-----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, UomMEAYGzvZBlVo7/t3417HzNrCa/cFeb1QTdGDL/ae58ey2tEre/FjT7qIovS7v OpehMtBnM3hAPoniluYuww== 0000071297-98-000026.txt : 19980401 0000071297-98-000026.hdr.sgml : 19980401 ACCESSION NUMBER: 0000071297-98-000026 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 34 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: BSE SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW ENGLAND ELECTRIC SYSTEM CENTRAL INDEX KEY: 0000071297 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 041663060 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03446 FILM NUMBER: 98580039 BUSINESS ADDRESS: STREET 1: 25 RESEARCH DR CITY: WESTBOROUGH STATE: MA ZIP: 01581 BUSINESS PHONE: 5083669011 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MASSACHUSETTS ELECTRIC CO CENTRAL INDEX KEY: 0000063073 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 041988940 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-05464 FILM NUMBER: 98580040 BUSINESS ADDRESS: STREET 1: 25 RESEARCH DR CITY: WESTBOROUGH STATE: MA ZIP: 01582 BUSINESS PHONE: 5083892000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NARRAGANSETT ELECTRIC CO CENTRAL INDEX KEY: 0000069659 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 050187805 STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07471 FILM NUMBER: 98580041 BUSINESS ADDRESS: STREET 1: 280 MELROSE ST CITY: PROVIDENCE STATE: RI ZIP: 02907 BUSINESS PHONE: 4019411400 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW ENGLAND POWER CO CENTRAL INDEX KEY: 0000071337 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 041663070 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06564 FILM NUMBER: 98580042 BUSINESS ADDRESS: STREET 1: 25 RESEARCH DR CITY: WESTBOROUGH STATE: MA ZIP: 01582 BUSINESS PHONE: 6173669011 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For fiscal year ended December 31, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Registrant; State of Incorporation or I.R.S. Employer Commission Organization; Address; Identification File Number and Telephone Number Number - ------------ ---------------------- --------------- 1-3446 NEW ENGLAND ELECTRIC SYSTEM 04-1663060 (A Massachusetts voluntary association) 25 Research Drive Westborough, Massachusetts 01582 Telephone: 508-389-2000 1-6564 NEW ENGLAND POWER COMPANY 04-1663070 (A Massachusetts corporation) 25 Research Drive Westborough, Massachusetts 01582 Telephone: 508-389-2000 0-5464 MASSACHUSETTS ELECTRIC COMPANY 04-1988940 (A Massachusetts corporation) 25 Research Drive Westborough, Massachusetts 01582 Telephone: 508-389-2000 1-7471 THE NARRAGANSETT ELECTRIC COMPANY 05-0187805 (A Rhode Island corporation) 280 Melrose Street Providence, Rhode Island 02907 Telephone: 401-784-7000 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. (X) Yes ( ) No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( )
Securities registered pursuant to Section 12(b) of the Act:
Outstanding at Name of each exchange Registrant Title of each class March 18, 1998 on which registered - ---------- ------------------- -------------- --------------------- New England Common Shares 64,161,560 New York Stock Exchange Electric Boston Stock Exchange System Securities registered pursuant to Section 12(g) of the Act: Registrant Title of each class - ---------- ------------------- New England Dividend Series Preferred Stock Power Company Massachusetts Cumulative Preferred Stock Electric Company Preferred Stock - Cumulative The Narragansett Cumulative Preferred Stock Electric Company Aggregate market value of the voting stock Number of shares of held by nonaffiliates common stock outstanding of the registrants at of the registrants at March 18, 1998 March 18, 1998 ---------------------- ------------------------ New England $2,823,108,640 64,161,560 ($1 par value) Electric System New England $1,693,285 6,449,896 ($20 par value) Power Company Massachusetts None 2,398,111 ($25 par value) Electric Company The Narragansett None 1,132,487 ($50 par value) Electric Company
Documents Incorporated by Reference
Part of Form 10-K into which Description document is incorporated - ---------------------------------- ---------------------------- Portions of Annual Reports to Parts I and II Shareholders for the year ended December 31, 1997 of the following companies, as set forth in Parts I and II New England Electric System New England Power Company Massachusetts Electric Company The Narragansett Electric Company Portions of Proxy Statement of Part III New England Electric System filed in connection with its annual meeting of shareholders to be held on April 28, 1998, as set forth in Part III This combined Form 10-K is separately filed by New England Electric System, New England Power Company, Massachusetts Electric Company, and The Narragansett Electric Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes no representation as to information relating to the other companies.
TABLE OF CONTENTS PAGE GLOSSARY OF TERMS.......................................... iii FORWARD LOOKING INFORMATION................................ v PART I ITEM 1. BUSINESS.......................................... 1 THE SYSTEM................................................. 1 System Organization................................... 1 Employees............................................. 3 ELECTRIC UTILITY OPERATIONS................................ 3 Industry Restructuring................................ 3 Outlook............................................. 4 Massachusetts Legislation and Settlement Agreement.. 4 Rhode Island Legislation and Settlement Agreement... 6 New Hampshire Legislation and Settlement Agreement.. 6 Unaffiliated Customers.............................. 7 Divestiture of Generating Business.................. 7 Risk Factors........................................ 9 Other............................................... 9 Electricity Delivery Companies........................ 9 Mass. Electric Description of Business........................... 9 Rates............................................. 10 Narragansett Description of Business........................... 11 Rates............................................. 12 Granite State Description of Business........................... 13 Rates............................................. 13 Nantucket Description of Business........................... 13 Recovery of Demand-Side Management Expenditures..... 14 Transmission and Generation Business.................. 14 NEP Description of Business........................... 14 Rates............................................. 15 Unregulated Business.................................. 16 Operating Revenues.................................... 17 Electric Utility Properties........................... 19 Transmission, Distribution, and Generation Properties........................................ 19 Map - Electric Utility Properties................... 25 Nuclear Units....................................... 26 Divestiture of Nonnuclear Generating Business....... 31 Energy Mix.......................................... 31 Fuel for Generation................................. 31 Oil and Gas Operations.............................. 33 Nonutility Power Producer Information............... 33 Hydroelectric Project Licensing..................... 34 Ocean State Power................................... 35 PAGE Regulatory and Environmental Matters.................. 35 Regulation.......................................... 35 Environmental Requirements.......................... 36 Construction and Financing............................ 38 Research and Development.............................. 42 EXECUTIVE OFFICERS......................................... 43 ITEM 2. PROPERTIES....................................... 47 ITEM 3. LEGAL PROCEEDINGS................................ 47 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................... 48 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS.................. 50 ITEM 6. SELECTED FINANCIAL DATA.......................... 50 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 51 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................................... 52 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...... 52 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............. 53 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................... 53 ITEM 11. EXECUTIVE COMPENSATION........................... 56 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................... 69 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS... 72 PART IV ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K................. 72 INDEX TO FINANCIAL STATEMENTS.............................. 102 GLOSSARY OF TERMS Term Meaning ---- ------- AFDC allowance for funds used during construction AllEnergy AllEnergy Marketing Company, LLC Connecticut Yankee Connecticut Yankee Atomic Power Company DOE U.S. Department of Energy DOER Massachusetts Division of Energy Resources DSM demand-side management EPA U.S. Environmental Protection Agency Electricity Delivery Mass. Electric, Narragansett, Granite Companies State, and Nantucket FERC Federal Energy Regulatory Commission FAS 121 Financial Accounting Standards No. 121, Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of FAS 80 Financial Accounting Standards No. 80, Accounting for Futures Contracts Firm Energy agreement between NEPOOL members and Contract Hydro-Quebec Granite State Granite State Electric Company Granite State Granite State Energy, Inc. Energy Interconnection transmission interconnection between participating New England utilities and Hydro-Quebec ISO Independent System Operator kWh kilowatt hour Maine Yankee Maine Yankee Atomic Power Company Mass. Electric Massachusetts Electric Company Mass. Hydro New England Hydro-Transmission Electric Company, Inc. Massachusetts settlement agreement previously reached Settlement among the NEES companies' Massachusetts subsidiaries MDPU Massachusetts Department of Public Utilities MDTE Massachusetts Department of Telecommunications and Energy MW megawatts Nantucket Nantucket Electric Company Narragansett The Narragansett Electric Company N.E. Hydro Finance New England Hydro Finance Company, Inc. NEEI New England Energy Incorporated NEES New England Electric System NEESCom NEES Communications, Inc. NEES companies the subsidiaries of NEES NEES Global NEES Global Transmission, Inc. NEET New England Electric Transmission Corporation NEP New England Power Company NEES Energy NEES Energy, Inc. NEPOOL New England Power Pool NEUs New England Utilities N.H. Hydro New England Hydro-Transmission Corporation GLOSSARY OF TERMS Term Meaning ---- ------- NOx nitrogen oxide NRC Nuclear Regulatory Commission OSP Ocean State Power OSP II Ocean State Power II PCRBs pollution control revenue bonds PG&E PG&E Corporation PBOPs postretirement benefits other than pensions PPCA purchased power cost adjustment Resources Narragansett Energy Resources Company retail choice retail customers are allowed to choose their electricity supplier Rhode Island Settlement settlement agreement among NEP, Narragansett, the RIPUC and the Rhode Island Division of Public Utilities and Carriers to implement the stranded cost recovery provisions of the Rhode Island statute RIPUC Rhode Island Public Utilities Commission Samedan Samedan Oil Corporation Seabrook 1 Seabrook Nuclear Generating Station Unit 1 SEC Securities and Exchange Commission Sellers NEP and Narragansett Service Company New England Power Service Company Service Extension rate discounts given to large Discounts commercial and industrial customers who agree to give a five-year notice before they choose to purchase power from another supplier SO2 sulphur dioxide spent nuclear fuel high level radioactive waste stranded costs the amounts by which prudently incurred costs incurred to supply customers electricity under a regulated industry structure exceed market prices under an unregulated industry structure System the subsidiaries of NEES collectively USGen USGen New England, Inc. unbilled revenues electricity delivered but not yet billed Vermont Yankee Vermont Yankee Nuclear Power Corporation Yankee Atomic Yankee Atomic Electric Company Yankee Companies Yankee Atomic, Vermont Yankee, Maine Yankee, and Connecticut Yankee 1935 Act Public Utility Holding Company Act of 1935, as amended FORWARD LOOKING INFORMATION This report and other presentations made by NEES and its subsidiaries contain forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Throughout this report, forward looking statements can be identified by the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimated", "project", "believe", or similar expressions. Although NEES and each of its subsidiaries believe that, in making any such statements, its expectations are based on reasonable assumptions, any such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. Important factors that could cause actual results to differ materially from those in the forward looking statements include, but are not limited to: the impact of general economic changes in New England; changing fuel prices; the impact of industry restructuring, customer choice of power suppliers, increased competition in the electric utility industry, and sale of the nonnuclear generating business, as more fully set out below under INDUSTRY RESTRUCTURING, page 3; federal and state regulatory developments and changes in law which may have a substantial adverse impact on the value of NEES and the NEES companies' assets; changes in accounting rules and interpretations which may have an adverse impact on the NEES companies' statements of financial position and reported earnings; timing and adequacy of rate relief; adverse changes in electric load and customer growth; climatic changes or unexpected changes in weather patterns; generating plant and distribution facility performance and possible power shortages, as more fully set out below under Transmission, Distribution, and Generation Properties, page 19; and operation and decommissioning costs associated with nuclear generating facilities, as set out under Nuclear Units below, page 26 (see Risk Factors, page 9, for more information). PART I ITEM 1. BUSINESS THE SYSTEM SYSTEM ORGANIZATION New England Electric System (NEES) is a voluntary association created under Massachusetts law on January 2, 1926, and is a registered holding company under the Public Utility Holding Company Act of 1935, as amended (the 1935 Act). NEES owns voting stock in the amounts indicated of the following companies, which together constitute the System. % Voting Securities State of Type of Owned by Name of Company Organization Business NEES --------------- ------------ -------- --------- AllEnergy Marketing Company, Mass. Marketing * L.L.C. (AllEnergy) Granite State Electric Company N.H. Retail 100 (Granite State) Electric Granite State Energy, Inc. N.H. Marketing 100 (Granite State Energy) Massachusetts Electric Company Mass. Retail 100 (Mass. Electric) Electric Nantucket Electric Company Mass. Retail 100 (Nantucket) Electric The Narragansett Electric Company R.I. Retail 100 (Narragansett) Electric Narragansett Energy Resources R.I. Wholesale 100 Company (Resources) Electric Generation NEES Communications, Inc. Mass. Telecommunications 100 (NEESCom) NEES Energy, Inc. (NEES Energy) Mass. Marketing 100 NEES Global Transmission, Inc. Mass. Development 100 (NEES Global) (formerly New Services England Electric Resources, Inc.) New England Electric Transmission N.H. Electric 100 Corporation (NEET) Transmission New England Energy Incorporated Mass. Oil and Gas 100 (NEEI) New England Hydro Finance Company, Mass. Debt Financing ** Inc. (N.E. Hydro Finance) New England Hydro-Transmission N.H. Electric 53.97(a) Corporation (N.H. Hydro) Transmission New England Hydro-Transmission Mass. Electric 53.97(a) Electric Company, Inc. Transmission (Mass. Hydro) * NEES Energy owns 99 percent and NEES Global owns 1 percent of the voting securities. ** Mass. Hydro and N.H. Hydro each own 50 percent of the voting securities. % Voting Securities State of Type of Owned by Name of Company Organization Business NEES --------------- ------------ -------- --------- New England Power Company (NEP) Mass. Wholesale 99.71(b) Electric Generation & Transmission (c) New England Power Service Company Mass. Service 100 (Service Company) Company (a) The common stock of these subsidiaries is owned by NEES and certain participants (or their parent companies) in the second phase of the Hydro-Quebec project. See Interconnection with Quebec, page 23. (b) Holders of common stock and 6% Cumulative Preferred Stock of NEP have general voting rights. The 6% Cumulative Preferred Stock held by nonaffiliates represents 0.29 percent of the total voting power. (c) For information on NEP's ownership interest in nuclear generating units, see Nuclear Units, page 26. The facilities of NEES' four electricity delivery companies, Mass. Electric, Narragansett, Granite State, and Nantucket (collectively referred to as the Electricity Delivery Companies), and of its principal generation and transmission subsidiary, NEP, constitute a single integrated electric utility system that is directly interconnected with other utilities in New England and New York State, and indirectly interconnected with utilities in Canada. See ELECTRIC UTILITY OPERATIONS, page 3. See INDUSTRY RESTRUCTURING, page 3, for information on the agreement to sell the NEES companies' generating business. Granite State Energy is a wholly-owned, nonutility subsidiary of NEES which provides a range of energy and related services, including but not limited to sales of electric energy, audits, power quality, fuel supply, repair, maintenance, construction, design, engineering, and consulting. NEES Energy is a wholly-owned, nonutility marketing subsidiary of NEES. NEES Energy owns a 99 percent interest in AllEnergy, an energy marketing joint venture between NEES Energy and NEES Global. NEESCom is a wholly-owned, nonutility subsidiary of NEES which provides telecommunications and information-related products and services. NEET owns and operates a portion of an international transmission interconnection between the electric systems of Hydro-Quebec and New England. Mass. Hydro and N.H. Hydro own and operate facilities in connection with an expanded second phase of this interconnection. N.E. Hydro Finance provides the debt financing to Mass. Hydro and N.H. Hydro for the capital costs of the interconnection. For more information, see Interconnection with Quebec, page 23. NEEI primarily participated (principally through a partnership with a nonaffiliated oil company) in domestic oil and gas exploration, development, and production and the sale to NEP of fuel purchased in the open market. As part of the NEES companies' plan to divest their generating business, NEEI sold its oil and gas properties in February 1998. For more information, see INDUSTRY RESTRUCTURING, page 3, and Oil and Gas Operations, page 33. Resources is a general partner, with a 20 percent interest, in each of two partnerships formed in connection with the Ocean State Power project. NEES' ownership interest in Resources is subject to a sale agreement as part of the NEES companies' divestiture of their generating business. For more information, see INDUSTRY RESTRUCTURING, page 3, and Ocean State Power, page 35. The Service Company has contracted with NEES and its subsidiaries to provide, at cost, such administrative, engineering, construction, legal and financial services as the companies request. NEES Global is a wholly-owned, nonutility subsidiary of NEES which provides consulting and independent project development services domestically and internationally to nonaffiliates. EMPLOYEES At December 31, 1997, NEES subsidiaries had approximately 4,665 employees. At that date, the total number of employees was approximately 842 at NEP, 1,691 at Mass. Electric, 734 at Narragansett, 70 at Granite State, 23 at Nantucket and 1,305 at the Service Company. Of the 4,665 employees, approximately 2,800 are members of labor organizations. Collective bargaining agreements with the Brotherhood of Utility Workers of New England, Inc., the International Brotherhood of Electrical Workers, and the Utility Workers Union of America, AFL-CIO expire in May, 1999. The NEES companies have reached an agreement with all three of their unions regarding employee benefits related to industry restructuring and divestiture, including a voluntary early retirement package and benefits for displaced employees. ELECTRIC UTILITY OPERATIONS INDUSTRY RESTRUCTURING Historically, electric utilities have provided their customers bundled electric service within exclusive franchise service territories. As the result of a number of trends, including a disparity in electric rates among regions of the country and new regulations and legislation intended to foster competition, distribution customers are being allowed to choose their power supplier, with incumbent utilities required to deliver that electricity over their transmission and distribution systems. Because of legislation enacted in the states served by the NEES companies, most customers served by the NEES companies will have the ability to choose their power supplier by the first quarter of 1998. When customers are allowed to choose their power supplier, utilities face the risk that market prices may not be sufficient to recover the costs of the commitments incurred to supply customers under a regulated structure. The amounts by which such costs exceed market prices are commonly referred to as "stranded costs." As described below, the NEES companies have reached settlement agreements with parties representing all of their distribution customers. In each case, these settlements provide for recovery of stranded costs. Outlook Starting in 1998, NEES earnings will be reduced by the restructuring of the electric utility business in the states served by the NEES companies. During the first quarter of 1998, customers in Massachusetts and Rhode Island, representing approximately 95 percent of the NEES companies' revenues from the sale of electricity, will have the ability to choose their power supplier. Upon the introduction of consumer choice, settlement agreements related to recovery of stranded costs will limit the return on equity earned on the NEES companies' generating business to approximately 9.4 percent, before mitigation incentives, which is significantly lower than earned by the generating business in recent years. (The settlement agreements also will cap earnings for the majority of NEES' distribution business at 11.75 percent.) Following completion of the sale of the NEES companies' nonnuclear generating business, which is discussed in more detail below, NEES earnings will be affected by the return on the reinvestment of the sale proceeds, whether through retirement of debt, the repurchase of NEES shares, investments in new ventures, or otherwise. This reinvestment return is expected, at least in the near term, to be considerably less than the return historically earned in the generating business. Massachusetts Legislation and Settlement Agreement In November 1997, legislation was enacted which provides customers of Massachusetts' investor-owned utilities with the ability to choose their power supplier beginning on March 1, 1998. The legislation requires electric companies to provide customers who do not choose a power supplier with a transition rate (or "standard offer service") which results in a 10 percent rate reduction, with the discount increasing to 15 percent on or before September 1, 1999. The legislation also provides a mechanism for the recovery of stranded costs resulting from the introduction of customer choice. In December 1997, the Massachusetts Department of Telecommunications and Energy (MDTE) (formerly the Massachusetts Department of Public Utilities (MDPU)) found that a settlement agreement (the Massachusetts Settlement) previously reached among the NEES companies' Massachusetts subsidiaries (NEP, Mass. Electric, and Nantucket) and various governmental agencies and other interested parties substantially complies with or is consistent with the Massachusetts statute. The Massachusetts Settlement was also conditionally approved by the FERC in November 1997, subject to a compliance filing to clarify the impact of the settlement on nonsettling parties. In accordance with the Massachusetts Settlement, NEP's wholesale contracts with Mass. Electric and Nantucket have been amended effective March 1, 1998. The Massachusetts Settlement provides that Mass. Electric's and Nantucket's share of NEP's stranded costs will be recovered from distribution customers through a transition access charge, which will be collected by these electricity delivery companies. Under the Massachusetts Settlement, the recovery of NEP's stranded costs is divided into several categories. Unrecovered costs associated with generating plants and regulatory assets would be recovered over 12 years and would earn a return on equity of 9.4 percent. The above-market component of purchased power contracts and nuclear decommissioning costs would be recovered as incurred over the life of those obligations, a period expected to extend beyond 12 years. Initially, the transition access charge was set at 2.8 cents per kWh. The MDTE has approved a reduction of the initial transition access charge to 2.7 cents per kWh for Mass. Electric and Nantucket effective March 1, 1998. NEP's filing with the FERC to approve this reduction is pending. Mass. Electric and Nantucket have already reflected the lower transition access charge amount in their rates. The transition access charge would be reduced further upon completion of the sale of NEP's nonnuclear generating business, as described below. As the transition access charge declines, NEP would earn incentives based on successful mitigation of its stranded costs. These incentives would supplement NEP's return on equity. In addition to addressing customer choice and the recovery of stranded costs, the Massachusetts Settlement also required the NEES companies to divest their nonnuclear generating business. In August 1997, NEP and NEES' Rhode Island subsidiary, Narragansett, entered into an agreement to sell substantially all of their nonnuclear generating business to USGen New England, Inc. (USGen), an indirect wholly owned subsidiary of PG&E Corporation (PG&E). See "Divestiture of Generating Business" below. The net proceeds from the sale of the nonnuclear generating business to USGen will be used to reduce the transition access charge to approximately 1.5 cents per kWh. In addition, the FERC accepted the NEES companies' proposal in conjunction with their divestiture filing that the recovery of the remaining above-market nuclear generating plant investment and regulatory assets be completed by the end of the year 2000. A referendum question which asks voters to repeal the Massachusetts statute is expected to be on the ballot in November 1998. The NEES companies are unable to predict the outcome. While by itself, repeal of the statute is not expected to materially impair the effectiveness of the previously approved Massachusetts Settlement, the potential exists that following repeal, there could be legislative or regulatory actions which could be materially adverse to the NEES companies. Rhode Island Legislation and Settlement Agreement In August 1996, the state of Rhode Island enacted legislation that allows customers in that state the opportunity to choose their power supplier. Under the Rhode Island statute, state accounts, certain new customers, and the largest manufacturing customers were able to choose their power supplier beginning on July 1, 1997. The balance of Rhode Island customers gained the ability to choose their power supplier on January 1, 1998. The Rhode Island statute also provided utilities with the ability to recover stranded costs. In November 1997, the FERC conditionally approved a settlement agreement (the Rhode Island Settlement) among NEP, Narragansett, the Rhode Island Public Utilities Commission (RIPUC) and the Rhode Island Division of Public Utilities and Carriers to implement the stranded cost recovery provisions of the Rhode Island statute, subject to a compliance filing to clarify the impact of the settlement on nonsettling parties. The terms of the Rhode Island Settlement are substantially the same as the Massachusetts Settlement. The Rhode Island Settlement requires NEP to sell power to Narragansett at specified prices for resale to distribution customers who do not choose a power supplier (or "standard offer service"). The total rates for customers purchasing this interim power service from Narragansett are approximately 7 percent below the total rates that were in effect during 1997. Pursuant to the Rhode Island statute, the total rate for customers who do not choose a power supplier is capped through 2009 at a level equal to the 1996 rate adjusted upward for 80 percent of inflation and for other factors beyond the control of Narragansett. New Hampshire Legislation and Settlement Agreement On February 3, 1998, NEES' New Hampshire subsidiary, Granite State, and NEP reached a comprehensive settlement agreement with the Governor's office of the State of New Hampshire and a number of other interested parties on a plan to provide choice of power supplier to its customers by no later than July 1, 1998. This settlement agreement was reached in response to a previously enacted New Hampshire statute which requires customer choice of power supplier. The principle terms of the New Hampshire settlement agreement, which require approval by state and federal regulators, are substantially similar to the Massachusetts Settlement and Rhode Island Settlement, including rate reductions for customers and the ability to recover stranded costs. On March 20, 1998, the New Hampshire Public Utilities Commission issued an Order on Rehearing of their previously issued Final Plan on industry restructuring. The Order on Rehearing reaffirmed the interim recovery of stranded costs from customers previously established in February 1997 for Granite State (1.9 cents per kWh), which reflects an assumed level of stranded cost mitigation. The Order on Rehearing also addressed a number of other issues, including standards of conduct of affiliates, energy efficiency programs, and billing and metering services. The Order on Rehearing encouraged utilities to file settlements but appears to be inconsistent with one key aspect of the settlement filed by Granite State concerning a separate transition service for existing customers with back-stop pricing provided by USGen, similar to that in place for Mass. Electric and Narragansett, after the divestiture of NEP's and Narragansett's nonnuclear generating business to USGen, as discussed below. Unaffiliated Customers Agreements have not yet been reached with certain wholesale customers that represent less than 2 percent of the NEES companies' stranded cost exposure. The largest of these customers, the Town of Norwood, Massachusetts, gave notice in March 1998 of its intent to terminate its contract with NEP, without accepting responsibility for its share of NEP's stranded costs, and to begin taking power from another supplier. NEP has filed with the Federal Energy Regulatory Commission (FERC) for permission to charge Norwood a contract termination charge for its share of NEP's stranded costs. Divestiture of Generating Business As described above, in August 1997, NEP and Narragansett (collectively, the Sellers) reached an agreement to sell their nonnuclear generating business to USGen. The nonnuclear generating business includes three fossil-fueled and 15 hydroelectric generating stations, totaling approximately 4,000 megawatts (MW) of capacity, as well as NEES' 100 percent interest in Resources, a 20 percent general partner in the Ocean State Power project, all of which has a book value of $1.1 billion. USGen will pay the Sellers $1.59 billion in cash, of which $225 million will be contingent upon the introduction of customer choice of power supplier in Massachusetts. Based on the enactment of the Massachusetts statute, the NEES companies believe that the conditions for payment of the full purchase price have been met. USGen will also reimburse the NEES companies for $85 million of costs associated with early retirement and special severance programs for employees affected by industry restructuring. USGen will assume responsibility for environmental conditions at the Sellers' nonnuclear generating stations. USGen will also assume the Sellers' obligations under long-term fuel and fuel transportation contracts and certain collective bargaining agreements for nonnuclear facilities. In addition to the purchase of the nonnuclear generating stations, USGen will purchase NEP's entitlement to approximately 1,100 MW of power procured under long-term contracts. NEP will make a monthly fixed contribution towards the above-market cost of the purchased power of between $12.5 million and $14.2 million per month from closing through January 2008. USGen will be responsible for the balance of the costs under the purchased power contracts. The sale is subject to approval by various state and federal regulatory agencies. Several parties have objected to the sale on various grounds, including allegations that following the sale, USGen would be able to exercise unlawful levels of market power. On February 25, 1998, the FERC issued an order that rejected the market power allegations, approved the sale, and conditionally approved most supporting filings. On February 27, 1998, the FERC approved the transfer of the hydroelectric generating licenses to USGen. While the timing of receipt of final regulatory approvals is uncertain, receipt of all approvals is unlikely before mid-1998. Closing is contingent upon all regulatory approvals being obtained by February 1999. In order to meet the terms of NEP's mortgage indenture, NEP will be required, prior to the consummation of the sale, to either defease or call approximately $278 million of its mortgage bonds. Any defeasance of bonds would be by deposit of cash representing principal and interest to the maturity date, or interest, principal, and general redemption premium to an earlier redemption date. In addition, NEP will retire approximately $372 million of mortgage bonds securing the issuance of a like amount of pollution control revenue bonds (PCRBs) by various public agencies. However, NEP expects that substantially all of the underlying PCRBs will remain outstanding as unsecured obligations of NEP. In addition, the long-term debt of Resources will be retired prior to the closing. NEP's stranded costs will be recovered from distribution customers through a transition access charge, which will be collected by NEP's distribution affiliates. Upon completion of the divestiture of NEP's nonnuclear generating business, stranded costs will be reduced from $4.5 billion to $2.1 billion. As part of the divestiture plan, in February 1998, NEEI (a wholly-owned subsidiary of NEES) sold its oil and gas properties for approximately $50 million. NEEI's loss on the sale of approximately $120 million, before tax, has been reimbursed by NEP. NEEI retired $121 million of bank debt at the same time. At the divestiture date, any gain or loss from the divestiture of nonnuclear generating assets and oil and gas assets will be recorded as a regulatory asset or liability to be recovered as part of NEP's stranded costs, through the ongoing transition access charge, consistent with the settlement agreements. NEP may be required to record a liability for the monthly fixed contribution towards the above-market cost of purchased power. In such an event, NEP would also record a regulatory asset consistent with the settlement agreements. In addition, NEP will endeavor to sell, or otherwise transfer, its minority interest in three nuclear power plants and a 60 MW interest in a fossil-fueled generating station in Maine to nonaffiliates. Until such time as the nuclear interests are divested, NEP will share with customers 80 percent of the revenues and operating costs related to the units, with shareholders retaining the balance. In the event that NEP determines that it has an impairment of its nuclear plant balances under Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (FAS 121), it will record any such impairment as a regulatory asset. Risk Factors While the NEES companies believe that the previously described settlements and legislation and the sale agreement with USGen and other developments constitute substantial progress in reducing the impacts associated with industry restructuring, significant risks remain. These include, but are not limited to: (i) the potential that ultimately the settlements will not be implemented in the manner anticipated by NEES, (ii) the possibility that a voter referendum in November 1998 could overturn the Massachusetts legislation, followed by materially adverse legislative or regulatory actions, (iii) the possibility of federal legislation that would increase the risks above those contained in the settlements and the Massachusetts and Rhode Island statutes, (iv) the potential for adverse stranded cost recovery decisions involving wholesale customers with whom settlements have not yet been reached, and (v) the failure to complete the sale of the nonnuclear generating business to USGen. The major risk factors affecting the Electricity Delivery Companies relate to the possibility of adverse regulatory or judicial decisions or legislation which limit the level of revenues the Electricity Delivery Companies are allowed to charge for their services or affect the costs the Electricity Delivery Companies incur. Other For more information on workforce reductions, accounting implications, year 2000 computer issues, and new accounting standards, see pages 14 through 20 of the 1997 NEES Annual Report. ELECTRICITY DELIVERY COMPANIES The combined service area of the Electricity Delivery Companies constitutes the electric delivery service area of the System and covers more than 4,500 square miles with a population of about 3,000,000 (1990 census). See Map - Electric Utility Properties, page 25. The largest cities served are Worcester, Mass. (population 170,000) and Providence, Rhode Island (population 161,000). In addition, NEP's business going forward will be primarily that of transmitting electricity. For a further description of NEP's business, see TRANSMISSION AND GENERATION BUSINESS, page 14. Mass. Electric Description of Business Mass. Electric provides approximately 970,000 customers with electric delivery service in an area comprising approximately 43 percent of The Commonwealth of Massachusetts. The population of the service area is about 2,160,000 or 36 percent of the total population of the Commonwealth (1990 Census). Mass. Electric's service area consists of 146 cities and towns including the highly diversified commercial and industrial cities of Worcester, Lowell, and Quincy, the Interstate 495 high technology belt, and many suburban communities and rural towns. The economy of the area is diversified. Principal industries served by Mass. Electric include computer manufacturing and related businesses, electrical and industrial machinery, plastic goods, fabricated metals and paper, and chemical products. In addition, a broad range of professional, banking, medical, and educational institutions is served. During 1997, 40 percent of Mass. Electric's revenue from the sale of electricity was derived from residential customers, 38 percent from commercial customers, 21 percent from industrial customers, and 1 percent from others. In 1997, the 20 largest customers of Mass. Electric accounted for approximately 7 percent of its electric revenue. In November 1997, legislation was enacted in The Commonwealth of Massachusetts which provides Mass. Electric's customers with choice of power supplier beginning on March 1, 1998 (see INDUSTRY RESTRUCTURING, page 3). Rates Rate schedules applicable to electric services rendered by Mass. Electric are on file with the MDTE. The Massachusetts Settlement establishes distribution rates for Mass. Electric. On March 1, 1998, Mass. Electric's distribution rates were set at a level approximately $45 million above the level embedded in its previously bundled rates, with such rates then frozen through the year 2000. This increase reflects changes to the distribution cost of service that include an $11 million increase in annual depreciation expense, a $3 million annual contribution to a storm fund, and increased amortization of unfunded deferred income taxes of approximately $1 million over six years. The Massachusetts restructuring legislation also expanded the eligibility for certain rate discount programs, the cost of which is uncertain at this time. From 1998 through 2000, Mass. Electric's return on equity will be subject to a floor of 6 percent and a ceiling of 11 percent. Earnings over the ceiling will be shared equally between customers and shareholders up to a maximum of 12.5 percent. This sharing results in an effective cap on Mass. Electric's return on equity of 11.75 percent, excluding certain limited incentive opportunities. To the extent that earnings fall below the floor, Mass. Electric will be authorized to surcharge customers for the shortfall. The statute also imposes an inflation cap through March 1, 2005 on the total rates for customers who have not chosen a power supplier. If this inflation cap is triggered, under the Massachusetts Settlement the recovery of stranded investment costs would be deferred. This inflation cap does not apply to any surcharge triggered by the rate of return floor. The Massachusetts Settlement also eliminated Mass. Electric's purchased power cost adjustment (PPCA) mechanism as of July 31, 1996. This mechanism allowed Mass. Electric to recover purchased power rate changes from NEP and the effects of NEP's seasonal rates. The Massachusetts Settlement required that Mass. Electric's net $18 million PPCA refund liability balance at July 31, 1996 be transferred on its books to establish a storm contingency fund account of $3 million initially, with the remainder applied to reduce regulatory assets for hazardous waste costs. Historically, Mass. Electric's rates were periodically adjusted by rate cases, including: 1995 - The MDPU approved a $31 million increase to base rates, effective October 1, 1995. 