) to purchase nuclear fuel for Millstone. Additionally, nonnuclear O&M expenses in 1997 were reduced by about $30 million from 1996. Tight cost controls will continue to be essential in 1998 to CL&P's efforts to meet the financial covenants contained in the $313.75 million revolving credit arrangement available to CL&P and Western Massachusetts Electric Company (WMECO). In 1998, management expects Millstone-related expenses to fall significantly, assuming Millstone 3 and Millstone 2 are returned to service at dates close to current estimates, although the O&M expenses at Millstone 3 and 2 will be considerably higher than before the station was placed on the Nuclear Regulatory Commission's (NRC's) watch list. The actual level of 1998 nuclear spending at Millstone will depend on when the units return to operation and the cost of restoring them to service. The company hopes to restart Millstone 3, the newest and largest unit at the site, in the early spring of 1998 and Millstone 2 three to four months after Millstone 3. The company cannot restart the Millstone units until it receives formal approval from the NRC. As part of an effort to reduce spending in 1998, Millstone 1 has been placed in extended maintenance status. Management will review its options with respect to Millstone 1 in 1998, including restart, early retirement and other options. Rate reductions to customers served by CL&P are likely to offset a portion of the benefit of lower Millstone-related costs. On March 1, 1998, CL&P's rates were reduced by approximately 1.4 percent to reflect the removal of Millstone 1 from rates, and additional non cash reductions were made to revenue requirements as a result of an interim rate order issued by the Connecticut Department of Public Utility Control (DPUC). A pending CL&P rate case may result in additional rate adjustments later in 1998. CL&P's revenues could be further reduced if substantial delays in restarting Millstone 3 and Millstone 2 result in a DPUC decision to remove those units from rates. In addition to focusing on maintaining liquidity, management also must attend to industry restructuring efforts in Connecticut. Restructuring legislation is being considered in the Connecticut legislative session that began in February 1998. In 1997, CL&P experienced modest economic growth in its retail sales that was offset by the effects of mild winter weather. In 1998, management expects that the Connecticut economy will continue to experience modest growth. MILLSTONE OUTAGES CL&P has an 81-percent ownership interest in Millstone units 1 and 2 and a 52.93-percent ownership interest in Millstone unit 3. Millstone 1, 2 and 3 have been out of service since November 4, 1995, February 21, 1996, and March 30, 1996, respectively. Subsequent to its January 31, 1996, announcement that Millstone had been placed on its watch list, the NRC has stated that the units cannot return to service until independent, third-party verification teams have reviewed the actions taken to improve the design, configuration and employee concern issues that prompted the NRC to place the units on its watch list. The actual date of the return to service for each of the units is dependent upon the completion of independent inspections, reviews by the NRC and a vote by the NRC Commissioners. In January 1998, NU declared Millstone 3 physically ready for restart, which meant that almost all of the restart-required physical work had been completed in the plant. The NRC currently is conducting a series of inspections to determine, among other things, whether the plant has effective leadership and corrective action and employee concerns programs. The Independent Corrective Action Verification Program, an NRC-ordered independent review of the plant's design and licensing bases, is expected to be completed in March 1998. In 1997, CL&P's share of nonfuel O&M costs expensed for Millstone totaled approximately $455 million, including $59 million reserved for future restart costs. The 1997 costs are net of $50 million of costs which were reserved in 1996. In 1996, the CL&P's share of nonfuel O&M costs expensed for Millstone totaled approximately $322 million, including $50 million reserved for future restart costs. Management will continue to evaluate the costs to be incurred in 1998 to determine whether adjustments to the existing reserves are required. CL&P's portion of replacement power costs attributable to the Millstone outages totaled approximately $281 million in 1997 compared to $216 million expensed in 1996. These costs for 1998 are forecasted to average approximately $7 million per month for Millstone 3, $7 million per month for Millstone 2 and $5 million per month for Millstone 1 while the plants are out of service. CL&P has been, and will continue to be, expensing all of the costs to restart the units including replacement power and nonfuel O&M expenses. See "Rate Matters" for issues related to the recovery of Millstone 1 costs. NU and its subsidiaries are involved in several class action lawsuits and other litigation in connection with their nuclear operations. See the "Notes to Consolidated Financial Statements," Note 11B, for further information on this litigation. MILLSTONE 1 Management will review its options with respect to Millstone 1 during 1998. The issues that management will consider in evaluating its options include the costs to restart the unit, the economic benefits of the unit's continued operation and certain Connecticut state law issues. In the CL&P four year rate review proceeding, (discussed in detail under "Rate Matters"), the DPUC noted that CL&P may not be able to recover its remaining investment in Millstone 1 if the DPUC were to determine that the unit had been prematurely shut down due to management imprudence. Additionally, there is a Connecticut statute which may limit CL&P's ability to collect decommissioning charges in the future if Millstone 1 were to be prematurely retired. CL&P's net unrecovered Millstone 1 plant cost and the unrecovered decommissioning costs at December 31, 1997, were approximately $216 million and $198 million, respectively. CAPACITY During 1996 and continuing into 1997, CL&P took measures to improve its capacity position, including obtaining additional generating capacity, improving the availability of CL&P's generating units and improving its transmission capability. During 1997, CL&P spent approximately $48 million to ensure availability of adequate generating capacity in Connecticut, of which $35 million was expensed. In 1998, CL&P does not anticipate the need to take additional measures to ensure adequate generating capacity. CL&P could incur up to an additional $50 million in 1998 for incremental capacity purchases to meet NEPOOL requirements as a result of the Millstone outages. LIQUIDITY AND CAPITAL RESOURCES Cash provided from operations decreased approximately $227 million in 1997, compared to 1996, primarily due to higher cash expenditures related to the Millstone outages, and the pay down in 1997 of the 1996 year end accounts payable balance. The 1996 year end accounts payable balance was relatively high due to costs related to a severe December storm and costs associated with the Millstone outages that had been incurred but not yet paid by the end of 1996. Net cash from financing activities increased approximately $69 million, primarily due to an increase in short-term borrowings and lower cash dividends on common shares, partially offset by higher long-term debt retirements. Cash used for investments decreased approximately $158 million, primarily due to lower investments in the NU system Money Pool, partially offset by higher capital expenditures and an increase in special deposits. CL&P established facilities in 1996 under which it may sell, from time to time, up to $200 million of its accounts receivable and accrued utility revenues. As of December 31, 1997, CL&P sold approximately $70 million of receivables to third-party purchasers. NU's, CL&P's and WMECO's three-year revolving credit agreement (Credit Agreement) was amended in May 1997 (the Credit Agreement). Under the Credit Agreement, CL&P and WMECO are able to borrow up to approximately $225 million and $90 million, respectively, subject to a total borrowing limit of $313.75 million for all three borrowers. NU will be able to borrow up to $50 million when NU, CL&P and WMECO have each maintained a consolidated operating income to consolidated interest expense ratio of at least 2.50 to 1 for two consecutive fiscal quarters. Currently, the companies cannot meet this requirement. At December 31, 1997, CL&P had $35 million outstanding under the Credit Agreement. Each major subsidiary of NU finances its own needs. Neither CL&P nor WMECO has any financing agreements containing cross defaults based on financial defaults by NU, Public Service Company of New Hampshire (PSNH) or North Atlantic Energy Corporation (NAEC). Nevertheless, it is possible that investors will take negative operating results or regulatory developments for one subsidiary of NU into account when evaluating the other NU subsidiaries. That could, as a practical matter and despite the contractual and legal separations among NU and its subsidiaries, negatively affect the company's access to financial markets. In December 1997 and January 1998, Moody's Investors Service (Moody's) and Standard & Poor's (S&P), respectively, downgraded the senior secured debt of CL&P, WMECO and NU, as well as the preferred stock of CL&P and WMECO. This was the fourth time Moody's and S&P have downgraded CL&P and WMECO securities since the Millstone units went on the NRC watch list in 1996. All of NU system's securities are rated below investment grade and remain under review for further downgrade. CL&P's accounts receivable program could be terminated if its senior secured debt is downgraded two more steps from its current ratings. Although CL&P does not have any plans to issue debt in the near term, rating agency downgrades generally increase the future cost of borrowing funds because lenders will want to be compensated for increased risk. Additionally, this could affect the terms and ability of the company to extend existing agreements. CL&P's ability to borrow under the financing arrangements is dependent on the satisfaction of contractual borrowing conditions. The financial covenants that must be satisfied to permit CL&P and WMECO to borrow under the Credit Agreement are particularly restrictive and become more restrictive throughout 1998. Spending levels in 1998, particularly for the first half of the year while the Millstone units are expected to be out of service, will be constrained to levels intended to assure that the financial covenants in CL&P's and WMECO's Credit Agreement are satisfied. However, there is no assurance that these financial covenants will be met as the system may encounter additional unexpected costs from such areas as storms, reduced revenues from regulatory actions or the effect of weather on sales levels. If the return to service of Millstone 3 or Millstone 2 is delayed substantially beyond the present restart estimates, if some borrowing facilities become unavailable because of difficulties in meeting borrowing conditions or renegotiating extensions, if the system encounters additional significant costs, or any other significant deviations from management's current assumptions, the currently available borrowing facilities could be insufficient to meet all of CL&P's cash requirements. In those circumstances, management would take even more stringent actions to reduce costs and cash outflows and would attempt to take other actions to obtain additional sources of funds. The availability of these funds would be dependent upon the general market conditions and CL&P's credit and financial condition at that time. RESTRUCTURING CL&P continues to operate under cost-of-service based regulation, however, future rates and the recovery of strandable costs are issues that are being considered as part of broad restructuring legislation in the current Connecticut legislative session. Strandable costs are expenditures or commitments that have been made to meet public service obligations with the expectation that they would be recovered from customers in the future. CL&P has had exposure to strandable costs for its investments in high-cost nuclear generating plants, state-mandated purchased power obligations and significant regulatory assets. The company's exposure to strandable investments and purchased power obligations exceeds its shareholder's equity. CL&P's financial strength and resulting ability to compete in a restructured environment will be negatively affected if the company is unable to recover its past investments and commitments. Even if the company is given the opportunity to recover a large portion of its strandable costs, earnings prospects in a restructured environment will be affected in ways which cannot be estimated at this time. The company is seeking to mitigate the impacts of restructuring by proposing stable, lower rates, while pursuing customer choice options and full recovery of its strandable costs. The company's strategy to recover strandable costs includes efforts to promote state legislation that will authorize the issuance of rate reduction bonds that would refinance these investments and which would be repaid through non-bypassable charges to customers. Management is unable to predict the ultimate outcome of these initiatives which will be subject to regulatory and legislative approvals. Management believes it is entitled to full recovery of its prudently incurred costs, including regulatory assets and other strandable costs. See the "Notes to Consolidated Financial Statements," Note 1H, for the potential accounting impacts of restructuring. RATE MATTERS In July 1996, the DPUC approved a rate settlement agreement with CL&P (the Settlement). Under the Settlement, CL&P froze base rates until at least December 31, 1997, and agreed to accelerate the amortization of regulatory assets during the period that the rate freeze remains in effect. The Settlement provided that CL&P's target return on equity (ROE) would be 10.7 percent but did not alter CL&P's allowed ROE of 11.7 percent. If CL&P's actual ROE for a calendar year exceeds 10.7 percent after the target regulatory asset amortization ($68 million in 1997) and after adjustment for any incremental NRC billings and any rate disallowances for nuclear operations, then CL&P shall retain two-thirds of any surplus and use the remaining one-third to provide a reduction in bills. CL&P's actual ROE, as adjusted, fell below the target ROE for 1996 and 1997 and, therefore, the accelerated amortization of regulatory assets was reduced to the minimum amounts allowed under the Settlement ($73 million in 1996 and $54 million in 1997). For each full year that the rate freeze remains in effect, CL&P agreed to amortize an additional $44 million of regulatory assets. On July 30, 1997, the DPUC issued a decision in its prudence review of nuclear cost recovery issues disallowing CL&P's recovery of all of the replacement power costs associated with the ongoing outages at Millstone. CL&P has expensed, and will continue to expense, replacement power costs for the Millstone outages as they are incurred. The DPUC is required to review a utility's rates every four years if there has not been a rate proceeding during such period. In 1997, the DPUC conducted such a review of CL&P's rates, including an analysis of the possibility of removing one or more of the Millstone nuclear units from CL&P's rate base. On December 31, 1997, the DPUC issued its ruling in this matter. The decision did not effect a change in CL&P's rates, but set forth findings and conclusions that could be used to do so in additional proceedings. The most significant conclusion was that Millstone 1 should be removed from CL&P's rate base, which would cause an annual revenue reduction of approximately $30.5 million. The decision stated that the DPUC would open an interim rate case immediately to remove Millstone 1 from CL&P's rates and simultaneously to remove an additional $110.5 million of other expenses from rates related to perceived overearnings. On February 25, 1998, the DPUC issued a decision reducing CL&P's rates by approximately 1.4 percent to reflect the removal of Millstone 1 from rates. This reduction reflects the removal from rates of O&M, depreciation and investment return related to Millstone 1, net of replacement power costs. In addition, the decision requires CL&P to accelerate the amortization of regulatory assets by $110.5 million, which includes the $44 million from the 1996 Settlement. The interim rate reduction became effective on March 1, 1998. CL&P also was directed to file a full rate case on June 1, 1998, to address potential overearnings amounting to an additional $150 million in 1998. The effective date of any rate order will be September 28, 1998. In addition, the DPUC has scheduled hearings for April 1, 1998 to determine the status of Millstone 3 and Millstone 2. If the units are not operating by that date, the DPUC will consider their removal from rates. A similar restart status hearing is anticipated for June 1, 1998. The DPUC also will consider CL&P's analyses of the economic benefits of the continued operation of Millstone 1 and 2 in the context of CL&P's next integrated resource planning proceeding, which begins in April 1998. NUCLEAR DECOMMISSIONING CONNECTICUT YANKEE CL&P has a 34.5 percent ownership interest in the Connecticut Yankee nuclear generating facility (CY or the plant). On December 4, 1996, the Board of Directors of Connecticut Yankee Atomic Power Company voted unanimously to cease permanently the production of power at the plant. The decision to retire CY from commercial operation was based on an economic analysis of the costs of operating it compared to the costs of closing it and incurring replacement power costs over the remaining period of the plant's operating license, which would have expired in 2007. The economic analysis showed that closing the plant and incurring replacement power costs produced substantial savings. CY has undertaken a number of regulatory filings intended to implement the decommissioning. In late December 1996, CY filed an amendment to its power contracts with the FERC to clarify the obligations of its purchasing utilities following the decision to cease power production. At December 31, 1997, CL&P's share of these obligations was approximately $214 million, including the cost of decommissioning and the recovery of existing assets. Management expects that the company will continue to be allowed to recover such FERC approved costs from its customers. Accordingly, CL&P has recognized its share of the estimated costs as a regulatory asset, with a corresponding obligation, on its balance sheets. MAINE YANKEE CL&P has a 12 percent ownership interest in the Maine Yankee (MY) nuclear generating facility. On August 6, 1997, the Board of Directors of Maine Yankee Atomic Power Company (MYAPC) voted unanimously to retire MY. On January 14, 1998, FERC released a draft order on the MYAPC application to amend its power contracts with the owner/purchasers and revise its decommissioning and other charges. FERC has accepted the proposed application for filing and made the amendments and the proposed charges under the contracts effective on January 15, 1998, subject to refund after hearings. At December 31, 1997, CL&P's share of the estimated remaining obligation, including decommissioning, amounted to approximately $104 million. Under the terms of the contracts with MYAPC, the shareholders' sponsor companies, including CL&P, are responsible for their proportionate share of the costs of the unit, including decommissioning. Management expects that CL&P will be allowed to recover these costs from it's customers. Accordingly, CL&P has recognized these costs as a regulatory asset, with a corresponding obligation on its balance sheet. MILLSTONE AND SEABROOK CL&P's estimated cost to decommission its shares of the Millstone plants and Seabrook is approximately $1.1 billion in year end 1997 dollars. These costs are being recognized over the lives of the respective units with a portion currently being recovered through rates. As of December 31, 1997, CL&P's share of the market value of the contributions already made to the decommissioning trusts, including their investment returns, was approximately $369 million. See the "Notes to Consolidated Financial Statements," Note 3, for further information on nuclear decommissioning, including the CL&P's share of costs to decommission the other regional nuclear generating units. ENVIRONMENTAL MATTERS CL&P is potentially liable for environmental cleanup costs at a number of sites inside and outside its service territory. To date, the future estimated environmental remediation liability has not been material with respect to the earnings or financial position of CL&P. At December 31, 1997, CL&P had recorded an environmental reserve of approximately $6.4 million. See the "Notes to Consolidated Financial Statements," Note 11C, for further information on environmental matters. YEAR 2000 ISSUE The Year 2000 issue exists because many computer systems and applications currently use two-digit date fields to designate a year. As the change of the century occurs, date-sensitive systems may recognize the year 2000 as 1900, or not recognize it at all. This inability to recognize or properly treat the year 2000 may cause NU's systems to process critical financial and operational information incorrectly. The NU system has assessed and continues to assess the impact of the Year 2000 issue on its operating and reporting systems. The assessment of the nuclear operating systems is continuing and is expected to be completed in the summer of 1998. The NU system will utilize both internal and external resources to reprogram or replace, and test the software for Year 2000 modifications. The total estimated remaining cost of the Year 2000 project for the NU system is $37 million and is being funded through operating cash flows. This estimate does not include any costs for the replacement or repair of equipment or devices that may be identified during the assessment process. The majority of these costs will be expensed as incurred over the next two years. To date, the NU system has incurred and expensed approximately $4 million related to the assessment of and preliminary efforts in connection with its Year 2000 project. The costs of the project and the date on which the NU system plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those plans. If the NU system's remediation plan is not successful, there could be a significant disruption of the company's operations. RISK-MANAGEMENT INSTRUMENTS The following discussion about the company's risk-management activities includes forward-looking statements that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. This analysis presents the hypothetical loss in earnings related to the fuel price and interest rate market risks not covered by the risk-management instruments at December 31, 1997. The company uses swaps, collars, puts, and calls to manage the market risk exposures associated with changes in fuel prices and variable interest rates. The company does not use these risk-management instruments for speculative purposes. For more information on CL&P's use of risk management instruments, see the "Notes to Consolidated Financial Statements," Notes 12. In the generation of electricity, the most significant variable cost component is the cost of fuel. Typically, most of CL&P's fuel purchases are protected by a regulatory fuel price adjustment clause. However, for a specific, well-defined volume of fuel that is excluded from the fuel price adjustment clause (unprotected volume), CL&P employs fuel price risk-management instruments to protect itself against the risk of rising fuel prices, thereby limiting fuel costs and protecting its profit margins. These risks are created by the sale of long-term, fixed-price electricity contracts to wholesale customers and the purchase or generation of replacement power related to the ongoing Millstone nuclear outages. At December 31, 1997, CL&P had outstanding agreements with a total notional value of approximately $327 million. The settlement amounts associated with the instruments reduced fuel expense by approximately $7.8 million. CL&P has had experience using various fuel price risk-management instruments since 1994, most of which have been in the form of fuel price swaps. At December 31, 1997 approximately 30 percent of the unprotected volume was covered by fuel price risk-management instrument (hedge ratio) for 1997. This effectively fixed or bounded the fuel cost and thus eliminated the market price risk for this covered volume of fuel. At December 31, 1997, the company had a hedge ratio of 44 percent for 1998. At December 31, 1997, the 56 percent uncovered volume of fuel for 1998, as a result of not being hedged, is subject to changes in actual market prices. Therefore, assuming a hypothetical 10 percent increase in the average 1997 price of fuel in 1998, the result would be a negative pre-tax impact on earnings of approximately $12.4 million. This analysis is based on the broad assumption that the entire uncovered volume of fuel remains constant and will be purchased on the spot market. This assumption is subject to change as the uncovered volume of fuel likely will change during the next year. Other assumptions used in this analysis, projections of the fuel mix, the amount of long-term sales contracts or the projected Millstone restart dates, also are subject to change. RESULTS OF OPERATIONS Income Statement Variances (Millions of Dollars) 1997 over/(under) 1996 1996 over/(under) 1995 Amount Percent Amount Percent Operating revenues $ 68 3% $ 10 - % Fuel, purchased and net interchange power 146 18 222 37 Other operation (44) (6) 164 27 Maintenance 56 19 107 56 Amortization of regulatory assets, net 4 7 3 6 Federal and state income taxes (50) (a) (202) (a) Other income, net (23) (a) 6 42 Net income (64) (80) (285) (a) (a) Percentage greater than 100 OPERATING REVENUES Total operating revenues increased in 1997, primarily due to higher fuel recoveries and higher conservation recoveries. Fuel recoveries increased $33 million, primarily due to a higher fuel adjustment clause rate in 1997. Conservation recoveries increased by $17 million primarily due to a 1996 reserve for over-recoveries of demand-side management costs. Retail kilowatt hour sales were essentially unchanged in 1997. Total operating revenues increased in 1996, primarily due to higher retail sales and regulatory decisions, partially offset by lower fuel recoveries and lower wholesale revenues. Retail sales increased 1.8 percent ($29 million) primarily due to modest economic growth in 1996. Regulatory decisions increased revenues by $15 million primarily due to the mid-1995 retail rate increase, partially offset by 1996 reserves for over-recoveries of demand-side management costs. Fuel recoveries decreased $24 million primarily due to lower average fossil fuel prices. Wholesale revenues decreased $18 million primarily due to higher recognition in 1995 of lump-sum payments for the termination of a long-term contract and capacity sales contracts that expired in 1995. FUEL, PURCHASED AND NET INTERCHANGE POWER Fuel, purchased and net interchange power expense increased in 1997, primarily due to replacement power costs associated with the Millstone outages and the expensing in 1997 of replacement power costs incurred in 1996. Fuel, purchased and net interchange power expense increased in 1996, primarily due to replacement power due to the nuclear outages and the 1996 write-off of the generation utilization adjustment clause (GUAC) balances under the Settlement, partially offset by lower nuclear generation and the timing of the recognition of costs under the company's fuel clauses. OTHER OPERATION AND MAINTENANCE Other operation and maintenance expenses increased in 1997, primarily due to higher costs associated with the Millstone restart effort ($133 million, including a net increase of $9 million in reserves for future costs) and higher charges from Maine Yankee ($9 million), partially offset by lower recognition of nuclear refueling outage costs primarily as a result of the 1996 Rate Settlement ($72 million), lower capacity charges from Connecticut Yankee as a result of a property tax refund ($27 million), lower administrative and general expenses ($23 million) primarily due to lower pensions and benefit costs and lower storm expenses. Other operation and maintenance expenses increased in 1996, primarily due to higher costs associated with the Millstone restart effort ($143 million, including $50 million of reserves for future costs) and 1996 costs to ensure adequate generating capacity ($39 million). In addition, 1996 costs reflect higher storm and reliability expenditures, higher recognition of conservation expenses and higher marketing costs. AMORTIZATION OF REGULATORY ASSETS, NET Amortization of regulatory assets, net increased in 1997, primarily due to the completion of cogeneration deferrals in 1996 and increased amortization in 1997, partially offset by the completion of CL&P's Seabrook amortization in 1996. Amortization of regulatory assets, net increased in 1996, primarily due to lower cogeneration deferrals and the accelerated amortization of regulatory assets as a result of the Settlement, partially offset by the completion of the Millstone 3 phase-in amortization in 1995. FEDERAL AND STATE INCOME TAXES Federal and state income taxes decreased in 1997 and 1996, primarily due to lower book taxable income. OTHER INCOME, NET Other income, net decreased in 1997, primarily due to costs associated with the accounts receivable facility, nonutility marketing and advertising costs and lower miscellaneous income. Other income, net increased in 1996, primarily due to higher income on temporary cash investments in 1996. SELECTED FINANCIAL DATA(a) 1997 1996 1995 1994 1993 (Thousands of Dollars) Operating Revenues.$2,465,587 $2,397,460 $2,387,069 $2,328,052 $2,366,050 Operating (Loss) /Income.......... (12,399) 29,773 324,026 286,948 241,655 Net(Loss)/Income... (144,377) (80,237) 205,216 198,288 191,449(b) Cash Dividends on Common Stock..... 5,989 138,608 164,154 159,388 160,365 Total Assets....... 6,081,223 6,244,036 6,045,631 6,217,457 6,397,405 Long-Term Debt (c). 2,043,327 2,038,521 1,822,018 1,823,690 2,057,280 Preferred Stock Not Subject to Mandatory Redemption....... 116,200 116,200 116,200 166,200 166,200 Preferred Stock Subject to Mandatory Redemption(c).... 155,000 155,000 155,000 230,000 230,000 Obligations Under Capital Leases(c) 158,118 155,708 172,264 175,969 177,418 STATEMENTS OF QUARTERLY FINANCIAL DATA (Unaudited) Quarter Ended(a) 1997 March 31 June 30 September 30 December 31 (Thousands of Dollars) Operating Revenues $624,908 $ 574,841 $ 627,712 $ 638,126 Operating Income/ (Loss) $ 23,148 $ (33,587) $ (15,552) $ 13,592 Net Loss $ (6,431) $ (64,089) $ (50,077) $ (23,780) 1996 Operating Revenues $659,355 $ 542,999 $ 599,505 $ 595,601 Operating Income/ (Loss) $ 59,977 $ 15,197 $ 593 $ (45,994) Net Income/(Loss) $ 32,851 $(10,700) $ (26,938) $ (75,450) (a) Reclassifications of prior data have been made to conform with the current presentation. (b) Includes the cumulative effect of change in accounting for municipal property tax expense, which increased earnings for common shares by $47.7 million. (c) Includes portion due within one year. STATISTICS Gross Electric Average Utility Plant Annual December 31, Use Per Electric (Thousands of kWh Sales Residential Customers Employees Dollars) (Millions) Customer (kWh) (Average) (December 31) 1997 $6,639,786 26,766 8,526 1,103,309 2,163 1996 6,512,659 26,043 8,639 1,099,340 2,194 1995 6,389,190 26,366 8,506(a) 1,094,527 2,270 1994 6,327,967 26,975 8,775 1,086,400 2,587 1993 6,214,401 26,107 8,519 1,078,925 2,676 (a) Effective January 1, 1996, the amounts shown reflect billed and unbilled sales. 1995 has been restated to reflect this change. EX-13.3 28 ANNUAL REPORT FOR WMECO 1997 Annual Report Western Massachusetts Electric Company Index Contents Page Consolidated Balance Sheets......................................... 2-3 Consolidated Statements of Income................................... 4 Consolidated Statements of Cash Flows............................... 5 Consolidated Statements of Common Stockholder's Equity.............. 6 Notes to Consolidated Financial Statements.......................... 7 Report of Independent Public Accountants............................ 38 Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 39 Selected Financial Data............................................. 49 Statements of Quarterly Financial Data.............................. 49 Statistics.......................................................... 50 Preferred Stockholder and Bondholder Information.................... Back Cover PART I. FINANCIAL INFORMATION WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------- At December 31, 1997 1996 - ---------------------------------------------------------------------------------------- (Thousands of Dollars) ASSETS - ------ Utility Plant, at original cost: Electric (Note 1H)....................................... $ 1,284,288 $ 1,257,097 Less: Accumulated provision for depreciation.......... 559,119 503,989 ------------- ------------ 725,169 753,108 Construction work in progress............................ 19,038 15,968 Nuclear fuel, net........................................ 30,907 30,296 ------------- ------------ Total net utility plant.............................. 775,114 799,372 ------------- ------------ Other Property and Investments: Nuclear decommissioning trusts, at market................ 102,708 83,611 Investments in regional nuclear generating companies, at equity.................................... 15,741 15,448 Other, at cost........................................... 4,900 4,367 ------------- ------------ 123,349 103,426 ------------- ------------ Current Assets: Cash..................................................... 105 67 Investments in securitizable assets (Note 10)............ 25,280 - Receivables, less accumulated provision for uncollectible accounts of $50,000 in 1997 and of $2,121,000 in 1996 (Note 10).................... 2,739 40,168 Accounts receivable from affiliated companies............ 3,933 3,525 Taxes receivable......................................... 10,768 1,778 Accrued utility revenues (Note 10)....................... - 12,394 Fuel, materials and supplies, at average cost............ 5,860 5,317 Prepayments and other.................................... 14,945 12,262 ------------- ------------ 63,630 75,511 ------------- ------------ Deferred Charges: Regulatory assets (Note 1H).............................. 211,377 210,852 Unamortized debt expense................................. 2,695 1,866 Other.................................................... 2,963 888 ------------- ------------ 217,035 213,606 ------------- ------------ Total Assets......................................... $ 1,179,128 $ 1,191,915 ============= ============
The accompanying notes are an integral part of these financial statements. WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------- At December 31, 1997 1996 - --------------------------------------------------------------------------------------- (Thousands of Dollars) CAPITALIZATION AND LIABILITIES - ------------------------------ Capitalization: Common stock--$25 par value--authorized and outstanding 1,072,471 shares in 1997 and 1996.......... $ 26,812 $ 26,812 Capital surplus, paid in................................ 151,171 150,911 Retained earnings....................................... 50,225 97,045 ------------- ------------ Total common stockholder's equity.............. 228,208 274,768 Cumulative preferred stock-- $100 par value-- authorized 1,000,000 shares; outstanding 200,000 shares in 1997 and 1996; $25 par value--authorized 3,600,000 shares; outstanding 840,000 shares in 1997 and 1996 Preferred stock not subject to mandatory redemption..... 20,000 20,000 Preferred stock subject to mandatory redemption......... 19,500 21,000 Long-term debt.......................................... 386,849 334,742 ------------- ------------ Total capitalization........................... 654,557 650,510 ------------- ------------ Obligations Under Capital Leases (Note 8)................. 217 29,269 ------------- ------------ Current Liabilities: Notes payable to banks.................................. 15,000 - Notes payable to affiliated company..................... 14,350 47,400 Long-term debt and preferred stock--current portion................................................ 11,300 14,700 Obligations under capital leases--current portion................................................ 32,670 2,965 Accounts payable........................................ 30,571 26,698 Accounts payable to affiliated companies................ 21,209 20,256 Accrued taxes........................................... 522 2,659 Accrued interest........................................ 3,318 5,643 Nuclear compliance (Note 11B)........................... 13,800 11,800 Other................................................... 2,446 4,754 ------------- ------------ 145,186 136,875 ------------- ------------ Deferred Credits: Accumulated deferred income taxes....................... 241,036 245,253 Accumulated deferred investment tax credits............. 23,364 24,833 Deferred contractual obligations (Note 2)............... 93,628 84,598 Other................................................... 21,140 20,577 ------------- ------------ 379,168 375,261 ------------- ------------ Commitments and Contingencies (Note 11) ------------- ------------ Total Capitalization and Liabilities........... $ 1,179,128 $ 1,191,915 ============= ============
The accompanying notes are an integral part of these financial statements. WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------- For the Years Ended December 31, 1997 1996 1995 - --------------------------------------------------------------------------------- (Thousands of Dollars) Operating Revenues............................. $ 426,447 $ 421,337 $ 420,434 ---------- ---------- ---------- Operating Expenses: Operation -- Fuel, purchased and net interchange power. 140,976 115,691 86,738 Other..................................... 155,399 148,697 143,000 Maintenance.................................. 81,466 56,201 37,447 Depreciation................................. 39,753 39,710 37,924 Amortization of regulatory assets, net....... 6,428 9,170 19,562 Federal and state income taxes (Note 7)...... (15,926) 5,995 14,060 Taxes other than income taxes................ 19,316 19,850 18,639 ---------- ---------- ---------- Total operating expenses............... 427,412 395,314 357,370 ---------- ---------- ---------- Operating (Loss)/Income........................ (965) 26,023 63,064 ---------- ---------- ---------- Other Income: Equity in earnings of regional nuclear generating companies....................... 1,524 1,800 1,771 Other, net................................... (1,106) 1,153 1,232 Income taxes................................. 1,026 1,068 262 ---------- ---------- ---------- Other income, net...................... 1,444 4,021 3,265 ---------- ---------- ---------- Income before interest charges......... 479 30,044 66,329 ---------- ---------- ---------- Interest Charges: Interest on long-term debt................... 26,046 24,094 26,840 Other interest............................... 3,109 2,028 356 ---------- ---------- ---------- Interest charges, net.................. 29,155 26,122 27,196 ---------- ---------- ---------- Net (Loss)/Income.............................. $ (28,676) $ 3,922 $ 39,133 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------- For the Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------------------------- (Thousands of Dollars) Operating Activities: Net (Loss)/Income........................................... $ (28,676) $ 3,922 $ 39,133 Adjustments to reconcile to net cash from operating activities: Depreciation.............................................. 39,753 39,710 37,924 Deferred income taxes and investment tax credits, net..... (2,040) (3,439) 3,418 Deferred Millstone 3 return............................... - - 7,146 Recoverable energy costs, net of amortization............. (8,184) (10,517) 1,285 Amortization of nuclear refueling outage, net of deferrals 8,819 6,188 (8,857) Other sources of cash..................................... 27,804 21,248 32,266 Other uses of cash........................................ (21,215) (10,270) (8,039) Changes in working capital: Receivables and accrued utility revenues.................. 29,415 (1,853) (1,933) Fuel, materials and supplies.............................. (543) (203) (285) Accounts payable.......................................... 4,826 20,875 (11,669) Sale of receivables and accrued utility revenues (Note 10) 20,000 - - Investment in securitizable assets (Note 10).............. (25,280) - - Accrued taxes............................................. (2,137) (805) (3,474) Nuclear compliance, net (Note 11B)........................ 2,000 11,800 - Other working capital (excludes cash)..................... (16,882) (8,144) 1,256 ----------- ----------- ----------- Net cash flows from operating activities...................... 27,660 68,512 88,171 ----------- ----------- ----------- Financing Activities: Issuance of long-term debt.................................. 60,000 - - Net (decrease)/increase in short-term debt.................. (18,050) 23,350 24,050 Reacquisitions and retirements of long-term debt............ (14,700) - (34,550) Reacquisitions and retirements of preferred stock........... - (36,500) (15,675) Cash dividends on preferred stock........................... (3,140) (5,305) (4,944) Cash dividends on common stock.............................. (15,004) (16,494) (30,223) ----------- ----------- ----------- Net cash flows from/(used for) financing activities........... 9,106 (34,949) (61,342) ----------- ----------- ----------- Investment Activities: Investment in plant: Electric utility plant.................................... (26,249) (23,468) (27,084) Nuclear fuel.............................................. (8) 541 75 ----------- ----------- ----------- Net cash flows used for investments in plant................ (26,257) (22,927) (27,009) NU System Money Pool........................................ - - 8,750 Investment in nuclear decommissioning trusts................ (9,645) (9,794) (8,503) Other investment activities, net............................ (826) (977) 46 ----------- ----------- ----------- Net cash flows used for investments........................... (36,728) (33,698) (26,716) ----------- ----------- ----------- Net Increase/(Decrease) In Cash For The Period................ 38 (135) 113 Cash - beginning of period.................................... 67 202 89 ----------- ----------- ----------- Cash - end of period.......................................... $ 105 $ 67 $ 202 =========== =========== =========== Supplemental Cash Flow Information: Cash paid/(refunded) during the year for: Interest, net of amounts capitalized........................ $ 28,711 $ 21,725 $ 25,551 =========== =========== =========== Income taxes................................................ $ (1,121) $ 7,816 $ 14,385 =========== =========== =========== Increase in obligations: Niantic Bay Fuel Trust...................................... $ 660 $ 669 $ 7,851 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