1993 - The MDPU approved the following: - an 11-month, $26 million general rate decrease effective December 1, 1993; - recognition of $35 million of unbilled revenues as of September 30, 1993, amortized into income over a 13-month period, ended December 1994; and - rate discounts for large commercial and industrial customers who agreed to give a five- year notice to Mass. Electric before they chose to purchase power from another supplier (Service Extension Discounts). These Service Extension Discounts ended effective March 1, 1998. The rates of Mass. Electric in 1997 contained fuel adjustment clauses that allowed the rates to be adjusted to reflect changes in the cost of fuel. Mass. Electric's fuel clause will terminate during the first quarter of 1998, subject to a final reconciliation and refund or surcharge of any excess or deficiency in fuel cost recovery. Narragansett Description of Business Narragansett provides approximately 330,000 customers with electric delivery service. Its service territory, which includes urban, suburban, and rural areas, covers about 839 square miles or 80 percent of the area of Rhode Island, and encompasses 27 cities and towns including the cities of Providence, East Providence, Cranston, and Warwick. The population of the area is about 725,000 (1990 Census) which represents about 72 percent of the total population of the state. The economy of the territory is diversified. Principal industries served by Narragansett produce fabricated metal products, electrical and industrial machinery, transportation equipment, textiles, silverware, and chemical products. In addition, a broad range of professional, banking, medical, and educational institutions is served. During 1997, 43 percent of Narragansett's revenue from the sale of electricity was derived from residential customers, 41 percent from commercial customers, 14 percent from industrial customers, and 2 percent from others. In 1997, the 20 largest customers of Narragansett accounted for approximately 9 percent of its electric revenue. In 1996, legislation was enacted in the state of Rhode Island which provided certain customers with choice of supplier on July 1, 1997, with the balance of customers gaining such choice on January 1, 1998 (see INDUSTRY RESTRUCTURING, page 3). Rates Rate schedules applicable to electric services rendered by Narragansett are on file with the RIPUC and the Rhode Island Division of Public Utilities and Carriers. Under the Rhode Island statute, Narragansett increased distribution rates by approximately $11 million in January 1997 and another $7 million in January 1998. The statute also provides that Narragansett may request increased distribution rates which would take effect no earlier than 1999. Effective January 1998, the RIPUC approved a $3.1 million decrease in rates for Narragansett, reflecting a corresponding decrease in expense associated with postretirement benefits other than pensions (PBOPs). The RIPUC also approved a refund of approximately $800,000 resulting from a past overcollection of PBOP costs. This refund obligation was reflected on Narragansett's books at December 31, 1997. Historically, Narragansett's rates were periodically adjusted by rate cases, including: 1995 - The RIPUC approved a $15 million base rate increase, effective December 1, 1995, and $3 million in new discounts for manufacturing customers, which ended in 1997. - The FERC approved a rate agreement increasing credits received from NEP to approximately $50 million for ownership and operating costs related to Narragansett's 10 percent investment in the Manchester Street plant, which went back into service in 1995, as well as Narragansett's costs associated with its integrated transmission facilities. 1994 - The RIPUC approved a rate agreement that provided for the recognition of $14 million of unbilled revenues over a 21-month period, which ended December 1995, and provided for rate discounts for large commercial and industrial customers who agreed to give a five-year notice to Narragansett before they chose to purchase power from another supplier (Service Extension Discounts). These Service Extension Discounts ended effective January 1, 1998. 1993 - The RIPUC approved a $1.5 million rate increase as part of the three-year phase-in of Narragansett's PBOP cost recovery. Similar increases took effect in January 1994 and 1995. The rates of Narragansett in 1997 contained fuel adjustment clauses that allowed the rates to be adjusted to reflect changes in the cost of fuel. Narragansett's fuel clause terminated at the end of 1997, subject to a final reconciliation. A 1986 Rhode Island Supreme Court decision held that the RIPUC's rate-making power includes the authority to order refunds of amounts earned in excess of an allowed return. As a result of the decision, the RIPUC monitors Narragansett's earnings on a regular basis. Granite State Description of Business Granite State provides approximately 36,000 customers in 21 New Hampshire communities with electric delivery service in the State of New Hampshire in an area having a population of about 73,000 (1990 Census), including the Salem area of Southern New Hampshire as well as several communities located along the Connecticut River, primarily in the Lebanon and Walpole areas. During 1997, 48 percent of Granite State's revenue from the sale of electricity was derived from commercial customers, 38 percent from residential customers, 13 percent from industrial customers, and 1 percent from others. In 1997, the 10 largest customers of Granite State accounted for about 19 percent of its electric revenue. Granite State is not subject to the reporting requirements of the Securities Exchange Act of 1934, and its financial impact on the System is small. Information on Granite State is provided herein solely for the purpose of furnishing a more complete description of System operations. In February 1998, Granite State and its generation and transmission affiliate, NEP, reached a settlement agreement with the Governor's office of the State of New Hampshire and a number of other interested parties. This settlement agreement provides for a distribution rate surcharge for storm costs and pilot program costs. This settlement is subject to federal and state regulatory approval. If approved, the settlement provides for choice of power supplier by New Hampshire customers no later than July 1, 1998 (see INDUSTRY RESTRUCTURING, page 3). Rates The rates of Granite State in 1997 contained fuel adjustment clauses that allowed the rates to be adjusted to reflect changes in the cost of fuel. Fuel costs billed by Granite State are estimated on a semi-annual basis. Billings are adjusted in the subsequent period for any excess or deficiency in fuel cost recovery. Nantucket Description of Business In March 1996, NEES acquired Nantucket for $3.5 million. Nantucket provides electric delivery service to approximately 10,000 customers on Nantucket Island which has a year-round population of approximately 6,000 (1990 Census) and a seasonal tourist population which peaks at approximately 40,000 during the summer. Nantucket's service area covers the entire island. In November 1997, legislation was enacted in The Commonwealth of Massachusetts which provided Nantucket's customers with choice of power supplier beginning on March 1, 1998 (see INDUSTRY RESTRUCTURING, page 3). During 1997, 61 percent of Nantucket's revenue from the sale of electricity was derived from residential customers, 37 percent from commercial customers, and 2 percent from others. During 1996, a 26-mile-long submarine cable connecting Nantucket Island with the transmission system on the mainland was constructed. Nantucket is not subject to the reporting requirements of the Securities Exchange Act of 1934, and its financial impact on the System is small. Information on Nantucket is provided herein solely for the purpose of furnishing a more complete description of System operations. Recovery of Demand-Side Management Expenditures The Electricity Delivery Companies offer conservation and load management programs, usually referred to in the industry as Demand- Side Management (DSM) programs, which are designed to help customers use electricity efficiently, as a part of meeting the NEES companies' regulatory requirements and customers' needs for energy services. The Electricity Delivery Companies regularly file their DSM programs with their respective regulatory agencies and have received approval to recover DSM program expenditures in rates on a current basis through 1997. Mass. Electric's expenditures were $53 million, $48 million, and $51 million in 1995, 1996, and 1997, respectively. Narragansett's expenditures were $9 million, $10 million, and $10 million, in 1995, 1996, and 1997, respectively. Narragansett and Granite State have received approvals from their respective state regulatory agencies to recover substantially all of their 1998 DSM program expenditures. The Massachusetts Settlement and statute provide for recovery of DSM-related costs. Mass. Electric and Nantucket have filed DSM program expenditure recovery plans with the MDTE for the period 1998 through 2002 and have received interim MDTE approval, subject to further MDTE review and modification based on comments by the Massachusetts Division of Energy Resources (DOER) and other parties. Mass. Electric and Nantucket subsequently filed a comprehensive Offer of Settlement with the MDTE resolving all issues raised by the DOER and other settling parties relating to Mass. Electric and Nantucket's DSM program for the period 1998 to 2002. Since 1990, the Electricity Delivery Companies have been allowed to earn incentives based on the results of their DSM programs. The Electricity Delivery Companies must be able to demonstrate the electricity savings produced by their DSM programs to their respective state regulatory agencies before incentives are recorded. Mass. Electric recorded $5.1 million, $5.7 million, and $7.0 million of before-tax incentives in 1995, 1996, and 1997, respectively. Narragansett recorded $0.5 million, $0.2 million, and $0.3 million of before-tax incentives in 1995, 1996, and 1997, respectively. TRANSMISSION AND GENERATION BUSINESS NEP Description of Business NEP's business has been principally generating, purchasing, transmitting, and selling electric energy in wholesale quantities. In 1997, 91 percent of NEP's all-requirement revenue from the sale of electricity was derived from sales for resale to affiliated companies and 9 percent from sales for resale to municipal and other utilities. NEP was the wholesale supplier of the electric energy requirements of the Electricity Delivery Companies under contracts that required seven years' notice of termination. NEP's contracts with Mass. Electric, Nantucket, and Narragansett have been amended. Mass. Electric and Nantucket conducted a competitive solicitation among power suppliers in February 1998. No other supplier bid to supply power to these companies. Narragansett will conduct a similar competitive solicitation in April 1998. If bids are received in response to this solicitation, Narragansett may begin to purchase its electric energy requirements from other suppliers. NEP retains the backstop obligation to supply the electric energy requirements of Mass. Electric, Nantucket, and Narragansett for retail customers eligible to continue to buy electricity from their electricity delivery company at regulated prices, so-called "standard offer service." Upon the completion of the sale of NEP's nonnuclear generating business to USGen, USGen will have the backstop obligation. Narragansett receives credits against its purchases of power from NEP for the cost of generation from its Providence units, which are functionally integrated with NEP's facilities to achieve maximum economy and reliability. Discussions of NEP's generating properties, load growth, energy mix, and fuel supplies include the related properties of Narragansett. (For a discussion of electric utility operations in a more competitive environment, see INDUSTRY RESTRUCTURING, page 3, and for a discussion of the sale of NEP's nonnuclear generating business, see Divestiture of Generating Business, page 7.) In addition to NEP's nonnuclear and nuclear generation, it is involved in the transmission of electricity and owns a system of transmission lines and substations (see Map - Electric Utility Properties, page 25). As discussed above, NEP has agreed to sell its nonnuclear generating business and to attempt to sell the nuclear assets. NEP will retain its transmission business. Rates Since January 1995, NEP has collected the majority of its generation and transmission revenues pursuant to the rates under Tariff No. 1 established in the FERC approved W-95 settlement agreement, including the revenues from the Electricity Delivery Companies. Under Tariff No. 1, NEP is obligated to sell to its customers, and its customers are obligated to purchase from NEP, the requirements of its retail service territory, and they may only terminate those mutual obligations upon seven years' notice. In addition, NEP established an open access transmission Tariff No. 9 applicable to non-Tariff No. 1 customers in July 1996. As customers of NEP and the Electricity Delivery Companies become eligible to chose their own power supplier in accordance with industry restructuring, it is necessary to amend Tariff No. 1. The settlement agreements between NEP and the Electricity Delivery Companies include an amendment to the Tariff No. 1 service agreement which reforms the contractual relationship to allow for the early termination of the Electricity Delivery Companies' obligation to purchase wholesale all-requirements service from NEP, in consideration for the payment of the contract termination charge. The Electricity Delivery Companies will recover the contract termination charge through a transition access charge. (see INDUSTRY RESTRUCTURING, page 3) NEP has also reached a similar agreement with an unaffiliated wholesale customer. These agreements amend the provisions of Tariff No. 1 and allow for the provision of unbundled service by NEP. NEP's unbundled rates going forward will consist of the contract termination charge, transmission charges, standard offer charges where applicable, and market revenues where applicable. The contract termination charge initially equals 2.8 cents per kilowatthour. The MDTE has approved a reduction of the initial contract termination charge to 2.7 cents per kWh for Mass. Electric and Nantucket, effective March 1, 1998. NEP's filing with the FERC to approve this reduction is pending. Upon divestiture, the contract termination charge declines to approximately 1.5 cents per kWh (see INDUSTRY RESTRUCTURING, page 3). The transmission rate pursuant to the open access Tariff No. 9 is a formula rate which recovers NEP's actual costs plus a return on actual capital investment and will equal approximately 0.4 cents per kWh. The standard offer revenues will equal 3.2 cents per kWh in 1998 and escalate in the years thereafter and are recovered by NEP until the completion of the divestiture. Revenues from sale in the marketplace will vary. The settlement agreements also provide for recovery of lost revenue due to differences between what NEP would have collected under Tariff No. 1 and what it actually collects under the unbundled tariffs for the time period between the time customers can choose their electricity supplier and divestiture of NEP's nonnuclear generating business. The electric utility business of NEP and the Electricity Delivery Companies (except Nantucket) is not highly seasonal. For NEP and the Electricity Delivery Companies, industrial customers are broadly distributed among standardized industrial classifications. No single industrial classification exceeds 3 percent of operating revenue, and no single customer of the System contributes more than 1 percent of operating revenue. UNREGULATED BUSINESS AllEnergy's principal purpose is to sell energy and provide a range of energy-related services, including but not limited to, marketing, brokering and sales of energy, audits, fuel supply, repair, maintenance, construction, operation, design, engineering, and consulting, to customers in the competitive market in New England and New York. In December 1997, AllEnergy became a wholly- owned indirect subsidiary of NEES when Eastern Enterprises' 50 percent interest in the joint venture was purchased by NEES. NEESCom was established in August 1996 to allow the NEES companies to participate in the growing telecommunications industry. This subsidiary (an exempt telecommunications company) is not regulated under the Public Utility Holding Company Act of 1935 and has a license from the Federal Communications Commission. It will focus on the fiber optics, cable, and infrastructure sectors of the telecommunications industry. NEES Global is a wholly-owned nonutility subsidiary of NEES. Its principal purpose is to provide consulting and independent project development services for transmission projects. Secondarily, NEES Global also provides consulting services to unaffiliated utilities in the areas of electric industry restructuring and customer choice. NEES and the NEES companies have from time to time considered, and expect to consider in the future, various strategies designed to enhance NEES' competitive position and to increase its ability to anticipate and adapt to changes in the electric utility industry. These strategies may include business combinations with other companies, internal restructurings, acquisitions or dispositions of assets or lines of business, and changes to franchised service territories. NEES and the NEES companies may from time to time engage in discussions, either internally or with third parties, regarding one or more of these potential strategies. Those discussions may be subject to confidentiality agreements, and NEES' policy is generally not to comment on such activities. No assurances can be given that any potential transaction of the type described above may actually occur, or, if one does occur, the ultimate effect thereof on NEES' or any NEES company's results of operations, financial condition or competitive position. See Divestiture of Generating Business, page 7. OPERATING REVENUES The following is the detail of consolidated kWh sales and deliveries, revenue from sales of electricity by the System, and System operating income for the last three years.
Sales and Deliveries of Electricity (in thousands of kWh) ------------------------------------ Classification 1997 1996 1995 - -------------- ---- ---- ---- Residential 7,992,677 7,993,375 7,837,527 Commercial 8,731,976 8,559,082 8,378,580 Industrial 4,928,622 4,892,524 4,952,217 Other 134,499 137,378 142,848 ---------- ---------- ---------- Total Sales to Ultimate Customers 21,787,774 21,582,359 21,311,172 Sales for Resale 4,034,345 3,611,643 1,592,577 ---------- ---------- ---------- Total Sales 25,822,119 25,194,002 22,903,749 Deliveries 334,780 101,402 ---------- ---------- ---------- Total Sales and Deliveries 26,156,899 25,295,404 22,903,749 ========== ========== ========== Revenues from Sales of Electricity (in thousands of dollars) ---------------------------------- Classification 1997 1996 1995 - -------------- ---- ---- ---- Residential $877,447 $ 849,070 $ 841,433 Commercial 840,671 792,380 773,138 Industrial 403,868 383,659 393,174 Other 28,040 26,902 25,836 ---------- ---------- ---------- Total Sales to Ultimate Customers 2,150,026 2,052,011 2,033,581 Amortization of Unbilled Revenues 8,209 Sales for Resale 149,339 140,110 79,452 ---------- ---------- ---------- Total 2,299,365 2,192,121 2,121,242 Other Operating Revenue 203,226 158,577 150,470 ---------- ---------- ---------- Total Operating Revenue $2,502,591 $2,350,698 $2,271,712 ========== ========== ========== Operating Income $ 366,861 $ 348,118 $ 323,428 ========== ========== ==========
Operating revenue increased in 1997 and reflects higher kWh deliveries, rate increases, increased revenues related to rate adjustment mechanisms, and increased fuel revenues. In 1997, kWh deliveries to ultimate customers increased 2.0 percent, reflecting the effects of an improving regional economy. In 1997, 73 percent of the System's electric utility revenues was attributable to NEP, whose rates are subject to regulation by the FERC. The rates of Mass. Electric and Nantucket, Narragansett, and Granite State are subject to the respective jurisdictions of the state regulatory commissions in Massachusetts, Rhode Island, and New Hampshire. For a discussion of 1998 rates, see ELECTRICITY DELIVERY COMPANIES, page 9 and TRANSMISSION AND GENERATION BUSINESS, page 14. ELECTRIC UTILITY PROPERTIES Transmission, Distribution, and Generation Properties The electric utility properties of the System companies consist of NEP's and Narragansett's fossil-fuel base load and intermediate load steam and combined cycle generating units, conventional and pumped storage hydroelectric stations, internal combustion peaking units, and portions of fossil fuel and nuclear generating units. On August 5, 1997, NEP and Narragansett entered into an agreement to sell their nonnuclear generating assets. See Divestiture of Generating Business, page 7. NEP also plans to seek offers to sell its nuclear generating business. The properties of the System also include the ownership interests of NEET, Mass. Hydro, and N.H. Hydro in the Hydro-Quebec Interconnection, and an integrated system of transmission lines, substations, and distribution facilities. See Map - Electric Utility Properties, page 25. NEP's integrated system consists of 2,266 circuit miles of transmission lines, 118 substations with an aggregate capacity of 15,697,624 kVA, and 7 pole or conduit miles of distribution lines. The properties of Mass. Electric and Narragansett include substations and distribution and transmission lines, which are interconnected with transmission and other facilities of NEP. At December 31, 1997, Mass. Electric owned 253 substations, which had an aggregate capacity of 2,984,429 kVA, 148,718 line transformers with the capacity of 8,398,146 kVA, and 16,919 pole or conduit miles of distribution lines. Mass. Electric also owns 83 circuit miles of transmission lines. At December 31, 1997, Narragansett owned 243 substations, which had an aggregate capacity of 3,055,065 kVA, 48,653 line transformers with the capacity of 2,102,894 kVA, and 4,553 pole or conduit miles of distribution lines. Narragansett, in addition, owns 326 circuit miles of transmission lines. Substantially all of the properties and franchises of Mass. Electric, Narragansett, and NEP are subject to the liens of indentures under which mortgage bonds have been issued. NEP's bond indenture restricts the sale of the trust property in its entirety or substantially in its entirety. In order to meet the terms of NEP's mortgage indenture, NEP will be required, prior to the consummation of the sale of its nonnuclear generating business, to either defease or call approximately $278 million of its mortgage bonds (see Divestiture of Generating Business, page 7). For details of the mortgage liens on these properties, see the long-term debt note in Notes to Financial Statements in each of these companies' respective 1997 annual reports. The properties of NEET are subject to a mortgage under its financing arrangements. The net capability at December 31, 1997, and the net generation for the twelve months ended December 31, 1997, from all sources were as follows:
Year(s) Placed Energy Net Net Source Location In-Service Source Capability Generation ------ -------- ---------- ------ ---------- ------------- Fossil Fuel Units (MW) (000's of MWh) Brayton Point Station Units 1,2 & 3 Somerset, 1963-1969 Coal-Oil-Gas(a) 1,135 8,383 Unit 4 Mass. 1974 Oil-Gas 446 543 Salem Harbor Station Units 1,2 & 3 Salem, 1952-1958 Coal-Oil(a) 314 2,188 Unit 4 Mass. 1972 Oil 400 1,718 Manchester St. Prov., 1995 Gas-Oil 495 3,553 Station(b) R.I. Other System Me., Mass. 1963-1978 Oil 93 90 Units(c) Hydroelectric Units(d) Conventional Mass.,N.H. 1909-1987 Water 576 1,487 & Vt. Pumped Storage Bear Swamp Rowe, Mass. 1974 Water 585 (154) Other(e) - - - 927 4,523 ----- ------ Subtotal 4,971 22,331 Nuclear Units(f) Vermont Yankee Vt. 1972 Nuclear 95 767 Millstone 3 Waterford, 1986 Nuclear 0 0 Conn. Seabrook 1 Seabrook, 1990 Nuclear 116 791 N.H. ----- ------ Subtotal 211 1,558 ----- ----- Total 5,182 23,889 ===== ======
(a) These units currently burn coal, but are also capable of burning oil. In addition Brayton Point Units 1, 2, and 3 are capable of limited co-firing of natural gas. (b) In 1995, NEES subsidiaries completed the approximately 500 MW repowering of Manchester Street Station in Providence, Rhode Island. Total costs for the generating station were approximately $440 million, including allowance for funds used during construction (AFDC). (c) Includes (i) an interest in a jointly owned oil-fired unit in Yarmouth, Maine, and (ii) diesel units at various locations. (d) See Hydroelectric Project Licensing, page 34. (e) Capability includes contracted purchases (1,095 MW) less contract sales (168 MW). Net generation includes the effects of the above contracted purchases and economy interchanges through the New England Power Exchange (including a 115 MW capacity credit associated with purchases from Hydro-Quebec and purchases from nonutility generation). For further information see Nonutility Power Producer Information, page 33. (f) See Nuclear Units, page 26. NEP, Narragansett, and AllEnergy are members of the New England Power Pool (NEPOOL). Mass. Electric, Nantucket, and Granite State participate in NEPOOL through NEP. The NEPOOL Agreement provides for coordination of the planning and operation of the generation and transmission facilities of its members. The NEPOOL Agreement incorporates generating capacity reserve obligations, provisions regarding the use of major transmission lines, and provisions for payment for facilities usage. The NEPOOL Agreement further provides for New England-wide central dispatch of generation by the Independent System Operator (ISO). Through NEPOOL, operating and capital economies are achieved and reserves are established on a region-wide rather than an individual company basis. At the end of 1996, NEPOOL filed with the FERC a comprehensive proposal to restructure NEPOOL. The main elements of the proposal include: (1) the establishment of a regional transmission tariff that will ensure open, nondiscriminatory access to the regional transmission network; (2) the development of wholesale competitive markets and a power exchange for capacity, energy and several ancillary services with market-based pricing for these products and services; (3) a new governance structure for NEPOOL that will allow for more flexible and representative governance; and (4) the creation of a new institution, the ISO, that will operate the bulk power system and administer the regional tariff and power exchange. Since the initial filing, the FERC has conditionally accepted a number of NEPOOL's proposals including the Regional Open Access Tariff, the ISO, and the NEPOOL governance restructuring. NEPOOL is awaiting a final order on its market proposal. The NEES companies support the NEPOOL restructuring proposal because they believe it will facilitate the development of robust competition in the wholesale electricity markets in New England and facilitate retail access. A number of parties intervened in the proceeding. The 1997 NEPOOL peak demand of 20,569 MW occurred on July 14, 1997. This was a new all-time NEPOOL peak demand which surpassed the previous all time NEPOOL peak demand of 20,519 MW set on July 21, 1994. The 1997 summer peak for the System of 4,326 MW occurred on July 17, 1997. The previous all-time peak load of 4,385 MW occurred on July 21, 1994. The 1997-1998 winter peak of 3,901 MW occurred on December 15, 1997. NEPOOL currently projects a capacity shortfall of approximately 500 MW from long-range planning criteria for the summer of 1998, assuming normal summer weather. This projection further assumes that the three Millstone nuclear units will be unavailable during the summer. Extensive or extended hot weather or losses of other major generating units or transmission ties could further strain the System. NEPOOL participants are working to mitigate any capacity shortages and prevent disruptions in electric service this summer. A new spot market for capacity, which is expected to become effective on April 1, 1998, may create sufficient economic incentives for the NEPOOL participants to meet the increased capacity requirements in the aggregate. NEPOOL participants will coordinate with adjacent control areas to arrange for import power and will make use of voluntary interruptible load options to meet the projected capacity shortfall. Interconnection with Quebec NEET, Mass. Hydro, and N.H. Hydro own and operate, on behalf of NEPOOL participants in the project, a 450 kV direct current transmission line and related terminals to interconnect the New England and Quebec transmission systems (the Interconnection). The transfer capability of the Interconnection is currently rated at 1,800 MW. Operating limits implemented by adjacent Power Pools covering New York, New Jersey, Pennsylvania, and Maryland often restrict the effective transfer capability to levels of 1,200 MW to 1,400 MW. Participants in the Interconnection purchase from and sell energy to Hydro-Quebec pursuant to several agreements. The principal agreement calls for New England Utilities (NEUs) to purchase 7 billion kWh of energy each year for ten years (the Firm Energy Contract). Purchases under the Firm Energy Contract totaled over 5.5 billion kWh in 1997. Net energy deliveries from Hydro- Quebec over the Interconnection totaled more than 7.3 billion kWh in 1997. These additional deliveries reflect the use of the Interconnection by participants to conduct independent transactions with Hydro-Quebec on a regular basis. The Interconnection has two phases. NEP's participation in both is approximately 18 percent. NEP and the other participants have entered into support agreements that end in 2020, to pay monthly their proportionate share of the total cost of constructing, owning, and operating the transmission facilities. NEP accounts for these support agreements as capital leases and accordingly recorded approximately $65 million in utility plant at December 31, 1997. Under the support agreements, NEP has agreed to guarantee its share of debt financing for the second phase. At December 31, 1997, NEP had guaranteed approximately $25 million of project debt. In the event any Interconnection facilities are abandoned for any reason, each participant is contractually committed to pay its pro-rata share of the net investment in the abandoned facilities. NEP's rights and obligations under its support agreements will be transferred to USGen upon completion of the sale of NEP's nonnuclear generating business (see Divestiture of Generating Business, page 7). For information regarding a dispute between the NEUs and Hydro- Quebec regarding their Firm Energy Contract, see Item 3 herein. Map - Electric Utility Properties (Displays electric utility properties of NEES subsidiaries) Nuclear Units General NEP is a stockholder of Yankee Atomic Electric Company (Yankee Atomic), Vermont Yankee Nuclear Power Corporation (Vermont Yankee), Maine Yankee Atomic Power Company (Maine Yankee), and Connecticut Yankee Atomic Power Company (Connecticut Yankee). Each of these companies (collectively referred to as the Yankee Companies) owns a single nuclear generating unit. NEP purchases the output of the Vermont Yankee nuclear electric generating plant in the same percentage as its stock ownership, less small entitlements taken by municipal utilities. Yankee Atomic, Connecticut Yankee, and Maine Yankee have permanently ceased operations. NEP has power contracts with each Yankee Company that require NEP to pay an amount equal to its share of total fixed and operating costs (including decommissioning costs) of the plant plus a return on equity. The stockholders of three Yankee Companies (Vermont Yankee, Maine Yankee, and Connecticut Yankee) have agreed, subject to regulatory approval, to provide capital requirements in the same proportion as their ownership percentages of the particular Yankee Company. In addition, NEP is a joint owner of the Millstone 3 nuclear generating unit in Connecticut and the Seabrook 1 nuclear generating unit in New Hampshire. Millstone 3 and Seabrook 1 are operated by subsidiaries of Northeast Utilities. The Millstone 3 unit is currently shut down. NEP pays its proportionate share of costs and receives its proportionate share of output from Vermont Yankee, Millstone 3, and Seabrook 1. Listed below is information on each operating nuclear plant in which NEP has an ownership interest. Operating Nuclear Units
NEP's Share of NEP's Net Plant Ownership Assets Unit Interest (%) ($ in millions) ---- ------------ --------------- Vermont Yankee 20 35 Millstone 3 12 366 Seabrook 1 10 54
Nuclear Units Permanently Shut Down Three of the four regional nuclear generating companies in which NEP has a minority interest own nuclear generating units which have been permanently shut down. These three units are as follows:
NEP's Investment Future Estimated ------------------- Date Billings to NEP Unit % $(millions) Retired $(millions) ---- --- ----------- ------------ ---------------- Yankee Atomic 30 7 February 1992 44 Connecticut Yankee 15 17 December 1996 92 Maine Yankee 20 16 August 1997 164
Operating Nuclear Plants - Decommissioning Estimates
NEP's share of ($ in millions) -------------------------------- Estimated Decommissioning Decommissioning Fund Costs Balances (1) License Unit (in 1997 $) (12/31/97) Expiration ---- --------------- --------------- ---------- Vermont Yankee $77 $34 2012 Millstone 3 $66 $18 2025 Seabrook 1 (2) $47 $ 9 2026 (1) Certain additional amounts are anticipated to be available through tax deductions. (2) Proposed legislation in New Hampshire would make owners of Seabrook 1 proportional guarantors for decommissioning costs in the event that an owner without a franchise service territory fails to fund its share of decommissioning costs.
For a discussion of NEP's investment in both operating and retired nuclear units, the Millstone 3 unit, nuclear decommissioning costs and nuclear insurance issues, see pages 35 to 38 of the 1997 NEES Annual Report. High-Level Waste Disposal The Nuclear Waste Policy Act of 1982 provides a framework and timetable for selection of sites for repositories of high-level radioactive waste (spent nuclear fuel) from United States nuclear plants. The U.S. Department of Energy (DOE) has entered into contracts with the Yankee Companies, the Millstone 3 joint owners, and the Seabrook 1 joint owners for acceptance of title to, and transportation and storage of, this waste. Under these contracts, each operating unit will pay fees to the DOE to cover the development and creation of waste repositories. Fees for fuel burned since April 1983 have been collected by the DOE on an ongoing basis at the rate of one tenth of a cent per kWh of net generation. Fees for generation up through April 1983 were determined by the DOE as follows: $13.2 million for Yankee Atomic, $48.7 million for Connecticut Yankee, $50.4 million for Maine Yankee, and $39.3 million for Vermont Yankee. Neither Millstone 3 nor Seabrook 1 has been assessed any fees for fuel burned through April 1983 because they did not enter commercial operation until 1986 and 1990, respectively. The Yankee Companies had several options to pay these fees. Yankee Atomic paid its fee to the DOE for the period through April 1983. The other three Yankee Companies elected to defer payment until a future date, thereby incurring interest expense. However, payment to the DOE must occur prior to the first delivery of spent fuel. Connecticut, Maine, and Vermont Yankee have segregated a portion of their respective DOE obligations in external accounts. The remainder of the funds have been used to support general capital requirements. All expect to separately fund in full in external accounts their DOE obligation (including accrued interest) prior to payment to the DOE. To the extent that any of the three Yankee Companies is unable to fully meet its DOE obligation at the prescribed time, NEP might be required to provide additional funds. Prior to such time that the DOE takes delivery of a plant's spent nuclear fuel, it is stored on site in spent fuel pools. Millstone 3, Seabrook 1, and Vermont Yankee are in the process of reconfiguring their spent fuel pools to allow for additional storage capability. Upon successful completion of the reconfiguring, Millstone 3 will have sufficient spent fuel pool capacity to support plant operation through the expiration of their respective current Nuclear Regulatory Commission (NRC) license. Seabrook 1's licensed storage capacity will allow a full core discharge until 2011. Vermont Yankee will be able to maintain a full core discharge capability until 2004. Yankee Atomic, Connecticut Yankee and Maine Yankee all have adequate on-site storage capacity for all their spent fuel. Federal legislation enacted in 1987 directed the DOE to proceed with the studies necessary to develop and operate a permanent high-level waste disposal site at Yucca Mountain, Nevada. There is local opposition to development of this site. Although originally scheduled to open in 1998, the DOE currently estimates that the permanent disposal site is not expected to open before 2015. Currently there is legislation before Congress that would create an interim spent fuel storage site to be used until the Yucca Mountain permanent storage site becomes available. Separate bills passed the Senate and House in 1997 and are awaiting action by a joint House-Senate conference committee. Although the measures had strong bipartisan support in both chambers, their future is uncertain due to the threat of a Presidential veto. On July 23, 1996, the U.S. Court of Appeals for the District of Columbia Circuit issued its decision in a lawsuit petitioning the Court to declare the 1998 contract date a binding legal obligation. The Court stated that the DOE is obligated "to start disposing Spent Nuclear Fuel no later than January 31, 1998." The Court's decision did not specify a plan for ensuring that the DOE meets its obligations, but rather noted that it was premature to determine the appropriate remedy since the DOE had not yet defaulted upon either its statutory or contractual obligation. In January 1997, 36 utilities and 33 states filed lawsuits against the DOE in the U.S. Court of Appeals for the District of Columbia Circuit. The plaintiffs sought to suspend payments to the Nuclear Waste Fund until DOE begins taking spent fuel. The payment would instead be made to special escrow accounts. The petitioners in the lawsuits requested that the court review the above decision in which the same court ruled that the January 31, 1998 contract date was binding and order DOE to prepare a plan to begin taking spent fuel by that date. In November 1997, the U.S. District Court of Appeals for the District of Columbia Circuit ruled that the lack of an interim storage facility does not excuse the DOE from meeting its contractual obligation to begin accepting spent nuclear fuel no later than January 31, 1998. The Court did not require the DOE to develop a plan for meeting the January 1998 deadline. The DOE did not begin accepting spent nuclear fuel by January 31, 1998. In February and March 1998, Yankee Atomic and Connecticut Yankee, respectively, filed separate suits in the United States Court of Federal Claims against the DOE for monetary damages for breach of contract arising from the DOE's refusal to accept nuclear fuel from the plants. Vermont Yankee, Maine Yankee, Millstone 3 and Seabrook 1 have joined with others in separate legal actions against the DOE. Federal authorities have deferred indefinitely the commercial reprocessing of spent nuclear fuel. Low-Level Waste Disposal Federal law allows the states in which the three existing low- level waste disposal sites were located to deny access to nonregional waste generators after 1992. Under the statute, individual states are responsible for finding local sites for disposal or forming regional disposal compacts by defined milestone dates. None of the states in which NEP holds an interest in a nuclear facility has met the statutory milestones toward developing disposal sites. Currently, two low-level waste disposal sites in the U.S. are accepting nonregional waste, Chem-Nuclear Systems, Inc.'s site in Barnwell, South Carolina and Envirocare of Utah, Inc's site in Clive, Utah. The Barnwell facility reopened its services to most nonregional generators on July 1, 1995 and is authorized to remain open until July 1, 2005. In 1996, the South Carolina Supreme Court upheld the constitutionality of the legislative action that reopened Barnwell to nonregional generators. Envirocare began accepting Class A low-level waste in 1995. Class A waste is the least contaminated of the three categories defining low-level waste. The Barnwell facility accepts all three categories of waste. Connecticut Yankee, Maine Yankee, Millstone 3, Seabrook 1, and Yankee Atomic are currently shipping low-level waste to these sites. Chem-Nuclear Systems, as operator of the Barnwell facility, is obligated to make certain payments to the State of South Carolina. Chem-Nuclear has indicated that projected revenues from its disposal activities at Barnwell are not likely to be sufficient to reimburse it for these payments, and is exploring alternatives to increase revenues from utilities disposing waste at Barnwell. NEP cannot predict what impact, if any, this situation will have on the continued availability of the Barnwell site. The States of Maine and Vermont have established a compact with Texas for the disposal of low-level waste in Hudspeth County, Texas. The compact agreement has been approved in all three states and is now before the U.S. Congress. In 1997, the House approved the compact agreement and it is under review by the Senate. If Congress approves, the site is expected to begin accepting waste during 1999. While Maine Yankee has been shipping its low-level waste off-site, Vermont Yankee has elected to store low-level waste on-site until that time, although a shipment was made to Barnwell in 1997. The compact relieves Maine and Vermont from having to site an in-state disposal facility. Connecticut, Massachusetts, and New Hampshire are still required to pursue local or regional low-level waste disposal facilities. However, Massachusetts suspended its search for a local disposal facility in 1996. Nuclear Fuel Supply The utilities responsible for the fuel supply for these operating nuclear units are not experiencing any difficulty in obtaining commitments for the supply of each element of the nuclear fuel cycle. Other Items Federal legislation requires emergency response plans, approved by federal authorities, for nuclear generating units. The Yankee Companies, Seabrook 1, and Millstone 3 are not currently experiencing difficulty in maintaining approval of their emergency response plans. A Maine statute provides that if both Maine Yankee and its decommissioning trust fund have insufficient assets to pay for the plant decommissioning, the owners of Maine Yankee are jointly and severally liable for the shortfall. The definition of owner under the statute covers NEP and may cover companies affiliated with it. NEP and the Electricity Delivery Companies cannot determine, at this time, the constitutionality, applicability, or effect of this statute. If NEP or the Electricity Delivery Companies were required to make payments under this statute, they would assess their legal remedies at that time. In any event, NEP and the Electricity Delivery Companies would attempt to recover through rates any payments required. If any claim in excess of NEP's ownership share were enforced against a NEES company, that company would seek reimbursement from any other Maine Yankee stockholder which failed to pay its share of such costs. Divestiture of Nonnuclear Generating Business On August 5, 1997, the NEES companies reached an agreement to sell their nonnuclear generating business to USGen. For more information, see INDUSTRY RESTRUCTURING, page 3. Energy Mix The following table displays the contributions of various fuel sources and other generation to total net generation of electricity by NEP during the past three years, as well as an estimate for 1998:
% of Net Generation ------------------------------ Estimated Actual --------- ------------------- 1998 1997 1996 1995 ---- ---- ---- ---- Coal 39 44 42 38 Nuclear 7 5 14 14 Gas (1) 28 29 24 22 Oil 7 4 1 10 Hydroelectric 7 6 7 5 Hydro-Quebec 6 6 6 5 Renewable Nonutility Generation (2) 6 6 6 6 --- --- --- --- 100 100 100 100 (1) Gas includes both utility and nonutility generation. (2) Waste to energy and hydro.
Fuel for Generation NEP burned the following amounts of coal, residual oil, and gas during the past three years: 1997 1996 1995 ---- ---- ---- Coal (in millions of tons) 4.1 3.8 3.4 Oil (in millions of barrels) 3.3 2.2 1.7 Natural Gas (in billions of cubic feet) 31.1 28.6 16.2 Coal Procurement Program Depending on coal-fired generating unit availability and the degree to which the units are dispatched, NEP's 1998 coal requirements should range between 3.8 and 4.2 million tons. NEP obtains its domestic coal under contracts of varying lengths and on a spot basis from domestic coal producers in Kentucky, West Virginia, and Virginia, and from mines in Colombia and Venezuela. Two different rail systems (CSX and Norfolk Southern) transport coal from domestic sources to loading ports on the east coast. NEP's coal is transported from east coast ports by ocean-going collier to Brayton Point and Salem Harbor. NEP has a term charter with International Shipholding Corporation for the S.S. Energy Enterprise, a self-unloading collier, which carries most of NEP's U.S. coal and a portion of foreign coal. NEP also charters other coal-carrying vessels for the balance of foreign coal, and presently has contracts of affreightment with Canada Steamship Lines, International and Marbulk Shipping Inc. As protection against interruptions in coal deliveries, NEP maintains average coal inventories at its generating stations of 25 to 50 days. To meet environmental requirements, NEP uses coal with a relatively low sulphur content. NEP's average price for coal burned, including transportation costs, was $42.25 per ton in 1995, $42.03 in 1996, and $42.39 in 1997. Based on a 42 gallon barrel of oil producing 6.3 million Btu's, these coal prices were equivalent to approximately $10.25 per barrel of oil in 1995, $10.20 in 1996, and $10.28 in 1997. Oil Procurement Program Depending on unit availability, dispatch, and the relationship of oil and gas prices, the System's 1998 oil requirements are expected to be approximately 3.0 to 4.5 million barrels. The System obtains its oil requirements through short-term contracts with oil suppliers and purchases on the spot market. The System currently has a total storage capacity for approximately 1.3 million barrels of residual and diesel fuel oil. The System's average cost of oil burned, calculated on a 6.3 million Btu per barrel basis, was $14.46 in 1995, $17.19 in 1996, and $16.60 in 1997. Natural Gas NEP has contracts with two Canadian natural gas suppliers for a total of 35 million cubic feet per day as well as a 7.5 million cubic feet per day liquified natural gas supply contract with a Massachusetts corporation. NEP has service agreements for firm transportation of natural gas with a number of pipeline companies. The agreements are sufficient to cover a total delivery to New England of an aggregate amount of approximately 127.5 million cubic feet per day. Service under the pipeline agreements and one of the supply contracts require minimum fixed payments. NEP's minimum fixed payments under all pipeline and supply agreements are currently estimated to be approximately $59 million to $62 million per year from 1998 to 2002. Remaining fixed payments from 2003 through 2014 total approximately $501 million. The amount of the fixed payments is subject to FERC regulation and will depend on FERC actions affecting the rates on each of the pipelines. In connection with managing its fuel supply, NEP uses a portion of this pipeline capacity to sell natural gas. Proceeds from sales of natural gas and pipeline capacity of $71 million, $50.2 million, and $41 million in 1995, 1996, and 1997, respectively, have been passed on to customers through NEP's fuel clause. These contracts will be assumed by USGen upon completion of the sale of the NEES companies' nonnuclear generating business to USGen (see Divestiture of Generating Business, page 7). Oil and Gas Operations NEEI participated in a rate-regulated domestic oil and gas exploration, development, and production program through a partnership with a nonaffiliated oil company. Losses from this program, calculated under the full cost method of accounting, have been charged to NEP, and ultimately to distribution customers, in accordance with Securities and Exchange Commission (SEC) and FERC approvals. Such losses were $11 million, $22 million, and $44 million in 1997, 1996, and 1995, respectively. In February 1998, after a competitive bidding process, NEEI sold all of its remaining oil and gas properties held as of December 31, 1997 to Samedan Oil Corporation for $50 million. The loss on such disposition, approximately $120 million, before tax, has been charged to NEP. The settlements provide for the recovery of the NEEI loss as part of NEP's stranded costs. See INDUSTRY RESTRUCTURING, page 3, and Divestiture of Generating Business, page 7. Nonutility Power Producer Information The System companies purchase a portion of the electricity generated by, or provide backup or standard service to, 140 small power producers, cogenerators, or independent power producers (a total of 5,286,228 MWh of purchases in 1997). As of December 31, 1997, these nonutility generation sources include 24 low-head hydroelectric plants, 49 wind or solar generators, 13 waste to energy facilities, 51 cogenerators, and 3 independent power producers. The total capacity of these sources is as follows: Source MW at 12/31/97 ------ -------------- Hydro 37 Waste to Energy 182 Cogeneration 306 Independent Power Producers 393 ---- Total 918 These amounts include 758 MW of long-term capacity, 16 MW of short-term capacity, and 144 MW treated as load reductions and includes the Ocean State Power contracts discussed below. NEP's entitlements under these contracts are subject to a sale agreement with USGen. For information on the sale of the NEES companies' nonnuclear generating business including entitlements to power procured under long-term contracts, see Divestiture of Generating Business, page 7. Hydroelectric Project Licensing NEP is the largest operator of conventional hydroelectric facilities in New England. NEP has entered into an agreement to sell its hydroelectric facilities to USGen (see Divestiture of Generating Business, page 7). All of NEP's hydroelectric projects are licensed by the FERC. These licenses expire periodically and the projects must be relicensed at that time. NEP's present licenses expire over a period from 2001 to 2020, excluding the Deerfield River Project discussed below. Upon expiration of a FERC license for a hydro project, the project may be taken over by the United States or licensed to the existing, or a new licensee. If the project were taken over, the existing licensee would receive an amount equal to the lesser of (i) fair value of the project or (ii) original cost less depreciation and amounts held in amortization reserves, plus in either case severance damages. The net book value of NEP's hydroelectric plants in service was $237 million as of December 31, 1997. In the event that a new license is not issued when the existing license expires, FERC must issue annual licenses to the existing licensee which will allow the project to continue operation until a new license is issued. A new license for a project may incorporate operational restrictions and requirements for additional nonpower facilities (e.g., fish passage or recreational facilities) that could affect operation of the project, and may also require additional capital investment. For example, NEP has previously received new licenses for projects on the Connecticut River that involved construction of an extensive system of fish ladders. The license for the 84 MW Deerfield River Project expired at the end of 1993. NEP filed an application for a new license in 1991. NEP has signed, with 15 governmental agencies and nongovernmental organizations, a Settlement Agreement which embodies operational, environmental and recreational conditions acceptable to the parties. In 1996, FERC issued a final environmental impact statement which supports the Settlement Agreement. NEP has received water quality certifications from The Commonwealth of Massachusetts and the State of Vermont needed to complete the FERC relicensing processing. The Vermont certificate was appealed by an advocacy group; however, the appeal has subsequently been settled. On March 25, 1997, the FERC voted to issue NEP a new 40-year license for the project. NEP filed a Petition for Rehearing in May 1997. The FERC ruled on that Petition, in terms generally favorable to NEP. The next NEP project to require a new license will be the 369 MW Fifteen Mile Falls Project on the Connecticut River in New Hampshire and Vermont. This license expires in 2001. The formal process of preparing an application for a new license began in 1996 with the filing of a Letter of Intent to Relicense with the FERC. NEP has conducted relicensing studies and engaged in a cooperative settlement process with 17 stakeholder parties. That process culminated in a Settlement Agreement signed in August 1997, enabling NEP to participate in what will likely result in an alternative relicensing process which results in an Applicant Prepared Environmental Assessment filed with the relicense application. This alternative process will, NEP believes, result in a cost-effective and streamlined regulatory option before the FERC. NEP applied for this alternative process in March 1998. NEP must file its relicense application before July 31, 1999. In 1994, the FERC adopted a policy statement in which it asserted that it has authority over the decommissioning of licensed hydroelectric projects being abandoned or denied a new license. However, the FERC has recognized in the process leading to the policy statement that mandated project removal would occur in only rare circumstances. The FERC also declined to require any generic funding mechanism to cover decommissioning costs. If a project is decommissioned, the licensee may incur substantial costs. Ocean State Power Ocean State Power (OSP) and Ocean State Power II (OSP II) are general partnerships that own and operate a two unit gas-fired combined cycle electric power plant in Burrillville, Rhode Island. The two units have a combined winter net electrical capability of approximately 562 MW. Each unit's capacity and energy output is sold under 20-year unit power agreements to a group of New England utilities, including NEP, which has contracts for 48.5 percent of the output of each unit. NEP is required to make certain minimum fixed payments to cover capital and fixed operating costs of these units in amounts estimated to be $75 million per year. Resources is a general partner with a 20 percent interest in both OSP and OSP II and had an equity investment of approximately $35 million at December 31, 1997. Upon completion of the sale of the nonnuclear generating business, which includes Resources, to USGen in 1998, $29 million of Resources' debt will be retired (see Divestiture of Generating Business, page 7). REGULATORY AND ENVIRONMENTAL MATTERS Regulation Numerous activities of NEES and its subsidiaries are subject to regulation by various federal agencies. Under the 1935 Act, many transactions of NEES and its subsidiaries are subject to the jurisdiction of the SEC. With the intensifying competitive pressures within the electric utility industry, there has been increasing debate about modifying or repealing the 1935 Act. Under the Federal Power Act, certain electric subsidiaries of NEES are subject to the jurisdiction of the FERC with respect to rates, accounting, and hydroelectric facilities. In addition, the NRC has broad jurisdiction over nuclear units and federal environmental agencies have broad jurisdiction over environmental matters. The electric utility subsidiaries of NEES are also subject to the jurisdiction of regulatory bodies of the states and municipalities in which they operate. For more information, see INDUSTRY RESTRUCTURING, page 3; Mass. Electric, Narragansett, Granite State, and NEP Rates, pages 10 through 15; Nuclear Units, page 26; Fuel for Generation, page 31; Oil and Gas Operations, page 33; and Environmental Requirements, page 36. Environmental Requirements Existing Operations The NEES subsidiaries are subject to federal, state, and local environmental regulation of, among other things, wetlands and flood plains; air and water quality; storage, transportation, and disposal of hazardous wastes and substances; underground storage tanks; and land-use. It is likely that the stringency of environmental regulation affecting the System and its operations will increase in the future. Siting and Construction Activities for New Facilities All New England states require, in certain circumstances, regulatory approval for site selection or construction of major transmission facilities. Connecticut, Maine, Massachusetts, New Hampshire, and Rhode Island also have programs of coastal zone management that might restrict construction of electrical facilities in, or potentially affecting, coastal areas. The New England states have environmental laws which require project proponents to prepare reports of the environmental impact of certain proposed actions for review by various agencies. Environmental Expenditures Total System capital expenditures for environmental protection facilities have been substantial. System capital expenditures for such facilities amounted to approximately $39 million in 1995, $9 million in 1996, and $7 million in 1997, including expenditures by NEP of $32 million, $3 million, and $5 million, respectively, for those years. The System estimates that capital expenditures for environmental protection facilities in 1998 and 1999 will not be material to the System. Hazardous Substances The electric utility industry typically utilizes and/or generates in its operations a range of potentially hazardous products and by-products. For more information regarding sites for which NEES and/or its subsidiaries have been named as potentially responsible parties, other sites, a settlement agreement covering rate recovery of certain remediation costs, and reserves, see pages 20 and 34 of the NEES 1997 Annual Report, Note D of the Notes to the Financial Statements of the NEP 1997 Annual Report, and Financial Review and Note D of the Notes to the Financial Statements of both the Mass. Electric 1997 Annual Report and the Narragansett 1997 Annual Report. Nuclear The NRC, along with other federal and state agencies, has extensive regulations pertaining to environmental aspects of nuclear reactors. Safety aspects of nuclear reactors, including design controls and inspection programs to mitigate any possibility of nuclear accidents and to reduce any damages therefrom, are also subject to NRC regulation. See Nuclear Units, page 26. Air Approximately 45 percent of NEP's electricity is produced at eight older thermal generating units in Massachusetts. Six are principally fueled by coal, one by oil, and one by oil and gas. The federal Clean Air Act requires significant reduction in utility sulfur dioxide (SO2) and nitrogen oxides (NOx) emissions that result from burning fossil fuels by the year 2000 to reduce acid rain and ground-level ozone (smog). All eight of NEP's thermal units will be subject to Phase 2 of the federal and state acid rain regulations that become effective in 2000. NEP believes that the SO2 controls already installed for Massachusetts requirements (which took effect in 1995) will satisfy the Phase 2 acid rain regulations. In 1995, the NEES companies and the DOE executed an accord pursuant to the Climate Challenge Program, a joint voluntary effort of the DOE and the electric utility industry. Under the accord, the NEES companies committed to reduce greenhouse gas emissions 20 percent below 1990 levels by 2000. Climate Challenge is a component of President Clinton's Climate Change Action Plan. In connection with the federal ozone emission requirements, state environmental agencies in The Ozone Transport Region have developed a second phase of NOx reduction regulations that were scheduled to be fully implemented by NEP in the summer of 1999. For more information on NEP's planned divestiture of its nonnuclear generating business, see Divestiture of Generating Business, page 7. Water The federal Clean Water Act prohibits the discharge of any pollutant (including heat), except in compliance with a discharge permit issued by the states or the EPA for a term of no more than five years. NEP and Narragansett have received required permits for all their steam-generating plants. NEET has received its required surface water discharge permits for all of its current operations. For information regarding NEP's water discharge permit for its Brayton Point power plant, see pages 19 to 20 of the NEES 1997 Annual Report. CONSTRUCTION AND FINANCING Estimated construction expenditures (including nuclear fuel) for the System's electric utility companies are shown below for 1998 through 2000. The System conducts a continuing review of its construction and financing programs. These programs and the estimates shown below are subject to revision based upon changes in assumptions as to System load growth, rates of inflation, receipt of adequate and timely rate relief, the availability and timing of regulatory approvals, new environmental and legal or regulatory requirements, total costs of major projects, and the availability and costs of external sources of capital.
Estimated Construction Expenditures ----------------------------------- 1998 1999 2000 Total ---- ---- ---- ----- ($ in Millions - excluding AFDC) NEP - --- Generation (1)(2) Nonnuclear 10 0 0 10 Nuclear 10 10 10 30 Transmission 45 45 45 135 ---- ---- ---- ---- Total NEP 65 55 55 175 ---- ---- ---- ---- Mass. Electric - -------------- Distribution 90 90 90 270 Narragansett - ------------ Transmission 5 5 5 15 Distribution 30 25 25 80 ---- ---- ---- ---- Total Narragansett 35 30 30 95 ---- ---- ---- ---- Granite State - ------------- Distribution 3 4 4 11 ---- ---- ---- ---- Nantucket - --------- Distribution 3 1 1 5 ---- ---- ---- ---- Combined Total - -------------- Generation (1)(2) 20 10 10 40 Transmission 50 50 50 150 Distribution 126 120 120 366 ---- ---- ---- ---- Grand Total 196 180 180 556 ---- ---- ---- ---- (1) Includes nuclear fuel. (2) For more information, see INDUSTRY RESTRUCTURING, page 3.
Financing All of NEP's construction expenditures during the period from 1998 to 2000 will be financed by internally generated funds. The proportion of the Electricity Delivery Companies' construction expenditures estimated to be financed by internally generated funds during the period from 1998 to 2000 is: Mass. Electric 75% Narragansett 100% Granite State 75% Nantucket 100% The general practice of the operating subsidiaries of NEES has been to finance construction expenditures in excess of internally generated funds initially by issuing unsecured short-term debt. This short-term debt is subsequently reduced through sales by such subsidiaries of long-term debt securities and preferred stock, and through capital contributions from NEES to the subsidiaries. NEES, in turn, generally has financed capital contributions to the operating subsidiaries through retained earnings and the sale of additional NEES shares. Since April 1991, NEES has been meeting all of the requirements of its dividend reinvestment and common share purchase plan and employee share plans through open market purchases. Under these plans, NEES may revert to the issuance of new common shares at any time. The ability of NEP and the Electricity Delivery Companies to issue short-term debt is limited by regulatory restrictions. The following table summarizes the short-term debt limits at December 31, 1997, and the amount of outstanding short-term debt and lines of credit and standby bond facilities at such date.
($ millions) Lines of Credit/ Standby Bond Limit Outstanding Facilities ----- ----------- ---------------- NEP 375 111 580 Mass. Electric 150 35 65 Narragansett 100 16 31 Granite State 10 4 7 Nantucket 5 .025 3
NEES and certain subsidiaries, with regulatory approval, operate a money pool to more effectively utilize cash resources and to reduce outside short-term borrowings. Short-term borrowing needs are met first by available funds of the money pool participants. Borrowing companies pay interest at a rate designed to approximate the cost of outside short-term borrowings. Companies which invest in the pool share the interest earned on a basis proportionate to their average monthly investment in the money pool. Funds may be withdrawn from or repaid to the pool at any time without prior notice. At December 31, 1997, NEP, Mass. Electric, Narragansett, and Granite State each had money pool borrowings of approximately $3 million, $5 million, $4 million, and $4 million, respectively. In order to issue additional long-term debt and preferred stock, NEP and the Electricity Delivery Companies, excluding Nantucket, must comply with earnings coverage requirements contained in their respective mortgages, note agreements, and preference provisions. The most restrictive of these provisions in each instance generally requires (1) for the issuance of additional mortgage bonds by NEP, Mass. Electric, and Narragansett, for purposes other than the refunding of certain outstanding mortgage bonds, a minimum earnings coverage (before income tax) of twice the pro forma annual interest charges on mortgage bonds, and (2) for the issuance of additional preferred stock by NEP, Mass. Electric, and Narragansett, minimum gross income coverage (after income tax) of one and one-half times pro forma annual interest charges and preferred stock dividends, in each case for a period of twelve consecutive calendar months within the fifteen calendar months immediately preceding the proposed new issue. The respective long-term debt and preferred stock coverages of NEP and the Electricity Delivery Companies, excluding Nantucket, under their respective mortgage indentures, note agreements, and preference provisions, are stated in the following table for the past three years:
Coverage ----------------------- 1997 1996 1995 ---- ---- ---- NEP - --- General and Refunding Mortgage Bonds 4.09 4.16 4.05 Preferred Stock 2.48 2.47 2.45 Mass. Electric - -------------- First Mortgage Bonds 5.09 3.25 2.82 Preferred Stock 2.89 1.93 1.71 Narragansett - ------------ First Mortgage Bonds 3.98 3.22 3.10 Preferred Stock 2.61 2.04 2.01 Granite State - ------------- Notes (1) 3.39 2.82 2.38 (1) As defined under the most restrictive note agreement.