- --------------------------------------------------------------------------------------- Capital Retained Common Surplus, Earnings Stock Paid In (a) Total - --------------------------------------------------------------------------------------- (Thousands of Dollars) Balance at January 1, 1995............... $26,812 $149,683 $111,586 $288,081 Net income for 1995.................. 39,133 39,133 Cash dividends on preferred stock.............................. (4,944) (4,944) Cash dividends on common stock....... (30,223) (30,223) Loss on the retirement of preferred stock.............................. (256) (256) Capital stock expenses, net.......... 499 499 -------- --------- --------- --------- Balance at December 31, 1995............. 26,812 150,182 115,296 292,290 Net income for 1996.................. 3,922 3,922 Cash dividends on preferred stock.............................. (5,305) (5,305) Cash dividends on common stock....... (16,494) (16,494) Loss on the retirement of preferred stock.............................. (374) (374) Capital stock expenses, net.......... 729 729 -------- --------- --------- --------- Balance at December 31, 1996............. 26,812 150,911 97,045 274,768 Net loss for 1997.................... (28,676) (28,676) Cash dividends on preferred stock.............................. (3,140) (3,140) Cash dividends on common stock....... (15,004) (15,004) Capital stock expenses, net.......... 260 260 -------- --------- --------- --------- Balance at December 31, 1997............. $26,812 $151,171 $ 50,225 $228,208 ======== ========= ========= =========
(a) The company has dividend restrictions imposed by its long-term debt agreements. At December 31, 1997, these restrictions totaled approximately $21.5 million. The accompanying notes are an integral part of these financial statements. Western Massachusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. ABOUT WESTERN MASSACHUSETTS ELECTRIC COMPANY Western Massachusetts Electric Company and subsidiary (WMECO or the company), The Connecticut Light and Power Company (CL&P), Holyoke Water Power Company (HWP), Public Service Company of New Hampshire (PSNH) and North Atlantic Energy Corporation (NAEC) are the operating subsidiaries comprising the Northeast Utilities system (the NU system) and are wholly owned by Northeast Utilities (NU). The NU system furnishes franchised retail electric service in Connecticut, New Hampshire and western Massachusetts through CL&P, PSNH, WMECO and HWP. The fifth wholly owned subsidiary, NAEC, sells all of its entitlement to the capacity and output of the Seabrook nuclear power plant (Seabrook) to PSNH. In addition to its franchised retail service, the NU system furnishes firm and other wholesale electric services to various municipalities and other utilities, and participates in limited retail access programs, providing off-system retail electric service. The NU system serves about 30 percent of New England's electric needs and is one of the 25 largest electric utility systems in the country as measured by revenues. Other wholly owned subsidiaries of NU provide support services for the NU system companies and, in some cases, for other New England utilities. Northeast Utilities Service Company (NUSCO) provides centralized accounting, administrative, information resources, engineering, financial, legal, operational, planning, purchasing and other services to the NU system companies. Northeast Nuclear Energy Company (NNECO) acts as agent for the NU system companies and other New England utilities in operating the Millstone nuclear generating facilities. In addition, CL&P and WMECO each have established a special purpose subsidiary whose business consists of the purchase and resale of receivables. For information regarding WMECO's subsidiary, see Note 10, "Sale of Customer Receivables and Accrued Utility Revenues." B. PRESENTATION The consolidated financial statements of WMECO include the accounts of its wholly owned subsidiary. Significant intercompany transactions have been eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications of prior years' data have been made to conform with the current year's presentation. All transactions among affiliated companies are on a recovery of cost basis which may include amounts representing a return on equity and are subject to approval by various federal and state regulatory agencies. C. PUBLIC UTILITY REGULATION NU is registered with the Securities and Exchange Commission (SEC) as a holding company under the Public Utility Holding Company Act of 1935 (1935 Act). NU and its subsidiaries, including WMECO, are subject to the provisions of the 1935 Act. Arrangements among the NU system companies, outside agencies and other utilities covering inter- connections, interchange of electric power and sales of utility property are subject to regulation by the Federal Energy Regulatory Commission (FERC) and/or the SEC. WMECO is subject to further regulation for rates, accounting, and other matters by the FERC and/or the applicable state regulatory commissions. For information regarding proposed changes in the nature of industry regulation, see Note 11A, "Commitments and Contingencies - Restructuring and Rate Matters." D. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 129, "Disclosure of Information about Capital Structure." SFAS 129 establishes standards for disclosing information about an entity's capital structure. WMECO's current disclosures are consistent with the requirements of SFAS 129. During June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income" and SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 130 establishes standards for the reporting and disclosure of comprehensive income. To date, WMECO has not had material transactions that would be required to be reported as comprehensive income. SFAS 131 determines the standards for reporting and disclosing qualitative and quantitative information about a company's operating segments. This information includes segment profit or loss, certain segment revenue and expense items and segment assets and a reconciliation of these segment disclosures to corresponding amounts in the company's general purpose financial statements. WMECO currently evaluates management performance using a cost-based budget, and the information required by SFAS 131 is not available. Therefore, these disclosure requirements are not applicable. Management believes that the implementation of SFAS 130 and SFAS 131 will not have a material impact on WMECO's current disclosures. See Note 10, "Sale of Customer Receivables and Accrued Utility Revenues," and Note 11C, "Commitments and Contingencies -- Environmental Matters," for information on other newly issued accounting and reporting standards related to those specific areas. E. INVESTMENTS AND JOINTLY OWNED ELECTRIC UTILITY PLANT Regional Nuclear Generating Companies: WMECO owns common stock of four regional nuclear generating companies (Yankee companies). WMECO's investments in the Yankee companies are accounted for on the equity basis due to WMECO's ability to exercise significant influence over their operating and financial policies. The Yankee companies, with WMECO's ownership interests, are: Connecticut Yankee Atomic Power Company (CYAPC) ................. 9.5% Yankee Atomic Electric Company (YAEC) ........................... 7.0 Maine Yankee Atomic Power Company (MYAPC) ....................... 3.0 Vermont Yankee Nuclear Power Corporation (VYNPC) ................ 2.5 WMECO's investments in the Yankee companies at December 31, 1997 are: (Thousands of Dollars) CYAPC ................................................. $10,552 YAEC .................................................. 1,465 MYAPC ................................................. 2,370 VYNPC ................................................. 1,354 $15,741 Each Yankee company owns a single nuclear generating unit. Under the terms of the contracts with the Yankee companies, the shareholders- sponsors are responsible for their proportionate share of the costs of each unit, including decommissioning. The energy and capacity costs from VYNPC and nuclear decommissioning costs of the Yankee companies that have been shut down are billed as purchased power to WMECO. The electricity produced by the Vermont Yankee nuclear generating facility (VY) is committed substantially on the basis of ownership interests and is billed pursuant to contractual agreements. YAEC's, CYAPC's and MYAPC's nuclear power plants were shut down permanently on February 26, 1992, December 4, 1996, and August 6, 1997, respectively. Under ownership agreements with the Yankee companies, WMECO may be asked to provide direct or indirect financial support for one or more of the companies. For more information on the Yankee companies, see Note 2, "Nuclear Decommissioning," and Note 11F, "Commitments and Contingencies --Long-Term Contractual Arrangements." Millstone 1: WMECO has a 19 percent joint-ownership interest in Millstone 1, a 660-megawatt (MW) nuclear generating unit. As of December 31, 1997 and 1996, plant-in-service included approximately $91 million and $90.2 million, respectively, and the accumulated provision for depreciation included approximately $40.1 million and $37.2 million, respectively, for WMECO's share of Millstone 1. WMECO's share of Millstone 1 expenses is included in the corresponding operating expenses on the accompanying Consolidated Statements of Income. Millstone 2: WMECO has a 19 percent joint-ownership interest in Millstone 2, a 870-MW nuclear generating unit. As of December 31, 1997 and 1996, plant-in-service included approximately $162.4 million and $161.4 million, respectively, and the accumulated provision for depreciation included approximately $57.6 million and $51.7 million, respectively, for WMECO's share of Millstone 2. WMECO's share of Millstone 2 expenses is included in the corresponding operating expenses on the accompanying Consolidated Statements of Income. Millstone 3: WMECO has a 12.24 percent joint-ownership interest in Millstone 3, a 1,154-MW nuclear generating unit. As of December 31, 1997 and 1996, plant-in-service included approximately $378.7 million and $377.7 million, respectively, and the accumulated provision for depreciation included approximately $110.1 million and $99.8 million, respectively, for WMECO's share of Millstone 3. WMECO's share of Millstone 3 expenses is included in the corresponding operating expenses on the accompanying Consolidated Statements of Income. The three Millstone units are out of service. NU hopes to return Millstone 3 to service in the early spring of 1998 and Millstone 2 three to four months after Millstone 3. Millstone 1 has been placed in extended maintenance status. Management is reviewing its options with respect to Millstone 1, including restart, early retirement and other options. In a draft ruling issued in February 1998, the Connecticut Department of Public Utility Control (DPUC) determined that Millstone 1 was no longer "used and useful" and ordered it removed from rate base. For more information regarding the Millstone units, see Note 2, "Nuclear Decommissioning," and Note 11B, "Commitments and Contingencies - Nuclear Performance." F. DEPRECIATION The provision for depreciation is calculated using the straight-line method based on estimated remaining lives of depreciable utility plant-in-service, adjusted for salvage value and removal costs, as approved by the appropriate regulatory agency. Except for major facilities, depreciation rates are applied to the average plant-in-service during the period. Major facilities are depreciated from the time they are placed in service. When plant is retired from service, the original cost of plant, including costs of removal, less salvage, is charged to the accumulated provision for depreciation. The depreciation rates for the several classes of electric plant-in-service are equivalent to a composite rate of 3.2 percent in 1997 and 1996 and 3.1 percent in 1995. See Note 2, "Nuclear Decommissioning," for information on nuclear plant decommissioning. WMECO's nonnuclear generating facilities have limited service lives. Plant may be retired in place or dismantled based upon expected future needs, the economics of the closure and environmental concerns. The costs of closure and removal are incremental costs and, for financial reporting purposes, are accrued over the life of the asset as part of depreciation. At December 31, 1997 and 1996, the accumulated provision for depreciation included approximately $3.2 million, respectively, accrued for the cost of removal, net of salvage for nonnuclear generation property. G. REVENUES Other than revenues under fixed-rate agreements negotiated with certain wholesale, commercial and industrial customers, utility revenues are based on authorized rates applied to each customer's use of electricity. In general, rates can be changed only through a formal proceeding before the appropriate regulatory commission. Regulatory commissions also have authority over the terms and conditions of nontraditional rate making arrangements. At the end of each accounting period, WMECO accrues an estimate for the amount of energy delivered but unbilled. H. REGULATORY ACCOUNTING AND ASSETS The accounting policies of WMECO and the accompanying consolidated financial statements conform to generally accepted accounting principles applicable to rate-regulated enterprises and reflect the effects of the ratemaking process in accordance with SFAS 71, "Accounting for the Effects of Certain Types of Regulation." Assuming a cost-of-service based regulatory structure, regulators may permit incurred costs, normally treated as expenses, to be deferred and recovered through future revenues. Through their actions, regulators also may reduce or eliminate the value of an asset, or create a liability. If any portion of WMECO's operations were no longer subject to the provisions of SFAS 71, as a result of a change in the cost-of-service based regulatory structure or the effects of competition, WMECO would be required to write off related regulatory assets and liabilities unless there is a formal transition plan which provides for the recovery, through established rates, for the collection of approved stranded costs and to maintain the cost-of-service basis for the remaining regulated operations. At the time of transition, WMECO would be required to determine any impairment to the carrying costs of deregulated plant and inventory assets. The staff of the SEC has had concerns regarding the appropriateness of the utilities' ability to continue application of SFAS 71 for the generation portion of their business in a restructured environment. The SEC referred the issue to the Emerging Issues Task Force (EITF) of the FASB which reached a consensus and issued "Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71 and 101," (EITF 97-4). The EITF concluded: (1) the future recognition of regulatory assets for the portion of the business that no longer qualifies for application of SFAS 71 depends on the regulators' treatment of the recovery of those costs and other stranded assets from cash flows of other portions of the business still considered to be regulated, and (2) a utility should discontinue the application of SFAS 71 when a legislative and regulatory plan has been enacted, which would include transition plans into a competitive environment, and when the stranded costs which are subject to future rate recovery are determined. EITF 97-4 became effective in August 1997. Electric utility industry restructuring within the state of Massachusetts will be effective March 1, 1998. WMECO has submitted its proposed restructuring plan to the Massachusetts Department of Telecommunications and Energy (DTE), formerly the Massachusetts Department of Public Utilities. If the DTE approves the plan in its current form, WMECO would discontinue the application of SFAS 71. However, the restructuring legislation enacted by the state of Massachusetts specifically provides for future deferrals and the cost recovery of generation-related assets as contemplated under the plan. As such, WMECO is not expected to have to write off either its generation-related assets or related regulatory assets. WMECO's generation-related regulatory assets were valued at approximately $188 million at December 31, 1997. The majority of WMECO's regulatory assets are related to its generation business. For more information on the WMECO's regulatory environment and the impacts of restructuring, see Note 11A, "Commitments and Contingencies- Restructuring and Rate Matters," and Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A). SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," requires the evaluation of long- lived assets, including regulatory assets, for impairment when certain events occur or when conditions exist that indicate the carrying amounts of assets may not be recoverable. SFAS 121 requires that any long-lived assets which are no longer probable of recovery through future revenues be revalued based on estimated future cash flows. If this revaluation is less than the book value of the asset, an impairment loss would be charged to earnings. Management continues to believe it is probable that WMECO will recover its investments in long-lived assets through future revenues. This conclusion may change in the future as the implementation of restructuring plans within Massachusetts will generally require the formation of a separate generation entity that will be subject to competitive market conditions. As a result, WMECO will be required to assess the carrying amounts of its long-lived assets in accordance with SFAS 121. The components of WMECO's regulatory assets are as follows: At December 31, 1997 1996 (Thousands of Dollars) Income taxes, net (Note 1I) ..................... $ 63,716 $ 71,519 Unrecovered contractual obligations (Note 2) ...................................... 93,628 84,598 Recoverable energy costs (Note 1J) .............. 26,270 17,510 Other ........................................... 27,763 37,225 $211,377 $210,852 I. INCOME TAXES The tax effect of temporary differences (differences between the periods in which transactions affect income in the financial statements and the periods in which they affect the determination of taxable income) is accounted for in accordance with the ratemaking treatment of the applicable regulatory commissions. See Note 7, "Income Tax Expense" for the components of income tax expense. The tax effect of temporary differences, including timing differences accrued under previously approved accounting standards, which give rise to the accumulated deferred tax obligation is as follows: At December 31, 1997 1996 (Thousands of Dollars) Accelerated depreciation and other plant-related differences ................. $223,038 $218,389 Regulatory assets - income tax gross up ......... 30,175 29,457 Other ........................................... (12,177) (2,593) $241,036 $245,253 J. RECOVERABLE ENERGY COSTS Under the Energy Policy Act of 1992 (Energy Act), WMECO is assessed for its proportionate share of the costs of decontaminating and decommissioning uranium enrichment plants owned by the United States Department of Energy (D&D assessment). The Energy Act requires that regulators treat D&D assessments as a reasonable and necessary current cost of fuel, to be fully recovered in rates, like any other fuel cost. WMECO is currently recovering these costs through rates. As of December 31, 1997, WMECO's total D&D deferrals were approximately $11.3 million. WMECO has a fuel adjustment clause (FAC) which includes energy costs along with capacity and transmission charges and credits that result from short-term transactions with other utilities and from certain FERC- approved contracts among the NU system's operating companies. The Massachusetts restructuring legislation will effectively eliminate the FAC, effective March 1, 1998. On August 20, 1997, WMECO filed with the DTE a joint motion for approval of a settlement agreement with the Massachusetts Attorney General which allowed WMECO to recover approximately $15.3 million of fuel costs for the period September 1997 through February 1998. Under the current FAC rate, WMECO continues to defer significant costs for future recovery. At December 31, 1997, WMECO's net recoverable energy costs were approximately $26.3 million, which includes approximately $11.3 million of costs related to WMECO's share of the D&D assessment. For additional information regarding recoverable energy costs see the MD&A. K. SPENT NUCLEAR FUEL DISPOSAL COSTS Under the Nuclear Waste Policy Act of 1982, WMECO must pay the United States Department of Energy (DOE) for the disposal of spent nuclear fuel and high-level radioactive waste. The DOE is responsible for the selection and development of repositories for, and the disposal of, spent nuclear fuel and high-level radioactive waste. Fees for nuclear fuel burned on or after April 7, 1983, are billed currently to customers and paid to the DOE on a quarterly basis. For nuclear fuel used to generate electricity prior to April 7, 1983 (prior-period fuel), payment must be made prior to the first delivery of spent fuel to the DOE. Until such payment is made, the outstanding balance will continue to accrue interest at the three-month Treasury Bill Yield Rate. At December 31, 1997, fees due to the DOE for the disposal of prior-period fuel were approximately $39.0 million, including interest costs of $23.4 million. The DOE was originally scheduled to begin accepting delivery of spent fuel in 1998. However, delays in identifying a permanent storage site have continually postponed plans for the DOE's long-term storage and disposal site. Extended delays or a default by the DOE could lead to consideration of costly alternatives. The company has primary responsibility for the interim storage of its spent nuclear fuel. Current capability to store spent fuel at Millstone 1 and 2 are estimated to be adequate until 2004. Storage facilities for Millstone 3 are expected to be adequate for the projected life of the unit. Meeting spent fuel storage requirements beyond these periods could require new and separate storage facilities, the costs for which have not been determined. 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 contractual obligation to begin accepting spent nuclear fuel no later than January 31, 1998. Currently, the DOE has not taken the spent nuclear fuel as scheduled and, as a result, may have to pay contract damages. The ultimate outcome of this legal proceeding is uncertain at this time. 2. NUCLEAR DECOMMISSIONING Millstone: WMECO's nuclear power plants have service lives that are expected to end during the years 2010 through 2025. Upon retirement, these units must be decommissioned. Current decommissioning studies concluded that complete and immediate dismantlement at retirement continues to be the most viable and economic method of decommissioning the three Millstone units. Decommissioning studies are reviewed and updated periodically to reflect changes in decommissioning requirements, costs, technology and inflation. The estimated cost of decommissioning WMECO's ownership share of Millstone 1, 2 and 3, in year-end 1997 dollars, is $91.7 million, $82.1 million and $67.8 million, respectively. The Millstone units decommissioning costs will be increased annually by their respective escalation rates. Nuclear decommissioning costs are accrued over the expected service life of the units and are included in depreciation expense on the Consolidated Statements of Income. Nuclear decommissioning costs amounted to $6.2 million in 1997 and 1996 and $5.0 million in 1995. Nuclear decommissioning, as a cost of removal, is included in the accumulated provision for depreciation on the Consolidated Balance Sheets. At December 31, 1997 and 1996, the balance in the accumulated reserve for depreciation amounted to $102.7 million and $83.6 million, respectively. WMECO has established external decommissioning trusts through a trustee for its portion of the costs of decommissioning Millstone 1, 2 and 3. Funding of the estimated decommissioning costs assumes levelized collections for the Millstone units and after-tax earnings on the Millstone decommissioning funds of approximately 5.5 percent. As of December 31, 1997, WMECO has collected, through rates, $59.7 million toward the future decommissioning costs of its share of the Millstone units, all of which has been transferred to external decommissioning trusts. Earnings on the decommissioning trusts increase the decommissioning trust balance and the accumulated reserve for depreciation. Unrealized gains and losses associated with the decommissioning trusts also impact the balance of the trust and the accumulated reserve for depreciation. Changes in requirements or technology, the timing of funding or dismantling, or adoption of a decommissioning method other than immediate dismantlement would change decommissioning cost estimates and the amounts required to be recovered. WMECO attempts to recover sufficient amounts through its allowed rates to cover its expected decommissioning costs. Only the portion of currently estimated total decommissioning costs that has been accepted by regulatory agencies is reflected in rates of WMECO. Based on present estimates and assuming its nuclear units operate to the end of their respective license periods, WMECO expects that the decommissioning trusts will be substantially funded when the units are retired from service. Millstone 1 has been placed in extended status while management is reviewing its options with respect to the unit. These include restart, early retirement and other options. Relating to management's consideration of the option to immediately retire Millstone 1 are certain Connecticut state law issues which relate to WMECO as minority owner. In its four-year rate review proceeding, the DPUC noted that CL&P may not be able to obtain its remaining investment in Millstone 1 if it were to determine that the unit had been prematurely shut down due to management imprudence. Additionally, there is a Connecticut statute which may limit CL&P's ability to collect future decommissioning charges related to Millstone 1 if Millstone 1 were to be terminated before the end of its expected life. At December 31, 1997, WMECO's net unrecovered Millstone 1 plant costs were $50.9 million and the remaining unrecovered decommissioning costs were approximately $44 million. Yankee Companies: VYNPC owns and operates a nuclear generating unit with a service life that is expected to end in 2012. WMECO's ownership share of estimated costs, in year-end 1997 dollars, of decommissioning this unit is $12.6 million. On August 6, 1997, the board of directors of MYAPC voted unanimously to cease permanently the production of power at its nuclear generating facility (MY). The NU system companies had relied on MY for approximately one percent of their capacity. During November 1997, MYAPC filed an amendment to its power contracts clarifying the obligations of its purchasing utilities following the decision to cease power production. During January 1998, the FERC accepted the amendments and proposed rates, subject to refund. At December 31, 1997, the remaining estimated obligation, including decommissioning, amounted to approximately $867.2 million, of which WMECO's share was approximately $26.0 million. On December 4, 1996, the board of directors of CYAPC voted unanimously to cease permanently the production of power at its nuclear generating plant (CY). During 1996, the NU system companies had relied on CY for approximately three percent of their capacity. During late December 1996, CYAPC filed an amendment to its power contracts clarifying the obligations of its purchasing utilities following the decision to cease power production. On February 27, 1997, the FERC approved an order for hearing which, among other things, accepted CYAPC's contract amendment. The new rates became effective March 1, 1997, subject to refund. At December 31, 1997, the remaining estimated obligation, including decommissioning, amounted to $619.9 million, of which WMECO's share was approximately $58.9 million. YAEC is in the process of decommissioning its nuclear facility. At December 31, 1997, the estimated remaining costs, including decommissioning, amounted to $124.4 million, of which WMECO's share was approximately $8.7 million. Under the terms of the contracts with MYAPC, CYAPC and YAEC, the shareholder-sponsor companies, including WMECO, are responsible for their proportionate share of the costs of the units, including decommissioning. Management expects that WMECO will continue to be allowed to recover these costs from its customers. Accordingly, WMECO has recognized these costs as regulatory assets, with corresponding obligations. Proposed Accounting: The staff of the SEC has questioned certain current accounting practices of the electric utility industry, including WMECO, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating units in the financial statements. In response to these questions, the FASB has agreed to review the accounting for closure and removal costs, including decommissioning. If current electric utility industry accounting practices for nuclear power plant decommissioning are changed, the annual provision for decommissioning could increase relative to 1997, and the estimated cost for decommissioning could be recorded as a liability (rather than as accumulated depreciation), with recognition of an increase in the cost of the related nuclear power plant. Management believes that WMECO will continue to be allowed to recover decommissioning costs through rates. 3. SHORT-TERM DEBT Limits: The amount of short-term debt borrowings that may be incurred by WMECO is subject to periodic approval by either the SEC under the 1935 Act or by the DTE. SEC authorization allowed WMECO, as of January 1, 1998, to incur short-term borrowings up to a maximum of $150 million. In addition, the charter of WMECO contains a provision which restricts the total amount of unsecured debt that it may borrow at any one time. As of January 1, 1998, this charter provision allowed WMECO to incur unsecured borrowings, whether short-term or long-term, up to a maximum of approximately $114 million. Credit Agreements: In May 1997, because of the potential for NU and CL&P to violate their various financial ratio tests, NU amended the three-year revolving credit agreement (Credit Agreement) with a group of 12 banks. Under the amended Credit Agreement, CL&P and WMECO are able to borrow, subject to the availability of first mortgage bond collateral, up to $313.75 million and $150 million, respectively. At December 31, 1997, CL&P and WMECO have issued first mortgage bonds to enable borrowings under this facility up to a maximum of $225 million and $90 million, respectively. NU, which cannot issue first mortgage bonds, will be able to borrow up to $50 million if NU consolidated, CL&P and WMECO each meet certain interest coverage tests for two consecutive quarters. In addition, CL&P and WMECO each must meet certain minimum quarterly financial ratios to access the Credit Agreement. Both CL&P and WMECO satisfied these tests for the quarter ending December 31, 1997. The overall limit for all of the borrowing system companies under the entire Credit Agreement is $313.75 million. The companies are obligated to pay a facility fee of .50 percent per annum of each bank's total commitment under this Credit Agreement which will expire in November 1999. At December 31, 1997 and 1996, there were $50 million and $27.5 million, respectively, in borrowings under this Credit Agreement. Of these borrowings, $15 million were borrowed by WMECO in 1997 and none were borrowed by WMECO in 1996. In addition to the Credit Agreement, NU, CL&P, WMECO, HWP and The Rocky River Realty Company (RRR) have various revolving credit lines through separate bilateral credit agreements. Under this facility, four banks maintain commitments to the respective companies totaling $56.25 million. NU, CL&P and WMECO may borrow up to the aggregate $56.25 million, whereas HWP and RRR may borrow up to their SEC or board authorized short-term debt limit of $5 million and $22 million, respectively. Under the terms of this facility, the companies are obligated to pay a facility fee of .15 percent per annum of each bank's total commitment. These commitments will expire in December 1998. At December 31, 1997 and 1996, there were no borrowings and $11.3 million in borrowings, respectively, under this facility. Under the credit facilities discussed above, WMECO may borrow funds on a short-term revolving basis under its respective agreements, using either fixed-rate loans or standby loans. Fixed rates are set using competitive bidding. Standby loans are based upon several alternative variable rates. The weighted average annual interest rate on WMECO's notes payable to banks outstanding on December 31, 1997 was 6.95 percent. WMECO had no borrowings under these facilities at December 31, 1996. Money Pool: Certain subsidiaries of NU, including WMECO, are members of the Northeast Utilities System Money Pool (Pool). The Pool provides a more efficient use of the cash resources of the system, and reduces outside short-term borrowings. NUSCO administers the Pool as agent for the member companies. Short-term borrowing needs of the member companies are first met with available funds of other member companies, including funds borrowed by NU parent. NU parent may lend to the Pool but may not borrow. Funds may be withdrawn from or repaid to the Pool at any time without prior notice. Investing and borrowing subsidiaries receive or pay interest based on the average daily Federal Funds rate. However, borrowings based on loans from NU parent bear interest at NU parent's cost and must be repaid based upon the terms of NU parent's original borrowing. At December 31, 1997 and 1996, WMECO had $14.4 million and $47.4 million, respectively, of borrowings outstanding from the Pool. The interest rate on borrowings from the Pool at December 31, 1997 and 1996 was 5.8 percent and 6.3 percent, respectively. Maturities of short-term debt obligations were for periods of three months or less. For further information on short-term debt, including the ability to access these agreements, see the MD&A. 4. PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION Details of preferred stock not subject to mandatory redemptions are: December 31, Shares 1997 Outstanding Redemption December 31, December 31, Description Price 1997 1997 1996 1995 (Thousands of Dollars) 7.72% Series B of 1971 ...........$103.51 200,000 $20,000 $20,000 $20,000 1988 Adjustable Rate DARTS ........ - - - - 33,500 Total preferred stock not subject to mandatory redemption ........ $20,000 $20,000 $53,500 All or any part of each outstanding series of preferred stock may be redeemed by the company at any time at established redemption prices plus accrued dividends to the date of redemption. 5. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION Details of preferred stock subject to mandatory redemption are: December 31 Shares 1997 Outstanding Redemption December 31, December 31, Description Price* 1997 1997 1996 1995 (Thousands of Dollars) 7.60% Series of 1987 ........... $25.64 840,000 $21,000 $21,000 $24,000 Less preferred stock to be redeemed within one year, net of reacquired stock .............. 60,000 1,500 - 1,500 Total preferred stock subject to mandatory redemption ......... $19,500 $21,000 $22,500 *Redemption price reduces in future years. The minimum sinking-fund provisions of the 1987 Series subject to mandatory redemption at December 31, 1997, for the years 1998 through 2002 is $1.5 million per year. In case of default on sinking-fund payments, no payments may be made on any junior stock by way of dividends or otherwise (other than in shares of junior stock) so long as the default continues. If the company is in arrears in the payment of dividends on any outstanding shares of preferred stock, the company would be prohibited from redemption or purchase of less than all of the preferred stock outstanding. All or part of the 7.60% Series of 1987 may be redeemed by the company at any time at an established redemption price plus accrued dividends to the date of redemption subject to certain refunding limitations. 6. LONG-TERM DEBT Details of long-term debt outstanding are: December 31, 1997 1996 (Thousands of Dollars) First Mortgage Bonds: 5 3/4% Series F, due 1997................. $ - $ 14,700 6 3/4% Series G, due 1998................. 9,800 9,800 6 1/4% Series X, due 1999................. 40,000 40,000 6 7/8% Series W, due 2000................. 60,000 60,000 7 3/8% Series B, due 2001................. 60,000 - 7 3/4% Series V, due 2002................. 85,000 85,000 7 3/4% Series Y, due 2024................. 50,000 50,000 Total First Mortgage Bonds.......................... 304,800 259,500 Pollution Control Notes: Tax Exempt Variable Series A, due 2028............. 53,800 53,800 Fees and interest due for spent fuel disposal costs (Note 1K)..................... 39,045 37,055 Less: Amounts due within one year.................. 9,800 14,700 Unamortized premium and discounts, net.............. (996) (913) Long-term debt, net................................. $ 386,849 $334,742 Long-term debt maturities and cash sinking-fund requirements on debt outstanding at December 31, 1997 for the years 1998 through 2002 are approximately $9.8 million, $40 million, $60 million, $60 million and $85 million, respectively. In addition, there are annual one-percent sinking- and improvement-fund requirements, currently amounting to $1.5 million for 1998 and 1999 and $900 thousand for 2000 through 2002. Such sinking- and improvement-fund requirements may be satisfied by the deposit of cash or bonds by certification of property additions. All or any part of each outstanding series of first mortgage bonds may be redeemed by WMECO at any time at established redemption prices plus accrued interest to the date of redemption, except certain series which are subject to certain refunding limitations during their respective initial five-year redemption periods. Essentially all of WMECO's utility plant is subject to the lien of its first mortgage bond indenture. As of December 31, 1997 and 1996, WMECO has secured $53.8 million of pollution control notes with second mortgage liens on Millstone 1, junior to the liens of its first mortgage bond indenture. The average effective interest rate on the variable-rate pollution control notes was 3.5 percent for 1997 and 3.3 percent for 1996. 7. INCOME TAX EXPENSE The components of the federal and state income tax provisions (credited)/charged to operations are: For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars) Current income taxes: Federal............................ $(14,277) $7,007 $ 7,419 State.............................. (635) 1,358 2,961 Total current.................... (14,912) 8,365 10,380 Deferred income taxes, net: Federal............................ (652) (1,805) 4,130 State.............................. 81 (165) 1,003 Total deferred................... (571) (1,970) 5,133 Investment tax credits, net.......... (1,469) (1,468) (1,715) Total income tax (credit)/ expense............................ $(16,952) $4,927 $13,798 The components of total income tax expense are classified as follows: Income taxes charged to operating expenses................. $(15,926) $5,995 $14,060 Other income taxes .................. (1,026) (1,068) (262) Total income tax (credit)/ expense............................ $(16,952) $4,927 $13,798 Deferred income taxes are comprised of the tax effects of temporary differences as follows: For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars) Depreciation, leased nuclear fuel, settlement credits, and disposal costs....................$ 1,407 $ 32 $9,066 Energy adjustment clause................ 3,115 4,102 (1,549) Expenses associated with nuclear outages....................... (1,078) (4,633) - Demand side management.................. 321 1,557 (1,184) Nuclear plant deferrals................. (3,431) (2,258) 2,468 Pension................................. 999 (57) (482) Bond redemptions........................ (535) (502) (572) Other................................... (1,369) (211) (2,614) Deferred income taxes, net.............. $ (571) $(1,970) $5,133 A reconciliation between income tax expense and the expected tax expense at the applicable statutory rate is as follows: For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars) Expected federal income tax at 35 percent of pretax income for...... $(15,970) $2,946 $18,526 Tax effect of differences: Depreciation......................... 1,352 2,280 2,173 Amortization of regulatory assets.... 1,916 1,029 1,665 Investment tax credit amortization... (1,469) (1,468) (1,715) State income taxes, net of federal benefit.................... (309) 776 2,577 Adjustment for prior years' taxes.... (967) - (7,702) Dividends received reduction......... (408) (378) (481) Other, net........................... (1,097) (258) (1,245) Total income tax (credit)/expense...... $(16,952) $4,927 $13,798 8. LEASES WMECO and CL&P may finance up to $400 million of nuclear fuel for Millstone 1 and 2 and their respective shares of the nuclear fuel for Millstone 3 under the Niantic Bay Fuel Trust (NBFT) capital lease agreement which is scheduled to expire July 31, 1998. The NBFT capital lease agreement, which was amended in February 1998, requires CL&P and WMECO to secure their obligation to repay the NBFT with up to $90 million of first mortgage bonds. CL&P and WMECO will issue these bonds by May 1998. WMECO and CL&P make quarterly lease payments for the cost of nuclear fuel consumed in the reactors based on a units-of-production method at rates which reflect estimated kilowatt hours of energy provided plus financing costs associated with the fuel in the reactors. Upon permanent discharge from the reactors, ownership of the nuclear fuel transfers to WMECO and CL&P. WMECO has also entered into lease agreements, some of which may be capital leases, for the use of data processing and office equipment, vehicles, nuclear control room simulators and office space. The provisions of these lease agreements generally provide for renewal options. The following rental payments have been charged to expense: Year Capital Leases Operating Leases 1997 ................... $ 1,820,000 $5,968,000 1996 ................... 3,598,000 6,410,000 1995 ................... 12,553,000 6,398,000 Interest included in capital lease rental payments was $1,820,000 in 1997, $1,858,000 in 1996, and $1,954,000 in 1995. Future minimum rental payments, excluding executory costs such as property taxes, state use taxes, insurance and maintenance, under long-term noncancelable leases, as of December 31, 1997, are: Year Capital Leases Operating Leases (Thousands of Dollars) 1998........................... $32,700 $ 3,700 1999........................... 36 3,400 2000.......................... 36 3,100 2001........................... 36 2,800 2002........................... 36 2,500 After 2002..................... 70 18,600 Future minimum lease payments..................... 32,914 $34,100 Less amount representing interest..................... 14 Present value of future minimum lease payments............... $32,900 9. EMPLOYEE BENEFITS A. PENSION BENEFITS The NU system's subsidiaries participate in a uniform noncontributory defined benefit retirement plan covering all regular NU system employees. Benefits are based on years of service and the employees' highest eligible compensation during 60 consecutive months of employment. WMECO's direct portion of the NU system's pension credit, part of which was credited to utility plant, approximated $(5.7) million in 1997, $(2.0) million in 1996 and $(2.7) million in 1995. WMECO's pension (credits)/costs for 1997, 1996 and 1995 included approximately $(529) thousand, $1.0 million and $0.0 million, respectively, related to workforce reduction programs. Currently, WMECO funds annually an amount at least equal to that which will satisfy the requirements of the Employee Retirement Income Security Act and the Internal Revenue Code. Pension costs are determined using market-related values of pension assets. Pension assets are invested primarily in domestic and international equity securities and bonds. The components of net pension credit for WMECO are: For the Years Ended December 31, 1997 1996 1995 (Thousand of Dollars) Service cost....................... $ 1,346 $ 2,932 $ 1,645 Interest cost...................... 7,858 7,786 7,757 Return on plan assets.............. (31,874) (22,174) (29,798) Net amortization................... 16,944 9,458 17,669 Net pension (credit)............... $(5,726) $(1,998) $(2,727) For calculating pension cost, the following assumptions were used: For the Years Ended December 31, 1997 1996 1995 Discount rate...................... 7.75% 7.50% 8.25% Expected long-term rate of return........................ 9.25 8.75 8.50 Compensation/progression rate...... 4.75 4.75 5.00 The following table represents the plan's funded status reconciled to the Consolidated Balance Sheets: At December 31, 1997 1996 (Thousands of Dollars) Accumulated benefit obligation, including vested benefits at December 31, 1997 and 1996 of $(87,278,000) and $(85,094,000), respectively ....................... $( 93,555) $( 91,170) Projected benefit obligation.......... $(109,536) $(107,816) Market value of plan assets........... 181,028 157,863 Market value in excess of projected benefit obligation........ 71,492 50,047 Unrecognized transition amount........ (1,727) (1,963) Unrecognized prior service costs...... 1,142 1,213 Unrecognized net gain................. (62,370) (46,486) Prepaid pension asset ................ $ 8,537 $ 2,811 The following actuarial assumptions were used in calculating the plan's year-end funded status: At December 31, 1997 1996 Discount rate.................................. 7.25% 7.75% Compensation/progression rate.................. 4.25 4.75 B. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The NU system's subsidiaries provide certain health care benefits, primarily medical and dental, and life insurance benefits through a benefit plan to retired employees (referred to as SFAS 106 benefits). These benefits are available for employees retiring from the company who have met specified service requirements. For current employees and certain retirees, the total SFAS 106 benefit is limited to two times the 1993 per-retiree health care cost. The SFAS 106 obligation has been calculated based on this assumption. WMECO's direct portion of SFAS 106 benefits, part of which were deferred or charged to utility plant, approximated $2.8 million in 1997, $3.8 million in 1996, and $4.4 million in 1995. WMECO is funding SFAS 106 postretirement costs through external trusts. WMECO is funding, on an annual basis, amounts that have been rate-recovered and which also are tax deductible under the Internal Revenue Code. The trust assets are invested primarily in equity securities and bonds. The components of health care and life insurance costs are: For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars) Service cost....................... $ 355 $ 490 $ 490 Interest cost...................... 2,011 2,236 2,544 Return on plan assets.............. (2,088) (883) (718) Amortization of unrecognized transition obligation............ 1,641 1,641 1,641 Other amortization, net............ 868 353 473 Net health care and life insurance cost................... $2,787 $3,837 $4,430 For calculating WMECO's SFAS 106 benefit costs, the following assumptions were used: For the Years Ended December 31, 1997 1996 1995 Discount rate....................... 7.75% 7.50% 8.00% Long-term rate of return - Health assets, net of tax......... 6.00 5.25 5.00 Life assets....................... 9.25 8.75 8.50 The following table represents the plan's funded status reconciled to the Consolidated Balance Sheets: At December 31, 1997 1996 (Thousands of Dollars) Accumulated postretirement benefit obligation of: Retirees..................................... $(23,123) $(24,614) Fully eligible active employees.............. (84) (28) Active employees not eligible to retire...... (4,619) (5,449) Total accumulated postretirement benefit obligation.......................... (27,826) (30,091) Market value of plan assets................... 12,838 10,215 Accumulated postretirement benefit obligation in excess of plan assets......... (14,988) (19,876) Unrecognized transition amount................ 24,618 26,259 Unrecognized net gain......................... (9,630) (6,765) Accrued postretirement benefit liability...... $ - $ (382) The following actuarial assumptions were used in calculating the plan's year-end funded status: At December 31, 1997 1996 Discount rate................................. 7.25% 7.75% Health care cost trend rate (a)............... 5.76 7.23 (a) The annual growth in per capita cost of covered health care benefits was assumed to decrease to 4.40 percent by 2001. The effect of increasing the assumed health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997, by $1.7 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $131 thousand. The trust holding the health plan assets is subject to federal income taxes at a 39.6 percent tax rate. WMECO currently is recovering SFAS 106 costs through rates. 10. SALE OF CUSTOMER RECEIVABLES AND ACCRUED UTILITY REVENUES During 1996, WMECO entered into an agreement to sell up to $40 million of undivided ownership interests in eligible customer receivables and accrued utility revenues (receivables). The FASB issued SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," in June, 1996. SFAS 125 became effective on January 1, 1997, and establishes, in part, criteria for concluding whether a transfer of financial assets in exchange for consideration should be accounted for as a sale or as a secured borrowing. During May 1997, WMECO had restructured its sales agreement to comply with the conditions of SFAS 125 and account for transactions occurring under this program as a sale of assets. WMECO established a special purpose, wholly owned subsidiary whose business consists of the purchase and resale of receivables. For receivables sold, WMECO has retained collection responsibilities as agent for the purchaser under WMECO's agreement. As collections reduce previously sold receivables, new receivables may be sold. At December 31, 1997, approximately $20 million of receivables had been sold to a third-party purchaser by WMECO, through the use of its special purpose, wholly owned subsidiary, WMECO Receivables Corporation (WRC). All receivables transferred to WRC are assets owned by WRC and are not available to pay WMECO's creditors. For WRC's sales agreement with the third-party purchaser, the receivables were sold with limited recourse. WRC's sales agreement provides for a formula-based loss reserve in which additional receivables may be assigned to the third-party purchaser for costs such as bad debt. The third-party purchaser absorbs the excess amount in the event that actual loss experience exceeds the loss reserve. At December 31, 1997 approximately $3.0 million of assets had been designated as collateral by WRC. This amount represents the formula-based amount of credit exposure at December 31, 1997. Historical losses for bad debt for WMECO have been substantially less. During December 1997, Moody's Investors Service downgraded the rating on WMECO's first mortgage bonds. This downgrade brought WMECO's bond ratings to a level at which the sponsor of WMECO's accounts receivable program can take various actions, in its discretion, which would have the practical effect of limiting WMECO's ability to utilize the facility. To date, the sponsor has not notified WMECO that it will elect to exercise those rights, and the program is functioning in its normal mode. The WMECO accounts receivable program is terminable if WMECO's first mortgage bond credit ratings experience one more level of downgrade. CL&P's accounts receivable program could be terminated if its senior secured debt is downgraded two more steps from its current ratings. Concentrations of credit risk to the purchaser under WMECO's agreement with respect to the receivables are limited due to WMECO's diverse customer base within its service territory. For additional information on the accounts receivable program and WMECO's ability to utilize this program, see the MD&A. 11. COMMITMENTS AND CONTINGENCIES A. RESTRUCTURING AND RATE MATTERS During November 1997, the state of Massachusetts enacted a comprehensive electric utility industry restructuring bill (legislation). On December 31, 1997, WMECO filed its restructuring plan with the DTE, as required by the legislation. The WMECO restructuring plan describes the process by which WMECO will, beginning March 1, 1998, initiate a ten percent rate reduction for all customer rate classes and allow customers to choose their energy supplier. As part of the plan, the DTE authorized recovery of certain strandable above-market costs (strandable costs). The legislation gives the DTE the authority to determine the amount of strandable costs that will be eligible for recovery by utilities. Costs which will qualify as strandable costs and be eligible for recovery include, but are not limited to, certain above-market costs associated with generating facilities, costs associated with long-term commitments to purchase power at above-market prices from small power producers and nonutility generators, and regulatory assets and associated liabilities related to the generation portion of WMECO's business. Under the statute, if a distribution company claims that it is unable to meet a price reduction of ten percent initially and 15 percent by September 1, 1999, the distribution company may so state to the DTE and the DTE is provided with the authority to "explore all possible mechanisms and options within the limits of the constitution" to achieve the mandated rate reductions. The statute indicates that allowing a substitute company to provide standard offer service is one option that can be considered by the DTE. The costs of transitioning to competition will be mitigated through several steps, including divesting WMECO's non-nuclear generating assets at an auction to be held as soon as June 1998, and securitization of approximately $500 million in strandable costs by September 30, 1998. NU presently expects to participate, through a competitive affiliate, in the competitive bid process for WMECO's generation resources. Any net proceeds in excess of book value received from the divestiture of these units will be used to mitigate strandable costs. As required by the legislation, WMECO will continue to operate and maintain its transmission and local distribution network and deliver electricity to all customers. As noted above, the legislation has authorized Massachusetts utilities to finance a portion of the strandable costs through securitization, using rate reduction bonds. A separate transition charge will be collected over the life of the bonds to recover principal, interest and issuance costs. WMECO's ability to recover its strandable costs will depend on several factors, which include, but are not limited to, continuous recovery of the costs over the transitional period supported by the legislation, the aggregate amount of strandable costs which the company will be allowed to recover and the market price of electricity. Management believes that the company will recover its strandable costs. However, a change in one or more of these factors could affect the recovery of strandable costs and may result in a loss to the company. FERC Rate Proceedings: For information regarding the FERC rate proceedings for CYAPC and MYAPC, see Note 2, "Nuclear Decommissioning." B. NUCLEAR PERFORMANCE Millstone: The three Millstone units are managed by NNECO. Millstone 1, 2 and 3 have been out of service since November 4, 1995, February 21, 1996, and March 30, 1996, respectively, and are on the Nuclear Regulatory Commission's (NRC) watch list. NU has restructured its nuclear organization and is currently implementing comprehensive plans to restart the units. Subsequent to its January 31, 1996 announcement that Millstone had been placed on its watch list, the NRC stated that the units cannot return to service until independent, third-party verification teams have reviewed the actions taken to improve the design, configuration and employee concerns issues that prompted the NRC to place the units on its watch list. The actual date of the return to service for each of the units is dependent upon the completion of independent inspections and reviews by the NRC and a vote by the NRC commissioners. NU hopes to return Millstone 3 to service in the early spring of 1998 and Millstone 2 three to four months after Millstone 3. Millstone 1 is currently in extended maintenance status. In 1997, WMECO's share of nonfuel O&M costs expensed for Millstone totaled $106 million, including $14 million reserved for future restart costs. Budgeted nuclear spending levels at Millstone for 1998 will be reduced from 1997 levels, although they will be considerably higher than before the station was placed on the NRC's watch list. The actual level of 1998 spending will depend on when the units return to operation and the cost of restoring them to service. The total cost to restart the units cannot be precisely estimated at this time. Management will continue to evaluate the costs to be incurred in 1998 to determine whether adjustments to the existing reserves are required. Management cannot predict when the NRC will allow any of the Millstone units to return to service and thus cannot precisely estimate the total replacement power costs WMECO will ultimately incur. Replacement power costs incurred by WMECO attributable to the Millstone outages averaged approximately $5 million per month during 1997, and for 1998 are projected to average approximately $2 million per month for Millstone 3, $2 million per month for Millstone 2 and $1 million per month for Millstone 1 while the plants remain out of service. WMECO will continue to expense its replacement power costs in 1998. Based on the current estimates of expenditures and restart dates, management believes the NU system has sufficient resources to fund the restoration of the Millstone units and related replacement power costs. If the return to service of Millstone 3 or 2 is delayed substantially beyond the present restart estimates, if some financing facilities become unavailable because of difficulties in meeting borrowing conditions or renegotiating extensions, if CL&P and WMECO encounter additional significant costs or if any other significant deviations from management's assumptions occur, CL&P and WMECO could be unable to meet their cash requirements. In those circumstances, management would take even more stringent actions to reduce costs and cash outflows and attempt to obtain additional sources of funds. The availability of these funds would be dependent upon general market conditions and CL&P's and WMECO's respective credit and financial conditions at that time. For information concerning the ability of WMECO to access its borrowing facilities, see the MD&A. Litigation: CL&P and WMECO, through NNECO as agent, operate Millstone 3 at cost, and without profit, under a sharing agreement that obligates them to utilize good utility operating practice and requires the joint owners to share the risk of employee negligence and other risks of operation and maintenance pro-rata in accordance with their ownership shares. This agreement also provides that CL&P and WMECO would be liable only for damages to the non-NU owners for a deliberate violation of the agreement pursuant to authorized corporate action. On August 7, 1997, the non-NU owners of Millstone 3 filed demands for arbitration with CL&P and WMECO as well as lawsuits in Massachusetts Superior Court against NU and its current and former trustees. The non-NU owners raise a number of contract, tort and statutory claims arising out of the operation of Millstone 3. The arbitrations and lawsuits seek to recover compensatory damages, punitive damages, treble damages and attorneys' fees. Owners representing approximately two-thirds of the non-NU interests in Millstone 3 claimed compensatory damages in excess of $200 million. In addition, one of the lawsuits seeks to restrain NU from disposing of its shares of the stock of WMECO and HWP, pending the outcome of the lawsuit. Management cannot estimate the potential outcome of these suits but believes there is no legal basis for the claims and intends to defend against them vigorously. To date, no reserves have been established for this litigation. At December 31, 1997, the costs related to this litigation for the NU system were estimated to be approximately $100 million for incremental O&M costs and approximately $100 million for replacement power costs. These costs are likely to increase as long as Millstone 3 remains out of service. C. ENVIRONMENTAL MATTERS The NU system is subject to regulation by federal, state and local authorities with respect to air and water quality, the handling and disposal of toxic substances and hazardous and solid wastes, and the handling and use of chemical products. The NU system has an active environmental auditing and training program and believes that it is in substantial compliance with current environmental laws and regulations. However, the NU system is subject to certain enforcement actions and governmental investigations in the environmental area. Management cannot predict the outcome of these enforcement acts and investigations. Environmental requirements could hinder the construction of new generating units, transmission and distribution lines, substations, and other facilities. Changing environmental requirements could also require extensive and costly modifications to WMECO's existing generating units, and transmission and distribution systems, and could raise operating costs significantly. As a result, WMECO may incur significant additional environmental costs, greater than amounts included in cost of removal and other reserves, in connection with the generation and transmission of electricity and the storage, transportation and disposal of by-products and wastes. WMECO may also encounter significantly increased costs to remedy the environmental effects of prior waste handling activities. The cumulative long-term cost impact of increasingly stringent environmental requirements cannot be estimated accurately. WMECO has recorded a liability based upon currently available information for what it believes are its estimated environmental remediation costs that it expects to incur for waste disposal sites. In most cases, additional future environmental cleanup costs are not reasonably estimable due to a number of factors, including the unknown magnitude of possible contamination, the appropriate remediation methods, the possible effects of future legislation or regulation and the possible effects of technological changes. At December 31, 1997, the net liability recorded by WMECO for its estimated environmental remediation costs, excluding any possible insurance recoveries or recoveries from third parties, amounted to approximately $1.6 million, which management has determined to be the most probable amount within the range of $1.6 million to $2.6 million. During 1997, WMECO adopted Statement of Position 96-1, "Environmental Remediation Liabilities" (SOP). The principal objective of the SOP is to improve the manner in which existing authoritative accounting literature is applied by entities to specific situations of recognizing, measuring and disclosing environmental remediation liabilities. The adoption of the SOP resulted in an increase of approximately $370 thousand to WMECO's environmental reserve in 1997. WMECO cannot estimate the potential liability for future claims, including environmental remediation costs, that may be brought against it. However, considering known facts, existing laws and regulatory practices, management does not believe the matters disclosed above will have a material effect on WMECO's financial position or future results of operations. D. NUCLEAR INSURANCE CONTINGENCIES Under certain circumstances, in the event of a nuclear incident at one of the nuclear facilities in the country covered by the federal government's third-party liability indemnification program, an owner of a nuclear unit could be assessed in proportion to its ownership interest in each of its nuclear units up to $75.5 million. Payments of this assessment would be limited to $10.0 million in any one year per nuclear incident based upon the owner's pro rata ownership interest in each of its nuclear units. In addition, the owner would be subject to an additional five percent or $3.8 million, in proportion to its ownership interests in each of its nuclear units, if the sum of all claims and costs from any one nuclear incident exceeds the maximum amount of financial protection. Based upon its ownership interests in Millstone 1, 2 and 3, WMECO's maximum liability, including any additional assessments, would be $39.8 million per incident, of which payments would be limited to $5 million per year. In addition, through power purchase contracts with MYAPC, VYNPC, and CYAPC, WMECO would be responsible for up to an additional $11.9 million per incident, of which payments would be limited to $1.5 million per year. Insurance has been purchased to cover the primary cost of repair, replacement or decontamination of utility property resulting from insured occurrences. WMECO is subject to retroactive assessments if losses exceed the accumulated funds available to the insurer. The maximum potential assessment against WMECO with respect to losses arising during the current policy year is approximately $2.7 million under the primary property insurance program. Insurance has been purchased to cover certain extra costs incurred in obtaining replacement power during prolonged accidental outages and the excess cost of repair, replacement, or decontamination or premature decommissioning of utility property resulting from insured occurrences. WMECO is subject to retroactive assessments if losses exceed the accumulated funds available to the insurer. The maximum potential assessments against WMECO with respect to losses arising during current policy years are approximately $2.2 million under the replacement power policies and $3.8 million under the excess property damage, decontamination and decommissioning policies. The cost of a nuclear incident could exceed available insurance proceeds. Insurance has been purchased aggregating $200 million on an industry basis for coverage of worker claims. All participating reactor operators insured under this coverage are subject to retrospective assessments of $3 million per reactor. The maximum potential assessment against WMECO with respect to losses arising during the current policy period is approximately $2.2 million. Effective January 1, 1998, a new worker policy was purchased which is not subject to retrospective assessments. E. CONSTRUCTION PROGRAM The construction program is subject to periodic review and revision by management. WMECO currently forecasts construction expenditures of approximately $185 million for the years 1998-2002, including $27 million for 1998. In addition, WMECO estimates that nuclear fuel requirements, including nuclear fuel financed through the NBFT, will be approximately $56.4 million for the years 1998-2002, including $8.4 million for 1998. See Note 8, "Leases" for additional information about the financing of nuclear fuel. F. LONG-TERM CONTRACTUAL ARRANGEMENTS Yankee Companies: The NU system companies rely on VY for approximately 1.7 percent of their capacity under long-term contracts. Under the terms of their agreements, the NU system companies pay their ownership (or entitlement) shares of costs, which include depreciation, O&M expenses, taxes, the estimated cost of decommissioning and a return on invested capital. These costs are recorded as purchased power expense and are recovered through the companies' rates. WMECO's total cost of purchases under contracts with VYNPC amounted to $3.9 million in 1997, $4.1 million in 1996 and 1995. The other Yankee generating facilities, MY, CY and Yankee Rowe, were permanently shut down as of August 6, 1997, December 4, 1996 and February 26, 1992, respectively. See Note 1E, "Summary of Significant Accounting Policies--Investments and Jointly Owned Electric Utility Plant," for further information on the Yankee companies, and Note 2, "Nuclear Decommissioning," regarding the related decommissioning obligations. Nonutility Generators: WMECO has entered into various arrangements for the purchase of capacity and energy from nonutility generators (NUGs). These arrangements have terms from 15 to 25 years, currently expiring in the years 2008 through 2013, and requires WMECO to purchase energy at specified prices or formula rates. For the 12 months ending December 31, 1997, approximately 14 percent of NU system electricity requirements were met by NUGs. WMECO's total cost of purchases under these arrangements amounted to $31.2 million in 1997, $29.5 million in 1996, and $28.6 million in 1995. These costs may be deferred for eventual recovery through rates. Hydro-Quebec: Along with other New England utilities, WMECO, CL&P, PSNH and HWP have entered into agreements to support transmission and terminal facilities to import electricity from the Hydro-Quebec system in Canada. WMECO is obligated to pay, over a 30-year period ending in 2020, its proportionate share of the annual O&M and capital costs of these facilities. Estimated Annual Costs: The estimated annual costs of WMECO's significant long-term contractual arrangements are as follows: 1998 1999 2000 2001 2002 (Millions of Dollars) VYNPC ....................... $ 4.9 $ 4.9 $ 4.8 $ 5.2 $ 5.4 NUGs ........................ 35.1 36.8 39.5 41.6 43.8 Hydro-Quebec ................ 3.8 3.6 3.6 3.5 3.4 For additional information regarding the recovery of purchased power costs, see Note 1J, "Summary of Significant Accounting Policies - Recoverable Energy Costs." 12. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each of the following financial instruments: Cash and nuclear decommissioning trusts: The carrying amounts approximate fair value. SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," requires investments in debt and equity securities to be presented at fair value. As a result of this requirement, the investments held in WMECO's nuclear decommissioning trust were adjusted to market by approximately $17.9 million as of December 31, 1997, and $8.4 million as of December 31, 1996, with a corresponding offset to the accumulated provision for depreciation. The amounts adjusted in 1997 and 1996 represent cumulative gross unrealized holding gains. The cumulative gross unrealized holding losses were immaterial for both 1997 and 1996. Preferred stock and long-term debt: The fair value of WMECO's fixed-rate securities is based upon the quoted market price for those issues or similar issues. Adjustable rate securities are assumed to have a fair value equal to their carrying value. The carrying amount of WMECO's financial instruments and the estimated fair values are as follows: Carrying Fair At December 31, 1997 Amount Value (Thousands of Dollars) Preferred stock not subject to mandatory redemption........................... $ 20,000 $ 16,252 Preferred stock subject to mandatory redemption............................ 21,000 20,580 Long-term debt - First Mortgage Bonds............ 304,800 302,627 Other long-term debt............................. 92,845 92,845 Carrying Fair At December 31, 1996 Amount Value (Thousands of Dollars) Preferred stock not subject to mandatory redemption........................... $ 20,000 $ 15,200 Preferred stock subject to mandatory redemption............................ 21,000 18,404 Long-term debt - First Mortgage Bonds............ 259,500 260,440 Other long-term debt............................. 90,855 90,855 The fair values shown above have been reported to meet the disclosure requirements and do not purport to represent the amounts at which those obligations would be settled. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Western Massachusetts Electric Company: We have audited the accompanying consolidated balance sheets of Western Massachusetts Electric Company (a Massachusetts corporation and a wholly owned subsidiary of Northeast Utilities) and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of income, common stockholder's equity and cash flows for each of the three years in the period ended December 31, 1997. 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 Western Massachusetts Electric Company and subsidiary as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Hartford, Connecticut February 20, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section contains management's assessment of WMECO's (the company) financial condition and the principal factors having an impact on the results of operations. The company is a wholly-owned subsidiary of Northeast Utilities (NU). This discussion should be read in conjunction with the company's consolidated financial statements and footnotes. FINANCIAL CONDITION OVERVIEW The length of the ongoing outages at the three Millstone nuclear plants (Millstone) and the high costs of the recovery efforts weakened WMECO's 1997 net income, balance sheet and cash flows and will continue to have an adverse impact on the company's financial condition until the units are returned to service. WMECO had a net loss of approximately $29 million in 1997, compared to net income of approximately $4 million in 1996. The poorer financial results in 1997 were due primarily to the fact that all three Millstone units were off line for the entire year in 1997 and spending associated with the recovery efforts was significantly higher in 1997 than it was in 1996. Millstone 3 operated for nearly three months in 1996 and Millstone 2 for nearly two months. As a result, the cost of replacing power ordinarily generated by the Millstone units rose by approximately $15 million in 1997. The total operation and maintenance (O&M) costs at Millstone were approximately $30 million higher in 1997. The higher Millstone costs have caused WMECO to focus closely on maintaining adequate liquidity and reducing non nuclear O&M costs. In July 1997, WMECO successfully sold $60 million of first mortgage bonds. WMECO's access to $90 million of revolving credit lines was renegotiated in the first half of 1997. Also helping to maintain liquidity was the renegotiation in early 1998 of a $100 million credit line used by Niantic Bay Fuel Trust (NBFT) to purchase nuclear fuel for Millstone. Additionally, non nuclear O&M expenses in 1997 were reduced by about $5 million from 1996. Tight cost controls will continue to be essential in 1998 to WMECO's efforts to meet the financial covenants contained in the $313.75 million revolving credit arrangement available to WMECO and The Connecticut Light and Power Company (CL&P). In 1998, management expects Millstone-related expenses to fall significantly, assuming Millstone 3 and Millstone 2 are returned to service at dates close to current estimates, although the O&M expenses at Millstone 3 and 2 will be considerably higher than before the station was placed on the Nuclear Regulatory Commission's (NRC's) watch list. The actual level of 1998 nuclear spending at Millstone will depend on when the units return to operation and the cost of restoring them to service. The company hopes to restart Millstone 3, the newest and largest unit at the site, in early spring of 1998 and Millstone 2 three to four months after Millstone 3. The company cannot restart the Millstone units until it receives formal approval from the NRC. As part of an effort to reduce spending in 1998, Millstone 1 has been placed in extended maintenance status. Management will review its options with respect to Millstone 1 in 1998, including restart, early retirement and other options. Rate reductions to customers served by the company are likely to offset a portion of the benefit of lower Millstone-related costs. On March 1, 1998, WMECO reduced retail rates by 10 percent in compliance with industry restructuring legislation passed in November 1997 by the Massachusetts Legislature. The 1997 Massachusetts legislation allowed full retail choice on March 1, 1998. WMECO expects to recover fully its stranded costs through a combination of securitization and divestiture of its non-nuclear generating assets. MILLSTONE OUTAGES WMECO has a 19-percent ownership interest in Millstone units 1 and 2 and a 12.24-percent ownership interest in Millstone unit 3. Millstone 1, 2 and 3 have been out of service since November 4, 1995, February 21, 1996, and March 30, 1996, respectively. Subsequent to its January 31, 1996, announcement that Millstone had been placed on its watch list, the NRC has stated that the units cannot return to service until independent, third-party verification teams have reviewed the actions taken to improve the design, configuration and employee concern issues that prompted the NRC to place the units on its watch list. The actual date of the return to service for each of the units is dependent upon the completion of independent inspections, reviews by the NRC and a vote by the NRC Commissioners. In January 1998, NU declared Millstone 3 physically ready for restart, which meant that almost all of the restart-required physical work had been completed in the plant. The NRC currently is conducting a series of inspections to determine, among other things, whether the plant has effective leadership and corrective action and employee concerns programs. The Independent Corrective Action Verification Program, an NRC-ordered independent review of the plant's design and licensing bases, is expected to be completed in March 1998. In 1997, WMECO's share of nonfuel O&M costs expensed for Millstone totaled approximately $106 million, including $14 million reserved for future restart costs. The 1997 costs are net of $12 million of costs which were reserved in 1996. In 1996, WMECO'S share of nonfuel O&M costs expensed for Millstone totaled approximately $76 million, including $12 million reserved for future restart costs. Management will continue to evaluate the costs to be incurred in 1998 to determine whether adjustments to the existing reserves are required. Replacement power costs attributable to the Millstone outages totaled approximately $56 million in 1997 compared to $41 million expensed in 1996. These costs for 1998 are forecasted to average approximately $2 million per month for Millstone 3, $2 million per month for Millstone 2 and $1 million per month for Millstone 1 while the plants are out of service. The company has been, and will continue to be, expensing all of the costs to restart the units including replacement power and nonfuel O&M expenses. NU and its subsidiaries are involved in several class action lawsuits and other litigation in connection with their nuclear operations. See the "Notes to Consolidated Financial Statements," Note 11B, for further information on this litigation. MILLSTONE 1 Management will review its options with respect to Millstone 1 during 1998. The issues that management will consider in evaluating its options include the costs to restart the unit and the economic benefits of the unit's continued operation. CAPACITY During 1996 and continuing into 1997, WMECO took measures to improve its capacity position, including obtaining additional generating capacity, improving the availability of the company's generating units and improving the company transmission capability. During 1997, WMECO spent approximately $10 million to ensure availability of adequate generating generating capacityin Connecticut, of which $6 million was expensed. During 1998 these costs are expected to be approximately $11 million.