RESEARCH AND DEVELOPMENT Expenditures for the System's research and development activities totaled $7.5 million, $5.5 million, and $6.2 million in 1995, 1996, and 1997, respectively. Total expenditures are expected to be about $2.6 million in 1998. About 31 percent of these expenditures support the Electric Power Research Institute, which conducts research and development activities on behalf of its sponsors and provides the System with access to a wide range of relevant research results at minimum cost. The System also directly funds research projects of a more site-specific concern to the System and its customers. These projects include: - creating options to maintain electric service quality and reliability for customers at the lowest cost; - developing conservation, load control, and rate design measures that will help customers use electric energy more efficiently; and - developing, assessing, and demonstrating new technologies and fuels that will ensure economic, efficient and environmentally sound delivery of electric energy in the future. EXECUTIVE OFFICERS NEES - ---- All executive officers are elected to continue in office subject to Article 19 of the Agreement and Declaration of Trust until the first meeting of the Board of Directors following the next annual meeting of shareholders, or the special meeting of shareholders held in lieu of such annual meeting, and until their successors are chosen and qualified. The executive officers also serve as officers and/or directors of various subsidiary companies. Richard P. Sergel - Age: 48 - Elected President and Chief Executive Officer in 1998 - Senior Vice President from 1996 to 1998 - Vice President from 1992 to 1995 -Chairman of Mass. Electric and Narragansett from 1993 to 1997. Alfred D. Houston - Age: 57 - Executive Vice President since 1994 - Senior Vice President from 1987 to 1994 - Chief Financial Officer from 1984 to 1998 - Elected Chairman of NEP in 1998 - Vice President of NEP from 1987 to 1994 - Vice President of Narragansett from 1976 to 1998 - Treasurer of Narragansett from 1977 to 1998. Cheryl A. LaFleur - Age: 43 - Elected Senior Vice President in 1998 - Vice President from 1995 to 1998 - Secretary and General Counsel since 1995 - Vice President of Mass. Electric from 1993 to 1995 - Vice President of the Service Company - 1992-1993 and since 1995 - Vice President of NEP since 1995. Michael E. Jesanis - Age: 41 - Elected Senior Vice President and Chief Financial Officer in 1998 - Vice President from 1997 to 1998 - Treasurer from 1992 to 1998 - Elected Vice President of Mass. Electric and NEP in 1998 - Treasurer of Mass. Electric and NEP from 1992 to 1998. David C. Kennedy - Age: 49 - Elected Vice President in 1998 - Vice President of the Service Company since 1985. John G. Cochrane - Age: 40 - Elected Treasurer in 1998 - Vice President of the Service Company since 1993. NEP - --- The Treasurer is elected by the stockholders to hold office until the next annual meeting of stockholders and until the successor is duly chosen and qualified. The other executive officers are elected by the Board of Directors to hold office subject to the pleasure of the directors and until the first meeting of directors after the next annual meeting of stockholders and until their successors are duly chosen and qualified. Certain officers of NEP are, or at various times in the past have been, officers and/or directors of the System companies with which NEP has entered into contracts and had other business relations. Alfred D. Houston* - Elected Chairman in 1998. Lawrence E. Bailey - Age: 54 - Elected President in 1997 - Vice President from 1989 to 1997. Andrew H. Aitken - Age: 53 - Vice President since 1995 - Director of Environmental and Safety for the Service Company since 1993 - Director, Environmental Affairs for the Service Company from 1981 to 1993. Michael E. Hachey - Age: 44 - Elected Vice President in 1997 - Manager of Generation Marketing since 1994 - Manager of Independent Power Projects from 1989 to 1993. Michael E. Jesanis* - Elected Vice President in 1998 - Treasurer from 1992 to 1998. Cheryl A. LaFleur* - Vice President since 1995. John F. Malley - Age: 49 - Vice President since 1992. Masheed H. Rosenqvist - Age: 43 - Elected Vice President effective April 1, 1998 - Manager, Transmission Tariffs and Contracts for NEP or Service Company since 1997 - Consulting Engineer for the Service Company from 1995 to 1997. Principal Engineer for the Service Company from 1993 to 1995. Arnold H. Turner - Age: 57 - Vice President since 1989 - Director of Transmission Marketing since 1993. Mr. Turner plans to retire effective April 1, 1998. Jeffrey W. VanSant - Age: 44 - Vice President since 1993 - Manager of Oil and Gas Exploration and Development for the Service Company from 1985 to 1993 - Manager of Oil and Gas Procurement from 1992 to 1993 - Manager of Natural Gas Supply from 1989 to 1992. John G. Cochrane* - Elected Treasurer in 1998. Howard W. McDowell - Age: 54 - Elected Assistant Treasurer in 1998 - Controller since 1987 - Controller of Mass. Electric and Narragansett since 1987 - Treasurer of Granite State since 1984. *Please refer to the material supplied under the caption EXECUTIVE OFFICERS - NEES for other information regarding this officer. Mass. Electric - -------------- The Treasurer is elected by the stockholders to hold office until the next annual meeting of stockholders and until the successor is duly chosen and qualified. The other executive officers are elected by the board of directors to hold office subject to the pleasure of the directors and until the first meeting of the directors after the next annual meeting of stockholders. Certain officers of Mass. Electric are, or at various times in the past have been, officers and directors of System companies with which Mass. Electric has entered into contracts and had other business relations. Robert L. McCabe - Age: 56 - Elected Chairman in 1997 - President of Narragansett from 1986 to 1997. Lawrence J. Reilly - Age: 42 - President since 1996 - Vice President for the Service Company from 1993 to 1996 - Director of Rates for the Service Company from 1990 to 1996. Lydia M. Pastuszek - Age: 44 - Elected Senior Vice President in 1997 - Vice President from 1993 to 1997 - Vice President of NEP from 1990 to 1993 - President of Granite State from 1990 to 1996. Christopher E. Root - Age: 39 - Elected Senior Vice President in 1997 - Vice President from 1995 to 1997 - Director, Retail Distribution Services for the Service Company from 1993 to 1995 - Chief of Division Engineering for the Service Company from 1992 to 1993. Dennis E. Snay - Age: 56 - Elected Senior Vice President in 1997 - Vice President from 1990 to 1997. John C. Amoroso - Age: 59 - Vice President since 1993 - District Manager, Southeast District from 1992 to 1993. William J. Flaherty - Age: 40 - Elected Vice President in 1997 - Account Manager from 1993 to 1997. Andrea Foley-Stapleford - Age: 52 - Elected Vice President in 1997 - Director of Human Resources for the Service Company from 1996 to 1997 - Director of Labor Relations for the Service Company from 1993 to 1996 - Division Personnel Manager from 1990 to 1993. Richard W. Frost - Age: 58 - Elected Vice President in 1997 - Vice President of Narragansett since 1993. Michael E. Jesanis* - Elected Vice President in 1998 - Treasurer from 1992 to 1998. Charles H. Moser - Age: 57 - Vice President since 1993 - Chief Protection and Planning Engineer for the Service Company from 1984 to 1993. Joseph P. Newman - Age: 42 - Elected Vice President effective April 1, 1998 - Director of Government Affairs for the Service Company from 1996 to 1998. Kwong O. Nuey, Jr. - Age: 49 - Elected Vice President in 1997 - Director of Retail Information Services for the Service Company from 1993 to 1997. Nancy H. Sala - Age: 46 - Vice President since 1992. John G. Upham II - Age: 40 - Elected Vice President in 1997 - Municipal Account Manager from 1993 to 1997. John G. Cochrane* - Elected Treasurer in 1998. Howard W. McDowell - Controller since 1987 and Assistant Treasurer since 1977 - Reference is made to the material supplied under the caption EXECUTIVE OFFICERS - NEP for other information regarding Mr. McDowell. *Please refer to the material supplied under the caption EXECUTIVE OFFICERS - NEES for other information regarding this officer. Narragansett - ------------ Officers are elected by the board of directors or appointed, as appropriate, to serve until the meeting of directors following the annual meeting of stockholders, and until their successors are chosen and qualified. Officers other than the President, Treasurer, and Secretary, serve also at the pleasure of the directors. Certain officers of Narragansett are, or at various times in the past have been, officers and directors of System companies with which Narragansett has entered into contracts and had other business relations. Robert L. McCabe* - Elected Chairman in 1997 - President from 1986 to 1997. Lawrence J. Reilly* - Elected President in 1997. Lydia M. Pastuszek* - Elected Senior Vice President in 1997. Christopher E. Root* - Elected Senior Vice President in 1997. Richard W. Frost* - Vice President since 1993 - District Manager - Southern District from 1990 to 1993. Shannon M. Larson** - Age: 40 - Vice President since 1996 - Manager of Retail Marketing from 1995 to 1996 - Coordinator of Emerging Markets from 1994 to 1995 - Manager of Conservation and Load Management from 1990 to 1993 - Principal Analyst for the Service Company from 1993 to 1994. Richard Nadeau - Age: 62 - Vice President since 1994 - Director of Customer Service since 1993 - Assistant to the President from 1990 to 1993. Michael F. Ryan - Age: 46 - Vice President since 1994 - Rhode Island Director for U.S. Senator John H. Chafee from 1986 to 1994. Peter T. Zschokke - Age: 40 - Elected Vice President effective April 1, 1998 - Manager of Retail Rates for the Service Company from 1992 to 1998. John G. Cochrane** - Elected Treasurer in 1998. Howard W. McDowell - Controller since 1987 - Reference is made to the material supplied under the caption EXECUTIVE OFFICERS - NEP for other information regarding Mr. McDowell. *Please refer to the material supplied under the caption EXECUTIVE OFFICERS - Mass. Electric for other information regarding these officers. **Mr. Reilly and Ms. Larson are married to each other. Ms. Larson intends to resign effective April 1, 1998. ITEM 2. PROPERTIES See ITEM 1. Business - Transmission, Distribution, and Generation Properties, page 19. ITEM 3. LEGAL PROCEEDINGS See Item 1. BUSINESS - Divestiture of Generation Business, page 7; Nuclear Units, page 26. In April 1997, the Town of Norwood, Massachusetts filed a lawsuit against NEP in the United States District Court for the District of Massachusetts. NEP is the wholesale power supplier for Norwood pursuant to rates approved by the FERC. Norwood alleges that NEP's proposed divestiture of its power generation assets would violate the terms of a 1983 power contract which settled an antitrust lawsuit brought by Norwood against NEP. Norwood also alleges that NEP's proposed divestiture plan and recovery of stranded investment costs contravene federal antitrust laws. Norwood seeks an injunction enjoining the divestiture and an unspecified amount of treble damages (a specific claim for $450 million was withdrawn). Norwood's motion for a preliminary injunction of the divestiture was denied on September 8, 1997. On November 21, 1997, Norwood filed an amended complaint making new allegations relating to the sale of NEP's generating assets and naming as additional defendants, NEES, USGen, and USGen's affiliate, PG & E. NEP continues to believe that its divestiture plan will promote competition in the wholesale power generation market and that it has met and will continue to meet its contractual commitments to Norwood. On January 9, 1998, the defendants, including NEES and NEP, filed motions to dismiss the lawsuit. In March 1998, Norwood gave notice of its intent to terminate its contract with NEP, without accepting responsibility for its share of NEP's stranded costs, and to begin taking power from another supplier. NEP has filed with the FERC for permission to charge Norwood a contract termination charge for its share of NEP's stranded costs. In August 1997, NEP filed suit against Northeast Utilities in Massachusetts Superior Court for damages resulting from the tortious conduct of NU relating to the Millstone 3 nuclear unit. NEP is seeking compensation for the losses it has suffered, including the costs of lost power and costs necessary to assure that Millstone 3 can safely return to operation. NEP also seeks punitive damages. NU has filed for dismissal of the suit and sought to consolidate it with suits filed by other joint owners in Massachusetts Superior Court. NEP also sent a demand for arbitration to Connecticut Light & Power Company and Western Massachusetts Electric Company, both subsidiaries of NU, seeking damages resulting from the breach of obligations under an agreement with NEP and others regarding the operation and ownership of Millstone 3. In the 1970s, NEP and several other shareholders (Sponsors) of Maine Yankee Atomic Power Company entered into 27 contracts (Secondary Purchase Agreements) under which they sold portions of their entitlement to Maine Yankee power output through 2002 to various entities, primarily municipal and cooperative systems in New England (Secondary Purchasers). Virtually all of the Secondary Purchasers have ceased making payments under the Secondary Purchase Agreements and have demanded arbitration, claiming that such agreements excuse further payments upon plant shutdown. NEP has notified the Secondary Purchasers that the shutdown does not relieve them of their obligation to make payments under the Secondary Purchase Agreements and that they are in default of such agreements. NEP has asked the FERC to enforce NEP's rights under the agreements. In the event that no further payments are forthcoming from Secondary Purchasers, NEP, as a primary obligor to Maine Yankee, would be required to pay an additional $9 million of shutdown costs. In 1996, various New England utilities which are members of the New England Power Pool, including NEP, submitted a dispute to arbitration regarding their Firm Energy Purchased Power Contract with Hydro-Quebec. In June 1997, Hydro-Quebec presented a damage claim of approximately $37 million for past damages, of which NEP's share would have been approximately $6 to $9 million. The claims involved a dispute over the components of a pricing formula and additional costs under the contract. With respect to ongoing claims, NEP had been paying Hydro-Quebec the higher amount (additional costs of approximately $3 million per year) since July 1996 under protest and subject to refund. In October 1997, an arbitrator ruled in favor of the New England utilities in all respects. NEP has made a demand for refund. Hydro-Quebec has not yet refunded any monies and has appealed the decision. On November 9, 1997, NEP and the other utilities began a second arbitration to enforce the first decision. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NEES ---- No matters were submitted to a vote of NEES shareholders during the last quarter of 1997. NEP --- On December 12, 1997, a Special Meeting of Stockholders was held. It was voted to amend NEP's (i) Articles of Organization and (ii) By-laws to delete restrictions on the issuance of unsecured indebtedness, each by a vote of 292,542 shares of the Dividend Series Preferred Stock "For", no votes "Against", and 1,633 shares of the Dividend Series Preferred Stock "Abstaining", and by a separate vote of 6,449,896 shares of the Common Stock "For". Mass. Electric -------------- Special Meetings of the Stockholders were held on December 12, 1997 and December 29, 1997. It was voted to amend Mass. Electric's (i) Articles of Organization and (ii) By-laws to delete restrictions on the issuance of unsecured indebtedness, each by a vote of 465,970.75 shares of the Preferred Stock "For", 7,177 shares of the Preferred Stock "Against", and 1,765 shares of the Preferred Stock "Abstaining", and by a separate class vote of 2,398,111 shares of the Common Stock "For". The following actions were taken by the unanimous vote of the 2,398,111 shares having general voting rights represented at the meeting: The composition of the board of directors was changed as of December 31, 1997 to consist of the following: Cheryl A. LaFleur Robert L. McCabe Lydia M. Pastuszek Lawrence J. Reilly Christopher E. Root Richard P. Sergel Dennis E. Snay The number of directors was fixed at seven. Narragansett ------------ Special Meetings of the Stockholders were held on December 12, 1997 and December 29, 1997. It was voted to amend Narragansett's Preferred Stock Preference Provisions to delete restrictions on the issuance of unsecured indebtedness, by a vote of 668,313 shares of the Preferred Stock "For", 690 shares of the Preferred Stock "Against", and 400 shares of the Preferred Stock "Abstaining", and by a separate class vote of 1,132,487 shares of the Common Stock "For". The following actions were taken by the unanimous vote of the 1,132,487 shares having general voting rights represented at the meeting: The composition of the board of directors was changed as of December 31, 1997 to consist of the following: Richard W. Frost Cheryl A. LaFleur Robert L. McCabe Lawrence J. Reilly Michael F. Ryan Richard P. Sergel Ronald L. Thomas The number of directors was fixed at seven. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS NEES information in response to the disclosure requirements specified by this ITEM 5. appears under the captions in the 1997 NEES Annual Report indicated below: Required Information Annual Report Caption -------------------- --------------------- (a) Market Information Shareholder Information (b) Holders Shareholder Information (c) Dividends Financial Results The information referred to above is incorporated by reference in this ITEM 5. NEP, Mass. Electric, and Narragansett - The information required by this item is not applicable as the common stock of all these companies is held solely by NEES. Information pertaining to payment of dividends and restrictions on payment of dividends is incorporated herein by reference to each company's 1997 Annual Report. ITEM 6. SELECTED FINANCIAL DATA NEES ---- The information required by this item is incorporated herein by reference to page 22 of the NEES 1997 Annual Report. NEP --- The information required by this item is incorporated herein by reference to Selected Financial Information, Note K of the NEP 1997 Annual Report. Mass. Electric -------------- The information required by this item is incorporated herein by reference to Selected Financial Information, Note K of the Mass. Electric 1997 Annual Report. Narragansett ------------ The information required by this item is incorporated herein by reference to Selected Financial Information, Note L of the Narragansett 1997 Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. NEES ---- The information required by this item is incorporated herein by reference to pages 10 through 21 of the NEES 1997 Annual Report. NEP --- The information required by this item is incorporated herein by reference to the Financial Review section of the NEP 1997 Annual Report. Mass. Electric -------------- The information required by this item is incorporated herein by reference to the Financial Review section of the Mass. Electric 1997 Annual Report. Narragansett ------------ The information required by this item is incorporated herein by reference to the Financial Review section of the Narragansett 1997 Annual Report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK NEES ---- NEES, through its wholly-owned indirect subsidiary, AllEnergy, uses derivative instruments to manage exposure in fluctuations in commodity prices. At this time, AllEnergy has only held exchange- traded futures contracts to manage risks associated with natural gas, propane, and heating oil price risks. Hedge criteria used and accounting for hedge transactions are in accordance with Statement of Financial Accounting Standards No. 80, Accounting for Futures Contracts (FAS 80). FAS 80 states that in order to qualify as a hedge, price movements in commodity derivatives must be highly correlated with the underlying hedged commodity and must reduce exposure to market fluctuations throughout the hedged period. Any gain or loss on a derivative which qualifies as a hedge under FAS 80 is deferred until recognized in the income statement in the same period as the hedged item is recognized in the income statement. As of December 31, 1997, all of AllEnergy's existing futures contracts qualified as hedges. NEP --- None. Mass. Electric -------------- None. Narragansett ------------ None. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NEES ---- The information required by this item is incorporated herein by reference to pages 22 through 46 of the NEES 1997 Annual Report. NEP --- The information required by this item is incorporated herein by reference to the financial statements and Notes to Financial Statements in the NEP 1997 Annual Report. Mass. Electric -------------- The information required by this item is incorporated herein by reference to the financial statements and Notes to Financial Statements in the Mass. Electric 1997 Annual Report. Narragansett ------------ The information required by this item is incorporated herein by reference to the financial statements and Notes to Financial Statements in the Narragansett 1997 Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NEES, NEP, Mass. Electric, and Narragansett - None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT NEES ---- The information required by this item is incorporated herein by reference to the material under the caption ELECTION OF DIRECTORS in the definitive proxy statement of NEES, dated March 9, 1998, for the 1998 Annual Meeting of Shareholders, provided that the information under the headings "Report of the Compensation Committee on Executive Compensation" and "Corporate Performance" are not so incorporated. Reference is also made to the information under the caption EXECUTIVE OFFICERS - NEES in Part I of this report. NEP --- The names of the directors of NEP, their ages, and a brief account of their business experience during the past five years appear below. Information required by this item for Executive Officers is provided under the caption EXECUTIVE OFFICERS - NEP in Part I of this report. Directors are elected to hold office until the next annual meeting of stockholders or special meeting held in lieu thereof and until their respective successors are chosen and qualified. Lawrence E. Bailey* - Elected Director in 1997. Alfred D. Houston* - Director since 1984. Directorships of NEES System companies: Granite State Energy, Inc., Narragansett Energy Resources Company, NEES Communications, Inc., NEES Energy, Inc., NEES Global Transmission, Inc., New England Electric System, New England Electric Transmission Corporation, New England Energy Incorporated, New England Hydro Finance Company, Inc., New England Hydro-Transmission Corporation, New England Hydro-Transmission Electric Company, Inc., and New England Power Service Company. Mr. Houston also serves as a member representative for NEES Global Transmission, Inc. on the Member's Committee of AllEnergy Marketing Co., LLC. Cheryl A. LaFleur* - Director since 1995. Directorships of NEES System companies: Granite State Electric Company, Granite State Energy, Inc., Massachusetts Electric Company, Nantucket Electric Company, The Narragansett Electric Company, Narragansett Energy Resources Company, NEES Communications, Inc., NEES Energy, Inc., NEES Global Transmission, Inc., New England Electric Transmission Corporation, New England Energy Incorporated, New England Hydro Finance Company, Inc., New England Hydro-Transmission Corporation, New England Hydro- Transmission Electric Company, Inc., and New England Power Service Company. Ms. LaFleur also serves as a member representative for NEES Energy, Inc. on the Member's Committee of AllEnergy Marketing Co., LLC. Richard P. Sergel* - Elected a Director in 1998. Directorships of NEES System companies: Granite State Electric Company, Massachusetts Electric Company, Nantucket Electric Company, The Narragansett Electric Company, NEES Communications, Inc., NEES Global Transmission, Inc., New England Electric System, New England Electric Transmission Corporation, New England Hydro Finance Company, Inc., New England Hydro-Transmission Corporation, New England Hydro-Transmission Electric Company, Inc., and New England Power Service Company. Mr. Sergel also serves as a member representative for NEES Energy, Inc. on the Member's Committee of AllEnergy Marketing Co., Inc. *Please refer to the material supplied under the caption EXECUTIVE OFFICERS - NEES and/or EXECUTIVE OFFICERS - NEP in Part I of this report for other information regarding these directors. Mass. Electric -------------- The names of the directors of Mass. Electric, their ages, and a brief account of their business experience during the past five years appear below. Information required by this item for Executive Officers is provided under the caption EXECUTIVE OFFICERS - - Mass. Electric in Part I of this report. Directors are elected to hold office until the next annual meeting of stockholders or special meeting held in lieu thereof and until their respective successors are chosen and qualified. Cheryl A. LaFleur* - Elected Director in 1997. Robert L. McCabe* - Elected Director in 1997. Directorships of NEES System affiliates: Granite State Electric Company, Nantucket Electric Company, and The Narragansett Electric Company. Other directorship: Citizens Savings Bank. Lydia M. Pastuszek* - Elected Director in 1997. Directorships of NEES System affiliates: Granite State Electric Company. Lawrence J. Reilly* - Director since 1996 - Directorships of NEES System affiliates: Granite State Electric Company, Nantucket Electric Company, and The Narragansett Electric Company. Christopher E. Root* - Elected Director in 1997. Directorships of NEES System affiliates: Granite State Electric Company and Nantucket Electric Company. Richard P. Sergel* - Director since 1993. Dennis E. Snay* - Elected Director in 1997. *Please refer to the material supplied under the caption EXECUTIVE OFFICERS - NEES and/or Mass. Electric in Part I of this report and/or the material supplied under the caption DIRECTORS AND OFFICERS OF THE REGISTRANT - NEP in this Item for other information regarding this director. Narragansett ------------ The names of the directors of Narragansett, their ages, and a brief account of their business experience during the past five years appear below. Information required by this item for Executive Officers is provided under the caption EXECUTIVE OFFICERS - - Narragansett in Part I of this report. Directors are elected to hold office until the next annual meeting of stockholders or special meeting held in lieu thereof and until their respective successors are chosen and qualified. Richard W. Frost* - Director since 1997. Cheryl A. LaFleur* - Director since 1997. Robert L. McCabe* - Director since 1986. Lawrence J. Reilly* - Director since 1997. Michael F. Ryan* - Director since 1997. Richard P. Sergel* - Director since 1993. Ronald L. Thomas - Age: 61 - Director since 1997 - Manager of Labor Relations since 1997 - Human Resources Manager from 1979 to 1997. *Please refer to the material supplied under the caption DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - NEP and/or Mass. Electric in this Item for other information regarding this director. Section 16(a) Beneficial Ownership Reporting Compliance ------------------------------------------------------- Section 16(a) of the Securities Exchange Act of 1934 requires the System's officers and directors, and persons who own more than 10 percent of a registered class of the System's equity securities, to file reports on Forms 3, 4, and 5 of share ownership and changes in share ownership with the SEC and the New York Stock Exchange and to furnish the System with copies of all Section 16(a) forms they file. Based solely on NEP's, Mass. Electric's, and Narragansett's review of the copies of such forms received by them, or written representations from certain reporting persons that such forms were not required for those persons, NEP, Mass. Electric, and Narragansett believe that, during 1997, all filing requirements applicable to its officers, directors, and 10 percent beneficial owners were complied with. ITEM 11. EXECUTIVE COMPENSATION NEES ---- The information required by this item is incorporated herein by reference to the material under the captions BOARD STRUCTURE AND COMPENSATION, EXECUTIVE COMPENSATION, PAYMENTS UPON A CHANGE IN CONTROL OR TERMINATION OF EMPLOYMENT, PLAN SUMMARIES, LONG TERM INCENTIVE PLAN - AWARDS IN LAST FISCAL YEAR, and RETIREMENT PLANS in the definitive proxy statement of NEES, dated March 9, 1998, for the 1998 Annual Meeting of Shareholders, provided that the information under the headings "Report of the Compensation Committee on Executive Compensation" and "Corporate Performance" are not so incorporated. NEP, Mass. Electric, and Narragansett ------------------------------------- EXECUTIVE COMPENSATION The following tables give information with respect to all compensation (whether paid directly by NEP, Mass. Electric, or Narragansett or billed to it as hourly charges) for services in all capacities for NEP, Mass. Electric, or Narragansett for the years 1995 through 1997 to or for the benefit of the Chief Executive Officer and the four other most highly compensated executive officers for each company. NEP SUMMARY COMPENSATION TABLE
Long-Term Compensa- Annual Compensation (b) tion -------------------------- --------- Other Restricted Name and Annual & Deferred All Other Principal Compensa- Share Compensa- Position Year Salary Bonus tion Awards tion (a) ($) ($)(c) ($)(d) ($)(e) ($)(f) - ---------- ---- ------- ------ --------- ---------- --------- Lawrence E. 1997 156,516 188,214 3,316 0 600 Bailey 1996 151,956 101,667 116 0 3,776 President 1995 144,720 92,328 116 0 3,598 John W. 1997 217,987 104,212 4,596 55,520 928 Rowe(g) 1996 180,096 96,445 3,046 124,047 1,638 Former 1995 157,070 124,818 2,795 0 1,387 Chairman Jeffrey D. 1997 154,433 133,560 8,274 0 1,077,143(h) Tranen 1996 200,684 100,548 5,002 125,836 3,358 Former 1995 188,884 135,224 4,972 0 3,377 President Andrew H. 1997 122,580 78,193 2,231 0 416 Aitken 1996 119,004 75,370 116 0 2,568 Vice 1995 107,081 66,683 108 0 2,243 President John F. 1997 140,280 96,072 2,922 0 375 Malley 1996 133,394 104,885 116 0 3,141 Vice 1995 127,236 96,261 116 0 2,907 President Arnold H. 1997 132,012 81,953 2,228 0 628 Turner 1996 128,172 89,185 116 0 2,849 Vice 1995 128,172 65,439 116 0 2,276 President
(a) Certain officers of NEP are also officers of NEES and various other System companies. (b) Includes deferred compensation in category and year earned. (c) The bonus figure represents: cash bonuses under an incentive compensation plan, the all-employee goals program, the variable match of the incentive thrift plan, including related deferred compensation plan matches, special cash bonuses, and unrestricted shares under the incentive share plan. See descriptions under Plan Summaries. (d) Includes amounts reimbursed by NEP for the payment of taxes on certain noncash benefits and contributions to the incentive thrift plan by NEP that are not bonus contributions including related deferred compensation plan match. See description under Plan Summaries. (e) The incentive share awards for the named executives who are also NEES executives made for 1996 and 1997 were in the form of restricted shares (with a five-year restriction) or deferred share equivalents, deferred for receipt for at least five years, at the executive's option. As cash dividends are declared, the number of deferred share equivalents will be increased as if the dividends were reinvested in shares. The shares awarded for the other named executives and for all executives for 1995 were not restricted and the value of the awards is included in the bonus column. As of December 31, 1997, the following executive officers held the amount of restricted and deferred shares with the value indicated: Mr. Bailey 3,892 shares, $166,383 value; Mr. Rowe 28,380 shares, $1,213,245 value; Mr. Aitken 3,044 shares, $130,131 value; Mr. Malley 3,759 shares, $160,697 value; and Mr. Turner 2,625 shares, $112,218 value. The value was calculated by multiplying the closing market price on December 31, 1997 by the number of shares. No awards vested during 1997 under the Long-Term Performance Share Award Plan. (f) Includes NEP contributions to life insurance. See description under Plan Summaries. The life insurance contribution is calculated based on the value of term life insurance for the named individuals. The premium costs for most of these policies have been or will be recovered by NEP. Prior to 1997, this column also included contributions by NEP to the incentive thrift plan that are not bonus contributions. These figures are now included in the Other Annual Compensation column. (g) Mr. Rowe resigned effective February 6, 1998. (h) Mr. Tranen resigned effective September 12, 1997. All Other Compensation includes: $830 for contributions to life insurance as described in footnote (f) above, $28,452 as accrued vacation pay, $621,081 as a severance payment, and $426,780 in pension related benefits. MASS. ELECTRIC SUMMARY COMPENSATION TABLE
Long-Term Compensa- Annual Compensation (b) tion -------------------------- --------- Other Restricted Name and Annual & Deferred All Other Principal Compen- Share Compensa- Position Year Salary Bonus sation Awards tion (a) ($) ($)(c) ($)(d) ($)(e) ($)(f) - ---------- ---- ------- ------ -------- ---------- --------- Lawrence J. 1997 160,515 168,637 6,910 0 448 Reilly 1996 96,163 70,177 2,467 46,082 2,250 President 1995 38,561 34,985 37 0 986 Richard P. 1997 149,549 147,794 5,352 31,170 477 Sergel 1996 135,213 70,388 3,411 87,965 2,247 Former 1995 123,480 93,047 3,256 0 2,285 Chairman Lydia M. 1997 125,481 81,944 2,544 0 241 Pastuszek 1996 86,068 52,017 69 22,115 1,893 Senior Vice 1995 86,597 53,204 72 0 2,403 President Christopher E. 1997 98,421 103,890 2,067 0 147 Root 1996 92,055 67,050 99 0 2,032 Senior Vice 1995 84,173 37,158 89 0 1,537 President Nancy H. 1997 124,344 60,661 2,603 0 283 Sala 1996 118,251 65,493 116 0 2,730 Vice 1995 115,524 59,932 116 0 2,498 President
(a) Certain officers of Mass. Electric are also officers of NEES and various other System companies. (b) Includes deferred compensation in category and year earned. (c) The bonus figure represents: cash bonuses under an incentive compensation plan, the all-employee goals program, the variable match of the incentive thrift plan, and unrestricted shares under the incentive share plan or special share bonuses. See descriptions under Plan Summaries. (d) Includes amounts reimbursed by Mass. Electric for the payment of taxes on certain noncash benefits and contributions to the incentive thrift plan by Mass. Electric that are not bonus contributions including related deferred compensation plan match. See description under Plan Summaries. (e) The incentive share awards for the named executives who are also NEES executives made for 1996 and 1997 were in the form of restricted shares (with a five-year restriction) or deferred share equivalents, deferred for receipt for at least five years, at the executive's option. As cash dividends are declared, the number of deferred share equivalents will be increased as if the dividends were reinvested in shares. In 1996, certain named officers also received special share awards in the form of deferred share equivalents. The shares awarded for the other named officers and for all executives for 1995 were not restricted and the value of the awards is included in the bonus column. As of December 31, 1997, the following executive officers held the amount of restricted and deferred shares with the value indicated: Mr. Reilly 6,320 shares, $270,180 value; Mr. Sergel 8,698 shares, $371,840 value; Ms. Pastuszek 2,886 shares, $123,377 value; Mr. Root 2,632 shares, $112,518 value; and Ms. Sala 1,989 shares, $85,030 value. The value was calculated by multiplying the closing market price on December 31, 1997 by the number of shares. No awards vested during 1997 under the Long-Term Performance Share Award Plan. (f) Includes Mass. Electric contributions to life insurance. See description under Plan Summaries. The life insurance contribution is calculated based on the value of term life insurance for the named individuals. The premium costs for most of these policies have been or will be recovered by Mass. Electric. Prior to 1997, this column also included contributions by Mass. Electric to the incentive thrift plan that are not bonus contributions. These figures are now included in the Other Annual Compensation column. NARRAGANSETT SUMMARY COMPENSATION TABLE
Long-Term Compensa- Annual Compensation (b) tion -------------------------- --------- Other Restricted Name and Annual & Deferred All Other Principal Compensa- Share Compensa- Position Year Salary Bonus tion Awards tion (a) ($) ($)(c) ($)(d) ($)(e) ($)(f) - ---------- ---- ------- ------ --------- ---------- --------- Robert L. 1997 179,460 148,868 9,881 0 1,528 McCabe 1996 127,388 88,905 4,819 50,308 3,424 Chairman 1995 152,407 111,785 4,206 0 4,851 and Former President Lawrence J. 1997 679 452 29 0 1 Reilly 1996 16,329 11,916 419 7,825 382 President(g) 1995 30,322 26,625 29 0 622 William 1997 135,972 84,924 2,839 0 88,885(h) Watkins, 1996 132,012 84,081 119 0 4,509 Jr. 1995 128,172 77,967 119 0 4,054 Executive Vice President Richard W. 1997 113,856 52,347 2,396 0 596 Frost 1996 108,432 57,680 119 0 2,888 Vice 1995 103,272 48,972 119 0 2,787 President Shannon M. 1997 105,012 51,259 2,220 0 330 Larson 1996 81,293 21,879 116 0 1,808 Vice 1995 68,432 2,908 132 0 1,809 President Michael F. 1997 103,983 52,060 2,197 0 220 Ryan 1996 64,555 18,397 77 0 1,473 Vice 1995 74,917 14,499 94 0 231 President
(a) Certain officers of Narragansett are also officers of NEES and various other System companies. (b) Includes deferred compensation in category and year earned. (c) The bonus figure represents: cash bonuses under an incentive compensation plan, the all-employee goals program, the variable match of the incentive thrift plan, and unrestricted shares under the incentive share plan or special share bonuses. See descriptions under Plan Summaries. (d) Includes amounts reimbursed by Narragansett for the payment of taxes on certain noncash benefits and contributions to the incentive thrift plan by Narragansett that are not bonus contributions including related deferred compensation plan match. See description under Plan Summaries. (e) The incentive share awards for the named executives made for 1996 and 1997 were in the form of restricted shares (with a five-year restriction) or deferred share equivalents, deferred for receipt for at least five years, at the executive's option. As cash dividends are declared, the number of deferred share equivalents will be increased as if the dividends were reinvested in shares. The shares awarded for 1995 were not restricted and the value of the awards is included in the bonus column. As of December 31, 1997, the following executive officers held the amount of restricted and deferred shares with the value indicated: Mr. McCabe 6,725 shares, $287,493 value; Mr. Reilly 6,320 shares, $270,180 value; Mr. Watkins 353 shares, $15,091 value; Mr. Frost 798 shares, $34,115 value; Ms. Larson 6,320 shares, $270,180 value; and Mr. Ryan 10 shares, $428 value. The value was calculated by multiplying the closing market price on December 31, 1997 by the number of shares. Mr. Reilly and Ms. Larson are married and both of their restricted shares are included in the others total. No awards vested during 1997 under the Long-Term Performance Share Award Plan. (f) Includes Narragansett contributions to life insurance. See description under Plan Summaries. The life insurance contribution is calculated based on the value of term life insurance for the named individuals. The premium costs for most of these policies have been or will be recovered by Narragansett. Prior to 1997, this column also included contributions by Narragansett to the incentive thrift plan that are not bonus contributions. These figures are now included in the Other Annual Compensation column. (g) Elected President effective October 1, 1997. (h) Retired effective January 1, 1998. All Other Compensation includes $1,528 contributions to life insurance as described in footnote (f) and a payment of $87,357 as a special retirement payment. Directors' Compensation Members of the Mass. Electric and Narragansett Boards of Directors, except employees of NEES System companies, received a quarterly retainer of $1,500, a meeting fee of $600 plus expenses, and 50 NEES common shares each year. Since all members of the NEP Board are employees of NEES System companies, no fees are paid for service on the Board except as noted below for Mrs. Bok. Effective December 31, 1997, the composition of all three boards was changed to include only employees of NEES System companies. Mrs. Bok retired as an employee of the System on January 1, 1994 (remaining as Chairman of the Board of NEES and a director for NEES subsidiaries). Mrs. Bok agreed to waive the normal fees and annual retainers otherwise payable for services by nonemployees on NEES subsidiary boards and received in lieu thereof a single annual stipend of $60,000. During 1997, Mrs. Bok also served as a consultant to NEES. Under the terms of her contract, she received an annual retainer of $100,000. Other The NEES Compensation Committee administers certain of the incentive compensation plans, and the Management Committee administers the others (including the incentive share plan). Retirement Plans The following table shows estimated annual benefits payable to executive officers under the qualified pension plan and the supplemental retirement plan, assuming retirement at age 65 in 1998. PENSION TABLE
Five-Year Average 10 Years 15 Years 20 Years 25 Years 30 Years 35 Years Compensa- of of of of of of tion Service Service Service Service Service Service - --------- -------- -------- -------- -------- -------- -------- $100,000 18,926 29,276 39,626 49,976 60,326 70,676 $150,000 29,276 42,414 57,439 72,464 87,489 102,514 $200,000 39,626 57,439 75,251 94,951 114,651 134,351 $250,000 49,976 72,464 94,951 116,814 141,064 165,314 $300,000 60,326 87,489 114,651 141,064 167,477 184,123 $350,000 70,676 102,514 134,351 165,314 196,277 215,865 $400,000 81,026 117,539 154,051 189,564 225,077 241,590 $450,000 91,376 132,564 173,751 213,814 253,877 279,315 $500,000 101,726 147,589 193,451 238,064 282,677 311,040
For purposes of the retirement plans, Messrs. Bailey, Rowe, Tranen, Aitken, Malley, and Turner currently have 29, 20, 28, 25, 26, and 32 credited years of service, respectively. Mr. Reilly, Mr. Sergel, Ms. Pastuszek, Mr. Root, and Ms. Sala currently have 16, 19, 17, 15, and 28 credited years of service, respectively. Mr. McCabe, Mr. Reilly, Mr. Watkins, Mr. Frost, Ms. Larson, and Mr. Ryan currently have 29, 16, 25, 35, 18, and 3 credited years of service, respectively. Benefits under the pension plans are computed using formulae based on percentages of highest average compensation computed over five consecutive years. The compensation covered by the pension plan includes salary, bonus, and incentive share awards. The benefits listed in the pension table are not subject to deduction for Social Security and are shown without any joint and survivor benefits. If the participant elected at age 65 a 100 percent joint and survivor benefit with a spouse of the same age, the benefit shown would be reduced by approximately 16 percent. The Pension Table above does not include annuity payments to be received in lieu of life insurance for Messrs. Rowe and Houston. The policies are described below under Plan Summaries. In December 1997, the NEES companies announced a voluntary early retirement program available to all nonunion employees over age 55 with ten or more years of service. Messrs. Amoroso, Frost, McCabe, Nadeau, Snay, and Turner were all eligible for the offer. The program offered either an annuity or a lump sum equal to the greater of either one week's base pay times the number of years of service or an additional five years service and five years of age toward their pension. The offer also included certain health care and bridging of social security benefits. The program is conditioned upon consummation of the divestiture of the nonnuclear generating business to USGen. Mr. McCabe also has an employment agreement which provides that if he remains in the employ of the NEES companies until December 31, 1998, or the retirement effective date under the offer, he will receive an annuity or a lump sum equal to an additional five years of service and five years of age toward his pension plus $225,000, subject to an offset for any benefits under the general offer. The value of Messrs. Amoroso, Frost, McCabe, Nadeau, Snay, and Turner's benefits under the offer and the contract cannot be determined until their retirement following the divestiture. The System contributes the full cost of post-retirement health benefits for senior executives. NEP, MASS. ELECTRIC, AND NARRAGANSETT PAYMENTS UPON A CHANGE OF CONTROL OR TERMINATION OF EMPLOYMENT NEES has an agreement with Mr. Sergel which provides severance benefits in the event of certain terminations of employment following a Change in Control of NEES (as defined below). The term of the agreement is for three years with automatic annual extensions, unless terminated by NEES. If, following a Change in Control, Mr. Sergel's employment is terminated other than for cause (as defined) or if Mr. Sergel terminates employment for good reason (as defined), NEES will pay to Mr. Sergel a lump sum cash payment equal to three times the sum of Mr. Sergel's most recent annual base compensation and the average of his bonus amounts for the prior three years. If Mr. Sergel receives payments under his severance agreement that would subject him to any federal excise tax due under section 280G of the Internal Revenue Code, he will receive a cash "gross-up" payment so he would be in the same net after-tax position he would have been in had such excise tax not been applied. In addition, NEES will provide disability and health benefits to Mr. Sergel for three years, provide such post- retirement health and welfare benefits as Mr. Sergel would have earned within such three years, and grant three additional years of pension credit. Change in Control, including potential change of control, occurs (1) when any person becomes the beneficial owner of 20 percent of the voting securities of NEES, (2) when the prior members of the Board of NEES no longer constitute a 2/3 majority of the Board, or (3) NEES enters into an agreement that could result in a Change in Control. Upon a change in control a participant in the deferred compensation plan has the option of receiving a full distribution of the participant's cash and share accounts and the actuarial value of future benefits from the insurance related benefits under a prior plan, all less 10 percent. The System's bonus plans, including the incentive compensation plans, the Incentive Thrift Plan, and the Goals Program, provide for payments equal to the average of the bonuses for the three prior years in the event of a Change of Control. These payments would be made in lieu of the regular bonuses for the year in which the Change in Control occurs. The Long-Term Performance Share Award Plan provides for a cash payment equal to the value of the performance shares in the participants' account times the average target achievement percentage for the Incentive Thrift Plan for the three prior years. The System's Retirees Health and Life Insurance Plan has provisions preventing changes in benefits adverse to the participants for three years following a Change in Control. The Incentive Share Plan and the related Incentive Share Deferral Agreements provide that, upon the occurrence of a change in control (defined more narrowly than in other plans), any restrictions on shares and account balances would cease. Under a retention agreement between Mr. Aitken and NEP, he has agreed to remain in NEP's employ, at the sole option of NEP, until the earlier of February 1999 or the closing date of the sale of the generation assets to USGen in return for a lump sum payment of $47,345. In August 1998, NEP will pay an additional amount equal to 4-1/2 months' base salary if it has not released Mr. Aitken from this obligation by July 6, 1998. NEP, MASS. ELECTRIC, AND NARRAGANSETT PLAN SUMMARIES A brief description of the various plans through which compensation and benefits are provided to the named executive officers is presented below to better enable shareholders to understand the information presented in the tables shown earlier. The amounts of compensation and benefits provided to the named executive officers under the plans described below (and charged to NEP, Mass. Electric, or Narragansett) are presented in the Summary Compensation Tables. Goals Program The Goals Program establishes goals annually. For 1997, these goals related to earnings per share, customer costs, safety, absenteeism, demand-side management results, generating station availability, transmission reliability, environmental and OSHA compliance, and customer satisfaction. Some goals apply to all employees, while others apply to particular functional groups. Depending upon the number of goals met, and provided the minimum earnings goal is met, employees may earn a cash bonus of 1 percent to 4-1/2 percent of their compensation. Incentive Thrift Plan The incentive thrift plan (a 401(k) program) provides for a match of 40 percent of up to the first 5 percent of base compensation contributed to the System's incentive thrift plan (shown under Other Annual Compensation in the Summary Compensation Tables) and, based on an incentive formula tied, in 1997, to earnings per share, may fully match the first 5 percent of base compensation contributed (the additional amount, if any, is shown under Bonus in the Summary Compensation Tables). Under Federal law, contributions to these plans are limited. In 1997, the salary reduction amount was limited to $9,500. Deferred Compensation Plan The Deferred Compensation Plan offers executives the opportunity to defer base pay and bonuses. The plan offers the option of investing at the prime rate or in NEES shares; however, share bonuses may only be deferred in a share account. Under Federal law, the Incentive Thrift Plan, described above, is required to limit participant base compensation to $160,000 in calculating the NEES match. Under the Deferred Compensation Plan, NEES will make a contribution to an executive's share account equivalent to the resultant reduction in his or her match under the Incentive Thrift Plan. Life Insurance NEES has established for certain senior executives life insurance plans funded by individual policies. The combined death benefit under these insurance plans is three times the participant's annual salary. These plans are structured so that, over time, NEES should recover the cost of the insurance premiums. Messrs. McCabe, Reilly, and Sergel are participants in these plans. After termination of employment, Mr. Rowe may elect, commencing at age 55 or later, to receive an annuity income equal to 40 percent of final annual salary. In that event, the life insurance is reduced over 15 years to an amount equal to the participant's final annual salary. Incentive Compensation Plan The System bonus plan for certain senior employees provides that in order for cash bonuses to be awarded, NEES must achieve a return on equity that places NEES in the top 50 percent of the approximately 80 electric utilities in the national utility group (the national grouping) or in the top 50 percent of the New England/New York regional utilities (the regional grouping). Bonuses are also dependent upon the achievement of individual goals. In order to provide a long-term component to the incentive compensation plan, participants may also be awarded NEES common shares. An individual's award of shares under the incentive share plan is a fixed percentage of her or his cash bonus for that year. If no cash award is made, no shares are distributed. In 1998, this plan will be replaced because the System is shifting from a vertically integrated utility to being primarily a transmission and distribution system and the System's strategic plan calls for new business development in competitive new areas. Comparative return on equity and cost per kWh measurements will become increasingly less representative as the prime measures of success as different utilities proceed through competitive transitions at different times and at different rates. Under the new plan, bonuses are tied to achievement of core business operating income and strategic objectives. Annual income targets will be established prior to or early in the plan year. In addition, strategic objectives will be established for each year. For 1998, those objectives are: achieving recovery of stranded investments; maximizing the return on the sale of the generation business; running the best wires business in the Northeast; increasing the size of the energy delivery business; and profiting from growth in unregulated ventures. Financial Counseling NEP, Mass. Electric, and Narragansett pay for personal financial counseling for certain executives. As required by the IRS, a portion of the amount paid is reported as taxable income for the executive. Financial counseling is also offered to other employees through seminars conducted at various locations each year. Other The NEES companies do not have any share option plans. LONG-TERM INCENTIVE PLAN - AWARDS IN LAST FISCAL YEAR ----------------------------------------------------- The Long-Term Performance Share Award Plan was established in 1996. There will be no payments under the plan until the Spring of 1999. Awards under the plan are based upon various measures of NEES performance over a three-year period. Each award factor or measurement functions independently. The performance targets for each cycle are set by the Compensation Committee of the NEES Board. Performance is rated on rolling three-year periods, with a new cycle beginning each year. An individual's potential award under the plan is a fixed percentage (ranging from 15 percent to 50 percent) of base pay. At the end of the three-year cycle, the participant receives NEES shares based upon the performance against the various factors. The measures of performance for the cycle commencing January 1, 1997 are as follows: total shareholder return compared to the national group (60th-75th percentile); total shareholder return compared to the regional group (50th-75th percentile); maintenance or improvement of bond ratings; new business development; growth of transmission and distribution business; and system service levels, measured by system reliability and regulatory compliance. The national grouping is composed of approximately 80 electric utilities. The regional grouping is composed of New England/New York regional utilities. The following tables show the potential awards, for those executive officers named in the Summary Compensation Tables, under the Long-Term Performance Share Award Plan for the performance cycle commencing January 1, 1997. The NEES System's performance will be measured over the three-year period ending December 31, 1999. NEP --- ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK PRICE-BASED PLANS ------------------------------------------------
Number of Common Share Performance Name Equivalents(a) Period Threshold(b) Target(c) ---- -------------- ----------- ------------ --------- Lawrence E. Bailey 1,128 3 years 7 1,128 John W. Rowe(d) 8,617 3 years 0 0 Jeffrey D. Tranen(d) 3,333 3 years 0 0 Andrew H. Aitken 884 3 years 5 884 John F. Malley 1,011 3 years 6 1,011 Arnold H. Turner 952 3 years 6 952 Mass. Electric -------------- ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK PRICE-BASED PLANS ------------------------------------------------ Number of Common Share Performance Name Equivalents(a) Period Threshold(b) Target(c) ---- -------------- ----------- ------------ --------- Lawrence J. Reilly 1,179 3 years 7 1,179 Richard P. Sergel 3,266 3 years 20 3,266 Lydia M. Pastuszek 1,019 3 years 6 1,019 Christopher E. Root 832 3 years 5 832 Nancy H. Sala 538 3 years 3 538 Narragansett ------------ ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK PRICE-BASED PLANS ------------------------------------------------ Number of Common Share Performance Name Equivalents(a) Period Threshold(b) Target(c) ---- -------------- ----------- ------------ --------- Robert L. McCabe 1,311 3 years 8 1,311 Lawrence J. Reilly 1,179 3 years 7 1,179 William Watkins, Jr. 980 3 years 6 980 Richard W. Frost 493 3 years 3 493 Shannon M. Larson 454 3 years 3 454 Michael F. Ryan 459 3 years 3 459
(a) Amounts are denominated in common share units. No dividends are attributable to share units. At the end of the cycle, awards are paid either in shares or in cash (valued at the five-day average price prior to the January 15 following the close of the performance cycle). (b) The awards in this column represent the threshold number of shares that could be earned if the minimum attainment level is reached for one factor. The minimum payout upon failure to achieve any of the goals would be zero. (c) The awards in this column represent the target (and maximum) number of shares that could be earned if the maximum performance is achieved for all factors. (d) Upon Mr. Tranen's resignation in September 1997 and Mr. Rowe's resignation in February 1998, they became ineligible to receive any award under the Long-Term Performance Share Award Plan. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT NEES ---- The information required by this item is incorporated herein by reference to the material under the caption TOTAL COMMON EQUITY BASED HOLDINGS in the definitive proxy statement of NEES, dated March 9, 1998, for the 1998 Annual Meeting of Shareholders, provided that the information under the headings "Report of the Compensation Committee on Executive Compensation" and "Corporate Performance" are not so incorporated. NEP, Mass. Electric, and Narragansett ------------------------------------- NEES owns 100 percent of the voting securities of Mass. Electric and Narragansett. NEES owns 98.85 percent of the voting securities of NEP. SECURITY OWNERSHIP The following tables list the holdings of NEES common shares as of March 2, 1998 by NEP, Mass. Electric, and Narragansett directors, the executive officers named in the Summary Compensation Tables, and all directors and executive officers, as a group. NEP ---
Shares Deferred Beneficially Share Name Owned (a) Equivalents (b) Total ---- ------------ --------------- ----- Andrew H. Aitken 6,606 2,572 9,178 Lawrence E. Bailey 5,153 3,330 8,483 Alfred D. Houston 13,688 11,558 25,246 Cheryl A. LaFleur 3,191 5,787 8,978 John F. Malley 2,506 3,364 5,870 John W. Rowe 14,823 25,355 40,178 Jeffrey D. Tranen 107 107 Arnold H. Turner 4,914 2,112 7,026 All directors and executive officers, as a group (11 persons) 64,846 (c) 61,994 126,840 Mass. Electric -------------- Shares Deferred Beneficially Share Name Owned (a) Equivalents (b) Total ---- ------------ --------------- ----- Cheryl A. LaFleur 3,191 5,787 8,978 Robert L. McCabe 10,156 6,054 16,210 Lydia M. Pastuszek 7,185 2,446 9,631 Lawrence J. Reilly 3,656 5,959 9,615 Christopher E. Root 2,036 2,304 4,340 Nancy H. Sala 4,153 (d) 1,636 5,789 Richard P. Sergel 8,086 8,313 16,399 Dennis E. Snay 4,608 535 5,143 All directors and executive officers, as a group (17 persons) 84,854 (c) 42,610 127,464 Narragansett ------------ Shares Deferred Beneficially Share Name Owned (a) Equivalents (b) Total ---- ------------ --------------- ----- Richard W. Frost 7,677 502 8,179 Cheryl A. LaFleur 3,191 5,787 8,978 Shannon M. Larson 3,656 5,959 9,615 Robert L. McCabe 10,156 6,054 16,210 Lawrence J. Reilly 3,656 5,959 9,615 Michael F. Ryan 829 10 839 Richard P. Sergel 8,086 8,313 16,399 Ronald L. Thomas 1,405 1,405 William Watkins, Jr. 1,113 1,113 All directors and executive officers, as a group (14 persons) 73,070 (c) 49,848 122,918