(DO WE WANT TO SAY WHY 1998 IS SO MUCH LOIn 1998, WMECO does not anticipate the need to take additional measures to ensure adequate generating capacity. LIQUIDITY AND CAPITAL RESOURCES Cash provided from operations decreased approximately $41 million in 1997, compared to 1996, primarily due to higher cash expenditures related to the Millstone outages, and the pay down in 1997 of the 1996 year end accounts payable balance. The 1996 year end accounts payable balance was relatively high due to costs related to a severe December storm and costs associated with the Millstone outages that had been incurred but not yet paid by the end of 1996. Net cash from financing activities increased approximately $44 million, primarily due to the issuance of long-term debt in 1997 and lower reacquisitions and retirements of long-term debt and preferred stock, partially offset by the repayment of short-term debt. WMECO established facilities in 1996 under which they may sell, from time to time, up to $40 million, of its accounts receivable and accrued utility revenues. As of December 31, 1997, WMECO sold approximately $20 million of receivables to third-party purchasers. NU's, WMECO's and CL&P's three-year revolving credit agreement (Credit Agreement) was amended in May 1997 (the Credit Agreement). Under the Revolving Credit Agreement, CL&P and WMECO are able to borrow up to approximately $225 million and $90 million, respectively, subject to a total borrowing limit of $313.75 million for all three borrowers. NU will be able to borrow up to $50 million when NU, CL&P and WMECO have each maintained a consolidated operating income to consolidated interest expense ratio of at least 2.50 to 1 for two consecutive fiscal quarters. Currently, the companies cannot meet this requirement. At December 31, 1997, WMECO had $15 million outstanding under the New Credit Agreement. Each major subsidiary of NU finances its own needs. Neither CL&P nor WMECO has any financing agreements containing cross defaults based on financial defaults by NU, Public Service Company of New Hampshire (PSNH) or North Atlantic Energy Corporation (NAEC). Nevertheless, it is possible that investors will take negative operating results or regulatory developments for one subsidiary of NU into account when evaluating the other NU subsidiaries. That could, as a practical matter and despite the contractual and legal separations among NU and its subsidiaries, negatively affect the company's access to financial markets. In December 1997 and January 1998, Moody's Investors Service (Moody's) and Standard & Poor's (S&P), respectively, downgraded the senior secured debt of CL&P, WMECO and NU, as well as the preferred stock of CL&P and WMECO. This was the fourth time Moody's and S&P have downgraded CL&P and WMECO securities since the Millstone units went on the NRC watch list in 1996. All of the NU system's securities are rated below investment grade and remain under review for further downgrade. Although WMECO does not have any plans to issue debt in the near term, rating agency downgrades generally increase the future cost of borrowing funds because lenders will want to be compensated for increased risk. Additionally, this could also affect the terms and ability of the company to extend existing agreements. The downgrade by Moody's of WMECO's first mortgage bonds to Ba2 in December 1997 brought those ratings to a level at which the sponsor of WMECO's accounts receivable program can take various actions, in its discretion, which would have the practical effect of limiting WMECO's ability to utilize the facility. The WMECO accounts receivable program could be terminated if WMECO's first mortgage bond credit ratings experience one more level of downgrade. WMECO's ability to borrow under the financing arrangements is dependent on the satisfaction of contractual borrowing conditions. The financial covenants that must be satisfied to permit WMECO to borrow under the New Credit Agreement are particularly restrictive and become more restrictive throughout 1998. Spending levels in 1998, particularly for the first half of the year while the Millstone units are expected to be out of service, have been, and will be constrained to levels intended to assure that the financial covenants in WMECO's Credit Agreement are satisfied. However, there is no assurance that these financial covenants will be met as the system may encounter additional unexpected costs from such areas as storms, reduced revenues from regulatory actions or the effect of weather on sales levels. If the return to service of Millstone 3 or Millstone 2 is delayed substantially beyond the present restart estimates, if some borrowing facilities become unavailable because of difficulties in meeting borrowing conditions or renegotiating extensions, if the system encounters additional significant costs, or any other significant deviations from management's current assumptions, the currently available borrowing facilities could be insufficient to meet all of WMECO's cash requirements. In those circumstances, management would take even more stringent actions to reduce costs and cash outflows and would attempt to take other actions to obtain additional sources of funds. The availability of these funds would be dependent upon the general market conditions and WMECO's credit and financial condition at that time. RESTRUCTURING On November 25, 1997, Massachusetts enacted a comprehensive electric utility industry restructuring bill. The bill provides that each Massachusetts electric company, including WMECO, will decrease its rates by 10 percent and allow all its customers to choose their retail electric supplier on March 1, 1998. The statute requires a further 5 percent rate reduction, adjusted for inflation, by September 1, 1999. In addition, the legislation provides, among other things, for: (i) recovery of stranded costs through a "transition charge" to customers, subject to review by the Department of Telecommunications and Energy (DTE), formerly the Department of Public Utilities (DPU, collectively the DTE), (ii) a possible limitation on WMECO's return on equity should its transition cost charge go above a certain level, (iii) securitization of allowed strandable costs, and (iv) divestiture of nonnuclear generation. WMECO hopes it will be able to complete securitization in 1998. The statute also provides that an electric company must transfer or separate ownership of generation, transmission and distribution facilities into independent affiliates or functionally separate such facilities within 30 business days after federal approval. Additionally, marketing companies formed by an electric company are to be separate from the electric company and separate from generation, transmission or distribution affiliates. Under the statute, if a distribution company claims that it is unable to meet a price reduction of 10% initially and 15% by September 1, 1999, the distribution company may so state to the DTE and the DTE is provided with the authority to "explore all possible mechanisms and options within the limits of the constitution" to achieve the mandated rate reductions." The statute indicates that allowing a substitute company to provide standard offer service is one option that can be considered by the DTE. On December 31, 1997, WMECO filed its restructuring plan with the DTE consistent with the Massachusetts restructuring legislation. The plan sets out the process by which WMECO, as of March 1, 1998, initiated a 10 percent rate reduction for all customer rate classes and allowed customers to choose their energy supplier. WMECO intends to mitigate its strandable costs through several steps, including divesting WMECO's nonnuclear generating plants at an auction to be held as soon as June 30, 1998, and securitization of approximately $500 million of stranded costs. NU intends to participate through a nonregulated affiliate in the competitive bid process for WMECO's generation resources. Any proceeds in excess of book value received from the divestiture of these units will be used to mitigate stranded costs. As required by the legislation, WMECO will continue to operate and maintain the transmission and local distribution network and deliver electricity to all customers. On February 20, 1998, the DTE issued an order approving, in all material respects, WMECO's restructuring plan on an interim basis. A final decision is expected in 1998. Because WMECO is obligated to reduce rates on March 1, 1998, before the means of financing for restructuring are completed, WMECO's cash flows and financial condition will be negatively affected. These impacts would become significant if there are material delays in, or significantly reduced proceeds from, the divestiture of nonnuclear generation and securitization. RATE MATTERS In April, 1996, the DTE approved a settlement (the Agreement) that included the continuation through February 1998 of a 2.4 percent rate reduction instituted in June 1994. Additionally, the Agreement terminated certain pending and potential reviews of WMECO's generating plant performance and accelerated its amortization of strandable generation assets by approximately $6 million in 1996 and $10 million in 1997. On August 20, 1997, WMECO filed with the DTE a joint motion for approval of a settlement agreement with the Massachusetts Attorney General for a fuel adjustment clause (FAC) which would allow for a lower rate to WMECO customers for the billing months of September 1997 through February 1998. WMECO is not recovering replacement power costs during this period and has indicated that it would not seek recovery of any of replacement power costs associated with the Millstone outages. WMECO has been expensing and will continue to expense these costs. The Massachusetts restructuring legislation effectively eliminates the FAC, effective March 1, 1998. NUCLEAR DECOMMISSIONING CONNECTICUT YANKEE WMECO has a 9.5 percent ownership interest in the Connecticut Yankee nuclear generating facility (CY or the plant). On December 4, 1996, the Board of Directors of Connecticut Yankee Atomic Power Company voted unanimously to cease permanently the production of power at the plant. The decision to retire CY from commercial operation was based on an economic analysis of the costs of operating it compared to the costs of closing it and incurring replacement power costs over the remaining period of the plant's operating license, which would have expired in 2007. The economic analysis showed that closing the plant and incurring replacement power costs produced substantial savings. CY has undertaken a number of regulatory filings intended to implement the decommissioning. In late December 1996, CY filed an amendment to its power contracts with the FERC to clarify the obligations of its purchasing utilities following the decision to cease power production. At December 31, 1997, WMECO's share of these obligations was approximately $59 million, including the cost of decommissioning and the recovery of existing assets. Management expects that the company will continue to be allowed to recover such FERC approved costs from its customers. Accordingly, WMECO has recognized its share of the estimated costs as a regulatory asset, with a corresponding obligation, on its balance sheets. MAINE YANKEE (MY) WMECO has a 3 percent ownership interest in the Maine Yankee (MY) nuclear generating facility. On August 6, 1997, the Board of Directors of Maine Yankee Atomic Power Company (MYAPC) voted unanimously to retire MY. On January 14, 1998, FERC released a draft order on the MYAPC application to amend its power contracts with the owner/purchasers and revise its decommissioning and other charges. FERC has accepted the proposed application for filing and made the amendments and the proposed charges under the contracts effective on January 15, 1998, subject to refund after hearings. At December 31, 1997, WMECO'S share of the estimated remaining obligation, including decommissioning, amounted to approximately $26 million. Under the terms of the contracts with MYAPC, the shareholders' sponsor companies, including WMECO, are responsible for their proportionate share of the costs of the unit, including decommissioning. Management expects that WMECO will be allowed to recover these costs from its customers. Accordingly, WMECO has recognized these costs as a regulatory asset, with a corresponding obligation on its balance sheet. MILLSTONE WMECO's estimated cost to decommission its share of the Millstone plants is approximately $242 million in year end 1997 dollars. These costs are being recognized over the lives of the respective units with a portion being currently recovered through rates. As of December 31, 1997, the market value of the contributions already made to the decommissioning trusts, including their investment returns, was approximately $103 million. See the "Notes to Consolidated Financial Statements," Note 2, for further information on nuclear decommissioning. ENVIRONMENTAL MATTERS WMECO is potentially liable for environmental cleanup costs at a number of sites inside and outside its service territory. To date, the future estimated environmental remediation liability has not been material with respect to the earnings or financial position of WMECO. At December 31, 1997, WMECO had recorded an environmental reserve of approximately $1.4 million. See the "Notes to Consolidated Financial Statements," Note 11C, for further information on environmental matters. YEAR 2000 ISSUE The Year 2000 issue exists because many computer systems and applications currently use two-digit date fields to designate a year. As the change of the century occurs, date-sensitive systems may recognize the year 2000 as 1900, or not recognize it at all. This inability to recognize or properly treat the year 2000 may cause NU's systems to process critical financial and operational information incorrectly. The NU system has assessed and continues to assess the impact of the Year 2000 issue on its operating and reporting systems. The assessment of the nuclear operating systems is continuing and is expected to be completed in the summer of 1998. The NU System will utilize both internal and external resources to reprogram or replace, and test the software for Year 2000 modifications. The total estimated remaining cost of the Year 2000 project for the NU system is $37 million and is being funded through operating cash flows. This estimate does not include any costs for the replacement or repair of equipment or devices that may be identified during the assessment process. The majority of these costs will be expensed as incurred over the next two years. To date, the NU system has incurred and expensed approximately $4 million related to the assessment of and preliminary efforts in connection with its Year 2000 project. The costs of the project and the date on which the NU system plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those plans. If the NU system's remediation plan is not successful, there could be a significant disruption of the company's operations. RESULTS OF OPERATIONS Income Statement Variances Millions of Dollars 1997 over/(under) 1996 1996 over/(under) 1995 Amount Percent Amount Percent Operating revenues $ 5 1% $ 1 - % Fuel, purchased and net interchange power 25 22 29 33 Other operation 7 5 6 4 Maintenance 25 45 19 50 Amortization of regulatory assets, net (3) (30) (10) (53) Federal and state income taxes (22) (a) (9) (64) Other income, net (2) (a) - - Interest on long-term debt 2 8 (3) (10) Net income (33) (a) (35) (90) (a) Percentage greater than 100 OPERATING REVENUES Total operating revenues increased in 1997, primarily due to higher transmission and capacity revenues and higher retail revenues. Retail revenues were higher due to lower price discounts to customers, partially offset by lower retail sales. Retail kilowatt-hour sales were 1 percent lower in 1997 primarily as a result of mild winter weather. Total operating revenues increased in 1996, primarily due to higher retail sales, partially offset by lower fuel and conservation recoveries. Retail kilowatt-hour sales increased 2.7 percent ($9 million) primarily due to modest economic growth in 1996. Fuel recoveries decreased $6 million, primarily due to the timing of the recovery of costs under the company's fuel clause. Conservation recoveries decreased approximately $6 million primarily due to lower demand side management costs. FUEL, PURCHASED AND NET INTERCHANGE POWER Fuel, purchased and net interchange power expense increased in 1997, primarily due to replacement power costs associated with the Millstone outages. Fuel, purchased and net interchange power expense increased in 1996, primarily due to higher replacement power associated with the Millstone outages, partially offset by the timing of the recognition of costs under the company's fuel clause and lower nuclear generation. OTHER OPERATION AND MAINTENANCE Other operation and maintenance expenses increased in 1997, primarily due to higher costs associated with the Millstone restart effort ($30 million, including a net increase of $2 million in reserves for future costs), higher capacity charges from Maine Yankee ($2 million) and higher costs to ensure adequate capacity ($6 million), partially offset by lower capacity charges from Connecticut Yankee as a result of a property tax refund ($4 million) and lower administrative and general expenses ($5 million) primarily due to lower pensions and benefit costs. Other operation and maintenance expenses increased in 1996, primarily due to higher costs associated with the Millstone restart effort ($33 million, including $12 million of reserves for future costs), partially offset by lower costs for demand side management programs and a 1995 work stoppage. AMORTIZATION OF REGULATORY ASSETS, NET Amortization of regulatory assets, net decreased in 1997, primarily due to the completion of the amortization of the Millstone 3 unuseful investment in 1996. Amortization of regulatory assets, net decreased in 1996, primarily due to the completion of the amortization of the Millstone 3 phase-in plans in 1995 and unuseful investment in June, 1996, partially offset by higher amortization as a result of the 1996 rate settlement. FEDERAL AND STATE INCOME TAXES Federal and state income taxes decreased in 1997, primarily due to lower book taxable income. Federal and state income taxes decreased in 1996, primarily due to lower book taxable income, partially offset by 1995 tax benefits from a favorable tax ruling and the expiration of the 1991 federal statute of limitations. OTHER INCOME, NET Other income, net decreased in 1997, primarily due to costs associated with the accounts receivable facility. INTEREST ON LONG-TERM DEBT Interest on long-term debt increased in 1997 due to the issuance of additional long-term debt. Interest on long-term debt decreased in 1996, primarily due to lower average interest rates as a result of refinancing activities and lower average 1996 debt levels.
SELECTED FINANCIAL DATA (a) 1997 1996 1995 1994 1993 (Thousands of Dollars) Operating Revenues......... $ 426,447 $ 421,337 $ 420,434 $ 421,477 $ 415,055 Operating (Loss) Income.... (965) 26,023 63,064 70,940 60,348 Net (Loss) Income.......... (28,676) 3,922 39,133 49,457 40,594(b) Cash Dividends on Common Stock............. 15,004 16,494 30,223 29,514 28,785 Total Assets............... 1,179,128 1,191,915 1,142,346 1,183,618 1,204,642 Long-Term Debt (c)......... 396,649 349,442 347,470 379,969 393,232 Preferred Stock Not Subject to Mandatory Redemption............... 20,000 20,000 53,500 68,500 73,500 Preferred Stock Subject to Mandatory Redemption(c)............ 21,000 21,000 24,000 24,675 27,000 Obligations Under Capital Leases(c)........ 32,887 32,234 36,011 36,797 36,902
(a) Reclassifications of prior data have been made to conform with the current presentation. (b)Includes the cumulative effect of change in accounting for municipal property tax expense, which increased earnings for common shares by $3.9 million. (c) Includes portion due within one year. STATEMENTS OF QUARTERLY FINANCIAL DATA (Unaudited) Quarter Ended (a) 1997 March 31 June 30 Sept. 30 Dec. 31 Operating Revenues.............. $106,054 $104,130 $111,166 $105,097 Operating Income (Loss)......... $ 3,865 $ (8,160) $ (2,277) $ 5,607 Net Income (Loss)............... $ (1,843) $(14,858) $ (9,455) $ (2,520) 1996 Operating Revenues.............. $114,797 $102,602 $ 99,866 $104,072 Operating Income (Loss)......... $ 13,692 $ 9,377 $ 4,327 $ (1,373) Net Income (Loss)............... $ 8,109 $ 4,016 $ (396) $ (7,807) STATISTICS Gross Electric Average Utility Plant Annual December 31, Use Per Electric (Thousands kWh Sales Residential Customers Employees of Dollars) (Millions) Customer (kWh) (Average) (December 31) 1997 $1,334,233 4,300 7,121 195,324 507 1996 1,303,361 4,626 7,335 194,705 497 1995 1,285,269 4,846 7,105* 193,964 527 1994 1,271,513 4,978 7,433 193,187 617 1993 1,242,927 4,715 7,351 192,542 657 *Effective January 1, 1996, the amounts shown reflect billed and unbilled sales. 1995 has been restated to reflect this change. EX-13.4 29 ANNUAL REPORT FOR PSNH 1997 Annual Report Public Service Company of New Hampshire Index Contents Page Balance Sheets.......................................................... 2 Statements of Income.................................................... 4 Statements of Cash Flows................................................ 5 Statements of Common Stockholder's Equity............................... 6 Notes to Financial Statements........................................... 7 Report of Independent Public Accountants................................ 40 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 42 Selected Financial Data................................................. 50 Statistics.............................................................. 52 Statements of Quarterly Financial Data.................................. 52 Preferred Stockholder and Bondholder Information.....................Back Cover PART I. FINANCIAL INFORMATION PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE BALANCE SHEETS
- ----------------------------------------------------------------------------------------- At December 31, 1997 1996 - ----------------------------------------------------------------------------------------- (Thousands of Dollars) ASSETS - ------ Utility Plant, at cost: Electric (Note 1H, Note 2).............................. $ 1,898,319 $ 1,877,955 Less: Accumulated provision for depreciation......... 590,056 552,780 ------------- ------------- 1,308,263 1,325,175 Unamortized acquisition costs (Note 1J)................. 402,285 491,709 Construction work in progress........................... 10,716 11,032 Nuclear fuel, net....................................... 1,308 1,313 ------------- ------------- Total net utility plant............................. 1,722,572 1,829,229 ------------- ------------- Other Property and Investments: Nuclear decommissioning trusts, at market............... 4,332 3,229 Investments in regional nuclear generating companies and subsidiary company, at equity............ 19,169 19,578 Other, at cost.......................................... 3,773 1,835 ------------- ------------- 27,274 24,642 ------------- ------------- Current Assets: Cash and cash equivalents............................... 94,459 1,015 Notes receivable from affiliated companies.............. - 18,250 Receivables, less accumulated provision for uncollectible accounts of $1,702,000 in 1997 and of $1,700,000 in 1996............................. 89,338 105,381 Accounts receivable from affiliated companies........... 38,520 32,452 Accrued utility revenues................................ 36,885 36,317 Fuel, materials, and supplies, at average cost.......... 40,161 44,852 Recoverable energy costs net--current portion........... 31,886 - Prepayments and other................................... 11,271 24,629 ------------- ------------- 342,520 262,896 ------------- ------------- Deferred Charges: Regulatory assets (Note 1H)............................. 695,418 684,504 Deferred receivable from affiliated company (Note 10G).. 32,472 33,284 Unamortized debt expense................................ 11,749 12,731 Other................................................... 5,154 3,926 ------------- ------------- 744,793 734,445 ------------- ------------- Total Assets........................................ $ 2,837,159 $ 2,851,212 ============= =============
The accompanying notes are an integral part of these financial statements. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE BALANCE SHEETS
- ----------------------------------------------------------------------------------------- At December 31, 1997 1996 - ----------------------------------------------------------------------------------------- (Thousands of Dollars) CAPITALIZATION AND LIABILITIES - ------------------------------ Capitalization: Common stock--$1 par value. Authorized and outstanding 1,000 shares................ $ 1 $ 1 Capital surplus, paid in................................ 423,713 423,058 Retained earnings....................................... 170,188 174,691 ------------- ------------- Total common stockholder's equity.............. 593,902 597,750 Preferred stock subject to mandatory redemption......... 75,000 100,000 Long-term debt.......................................... 516,485 686,485 ------------- ------------- Total capitalization........................... 1,185,387 1,384,235 ------------- ------------- Obligations Under Seabrook Power Contracts and Other Capital Leases (Note 2 and Note 3)............. 799,450 871,707 ------------- ------------- Current Liabilities: Long-term debt and preferred stock--current portion..... 195,000 25,000 Obligations under Seabrook Power Contracts and other capital leases--current portion........................ 122,363 42,910 Accounts payable........................................ 21,231 37,675 Accounts payable to affiliated companies................ 32,677 31,130 Accrued taxes........................................... 69,445 81 Accrued interest........................................ 7,197 7,992 Accrued pension benefits................................ 46,061 44,790 Other................................................... 9,917 37,516 ------------- ------------- 503,891 227,094 ------------- ------------- Deferred Credits: Accumulated deferred income taxes....................... 204,219 258,317 Accumulated deferred investment tax credits............. 3,972 4,511 Deferred contractual obligations (Note 4)............... 83,042 50,271 Deferred revenue from affiliated company................ 32,472 33,284 Other................................................... 24,726 21,793 ------------- ------------- 348,431 368,176 ------------- ------------- Commitments and Contingencies (Note 10) ------------- ------------- Total Capitalization and Liabilities........... $ 2,837,159 $ 2,851,212 ============= =============
The accompanying notes are an integral part of these financial statements. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------- For the Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------------- (Thousands of Dollars) Operating Revenues................................. $1,108,459 $1,110,169 $ 979,971 ----------- ----------- ---------- Operating Expenses: Operation -- Fuel, purchased and net interchange power..... 326,745 356,679 257,008 Other......................................... 367,963 327,237 313,604 Maintenance...................................... 38,320 45,728 42,244 Depreciation..................................... 44,377 42,983 44,337 Amortization of regulatory assets, net........... 56,557 56,884 55,547 Federal and state income taxes (Note 9).......... 86,600 80,340 69,817 Taxes other than income taxes.................... 43,623 45,123 41,786 ----------- ----------- ---------- Total operating expenses................... 964,185 954,974 824,343 ----------- ----------- ---------- Operating Income................................... 144,274 155,195 155,628 ----------- ----------- ---------- Other Income: Equity in earnings of regional nuclear generating companies and subsidary company..... 1,373 2,075 1,645 Other, net....................................... 698 8,075 3,162 Income taxes..................................... (2,391) (7,723) (770) ----------- ----------- ---------- Other (loss)/income, net................... (320) 2,427 4,037 ----------- ----------- ---------- Income before interest charges............. 143,954 157,622 159,665 ----------- ----------- ---------- Interest Charges: Interest on long-term debt....................... 51,259 57,557 76,320 Other interest................................... 273 3,163 90 ----------- ----------- ---------- Interest charges, net...................... 51,532 60,720 76,410 ----------- ----------- ---------- Net Income......................................... $ 92,422 $ 96,902 $ 83,255 =========== =========== ==========
The accompanying notes are an integral part of these financial statements. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------- For the Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------------------------- (Thousands of Dollars) Operating Activities: Net Income.................................................. $ 92,422 $ 96,902 $ 83,255 Adjustments to reconcile to net cash from operating activities: Depreciation.............................................. 44,377 42,983 44,337 Deferred income taxes and investment tax credits, net..... 21,795 94,646 69,986 Recoverable energy costs, net of amortization............. (12,336) 31,663 (15,266) Amortization of acquisition costs......................... 56,557 56,884 55,547 Deferred Seabrook capital costs (Note 1K)................. (8,376) - - Other sources of cash..................................... 51,054 65,922 15,973 Other uses of cash........................................ (67,590) (51,188) - Changes in working capital: Receivables and accrued utility revenues.................. 9,407 (36,907) (10,506) Fuel, materials and supplies.............................. 4,691 (3,135) (4,264) Accounts payable.......................................... (14,897) (7,714) 2,375 Accrued taxes............................................. 69,364 (717) (3,506) Other working capital (excludes cash)..................... (13,765) (12,659) 16 ----------- ----------- ----------- Net cash flows from operating activities...................... 232,703 276,680 237,947 ----------- ----------- ----------- Financing Activities: Reacquisitions and retirements of long-term debt............ - (172,500) (141,000) Reacquisitions and retirements of preferred stock........... (25,000) - - Cash dividends on preferred stock........................... (11,925) (13,250) (13,250) Cash dividends on common stock.............................. (85,000) (52,000) (52,000) ----------- ----------- ----------- Net cash flows used for financing activities.................. (121,925) (237,750) (206,250) ----------- ----------- ----------- Investment Activities: Investment in plant: Electric utility plant.................................... (33,570) (37,480) (46,672) Nuclear fuel.............................................. 5 129 (184) ----------- ----------- ----------- Net cash flows used for investments in plant................ (33,565) (37,351) (46,856) NU System Money Pool........................................ 18,250 850 15,900 Investment in nuclear decommissioning trusts................ (490) (521) (489) Other investment activities, net............................ (1,529) (1,010) (431) ----------- ----------- ----------- Net cash flows used for investments........................... (17,334) (38,032) (31,876) ----------- ----------- ----------- Net Increase/(Decrease) in Cash For The Period................ 93,444 898 (179) Cash and cash equivalents - beginning of period............... 1,015 117 296 ----------- ----------- ----------- Cash and cash equivalents - end of period..................... $ 94,459 $ 1,015 $ 117 =========== =========== =========== Supplemental Cash Flow Information: Cash paid/(refunded) during the year for: Interest, net of amounts capitalized........................ $ 51,775 $ 58,835 $ 74,543 =========== =========== =========== Income taxes................................................ $ 10,612 $ (457) $ 1,369 =========== =========== =========== Increase in obligations: Seabrook Power Contracts and other capital leases........... $ 6,197 $ 93 $ 28,028 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
- --------------------------------------------------------------------------------------- Capital Common Surplus, Retained Stock Paid In Earnings Total - --------------------------------------------------------------------------------------- (Thousands of Dollars) Balance at January 1, 1995............... $ 1 $421,784 $125,034 $546,819 Net income for 1995.................. 83,255 83,255 Cash dividends on preferred stock.... (13,250) (13,250) Cash dividends on common stock....... (52,000) (52,000) Capital stock expenses, net.......... 601 601 -------- --------- --------- --------- Balance at December 31, 1995............. 1 422,385 143,039 565,425 Net income for 1996.................. 96,902 96,902 Cash dividends on preferred stock.... (13,250) (13,250) Cash dividends on common stock....... (52,000) (52,000) Capital stock expenses, net.......... 673 673 -------- --------- --------- --------- Balance at December 31, 1996............. 1 423,058 174,691 597,750 Net income for 1997.................. 92,422 92,422 Cash dividends on preferred stock.... (11,925) (11,925) Cash dividends on common stock....... (85,000) (85,000) Capital stock expenses, net.......... 655 655 -------- --------- --------- --------- Balance at December 31, 1997............. $ 1 $423,713 $170,188 $593,902 ======== ========= ========= =========
The accompanying notes are an integral part of these financial statements. Public Service Company of New Hampshire NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. ABOUT PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE Public Service Company of New Hampshire (PSNH or the company), The Connecticut Light and Power Company (CL&P), Western Massachusetts Electric Company (WMECO), North Atlantic Energy Corporation (NAEC), and Holyoke Water Power Company (HWP) are the operating subsidiaries comprising the Northeast Utilities system (the NU system) and are wholly owned by Northeast Utilities (NU). The NU system furnishes franchised retail electric service in Connecticut, New Hampshire, and western Massachusetts through CL&P, PSNH, WMECO, and HWP. A fifth subsidiary, NAEC, sells all of its entitlement to the capacity and output of the Seabrook nuclear generating unit (Seabrook, a 1,148-megawatt (MW) nuclear generating unit) to PSNH under two long-term contracts (the Seabrook Power Contracts). In addition to its franchised retail service, the NU system furnishes firm and other wholesale electric services to various municipalities and other utilities, and participates in limited retail access programs, providing off-system retail electric service. The NU system serves about 30 percent of New England's electric needs and is one of the 25 largest electric utility systems in the country as measured by revenues. Other wholly owned subsidiaries of NU provide support services for the NU system companies and, in some cases, for other New England utilities. Northeast Utilities Service Company (NUSCO) provides centralized accounting, administrative, information resources, engineering, financial, legal, operational, planning, purchasing and other services to the NU system companies. North Atlantic Energy Service Corporation (NAESCO) acts as agent for CL&P and NAEC, and has operational responsibilities for Seabrook. Northeast Nuclear Energy Company (NNECO) acts as agent for the NU system companies and other New England utilities in operating the Millstone nuclear generating facilities. B. PRESENTATION The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications of prior years' data have been made to conform with the current year's presentation. All transactions among affiliated companies are on a recovery of cost basis which may include amounts representing a return on equity and are subject to approval by various federal and state regulatory agencies. C. PUBLIC UTILITY REGULATION NU is registered with the Securities and Exchange Commission (SEC) as a holding company under the Public Utility Holding Company Act of 1935 (1935 Act). NU and its subsidiaries, including PSNH, are subject to the provisions of the 1935 Act. Arrangements among the NU system companies, outside agencies and other utilities covering inter- connections, interchange of electric power and sales of utility property are subject to regulation by the Federal Energy Regulatory Commission (FERC) and/or the SEC. PSNH is subject to further regulation for rates, accounting and other matters by the FERC and/or the applicable state regulatory commissions. For information regarding proposed changes in the nature of industry regulation, see Note 10A, "Commitments and Contingencies - Restructuring and Rate Matters." D. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board (FASB) issued a new accounting standard in February 1997: Statement of Financial Accounting Standards (SFAS) 129, "Disclosure of Information about Capital Structure." SFAS 129 establishes standards for disclosing information about an entity's capital structure. PSNH's current disclosures are consistent with the requirements of SFAS 129. During June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income" and SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 130 establishes standards for the reporting and disclosure of comprehensive income. To date, the NU system companies have not had material transactions that would be required to be reported as comprehensive income. SFAS 131 determines the standards for reporting and disclosing qualitative and quantitative information about a company's operating segments. This information includes segment profit or loss, certain segment revenue and expense items and segment assets and a reconciliation of these segment disclosures to corresponding amounts in the company's general purpose financial statements. Management performance is currently evaluated using a cost-based budget and the information required by SFAS 131 is not available. Therefore, these disclosure requirements are not applicable. Management believes that the implementation of SFAS 130 and SFAS 131 will not have a material impact on PSNH's current disclosures. See Note 10C, "Commitments and Contingencies-Environmental Matters," for information on other newly issued accounting and reporting standards related to this area. E. INVESTMENTS AND JOINTLY OWNED ELECTRIC UTILITY PLANT Regional Nuclear Generating Companies: PSNH owns common stock of four regional nuclear generating companies (Yankee companies). PSNH's investments in the Yankee companies are accounted for on the equity basis due to PSNH's ability to exercise significant influence over their operating and financial policies. The Yankee companies, with PSNH's ownership interests, are: Connecticut Yankee Atomic Power Company (CYAPC) ................. 5.0% Yankee Atomic Electric Company (YAEC) ........................... 7.0 Maine Yankee Atomic Power Company (MYAPC) ....................... 5.0 Vermont Yankee Nuclear Power Corporation (VYNPC) ................ 4.0 PSNH's equity investments in the Yankee companies at December 31, 1997 are: (Thousands of Dollars) CYAPC .............................................. $ 5,761 YAEC ............................................... 1,427 MYAPC .............................................. 3,880 VYNPC .............................................. 