(a) Number of shares beneficially owned includes: (i) shares directly owned by certain relatives with whom directors or officers share voting or investment power; (ii) shares held of record individually by a director or officer or jointly with others or held in the name of a bank, broker, or nominee for such individual's account; (iii) shares in which certain directors or officers maintain exclusive or shared investment or voting power whether or not the securities are held for their benefit; and (iv) with respect to the executive officers, allocated shares in the Incentive Thrift Plan described above. (b) Deferred share equivalents are held under the Deferred Compensation Plan or pursuant to individual deferral agreements. Under the Plan or deferral agreements, executives may elect to defer cash compensation and share awards. There are various deferral periods available under the plans. At the end of the deferral period, the compensation is paid out in the same form, cash or NEES shares, as was deferred. The rights of the executives to payment are those of general, unsecured creditors. While deferred, the shares do not have voting rights or other rights associated with ownership. As cash dividends are declared, the number of deferred share equivalents will be increased as if the dividends were reinvested in NEES common shares. (c) Amount is less than 1 percent of the total number of shares of NEES outstanding. (d) Ms. Sala disclaims a beneficial ownership interest in 281 shares held in custodial accounts. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is made to ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT and ITEM 11. EXECUTIVE COMPENSATION. PART IV ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K List of Exhibits Unless otherwise indicated, the exhibits listed below are incorporated by reference to the appropriate exhibit numbers and the Commission file numbers indicated in parentheses. NEES ---- (3) Agreement and Declaration of Trust dated January 2, 1926, as amended through April 28, 1992 (Exhibit 3 to 1994 NEES Form 10-K, File No. 1-3446). (4) Instruments Defining the Rights of Security Holders (a) Massachusetts Electric Company First Mortgage Indenture and Deed of Trust, dated as of July 1, 1949, and twenty-one supplements thereto (Exhibit 7-A, File No. 1-8019; Exhibit 7-B, File No. 2-8836; Exhibit 4-C, File No. 2-9593; Exhibit 4 to 1980 Form 10-K, File No. 2-8019; Exhibit 4 to 1982 Form 10-K, File No. 0-5464; Exhibit 4 to 1986 Form 10-K, File No. 0-5464; Exhibit 4(a) to 1988 Form 10-K, File No. 1-3446; Exhibit 4(a) to 1989 Form 10-K, File No. 1-3446; Exhibit 4(a) to 1992 Form 10-K, File No. 1-3446; Exhibit 4(a) to 1993 Form 10-K, File No. 1-3446; Exhibit 4(a) to 1995 Form 10-K, File No. 1-3446). (b) The Narragansett Electric Company First Mortgage Indenture and Deed of Trust, dated as of September 1, 1944, and twenty-two supplements thereto (Exhibit 7-1, File No. 2-7042; Exhibit 7-B, File No. 2-7490; Exhibit 4-C, File No. 2-9423; Exhibit 4-D, File No. 2-10056; Exhibit 4 to 1980 Form 10-K, File No. 0-898; Exhibit 4 to 1982 Form 10-K, File No. 0-898; Exhibit 4 to 1983 Form 10-K, File No. 0-898; Exhibit 4 to 1985 Form 10-K, File No. 0-898; Exhibit 4 to 1986 Form 10-K, File No. 0-898; Exhibit 4 to 1987 Form 10-K, File No. 0-898; Exhibit 4 to 1991 Form 10-K, File No. 0-898; Exhibit 4(b) to 1992 Form 10-K, File No. 1-3446; Exhibit 4(b) to 1993 Form 10-K, File No. 1-3446; Exhibit 4(b) to 1995 Form 10-K, File No. 1-3446). (c) The Narragansett Electric Company Preference Provisions, as amended, dated December 15, 1997 (filed herewith). (d) New England Power Company Indentures General and Refunding Mortgage Indenture and Deed of Trust dated as of January 1, 1977 and twenty supplementsthereto (Exhibit 4(b) to 1980 Form 10-K, File No. 0-1229; Exhibit 4(b) to 1982 Form 10-K, File No. 0-1229; Exhibit 4(b) to 1983 Form 10-K, File No. 0-1229; Exhibit 4(b) to 1985 Form 10-K, File No. 0-1229; Exhibit 4(b) to 1986 Form 10-K, File No. 0-1229; Exhibit 4(c)(ii) to 1988 Form 10-K, File No. 1-3446; Exhibit 4(c)(ii) to 1989 Form 10-K, File No. 1-3446; Exhibit 4(c)(ii) to 1990 Form 10-K, File No. 1-3446; Exhibit 4(c)(ii) to 1991 Form 10-K, File No. 1-3446; Exhibit 4(c)(ii) to 1992 Form 10-K, File No. 1-3446; Exhibit 4(d) to 1993 Form 10-K, File No. 1-3446; Exhibit 4(d) to 1995 Form 10-K, File No. 1-3446). (10) Material Contracts (a) Boston Edison Company et al. and New England Power Company: Amended REMVEC Agreement dated August 12, 1977 (Exhibit 5-4(d), File No. 2-61881). (i) Boston Edison Company et al. and New England Power Company: REMVEC II Agreement dated on or about July 1, 1994 (filed herewith). (ii) Boston Edison Company et al. and New England Power Company: Security Analysis Service Agreement dated on or about July 1, 1994 (filed herewith). (b) The Connecticut Light and Power Company et al. and New England Power Company: Sharing Agreement for Joint Ownership, Construction and Operation of Millstone Unit No. 3 dated as of September 1, 1973, and Amendment dated as of August 1, 1974 (Exhibit 10-5, File No. 2-52820); Amendments dated as of December 15, 1975 and April 1, 1986; (Exhibit 10(b), to 1990 Form 10-K, File No. 1-3446). Transmission Support Agreement dated August 9, 1974; Instrument of Transfer to NEP with respect to the 1979 Connecticut Nuclear Unit, and Assumption of Obligations, dated December 17, 1975 (Exhibit 10-6(b), File No. 2-57831). (c) Connecticut Yankee Atomic Power Company et al. and New England Power Company: Stockholders Agreement dated July 1, 1964 (Exhibit 13-9-A, File No. 2-23006); Power Purchase Contract dated July 1, 1964 (Exhibit 13-9-B, File No. 2-23006); Additional Power Contract dated as of April 30, 1984 and 1996 Amendatory Agreement dated as of December 4, 1996 (Exhibit 10(c) to 1996 Form 10-K, File No. 1-3446); Supplementary Power Contract dated as of April 1, 1987 (Exhibit 10(c) to 1987 Form 10-K, File No. 1-3446); Capital Funds Agreement dated September 1, 1964 (Exhibit 13-9-C, File No. 2-23006); Transmission Agreement dated October 1, 1964 (Exhibit 13-9-D, File No. 2-23006); Agreement revising Transmission Agreement dated July 1, 1979 (Exhibit to 1979 Form 10-K, File No. 1-3446); Amendment revising Transmission Agreement dated as of January 19, 1994 (Exhibit 10(c) to 1995 Form 10- K, File No. 1-3446). (d) Maine Yankee Atomic Power Company et al. and New England Power Company: Capital Funds Agreement dated May 20, 1968 and Power Purchase Contract dated May 20, 1968 (Exhibit 4-5, File No. 2-29145); Amendments dated as of January 1, 1984, March 1, 1984 (Exhibit 10(d) to 1983 Form 10-K, File No. 1-3446), October 1, 1984, and August 1, 1985 (Exhibit 10(d) to 1985 Form 10-K, File No. 1-3446); Stockholders Agreement dated May 20, 1968 (Exhibit 10-20, File No. 2-34267); Additional Power Contract dated as of February 1, 1984 (Exhibit 10(d) to 1985 Form 10-K, File No. 1-3446); 1997 Amendatory Agreement dated as of August 6, 1997 (filed herewith). (e) New England Energy Incorporated Contracts (i) Capital Funds Agreement with NEES dated November 1, 1974 (Exhibit 10-29(b), File No. 2-52969); Amendment dated July 1, 1976, and Amendment dated July 26, 1979 (Exhibit 10(g)(i) to 1980 Form 10-K, File No. 1-3446); Amendment dated August 26, 1981 (Exhibit 10(f)(i) to 1981 Form 10-K, File No. 1-3446); Amendment dated March 26, 1985 (Exhibit 10(e)(i) to 1985 Form 10-K, File No. 1-3446); Amendment dated as of April 28, 1989 (Exhibit 10(e)(i) to 1989 Form 10-K, File No. 1-3446); Amendment dated as of June 1, 1990 (Exhibit 10(e)(i) to 1990 Form 10-K, File No. 1-3446); Amendment dated as of April 13, 1995 (Exhibit 10(e)(i) to 1996 Form 10-K, File No. 1-3446). (ii) Loan Agreement with NEES dated July 19, 1978 and effective November 1, 1974, and Amendment dated July 26, 1979 (Exhibit 10(g)(iii) to 1980 Form 10-K, File No. 1-3446); Amendment dated August 26, 1981 (Exhibit 10(f)(ii) to 1981 Form 10-K, File No. 1-3446); Amendment dated March 26, 1985 (Exhibit 10(e)(ii) to 1985 Form 10-K, File No. 1-3446); Amendment dated as of April 28, 1989 (Exhibit 10(e)(ii) to 1989 Form 10-K, File No. 1-3446); Amendment dated as of June 1, 1990 (Exhibit 10(e)(ii) to 1990 Form 10-K, File No. 1-3446); Amendment dated as of April 13, 1995 (Exhibit 10(e)(ii) to 1996 Form 10-K, File No. 1-3446). (iii) Fuel Purchase Contract with New England Power Company dated July 26, 1979, and Amendment dated August 26, 1981 (Exhibit 10(f)(iii) to 1981 Form 10-K, File No. 1-3446); Amendment dated March 26, 1985, and Amendment effective January 1, 1984 (Exhibit 10(e)(iii) to 1985 Form 10-K, File No. 1-3446); Amendment dated as of April 28, 1989 (Exhibit 10(e)(iii) to 1989 Form 10-K, File No. 1-3446). (iv) Partnership Agreement with Samedan Oil Corporation as Amended and Restated on February 5, 1985 (Exhibit 10(e)(iv) to 1984 Form 10-K, File No. 1-3446); Amendment dated as of January 14, 1992 (Exhibit 10(e)(iv) to 1991 Form 10-K, File No. 1- 3446). (v) Credit Agreement dated as of April 13, 1995 (Exhibit 10(e)(iv) to 1995 Form 10-K, File No. 1-3446). (vi) Capital Maintenance Agreement dated November 15, 1985, and Assignment and Security Agreement dated November 15, 1985 (Exhibit 10(e)(vi) to 1985 Form 10-K, File No. 1-3446); Amendment dated as of April 28, 1989 (Exhibit 10(e)(vi) to 1989 Form 10-K, File No. 1-3446); Amendment dated as of April 13, 1995 (Exhibit 10(e)(vi) to 1996 Form 10-K, File No. 1-3446). (f) New England Power Company and New England Electric Transmission Corporation et al.: Phase I Terminal Facility Support Agreement dated as of December 1, 1981 (Exhibit 10(g) to 1981 Form 10-K, File No. 1-3446); Amendments dated as of June 1, 1982, and November 1, 1982 (Exhibit 10(f) to 1982 Form 10-K, File No. 1-3446); Agreement with respect to Use of the Quebec Interconnection dated as of December 1, 1981 (Exhibit 10(g) to 1981 Form 10-K, File No. 1-3446); Amendments dated as of May 1, 1982, and November 1, 1982 (Exhibit 10(f) to 1982 Form 10-K, File No. 1-3446); Amendment dated as of January 1, 1986 (Exhibit (10)(f) 1986 Form 10-K, File No. 1-3446); Agreement for Reinforcement and Improvement of New England Power Company's Transmission System dated as of April 1, 1983 (Exhibit 10(f) to 1983 Form 10-K, File No. 1-3446); Lease dated as of May 16, 1983 (Exhibit 10(f) to 1983 Form 10-K, File No. 1-3446); Upper Development - Lower Development Transmission Line Support Agreement dated as of May 16, 1983 (Exhibit 10(f) to 1983 Form 10-K, File No. 1-3446). (g) New England Electric Transmission Corporation and PruCapital Management, Inc. et al: Note Agreement dated as of September 1, 1986 (Exhibit 10(g) to 1986 Form 10-K, File No. 1-3446); Mortgage, Deed of Trust and Security Agreement dated as of September 1, 1986 (Exhibit 10(g) to 1986 Form 10-K, File No. 1-3446); Equity Funding Agreement with New England Electric System dated as of December 1, 1985 (Exhibit 10(g) to 1991 Form 10-K, File No. 1-3446). (h) Vermont Electric Transmission Company, Inc. et al. and New England Power Company: Phase I Vermont Transmission Line Support Agreement dated as of December 1, 1981; Amendments dated as of June 1, 1982, and November 1, 1982 (Exhibit 10(g) to 1982 Form 10-K, File No. 1-3446); Amendment dated as of January 1, 1986 (Exhibit 10(h) to 1986 Form 10-K, File No. 1-3446). (i) New England Power Pool Agreement: (Exhibit 4(e), File No. 2-43025); Amendments dated July 1, 1972, and March 1, 1973 (Exhibit 10-15, File No. 2-48543); Amendment dated March 15, 1974 (Exhibit 10-5, File No. 2-52775); Amendment dated June 1, 1975 (Exhibit 10-14, File No. 2-57831); Amendment dated September 1, 1975 (Exhibit 10-13, File No. 2-59182); Amendments dated December 31, 1976, January 31, 1977, July 1, 1977, and August 1, 1977 (Exhibit 10-16, File No. 2-61881); Amendments dated August 15, 1978, January 3, 1980, and February 1980 (Exhibit 10-3, File No. 2-68283); Amendment dated September 1, 1981 (Exhibit 10(h) to 1981 Form 10-K, File No. 1-3446); Amendment dated as of December 1, 1981 (Exhibit 10(h) to 1982 Form 10-K, File No. 1-3446); Amendments dated June 1, 1982, June 15, 1983, and October 1, 1983 (Exhibit 10(i) to 1983 Form 10-K, File No. 1-3446); Amendments dated August 1, 1985, August 15, 1985, September 1, 1985, and January 1, 1986 (Exhibit 10(i) to 1985 Form 10-K, File No. 1-3446); Amendment dated September 1, 1986 (Exhibit 10(i) to 1986 Form 10-K, File No. 1-3446); Amendment dated April 30, 1987 (Exhibit 10(i) to 1987 Form 10-K, File No. 1-3446); Amendments dated March 1, 1988 and May 1, 1988 (Exhibit 10(i) to 1988 Form 10-K, File No. 1-3446); Amendment dated March 15, 1989 (Exhibit 10(i) to 1989 Form 10-K, File No. 1-3446); Amendment dated October 1, 1990 (Exhibit 10(i) to 1990 Form 10-K, File No. 1-3446); Amendment dated as of September 15, 1992 (Exhibit 10(i) to 1992 Form 10-K, File No. 1-3446); Amendments dated as of June 1, 1993, July 1, 1995, and September 1, 1995 (Exhibit 10(i) to 1995 Form 10-K, File No. 1-3446); Amendment dated as of December 1, 1996 (Exhibit 10(i) to 1996 Form 10-K, File No. 1-3446); Amendment dated as of September 1, 1997 (filed herewith); Amendment dated as of November 15, 1997 (filed herewith). (j) Public Service Company of New Hampshire et al. and New England Power Company: Agreement for Joint Ownership, Construction and Operation of New Hampshire Nuclear Units dated as of May 1, 1973; Amendments dated May 24, 1974, June 21, 1974, September 25, 1974 and October 25, 1974 (Exhibit 10-18(b), File No. 2-52820); Amendment dated January 31, 1975 (Exhibit 10-16(b), File No. 2-57831); Amendments dated April 18, 1979, April 25, 1979, June 8, 1979, October 11, 1979, December 15, 1979, June 16, 1980, December 31, 1980 (Exhibit 10(i) to 1980 Form 10-K, File No. 1-3446); Amendments dated June 1, 1982, April 27, 1984, June 15, 1984 (Exhibit 10(j) to 1984 Form 10-K, File No. 1-3446); Amendments dated March 8, 1985, March 14, 1986, May 1, 1986 and September 19, 1986 (Exhibit 10(j) to 1986 Form 10-K, File No. 1-3446); Amendment dated November 12, 1987 (Exhibit 10(j) to 1987 Form 10-K, File No. 1-3446); Amendment dated January 13, 1989 (Exhibit 10(j) to 1989 Form 10-K, File No. 1-3446); Amendment dated as of November 1, 1990 (Exhibit 10(j) to 1991 Form 10-K, File No. 1- 3446). Transmission Support Agreement dated as of May 1, 1973 (Exhibit 10-23, File No. 2-49184); Instrument of Transfer to NEP with respect to the New Hampshire Nuclear Units and Assumptions of Obligations dated December 17, 1975 and Agreement Among Participants in New Hampshire Nuclear Units, certain Massachusetts Municipal Systems and Massachusetts Municipal Wholesale Electric Company dated May 28, 1976 (Exhibit 10-16(c), File No. 2-57831); Seventh Amendment To and Restated Agreement for Seabrook Project Disbursing Agent (Exhibit 10(j) to 1991 Form 10-K, File No. 1- 3446); Amendments dated as of June 29, 1992 (Exhibit 10(j) to 1992 Form 10-K, File No. 1- 3446); Seabrook Project Managing Agent Operating Agreement dated as of June 29, 1992, and amendment to Seabrook Project Managing Agent Agreement dated as of June 29, 1992 (Exhibit 10(j) to 1992 Form 10- K, File No. 1-3446). (k) Vermont Yankee Nuclear Power Corporation et al. and New England Power Company: Capital Funds Agreement dated February 1, 1968, Amendment dated March 12, 1968, and Power Purchase Contract dated February 1, 1968 (Exhibit 4-6, File No. 2-29145); Amendments dated as of June 1, 1972 and April 15, 1983 (Exhibit 10(k) to 1983 Form 10-K, File No. 1-3446) and April 24, 1985 (Exhibit 10(k) to 1985 Form 10-K, File No. 1-3446); Amendment dated as of June 1, 1985 (Exhibit 10(k) to 1987 Form 10-K, File No. 1-3446); Amendments dated as of May 6, 1988 (Exhibit 10(k) to 1988 Form 10-K, File No. 1-3446); Amendment dated as of June 15, 1989 (Exhibit 10(k) to 1989 Form 10-K, File No. 1-3446); Additional Power Contract dated as of February 1, 1984 (Exhibit 10(k) to 1983 Form 10-K, File No. 1-3446); Guarantee Agreement dated as of November 5, 1981 (Exhibit 10(j) to 1981 Form 10-K, File No. 1-3446). (l) Yankee Atomic Electric Company et al. and New England Power Company: Amended and Restated Power Contract dated April 1, 1985 (Exhibit 10(l) to 1985 Form 10-K, File No. 1-3446); Amendment dated May 6, 1988 (Exhibit 10(l) to 1988 Form 10-K, File No. 1-3446); Amendments dated as of June 26, 1989 and July 1, 1989 (Exhibit 10(l) to 1989 Form 10-K, File No. 1-3446); Amendment dated as of February 1, 1992 (Exhibit 10(l) to 1992 Form 10-K, File No. 1-3446). *(m) New England Electric Companies' Deferred Compensation Plan as amended through November 26, 1996 (Exhibit 10(m) to 1996 Form 10-K, File No. 1- 3446). *(n) New England Electric System Companies Retirement Supplement Plan as amended through June 1, 1996 (Exhibit 10(n) to 1996 Form 10-K, File No. 1-3446). *(o) New England Electric Companies' Executive Supplemental Retirement Plan I as amended through May 20, 1996 (Exhibit 10(o) to 1996 Form 10-K, File No. 1-3446). *(p) New England Electric Companies' Executive Supplemental Retirement Plan II as amended through October 25, 1995 (Exhibit 10(p) to 1996 Form 10-K, File No. 1-3446). *(q) New England Electric Companies' Incentive Compensation Plan I as amended through October 24, 1995 (Exhibit 10(q) to 1996 Form 10-K, File No. 1- 3446). *(r) New England Electric Companies' Incentive Compensation Plan II as amended through January 1, 1995 (Exhibit 10(r) to 1995 Form 10-K, File No. 1- 3446). *(s) New England Electric Companies' Incentive Compensation Plan III as amended through January 1, 1996 (Exhibit 10(s) to 1996 Form 10-K, File No. 1-3446). *(t) New England Electric Companies' Senior Incentive Compensation Plan as amended through January 1, 1995 (Exhibit 10(q) to 1995 Form 10-K, File No. 1- 3446). *(u) New England Electric System Directors Deferred Compensation Plan as amended through December 1, 1996 (Exhibit 10(u) to 1996 Form 10-K, File No. 1- 3446). *(v) Forms of Life Insurance Program (Exhibit 10(s) to 1986 Form 10-K, File No. 1-3446); and Form of Life Insurance (Collateral Assignment) (Exhibit 10(t) to 1991 Form 10-K, File No. 1-3446). *(w) New England Electric Companies' Incentive Share Plan as amended through February 24, 1997 (Exhibit 10(w) to 1996 Form 10-K, File No. 1-3446). *(x) New England Electric Companies' Long-Term Performance Share Award Plan amended through February 24, 1997 (Exhibit 10(x) to 1996 Form 10-K, File No. 1-3446). *(y) New England Electric System Directors' Retirement Plan dated May 1, 1994 (Exhibit 10(y) to 1996 Form 10-K, File No. 1-3446). *(z) Forms of Severance Protection Agreement (Exhibit 10(z) to 1996 Form 10-K, File No. 1-3446). *(aa) New England Power Service Company and Joan T. Bok: Service Credit Letter dated October 21, 1982 (Exhibit 10(cc) to 1992 Form 10-K, File No. 1-3446). *(bb) New England Electric System and John W. Rowe: Service Credit Letter dated December 5, 1988 (Exhibit 10(dd) to 1992 Form 10-K, File No. 1-3446). *(cc) New England Power Service Company and the Company: Form of Supplemental Pension Service Credit Agreement (Exhibit 10(ee) to 1992 Form 10-K, File No. 1-3446). (dd) New England Power Company and New England Hydro-Transmission Electric Company, Inc. et al: Phase II Massachusetts Transmission Facilities Support Agreement dated as of June 1, 1985 (Exhibit 10(t) to 1986 Form 10-K, File No. 1-3446); Amendment dated as of May 1, 1986 (Exhibit 10(t) to 1986 Form 10-K, File No. 1-3446); Amendments dated as of February 1, 1987, June 1, 1987, September 1, 1987, and October 1, 1987 (Exhibit 10(u) to 1987 Form 10-K, File No. 1-3446); Amendment dated as of August 1, 1988 (Exhibit 10(u) to 1988 Form 10-K, File No. 1-3446); Amendment dated January 1, 1989 (Exhibit 10(u) to 1990 Form 10-K, File No. 1-3446). (ee) New England Power Company and New England Hydro-Transmission Corporation et al: Phase II New Hampshire Transmission Facilities Support Agreement dated as of June 1, 1985 (Exhibit 10(u) to 1986 Form 10-K, File No. 1-3446); Amendment dated as of May 1, 1986 (Exhibit 10(u) to 1986 Form 10-K, File No. 1-3446); Amendments dated as of February 1, 1987, June 1, 1987, September 1, 1987, and October 1, 1987 (Exhibit 10(v) to 1987 Form 10-K, File No. 1-3446); Amendment dated as of August 1,1988 (Exhibit 10(v) to 1988 Form 10-K, File No. 1-3446); Amendments dated January 1, 1989 and January 1, 1990 (Exhibit 10(v) to 1990 Form 10-K, File No. 1-3446). (ff) New England Power Company et al: Phase II New England Power AC Facilities Support Agreement dated as of June 1, 1985 (Exhibit 10(v) to 1986 Form 10-K, File No. 1-3446); Amendment dated as of May 1, 1986 (Exhibit 10(v) to 1986 Form 10-K, File No. 1-3446); Amendments dated as of February 1, 1987, June 1, 1987, and September 1, 1987 (Exhibit 10(w) to 1987 Form 10-K, File No. 1-3446); Amendment dated as of August 1, 1988 (Exhibit 10(w) to 1988 Form 10-K, File No. 1-3446). (gg) New England Hydro-Transmission Electric Company, Inc. and New England Electric System et al: Equity Funding Agreement dated as of June 1, 1985 (Exhibit 10(w) to 1986 Form 10-K, File No. 1-3446); Amendment dated as of May 1, 1986 (Exhibit 10(w) to 1986 Form 10-K, File No. 1-3446); Amendment dated as of September 1, 1987 (Exhibit 10(x) to 1987 Form 10-K, File No. 1-3446); Amendment dated as of August 1, 1988 (Exhibit 10(x) to 1988 Form 10-K, File No. 1-3446). (hh) New England Hydro-Transmission Corporation and New England Electric System et al: Equity Funding Agreement dated as of June 1, 1985 (Exhibit 10(x) to 1986 Form 10-K, File No. 1-3446); Amendment dated as of May 1, 1986 (Exhibit 10(x) to 1986 Form 10-K, File No. 1-3446); Amendment dated as of September 1, 1987 (Exhibit 10(y) to 1987 Form 10-K, File No. 1-3446); Amendment dated as of August 1, 1988 (Exhibit 10(y) to 1988 Form 10-K, File No. 1-3446). (ii) Ocean State Power, et al., and Narragansett Energy Resources Company: Equity Contribution Agreement dated as of December 29, 1988 (Exhibit 10(aa) to 1988 Form 10-K, File No. 1-3446); Amendment dated as of September 29, 1989 (Exhibit 10(aa) to 1989 Form 10-K File No. 1-3446); Ocean State Power, et al., and New England Electric System: Equity Contribution Support Agreement dated as of December 29, 1988 (Exhibit 10(aa) to 1988 Form 10-K, File No. 1-3446); Amendment dated as of September 29, 1989 (Exhibit 10(aa) to 1989 Form 10-K, File No. 1-3446); Ocean State Power II, et al., and Narragansett Energy Resources Company: Equity Contribution Agreement dated as of September 29, 1989 (Exhibit 10(aa) to 1989 Form 10-K File No. 1-3446); Ocean State Power II, et al., and New England Electric System: Equity Contribution Support Agreement dated as of September 29, 1989 (Exhibit 10(aa) to 1989 Form 10-K File No. 1-3446). (jj) NEES Energy, Inc./AllEnergy Marketing Company, L.L.C.: Limited Liability Company Agreement dated as of September 18, 1996 (Exhibit B-1 to Amendment No. 1 to Form U-1, File No. 70-8921); Amendment No. 1 to Limited Liability Company Agreement dated as of December 3, 1997 (filed herewith). (kk) USGen, New England Energy, Inc. and New England Power Company and The Narragansett Electric Company: Asset Purchase Agreement dated as of August 5, 1997 (Exhibit 2 to Form 10-Q for period ended September 30, 1997, File No. 1-3446). *(ll) New England Power Service Company and Robert L. McCabe: Employment Agreement entered into as of March 11, 1998 (filed herewith). * Compensation related plan, contract, or arrangement. (13) 1997 Annual Report to Shareholders (filed herewith). (21) Subsidiary list appears in Part I of this document. (24) Power of Attorney (filed herewith). (27) Financial Data Schedule (filed herewith). NEP --- (3) (a) Articles of Organization as amended through June 27, 1987 (Exhibit 3(a) to 1988 Form 10-K, File No. 0-1229). (b) By-laws of the Company as amended December 12, 1997 (filed herewith). (4) General and Refunding Mortgage Indenture and Deed of Trust dated as of January 1, 1977 and twenty supplements thereto (Exhibit 4(b) to 1980 Form 10-K, File No. 0-1229; Exhibit 4(b) to 1982 Form 10-K, File No. 0-1229; Exhibit 4(b) to 1983 Form 10-K, File No. 0-1229; Exhibit 4(b) to 1985 Form 10-K, File No. 0-1229; Exhibit 4(b) to 1986 Form 10-K, File No. 0-1229; Exhibit 4(b) to 1986 Form 10-K, File No. 0-1229; Exhibit 4(b) to 1988 Form 10-K, File No. 0-1229; Exhibit 4(c)(ii) to 1989 NEES Form 10-K, File No. 1-3446; Exhibit 4(c)(ii) to 1990 NEES Form 10-K, File No. 1-3446; Exhibit 4(c)(ii) to 1991 NEES Form 10-K, File No. 1-3446; Exhibit 4(c)(ii) to 1992 NEES Form 10-K, File No. 1-3446; Exhibit 4(d) to 1993 NEES Form 10-K, File No. 1-3446; Exhibit 4(d) to 1995 NEES Form 10-K, File No. 1-3446). (10) Material Contracts (a) Boston Edison Company et al. and the Company: Amended REMVEC Agreement dated August 12, 1977 (Exhibit 5-4(d), File No. 2-61881). (i) Boston Edison Company et al. and the Company: REMVEC II Agreement dated on or about July 1, 1997 (Exhibit 10(a)(i) to NEES' 1997 Form 10- K, File No. 1-3446). (ii) Boston Edison Company et al. and the Company: Security Analysis Services Agreement dated on or about July 1, 1997 (Exhibit 10(a)(ii) to NEES' 1997 Form 10-K, File No. 1-3446). (b) The Connecticut Light and Power Company et al. and the Company: Sharing Agreement for Joint Ownership, Construction and Operation of Millstone Unit No. 3 dated as of September 1, 1973, and Amendment dated as of August 1, 1974 (Exhibit 10-5, File No. 2-52820); Amendments dated as of December 15, 1975 and April 1, 1986 (Exhibit 10(b) to NEES' 1990 Form 10-K File No. 1-3446). Transmission Support Agreement dated August 9, 1974; Instrument of Transfer to the Company with respect to the 1979 Connecticut Nuclear Unit, and Assumption of Obligations, dated December 17, 1975 (Exhibit 10-6(b), File No. 2-57831). (c) Connecticut Yankee Atomic Power Company et al. and the Company: Stockholders Agreement dated July 1, 1964 (Exhibit 13-9-A, File No. 2-2006); Power Purchase Contract dated July 1, 1964 (Exhibit 13-9-B, File No. 2-23006); Additional Power Contract dated as of April 30, 1984 and 1996 Amendatory Agreement dated as of December 4, 1996 (Exhibit 10(c) to 1996 Form 10-K, File No. 1-3446); Supplementary Power Contract dated as of April 1, 1987 (Exhibit 10(c) to 1987 Form 10-K, File No. 0-1229); Capital Funds Agreement dated September 1, 1964 (Exhibit 13-9-C, File No. 2-23006); Transmission Agreement dated October 1, 1964 (Exhibit 13-9-D, File No. 2-23006); Agreement revising Transmission Agreement dated July 1, 1979 (Exhibit to NEES' 1979 Form 10-K, File No. 1-3446); Amendment revising Transmission Agreement dated as of January 19, 1994 (Exhibit 10(c) to NEES' 1995 Form 10-K, File No. 1-3446; Five Year Capital Contribution Agreement dated November 1, 1980 (Exhibit 10(e) to NEES' 1980 Form 10-K, File No. 1-3446). (d) Maine Yankee Atomic Power Company et al. and the Company: Capital Funds Agreement dated May 20, 1968 and Power Purchase Contract dated May 20, 1968 (Exhibit 4-5, File No. 2-29145); Amendments dated as of January 1, 1984, March 1, 1984 (Exhibit 10(d) to NEES' 1983 Form 10-K, File No. 1-3446); October 1, 1984, and August 1, 1985 (Exhibit 10(d) to NEES' 1985 Form 10-K, File No. 1-3446); Stockholders Agreement dated May 20, 1968 (Exhibit 10-20; File No. 2-34267); Additional Power Contract dated as of February 1, 1984 (Exhibit 10(d) to NEES' 1985 Form 10-K, File No. 1-3446); 1997 Amendatory Agreement dated as of August 6, 1997 (Exhibit 10(d) to NEES' 1997 Form 10-K, File No. 1-3446). (e) Mass. Electric and the Company: Primary Service for Resale dated February 15, 1974 (Exhibit 5-17(a), File No. 2-52969); Amendment of Service Agreement dated June 22, 1983 (Exhibit 10(b) to Mass. Electric's 1986 Form 10-K, File No. 0-5464); Amendment of Service Agreement effective November 1, 1993 (Exhibit 10(e) to 1993 Form 10-K, File No. 0-1229); Memorandum of Understanding effective May 22, 1994 (Exhibit 10(e) to 1994 Form 10-K, File No. 0-1229); Amendment of Service Agreement effective July 1, 1996 (filed herewith); Amendment to Service Agreement dated as of February 1, 1997 (filed herewith). (f) The Narragansett Electric Company and the Company: Primary Service for Resale dated February 15, 1974 (Exhibit 4-1(b), File No. 2-51292); Amendment of Service Agreement dated July 26, 1990 (Exhibit 4(f) to New England Power Company's 1990 Form 10-K, File No. 0-1229). Amendment of Service Agreement dated July 24, 1991 (Exhibit 10(f) to 1991 Form 10-K, File No. 0-1229); Amendment of Service Agreement effective November 1, 1993 (Exhibit 10(f) to 1993 Form 10-K, File No. 0- 1229); Memorandum of Understanding effective May 22, 1994 (Exhibit 10(e) to 1994 Form 10-K, File No. 0-1229); Amendment of Service Agreement effective January 1, 1995 (Exhibit 10(f) to 1995 Form 10-K, File No. 0-1229); Amendment of Service Agreement effective October 30, 1995 (filed herewith); Amendment to Service Agreement dated as of February 1, 1997 (filed herewith). (g) New England Electric Transmission Corporation et al. and the Company: Phase I Terminal Facility Support Agreement dated as of December 1, 1981 (Exhibit 10(g) to NEES' 1981 Form 10-K, File No. 1-3446); Amendments dated as of June 1, 1982 and November 1, 1982 (Exhibit 10(f) to NEES' 1982 Form 10-K, File No. 1-3446); Agreement with respect to Use of the Quebec Interconnection dated as of December 1, 1981 (Exhibit 10(g) to NEES' 1981 Form 10-K, File No. 1-3446); Amendments dated as of May 1, 1982 and November 1, 1982 (Exhibit 10(f) to NEES' 1982 Form 10-K, File No. 1-3446); Amendment dated as of January 1, 1986 (Exhibit 10(f) to NEES' 1986 Form 10-K, File No. 1-3446); Agreement for Reinforcement and Improvement of the Company's Transmission System dated as of April 1, 1983 (Exhibit 10(f) to NEES' 1983 Form 10-K, File No. 1-3446); Lease dated as of May 16, 1983 (Exhibit 10(f) to NEES' 1983 Form 10-K, File No. 1-3446); Upper Development-Lower Development Transmission Line Support Agreement dated as of May 16, 1983 (Exhibit 10(f) to NEES' 1983 Form 10-K, File No. 1-3446). (h) Vermont Electric Transmission Company, Inc. et al. and the Company: Phase I Vermont Transmission Line Support Agreement dated as of December 1, 1981; Amendments dated as of June 1, 1982 and November 1, 1982 (Exhibit 10(g) to NEES' 1982 Form 10-K, File No. 1-3446); Amendment dated as of January 1, 1986 (Exhibit 10(h) to NEES' 1986 Form 10-K, File No. 1-3446). (i) New England Energy Incorporated and the Company: Fuel Purchase Contract dated July 26, 1979, and Amendment dated August 26, 1981 (Exhibit 10(f)(iii) to NEES' 1981 Form 10-K, File No. 1-3446); Amendment dated March 26, 1985, and Amendment effective January 1, 1984 (Exhibit 10(e)(iii) to NEES' 1985 Form 10-K, File No. 1-3446); Amendment dated as of April 28, 1989 (Exhibit 10(e)(iii) to 1989 NEES Form 10-K, File No. 1-3446). (j) New England Power Pool Agreement: (Exhibit 4(e), File No. 2-43025); Amendments dated July 1, 1972, March 1, 1973 (Exhibit 10-15, File No. 2-48543);Amendment dated March 15, 1974 (Exhibit 10-5, File No. 2-52775); Amendment dated June 1, 1975 (Exhibit 10-14, File No. 2-57831); Amendment dated September 1, 1975 (Exhibit 10-13, File No. 2-59182); Amendments dated December 31, 1976, January 31, 1977, July 1, 1977, and August 1, 1977 (Exhibit 10-16, File No. 2-61881); Amendments dated August 15, 1978, January 3, 1980, and February 1980 (Exhibit 10-3, File No. 2-68283); Amendment dated September 1, 1981 (Exhibit 10(h) to NEES' 1981 Form 10-K, File No. 1-3446); Amendment dated December 1, 1981 (Exhibit 10(h) to NEES' 1982 Form 10-K, File No. 1-3446); Amendments dated June 1, 1982, June 15, 1983, and October 1, 1983 (Exhibit 10(i) to NEES' 1983 Form 10-K, File 1-3446); Amendments dated August 1, 1985, August 15, 1985, September 1, 1985, and January 1, 1986 (Exhibit 10(i) to NEES' 1985 Form 10-K, File No. 1-3446); Amendment dated September 1, 1986 (Exhibit 10(i) to NEES' 1986 Form 10-K, File No. 1-3446); Amendment dated April 30, 1987 (Exhibit 10(i) to NEES' 1987 Form 10-K, File No. 1-3446); Amendments dated March 1, 1988 and May 1, 1988 (Exhibit 10(i) to NEES' 1988 Form 10-K, File No. 1-3446); Amendment dated March 15, 1989 (Exhibit 10(i) to 1989 NEES Form 10-K, File No. 1-3446); Amendment dated October 1, 1990 (Exhibit 10(i) to 1990 NEES Form 10-K, File No. 1-3446); Amendment dated October 1, 1990 Exhibit 10(i) to 1990 NEES Form 10-K, File No. 1-3446); Amendment dated as of September 15, 1992 (Exhibit 10(i) to 1992 NEES Form 10-K, File No. 1-3446); Amendments dated as of June 1, 1993, July 1, 1995, and September 1, 1995 (Exhibit 10(i) to 1995 NEES Form 10-K, File No. 1-3446); Amendment dated as of December 1, 1996 (Exhibit 10(i) to 1996 NEES Form 10-K, File No. 1-3446). Amendment dated as of September 1, 1997 and Amendment dated as of November 15, 1997 (Exhibit 10(i) to 1997 NEES Form 10-K, File No. 1-3446). (k) New England Power Service Company and the Company: Specimen of Service Contract (Exhibit 10(l) to 1994 Form 10-K, File No. 0-1229). (l) Massachusetts Electric Company, et al. and the Company: Form of Mutual Assistance Agreement (Exhibit 10(n) to 1996 Form 10-K, File No. 0-1229). (m) Massachusetts Electric Company, et al. and the Company: Restructuring Settlement Agreement approved by the Massachusetts Department of Public Utilities (Exhibit 10(o) to 1996 Form 10-K, File No. 0-1229). (n) Public Service Company of New Hampshire et al. and the Company: Agreement for Joint Ownership, Construction and Operation of New Hampshire Nuclear Units dated as of May 1, 1973; Amendments dated May 24, 1974, June 21, 1974, September 25, 1974 and October 25, 1974 (Exhibit 10-18(b), File No. 2-52820); Amendment dated January 31, 1975 (Exhibit 10-16(b), File No. 2-57831); Amendments dated April 18, 1979, April 25, 1979, June 8, 1979, October 11, 1979, December 15, 1979, June 16, 1980, and December 31, 1980 (Exhibit 10(i) to NEES' 1980 Form 10-K, File No. 1-3446); Amendments dated June 1, 1982, April 27, 1984, and June 15, 1984 (Exhibit 10(j) to NEES' 1984 Form 10-K, File No. 1-3446); Amendments dated March 8, 1985, March 14, 1986, May 1, 1986, and September 19, 1986 (Exhibit 10(j) to NEES' 1986 Form 10-K, File No. 1-3446); Amendment dated November 12, 1987 (Exhibit 10(j) to NEES' 1987 Form 10-K, File No. 1-3446); Amendment dated January 13, 1989 (Exhibit 10(j) to NEES' 1990 Form 10-K, File No. 1-3446); Seventh Amendment as of November 1, 1990 (Exhibit 10(m) to NEES' 1991 Form 10-K, File No. 1-3446). Transmission Support Agreement dated as of May 1, 1973 (Exhibit 10-23, File No. 2-49184); Instrument of Transfer to the Company with respect to the New Hampshire Nuclear Units and Assumptions of Obligations dated December 17, 1975 and Agreement Among Participants in New Hampshire Nuclear Units, certain Massachusetts Municipal Systems and Massachusetts Municipal Wholesale Electric Company dated May 28, 1976 (Exhibit 16(c), File No. 2-57831); Seventh Amendment To and Restated Agreement for Seabrook Project Disbursing Agent dated as of November 1, 1990 (Exhibit 10(m) to NEES' 1991 Form 10-K, File No. 1-3446); Amendments dated as of June 29, 1992 (Exhibit 10(j) to NEES' 1992 Form 10-K, File No. 1- 3446). Settlement Agreement dated as of July 19, 1990 between Northeast Utilities Service Company and the Company (Exhibit 10(m) to NEES' 1991 Form 10-K, File No. 1-3446). Seabrook Project Managing Agent Operating Agreement dated as of June 29, 1992, Amendment to Seabrook Project Managing Agent Operating Agreement dated as of June 29, 1992 (Exhibit 10(j) to NEES' 1992 Form 10-K, File No. 1- 3446). (o) Vermont Yankee Nuclear Power Corporation et al. and the Company: Capital Funds Agreement dated February 1, 1968, Amendment dated March 12, 1968 and Power Purchase Contract dated February 1, 1968 (Exhibit 4-6, File No. 2-29145); Amendments dated as of June 1, 1972, April 15, 1983 (Exhibit 10(k) to NEES' 1983 Form 10-K, File No. 0-1229) and April 24, 1985 (Exhibit 10(n) to NEES' 1985 Form 10-K, File No. 1-3446); Amendment dated as of June 1, 1985 (Exhibit 10(n) to 1988 Form 10-K, File No. 0-1229); Amendments dated May 6, 1988 (Exhibit 10(n) to 1988 Form 10-K, File No. 0-1229); Amendment dated as of June 15, 1989 (Exhibit 10(k) to 1989 NEES Form 10-K, File No. 1-3446); Additional Power Contract dated as of February 1, 1984 (Exhibit 10(k) to NEES' 1983 Form 10-K, File No. 1-3446); Guarantee Agreement dated as of November 5, 1981 (Exhibit 10(j) to NEES' 1981 Form 10-K, File No. 1-3446). (p) Yankee Atomic Electric Company et al. and the Company: Amended and Restated Power Contract dated April 1, 1985 (Exhibit 10(l) to NEES' 1985 Form 10-K, File No. 1-3446); Amendment dated May 6, 1988 (Exhibit 10(l) to NEES' 1988 Form 10-K, File No. 1-3446); Amendments dated as of June 26, 1989 and July 1, 1989 (Exhibit 10(l) to 1989 NEES Form 10-K, File No. 1-3446); Amendment dated as of February 1, 1992 (Exhibit 10(l) to 1992 NEES Form 10-K, File No. 1-3446). *(q) New England Electric Companies' Deferred Compensation Plan as amended through November 26, 1996 (Exhibit 10(m) to NEES' 1996 Form 10-K, File No. 1-3446). *(r) New England Electric System Companies Retirement Supplement Plan as amended through June 1, 1996 (Exhibit 10(n) to NEES' 1996 Form 10-K, File No. 1-3446). *(s) New England Electric Companies' Executive Supplemental Retirement Plan I as amended through May 20, 1996 (Exhibit 10(o) to NEES' 1996 Form 10-K, File No. 1-3446). *(t) New England Electric Companies Executive Supplemental Retirement Plan II as amended through October 25, 1995 (Exhibit 10(p) to NEES' 1996 Form 10-K, File No. 1-3446). *(u) New England Electric Companies' Incentive Compensation Plan I as amended through October 24, 1995 (Exhibit 10(p) to NEES' 1996 Form 10-K, File No. 1-3446). *(v) New England Electric Companies' Incentive Compensation Plan II as amended through January 1, 1995 (Exhibit 10(r) to NEES' 1995 Form 10-K, File No. 1-3446). *(w) New England Electric Companies' Incentive Compensation Plan III as amended through January 1, 1996 (Exhibit 10(s) to NEES' 1996 Form 10-K, File No. 1-3446). *(x) New England Electric Companies' Senior Incentive Compensation Plan as amended through January 1, 1995 (Exhibit 10(q) to NEES' 1995 Form 10-K, File No. 1-3446). *(y) Forms of Life Insurance Program: (Exhibit 10(s) to NEES' 1986 Form 10-K, File No. 1-3446); and Form of Life Insurance (Collateral Assignment) (Exhibit 10(t) to NEES' 1991 Form 10-K, File No. 1-3446). *(z) New England Electric Companies' Incentive Share Plan as amended through February 24, 1997 (Exhibit 10 (w) to NEES 1996 Form 10-K, File No. 1-3446). *(aa) New England Electric System Directors' Retirement Plan dated May 1, 1994 (Exhibit 10(y) to 1996 NEES Form 10-K, File No. 1-3446. *(bb) Forms of Severance Protection Agreement (Exhibit 10 (z) to NEES' 1996 Form 10-K, File No. 1-3446). *(cc) New England Electric Companies' Long-Term Performance Share Award Plan amended through February 24, 1997 (Exhibit 10(x) to NEES' 1996 Form 10-K, File No. 1-3446). (dd) New England Hydro-Transmission Electric Company, Inc. et al. and the Company: Phase II Massachusetts Transmission Facilities Support Agreement dated as of June 1, 1985 (Exhibit 10(t) to NEES' 1986 Form 10-K, File No. 1-3446); Amendment dated as of May 1, 1986 (Exhibit 10(t) to NEES' 1986 Form 10-K, File No. 1-3446); Amendments dated as of February 1, 1987, June 1, 1987, September 1, 1987, and October 1, 1987 (Exhibit 10(u) to NEES' 1987 Form 10-K, File No. 1-3446); Amendment dated as of August 1, 1988 (Exhibit 10(u) to NEES' 1988 Form 10-K, File No. 1-3446); Amendment dated January 1, 1989 (Exhibit 10(u) to NEES' 1990 Form 10-K, File No. 1-3446). (ee) New England Hydro-Transmission Corporation et al. and the Company: Phase II New Hampshire Transmission Facilities Support Agreement dated as of June 1, 1985 (Exhibit 10(u) to NEES' 1986 Form 10-K, File No. 1-3446); Amendment dated as of May 1, 1986 (Exhibit 10(u) to NEES' 1986 Form 10-K, File No. 1-3446); Amendments dated as of February 1, 1987, June 1, 1987, September 1, 1987, and October 1, 1987 (Exhibit 10(v) to NEES' 1987 Form 10-K, File No. 1-3446). Amendment dated as of August 1, 1988 (Exhibit 10(v) to NEES' 1988 Form 10-K, File No. 1-3446); Amendments dated January 1, 1989 and January 1, 1990 (Exhibit 10 (v) to NEES' 1990 Form 10-K, File No. 1-3446). (ff) Vermont Electric Power Company et al. and the Company: Phase II New England Power AC Facilities Support Agreement dated as of June 1, 1985 (Exhibit 10(v) to NEES' 1986 Form 10-K, File No. 1-3446); Amendment dated as of May 1, 1986 (Exhibit 10(v) to NEES' 1986 Form 10-K, File No. 1-3446). Amendments dated as of February 1, 1987, June 1, 1987, and September 1, 1987 (Exhibit 10(w) to NEES' 1987 Form 10-K, File No. 1-3446); Amendment dated as of August 1, 1988 (Exhibit 10(w) to NEES' 1988 Form 10-K, File No. 1-3446). (gg) USGen New England Contracts (i) Asset Purchase Agreement between the Company and The Narragansett Electric Company: dated as of August 5, 1997 (Exhibit 2 to NEES' Form 10-Q for period ended September 30, 1997, File No. 1-3446). (ii) Wholesale Sales Agreement between the Company and USGen New England, Inc. dated as of August 5, 1997 (filed herewith). (iii) PPA Transfer Agreement between the Company and USGen New England, Inc. dated as of August 5, 1997 (filed herewith). (iv) Form of PSA Performance Support Agreement between the Company, USGen New England, Inc., and each of the following; North Attleboro Electric Department, Groton Electric Light Department, Middleton Municipal Electric Department, Hingham Municipal Lighting Plant, Town of Holden Municipal Light Department, Unitil Power Corp. (Salem Harbor), Unitil Power Corp. (Ocean State), Bangor Hydro- Electric Company, Montaup Electric Company, Central Vermont Public Service Corporation, Braintree Electric Light Department, Littleton Electric Light Department, Massachusetts Government Land Bank, Reading (MA) Municipal Light Department, Shrewsbury Electric Light Plant, Taunton Municipal Light Plant, and Vermont Electric Company, dated as of August 5, 1997 (filed herewith). *(hh) New England Power Company and Andrew H. Aitken: Employment Agreement entered into as of December 9, 1997 (filed herewith). * Compensation related plan, contract, or arrangement. (13) 1997 Annual Report to Stockholders (filed herewith). (21) Subsidiary list (filed herewith). (24) Power of Attorney (filed herewith). (27) Financial Data Schedule (filed herewith). Mass. Electric -------------- (3) (a) Articles of Organization of the Company as amended March 5, 1993, August 11, 1993, September 20, 1993, and November 15, 1993 (Exhibit 3(a) to 1993 Form 10-K, File No. 0-5464). (b) By-Laws of the Company as amended December 12, 1997 (filed herewith). (4) First Mortgage Indenture and Deed of Trust, dated as of July 1, 1949, and twenty-one supplements thereto (Exhibit 7-A, File No. 1-8019; Exhibit 7-B, File No. 2-8836; Exhibit 4-C, File No. 2-9593; Exhibit 4 to 1980 Form 10-K, File No. 2-8019; Exhibit 4 to 1982 Form 10-K, File No. 0-5464; Exhibit 4 to 1986 Form 10-K, File No. 0-5464); Exhibit 4 to 1988 Form 10-K, File No. 0-5464; Exhibit 4(a) to 1989 NEES Form 10-K, File No. 1-3446; Exhibit 4(a) to 1992 NEES Form 10-K, File No. 1-3446; Exhibit 4(a) to 1993 NEES Form 10-K, File No. 1-3446; Exhibit 4(a) to 1995 NEES Form 10-K, File No. 1-3446). (10) Material Contracts (a) Boston Edison Company et al. and Company: Amended REMVEC Agreement dated August 12, 1977 (Exhibit 5-4(d), File No. 2-61881). (i) Boston Edison Company et al. and Company: REMVEC II Agreement dated on or about July 1, 1997 (Exhibit 10(a)(i) to NEES' 1997 Form 10- K, File No. 1-3446). (ii) Boston Edison Company et al. and Company: Security Analysis Services Agreement dated on or about July 1, 1997 (Exhibit 10(a)(ii) to NEES' 1997 Form 10- K, File No. 1-3446). (b) New England Power Company and the Company: Primary Service for Resale dated February 15, 1974 (Exhibit 5-17(a), File No. 2-52969); Amendment of Service Agreement dated July 22, 1983 (Exhibit 10(b) to 1986 Form 10-K, File No. 0-5464); Amendment of Service Agreement effective November 1, 1993 (Exhibit 10(e) to 1993 NEP Form 10-K, File No. 0- 1229); Memorandum of Understanding effective May 22, 1994 (Exhibit 10(e) to 1994 NEP Form 10-K, File No. 0-1229); Amendment of Service Agreement effective July 1, 1996 (Exhibit 10(e) to 1997 NEP Form 10-K, File No. 0-1229); Amendment to Service Agreement dated as of February 1, 1997 (Exhibit 10(e) to 1997 NEP Form 10-K, File No. 0-1229). (c) New England Power Pool Agreement: (Exhibit 4(e), File No. 2-43025); Amendments dated July 1, 1972, and March 1, 1973 (Exhibit 10-15, File No. 2-48543); Amendment dated March 15, 1974 (Exhibit 10-5, File No. 2-52775); Amendment dated June 1, 1975 (Exhibit 10-14, File No. 2-57831); Amendment dated September 1, 1975 (Exhibit 10-13, File No. 2-59182); Amendments dated December 31, 1976, January 31, 1977, July 1, 1977, and August 1, 1977 (Exhibit 10-16, File No. 2-61881); Amendments dated August 15, 1978, January 3, 1980, and February 1980 (Exhibit 10-3, File No. 2-68283); Amendment dated September 1, 1981 (Exhibit 10(h) to NEES' 1981 Form 10-K, File No. 1-3446); Amendment dated as of December 1, 1981 (Exhibit 10(h) to NEES' 1982 Form 10-K, File No. 1-3446); Amendments dated June 1, 1982, June 15, 1983, and October 1, 1983 (Exhibit 10(i) to NEES' 1983 Form 10-K, File No. 1-3446); Amendments dated August 1, 1985, August 15, 1985, September 1, 1985, and January 1, 1986 (Exhibit 10(i) to NEES' 1985 Form 10-K, File No. 1-3446); Amendment dated September 1, 1986 (Exhibit 10(i) to NEES' 1986 Form 10-K, File No. 1-3446); Amendments dated April 30, 1987 (Exhibit 10(i) to NEES' 1987 Form 10-K, File No. 1-3446); Amendments dated March 1, 1988 and May 1, 1988 (Exhibit 10(i) to NEES' 1988 Form 10-K, File No. 1-3446); Amendment dated March 15, 1989 (Exhibit 10(i) to 1989 NEES Form 10-K, File No. 1-3446). Amendment dated October 1, 1990 (Exhibit 10(i) to 1990 NEES Form 10-K, File No. 1-3446); Amendment dated as of September 15, 1992 (Exhibit 10(i) to 1992 NEES Form 10-K, File No. 1-3446). Amendments dated as of June 1, 1993, July 1, 1995, and September 1, 1995 (Exhibit 10(i) to 1995 NEES Form 10-K, File No. 1- 3446); Amendment dated as of December 1, 1996 (Exhibit 10(i) to 1996 NEES Form 10-K, File No. 1- 3446); Amendment dated as of November 28, 1997 (Exhibit 10(i) to 1997 NEES Form 10-K, File No. 1- 3446); Amendment dated as of September 1, 1997 and Amendment dated as of November 15, 1997 (Exhibit 10(i) to 1997 NEES Form 10-K, File No. 1-3446). (d) New England Power Service Company and the Company: Specimen of Service Contract (Exhibit 10(l) to 1994 NEP Form 10-K, File No. 0-1229). (e) New England Power Company et al. and the Company: Form of Mutual Assistance Agreement (Exhibit 10(n) to 1996 NEP Form 10-K, File No. 0-1229). (f) New England Power Company et al. and the Company: Restructuring Settlement Agreement approved by the Massachusetts Department of Public Utilities February 26, 1997 (Exhibit 10(o) to 1996 Form 10-K, File No. 0-1229). (g) New England Telephone and Telegraph Company and the Company: Specimen of Joint Ownership Agreement for Wood Poles (Exhibit 4(e), File No. 2-24458). *(h) New England Electric Companies' Deferred Compensation Plan as amended through November 26, 1996 (Exhibit 10(m) to NEES' 1996 Form 10-K, File No. 1-3446). *(i) New England Electric System Companies Retirement Supplement Plan as amended through June 1, 1996 (Exhibit 10(n) to NEES' 1996 Form 10-K, File No. 1-3446). *(j) New England Electric Companies' Executive Supplemental Retirement Plan I as amended through May 20, 1996 (Exhibit 10(o) to NEES' 1996 Form 10-K, File No. 1-3446). *(k) New England Electric Companies' Executive Supplemental Retirement Plan II as amended through October 25, 1995 (Exhibit 10(p) to NEES' 1996 Form 10-K, File No. 1-3446). *(l) New England Electric Companies' Incentive Compensation Plan as amended through January 1, 1995 (Exhibit 10(p) to NEES' 1995 Form 10-K, File No. 1-3446). *(m) New England Electric Companies' Incentive Compensation Plan II as amended through January 1, 1995 (Exhibit 10(r) to NEES' 1995 Form 10-K, File No. 1-3446). *(n) New England Electric Companies' Incentive Compensation Plan III as amended through January 1, 1996 (Exhibit 10(s) to NEES' 1996 Form 10-K, File No. 1-3446). *(o) New England Electric Companies' Form of Deferred Compensation Agreement for Directors (Exhibit 10(p) to NEES' 1980 Form 10-K, File No. 1-3446). *(p) New England Electric Companies' Senior Incentive Compensation Plan as amended through January 1, 1995 (Exhibit 10(q) to NEES' 1995 Form 10-K, File No. 1-3446). *(q) Forms of Life Insurance Program: (Exhibit 10(s) to NEES' 1986 Form 10-K, File No. 1-3446); and Form of Life Insurance (Collateral Assignment) (Exhibit 10(t) to NEES' 1991 Form 10-K, File No. 1-3446). *(r) New England Electric Companies' Incentive Share Plan as amended through February 24, 1997 (Exhibit 10(w) to NEES' 1996 Form 10-K, File No. 1-3446). *(s) New England Electric Companies' Long-Term Performance Share Award Plan amended through February 24, 1997 (Exhibit 10 (x) to NEES' 1996 Form 10-K, File No. 1-3446). *(t) New England Electric System Directors' Retirement Plan dated May 1, 1994 (Exhibit 10(y) to NEES' 1996 Form 10-K, File No. 1-3446. *(u) Forms of Severance Protection Agreement (Exhibit 10 (z) to NEES' 1996 Form 10-K, File No. 1-3446). *(v) New England Power Service Company and the Company: Form of Supplemental Pension Service Credit Agreement (Exhibit 10(ee) to 1992 NEES Form 10-K, File No. 1-3446). (w) Amended and Restated Wholesale Standard Offer Service Agreement among the Company, Nantucket Electric Company, and USGen New England, Inc. dated as of October 29, 1997 (filed herewith). * Compensation related plan, contract, or arrangement. (12) Statement re computation of ratios for incorporation by reference into the Mass. Electric registration statement on Form S-3, Commission File No. 333-46431 (filed herewith). (13) 1997 Annual Report to Stockholders (filed herewith). (24) Power of Attorney (filed herewith). (27) Financial Data Schedule (filed herewith). Narragansett ------------ (3) (a) Articles of Incorporation as amended June 9, 1988 (Exhibit 3(a) to 1988 Form 10-K, File No. 0-898). (b) By-Laws of the Company (Exhibit 3 to 1980 Form 10-K, File No. 0-898). (4) (a) First Mortgage Indenture and Deed of Trust, dated as of September 1, 1944, and twenty-two supplements thereto (Exhibit 7-1, File No. 2-7042; Exhibit 7-B, File No. 2-7490; Exhibit 4-C, File No. 2-9423; Exhibit 4-D, File No. 2-10056; Exhibit 4 to 1980 Form 10-K, File No. 0-898; Exhibit 4 to 1982 Form 10-K, File No. 0-898; Exhibit 4 to 1983 Form 10-K, File No. 0-898; Exhibit 4 to 1985 Form 10-K, File No. 0-898; Exhibit 4 to 1986 Form 10-K, File No. 0-898; Exhibit 4 to 1987 Form 10-K, File No. 0-898; Exhibit 4(b) to 1991 NEES Form 10-K, File No. 1-3446; Exhibit 4(b) to 1992 NEES Form 10-K, File No. 1-3446; Exhibit 4(b) to 1993 NEES Form 10-K, File No. 1-3446; Exhibit 4(b) to 1995 NEES Form 10- K, File No. 1-3446). (b) The Narragansett Electric Company Preference Provisions, as amended, dated December 15, 1997 (Exhibit 4(c) to 1997 NEES Form 10-K, File No. 1- 3446). (10) Material Contracts (a) Boston Edison Company et al. and the Company: Amended REMVEC Agreement dated August 12, 1977 (Exhibit 5-4(d), File No. 2-61881). (i) Boston Edison Company et al. and the Company: REMVEC II Agreement dated on or about July 1, 1997 (Exhibit 10(a)(i) to NEES' 1997 Form 10- K, File No. 1-3446). (ii) Boston Edison Company et al. and the Company: Security Analysis Services Agreement dated on or about July 1, 1997 (Exhibit 10(a)(ii) to NEES' 1997 Form 10-K, File No. 1-3446). (b) New England Power Company and the Company: Primary Service for Resale dated February 15, 1974 (Exhibit 4-1(b), File No. 2-51292); Amendment of Service Agreement dated July 26, 1990 (Exhibit 10(f) to 1990 NEP Form 10-K, File No. 0-1229); Amendment of Service Agreement dated July 24, 1991 (Exhibit 4(f) to 1991 NEP Form 10-K, File No. 0-1229); Amendment of Service Agreement effective November 1, 1993 (Exhibit 10(f) to 1993 NEP Form 10-K, File No. 0- 1229); Memorandum of Understanding effective May 22, 1994 (Exhibit 10(f) to 1994 NEP Form 10-K, File No. 0-1229); Amendment of Service Agreement effective January 1, 1995 (Exhibit 10(f) to 1995 NEP Form 10-K, File No. 0-1229); Amendment of Service Agreement effective October 30, 1995, Amendment of Service Agreement dated as of February 1, 1997 (Exhibit 10(f) to 1997 NEP Form 10-K, File No. 0-1229). (c) New England Power Pool Agreement: (Exhibit 4(e), File No. 2-43025); Amendments dated July 1, 1972, and March 1, 1973 (Exhibit 10-15, File No. 2-48543); Amendment dated March 15, 1974 (Exhibit 10-5, File No. 2-52775); Amendment dated June 1, 1975 (Exhibit 10-14, File No. 2-57831); Amendment dated September 1, 1975 (Exhibit 10-13, File No. 2-59182); Amendments dated December 31, 1976, January 31, 1977, July 1, 1977, and August 1, 1977 (Exhibit 10-16, File No. 2-61881); Amendments dated August 15, 1978, January 3, 1980, and February 1980 (Exhibit 10-3, File No. 2-68283); Amendment dated September 1, 1981 (Exhibit 10(h) to NEES' 1981 Form 10-K, File No. 1-3446); Amendment dated December 1, 1981 (Exhibit 10(h) to NEES' 1982 Form 10-K, File No. 1-3446); Amendments dated June 1, 1982, June 15, 1983, and October 1, 1983 (Exhibit 10(i) to NEES' 1983 Form 10-K, File No. 1-3446); Amendments dated August 1, 1985, August 15, 1985, September 1, 1985, and January 1, 1986 (Exhibit 10 (i) to NEES' 1985 Form 10-K, File No. 1-3446); Amendment dated September 1, 1986 (Exhibit 10(i) to NEES' 1986 Form 10-K, File No. 1-3446); Amendment dated April 30, 1987 (Exhibit 10(i) to NEES' 1987 Form 10-K, File No. 1-3446); Amendments dated March 1, 1988 and May 1, 1988 (Exhibit 10(i) to NEES' 1988 Form 10-K, File No. 1-3446); Amendment dated March 15, 1989 (Exhibit 10(i) to 1989 NEES Form 10-K, File No. 1-3446). Amendment dated October 1, 1990 (Exhibit 10(i) to 1990 NEES' Form 10-K, File No. 1-3446); Amendment dated as of September 15, 1992 (Exhibit 10(i) to NEES' 1992 Form 10-K, File No. 1-3446); Amendments dated as of June 1, 1993, July 1, 1995, and September 1, 1995 (Exhibit 10(i) to NEES' 1995 Form 10-K, File No. 1-3446); Amendment dated as of December 1, 1996 (Exhibit 10(i) to 1996 NEES Form 10-K, File No. 1-3446); Amendment dated as of September 1, 1997 and Amendment dated as of November 15, 1997 (Exhibit 10(i) to 1997 NEES Form 10-K, File No. 1-3446). (d) New England Power Service Company and the Company: Specimen of Service Contract (Exhibit 4(l) to 1994 NEP Form 10-K, File No. 0-1229). (e) New England Power Company et al. and the Company: Form of Mutual Assistance Agreement (Exhibit 10 (n) to 1996 Form 10-K, File No. 0-1229). (f) New England Telephone and Telegraph Company and the Company: Specimen of Joint Ownership Agreement for Wood Poles (Exhibit 3(d), File No. 2-24458). *(g) New England Electric Companies' Deferred Compensation Plan, as amended through November 26, 1996 (Exhibit 10(m) to NEES' 1996 Form 10-K, File No. 1-3446). *(h) New England Electric System Companies Retirement Supplement Plan, as amended through June 1, 1996 (Exhibit 10(n) to NEES' 1996 Form 10-K, File No. 1-3446). *(i) New England Electric Companies' Executive Supplemental Retirement Plan I, as amended through May 20, 1996 (Exhibit 10(o) to NEES' 1996 Form 10-K, File No. 1-3446). *(j) New England Electric Companies' Executive Supplemental Retirement Plan II, as amended through October 25, 1995 (Exhibit 10(p) to NEES' 1996 Form 10-K, File No. 1-3446). *(k) New England Companies' Incentive Compensation Plan, as amended through January 1, 1995 (Exhibit 10(p) to NEES' 1995 Form 10-K, File No. 1-3446). *(l) New England Electric Companies' Incentive Compensation Plan II as amended through January 1, 1995 (Exhibit 10(r) to NEES' 1995 Form 10-K, File No. 1-3446). *(m) New England Electric Companies' Incentive Compensation Plan III as amended through January 1, 1996 (Exhibit 10(s) to NEES' 1996 Form 10-K, File No. 1-3446). *(n) New England Electric Companies' Form of Deferred Compensation Agreement for Directors (Exhibit 10(p) to NEES' 1980 Form 10-K, File No. 1-3446). *(o) New England Electric Companies' Senior Incentive Compensation Plan as amended through January 1, 1995 (Exhibit 10(q) to NEES' 1995 Form 10-K, File No. 1-3446). *(p) Forms of Life Insurance Program (Exhibit 10(s) to NEES' 1986 Form 10-K, File No. 1-3446); and Form of Life Insurance (Collateral Assignment) (Exhibit 10(t) to NEES' 1991 Form 10-K, File No. 1-3446). *(q) New England Electric Companies' Incentive Share Plan as amended through February 24, 1997 (Exhibit 10(u) to NEES' 1995 Form 10-K, File No. 1-3446). *(r) New England Power Service Company and the Company: Form of Supplemental Pension Service Credit Agreement (Exhibit 10(ee) to 1992 NEES Form 10-K, File No. 1-3446). *(s) New England Electric Companies Long-Term Performance Share Award Plan amended through February 24, 1997 (Exhibit 10 (x) to NEES' 1996 Form 10-K, File No. 1-3446). *(t) New England Electric System Directors' Retirement Plan dated May 1, 1994 (Exhibit 10 (y) to NEES 1996 Form 10-K, File No. 1-3446). *(u) Forms of Severance Protection Agreement (Exhibit 10(z) to NEES' 1996 Form 10-K, File No. 1-3446). (v) USGen New England, Inc. Contracts (i) Asset Purchase Agreement between the Company and New England Power Company dated as of August 5, 1997 (Exhibit 2 to NEES' Form 10-Q for the period ended September 30, 1997, File No. 1-3446). (ii) Amended and Restated Wholesale Standard Offer Service Agreement between the Company and USGen New England, Inc. dated as of October 29, 1997 (filed herewith). * Compensation related plan, contract, or arrangement. (12) Statement re computation of ratios for incorporation by reference into the Narragansett registration statement on Form S-3, Commission File No. 33-61131 (filed herewith). (13) 1997 Annual Report to Stockholders (filed herewith). (24) Power of Attorney (filed herewith). (27) Financial Data Schedule (filed herewith). Reports on Form 8-K NEES ---- NEES filed reports on Form 8-K dated November 21, 1997, December 3, 1997, December 12, 1997, and December 23, 1997, all of which contained ITEM 5. NEP --- NEP filed reports on Form 8-K dated November 21, 1997, December 12, 1997, and December 23, 1997, all of which contained ITEM 5. Mass. Electric -------------- Mass. Electric filed reports on Form 8-K dated November 25, 1997, December 12, 1997, and December 23, 1997, all of which contained ITEM 5. Narragansett ------------ Narragansett filed reports on Form 8-K dated November 25, 1997 and December 12, 1997, both of which contained ITEM 5. NEW ENGLAND ELECTRIC SYSTEM 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. NEW ENGLAND ELECTRIC SYSTEM* s/Richard P. Sergel Richard P. Sergel President and Chief Executive Officer March 31, 1998 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 date indicated. (Signature and Title) Principal Executive Officer s/Richard P. Sergel Richard P. Sergel President and Chief Executive Officer Principal Financial Officer s/Michael E. Jesanis Michael E. Jesanis Senior Vice President and Chief Financial Officer Principal Accounting Officer s/John G. Cochrane John G. Cochrane Treasurer Directors (a majority) Joan T. Bok William M. Bulger Alfred D. Houston Paul L. Joskow John M. Kucharski Edward H. Ladd Joshua A. McClure George M. Sage s/John G. Cochrane Richard P. Sergel All by: Charles E. Soule John G. Cochrane Anne Wexler Attorney-in-fact James Q. Wilson James R. Winoker Date (as to all signatures on this page) March 31, 1998 *The name "New England Electric System" means the trustee or trustees for the time being (as trustee or trustees but not personally) under an agreement and declaration of trust dated January 2, 1926, as amended, which is hereby referred to, and a copy of which as amended has been filed with the Secretary of the Commonwealth of Massachusetts. Any agreement, obligation or liability made, entered into or incurred by or on behalf of New England Electric System binds only its trust estate, and no shareholder, director, trustee, officer or agent thereof assumes or shall be held to any liability therefor. NEW ENGLAND 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 signature of the undersigned company shall be deemed to relate only to matters having reference to such company. NEW ENGLAND POWER COMPANY s/Lawrence E. Bailey Lawrence E. Bailey President 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 date indicated. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named company. (Signature and Title) Principal Executive Officer s/Lawrence E. Bailey Lawrence E. Bailey President Principal Financial Officer s/John G. Cochrane John G. Cochrane Treasurer Principal Accounting Officer s/Howard W. McDowell Howard W. McDowell Controller Directors (a majority) Lawrence E. Bailey Alfred D. Houston Cheryl A. LaFleur s/John G. Cochrane All by: John G. Cochrane Attorney-in-fact Date (as to all signatures on this page) March 31, 1998 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. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company. MASSACHUSETTS ELECTRIC COMPANY s/Lawrence J. Reilly Lawrence J. Reilly President 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 date indicated. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named company. (Signature and Title) Principal Executive Officer s/Lawrence J. Reilly Lawrence J. Reilly President Principal Financial Officer s/John G. Cochrane John G. Cochrane Treasurer Principal Accounting Officer s/Howard W. McDowell Howard W. McDowell Controller Directors (a majority) Cheryl A. LaFleur Robert L. McCabe Lydia M. Pastuszek Lawrence J. Reilly Christopher E. Root s/John G. Cochrane Richard P. Sergel All by: Dennis E. Snay John G. Cochrane Attorney-in-fact Date (as to all signatures on this page) March 31, 1998 THE NARRAGANSETT 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. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company. THE NARRAGANSETT ELECTRIC COMPANY s/Lawrence J. Reilly Lawrence J. Reilly President 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 date indicated. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named company. (Signature and Title) Principal Executive Officer s/Lawrence J. Reilly Lawrence J. Reilly President Principal Financial Officer s/John G. Cochrane John G. Cochrane Treasurer Principal Accounting Officer s/Howard W. McDowell Howard W. McDowell Controller Directors (a majority) s/John G. Cochrane Cheryl A. LaFleur All by: Robert L. McCabe John G. Cochrane Lawrence J. Reilly Attorney-in-fact Michael F. Ryan Richard P. Sergel Ronald L. Thomas Date (as to all signatures on this page) March 31, 1998 NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
References (Page) ----------------------- 1997 Annual Form Report to 10-K Shareholders* ---- ------------- Report of Independent Accountants........................... 45 Statements of Consolidated Income, Year Ended December 31, 1997, 1996 and 1995............. 23 Statements of Consolidated Retained Earnings, Year Ended December 31, 1997, 1996 and 1995............. 23 Consolidated Balance Sheets, December 31, 1997 and 1996... 24 Consolidated Statements of Cash Flows, Year Ended December 31, 1997, 1996 and 1995............. 25 Consolidated Statements of Capitalization, December 31, 1997 and 1996.............................. 26 Notes to Financial Statements............................... 27-44 For the Year Ended December 31, 1997, 1996 and 1995: Consent of Independent Accountants........................ 103 * Incorporated by Reference
CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We consent to the incorporation by reference in the registration statements of New England Electric System on Form S-3 of the Dividend Reinvestment and Common Share Purchase Plan (File No. 33-12313) and on Forms S-8 of the New England Electric System Companies Incentive Thrift Plan (File No. 33-26066), the New England Electric System Companies Incentive Thrift Plan II (File No. 33-35470) and the Yankee Atomic Electric Company Thrift Plan (File No. 2-67531) of our report dated March 2, 1998 on our audits of the consolidated financial statements of New England Electric System and subsidiaries as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997, which report is incorporated by reference in this Annual Report on Form 10-K. We also consent to the incorporation by reference in the registration statements of New England Electric System on Form S-4 (File No. 333- 47383), Massachusetts Electric Company on Form S-3 (File No. 333-46431) and The Narragansett Electric Company on Form S-3 (File No. 33-61131) of our reports dated March 2, 1998 on our audits of the financial statements of New England Electric System, Massachusetts Electric Company and The Narragansett Electric Company, respectively, as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997, which reports are incorporated by reference in this Annual Report on Form 10-K. s/ Coopers & Lybrand L.L.P. Boston, Massachusetts COOPERS & LYBRAND L.L.P. March 30, 1998 NEW ENGLAND POWER COMPANY INDEX TO FINANCIAL STATEMENTS
References (Page) ---------------------- 1997 Annual Form Report to 10-K Shareholders* ---- ------------- Report of Independent Accountants........................... 1 Statements of Income, Year Ended December 31, 1997, 1996 and 1995............... 12 Statements of Retained Earnings, Year Ended December 31, 1997, 1996 and 1995............... 12 Balance Sheets, December 31, 1997 and 1996.................. 13 Statements of Cash Flows, Year Ended December 31, 1997, 1996 and 1995............... 14 Notes to Financial Statements............................... 15-35 For the Year Ended December 31, 1997, 1996 and 1995: Consent of Independent Accountants....................... 103 * Incorporated by Reference.