2,085 $13,153 Each Yankee company owns a single nuclear generating unit. Under the terms of the contracts with the Yankee companies, the shareholders- sponsors, including PSNH, are responsible for their proportionate share of the costs of each unit, including decommissioning. The energy and capacity costs from VYNPC and nuclear decommissioning costs of the Yankee companies that have been shut down are billed as purchased power to PSNH. The electricity produced by the Vermont Yankee nuclear generating facility (VY) is committed substantially on the basis of ownership interests and is billed pursuant to contractual agreements. YAEC's, CYAPC's and MYAPC's nuclear power plants were shut down permanently on February 26, 1992, December 4, 1996, and August 6, 1997, respectively. Under ownership agreements with the Yankee companies, PSNH may be asked to provide direct or indirect financial support for one or more of the companies. For more information on the Yankee companies, see Note 4, "Nuclear Decommissioning," and Note 10F, "Commitments and Contingencies - Long-Term Contractual Arrangements." Millstone 3: PSNH has a 2.85 percent joint ownership interest in Millstone 3, a 1,154-MW nuclear generating unit. As of December 31, 1997 and 1996, plant-in-service included approximately $118.7 million and the accumulated provision for depreciation included approximately $32.3 million and $29.4 million, respectively, for PSNH's share of Millstone 3. PSNH's share of Millstone 3 expenses is included in the corresponding operating expenses on the accompanying Statements of Income. The Millstone 3 unit is out of service. NU hopes to return Millstone 3 to service in early spring of 1998. For more information on the Millstone 3 unit, see Note 10B, "Commitments and Contingencies - Nuclear Performance." Wyman Unit 4: PSNH has a 3.14 percent ownership interest in Wyman Unit 4 (Wyman), a 632-MW oil-fired generating unit. At December 31, 1997 and 1996, plant-in-service included approximately $6.0 million, respectively and the accumulated provision for depreciation included approximately $3.9 million and $3.7 million, respectively, for PSNH's share of Wyman. PSNH's share of Wyman expenses is included in the corresponding operating expenses on the accompanying Statements of Income. F. DEPRECIATION The provision for depreciation is calculated using the straight-line method based on estimated remaining lives of depreciable utility plant-in-service, adjusted for salvage value and removal costs, as approved by the appropriate regulatory agencies. Except for major facilities, depreciation rates are applied to the average plant-in-service during the period. Major facilities are depreciated from the time they are placed in service. When plant is retired from service, the original cost of plant, including costs of removal, less salvage, is charged to the accumulated provision for depreciation. The depreciation rates for the several classes of electric plant-in-service are equivalent to a composite rate of 3.7 percent in 1997 and 1996, and 3.8 percent in 1995. See Note 4, "Nuclear Decommissioning," for information on nuclear plant decommissioning. PSNH's non-nuclear generating facilities have limited service lives. Plant may be retired in place or dismantled based upon expected future needs, the economics of the closure and environmental concerns. The costs of closure and removal are incremental costs and, for financial reporting purposes, are accrued over the life of the asset as part of depreciation. At December 31, 1997 and 1996, the accumulated provision for depreciation included approximately $34.2 million and $31.1 million, respectively, accrued for the cost of removal, net of salvage for nonnuclear generation property. G. REVENUES Other than revenues under fixed-rate agreements negotiated with certain wholesale, industrial and commercial customers and limited retail access programs, utility revenues are based on authorized rates applied to each customer's use of electricity. In general, rates can be changed only through a formal proceeding before the appropriate regulatory commission. Regulatory commissions also have authority over the terms and conditions of nontraditional rate making arrangements. At the end of each accounting period, PSNH accrues an estimate for the amount of energy delivered but unbilled. For information on the PSNH rate proceeding and its impact on PSNH, see Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A). H. REGULATORY ACCOUNTING AND ASSETS The accounting policies of PSNH and the accompanying financial statements conform to generally accepted accounting principles applicable to rate-regulated enterprises and reflect the effects of the ratemaking process in accordance with SFAS 71, "Accounting for the Effects of Certain Types of Regulation." Assuming a cost-of-service based regulatory structure, regulators may permit incurred costs, normally treated as expenses, to be deferred and recovered through future revenues. Through their actions, regulators also may reduce or eliminate the value of an asset, or create a liability. If any portion of PSNH's operations were no longer subject to the provisions of SFAS 71, as a result of a change in the cost-of-service based regulatory structure or the effects of competition, PSNH would be required to write off all of its related regulatory assets and liabilities unless there is a formal transition plan which provides for the recovery, through established rates, for the collection of approved stranded costs and to maintain the cost-of-service basis for the remaining regulated operations. At the time of transition, PSNH would be required to determine any impairment to the carrying costs of deregulated plant and inventory assets. Management anticipates that a restructuring program will be implemented within New Hampshire during the next few years. In a restructured environment, PSNH's generation business no longer will be rate regulated on a cost-of-service basis. The majority of PSNH's regulatory assets are related to its generation business. The staff of the SEC has had concerns regarding the appropriateness of the utilities' ability to continue application of SFAS 71 for the generation portion of their business in a restructured environment. The SEC referred the issue to the Emerging Issues Task Force (EITF) of the FASB which reached a consensus and issued "Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71 and 101," (EITF 97-4). The EITF concluded: (1) the future recognition of regulatory assets for the portion of the business that no longer qualifies for application of SFAS 71 depends on the regulators' treatment of the recovery of those costs and other stranded assets from cash flows of other portions of the business still considered to be regulated, and (2) a utility should discontinue the application of SFAS 71 when a legislative and regulatory plan has been enacted, which would include transition plans into a competitive environment, and when the stranded costs which are subject to future rate recovery are determined. EITF 97-4 became effective in August 1997. The issue of restructuring the electric utility industry in New Hampshire is currently the focus of negotiations and proceedings within the federal and state court systems . Management believes that PSNH's use of regulatory accounting remains appropriate while this issue remains in litigation. PSNH expects that its transmission and distribution business will continue to be rate-regulated on a cost-of-service basis, and accordingly, will continue to apply SFAS 71 to this portion of its business. For more information on PSNH's regulatory environment and the potential impacts of restructuring, see Note 10A, "Commitments and Contingencies - Restructuring and Rate Matters," and the MD&A. SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," requires the evaluation of long- lived assets, including regulatory assets, for impairment when certain events occur or when conditions exist that indicate the carrying amounts of assets may not be recoverable. SFAS 121 requires that any long-lived assets which are no longer probable of recovery through future revenues be revalued based on estimated future cash flows. If this revaluation is less than the book value of the asset, an impairment loss would be charged to earnings. Management continues to believe that it is probable that PSNH will recover its investments in long-lived assets through future revenues. This conclusion may change in the future as the implementation of restructuring plans within the state of New Hampshire will generally require the formation of a separate generation entity which will be subject to competitive market conditions. As a result, PSNH will be required to assess the carrying amounts of its long-lived assets in accordance with SFAS 121. The components of PSNH's regulatory assets are as follows: At December 31, 1997 1996 (Thousands of Dollars) Recoverable energy costs, net (Note 1K) ......................... $191,686 $211,236 Income taxes, net (Note 1I) ......... 128,244 151,431 Unrecovered contractual obligations (Note 4) .............. 83,042 50,271 Deferred costs, nuclear plants (Note 2) ................... 281,856 269,233 Seabrook deferral (Note 1K) ......... 8,376 - Other ............................... 2,214 2,333 $695,418 $684,504 I. INCOME TAXES The tax effect of temporary differences (differences between the periods in which transactions affect income in the financial statements and the periods in which they affect the determination of taxable income) is accounted for in accordance with the ratemaking treatment of the applicable regulatory commissions. See Note 9, "Income Tax Expense" for the components of income tax expense. The tax effect of temporary differences, including timing differences accrued under previously approved accounting standards, that give rise to the accumulated deferred tax obligation is as follows: At December 31, 1997 1996 (Thousands of Dollars) Accelerated depreciation and other plant-related differences ... $103,985 $225,263 Net operating loss (NOL) carryforwards ..................... (94,822) (94,149) Regulatory assets - income tax gross up .......................... 49,101 68,652 Other ............................... 145,955 58,551 $204,219 $258,317 At December 31, 1997, PSNH had a NOL carryforward of approximately $293 million, that can be used against PSNH's federal taxable income and which, if unused, expires between the years 2000 and 2006. PSNH also had Investment Tax Credit (ITC) carryforwards of $40 million which if unused, expires between the years 1998 and 2004. For a portion of the carryforward amounts indicated above, the reorganization of PSNH under Chapter 11 of the United States Bankruptcy Code limits the annual amount of NOL and ITC carryforwards that may be used. Approximately $31 million of the NOL and $9 million of the ITC carryforwards are subject to this limitation. See Note 10A, "Commitments and Contingencies - Restructuring and Rate Matters," for the possible impacts on PSNH from the NHPUC's decision related to industry restructuring. J. UNAMORTIZED ACQUISITION COSTS The unamortized PSNH acquisition costs represent the aggregate value placed by the 1989 rate agreement with the state of New Hampshire (Rate Agreement) on PSNH's assets in excess of the net book value of PSNH's non-Seabrook assets, plus the $700 million value assigned to Seabrook by the Rate Agreement, as part of the bankruptcy resolution on June 5, 1992 (Acquisition Date). The Rate Agreement provides for the recovery through rates, with a return, of the unamortized PSNH acquisition costs. The Rate Agreement provides that $425 million of the unamortized PSNH acquisition costs be amortized over the first seven years after PSNH's May 16, 1991 reorganization from bankruptcy (Reorganization Date) with the remaining amount to be amortized over the 20-year period after the Reorganization Date. The unrecovered balance of PSNH acquisition costs at December 31, 1997, was approximately $402.3 million. In accordance with the Rate Agreement, approximately $32.9 million of this amount will be recovered through rates by June 1, 1998, and the remaining amount of approximately $369.4 million will be recovered through rates by 2011. As of December 31, 1997, PSNH has collected approximately $591 million of acquisition costs through rates. K. RECOVERABLE ENERGY COSTS Under the Energy Policy Act of 1992 (Energy Act), PSNH is assessed for its proportionate share of the costs of decontaminating and decommissioning uranium enrichment plants owned by the United States Department of Energy (D&D assessment). The Energy Act requires that regulators treat D&D assessments as a reasonable and necessary current cost of fuel, to be fully recovered in rates like any other fuel cost. PSNH is currently recovering these costs through rates. As of December 31, 1997, PSNH's total D&D deferrals were approximately $300 thousand. The Rate Agreement includes a comprehensive fuel and purchased power adjustment clause (FPPAC) permitting PSNH to pass through to retail customers, for a ten-year period that began in May 1991, the retail portion of differences between the fuel and purchased power costs assumed in the Rate Agreement and PSNH's actual costs, which include the costs related to the Seabrook Power Contracts and the Clean Air Act Amendment. The cost components of the FPPAC are subject to a prudence review by the New Hampshire Public Utilities Commission (NHPUC). Under the Rate Agreement, charges made by NAEC through the Seabrook Power Contracts, including the deferred Seabrook capital expenses, are being deferred by PSNH and subsequently will be subsequently billed and collected by PSNH through the FPPAC. PSNH began to defer the amount of these costs on December 1, 1997 and will continue to do so for the period December 1, 1997 through May 31, 1998. Beginning on June 1, 1998, these costs will be recovered over a 36-month period. At December 31, 1997, PSNH has deferred approximately $8.4 million of these costs, which balance is recorded in PSNH's deferred costs, nuclear plants. On February 10, 1998, the NHPUC established a FPPAC rate for the period December 1, 1997 through May 31, 1998. The new FPPAC rate increased customer billings by approximately six percent. This rate continues to defer a substantial portion of these costs. At December 31, 1997, PSNH's net recoverable energy costs, excluding current net recoverable energy costs, were approximately $191.7 million. This amount includes approximately $172.9 million of deferred small power producer costs. See Note 10A, "Commitments and Contingencies - Restructuring and Rate Matters" for the possible impacts on PSNH of the NHPUC's decision related to industry restructuring. L. SPENT NUCLEAR FUEL DISPOSAL COSTS Under the Nuclear Waste Policy Act of 1982, PSNH must pay the United States Department of Energy (DOE) for the disposal of spent nuclear fuel and high-level radioactive waste. The DOE is responsible for the selection and development of repositories for, and the disposal of, spent nuclear fuel and high-level radioactive waste. Fees are billed currently to customers and paid to the DOE on a quarterly basis. The DOE was originally scheduled to begin accepting delivery of spent fuel in 1998. However, delays in identifying a permanent storage site have continually postponed plans for the DOE's long-term storage and disposal site. Extended delays or a default by the DOE could lead to consideration of costly alternatives. The company has primary responsibility for the interim storage of its spent nuclear fuel. Current capability to store spent fuel at Seabrook are estimated to be adequate until the year 2010. Meeting spent fuel storage requirements beyond this period could require new and separate storage facilities, the costs for which have not been determined. Storage facilities for Millstone 3 are expected to be adequate for the projected life of the unit. 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 contractual obligation to begin accepting spent nuclear fuel no later than January 31, 1998. Currently, the DOE has not taken the spent nuclear fuel as scheduled and, as a result, may have to pay contract damages. The ultimate outcome of this legal proceeding is uncertain at this time. M. CASH AND CASH EQUIVALENTS Cash and cash equivalents includes cash on hand and short-term cash investments which are highly liquid in nature and have original maturities of three months or less. 2. SEABROOK POWER CONTRACTS PSNH and NAEC have entered into two power contracts that obligate PSNH to purchase NAEC's 35.98 percent ownership of the capacity and output of Seabrook for the term of Seabrook's Nuclear Regulatory Commission (NRC) operating license. Under these power contracts, PSNH is obligated to pay NAEC's cost of service during this period, regardless of whether Seabrook 1 is operating. NAEC's cost of service includes all of its Seabrook-related costs, including operation and maintenance (O&M) expenses, fuel expense, income and property tax expense, depreciation expense, certain overhead and other costs and a return on its allowed investment. PSNH has included its right to buy power from NAEC on its Balance Sheets as part of utility plant and regulatory assets with a corresponding obligation. At December 31, 1997, this right was valued at approximately $917.1 million. The contracts established the value of the initial investment in Seabrook (initial investment) at $700 million. As prescribed by the Rate Agreement, as of May 1, 1996, NAEC phased into rates 100 percent of its investment in Seabrook 1. This plan is in compliance with SFAS 92,"Regulated Enterprises- Accounting for Phase-in Plans." From the Acquisition Date through November 1997, NAEC recorded $203.9 million of deferred return on its investment in Seabrook 1. At November 30, 1997, NAEC's utility plant included $84.1 million of deferred return that was transferred as part of the Seabrook plant assets to NAEC on the Acquisition Date. Beginning on December 1, 1997, the deferred return, including the portion transferred to NAEC, is currently being billed through the Seabrook Power Contracts to PSNH and will be fully recovered from customers by May 2001. NAEC depreciated its initial investment over the term of Seabrook 1's operating license (39 years), and any subsequent plant additions are depreciated on a straight- line basis over the remaining term of the power contracts at the time the subsequent additions are placed in service. If Seabrook 1 is shut down prior to the expiration of the NRC operating license, PSNH will be unconditionally required to pay NAEC termination costs for 39 years, less the period during which Seabrook 1 has operated. These termination costs will reimburse NAEC for its share of Seabrook 1 shut-down and decommissioning costs, and will pay NAEC a return of and on any undepreciated balance of its initial investment over the remaining term of the power contracts, and the return of and on any capital additions to the plant made after the Acquisition Date over a period of five years after shut down (net of any tax benefits to NAEC attributable the cancellation). Contract payments charged to operating expenses are approximately: Year Contract Payments (Thousands of Dollars) 1997................................. $188,000 1996................................. 159,000 1995................................. 154,000 Interest included in the contract payment was $57 million in 1997, $55 million in 1996, and $51 million in 1995. Future minimum payments, excluding executory costs, such as property taxes, state use taxes, insurance and maintenance, under the terms of the contracts, as of December 31, 1997, are approximately: Year Seabrook Power Contracts (Thousands of Dollars) 1998 ................................ $199,000 1999 ................................ 184,000 2000 ................................ 183,000 2001 ................................ 108,000 2002 ................................ 69,100 After 2002............................. 1,077,000 Future minimum payments................ 1,820,100 Less amount representing interest............................. 903,000 Present value of Seabrook Power Contracts payments .................. $ 917,100 See Note 10A, "Commitments and Contingencies - Restructuring and Rate Matters" for the possible impacts the NHPUC's restructuring decision may have on the Seabrook Power Contracts. 3. LEASES PSNH has entered into lease agreements, some of which are capital leases, for the use of data processing and office equipment, vehicles and office space. The provisions of these lease agreements generally provide for renewal options. The following rental payments have been charged to expense: Year Capital Leases Operating Leases 1997........................... $1,579,000 $5,657,000 1996........................... 1,105,000 4,884,000 1995........................... 1,103,000 5,291,000 Interest included in capital lease rental payments was $272,000 in 1997, $292,000 in 1996, and $351,000 in 1995. Future minimum rental payments, excluding executory costs, such as property taxes, state use taxes, insurance and maintenance, under long-term noncancellable leases, as of December 31, 1997, are: Year Capital Leases Operating Leases (Thousands of Dollars) 1998........................... $1,500 $ 6,100 1999........................... 1,200 5,300 2000........................... 1,000 4,700 2001........................... 1,000 4,200 2002........................... 100 2,200 After 2002 .................... 500 5,100 Future minimum lease payments .................... 5,300 $27,600 Less amount representing interest ..................... 600 Present value of future minimum lease payments ...... $4,700 4. NUCLEAR DECOMMISSIONING Millstone and Seabrook: Millstone 3 and Seabrook 1 have service lives that are expected to end during the years 2025 and 2026, respectively. Upon retirement, these units must be decommissioned. Current decommissioning studies concluded that complete and immediate dismantlement at retirement continues to be the most viable and economic method of decommissioning Millstone 3 and Seabrook 1. Decommissioning studies are reviewed and updated periodically to reflect changes in decommissioning requirements, costs, technology and inflation. The estimated cost of decommissioning PSNH's 2.85 percent ownership share of Millstone 3 and NAEC's 35.98 percent share of Seabrook 1, in year-end 1997 dollars, is $15.6 million and $170.2 million, respectively. Millstone 3 and Seabrook 1 decommissioning costs will be increased annually by their respective escalation rates. PSNH's Millstone 3 decommissioning costs are accrued over the expected service life of the unit and are included in depreciation expense on its Statements of Income. Nuclear decommissioning costs related to PSNH's share of Millstone 3 amounted to $0.4 million in 1997 and 1996, and $0.3 million in 1995. Nuclear decommissioning, as a cost of removal, is included in the accumulated provision for depreciation on PSNH's Balance Sheets. At December 31, 1997 and 1996, the balance in the accumulated reserve for depreciation amounted to $4.3 million and $3.2 million, respectively. PSNH makes payments to an independent decommissioning trust for its portion of the costs of decommissioning Millstone 3. NAEC's portion of the cost of decommissioning Seabrook 1 is paid to an independent decommissioning financing fund managed by the state of New Hampshire. Funding of the estimated decommissioning costs assumes levelized collections for Millstone 3 and escalated collections for Seabrook 1, and after-tax earnings on the Millstone and Seabrook decommissioning funds of approximately 5.5 percent and 6.5 percent, respectively. Under the terms of the Rate Agreement, PSNH is obligated to pay NAEC's share of Seabrook's decommissioning costs, even if the unit is shut down prior to the expiration of its operating license. Accordingly, NAEC bills PSNH directly for its share of the costs of decommissioning Seabrook 1. PSNH records its Seabrook decommissioning costs as a component of purchased power expense on its Statements of Income. Under the Rate Agreement, PSNH's Seabrook decommissioning costs are recovered through base rates. As of December 31, 1997, PSNH collected through rates approximately $2.6 million toward the future decommissioning costs of its share of Millstone 3, which has been transferred to the external decommissioning trust. As of December 31, 1997, NAEC has paid approximately $21.1 million (including payments made prior to the Acquisition Date by PSNH), into Seabrook 1's decommissioning financing fund. Earnings on the decommissioning trust and financing fund increase the decommissioning trust balance and the accumulated reserve for depreciation. Unrealized gains and losses associated with the decommissioning trust and financing fund also impact the balance of the trust, and the accumulated reserve for depreciation. Changes in requirements or technology, the timing of funding or dismantling, or adoption of a decommissioning method other than immediate dismantlement would change decommissioning cost estimates and the amounts required to be recovered. PSNH attempts to recover sufficient amounts through its allowed rates to cover its expected decommissioning costs. Only the portion of currently estimated total decommissioning costs that has been accepted by regulatory agencies is reflected in rates of PSNH. Based on present estimates and assuming its nuclear units operate to the end of their respective licensing periods, PSNH expects that the decommissioning trust and financing fund will be substantially funded when the units are retired from service. Yankee Companies: VYNPC owns and operates a nuclear generating unit with a service life that is expected to end in 2012. PSNH's ownership share of estimated costs, in year-end 1997 dollars, of decommissioning the unit owned and operated by VYNPC is $20.2 million. On August 6, 1997, the board of directors of MYAPC voted unanimously to cease permanently the production of power at its nuclear generating facility (MY). The NU system companies had relied on MY for approximately one percent of their capacity. During November 1997, MYAPC filed an amendment to its power contracts clarifying the obligations of its purchasing utilities following the decision to cease power production. During January 1998, the FERC accepted the amendments and proposed rates, subject to refund. At December 31, 1997, the remaining estimated obligation, including decommissioning, amounted to approximately $867.2 million, of which PSNH's share was approximately $43.4 million. On December 4, 1996, the board of directors of CYAPC voted unanimously to cease permanently the production of power at its nuclear generating plant (CY). During 1996, the NU system companies had relied on CY for approximately three percent of their capacity. During late December 1996, CYAPC filed an amendment to its power contracts clarifying the obligations of its purchasing utilities following the decision to cease power production. On February 27, 1997, the FERC approved an order for hearing which, among other things, accepted CYAPC's contract amendment. The new rates became effective March 1, 1997, subject to refund. At December 31, 1997, the remaining estimated obligation, including decommissioning, amounted to $619.9 million, of which PSNH's share was approximately $31.0 million. YAEC is in the process of decommissioning its nuclear facility. At December 31, 1997, the estimated remaining costs, including decommissioning, amounted to $124.4 million, of which PSNH's share was approximately $8.7 million. Under the terms of the contracts with MYAPC, CYAPC and YAEC, the shareholder-sponsor companies, including PSNH, are responsible for their proportionate share of the costs of the units, including decommissioning. Management expects that PSNH will continue to be allowed to recover these costs from its customers. Accordingly, PSNH has recognized these costs as regulatory assets, with corresponding obligations. Proposed Accounting: The staff of the SEC has questioned certain current accounting practices of the electric utility industry, including PSNH, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating units in the financial statements. In response to these questions, the FASB has agreed to review the accounting for closure and removal costs, including decommissioning. If current electric utility industry accounting practices for nuclear power plant decommissioning are changed, the annual provision for decommissioning could increase relative to 1997, and the estimated cost for decommissioning could be recorded as a liability (rather than as accumulated depreciation), with recognition of an increase in the cost of the related nuclear power plant. Management believes that PSNH will continue to be allowed to recover decommissioning costs through rates. 5. SHORT-TERM DEBT The amount of short-term borrowings that may be incurred by PSNH is subject to periodic approval by the SEC under the 1935 Act or by the NHPUC. Effective May 1997, PSNH was authorized under a waiver from the NHPUC, to incur short-term borrowings up to a maximum of $125 million. PSNH has a $125 million revolving credit agreement that will expire in April 1999. The revolving credit agreement is with a group of 16 banks. PSNH is obligated to pay a facility fee of .50 percent per annum on the commitment of $125 million. At December 31, 1997 and 1996, there were no borrowings under the facility. Under the credit facility discussed above, PSNH may borrow funds on a short-term revolving basis under its agreement, using either fixed-rate loans or standby loans. Fixed rates are set using competitive bidding. Standby loans are based upon several alternative variable rates. Money Pool: Certain subsidiaries of NU, including PSNH, are members of the Northeast Utilities System Money Pool (Pool). The Pool provides a more efficient use of the cash resources of the system, and reduces outside short-term borrowings. NUSCO administers the Pool as agent for the member companies. Short-term borrowing needs of the member companies are first met with available funds of other member companies, including funds borrowed by NU parent. NU parent may lend to the Pool but may not borrow. Funds may be withdrawn from or repaid to the Pool at any time without prior notice. Investing and borrowing subsidiaries receive or pay interest based on the average daily Federal Funds rate. However, borrowings based on loans from NU parent bear interest at NU parent's cost and must be repaid based upon the terms of NU parent's original borrowing. At December 31, 1997 and 1996, PSNH had no outstanding borrowings from the Pool. Maturities of PSNH's short-term debt obligations are for periods of three months or less. For further information on short-term debt, see the MD&A. 6. EMPLOYEE BENEFITS A. PENSION BENEFITS The NU system subsidiaries participate in a uniform noncontributory defined benefit retirement plan covering all regular NU system employees. Benefits are based on years of service and employees' highest eligible compensation during 60 consecutive months of employment. PSNH's direct portion of the NU system's pension cost, part of which was charged to utility plant, approximated $1.3 million in 1997, $6.2 million in 1996, and $2.3 million in 1995. Pension (credits)/costs for 1997 and 1996 included approximately $(1.0) million and $1.9 million, respectively, related to workforce reduction programs. Currently, PSNH funds annually an amount at least equal to that which will satisfy the requirements of the Employee Retirement Income Security Act and the Internal Revenue Code. Pension costs are determined using market-related values of pension assets. Pension assets are invested primarily in domestic and international equity securities and bonds. The components of net pension cost for PSNH are: For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars) Service cost........................... $ 2,987 $ 6,161 $ 3,462 Interest cost.......................... 13,398 12,808 11,923 Return on plan assets.................. (34,622) (24,393) (33,156) Net amortization....................... 19,508 11,608 20,108 Net pension cost....................... $ 1,271 $ 6,184 $ 2,337 For calculating pension cost, the following assumptions were used: For the Years Ended December 31, 1997 1996 1995 Discount rate.......................... 7.75% 7.50% 8.25% Expected long-term rate of return...... 9.25 8.75 8.50 Compensation/progression rate.......... 4.75 4.75 5.00 The following table represents the plan's funded status reconciled to the Balance Sheets: At December 31, 1997 1996 (Thousands of Dollars) Accumulated benefit obligation, including vested benefits at December 31, 1997 and 1996 of $(140,089,000) and $(131,624,000), respectively......................... $(152,709) $(143,377) Projected benefit obligation .......... (187,968) (179,192) Market value of plan assets ........... 195,612 173,035 Market value in excess of (less than) projected benefit obligation ........ 7,644 (6,157) Unrecognized transition amount ........ 4,003 4,337 Unrecognized prior service costs ...... 7,597 8,135 Unrecognized net gain ................. (65,305) (51,105) Accrued pension liability ............. $(46,061) $ (44,790) The following actuarial assumptions were used in calculating the plan's year-end funded status: For the Years Ended December 31, 1997 1996 Discount rate.......................... 7.25% 7.75% Compensation/progression rate.......... 4.25 4.75 B. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The NU system subsidiaries provide certain health care benefits, primarily medical and dental, and life insurance benefits through a benefit plan to retired employees (referred to as SFAS 106 benefits). These benefits are available for employees retiring from the NU system who have met specified service requirements. For current employees and certain retirees, the total SFAS 106 benefit is limited to two times the 1993 per-retiree health care cost. The SFAS 106 obligation has been calculated based on this assumption. PSNH's direct portion of SFAS 106 benefits, part of which was deferred or charged to utility plant, approximated $4.9 million in 1997, $6.2 million in 1996, and $7.2 million in 1995. PSNH is funding SFAS 106 postretirement costs through external trusts. PSNH is funding, on an annual basis, amounts that have been rate- recovered and which also are tax-deductible under the Internal Revenue Code. The trust assets are invested primarily in equity securities and bonds. The components of health care and life insurance cost are: For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars) Service cost .......................... $ 802 $ 914 $ 933 Interest cost ......................... 3,352 3,559 4,063 Return on plan assets ................. (3,753) (1,720) (1,694) Amortization of unrecognized transition obligation ............... 2,941 2,941 2,941 Other amortization, net ............... 1,541 547 998 Net health care and life insurance cost ...................... $4,883 $6,241 $7,241 For calculating PSNH's SFAS 106 benefit costs, the following assumptions were used: For the Years Ended December 31, 1997 1996 1995 Discount rate ......................... 7.75% 7.50% 8.00% Long-term rate of return - Health assets, net of tax .......... 6.00 5.25 5.00 Life assets ........................ 9.25 8.75 8.50 The following table represents the plan's funded status reconciled to the Balance Sheets: At December 31, 1997 1996 (Thousands of Dollars) Accumulated postretirement benefit obligation of: Retirees ........................... $(36,790) $(38,245) Fully eligible active employees ........................ (31) (22) Active employees not eligible to retire ............... (9,788) (9,696) Total accumulated post- retirement benefit obligation .......................... (46,609) (47,963) Market value of plan assets ........... 22,908 17,882 Accumulated postretirement benefit obligation in excess of plan assets ............... (23,701) (30,081) Unrecognized transition amount .............................. 44,108 47,049 Unrecognized net gain ................. (20,407) (17,139) Accrued postretirement benefit liability ........................... $ - $ (171) The following actuarial assumptions were used in calculating the plan's year-end funded status: At December 31, 1997 1996 Discount rate ......................... 7.25% 7.75% Health care cost trend rate (a) ....... 5.76 7.23 (a) The annual growth in per capita cost of covered health care benefits was assumed to decrease to 4.40 percent by 2001. The effect of increasing the assumed health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997, by $3.1 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $245 thousand. The trust holding the health plan assets is subject to federal income taxes at a 39.6 percent tax rate. PSNH currently is recovering SFAS 106 costs through rates. 7. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION Details of preferred stock subject to mandatory redemption are: Shares Outstanding December 31, Description December 31, 1997 1997 1996 1995 (Thousands of Dollars) 10.60% Series A of 1991 ..... 4,000,000 $100,000 $125,000 $125,000 Less preferred stock to be redeemed within one year .... 1,000,000 25,000 25,000 - Total preferred stock subject to mandatory redemption $ 75,000 $100,000 $125,000 In case of default on dividends or sinking-fund payments, no payments may be made on any junior stock by way of dividends or otherwise (other than in shares of junior stock) so long as the default continues. If PSNH is in arrears in the payment of dividends on any outstanding shares of preferred stock, PSNH would be prohibited from redemption or purchase of less than all of the preferred stock outstanding. The Series A Preferred Stock is not subject to optional redemption by PSNH. It is subject to an annual sinking fund requirement of $25 million, which began on June 30, 1997, sufficient to retire annually 1,000,000 shares at $25 per share. 8. LONG-TERM DEBT Details of long-term debt outstanding are: At December 31, 1997 1996 (Thousands of Dollars) First Mortgage Bonds: 9.17% Series B, due 1998.............. $170,000 $170,000 Total First Mortgage Bonds............ 170,000 170,000 Pollution Control Revenue Bonds: 7.65% Tax-Exempt Series A, due 2021....... 66,000 66,000 7.50% Tax-Exempt Series B, due 2021....... 108,985 108,985 7.65% Tax-Exempt Series C, due 2021....... 112,500 112,500 Adjustable Rate, Taxable, Series D, due 2021 ................................ 39,500 39,500 Adjustable Rate, Taxable, Series E, due 2021 ................................ 69,700 69,700 Adjustable Rate, Tax-Exempt, Series D, due 2021 ................................ 75,000 75,000 Adjustable Rate, Tax-Exempt, Series E due 2021 ................................ 44,800 44,800 Less: Amounts due within one year ........ 170,000 - Long-term debt, net ................ $516,485 $686,485 Long-term debt maturities and cash sinking-fund requirements on debt outstanding at December 31, 1997 aggregate approximately $170 million for 1998. There are neither sinking-fund requirements nor debt maturities existing for the years 1999 through 2002. Also, there are annual renewal and replacement fund requirements equal to 2.25 percent of the average of net depreciable utility property owned by PSNH at the reorganization date, plus cumulative gross property additions thereafter. PSNH expects to meet these future fund requirements by certifying property additions. Any deficiency would need to be satisfied by the deposit of cash or bonds. Essentially, all utility plant of PSNH is subject to the lien of its first mortgage bond indenture. PSNH's Revolving Credit Facility has a second lien, junior to the lien of its first mortgage bond indenture, on all PSNH property located in New Hampshire which will expire in April 1999. At December 31, 1997, there were no borrowings under the Revolving Credit Facility. Concurrent with the issuance of PSNH's Series A and B First Mortgage Bonds, PSNH entered into financing arrangements with the Business Finance Authority of the state of New Hampshire (BFA). Pursuant to these arrangements, the BFA issued seven series of Pollution Control Revenue Bonds (PCRBs) and loaned the proceeds to PSNH. At December 31, 1997, approximately $516.5 million of PCRBs were outstanding. The average effective interest rates on the variable-rate pollution control notes ranged from 3.8 percent to 5.6 percent for 1997, and from 3.5 percent to 5.5 percent for 1996. PSNH's obligation to repay each series of PCRBs is secured by a series of First Mortgage Bonds that were issued under its indenture. Each such series of First Mortgage Bonds contains terms and provisions with respect to maturity, principal payment, interest rate, and redemption that correspond to those of the applicable series of PCRBs. For financial reporting purposes, these bonds would not be considered outstanding unless PSNH fails to meet its obligations under the PCRBs. The PCRBs, except for Series D and E, are redeemable on or after May 1, 2001, at the option of the company with accrued interest and at specified premiums. Under current interest rate elections by PSNH, the Series D and E PCRBs are redeemable, at par plus accrued interest at the end of each interest-rate period. Future interest-rate elections by PSNH could significantly defer or eliminate the availability of optional redemptions by PSNH, and could affect costs as well. 9. INCOME TAX EXPENSE The components of the federal and state income tax provisions charged to operations are: For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars) Current income taxes: Federal ................................. $67,148 $(4,978) $(1,166) State ................................... 48 (1,605) 1,767 Total current ......................... 67,196 (6,583) 601 Deferred income taxes, net: Federal ................................. 21,118 94,922 72,147 State ................................... 1,217 272 (1,606) Total deferred ....................... 22,335 95,194 70,541 Investment tax credits, net ............... (540) (548) (555) Total income tax expense .................. $88,991 $88,063 $70,587 The components of total income tax expense are classified as follows: Income taxes charged to operating expenses ................................. $86,600 $80,340 $69,817 Other income taxes ........................ 2,391 7,723 770 Total income tax expense .................. $88,991 $88,063 $70,587 Deferred income taxes are comprised of the tax effects of temporary differences as follows: For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars) Depreciation .............................. $(1,937) $(1,055) $ 1,294 Deferred tax asset associated with NOL ................................ - 96,756 57,543 Energy adjustment clauses ................. 16,839 (10,716) 5,098 Amortization of regulatory settlement .............................. 11,501 11,501 11,501 Other ..................................... (4,068) (1,292) (4,895) Deferred income taxes, net ................ $22,335 $95,194 $70,541 A reconciliation between income tax expense and the expected tax expense at the applicable statutory rate is as follows: For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars) Expected federal income tax at 35 percent of pretax income ............. $63,495 $64,616 $53,845 Tax effect of differences: Depreciation ............................ 1,890 1,896 1,868 Amortization of acquisition costs ....... 31,298 31,410 31,522 Seabrook intercompany loss .............. (4,616) (7,504) (13,048) Investment tax credit amortization ...... (540) (548) (555) State income taxes, net of federal benefit ....................... 1,095 (867) 105 Other, net .............................. (3,631) (940) (3,150) Total income tax expense .................. $88,991 $88,063 $70,587 10. COMMITMENTS AND CONTINGENCIES A. RESTRUCTURING AND RATE MATTERS The 1996 restructuring legislation that the NHPUC is charged with implementing provides that the NHPUC may not adopt a restructuring plan that imposes a severe financial hardship on a utility. Management believes that PSNH is entitled to full recovery of its prudently incurred costs, including regulatory assets and other strandable costs. It bases this belief both on the general nature of public utility industry cost-of-service based regulation and the specific circumstances of the resolution of PSNH's previous bankruptcy proceedings and its acquisition by NU, including the recoveries provided by the Rate Agreement and related agreements. On February 28, 1997, the NHPUC issued its decision related to restructuring the state's electric utility industry and setting interim stranded cost charges for PSNH pursuant to legislation enacted in New Hampshire in 1996. In the decision, the NHPUC announced a departure from cost-based ratemaking and instead adopted a market-priced approach to ratemaking and stranded cost recovery. Accordingly, unless the NHPUC modifies its position or the litigation described below results in necessary modifications to the final plan which leads management to conclude that the ratemaking approach utilized in the NHPUC's restructuring decision will not go into effect, PSNH no longer will be subject to the provisions of SFAS 71. That would result in PSNH writing off from its balance sheet substantially all of its regulatory assets. The amount of the potential write-off triggered by the order is currently estimated at over $400 million, after taxes. PSNH does not believe that under the decision, it would be required to recognize any additional loss resulting from the impairment of the value of its other long-lived assets under the provisions of SFAS 121. On March 3, 1997, PSNH, NU, NAEC and NUSCO filed for a temporary restraining order, preliminary and permanent injunctive relief and for declaratory judgment in the United States District Court for New Hampshire (District Court). The case was subsequently transferred to Rhode Island. On March 10, 1997, the Chief Judge of the Rhode Island federal court issued a temporary restraining order which stayed the NHPUC's February 28, 1997 decision to the extent it established a rate-setting methodology that is not designed to recover PSNH's costs of providing service and would require PSNH to write off any regulatory assets. During 1997, a mediation process ended without a resolution. The District Court had suspended the procedural schedule associated with this court proceeding pending the resolution of appeals of certain preliminary rulings by the U.S. Circuit Court of Appeals for the First Circuit (First Circuit). On February 3, 1998, the First Circuit denied the appeals taken by would-be intervenors in PSNH's federal court proceeding concerning the NHPUC's final plan on restructuring. The First Circuit affirmed a previous court decision stating that the opposing interests in this case were adequately represented by the NHPUC or by PSNH. As a result of this decision, the proceedings in the District Court may resume. On February 17, 1998, the NHPUC filed a petition for rehearing with the First Circuit. The temporary restraining order issued by the District Court in March 1997 will remain in effect until further orders by either court. During 1997, the NHPUC reopened its proceeding to reconsider certain limited matters in its restructuring orders. The scope of the PSNH- specific rehearing proceedings included alternative rate-setting methodologies proposed by the intervenors; to decide the appropriate methodology to be used to determine PSNH's interim stranded costs; and to set PSNH's interim stranded cost charges utilizing the determined methodology. In testimony filed with the NHPUC in November 1997, PSNH proposed a new methodology to quantify its strandable costs. Under this proposal, PSNH would divest all owned generation and purchased- power obligations via auction. To the extent that the auction fails to produce sufficient revenues to cover the net book value of owned generation and contractual payment obligations of purchased-power, the difference would be recovered from customers through a non-bypassable distribution charge. The new proposal also relies upon securitization of certain assets to further reduce rates. On December 15, 1997, the NHPUC officially announced that industry restructuring would not take place on January 1, 1998. Management believes that industry restructuring will not take place in New Hampshire until the courts resolve the issues brought before them, or the parties involved reach a settlement. PSNH and NAEC are parties to a variety of financing agreements providing that the credit thereunder can be terminated or accelerated if they do not maintain specified minimum ratios of common equity to capitalization (as defined in each agreement). In addition, PSNH and NAEC are parties to a variety of financing agreements providing in effect that the credit thereunder can be terminated or accelerated if there are actions taken, either by PSNH or NAEC or by the state of New Hampshire, that deprive PSNH and/or NAEC of the benefits of the Rate Agreement and/or the Seabrook Power Contracts. If the NHPUC's February 28, 1997 decision were to become effective, it would, unless PSNH and NAEC receive waivers from their respective lenders, result in (i) write-offs that would cause PSNH's common equity to fall below the contractual minimums (ii) reductions in income that would cause PSNH's income to fall below the contractual minimums, (iii) potential violation of the contractual provisions with respect to actions depriving PSNH and NAEC of the benefits of the Rate Agreement and (iv) the potential for cross defaults to other PSNH and NAEC financing documents. Substantially all of PSNH's and NAEC's debt obligations would be affected. If these events transpired and if the creditors holding PSNH and NAEC debt obligations decide to exercise their rights to demand payment then either creditors or PSNH and NAEC could initiate proceedings under Chapter 11 of the bankruptcy laws. As a result of the NHPUC decision and the potential consequences discussed above, the reports of our auditors on the individual financial statements of PSNH and NAEC contain explanatory paragraphs. Those explanatory paragraphs indicate that a substantial doubt exists currently about the ability of PSNH and NAEC to continue as going concerns. The accounts of PSNH and NAEC are included in the consolidated financial statements of NU on the basis of a going concern. While the effect of the implementation of that decision would have a material adverse impact on NU's financial position, results of operations, and cash flows, it would not in and of itself result in defaults under borrowing or other financial agreements of\ NU or its other subsidiaries. On May 2, 1997, PSNH made a rate filing with the NHPUC. For information regarding this rate proceeding, see the MD&A. For information regarding the FERC rate proceedings for CYAPC and MYAPC, see Note 4, "Nuclear Decommissioning." B. NUCLEAR PERFORMANCE Millstone: The three Millstone units are managed by NNECO. Millstone 1, 2 and 3 have been out of service since November 4, 1995, February 21, 1996 and March 30, 1996, respectively, and are on the NRC's watch list. PSNH's ownership interest in the Millstone units is limited to a 2.85 percent joint ownership interest in Millstone 3. NU has restructured its nuclear organization and is currently implementing comprehensive plans to restart the units. Subsequent to its January 31, 1996 announcement that Millstone had been placed on its watch list, the NRC stated that the units cannot return to service until independent, third-party verification teams have reviewed the actions taken to improve the design, configuration and employee concerns issues that prompted the NRC to place the units on its watch list. The actual date of the return to service for each of the units is dependent upon the completion of independent inspections and reviews by the NRC and a vote by the NRC commissioners. NU hopes to return Millstone 3 to service in early spring of 1998 and Millstone 2 three to four months after Millstone 3. Millstone 1 is currently in extended maintenance status. In 1997, NU's share of nonfuel O&M costs expensed for Millstone totaled $566 million, including $73 million reserved for future restart costs. PSNH's share of nonfuel O&M costs was approximately $5 million. Budgeted nuclear spending levels at Millstone for 1998 will be reduced from 1997 levels, although they will be considerably higher than before the station was placed on the NRC's watch list. The actual level of 1998 spending will depend on when the units return to operation and the cost of restoring them to service. The total cost to restart the units cannot be precisely estimated at this time. Management will continue to evaluate the costs to be incurred in 1998 to determine whether adjustments to the existing reserves are required. Management cannot predict when the NRC will allow any of the Millstone units to return to service and thus cannot precisely estimate the total replacement power costs the NU system companies will ultimately incur. Replacement power costs incurred by NU attributable to the Millstone outages averaged approximately $28 million per month during 1997, and for 1998 are projected to average approximately $9 million per month for Millstone 3, $9 million per month for Millstone 2, and $6 million per month for Millstone 1 while the plants remain out of service. To date, PSNH's share of replacement power costs has not been material. PSNH's share of replacement power costs is not expected to be material for 1998, while Millstone 3 is out of service. CL&P, WMECO and PSNH will continue to expense their replacement power costs in 1998. Based on the current estimates of expenditures and restart dates, management believes the NU system has sufficient resources to fund the restoration of the Millstone units and related replacement power costs. If the return to service of Millstone 3 or 2 is delayed substantially beyond the present restart estimates, if some financing facilities become unavailable because of difficulties in meeting borrowing conditions or renegotiating extensions, if CL&P and WMECO encounter additional significant costs or if any other significant deviations from management's assumptions occur, CL&P and WMECO could be unable to meet their cash requirements. In those circumstances, management would take even more stringent actions to reduce costs and cash outflows and attempt to obtain additional sources of funds. The availability of these funds would be dependent upon general market conditions and CL&P's and WMECO's respective credit and financial conditions at that time. Litigation: On August 7, 1997, the non-NU owners of Millstone 3 filed demands for arbitration with CL&P and WMECO as well as lawsuits in Massachusetts Superior Court against NU and its current and former trustees. The non-NU owners raise a number of contract, tort and statutory claims arising out of the operation of Millstone 3. The arbitrations and lawsuits seek to recover compensatory damages, punitive damages, treble damages and attorneys' fees. Owners representing approximately two-thirds of the non-NU interests in Millstone 3 claimed compensatory damages in excess of $200 million. In addition, one of the lawsuits seeks to restrain NU from disposing of its shares of the stock of WMECO and HWP, pending the outcome of the lawsuit. Management cannot estimate the potential outcome of these suits but believes there is no legal basis for the claims and intends to defend against them vigorously. To date, no reserves have been established for this litigation. At December 31, 1997, the costs related to this litigation for the NU system were estimated to be $100 million for incremental O&M costs and approximately $100 million for replacement power costs. These costs are likely to increase as long as Millstone 3 remains out of service. C. ENVIRONMENTAL MATTERS The NU system is subject to regulation by federal, state and local authorities with respect to air and water quality, the handling and disposal of toxic substances and hazardous and solid wastes, and the handling and use of chemical products. The NU system has an active environmental auditing and training program and believes that it is in substantial compliance with current environmental laws and regulations. However, the NU system is subject to certain pending enforcement actions and governmental investigations in the environmental area. Management cannot predict the outcome of these enforcement actions and investigations. Environmental requirements could hinder the construction of new generating units, transmission and distribution lines, substations and other facilities. Changing environmental requirements could also require extensive and costly modifications to PSNH's existing generating units, and transmission and distribution systems, and could raise operating costs significantly. As a result, PSNH may incur significant additional environmental costs, greater than amounts included in cost of removal and other reserves, in connection with the generation and transmission of electricity and the storage, transportation and disposal of by-products and wastes. PSNH may also encounter significantly increased costs to remedy the environmental effects of prior waste handling activities. The cumulative long-term cost impact of increasingly stringent environmental requirements cannot be estimated accurately. PSNH has recorded a liability based upon currently available information for what it believes are its estimated environmental remediation costs that it expects to incur for waste disposal sites. In most cases, additional future environmental cleanup costs are not reasonably estimable due to a number of factors, including the unknown magnitude of possible contamination, the appropriate remediation methods, the possible effects of future legislation or regulation and the possible effects of technological changes. At December 31, 1997, the net liability recorded by PSNH for its estimated environmental remediation costs, excluding any possible insurance recoveries or recoveries from third parties, amounted to approximately $5.6 million, which management has determined to be the most probable amount. During 1997, PSNH adopted Statement of Position 96-1, "Environmental Remediation Liabilities" (SOP). The principal objective of the SOP is to improve the manner in which existing authoritative accounting literature is applied by entities to specific situations of recognizing, measuring and disclosing environmental remediation liabilities. The adoption of the SOP resulted in an increase of approximately $400 thousand to PSNH's environmental reserve in 1997. PSNH cannot estimate the potential liability for future claims, including environmental remediation costs, that may be brought against it. However, considering known facts, existing laws, and regulatory practices, management does not believe the matters disclosed above will have a material effect on PSNH's financial position or future results of operations. D. NUCLEAR INSURANCE CONTINGENCIES Under certain circumstances, in the event of a nuclear incident at one of the nuclear facilities in the country covered by the federal government's third-party liability indemnification program, an owner of a nuclear unit could be assessed in proportion to its ownership interest in each of its nuclear units up to $75.5 million. Payments of this assessment would be limited to $10.0 million in any one year per nuclear incident based upon the owner's pro rata ownership interest in each of its nuclear units. In addition, the owner would be subject to an additional five percent or $3.8 million, in proportion to its ownership interests in each of its nuclear units, if the sum of all claims and costs from any one nuclear incident exceeds the maximum amount of financial protection. Under the terms of the Seabrook Power Contracts with NAEC, PSNH could be obligated to pay for any assessment charged to NAEC as a "cost of service." Based on its ownership interest in Millstone 3 and NAEC's ownership interest in Seabrook 1, PSNH's maximum liability, including any additional assessments, would be $30.8 million per incident of which payments would be limited to $3.9 million per year. In addition, through power purchase contracts with MYAPC, VYNPC and CYAPC, PSNH would be responsible for up to an additional $11.1 million per incident, of which payments would be limited to a maximum of $1.4 million per year. Insurance has been purchased to cover the primary cost of repair, replacement or decontamination of utility property resulting from insured occurrences at Millstone 3 and CY. PSNH is subject to retroactive assessments if losses exceed the accumulated funds available to the insurer. The maximum potential assessment against PSNH with respect to losses arising during the current policy year is approximately $0.4 million under the primary property insurance program. Insurance has been purchased to cover certain extra costs incurred in obtaining replacement power during prolonged accidental outages and the excess cost of repair, replacement, or decontamination or premature decommissioning of utility property resulting from insured occurrences. PSNH is subject to retroactive assessments if losses exceed the accumulated funds available to the insurer. The maximum potential assessments against PSNH (including costs resulting from PSNH's contracts with NAEC), with respect to losses arising during current policy years are approximately $2.2 million under the replacement power policies and $5.2 million under the excess property damage, decontamination and decommissioning policies. Although PSNH has purchased the limits of coverage currently available from the conventional nuclear insurance pools, the cost of a nuclear incident could exceed available insurance proceeds. Insurance has been purchased aggregating $200 million on an industry basis for coverage of worker claims. All participating reactor operators insured under this coverage are subject to retrospective assessments of $3 million per reactor. The maximum potential assessment against PSNH (including costs resulting from the Seabrook Power Contracts with NAEC), with respect to losses arising during the current policy period is approximately $1.8 million. Effective January 1, 1998, a new worker policy was purchased which is not subject to retrospective assessments. E. CONSTRUCTION PROGRAM The construction program is subject to periodic review and revision by management. PSNH currently forecasts construction expenditures of approximately $302.6 million for the years 1998-2002, including approximately $41.9 million for 1998. In addition, PSNH estimates that nuclear fuel requirements, for its share of Millstone 3, will be $5.1 million for the years 1998-2002, including $1.7 million for 1998. F. LONG-TERM CONTRACTUAL ARRANGEMENTS Yankee Companies: PSNH, CL&P and WMECO rely on VY for approximately 1.7 percent of their capacity under long-term contracts. Under the terms of their agreements, the NU system companies pay their ownership (or entitlement) shares of costs, which include depreciation, O&M expenses, taxes, the estimated cost of decommissioning and a return on invested capital. These costs are recorded as purchased power expense and are recovered through the companies' rates. PSNH's total cost of purchases under contracts with VYNPC, amounted to $6.2 million in 1997, $6.5 million in 1996 and 1995. The other Yankee generating facilities, MY, CY and Yankee Rowe, were permanently shutdown as of August 6, 1997, December 4, 1996, and February 26, 1992, respectively. See Note 1E, "Summary of Significant Accounting Policies-Investments and Jointly Owned Electric Utility Plant," for more information on the Yankee companies. See Note 4, "Nuclear Decommissioning," regarding information on the related decommissioning studies. Nonutility Generators (NUGs): PSNH has requirements under various arrangements for the purchase of capacity and energy from NUGs. These arrangements have terms from 20 to 30 years, currently expiring in the years 1998 through 2023, and require PSNH to purchase energy at specified prices or formula rates. For the 12 months ending December 31, 1997, approximately 14 percent of the NU system electricity requirements were met by NUGs. PSNH's total cost of purchases under these arrangements amounted to $133.1 million in 1997, $132.6 million in 1996, and $124.0 million in 1995. These costs may be deferred for eventual recovery through rates. For additional information, see Note 1K, "Summary of Significant Accounting Policies-Recoverable Energy Costs." New Hampshire Electric Cooperative: PSNH entered into a buy-back agreement to purchase the capacity and energy of the New Hampshire Electric Cooperative, Inc.'s (NHEC) share of Seabrook 1 and to pay all of NHEC's Seabrook 1 costs for a ten-year period, which began on July 1, 1990. The total cost of purchases under this agreement was $23.4 million in 1997, $14.6 million in 1996, and $15.8 million in 1995. The total cost of these purchases has been collected through the FPPAC in accordance with the Rate Agreement. In connection with the agreement, NHEC agreed to continue as a firm-requirements customer of PSNH for 15 years. Hydro-Quebec: Along with other New England utilities, PSNH, CL&P, WMECO, and HWP have entered into agreements to support transmission and terminal facilities to import electricity from the Hydro-Quebec system in Canada. PSNH is obligated to pay, over a 30-year period ending in 2020, its proportionate share of the annual O&M and capital costs of these facilities. Estimated Annual Costs: The estimated annual costs of PSNH's significant long-term contractual arrangements are as follows: 1998 1999 2000 2001 2002 (Millions of Dollars) VYNPC ........................ $ 7.1 $ 7.1 $ 6.7 $ 7.4 $ 7.7 NUGs ......................... 139.4 142.9 147.1 151.3 155.5 NHEC ......................... 30.0 30.0 14.6 - - Hydro-Quebec ................. 10.2 9.8 9.7 9.4 9.2 For additional information regarding the recovery of purchased power costs, see Note 1K, "Summary of Significant Accounting Policies - Recoverable Energy Costs." G. DEFERRED RECEIVABLE FROM AFFILIATED COMPANY At the time PSNH emerged from bankruptcy on May 16, 1991, in accordance with the phase-in under the Rate Agreement, it began accruing a deferred return on a portion of its Seabrook investment. From May 16, 1991 to the Acquisition Date, PSNH accrued a deferred return of $50.9 million. On the Acquisition Date, PSNH sold the $50.9 million deferred return to NAEC as part of the Seabrook-related assets. At the time PSNH transferred the deferred return to NAEC, it realized, for income tax purposes, a gain that is deferred under the consolidated income tax rules. Beginning December 1, 1997, this gain is being restored for income tax purposes, as the deferred return of $50.9 million, and the associated income taxes of $32.9 million, are being collected by NAEC through the Seabrook Power Contracts. As NAEC recovers the $32.9 million in years eight through ten of the Rate Agreement, it will be obligated to make these corresponding payments to PSNH. On the Acquisition Date, PSNH recorded the $32.9 million of income taxes associated with the deferred return as a deferred receivable from NAEC, with a corresponding entry to deferred revenue, on its Balance Sheet. In 1993, due to changes in tax rates, this amount was adjusted to $33.2 million. For further information related to the phase-in of the Seabrook power plant, see Note 2, "Seabrook Power Contracts." See Note 10A, "Commitments and Contingencies - Restructuring and Rate Matters" for the possible impacts of the NHPUC's decision related to industry restructuring on this intercompany transaction between PSNH and NAEC. 11. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each of the following financial instruments: Cash and nuclear decommissioning trusts: The carrying amounts approximate fair value. SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," requires investments in debt and equity securities to be presented at fair value. Unrealized gains and losses resulting from the use of SFAS 115 accounting have not been material. Preferred stock and long-term debt: The fair value of PSNH's fixed-rate securities is based upon the quoted market price for those issues or similar issues. Adjustable rate securities are assumed to have a fair value equal to their carrying value. The carrying amounts of PSNH's financial instruments and the estimated fair values are as follows: Carrying Fair At December 31, 1997 Amount Value (Thousands of Dollars) Preferred stock subject to mandatory redemption..................... $100,000 $ 99,000 Long-term debt - First Mortgage Bonds...... $170,000 $170,425 Other long-term debt....................... $516,485 $537,599 Carrying Fair At December 31, 1996 Amount Value (Thousands of Dollars) Preferred stock subject to mandatory redemption..................... $125,000 $125,000 Long-term debt - First Mortgage Bonds...... 170,000 175,729 Other long-term debt....................... 516,485 523,536 The fair values shown above have been reported to meet the disclosure requirements and do not purport to represent the amounts at which those obligations would be settled. To the Board of Directors of Public Service Company of New Hampshire: We have audited the accompanying balance sheets of Public Service Company of New Hampshire (a New Hampshire corporation and a wholly owned subsidiary of Northeast Utilities) as of December 31, 1997 and 1996, and the related statements of income, common stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 Public Service Company of New Hampshire as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the company will continue as a going concern. As discussed in Note 10A, on February 28, 1997 the State of New Hampshire Public Utilities Commission (the NHPUC) issued an order outlining its final plan to restructure the electric utility industry. The final plan announced a departure from cost- based rate making, which, if implemented, would require the company to discontinue the application of Financial Accounting Standard No. 71, "Accounting for the Effects of Certain Types of Regulation," (FAS 71). The implementation of the final plan, including the effect of the discontinuation of FAS 71, would result in after tax write-off of over $400 million. Such a write-off would cause the company to be in technical default under financial covenants imposed by lenders, which, would, if not waived or renegotiated, give rise to the rights of lenders to accelerate the repayment of approximately $686 million of the company's indebtedness and approximately $495 million of an affiliated company's indebtedness. These conditions raise substantial doubt about the company's ability to continue as a going concern. The financial statements referred to above do not include any adjustments that might result from the outcome of this uncertainty. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE Management's Discussion and Analysis of Financial Condition and Results of Operations This section contains management's assessment of Public Service Company of New Hampshire's (PSNH or the company) financial condition and the principal factors having an impact on the results of operations. The company is a wholly-owned subsidiary of Northeast Utilities (NU). This discussion should be read in conjunction with the company's financial statements and footnotes. FINANCIAL CONDITION OVERVIEW Net income was approximately $92 million for 1997 compared to approximately $97 million for 1996. The decrease in net income was primarily due to higher operation expenses. Retail kilowatt-hour sales were essentially unchanged in 1997. A significant issue facing PSNH in 1998 is the industry restructuring efforts in New Hampshire. A temporary restraining order issued by a U.S. District Court is currently blocking the New Hampshire Public Utilities Commission (NHPUC) from implementing a February 1997 restructuring order that would have resulted in a write-off by PSNH of more than $400 million. Management hopes to negotiate an alternative restructuring proposal in 1998 that will produce significant PSNH rate reductions and allow retail customers to choose their electric suppliers, but still give PSNH and North Atlantic Energy Corporation (NAEC) an opportunity to maintain an adequate financial condition and earn fair returns on their investments. RESTRUCTURING In February, 1997, the NHPUC issued orders to restructure the state's electric utility industry and set interim stranded cost charges for PSNH. In the orders, the NHPUC announced a departure from cost-based ratemaking and adopted a market- priced approach to stranded cost recovery. PSNH, NU, NAEC and Northeast Utilities Service Company (NUSCO) filed for a temporary restraining order, preliminary and permanent injunctive relief and a declaratory judgment in the United States District Court of New Hampshire. The case subsequently was transferred to the United States District Court of Rhode Island (District Court) where a temporary restraining order was granted, staying, indefinitely, the enforcement of the NHPUC's restructuring orders as they affected PSNH. Certain appeals to the preliminary ruling have been denied and proceedings in the District Court are expected to resume. The NHPUC conducted rehearing proceedings in 1997 to decide the appropriate methodology to be used to determine PSNH's interim stranded costs and to set PSNH's interim stranded cost charges utilizing the determined methodology. The NHPUC has not indicated when it will issue a decision in these proceedings. On December 15, 1997, the NHPUC officially announced that industry restructuring would not take place on January 1, 1998. On December 24, 1997, the Governor's office filed a motion with the NHPUC formally requesting that certain issues concerning the rate agreement (Rate Agreement) between NU, PSNH and the state of New Hampshire, entered into in 1989 in connection with NU's reorganization plan to resolve PSNH's bankruptcy, be transferred to the New Hampshire Supreme Court for decision. The motion recommends that the NHPUC not issue any new rulings concerning the Rate Agreement pending such Supreme Court decision. On February 20, 1998, the NHPUC petitioned the New Hampshire Supreme Court to review two issues regarding the Rate Agreement; (i) whether the Rate Agreement creates private rights which would allow PSNH to seek damages under a contract theory if PSNH receives less than the full amount it claims as strandable costs under the Rate Agreement, and (ii) if yes, against whom and under what conditions such rights be enforceable. The Supreme Court first must determine whether it will accept the NHPUC's petition. As part of the rehearing proceedings, PSNH proposed a new methodology to quantify its stranded costs. Under this proposal, PSNH would divest its owned generation and purchased power obligations via auction. To the extent that the auction fails to produce sufficient revenues to cover the net book value of owned generation and contractual payment obligations of purchased power, the difference would be recovered from customers through a non-bypassable distribution charge. The new proposal also relies upon securitization of certain assets to further reduce rates. On February 20, 1998, PSNH forwarded a settlement offer to representatives from the state of New Hampshire that was consistent with PSNH's proposal in the rehearing proceedings, including among other things, a 20 percent rate reduction at the beginning of 1999, an auction of PSNH's non nuclear generating units and securitization of approximately $1.15 billion of PSNH's stranded costs. See the "Notes to Financial Statements," Note 10A, for the potential accounting impacts of restructuring. RATE MATTERS PSNH's Rate Agreement provided for seven base rate increases and a comprehensive fuel and purchased power adjustment clause (FPPAC). In June 1996, the final base rate increase of 5.5 percent went into effect. Although the FPPAC continues for an additional four years beyond the end of the fixed rate period, there is uncertainty regarding how it will continue to function. The costs associated with purchases by PSNH from certain non-utility generators (NUGs) at prices above the level assumed in rates are deferred and recovered through the FPPAC. At December 31, 1997, NUG deferrals totaled approximately $173 million. On May 2, 1997, PSNH made a rate filing with the NHPUC requesting base rates to remain at their current level after May 31, 1997. By order dated November 6, 1997, the NHPUC ordered a temporary rate reduction for PSNH at a revenue level 6.87 percent lower than current rates. The NHPUC also set an interim return on equity of 11 percent. The temporary rates became effective December 1, 1997. A final decision, which will be reconciled to July 1, 1997, is not expected to be issued until September, 1998. A portion of this reduction was offset by an increase to rates through the FPPAC. On February 10, 1998, the NHPUC ordered an FPPAC rate for the period December 1, 1997 through May 31, 1998, which increased customer bills by approximately 6 percent. Prior to this increase, the FPPAC rate had been a credit to reflect a customer refund ordered by the NHPUC beginning in June 1996. This rate continues to defer recovery of a substantial portion of costs for the future. In addition, recovery of the Seabrook deferred return (approximately $127 million annually) is scheduled to begin in June 1998. On March 13, 1998, PSNH filed a proposed change to its rates, effective June 1, 1998. Public hearings on the proposed rate change are scheduled to take place in May 1998. The NHPUC also confirmed in its February 10, 1998 decision that it would disallow approximately $3 million in replacement power costs related to outages at Connecticut Yankee, Maine Yankee and Vermont Yankee and require PSNH to set aside $10 million as a reserve for potential overpayments due to the fact that PSNH has not required small power producers to reduce deliveries during so- called "light-loading" periods, pending the NHPUC's review of this matter. The decision also alleges various breaches of the Rate Agreement and ordered PSNH to meet with the State to discuss these matters. Finally, the decision indicated that the NHPUC would open a proceeding to review whether the proceeds from the sale of steam generators (approximately $20.9 million for NAEC's share) related to the canceled Unit II at Seabrook station should flow through rates to reduce customer bills. See the "Notes to Financial Statements," Note 1K, for further information on the FPPAC. LIQUIDITY AND CAPITAL RESOURCES Cash provided from operations decreased approximately $44 million in 1997, compared to 1996, primarily due to lower recoveries through the FPPAC as a result of a customer refund ordered by the NHPUC and higher costs due to the Seabrook outage that are not being recovered currently, partially offset by higher working capital. Cash used for financing activities decreased approximately $116 million in 1997, compared to 1996, due primarily to the repayment of long-term debt in 1996, partially offset by the higher payment of cash dividends on common stock and the repayment of preferred stock in 1997. Cash used for investments decreased approximately $21 million in 1997, compared to 1996, primarily due to a decrease in investments in the NU system Money Pool. PSNH has a $125 million revolving credit agreement that will expire in April 1999. At December 31, 1997 there were no borrowings under the facility. PSNH has a first mortgage bond maturity of $170 million, plus accrued interest, on May 14, 1998. PSNH expects to meet that maturity with cash on hand and borrowing under the revolving credit agreement. Each major subsidiary of NU finances its own needs. Neither CL&P nor WMECO has any financing agreements containing cross defaults based on financial defaults by NU, PSNH or NAEC. Similarly, neither PSNH nor NAEC has any financing agreements containing cross defaults based on financial defaults by NU, CL&P or WMECO. Nevertheless, it is possible that investors will take negative operating results or regulatory developments at one company in the NU system into account when evaluating other companies in the NU system. That could, as a practical matter and despite the contractual and legal separations among the NU companies, negatively affect each company's access to financial markets. NUCLEAR PERFORMANCE MILLSTONE 3 PSNH has a 2.85 percent joint ownership interest in Millstone 3. Millstone 3 has been out of service since March 30, 1996. Subsequent to its January 31, 1996, announcement that Millstone had been placed on its watch list, the NRC has stated that the unit cannot return to service until independent, third party verification teams have reviewed the actions taken to improve the design, configuration and employee concerns issues that prompted the NRC to place the unit on its watch list. The actual date of the return to service for the unit is dependent upon the completion of independent inspections, reviews by the NRC and a vote by the NRC commissioners. In January 1998, NU declared Millstone 3 physically ready for restart, which meant that almost all of the restart-required physical work had been completed in the plant. The NRC currently is conducting a series of inspections to determine, among other things, whether the plant has effective leadership and corrective action and employee concerns programs. The Independent Corrective Action Verification Program, an NRC-ordered independent review of the plant's design and licensing bases, is expected to be completed in March 1998. To date, PSNH's costs related to the Millstone 3 outage have not had a material impact on the company's financial position or results of operations. Management expects that, under its current planning assumptions, Millstone 3's outage- related costs will continue to be immaterial to the company's results of operations. SEABROOK PSNH is obligated to purchase North Atlantic Energy Corporation's (NAEC) 35.98- percent share of the capacity and output generated by Seabrook 1(Seabrook) under the Seabrook Power Contract for a period equal to the length of the NRC full- power operating license for Seabrook (through 2026) whether or not Seabrook is operating and without regard to the cost of alternative sources of power. North Atlantic Energy Service Corporation is the managing agent and operates Seabrook. Seabrook operated at a capacity factor of 78.3 percent through December 1997, compared to 96.8 percent for the same period in 1996. The lower 1997 capacity factor is due primarily to the 50-day scheduled refueling and maintenance outage which began on May 10, 1997, and an unplanned outage that began on December 5, 1997. The unplanned outage occurred when the unit was shut down to repair leaks in a three inch stainless steel pipe in the residual heat removal system. The pipe was replaced, but problems were subsequently discovered in the control building air conditioning system. Design changes were implemented and the plant returned to service on January 16, 1998. DECOMMISSIONING CONNECTICUT YANKEE PSNH has a 5 percent ownership interest in the Connecticut Yankee nuclear generating facility (CY or the plant). On December 4, 1996, the Board of Directors of Connecticut Yankee Atomic Power Company voted unanimously to cease permanently the production of power at the plant. The decision to retire CY from commercial operation was based on an economic analysis of the costs of operating it compared to the costs of closing it and incurring replacement power costs over the remaining period of the plant's operating license, which would have expired in 2007. The economic analysis showed that closing the plant and incurring replacement power costs produced substantial savings. CY has undertaken a number of regulatory filings intended to implement the decommissioning. In late December 1996, CY filed an amendment to its power contracts with the FERC to clarify the obligations of its purchasing utilities following the decision to cease power production. At December 31, 1997, PSNH's share of these obligations was approximately $31 million, including the cost of decommissioning and the recovery of existing assets. Management expects that PSNH will continue to be allowed to recover such FERC approved costs from their customers. Accordingly, PSNH has recognized its share of the estimated costs as a regulatory asset, with a corresponding obligation, on its balance sheets. MAINE YANKEE PSNH has a 5 percent ownership interest in the Maine Yankee (MY) nuclear generating facility. On August 6, 1997, the Board of Directors of Maine Yankee Atomic Power Company (MYAPC) voted unanimously to retire MY. On January 14, 1998, FERC released a draft order on the MYAPC application to amend its power contracts with the owner/purchasers and revise its decommissioning and other charges. FERC has accepted the proposed application for filing and made the amendments and the proposed charges under the contracts effective on January 15, 1998, subject to refund after hearings. At December 31, 1997, PSNH's share of the estimated remaining obligation, including decommissioning amounted to approximately $43 million. Under the terms of the contracts with MYAPC, the shareholders' sponsor companies, including PSNH, are responsible for their proportionate share of the costs of the unit, including decommissioning. Management expects that PSNH will be allowed to recover these costs from its customers. Accordingly, PSNH has recognized these costs as a regulatory asset, with a corresponding obligation on its balance sheet. MILLSTONE AND SEABROOK PSNH's estimated cost to decommission its 2.85 percent share of Millstone 3 and NAEC's 35.98 share of Seabrook is approximately $16 million and $170 million, respectively, in year end 1997 dollars. These costs are being recognized over the lives of the respective units with a portion currently being recovered through rates. Under the terms of the Rate Agreement, the company is obligated to pay NAEC's share of Seabrook's decommissioning costs, even if the unit is shut down prior to the expiration of its operating license. As of December 31, 1997, the market value of the contributions already made to the Millstone 3 and Seabrook decommissioning trusts, including their investment returns, was approximately $4 million and $26 million, respectively. See the "Notes to Financial Statements," Note 4, for further information on nuclear decommissioning, including PSNH's share of costs to decommission the other regional nuclear generating units. ENVIRONMENTAL MATTERS PSNH is potentially liable for environmental cleanup costs at a number of sites inside and outside its service territory. To date, the future estimated environmental remediation liability has not been material with respect to the earnings or financial position of PSNH. At December 31, 1997, PSNH had recorded an environmental reserve of approximately $5.6 million. See the "Notes to Financial Statements" Note 10C, for further information on environmental matters. YEAR 2000 ISSUE The Year 2000 issue exists because many computer systems and applications currently use two-digit date fields to designate a year. As the change of the century occurs, date-sensitive systems may recognize the year 2000 as 1900, or not recognize it at all. This inability to recognize or properly treat the year 2000 may cause NU systems to process critical financial and operational information incorrectly. The company has assessed and continues to assess the impact of the Year 2000 issue on its operating and reporting systems. The assessment of the nuclear operating systems is continuing and is expected to be completed in the summer of 1998. The NU System will utilize both internal and external resources to reprogram or replace, and test the software for Year 2000 modifications. The total estimated remaining cost of the Year 2000 project is $37 million and is being funded through operating cash flows. This estimate does not include any costs for the replacement or repair of equipment or devices that may be identified during the assessment process. The majority of these costs will be expensed as incurred over the next two years. To date, the NU system has incurred and expensed approximately $4 million related to the assessment of, and preliminary efforts in connection with, its Year 2000 project. The costs of the project and the date on which the company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those plans. If the NU system's remediation plan is not successful, there could be a significant disruption of the NU system's operations. RESULTS OF OPERATIONS Income Statement Variances Increase/(Decrease) Millions of Dollars 1997 over/(under) 1996 1996 over/(under) 1995 Amount Percent Amount Percent Operating revenues ($2) - % $130 13% Fuel, purchased and net interchange power (30) (8) 100 39 Other operation 41 12 14 4 Maintenance (7) (16) 3 8 Other, net (7) (92) 5 (a) Interest on long-term debt (6) (11) (19) (25) Other interest expense (3) (91) 3 (a) Net income (4) (5) 14 16 (a) Percent greater than 100 OPERATING REVENUES Total operating revenues decreased in 1997 primarily due to lower fuel recoveries, partially offset by higher retail revenues. Fuel recoveries decreased approximately $12 million, primarily due to the customer refund ordered by the NHPUC. Retail revenues increased approximately $9 million, primarily due to the June 1996 rate increase, partially offset by the December 1997 rate decrease and higher price discounts to retain customers. Retail sales were essentially unchanged. Total operating revenues increased in 1996, primarily due to higher fuel recoveries, regulatory decisions, and other retail revenues. Fuel recoveries increased $112 million, primarily due to revenues resulting from the intercompany allocation of energy costs to NU affiliated companies ($125 million) and higher base fuel revenues primarily as a result of the June 1996 and 1995 retail-rate increases, partially offset by lower FPPAC revenues as a result of a customer refund ordered by the NHPUC. Revenues related to regulatory decisions increased $8 million, primarily due to the retail-rate increases. Other retail revenues increased $10 million primarily due to sales growth and other revenue sources. Retail sales increased 0.4 percent ($2 million), primarily due to economic growth in 1996, partially offset by milder weather in 1996. FUEL EXPENSE Fuel, purchased and net interchange power expense decreased in 1997, primarily due to the timing in the recognition of fuel expenses under the FPPAC, partially offset by higher purchased power costs. Fuel, purchased and net interchange power expense increased in 1996, primarily due to higher purchased power costs and the timing in the recognition of fuel expenses under the FPPAC. OTHER OPERATION AND MAINTENANCE EXPENSE Other operation and maintenance expense increased in 1997 primarily due to higher capacity charges under the Seabrook Power Contract as a result of the scheduled May 1997 refueling and maintenance outage and the unplanned December 1997 outage ($23 million), higher capacity purchases from NHEC ($11 million), higher capacity charges from MY ($4 million) and higher costs for PSNH's share of Millstone 3 ($2 million), partially offset by lower fossil costs ($4 million) and lower administration and sales costs ($3 million). Other operation and maintenance expenses increased in 1996, primarily due to higher storm costs, higher employee benefit costs, higher capacity charges under the Seabrook Power Contracts and higher marketing costs. OTHER, NET Other, net decreased in 1997 and increased in 1996, primarily due to the deferral in 1996 of interest expense ($5 million) associated with the FPPAC refund. INTEREST ON LONG-TERM DEBT Interest on long-term debt decreased in 1997 and 1996, primarily due to the repayment of the $172.5 million Series A first-mortgage bond in May 1996. OTHER INTEREST EXPENSE Other interest expense decreased in 1997 and increased in 1996, primarily due to 1996 interest expense ($5 million) associated with the FPPAC refund. Public Service Company of New Hampshire SELECTED FINANCIAL DATA (a) Jan. 1, 1997 Jan. 1, 1996 Jan. 1, 1995 to to to For the Periods Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995 (Thousands of Dollars) Operating Revenues........ $1,108,459 $1,110,169 $ 979,971 Operating Income.......... 144,274 155,195 155,628 Net Income ............... 92,422 96,902 83,255 Cash Dividends on Common Stock............ 85,000 52,000 52,000 At Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995 Total Assets.............. $2,837,159 $2,851,212 $2,920,487 Long-Term Debt (b)........ 686,485 686,485 858,985 Preferred Stock Subject to Mandatory Redemption(b)........... 100,000 125,000 125,000 Obligations Under Seabrook Power Contracts and Other Capital Leases(b)....... 921,813 914,617 915,288 (a) Reclassifications of prior data have been made to conform with the current presentation. (b) Includes portions due within one year. Public Service Company of New Hampshire SELECTED FINANCIAL DATA Jan. 1, 1994 Jan. 1, 1993 to to For the Periods Dec. 31, 1994 Dec. 31, 1993 (Thousands of Dollars) Operating Revenues........ $922,039 $864,415 Operating Income.......... 152,086 124,710 Net Income ............... 77,444 52,237 Cash Dividends on Common Stock............ - - At Dec. 31, 1994 Dec. 31, 1993 (Thousands of Dollars) Total Assets.............. $2,845,967 $2,774,511 Long-Term Debt (b)........ 999,985 1,093,895 Preferred Stock Subject to Mandatory Redemption(b)........... 125,000 125,000 Obligations Under Seabrook Power Contracts and Other Capital Leases(b)....... 887,967 856,559 Public Service Company of New Hampshire STATISTICS Average Gross Electric Annual Utility Plant Use Per December 31, kWh Residential Electric (Thousands of Sales Customer Customers Employees Dollars)(a) (Millions) (kWh) (Average) (December 31) 1997 $2,312,628 13,340 6,528 407,642 1,254 1996 2,382,009 13,601 6,567 407,082 1,279 1995 2,469,474 11,001 6,524(c) 406,077 1,325 1994 2,521,960 11,008 6,768 400,775 1,374 1993 2,590,644 11,146 6,817 397,277 1,426 STATEMENTS OF QUARTERLY FINANCIAL DATA (Unaudited) Quarter Ended (b) 1997 March 31 June 30 Sept.30 Dec. 31 Operating Revenues....... $278,321 $257,098 $285,390 $287,650 Operating Income......... $ 45,010 $ 34,062 $ 32,322 $ 32,880 Net Income............... $ 32,529 $ 21,161 $ 19,056 $ 19,676 1996 March 31 June 30 Sept.30 Dec. 31 Operating Revenues....... $269,540 $261,897 $296,719 $282,013 Operating Income......... $ 44,668 $ 42,156 $ 46,934 $ 21,437 Net Income............... $ 28,545 $ 23,986 $ 30,646 $ 13,725 (a) Includes reclassification of the unamortized acquisition costs to gross utility plant. (b) Reclassifications of prior data have been made to conform with the current presentation. (c) Effective January 1, 1996, the amounts shown reflect billed and unbilled sales. 1995 has been restated to reflect this change. EX-13.5 30 ANNUAL REPORT FOR NAEC 1997 Annual Report North Atlantic Energy Corporation Index Contents Page Balance Sheets................................................... 2 Statements of Income............................................. 4 Statements of Cash Flows......................................... 5 Statements of Common Stockholder's Equity........................ 6 Notes to Financial Statements.................................... 7 Report of Independent Public Accountants......................... 24 Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 26 Selected Financial Data.......................................... 32 Statistics....................................................... 32 Statements of Quarterly Financial Data........................... 32 Bondholder Information........................................... Back Cover PART I. FINANCIAL INFORMATION NORTH ATLANTIC ENERGY CORPORATION BALANCE SHEETS
- ----------------------------------------------------------------------------------------- At December 31, 1997 1996 - ----------------------------------------------------------------------------------------- (Thousands of Dollars) ASSETS - ------ Utility Plant, at original cost: Electric (Note 1G)...................................... $ 779,111 $ 775,794 Less: Accumulated provision for depreciation......... 143,778 124,530 ------------- ------------- 635,333 651,264 Construction work in progress........................... 4,616 8,887 Nuclear fuel, net....................................... 27,413 31,765 ------------- ------------- Total net utility plant............................. 667,362 691,916 ------------- ------------- Other Property and Investments: Nuclear decommissioning trusts, at market............... 26,547 19,744 ------------- ------------- 26,547 19,744 ------------- ------------- Current Assets: Cash.................................................... 13 299 Special deposits........................................ - 7,039 Receivables from affiliated companies................... 25,695 16,422 Taxes receivable........................................ 4,613 - Materials and supplies, at average cost................. 13,003 13,093 Prepayments and other................................... 4,220 4,302 ------------- ------------- 47,544 41,155 ------------- ------------- Deferred Charges: Regulatory assets (Note 1H)............................. 269,484 259,881 Unamortized debt expense................................ 3,702 4,692 ------------- ------------- 273,186 264,573 ------------- ------------- Total Assets........................................ $ 1,014,639 $ 1,017,388 ============= =============
The accompanying notes are an integral part of these financial statements. NORTH ATLANTIC ENERGY CORPORATION BALANCE SHEETS
- ----------------------------------------------------------------------------------------- At December 31, 1997 1996 - ----------------------------------------------------------------------------------------- (Thousands of Dollars) CAPITALIZATION AND LIABILITIES - ------------------------------ Capitalization: Common stock--$1 par value. Authorized and outstanding 1,000 shares.......................... $ 1 $ 1 Capital surplus, paid in................................ 160,999 160,999 Retained earnings....................................... 58,702 53,749 ------------- ------------- Total common stockholder's equity.............. 219,702 214,749 Long-term debt.......................................... 475,000 495,000 ------------- ------------- Total capitalization........................... 694,702 709,749 ------------- ------------- Current Liabilities: Notes payable to affiliated company..................... 9,950 2,500 Long-term debt--current portion......................... 20,000 20,000 Accounts payable........................................ 7,912 20,714 Accounts payable to affiliated companies................ 6,040 5,073 Accrued interest........................................ 3,025 2,888 Accrued taxes........................................... - 3,486 Other................................................... 1,055 271 ------------- ------------- 47,982 54,932 ------------- ------------- Deferred Credits: Accumulated deferred income taxes....................... 216,701 196,650 Deferred obligation to affiliated company (Note 6)...... 32,472 33,284 Other................................................... 22,782 22,773 ------------- ------------- 271,955 252,707 ------------- ------------- Commitments and Contingencies (Note 7) ------------- ------------- Total Capitalization and Liabilities........... $ 1,014,639 $ 1,017,388 ============= =============
The accompanying notes are an integral part of these financial statements. NORTH ATLANTIC ENERGY CORPORATION STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------ For the Years Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------ (Thousands of Dollars) Operating Revenues................................. $ 192,381 $ 162,152 $ 157,183 ---------- ---------- ---------- Operating Expenses: Operation -- Fuel.......................................... 13,405 15,013 12,030 Other......................................... 39,091 34,356 36,737 Maintenance...................................... 24,146 9,154 12,442 Depreciation..................................... 25,170 24,056 23,406 Amortization of regulatory assets, net........... 6,270 - - Federal and state income taxes (Note 5).......... 14,845 12,341 10,187 Taxes other than income taxes.................... 12,393 12,343 10,987 ---------- ---------- ---------- Total operating expenses................... 135,320 107,263 105,789 ---------- ---------- ---------- Operating Income................................... 57,061 54,889 51,394 ---------- ---------- ---------- Other Income: Deferred Seabrook return--other funds............ 7,205 7,700 9,405 Other, net....................................... (747) 1,200 1,556 Income taxes..................................... 4,394 5,052 2,776 ---------- ---------- ---------- Other income, net.......................... 10,852 13,952 13,737 ---------- ---------- ---------- Income before interest charges............. 67,913 68,841 65,131 ---------- ---------- ---------- Interest Charges: Interest on long-term debt....................... 50,722 52,414 62,721 Other interest................................... 649 (697) (519) Deferred Seabrook return--borrowed funds......... (13,411) (14,948) (21,512) ---------- ---------- ---------- Interest charges, net...................... 37,960 36,769 40,690 ---------- ---------- ---------- Net Income......................................... $ 29,953 $ 32,072 $ 24,441 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. NORTH ATLANTIC ENERGY CORPORATION STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------- For the Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------------------------- (Thousands of Dollars) Operating Activities: Net Income.................................................. $ 29,953 $ 32,072 $ 24,441 Adjustments to reconcile to net cash from operating activities: Depreciation.............................................. 25,170 24,056 23,406 Amortization of nuclear fuel.............................. 10,705 11,668 9,183 Deferred income taxes and investment tax credits, net..... 22,649 15,749 46,114 Deferred return - Seabrook................................ (20,616) (22,648) (30,917) Sale of Seabrook 2 steam generator........................ - 20,931 - Loss on reacquired debt................................... - - (31,886) Other sources of cash..................................... 11,052 9,175 2,957 Other uses of cash........................................ (2,224) (2,582) (3,375) Changes in working capital: Receivables............................................... (9,273) 2,270 (4,709) Materials and supplies.................................... 90 (824) (2,233) Accounts payable.......................................... (11,835) 19,509 2,167 Accrued taxes............................................. (3,486) 2,140 (93) Other working capital (excludes cash)..................... 3,429 (7,675) (12,161) ----------- ----------- ----------- Net cash flows from operating activities...................... 55,614 103,841 22,894 ----------- ----------- ----------- Financing Activities: Issuance of long-term debt.................................. - - 225,000 Net increase/(decrease) in short-term debt.................. 7,450 (5,500) 8,000 Reacquisitions and retirements of long-term debt............ (20,000) (45,000) (225,000) Cash dividends on common stock.............................. (25,000) (38,000) (24,000) ----------- ----------- ----------- Net cash flows used for financing activities.................. (37,550) (88,500) (16,000) ----------- ----------- ----------- Investment Activities: Investment in plant: Electric utility plant.................................... (6,606) (5,921) (6,906) Nuclear fuel.............................................. (6,147) (15,752) (16,609) ----------- ----------- ----------- Net cash flows used for investments in plant................ (12,753) (21,673) (23,515) NU System Money Pool........................................ - 2,500 26,250 Investment in nuclear decommissioning trusts................ (5,597) (4,404) (3,824) Other investment activities, net............................ - 222 - ----------- ----------- ----------- Net cash flows used for investments........................... (18,350) (23,355) (1,089) ----------- ----------- ----------- Net (Decrease)/Increase In Cash For The Period................ (286) (8,014) 5,805 Cash - beginning of period.................................... 299 8,313 2,508 ----------- ----------- ----------- Cash - end of period.......................................... $ 13 $ 299 $ 8,313 =========== =========== =========== Supplemental Cash Flow Information: Cash paid/(refunded) during the year for: Interest, net of amounts capitalized........................ $ 45,297 $ 46,322 $ 73,923 =========== =========== =========== Income taxes................................................ $ - $ (13,160) $ (36,679) =========== =========== ===========
The accompanying notes are an integral part of these financial statements. NORTH ATLANTIC ENERGY CORPORATION STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
- ----------------------------------------------------------------------------------- Capital Retained Common Surplus, Earnings Stock Paid In (a) Total - ----------------------------------------------------------------------------------- (Thousands of Dollars) Balance at January 1, 1995 ............. $ 1 $ 160,999 $ 59,236 $ 220,236 Net income for 1995................. 24,441 24,441 Cash dividends on common stock...... (24,000) (24,000) ---------- ---------- --------- ---------- Balance at December 31, 1995............ 1 160,999 59,677 220,677 Net income for 1996................. 32,072 32,072 Cash dividends on common stock...... (38,000) (38,000) ---------- ---------- --------- ---------- Balance at December 31, 1996............ 1 160,999 53,749 214,749 Net income for 1997................. 29,953 29,953 Cash dividends on common stock...... (25,000) (25,000) ---------- ---------- --------- ---------- Balance at December 31, 1997............ $ 1 $ 160,999 $ 58,702 $ 219,702 ========== ========== ========= ==========
(a) All retained earnings are available for distribution, plus an allowance of $10 million. The accompanying notes are an integral part of these financial statements. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. ABOUT NORTH ATLANTIC ENERGY CORPORATION North Atlantic Energy Corporation (NAEC or the company), The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH), Western Massachusetts Electric Company (WMECO), and Holyoke Water Power Company (HWP), are the operating subsidiaries comprising the Northeast Utilities system (the NU system) and are wholly owned by Northeast Utilities (NU). The NU system furnishes franchised retail electric service in Connecticut, New Hampshire, and western Massachusetts through CL&P, PSNH, WMECO, and HWP. NAEC sells all of its entitlement to the capacity and output of the Seabrook nuclear power plant, (Seabrook, a 1,148-megawatt nuclear generating unit) to PSNH. In addition to its franchised retail service, the NU system furnishes firm and other wholesale electric services to various municipalities and other utilities, and participates in limited retail access programs, providing off-system retail electric service. The NU system serves about 30 percent of New England's electric needs and is one of the 25 largest electric utility systems in the country as measured by revenues. Other wholly owned subsidiaries of NU provide support services for the NU system companies and, in some cases, for other New England utilities. Northeast Utilities Service Company (NUSCO) provides centralized accounting, administrative, information resources, engineering, financial, legal, operational, planning, purchasing and other services to the NU system companies. North Atlantic Energy Service Corporation (NAESCO) acts as agent for NAEC and CL&P and has operational responsibility for Seabrook. Northeast Nuclear Energy Company (NNECO) acts as agent for the NU system companies and other New England utilities in operating the Millstone nuclear generating facilities. B. PRESENTATION The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications of prior years' data have been made to conform with the current year's presentation. All transactions among affiliated companies are on a recovery of cost basis which may include amounts representing a return on equity and are subject to approval by various federal and state regulatory agencies. C. PUBLIC UTILITY REGULATION NU is registered with the Securities and Exchange Commission (SEC) as a holding company under the Public Utility Holding Company Act of 1935 (1935 Act), and it and its subsidiaries, including NAEC, are subject to the provisions of the 1935 Act. Arrangements among the NU system companies, outside agencies and other utilities covering interconnections, interchange of electric power and sales of utility property are subject to regulation by the Federal Energy Regulatory Commission (FERC) and/or the SEC. NAEC is subject to further regulation for rates, accounting and other matters by the FERC and/or applicable state regulatory commissions. For information regarding proposed changes in the nature of industry regulation, see Note 7A, "Commitments and Contingencies - Restructuring and Rate Matters." D. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board (FASB) issued a new accounting standard in February 1997: Statement of Financial Accounting Standards (SFAS) 129, "Disclosure of Information about Capital Structure." SFAS 129 establishes standards for disclosing information about an entity's capital structure. NAEC's current disclosures are consistent with the requirements of SFAS 129. During June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income." SFAS 130 establishes standards for the reporting and disclosure of comprehensive income. To date, NAEC has not had material transactions that would be required to be reported as comprehensive income. Management believes that the implementation of SFAS 130 will not have a material impact on NAEC's current disclosures. E. JOINTLY OWNED ELECTRIC UTILITY PLANT NAEC has a 35.98 percent joint-ownership interest in Seabrook which includes the 0.4 percent ownership interest in Seabrook 1 which NAEC acquired from Vermont Electric Generation and Transmission Cooperative in February 1994. NAEC sells all of its share of the power generated by Seabrook to PSNH under two long-term contracts (the Seabrook Power Contracts). As of December 31, 1997 and 1996, plant-in-service included approximately $723.2 million and $718.7 million, respectively, and the accumulated provision for depreciation included approximately $116.1 million and $102.0 million, respectively, for NAEC's share of Seabrook 1. NAEC's share of Seabrook 1 expenses is included in the corresponding operating expenses on the accompanying Statements of Income. F. DEPRECIATION The provision for depreciation is calculated using the straight-line method based on estimated remaining lives of depreciable utility plant- in-service, adjusted for salvage value and removal costs, as approved by the appropriate regulatory agency. Except for major facilities, depreciation rates are applied to the average plant-in-service during the period. Major facilities are depreciated from the time they are placed in service. When plant is retired from service, the original cost of plant, including costs of removal, less salvage, is charged to the accumulated provision for depreciation. The depreciation rates for the several classes of electric plant-in-service are equivalent to a composite rate of 3.5 percent in 1997, 3.4 percent in 1996 and 3.3 percent in 1995. See Note 2, "Nuclear Decommissioning," for additional information on nuclear plant decommissioning. G. SEABROOK POWER CONTRACTS PSNH and NAEC have entered into two power contracts that obligate PSNH to purchase NAEC's 35.98 percent ownership of the capacity and output of Seabrook 1 for the term of Seabrook 1's Nuclear Regulatory Commission (NRC) operating license. Under these contracts, PSNH is obligated to pay NAEC's cost of service during this period, regardless if Seabrook 1 is operating. NAEC's cost of service includes all of its Seabrook-related costs, including operation and maintenance (O&M) expenses, fuel expense, income and property tax expense, depreciation expense, certain overhead and other costs and a return on its allowed investment. The Seabrook Power Contracts established the value of the initial investment in Seabrook (initial investment) at $700-million. As prescribed by the 1989 rate agreement with the State of New Hampshire (Rate Agreement), as of May 1, 1996, NAEC phased into rates 100 percent of the recoverable portion of its investment in Seabrook 1. From June 5, 1992 (the date NU acquired PSNH and NAEC acquired Seabrook 1 from PSNH - the Acquisition Date) through November 1997, NAEC recorded $203.9 million of deferred return on its investment in Seabrook 1. At November 30, 1997, NAEC's utility plant included $84.1 million of deferred return that was transferred as part of the Seabrook plant assets to NAEC on the Acquisition Date. Beginning on December 1, 1997, the deferred return, including the portion transferred to NAEC is currently being billed through the Seabrook Power Contracts to PSNH, and will be fully recovered from customers by May 2001. NAEC is depreciating its initial investment over the term of Seabrook 1's operating license (39 years), and any subsequent plant additions are depreciated on a straight-line basis over the remaining term of the Seabrook Power Contracts at the time the subsequent additions are placed in service. If Seabrook 1 is shut down prior to the expiration of the NRC operating license, PSNH will be unconditionally required to pay NAEC termination costs for 39 years, less the period during which Seabrook 1 has operated. These termination costs will reimburse NAEC for its share of Seabrook 1 shut-down and decommissioning costs, and will pay NAEC a return of and on any undepreciated balance of its initial investment over the remaining term of the Seabrook Power Contracts, and the return of and on any capital additions to the plant made after the Acquisition Date over a period of five years after shut down (net of any tax benefits to NAEC attributable to the cancellation). H. REGULATORY ACCOUNTING AND ASSETS The accounting policies of the company and the accompanying financial statements conform to generally accepted accounting principles applicable to rate-regulated enterprises and reflect the effects of the ratemaking process in accordance with SFAS 71, "Accounting for the Effects of Certain Types of Regulation." Assuming a cost-of-service based regulatory structure, regulators may permit incurred costs, normally treated as expenses, to be deferred and recovered through future revenues. Through their actions, regulators also may reduce or eliminate the value of an asset, or create a liability. If any portion of the company's operations no longer were subject to the provisions of SFAS 71, as a result of a change in the cost-of-service based regulatory structure or the effects of competition, the company would be required to write off all of its related regulatory assets and liabilities unless there is a formal transition plan which provides for the recovery, through established rates, for the collection of approved stranded costs and to maintain the cost-of-service basis for the remaining regulated operations. At the time of transition, NAEC would be required to determine any impairment to the carrying costs of deregulated plant and inventory assets. The issue of restructuring the electric utility industry in New Hampshire is currently the focus of negotiations and proceedings within the federal and state court systems. The outcome of these court proceedings will impact NAEC due to NAEC's contractual relationship with PSNH through the Seabrook Power Contracts. However, management believes that NAEC's use of regulatory accounting remains appropriate while this issue remains in litigation. For more information on NAEC's regulatory environment and the potential impacts of restructuring, see Note 7A, "Commitments and Contingencies - Restructuring and Rate Matters," and Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A). SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," requires the evaluation of long- lived assets, including regulatory assets, for impairment when certain events occur or when conditions exist that indicate the carrying amounts of assets may not be recoverable. SFAS 121 requires that any long-lived assets which are no longer probable of recovery through future revenues be revalued based on estimated future cash flows. If this revaluation is less than the book value of the asset, an impairment loss would be charged to earnings. SFAS 121 did not have a material impact on the company's financial position or results of operations as of December 31, 1997. Management continues to believe that it is probable that the company will recover its investments in long-lived assets through future revenues. This conclusion may change in the future as the implementation of restructuring plans within New Hampshire will subject NAEC to competitive market conditions. As a result, NAEC will be required to assess the carrying amounts of its long-lived assets in accordance with SFAS 121. The components of NAEC's regulatory assets are as follows: At December 31, 1997 1996 (Thousands of Dollars) Deferred costs-Seabrook 1 (Note 1K)............................ $199,753 $185,078 Income taxes, net (Note 1I)............ 48,736 47,185 Recoverable energy costs (Note 1J)..... 2,057 2,217 Unamortized loss on reacquired debt................................. 18,938 25,401 $269,484 $259,881 I. INCOME TAXES The tax effect of temporary differences (differences between the periods in which transactions affect income in the financial statements and the periods in which they affect the determination of taxable income) is accounted for in accordance with the ratemaking treatment of the applicable regulatory commissions. See Note 5, "Income Tax Expense" for the components of income tax expense. The tax effect of temporary differences, including timing differences accrued under previously approved accounting standards, which give rise to the accumulated deferred tax obligation is as follows: At December 31, 1997 1996 (Thousands of Dollars) Accelerated depreciation and other plant-related differences ..... $159,251 $136,234 Regulatory assets - income tax gross up ............................ 17,094 16,516 Other ................................. 40,356 43,900 $216,701 $196,650 J. RECOVERABLE ENERGY COSTS Under the Energy Policy Act of 1992 (Energy Act), NAEC is assessed for its proportionate share of the costs of decontaminating and decommissioning uranium enrichment plants owned by the United States Department of Energy (D&D assessment). The Energy Act requires that regulators treat D&D assessments as a reasonable and necessary current cost of fuel, to be fully recovered in rates, like any other fuel cost. NAEC is currently recovering these costs through the Seabrook Power Contracts. As of December 31, 1997, NAEC's total D&D deferral was approximately $2.0 million. K. DEFERRED COST - SEABROOK 1 As prescribed by the Rate Agreement as of May 1, 1996, NAEC phased into rates 100 percent of the recoverable portion of its investment in Seabrook 1. This plan is in compliance with SFAS 92, "Regulated Enterprises - Accounting for Phase-In Plans." See Note 1G, "Summary of Significant Accounting Policies - Seabrook Power Contracts," for terms of Seabrook 1's phase-in. See Note 7A, "Commitments and Contingencies - Restructuring and Rate Matters," for the possible impacts of the NHPUC's decision related to industry restructuring. L. MARKET RISK-MANAGEMENT POLICIES NAEC utilizes market risk-management instruments to hedge well-defined risks associated with variable interest rates. To qualify for hedge treatment, the underlying hedged item must expose the company to risks associated with market fluctuations and the market risk-management instrument used must be designated as a hedge and must reduce the company's exposure to market fluctuations throughout the period. Amounts receivable or payable under interest-rate management instruments are accrued and offset against interest expense. NAEC does not use market risk-management instruments for speculative purposes. For further information, see Note 8, "Market Risk Management." M. SPENT NUCLEAR FUEL Under the Nuclear Waste Policy Act of 1982, NAEC must pay the United States Department of Energy (DOE) for the disposal of spent nuclear fuel and high-level radioactive waste. The DOE is responsible for the selection and development of repositories for, and the disposal of, spent nuclear fuel and high-level radioactive waste. Fees for nuclear fuel burned on or after April 7, 1983, are billed currently to customers and paid to the DOE on a quarterly basis. The DOE was originally scheduled to begin accepting delivery of spent fuel in 1998. However, delays in identifying a permanent storage site have continually postponed plans for the DOE's long-term storage and disposal site. Extended delays or a default by the DOE could lead to consideration of costly alternatives. The company has primary responsibility for the interim storage of its spent nuclear fuel. Current capability to store spent fuel at Seabrook is estimated to be adequate until the year 2010. Meeting spent fuel storage requirements beyond this period could require new and separate storage facilities, the costs for which have not been determined. 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 contractual obligation to begin accepting spent nuclear fuel no later than January 31, 1998. Currently, the DOE has not taken the spent nuclear fuel as scheduled, and, as a result, may have to pay contract damages. The ultimate outcome of this legal proceeding is uncertain at this time. 2. NUCLEAR DECOMMISSIONING The Seabrook 1 nuclear power plant has a service life that is expected to end in the year 2026. Upon retirement, this unit must be decommissioned. A current decommissioning study concluded that complete and immediate dismantlement at retirement continues to be the most viable and economic method of decommissioning Seabrook 1. Decommissioning studies are reviewed and updated periodically to reflect changes in decommissioning requirements, costs, technology and inflation. NAEC's 35.98 percent ownership of the estimated costs of decommissioning Seabrook 1, in year-end 1997 dollars, is $170.2 million. Seabrook 1 decommissioning costs will be increased annually by an escalation rate. Nuclear decommissioning costs are accrued over the expected service life of the unit and are included in depreciation expense on the Statements of Income. Nuclear decommissioning costs amounted to $4.5 million in 1997, $3.5 million in 1996, and $3.0 million in 1995. Nuclear decommissioning, as a cost of removal, is included in the accumulated provision for depreciation on the Balance Sheets. At December 31, 1997 and 1996, the balance in the accumulated reserve for depreciation amounted to $26.5 million and $19.7 million, respectively. Under the terms of the Rate Agreement, PSNH is obligated to pay NAEC's share of Seabrook 1's decommissioning costs, even if the unit is shut down prior to the expiration of its operating license. NAEC's portion of the cost of decommissioning Seabrook 1 is paid to an independent decommissioning financing fund managed by the state of New Hampshire. Funding of the estimated decommissioning costs assumes escalated collections for Seabrook 1 and after-tax earnings on the Seabrook decommissioning fund of 6.5 percent. As of December 31, 1997, NAEC (including payments made prior to the Acquisition Date by PSNH) had paid approximately $21.1 million into Seabrook 1's decommissioning financing fund. Earnings on the decommissioning financing fund increase the decommissioning trust balance and the accumulated reserve for depreciation. Unrealized gains and losses associated with the decommissioning financing fund also impact the balance of the trust and the accumulated reserve for depreciation. Changes in requirements or technology, the timing of funding or dismantling, or adoption of a decommissioning method other than immediate dismantlement would change decommissioning cost estimates and the amounts required to be recovered. PSNH attempts to recover sufficient amounts through its allowed rates to cover NAEC's expected decommissioning costs. Only the portion of currently estimated total decommissioning cost that has been accepted by regulatory agencies is reflected in PSNH's rates. Based on present estimates and assuming Seabrook 1 operates to the end of its licensing period, NAEC expects that the decommissioning financing fund will be substantially funded when Seabrook 1 is retired from service. Proposed Accounting: The staff of the SEC has questioned certain current accounting practices of the electric utility industry, including NAEC, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating units in the financial statements. In response to these questions, the FASB has agreed to review the accounting for closure and removal costs, including decommissioning. If current electric utility industry accounting practices for nuclear power plant decommissioning are changed, the annual provision for decommissioning could increase relative to 1997, and the estimated cost for decommissioning could be recorded as a liability (rather than as accumulated depreciation), with recognition of an increase in the cost of the related nuclear power plant. Management believes that NAEC will continue to be allowed to recover decommissioning costs through the Seabrook Power Contracts. 3. SHORT-TERM DEBT The amount of short-term borrowings that may be incurred by NAEC is subject to periodic approval by either the SEC under the 1935 Act or by its state regulator. Under the SEC restrictions, NAEC was authorized, as of January 1, 1998, to incur short-term borrowings up to a maximum of $60 million. Money Pool: Certain subsidiaries of NU, including NAEC, are members of the Northeast Utilities System Money Pool (Pool). The Pool provides a more efficient use of the cash resources of the system, and reduces outside short-term borrowings. NUSCO administers the Pool as agent for the member companies. Short-term borrowing needs of the member companies are first met with available funds of other member companies, including funds borrowed by NU parent. NU parent may lend to the Pool but may not borrow. Funds may be withdrawn from or repaid to the Pool at any time without prior notice. Investing and borrowing subsidiaries receive or pay interest based on the average daily Federal Funds rate. However, borrowings based on loans from NU parent bear interest at NU parent's cost and must be repaid based upon the terms of NU parent's original borrowing. Effective during May 1997, NAEC became a full participant of the NU Money Pool. At December 31, 1997 and 1996, NAEC had $9.95 million and $2.5 million, respectively, of borrowings outstanding from the Pool. The interest rate on borrowings from the Pool at December 31, 1997 and 1996 was 5.8 percent and 6.3 percent, respectively. Maturities of NAEC's short-term debt obligations were for periods of three months or less. For further information on short-term debt, see the MD&A. 4. LONG-TERM DEBT Details of long-term debt outstanding are: December 31, 1997 1996 (Thousands of Dollars) First Mortgage Bonds: 9.05% Series A, due 2002 ................. $295,000 $315,000 Notes: Variable - Rate Facility, due 2000 ...... 200,000 200,000 Less: Amounts due within one year ........ 20,000 20,000 Long-term debt, net ................ $475,000 $495,000 Long-term debt maturities and cash sinking-fund requirements on debt outstanding at December 31, 1997 is $20 million for the year 1998, $70 million for 1999, $270 million for 2000, $70 million for 2001, and $65 million for 2002. Market risk management instruments with financial institutions effectively fix the interest rate on NAEC's $200 million variable-rate bank note at 7.823 percent. For more information on the interest-rate management instruments, see Note 8, "Market Risk Management." The Series A Bonds are not redeemable prior to maturity except out of proceeds of sales of property subject to the lien of the Series A First Mortgage Bond Indenture (Indenture), at general redemption prices established by the Indenture, and out of condemnation or insurance proceeds and through the operation of the sinking fund. Essentially all of NAEC's utility plant is subject to the lien of its Indenture. 5. INCOME TAX EXPENSE The components of the federal and state income tax provisions charged to operations are: For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars) Current income taxes: Federal ................................. $(11,890) $(8,570) $(38,703) State ................................... (309) 110 - Total current............................. (12,199) (8,460) (38,703) Deferred income taxes, net: Federal .................................. 21,528 14,884 41,885 State .................................... 1,121 865 4,229 Total deferred ........................ 22,649 15,749 46,114 Total income tax expense .............. $10,450 $ 7,289 $ 7,411 The components of total income tax expense are classified as follows: For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars) Income taxes charged to operating expenses ................................ $14,844 $12,341 $10,187 Other income taxes ........................ (4,394) (5,052) (2,776) Total income tax expense ................ $10,450 $ 7,289 $ 7,411 Deferred income taxes are comprised of the tax effects of temporary differences as follows: For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars) Depreciation .............................. $20,823 $12,730 $24,444 Alternative minimum tax ................... - - - Bond redemptions .......................... (2,351) (2,359) 12,087 Seabrook 1 return ......................... 3,338 5,438 8,109 Other ..................................... 839 (60) 1,474 Deferred income taxes, net ............ $22,649 $15,749 $46,114 A reconciliation between income tax expense and the expected tax expense at the applicable statutory rate is as follows: For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars) Expected federal income tax at 35 percent of pretax income .......................... $14,141 $13,776 $11,148 Tax effect of differences: Depreciation ............................ (1,049) (1,343) (2,159) Deferred Seabrook 1 return .............. (2,522) (2,695) (3,292) State income taxes, net of federal benefit ................ 718 634 2,749 Sale of Seabrook 2 steam generator ............................... - (2,516) - Other, net ................................ (838) (567) (1,035) Total income tax expense .................. $10,450 $ 7,289 $ 7,411 6. DEFERRED OBLIGATION TO AFFILIATED COMPANY At the time PSNH emerged from bankruptcy on May 16, 1991, in accordance with the phase-in under the Rate Agreement, it began accruing a deferred return on the unphased-in portion of its Seabrook 1 investment. From May 16, 1991 to the Acquisition Date, PSNH accrued a deferred return of $50.9 million. On the Acquisition Date, PSNH transferred the $50.9 million deferred return to NAEC as part of the Seabrook-related assets. At the time PSNH transferred the deferred return to NAEC, it realized, for income tax purposes, a gain that is deferred under the consolidated income tax rules. Beginning December 1, 1997, this gain is being restored for income tax purposes as the deferred return of $50.9 million, and the associated income taxes of $33.2 million, are collected by NAEC through the Seabrook Power Contracts. As NAEC recovers the $33.2 million in years eight through ten of the Rate Agreement, it will be obligated to make corresponding payments to PSNH. See Note 1G, "Seabrook Power Contracts" for further information on the phase-in of the Seabrook power plant and see Note 7A, "Commitments and Contingencies - Restructuring and Rate Matters" for the possible impacts on NAEC from the NHPUC's decision related to industry restructuring. 7. COMMITMENTS AND CONTINGENCIES A. RESTRUCTURING AND RATE MATTERS New Hampshire: The 1996 restructuring legislation that the NHPUC is charged with implementing provides that the NHPUC may not adopt a restructuring plan that imposes a severe financial hardship on a utility. Management believes that PSNH is entitled to full recovery of its prudently incurred costs, including regulatory assets and strandable costs. It bases this belief both on the general nature of public utility industry cost-of-service based regulation and the specific circumstances of the resolution of PSNH's previous bankruptcy proceedings and its acquisition by NU, including the recoveries provided by the Rate Agreement and related agreements. On February 28, 1997, the NHPUC issued its decision related to restructuring the state's electric utility industry and setting interim stranded cost charges for PSNH pursuant to legislation enacted in New Hampshire in 1996. In the decision, the NHPUC announced a departure from cost-based ratemaking and instead adopted a market-priced approach to ratemaking and stranded cost recovery. Accordingly, unless the NHPUC modifies its position or the litigation described below results in necessary modifications to the final plan which leads management to conclude that the ratemaking approach utilized in the NHPUC's restructuring decision will not go into effect, PSNH no longer will be subject to the provisions of SFAS 71. That would result in PSNH writing off from its balance sheet substantially all of its regulatory assets. The amount of the potential write-off triggered by the order is currently estimated at over $400 million, after taxes. PSNH does not believe that under the decision, it would be required to recognize any additional loss resulting from the impairment of the value of its other long-lived assets under the provisions of SFAS 121. On March 3, 1997, PSNH, NU, NAEC and NUSCO filed for a temporary restraining order, preliminary and permanent injunctive relief and for declaratory judgment in the United States District Court for New Hampshire (District Court). The case was subsequently transferred to Rhode Island. On March 10, 1997, the Chief Judge of the Rhode Island federal court issued a temporary restraining order which stayed the NHPUC's February 28, 1997 decision to the extent it established a rate setting methodology that is not designed to recover PSNH's costs of providing service and would require PSNH to write off any regulatory assets. During 1997, a mediation process ended without a resolution. The District Court has suspended the procedural schedule associated with this court proceeding pending the resolution of appeals of certain preliminary rulings by the U.S. Circuit Court of Appeals for the First Circuit (First Circuit). On February 3, 1998, the First Circuit denied the appeals taken by would-be intervenors in PSNH's federal court proceeding concerning the NHPUC's final plan on restructuring. The First Circuit affirmed a previous court decision stating that the opposing interests in this case were adequately represented by the NHPUC or by PSNH. As a result of this decision, the proceedings in the District Court may resume. On February 17, 1998, the NHPUC filed a petition for rehearing with the First Circuit. The temporary restraining order issued by the District Court in March 1997 will remain in effect until further orders by either court. During 1997, the NHPUC reopened its proceeding to reconsider certain limited matters in its restructuring orders. The scope of the PSNH- specific re-hearing proceedings included alternative rate-setting methodologies proposed by the intervenors; to decide the appropriate methodology to be used to determine PSNH's interim stranded costs; and to set PSNH's interim stranded cost charges utilizing the determined methodology. In testimony filed with the NHPUC in November 1997, PSNH proposed a new methodology to quantify its strandable costs. Under this proposal, PSNH would divest all owned generation and purchased power obligations via auction. To the extent that the auction fails to produce sufficient revenues to cover the net book value of owned generation and contractual payment obligations of purchased-power, the difference would be recovered from customers through a non-bypassable distribution charge. The new proposal also relies upon securitization of certain assets to further reduce rates. On December 15, 1997, the NHPUC officially announced that industry restructuring would not take place on January 1, 1998. Management believes that industry restructuring will not take place in New Hampshire until the courts resolve the issues brought before them, or the parties involved reach a settlement. PSNH and NAEC are parties to a variety of financing agreements providing that the credit thereunder can be terminated or accelerated if they do not maintain specified minimum ratios of common equity to capitalization (as defined in each agreement). In addition, PSNH and NAEC are parties to a variety of financing agreements providing in effect that the credit thereunder can be terminated or accelerated if there are actions taken, either by PSNH or NAEC or by the state of New Hampshire, that deprive PSNH and/or NAEC of the benefits of the Rate Agreement and/or the Seabrook Power Contracts. If the NHPUC's February 28, 1997 decision were to become effective, it would, unless PSNH and NAEC receive waivers from their respective lenders, result in (i) write-offs that would cause PSNH's common equity to fall below the contractual minimums (ii) reductions in income that would cause PSNH's income to fall below the contractual minimums, (iii) potential violation of the contractual provisions with respect to actions depriving PSNH and NAEC of the benefits of the Rate Agreement and (iv) the potential for cross defaults to other PSNH and NAEC financing documents. Substantially all of PSNH's and NAEC's debt obligations would be affected. If these events transpired and if the creditors holding PSNH and NAEC debt obligations decide to exercise their rights to demand payment, then either creditors or PSNH and NAEC could initiate proceedings under Chapter 11 of the bankruptcy laws. As a result of the NHPUC decision and the potential consequences discussed above, the reports of our auditors on the individual financial statements of PSNH and NAEC contain explanatory paragraphs. Those explanatory paragraphs indicate that a substantial doubt exists currently about the ability of PSNH and NAEC to continue as going concerns. The accounts of PSNH and NAEC are included in the consolidated financial statements of NU on the basis of a going concern. While the effect of the implementation of that decision would have a material adverse impact on NU's financial position, results of operations, and cash flows, it would not in and of itself result in defaults under borrowing or other financial agreements of NU or its other subsidiaries. B. ENVIRONMENTAL MATTERS NAEC is subject to regulation by federal, state and local authorities with respect to air and water quality, the handling and disposal of toxic substances and hazardous and solid wastes, and the handling and use of chemical products. NAEC has an active environmental auditing and training program and believes that it is in substantial compliance with current environmental laws and regulations. However, the NU system is subject to certain pending enforcement actions and governmental investigation in the environmental area. Management cannot predict the outcome of these enforcement actions and investigations. Environmental requirements could hinder future construction. Changing environmental requirements could also require extensive and costly modifications to NAEC's existing investment in Seabrook 1 and could raise operating costs significantly. As a result, NAEC may incur significant additional environmental costs, greater than amounts included in cost of removal and other reserves, in connection with the generation of electricity and the storage, transportation, and disposal of by-products and wastes. NAEC may also encounter significantly increased costs to remedy the environmental effects of prior waste handling activities. The cumulative long-term cost impact of increasingly stringent environmental requirements cannot accurately be estimated. NAEC cannot estimate the potential liability for future claims, including environmental remediation costs, that may be brought against it. However, considering known facts, existing laws and regulatory practices, management does not believe the matters disclosed above will have a material effect on NAEC's financial position or future results of operations. C. NUCLEAR INSURANCE CONTINGENCIES Under certain circumstances, in the event of a nuclear incident at one of the nuclear facilities in the country covered by the federal government's third-party liability indemnification program, an owner of a nuclear unit could be assessed in proportion to its ownership interest in each of its nuclear units up to $75.5 million. Payments of this assessment would be limited to $10.0 million in any one year per nuclear incident based upon the owner's pro rata ownership interest in each of its nuclear units. In addition, the owner would be subject to an additional five percent of $3.8 million, in proportion to its ownership interests in each of its nuclear units, if the sum of all claims and costs from any one nuclear incident exceeds the maximum amount of financial protection. Based upon its ownership interest in Seabrook 1, NAEC's maximum liability, including any additional assessments, would be $28.5 million per incident, of which payments would be limited to $3.6 million per year. Insurance has been purchased to cover the primary cost of repair, replacement or decontamination or premature decommissioning of utility property resulting from insured occurrences at Seabrook station. NAEC is subject to retroactive assessments if losses exceed the accumulated funds available to the insurer. The maximum potential assessment against NAEC with respect to losses arising during the current policy year is approximately $2.6 million. Insurance has been purchased to cover the excess cost of repair, replacement or decontamination or premature decommissioning of utility property resulting from insured occurrences. NAEC is subject to retroactive assessments if losses exceed the accumulated funds available to the insurer. The maximum potential assessment against NAEC with respect to losses arising during current policy years is approximately $3.8 million. The cost of a nuclear incident could exceed available insurance proceeds. Insurance has been purchased aggregating $200 million on an industry basis for coverage of worker claims. All participating reactor operators insured under this coverage are subject to retrospective assessments of $3 million per reactor. The maximum potential assessment against NAEC with respect to losses arising during the current policy period is pproximately $1.1 million. Effective January 1, 1998, a new worker policy was purchased which is not subject to retrospective assessments. Under the terms of the Seabrook Power Contracts, any nuclear insurance assessments described above would be passed on to PSNH as a "cost of service." D. SEABROOK 1 CONSTRUCTION PROGRAM The construction program for Seabrook 1 is subject to periodic review and revision by management. NAEC currently forecasts construction expenditures for its share of Seabrook 1 to be $35.0 million for the years 1998-2002, including approximately $8.9 million for 1998. In addition, NAEC estimates that its share of Seabrook 1 nuclear fuel requirements will be approximately $51.5 million for the years 1998- 2002, including $12.9 million for 1998. 8. MARKET RISK MANAGEMENT NAEC uses swap instruments with financial institutions to hedge against interest rate risk associated with its $200 million variable rate bank note. The interest-rate management instruments employed eliminate the exposure associated with rising interest rates, and effectively fix the interest rate for this borrowing arrangement. Under the agreements, NAEC exchanges quarterly payments based on a differential between a fixed contractual interest rate and the three-month LIBOR rate at a given time. As of December 31, 1997, NAEC had outstanding agreements with a total notional value of $200 million and a positive mark-to-market position of approximately $104 thousand. Credit Risk: These agreements have been made with various financial institutions, each of which is rated "A3" or better by Moody's rating group. NAEC will be exposed to credit risk on its respective market risk- management instruments if the counterparties fail to perform their obligations. However, management anticipates that the counterparties will be able to fully satisfy their obligations under the agreements. 9. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each of the following financial instruments: Cash and nuclear decommissioning fund: The carrying amounts approximate fair value. SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," requires investments in debt and equity securities to be presented at fair value. As a result of this requirement, the investments held in NAEC's nuclear decommissioning fund were adjusted to market by approximately $1.5 million as of December 31, 1997 and adjusted to market by approximately $0.3 million as of December 31, 1996, with corresponding offsets to the accumulated provision for depreciation. The amounts adjusted in 1997 and 1996 represent cumulative gross unrealized holding gains. The cumulative gross unrealized holding losses were immaterial for 1997 and 1996. Long-term debt: The fair value of NAEC's fixed-rate security is based upon the quoted market price for that issue or similar issue. The adjustable rate security is assumed to have a fair value equal to its carrying amount. The carrying amounts of NAEC's financial instruments and the estimated fair values are as follows: Carrying Fair At December 31, 1997 Amount Value (Thousands of Dollars) First Mortgage Bonds ...................... $295,000 $301,599 Other long-term debt ...................... $200,000 $200,000 Carrying Fair At December 31, 1996 Amount Value (Thousands of Dollars) First Mortgage Bonds ...................... $315,000 $316,197 Other long-term debt ...................... $200,000 $200,000 The fair values shown above have been reported to meet the disclosure requirements and do not purport to represent the amounts at which those obligations would be settled. 10. NUCLEAR PERFORMANCE The three Millstone units are managed by NNECO. Millstone 1, 2, and 3 have been out of service since November 4, 1995, February 21, 1996 and March 30, 1996, respectively, and are on the NRC's watch list. NU has restructured its nuclear organization and is currently implementing comprehensive plans to restart the units. Subsequent to its January 31, 1996 announcement that Millstone had been placed on its watch list, the NRC stated that the units cannot return to service until independent, third-party verification teams have reviewed the actions taken to improve the design, configuration, and employee concerns issues that prompted the NRC to place the units on its watch list. The actual date of the return to service for each of the units is dependent upon the completion of independent inspections and reviews by the NRC and a vote by the NRC commissioners. NU hopes to return Millstone 3 to service in early spring of 1998 and Millstone 2 three to four months after Millstone 3. Millstone 1 is currently in extended maintenance status. To the Board of Directors of North Atlantic Energy Corporation: We have audited the accompanying balance sheets of North Atlantic Energy Corporation (a New Hampshire corporation and a wholly owned subsidiary of Northeast Utilities) as of December 31, 1997 and 1996, and the related statements of income, common stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 North Atlantic Energy Corporation as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 7A, on February 28, 1997, the State of New Hampshire Public Utilities Commission (the NHPUC) issued an order outlining its final plan to restructure the electric utility industry. The final plan announced a departure from cost-based ratemaking for Public Service Company of New Hampshire (PSNH). PSNH is the sole customer of the Company. The final plan, if implemented, would require PSNH to discontinue the application of Financial Accounting Standard No. 71, "Accounting for the Effects of Certain Types of Regulation," (FAS 71). The effects of such a discontinuation would cause PSNH and the Company to be in technical default under their current financial covenants, which would, if not waived or renegotiated, give rise to the rights of lenders to accelerate the repayment of approximately $686 million of PSNH's indebtedness and approximately $495 million of the Company's indebtedness. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements referred to above do not include any adjustments that might result from the outcome of this uncertainty. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Hartford, Connecticut February 20, 1998 North Atlantic Energy Corporation Management's Discussion and Analysis of Financial Condition and Results of Operations This section contains management's assessment of North Atlantic Energy Corporation's (NAEC or the company) financial condition and the principal factors having an impact on the results of operations. The company is a wholly- owned subsidiary of Northeast Utilities (NU). This discussion should be read in conjunction with the company's financial statements and notes to financial statements. FINANCIAL CONDITION EARNINGS OVERVIEW Public Service Company of New Hampshire (PSNH) and NAEC have entered into two power contracts that unconditionally obligate PSNH to purchase NAEC's 35.98 percent ownership of the capacity and output of Seabrook Unit 1 (Seabrook or the plant) for a period equal to the length of the Nuclear Regulatory Commission (NRC) full-power operating license for Seabrook (through 2026) whether or not Seabrook is operating and without regard to the cost of alternative sources of power (the Power Contracts). In addition, PSNH will be obligated to pay decommissioning and project cancellation costs after the termination of the operating license. NAEC does not have any employees of its own and does not operate Seabrook. North Atlantic Energy Service Corporation (NAESCO) is the managing agent and represents the Seabrook joint owners, including NAEC, in the operation of the plant. The company's cost-of-service includes all of its prudently incurred Seabrook- related costs, including operation and maintenance expense, fuel expense, property tax expense, depreciation expense, certain overhead and other costs and a phased-in return on its Seabrook investment. The company's only assets are Seabrook and other Seabrook-related assets and its only source of revenues are the Power Contracts. PSNH's obligations under the Power Contracts are solely its own and have not been guaranteed by NU. The Power Contracts contain no provisions entitling PSNH to terminate its obligations. If, however, PSNH were to fail to perform its obligation under the Power Contracts, the company would be required to find other purchasers for Seabrook power. A temporary restraining order issued by a U.S. District Court is currently blocking the New Hampshire Public Utilities Commission (NHPUC) from implementing a February, 1997 restructuring order that would have resulted in a write-off by PSNH of more than $400 million. Management hopes to negotiate an alternative restructuring proposal in 1998 that will produce significant PSNH rate reductions and allow retail customers to choose their electric suppliers, but still give PSNH and NAEC an opportunity to maintain an adequate financial condition and earn fair returns on their investments. NAEC had net income of approximately $30 million in 1997 compared to approximately $32 million in 1996. The decrease in net income for 1997 was primarily due to deferred tax benefits in 1996 associated with the proceeds from the sale of Seabrook Unit 2 steam generators, as well as lower earnings in temporary cash investments in 1997. LIQUIDITY AND CAPITAL RESOURCES Cash provided from operations decreased by approximately $48 million in 1997, compared to 1996, as a result of the pay down of the 1996 year end accounts payable balance and proceeds in 1996 from the sale of the Seabrook Unit 2 steam generators. The year end accounts payable balance was relatively high due to purchases in preparation for the Seabrook outage that had been incurred but not yet paid by the end of 1996. Cash used for financing activities decreased by approximately $51 million in 1997, compared to 1996, primarily due to lower reacquisitions and retirements of long-term debt, the utilization of the NU system money pool in 1997 and lower cash dividends on common stock. Cash used for investments decreased by approximately $5 million in 1997, compared to 1996, primarily due to lower 1997 nuclear fuel expenditures. Each major subsidiary of NU finances its own needs. Neither The Connecticut Light and Power Company (CL&P) nor Western Massachusetts Electric Company (WMECO) has any financing agreements containing cross defaults based on financial defaults by NU, PSNH or NAEC. Similarly, neither PSNH nor NAEC has any financing agreements containing cross defaults based on financial defaults by NU, CL&P or WMECO. Nevertheless, it is possible that investors will take negative operating results or regulatory developments at one company in the NU system into account when evaluating other companies in the NU System. That could, as a practical matter and despite the contractual and legal separations among the NU companies, negatively affect each company's access to financial markets. PSNH RESTRUCTURING In February, 1997, the NHPUC issued orders to restructure the state's electric utility industry and set interim stranded cost charges for PSNH. In the orders, the NHPUC announced a departure from cost-based ratemaking and adopted a market- priced approach to stranded cost recovery. PSNH, NU, NAEC and Northeast Utilities Service Company (NUSCO) filed for a temporary restraining order, preliminary and permanent injunctive relief and a declaratory judgment in the United States District Court of New Hampshire. The case subsequently was transferred to the United States District Court of Rhode Island (District Court) where a temporary restraining order was granted, staying, indefinitely, the enforcement of the NHPUC's restructuring orders as they affected PSNH. Certain appeals to the preliminary ruling have been denied and proceedings in the District Court are expected to resume. The NHPUC conducted rehearing proceedings in 1997 to decide the appropriate methodology to be used to determine PSNH's interim stranded costs and to set PSNH's interim stranded cost charges utilizing the determined methodology. The NHPUC has not indicated when it will issue a decision in these proceedings. On December 15, 1997, the NHPUC officially announced that industry restructuring would not take place on January 1, 1998. As part of the rehearing proceedings, PSNH proposed a new methodology to quantify its stranded costs. Under this proposal, PSNH would divest its owned generation and purchased power obligations via auction. To the extent that the auction fails to produce sufficient revenues to cover the net book value of owned generation and contractual payment obligations of purchased power, the difference would be recovered from customers through a non-bypassable distribution charge. The new proposal also relies upon securitization of certain assets to further reduce rates. On February 20, 1998, PSNH forwarded a settlement offer to representatives from the state of New Hampshire that was consistent with PSNH's proposal in the rehearing proceedings, including among other things, a 20 percent rate reduction at the beginning of 1999, an auction of PSNH's non-nuclear generating units and securitization of approximately $1.15 billion of PSNH's stranded costs. See the "Notes to Financial Statements", Note 7A, for the potential accounting impacts of restructuring. SEABROOK PERFORMANCE Seabrook operated at a capacity factor of 78.3 percent through December 1997, compared to 96.8 percent for the same period in 1996. The lower 1997 capacity factor is due primarily to the 50-day scheduled refueling and maintenance outage which began on May 10, 1997, and an unplanned outage which began on December 5, 1997. The unplanned outage occurred when the unit was shut down to repair leaks in a three inch stainless steel pipe in the residual heat removal system. The pipe was replaced, but problems were subsequently discovered in the control building air conditioning system. Design changes were implemented and the plant returned to service on January 16, 1998. SEABROOK DECOMMISSIONING NAEC's estimated cost to decommission its share of Seabrook is approximately $170 million in year end 1997 dollars. These costs are being recognized over the life of the unit with a portion currently being recovered through PSNH's rates. PSNH is obligated to pay NAEC's share of Seabrook's decommissioning costs even if the unit is shut down prior to the expiration of its license. As of December 31, 1997, the market value of the contributions already made to the decommissioning trusts, including their investment returns, was approximately $26 million. See the "Notes to Financial Statements," Note 2, for further information on nuclear decommissioning. ENVIRONMENTAL MATTERS NAEC is potentially liable for environmental cleanup costs at a number of sites inside and outside its service territory. NAEC cannot estimate the potential liability for these costs or for future claims, including environmental remediation costs, that may be brought against it. However, considering known facts, existing laws and regulatory practices, management does not believe that these costs will have a material effect on NAEC's financial position or future results of operations. See the "Notes to Financial Statements," Note 7B, for further information on environmental matters. YEAR 2000 ISSUE The Year 2000 issue exists because many computer systems and applications currently use two-digit date fields to designate a year. As the change of the century occurs, date-sensitive systems may recognize the year 2000 as 1900, or not recognize it at all. This inability to recognize or properly treat the year 2000 may cause NU's systems to process critical financial and operation information incorrectly. The company has assessed and continues to assess the impact of the Year 2000 issue on its operating and reporting systems. The assessment of the nuclear operating systems is continuing and is expected to be completed in the summer of 1998. The NU system will utilize both internal and external resources to reprogram, or replace, and test the software for Year 2000 modifications. The total estimated remaining cost of the Year 2000 project is estimated at $37 million and is being funded through operating cash flows. This estimate does not include any costs for the replacement or repair of equipment or devices that may be identified during the assessment process. The majority of these costs will be expensed as incurred over the next two years. To date, the NU system has incurred and expensed approximately $4 million related to the assessment of, and preliminary efforts in connection with, its Year 2000 project. The costs of the project and the date on which the company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those plans. If the NU system's remediation plan is not successful, there could be a significant disruption of the NU system's operation. RISK MANAGEMENT INSTRUMENTS The following discussion about the company's risk-management activities includes forward looking statements that involve risk and uncertainties. Actual results could differ materially from those projected in the forward looking statements. This analysis presents the hypothetical loss in earnings related to the interest rate market risks not covered by the risk-management instruments at December 31, 1997. The company uses swaps to manage the market risk. The company does not use these risk-management instruments for speculative purposes. NAEC holds a variable rate long-term note, exposing the company to interest rate risk. In order to hedge this risk, interest rate risk-management instruments have been entered into on NAEC's $200 million variable rate note, effectively fixing the interest on this note at 7.823 percent. For further information on risk management instruments, see the "Notes to Financial Statements," Note 8. RESULTS OF OPERATIONS Income Statement Variances Increase/(Decrease) Millions of Dollars 1997 over/(under)1996 1996 over/(under)1995 Amount Percent Amount Percent Operating revenues $30 19% $ 5 3% Fuel Expense (2) (11) 3 25 Other operation and maintenance expense 20 45 (5) (12) Amortization of Regulatory Assets, net 6 (a) - - Federal and State Income Taxes 3 43 - - Deferred Seabrook return (other and borrowed funds) (2) (9) (8) (27) Other, net (2) (a) - - Interest on Long-term Debt (2) (3) (10) (16) Net income (2) (7) 8 31 (a) Percent greater than 100 OPERATING REVENUES Operating revenues represent amounts billed to PSNH under the terms of the Power Contracts and billings to PSNH for decommissioning expense. Operating revenues increased in 1997 primarily due to higher operation and maintenance expenses and the increased return associated with the phase-in of the final 15 percent of the Seabrook plant investment in May, 1996. Operating revenues increased in 1996, primarily due to the increased return associated with the phase-in of the Seabrook investment, partially offset by a lower return due to lower debt costs. FUEL EXPENSE Fuel expenses decreased in 1997, primarily due to lower Seabrook capacity factors as a result of the Seabrook outages in 1997. Fuel expenses increased in 1996, primarily due to higher Seabrook capacity factors. OTHER OPERATION AND MAINTENANCE EXPENSE Other operation and maintenance expenses increased in 1997 primarily due to higher costs associated with the Seabrook outages in 1997. Other operation and maintenance expenses decreased in 1996, primarily due to a planned refueling and maintenance outage in 1995. AMORTIZATION OF REGULATORY ASSETS, NET Amortization of Regulatory Assets, net increased in 1997 primarily due to the beginning of the amortization of the Seabrook deferred return in December 1997. FEDERAL AND STATE INCOME TAXES Federal and State income taxes increased in 1997 primarily due to deferred tax benefits in 1996 associated with proceeds from the sale of the Seabrook Unit 2 steam generators. DEFERRED SEABROOK RETURN, NET Deferred Seabrook return, net decreased in 1997 primarily due to the final phase-in of Seabrook investment into rates in May, 1996. Deferred Seabrook return, net decreased in 1996, primarily due to the additional Seabrook investment phased into rates in May, 1996, and May, 1995, partially offset by a one-time adjustment in June, 1995, to the deferred Seabrook return balance. OTHER, NET Other, net decreased in 1997 primarily due to lower income from temporary cash investments and the amortization of the Seabrook deferred charges associated with the taxes on the purchased return. INTEREST ON LONG-TERM DEBT Although the change in 1997 was not significant, interest on long-term debt decreased in 1996 primarily due to the 1995 refinancing of its $205 million 15.23-percent variable-rate bank note. North Atlantic Energy Corporation SELECTED FINANCIAL DATA (a) 1997 1996 1995 1994 1993 (Thousands of Dollars) Operating Revenues...... $ 192,381 $ 162,152 $ 157,183 $145,751 $125,408 Operating Income........ $ 57,061 $ 54,889 $ 51,394 $ 42,950 $ 33,718 Net Income.............. $ 29,953 $ 32,072 $ 24,441 $ 30,535 $ 25,998 Cash Dividends on Common Stock.......... $ 25,000 $ 38,000 $ 24,000 $ 10,000 $ - Total Assets............ $1,014,639 $1,017,388 $1,014,649 $963,579 $900,821 Long-Term Debt (b)...... $ 495,000 $ 515,000 $ 560,000 $560,000 $560,000 STATISTICS 1997 1996 1995 1994 1993 Gross Electric Utility Plant at December 31, (Thousands of Dollars).. $811,140 $816,446 $806,892 $792,880 $789,127 kWh Sales (Millions) for the twelve month period ending December 31,... 2,859 3,542 3,016 2,229 3,218 STATEMENTS OF QUARTERLY FINANCIAL DATA (Unaudited) (Thousands of Dollars) Quarter Ended (a) 1997 March 31 June 30 Sept. 30 Dec.31 Operating Revenues...... $41,976 $50,128 $45,943 $54,334 Operating Income........ $14,406 $14,183 $14,124 $14,348 Net Income.............. $ 7,240 $ 6,958 $ 8,086 $ 7,669 1996 Operating Revenues...... $36,663 $39,107 $41,565 $44,817 Operating Income........ $12,075 $13,786 $14,639 $14,389 Net Income.............. $ 7,190 $ 7,356 $ 9,918 $ 7,608 (a) Reclassifications of prior data have been made to conform with the current presentation. (b) Includes portion due within one year. EX-21 31 SUBSIDIARIES OF THE REGISTRANT NORTHEAST UTILITIES SYSTEM Exhibit 21 SUBSIDIARIES OF THE REGISTRANT Northeast Utilities The Connecticut Light and Power Company (100%) - CL&P Capital, L.P. (3%) - Research Park, Inc. (100%) - The City and Suburban Electric and Gas Company (100%) - Electric Power Incorporated (100%) - The Connecticut Transmission Corporation (100%) - The Nutmeg Power Company (100%) - The Connecticut Steam Company (100%) - CL&P Receivables Corporation (100%) - Connecticut Yankee Atomic Power Company (34.5%) - Yankee Atomic Electric Company (24.5%) - Maine Yankee Atomic Power Company (12%) - Vermont Yankee Nuclear Power Corporation (9.5%) Public Service Company of New Hampshire (100%) - Properties, Inc. (100%) - New Hampshire Electric Company (100%) - Connecticut Yankee Atomic Power Company (5%) - Yankee Atomic Electric Company (7%) - Maine Yankee Atomic Power Company (5%) - Vermont Yankee Nuclear Power Corporation (4%) North Atlantic Energy Corporation (100%) North Atlantic Energy Service Corporation (100%) Western Massachusetts Electric Company (100%) - WMECO Receivables Corporation (100%) - Connecticut Yankee Atomic Power Company (9.5%) - Yankee Atomic Electric Company (7%) - Maine Yankee Atomic Power Company (3%) - Vermont Yankee Nuclear Power Corporation (2.5%) Holyoke Water Power Company (100%) - Holyoke Power and Electric Company (100%) Charter Oak Energy, Inc. (100%) - COE Development Corporation (100%) - COE Argentina I Corp. (100%) - COE Argentina II Corp. (100%) - COE Tejona Corporation (100%) - COE Ave Fenix Corporation (100%) Northeast Nuclear Energy Company (100%) Northeast Utilities Service Company (100%) The Quinnehtuk Company (100%) The Rocky River Realty Company (100%) Mode 1 Communications, Inc. (100%) Select Energy, Inc. (100%) HEC Inc. (100%) - HEC International Corporation (100%) - HEC Energy Consulting Canada, Inc. (100%) - Southwest HEC Energy Services L.L.C. (100%) EX-27.1 32 FDS FOR NU
UT 0000072741 NORTHEAST UTILITIES AND SUBSIDIARIES 1,000 YEAR DEC-31-1997 DEC-31-1997 PER-BOOK 6,463,158 704,701 970,673 2,275,880 0 10,414,412 684,211 932,493 664,678 2,127,241 245,750 136,200 3,645,659 50,000 0 0 244,560 30,250 30,427 177,304 3,572,880 10,414,412 3,834,806 (2,106) 3,641,174 3,649,770 185,036 (29,179) 166,559 271,981 (105,422) 30,286 (135,708) 32,134 282,095 377,221 (1.05) 0.00 EX-27.2 33 FDS FOR CLP
UT 0000023426 THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES 1,000 YEAR DEC-31-1997 DEC-31-1997 PER-BOOK 3,737,113 493,848 519,799 1,330,463 0 6,081,223 122,229 641,333 385,823 1,149,385 151,250 116,200 2,023,316 96,300 0 0 20,011 3,750 18,042 140,076 2,362,893 6,081,223 2,465,587 (70,429) 2,540,842 2,477,986 (12,399) (5,484) (10,310) 134,067 (144,377) 15,221 (159,598) 5,989 132,127 72,793 0.00 0.00 EX-27.3 34 FDS FOR WMECO
UT 0000106170 WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY 1,000 YEAR DEC-31-1997 DEC-31-1997 PER-BOOK 775,114 123,349 63,630 217,035 0 1,179,128 26,812 151,171 50,225 228,208 19,500 20,000 386,849 29,350 0 0 9,800 1,500 217 32,670 451,034 1,179,128 426,447 (16,952) 443,338 427,412 (965) 418 479 29,155 (28,676) 3,140 (31,816) 15,004 26,046 27,660 0.00 0.00 EX-27.4 35 FDS FOR PSNH
UT 0000315256 PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE 1,000 YEAR DEC-31-1997 DEC-31-1997 PER-BOOK 1,722,572 27,274 342,520 744,793 0 2,837,159 1 423,713 170,188 593,902 75,000 0 516,485 0 0 0 170,000 25,000 799,450 122,363 534,959 2,837,159 1,108,459 88,991 877,585 964,185 144,274 2,071 143,954 51,532 92,422 11,925 80,497 85,000 51,259 232,703 0.00 0.00 EX-27.5 36 FDS FOR NAEC
UT 0000880416 NORTH ATLANTIC ENERGY CORPORATION 1,000 YEAR DEC-31-1997 DEC-31-1997 PER-BOOK 667,362 26,547 47,544 273,186 0 1,014,639 1 160,999 58,702 219,702 0 0 475,000 9,950 0 0 20,000 0 0 0 289,987 1,014,639 192,381 10,451 120,475 135,320 57,061 6,458 67,913 37,960 29,953 0 29,953 25,000 50,722 55,614 0.00 0.00 -----END PRIVACY-ENHANCED MESSAGE-----