MASSACHUSETTS ELECTRIC COMPANY INDEX TO FINANCIAL STATEMENTS
References (Page) ---------------------- 1997 Annual Form Report to 10-K Shareholders* ---- ------------- Report of Independent Accountants........................... 1 Statements of Income, Year Ended December 31, 1997, 1996 and 1995............... 8 Statements of Retained Earnings, Year Ended December 31, 1997, 1996 and 1995............... 8 Balance Sheets, December 31, 1997 and 1996.................. 9 Statements of Cash Flows, Year Ended December 31, 1997, 1996 and 1995............... 10 Notes to Financial Statements............................... 11-25 For the Year Ended December 31, 1997, 1996 and 1995: Consent of Independent Accountants........................ 103 * Incorporated by Reference.
THE NARRAGANSETT ELECTRIC COMPANY INDEX TO FINANCIAL STATEMENTS
References (Page) ---------------------- 1997 Annual Form Report to 10-K Shareholders* ---- ------------- Report of Independent Accountants........................... 1 Statements of Income, Year Ended December 31, 1997, 1996 and 1995............... 8 Statements of Retained Earnings, Year Ended December 31, 1997, 1996 and 1995............... 8 Balance Sheets, December 31, 1997 and 1996.................. 9 Statements of Cash Flows, Year Ended December 31, 1997, 1996 and 1995............... 10 Notes to Financial Statements............................... 11-24 For the Year Ended December 31, 1997, 1996 and 1995: Consent of Independent Accountants........................ 103 * Incorporated by Reference.
EX-99 2 NEES EXHIBIT INDEX --------------- Exhibit No. Description Page - ----------- ----------- ---- (3) Agreement and Declaration of Incorporated Trust dated January 2, 1926, by Reference as amended through April 28, 1992 (4)(a) Massachusetts Electric Company Incorporated First Mortgage Indenture and by Reference Deed of Trust, dated as of July 1, 1949, and twenty-one supplements thereto (4)(b) The Narragansett Electric Incorporated Company First Mortgage Indenture by Reference and Deed of Trust, dated as of September 1, 1944, and twenty-two supplements thereto (4)(c) The Narragansett Electric Filed herewith Company Preference Provisions, as amended, dated December 15, 1997 (4)(d) New England Power Company General Incorporated and Refunding Mortgage Indenture by Reference and Deed of Trust dated as of January 1, 1977 and twenty supplements thereto (10)(a) Boston Edison Company et al. and Incorporated New England Power Company: by Reference Amended REMVEC Agreement dated August 12, 1977 (10)(a)(i) Boston Edison Company et al. and Filed herewith New England Power Company: REMVEC II Agreement dated on or about July 1, 1994 (10(a)(ii) Boston Edison Company et al. and Filed herewith New England Power Company: Security Analysis Service Agreement dated on or about July 1, 1994 (10)(b) The Connecticut Light and Power Incorporated Company et al. and New England by Reference Power Company: Sharing Agreement for Joint Ownership, Construction and Operation of Millstone Unit No. 3 dated as of September 1, 1973, and Amendments thereto; Transmission Support Agreement dated August 9, 1974; Instrument of Transfer to NEP with respect to the 1979 Connecticut Nuclear Unit, and Assumption of Obligations, dated December 17, 1975 (10)(c) Connecticut Yankee Atomic Power Incorporated Company et al. and New England by Reference Power Company: Stockholders Agreement dated July 1, 1964; Power Purchase Contract dated July 1, 1964; Additional Power Contract dated as of April 30, 1984 and 1996 Amendatory Agreement dated as of December 4, 1996; Supplementary Power Contract dated as of April 1, 1987, Capital Funds Agreement dated September 1, 1964; Transmission Agreement dated October 1, 1964; Agreement revising Transmission Agreement dated July 1, 1979 and Amendment thereto dated January 19, 1994 (10)(d) Maine Yankee Atomic Power Company Incorporated et al. and New England Power by Reference Company: Capital Funds Agreement dated May 20, 1968 and Power Purchase Contract dated May 20, 1968; Amendments dated as of January 1, 1984, March 1, 1984, October 1, 1984, and August 1, 1985; Stockholders Agreement dated May 20, 1968; Additional Power Contract dated as of February 1, 1984 1997 Amendatory Agreement dated Filed herewith as of August 6, 1997 (10)(e)(i) New England Energy Incorporated Incorporated Capital Funds Agreement with by Reference NEES dated November 1, 1974 and Amendments thereto (10)(e)(ii) New England Energy Incorporated Incorporated Loan Agreement with NEES dated by Reference July 19, 1978 and effective November 1, 1974, and Amendments thereto (10)(e)(iii) New England Energy Incorporated Incorporated Fuel Purchase Contract with by Reference New England Power Company dated July 26, 1979, and Amendments thereto (10)(e)(iv) New England Energy Incorporated Incorporated Partnership Agreement with by Reference Samedan Oil Corporation as Amended and Restated on February 5, 1985 and Amendment thereto (10)(e)(v) New England Energy Incorporated Incorporated Credit Agreement dated as of by Reference April 13, 1995 (10)(e)(vi) New England Energy Incorporated Incorporated Capital Maintenance Agreement by Reference dated November 15, 1985, and Assignment and Security Agreement dated November 15, 1985 and Amendments thereto (10)(f) New England Power Company and Incorporated New England Electric Transmission by Reference Corporation et al.: Phase I Terminal Facility Support Agreement dated as of December 1, 1981 and Amendments thereto; Agreement with respect to Use of the Quebec Interconnection dated as of December 1, 1981 and Amendments thereto; Agreement for Reinforcement and Improvement of New England Power Company's Transmission System dated as of April 1, 1983; Lease dated as of May 16, 1983; Upper Development - Lower Development Transmission Line Support Agreement dated as of May 16, 1983 (10)(g) New England Electric Transmission Incorporated Corporation and PruCapital by Reference Management, Inc. et al: Note Agreement dated as of September 1, 1986; Mortgage, Deed of Trust and Security Agreement dated as of September 1, 1986; Equity Funding Agreement with New England Electric System dated as of December 1, 1985 (10)(h) Vermont Electric Transmission Incorporated Company, Inc. et al. and New by Reference England Power Company: Phase I Vermont Transmission Line Support Agreement dated as of December 1, 1981 and Amendments thereto (10)(i) New England Power Pool Incorporated Agreement and Amendments thereto by Reference Amendment dated as of September Filed herewith 1, 1997 Amendment dated as of November Filed herewith 15, 1997 (10)(j) Public Service Company of New Incorporated Hampshire et al. and New England by Reference Power Company: Agreement for Joint Ownership, Construction and Operation of New Hampshire Nuclear Units dated as of May 1, 1973 and Amendments thereto; Transmission Support Agreement dated as of May 1, 1973; Instrument of Transfer to NEP with respect to the New Hampshire Nuclear Units and Assumptions of Obligations dated December 17, 1975; Agreement Among Participants in New Hampshire Nuclear Units, certain Massachusetts Municipal Systems and Massachusetts Municipal Wholesale Electric Company dated May 28, 1976; Seventh Amendment To and Restated Agreement for Seabrook Project Disbursing Agent and Amendments thereto; Seabrook Project Managing Agent Operating Agreement dated as of June 29, 1992, and Amendment to Seabrook Project Managing Agent Agreement dated as of June 29, 1992 (10)(k) Vermont Yankee Nuclear Power Incorporated Corporation et al. and New by Reference England Power Company: Capital Funds Agreement dated February 1, 1968, Amendment dated March 12, 1968, and Power Purchase Contract dated February 1, 1968 and Amendments thereto; Additional Power Contract dated as of February 1, 1984; Guarantee Agreement dated as of November 5, 1981 (10)(l) Yankee Atomic Electric Company Incorporated et al. and New England Power by Reference Company: Amended and Restated Power Contract dated April 1, 1985 and Amendments thereto (10)(m) New England Electric Companies' Incorporated Deferred Compensation Plan as by Reference amended through November 26, 1996 (10)(n) New England Electric System Incorporated Companies Retirement Supplement by Reference Plan as amended through June 1, 1996 (10)(o) New England Electric Companies' Incorporated Executive Supplemental Retirement by Reference Plan I as amended through May 20, 1996 (10)(p) New England Electric Companies' Incorporated Executive Supplemental Retirement by Reference Plan II as amended through October 25, 1995 (10)(q) New England Electric Companies' Incorporated Incentive Compensation Plan I by Reference as amended through October 24, 1995 (10)(r) New England Electric Companies' Incorporated Incentive Compensation Plan II by Reference as amended through January 1, 1995 (10)(s) New England Electric Companies' Incorporated Incentive Compensation Plan III by Reference as amended through January 1, 1996 (10)(t) New England Electric Companies' Incorporated Senior Incentive Compensation by Reference Plan as amended through January 1, 1995 (10)(u) New England Electric System Incorporated Directors Deferred Compensation by Reference Plan as amended through December 1, 1996 (10)(v) Forms of Life Insurance Program Incorporated and Form of Life Insurance by Reference (Collateral Assignment) (10)(w) New England Electric Companies' Incorporated Incentive Share Plan as amended by Reference through February 24, 1997 (10)(x) New England Electric Companies' Incorporated Long-Term Performance Share by Reference Award Plan amended through February 24, 1997 (10)(y) New England Electric System Incorporated Directors' Retirement Plan by Reference dated May 1, 1994 (10)(z) Forms of Severance Protection Incorporated Agreement by Reference (10)(aa) New England Power Service Incorporated Company and Joan T. Bok: by Reference Service Credit Letter dated October 21, 1982 (10)(bb) New England Electric System Incorporated and John W. Rowe: Service by Reference Credit Letter dated December 5, 1988 (10)(cc) New England Power Service Incorporated Company and the Company: by Reference Form of Supplemental Pension Service Credit Agreement (10(dd) New England Power Company and Incorporated New England Hydro-Transmission by Reference Electric Company, Inc. et al: Phase II Massachusetts Transmission Facilities Support Agreement dated as of June 1, 1985 and Amendments thereto (10)(ee) New England Power Company and Incorporated New England Hydro-Transmission by Reference Corporation et al: Phase II New Hampshire Transmission Facilities Support Agreement dated as of June 1, 1985 and Amendments thereto (10)(ff) New England Power Company et Incorporated al: Phase II New England Power by Reference AC Facilities Support Agreement dated as of June 1, 1985 and Amendments thereto (10)(gg) New England Hydro-Transmission Incorporated Electric Company, Inc. and New by Reference England Electric System et al: Equity Funding Agreement dated as of June 1, 1985 and Amendments thereto (10)(hh) New England Hydro-Transmission Incorporated Corporation and New England by Reference Electric System et al: Equity Funding Agreement dated as of June 1, 1985 and Amendments thereto (10)(ii) Ocean State Power, et al., and Incorporated Narragansett Energy Resources by Reference Company: Equity Contribution Agreement dated as of December 29, 1988; Amendment dated as of September 29, 1989 Ocean State Power, et al., and Incorporated New England Electric System: by Reference Equity Contribution Support Agreement dated as of December 29, 1988; Amendment dated as of September 29, 1989; Ocean State Power II, et al., Incorporated and Narragansett Energy Resources by Reference Company: Equity Contribution Agreement dated as of September 29, 1989; Ocean State Power II, et al., and New England Electric System: Equity Contribution Support Agreement dated as of September 29, 1989 (10)(jj) NEES Energy, Inc./AllEnergy Incorporated Marketing Company, L.L.C. by Reference Limited Liability Company Agreement dated as of September 18, 1996 Amendment No. 1 to Limited Filed herewith Liability Company Agreement dated as of December 3, 1997 (10)(kk) USGen, New England Energy, Inc. Incorporated and New England Power Company by Reference and The Narragansett Electric Company: Asset Purchase Agreement dated as of August 5, 1997 (10)(ll) New England Power Service Company Filed herewith and Robert L. McCabe: Employment Agreement entered into as of March 11, 1998 (13) 1997 Annual Report to Filed herewith Shareholders (21) Subsidiary list Incorporated by Reference (24) Power of Attorney Filed herewith (27) Financial Data Schedule Filed herewith NEP EXHIBIT INDEX ------------- Exhibit No. Description Page - ----------- ----------- ---- (3)(a) Articles of Organization as Incorporated amended through June 27, 1987 by Reference (3)(b) By-laws of the Company as Filed herewith amended December 12, 1997 (4) General and Refunding Mortgage Incorporated Indenture and Deed of Trust by Reference dated as of January 1, 1977 and twenty supplements thereto (10)(a) Boston Edison Company et al. Incorporated and the Company: Amended by Reference REMVEC Agreement dated August 12, 1977 (10)(a)(i) Boston Edison Company et al. Incorporated and the Company: REMVEC II by Reference Agreement dated on or about July 1, 1997 (10)(a)(ii) Boston Edison Company et al. Incorporated and the Company: Security by Reference Analysis Services Agreement dated on or about July 1, 1997 (10)(b) The Connecticut Light and Power Incorporated Company et al. and the Company: by Reference Sharing Agreement for Joint Ownership, Construction and Operation of Millstone Unit No. 3 dated as of September 1, 1973, and Amendments thereto; Transmission Support Agreement dated August 9, 1974; Instrument of Transfer to the Company with respect to the 1979 Connecticut Nuclear Unit, and Assumption of Obligations, dated December 17, 1975 (10)(c) Connecticut Yankee Atomic Power Incorporated Company et al. and the Company: by Reference Stockholders Agreement dated July 1, 1964; Power Purchase Contract dated July 1, 1964; Supplementary Power Contract dated as of April 1, 1987; 10(c)(cont.) Capital Funds Agreement dated September 1, 1964; Transmission Agreement dated October 1, 1964; Agreement revising Transmission Agreement dated July 1, 1979; Amendment revising Transmission Agreement dated as of January 19, 1994; Five Year Capital Contribution Agreement dated November 1, 1980; Guarantee Agreement dated as of November 13, 1981; Guarantee Agreement dated as of August 1, 1985 (10)(d) Maine Yankee Atomic Power Incorporated Company et al. and the Company: by Reference Capital Funds Agreement dated May 20, 1968 and Power Purchase Contract dated May 20, 1968; and Amendments thereto; Stockholders Agreement dated May 20, 1968; Additional Power Contract dated as of February 1, 1984; 1997 Amendatory Agreement dated as of August 6, 1997 (10)(e) Mass. Electric and the Company: Incorporated Primary Service for Resale dated by Reference February 15, 1974; and Amendments thereto; Memorandum of Understanding effective May 22, 1994 Amendment of Service Agreement Filed herewith effective July 1, 1996 Amendment to Service Agreement Filed herewith dated as of February 1, 1997 (10)(f) The Narragansett Electric Incorporated Company and the Company: by Reference Primary Service for Resale dated February 15, 1974 and Amendments thereto; Memorandum of Understanding effective May 22, 1994 and Amendment thereto Amendment of Service Agreement Filed herewith effective October 30, 1995 Amendment to Service Agreement Filed herewith dated as of February 1, 1997 (10)(g) New England Electric Incorporated Transmission Corporation et al. by Reference and the Company: Phase I Terminal Facility Support Agreement dated as of December 1, 1981; Amendments dated as of June 1, 1982 and November 1, 1982; Agreement with respect to Use of the Quebec Interconnection dated as of December 1, 1981; Amendments dated as of May 1, 1982 and November 1, 1982; Amendment dated as of January 1, 1986; Agreement for Reinforcement and Improvement of the Company's Transmission System dated as of April 1, 1983; Lease dated as of May 16, 1983; Upper Development-Lower Development Transmission Line Support Agreement dated as of May 16, 1983 (10)(h) Vermont Electric Transmission Incorporated Company, Inc. et al. and the by Reference Company: Phase I Vermont Transmission Line Support Agreement dated as of December 1, 1981 and Amendments thereto (10)(i) New England Energy Incorporated Incorporated and the Company: Fuel Purchase by Reference Contract dated July 26, 1979, and Amendments thereto (10)(j) New England Power Pool Incorporated Agreement and Amendments by Reference thereto (10)(k) New England Power Service Incorporated Company and the Company: by Reference Specimen of Service Contract (10)(l) Massachusetts Electric Incorporated Company, et al. and the by Reference Company: Form of Mutual Assistance Agreement (10)(m) Massachusetts Electric Incorporated Company, et al. and the by Reference Company: Restructuring Settlement Agreement approved by the Massachusetts Department of Public Utilities (10)(n) Public Service Company of New Incorporated Hampshire et al. and the by Reference Company: Agreement for Joint Ownership, Construction and Operation of New Hampshire Nuclear Units dated as of May 1, 1973 and Amendments thereto; Seventh Amendment as of November 1, 1990; Transmission Support Agreement dated as of May 1, 1973; Instrument of Transfer to the Company with respect to the New Hampshire Nuclear Units and Assumptions of Obligations dated December 17, 1975 and Agreement Among Participants in New Hampshire Nuclear Units, certain Massachusetts Municipal Systems and Massachusetts Municipal Wholesale Electric Company dated May 28, 1976; Seventh Amendment To and Restated Agreement for Seabrook Project Disbursing Agent dated as of November 1, 1990; Amendments dated as of June 29, 1992 Settlement Agreement dated as Incorporated of July 19, 1990 between by Reference Northeast Utilities Service Company and the Company Seabrook Project Managing Incorporated Agent Operating Agreement by Reference dated as of June 29, 1992; and Amendment thereto (10)(o) Vermont Yankee Nuclear Power Incorporated Corporation et al. and the by Reference Company: Capital Funds Agreement dated February 1, 1968, Amendment dated March 12, 1968 and Power Purchase Contract dated February 1, 1968 and Amendments thereto; Additional Power Contract dated as of February 1, 1984; Guarantee Agreement dated as of November 5, 1981 (10)(p) Yankee Atomic Electric Company Incorporated et al. and the Company: by Reference Amended and Restated Power Contract dated April 1, 1985 and Amendments thereto (10)(q) New England Electric Companies' Incorporated Deferred Compensation Plan as by Reference amended through November 26, 1996 (10)(r) New England Electric System Incorporated Companies Retirement Supplement by Reference Plan as amended through June 1, 1996 (10)(s) New England Electric Companies' Incorporated Executive Supplemental Retirement by Reference Plan I as amended through May 20, 1996 (10)(t) New England Electric Companies' Incorporated Executive Supplemental Retirement by Reference Plan II as amended through October 25, 1995 (10)(u) New England Electric Companies' Incorporated Incentive Compensation Plan I as by Reference amended through October 24, 1995 (10)(v) New England Electric Companies' Incorporated Incentive Compensation Plan II as by Reference amended through January 1, 1995 (10)(w) New England Electric Companies' Incorporated Incentive Compensation Plan III as by Reference amended through January 1, 1996 (10)(x) New England Electric Companies' Incorporated Senior Incentive Compensation by Reference Plan as amended through January 1, 1995 (10)(y) Forms of Life Insurance Program Incorporated and Form of Life Insurance by Reference (Collateral Assignment) (10)(z) New England Electric Companies' Incorporated Incentive Share Plan as amended by Reference through February 24, 1997 (10)(aa) New England Electric System Incorporated Directors' Retirement Plan by Reference dated May 1, 1994 (10)(bb) Forms of Severance Protection Incorporated Agreement by Reference (10)(cc) New England Electric Companies' Incorporated Long-Term Performance Share by Reference Award Plan amended through February 24, 1997 (10)(dd) New England Hydro-Transmission Incorporated Electric Company, Inc. et al. by Reference and the Company: Phase II Massachusetts Transmission Facilities Support Agreement dated as of June 1, 1985 and Amendments thereto (10)(ee) New England Hydro-Transmission Incorporated Corporation et al. and the by Reference Company: Phase II New Hampshire Transmission Facilities Support Agreement dated as of June 1, 1985 and Amendments thereto (10)(ff) Vermont Electric Power Company Incorporated et al. and the Company: Phase by Reference II New England Power AC Facilities Support Agreement dated as of June 1, 1985 and Amendments thereto (10)(gg)(i) Asset Purchase Agreement between Incorporated USGen New England and The Company by Reference and The Narragansett Electric Company dated as of August 5, 1997 (10)(gg)(ii) Wholesale Sales Agreement between Filed herewith the Company and USGen New England, Inc. dated as of August 5, 1997 (10)(gg)(iii) PPA Transfer Agreement between Filed herewith the Company and USGen New England, Inc. dated as of August 5, 1997 (10)(gg)(iv) Form of PSA Performance Support Filed herewith Agreement between the Company, USGen New England, Inc., and various Wholesale Customers dated as of August 5, 1997 (10)(hh) New England Power Company and Filed herewith Andrew H. Aitken: Employment Agreement entered into as of December 9, 1997 (13) 1997 Annual Report to Filed herewith Stockholders (21) Subsidiary list Filed herewith (24) Power of Attorney Filed herewith (27) Financial Data Schedule Filed herewith Mass. Electric -------------- EXHIBIT INDEX ------------- Exhibit No. Description Page - ----------- ----------- ---- (3)(a) Articles of Organization of the Incorporated Company as amended through by Reference November 15, 1993 (3)(b) By-Laws of the Company as Filed herewith amended December 12, 1997 (4) First Mortgage Indenture and Incorporated Deed of Trust, dated as of by Reference July 1, 1949, and twenty-one supplements thereto (10)(a) Boston Edison Company et al. Incorporated and Company: Amended REMVEC by Reference Agreement dated August 12, 1977 (10)(a)(i) Boston Edison Company et al. Incorporated and Company: REMVEC II Agreement by Reference dated on or about July 1, 1997 (10)(a)(ii) Boston Edison Company et al. Incorporated and Company: Security Analysis by Reference Services Agreement dated on or about July 1, 1997 (10)(b) New England Power Company Incorporated and the Company: Primary by Reference Service for Resale dated February 15, 1974, and Amendments thereto; Memorandum of Understanding effective May 22, 1994 (10)(c) New England Power Pool Incorporated Agreement and Amendments by Reference thereto (10)(d) New England Power Service Incorporated Company and the Company: by Reference Specimen of Service Contract (10)(e) New England Power Company Incorporated et al. and the Company: by Reference Form of Mutual Assistance Agreement (10)(f) New England Power Company Incorporated et al. and the Company: by Reference Restructuring Settlement Agreement approved by the Massachusetts Department of Public Utilities February 26, 1997 (10)(g) New England Telephone and Incorporated Telegraph Company and the by Reference Company: Specimen of Joint Ownership Agreement for Wood Poles (10)(h) New England Electric Companies' Incorporated Deferred Compensation Plan as by Reference amended through November 26, 1996 (10)(i) New England Electric System Incorporated Companies Retirement Supplement by Reference Plan as amended through June 1, 1996 (10)(j) New England Electric Companies' Incorporated Executive Supplemental Retirement by Reference Plan I as amended dated May 20, 1996 (10)(k) New England Electric Companies' Incorporated Executive Supplemental Retirement by Reference Plan II as amended through October 25, 1995 (10)(l) New England Electric Companies' Incorporated Incentive Compensation Plan by Reference as amended through January 1, 1995 (10)(m) New England Electric Companies' Incorporated Incentive Compensation Plan II by Reference as amended through January 1, 1995 (10)(n) New England Electric Companies' Incorporated Incentive Compensation Plan III by Reference as amended through January 1, 1996 (10)(o) New England Electric Companies' Incorporated Form of Deferred Compensation by Reference Agreement for Directors (10)(p) New England Electric Companies' Incorporated Senior Incentive Compensation by Reference Plan as amended through January 1, 1995 (10)(q) Forms of Life Insurance Program Incorporated and Form of Life Insurance by Reference (Collateral Assignment) (10)(r) New England Electric Companies' Incorporated Incentive Share Plan as amended by Reference through February 24, 1997 (10)(s) New England Electric Companies' Incorporated Long-Term Performance Share by Reference Award Plan amended through February 24, 1997 (10)(t) New England Electric System Incorporated Directors' Retirement by Reference Plan dated May 1, 1994 (10)(u) Forms of Severance Protection Incorporated Agreement (10)(v) New England Power Service Incorporated Company and the Company: by Reference Form of Supplemental Pension Service Credit Agreement (10)(w) Amended and Restated Wholesale Filed herewith Standard Offer Service Agreement among the Company, Nantucket Electric Company, and USGen New England, Inc. dated as of October 29, 1997 (12) Statement re computation of Filed herewith ratios for incorporation by reference into the Mass. Electric registration statement on Form S-3, Commission File No. 333-46431 (13) 1997 Annual Report to Filed herewith Stockholders (24) Power of Attorney Filed herewith (27) Financial Data Schedule Filed herewith Narragansett ------------- EXHIBIT INDEX ------------- Exhibit No. Description Page - ----------- ----------- ---- (3)(a) Articles of Incorporation as Incorporated amended June 9, 1988 by Reference (3)(b) By-Laws of the Company Incorporated by Reference (4)(a) First Mortgage Indenture and Incorporated Deed of Trust, dated as of by Reference September 1, 1944, and twenty-two supplements thereto (4)(b) The Narragansett Electric Incorporated Company Preference Provisions, by Reference as amended, dated December 15, 1997 (10)(a) Boston Edison Company et al. Incorporated and the Company: Amended REMVEC by Reference Agreement dated August 12, 1977 (10)(a)(i) Boston Edison Company et al. and Incorporated the Company: REMVEC II Agreement by Reference dated on or about July 1, 1997 (10)(a)(ii) Boston Edison Company et al. and Incorporated the Company: Security Analysis by Reference Services Agreement dated on or about July 1, 1997 (10)(b) New England Power Company and Incorporated the Company: Primary Service for by Reference Resale dated February 15, 1974 and Amendments thereto; Memorandum of Understanding effective May 22, 1994 (10)(c) New England Power Pool Agreement Incorporated and Amendments thereto by Reference (10)(d) New England Power Service Incorporated Company and the Company: by Reference Specimen of Service Contract (10)(e) New England Power Company Incorporated et al. and the Company: by Reference Form of Mutual Assistance Agreement (10)(f) New England Telephone and Incorporated Telegraph Company and the by Reference Company: Specimen of Joint Ownership Agreement for Wood Poles (10)(g) New England Electric Companies' Incorporated Deferred Compensation Plan by Reference as amended through November 26, 1996 (10)(h) New England Electric System Incorporated Companies Retirement Supplement by Reference Plan, as amended through June 1, 1996 (10)(i) New England Electric Companies' Incorporated Executive Supplemental Retirement by Reference Plan I, as amended through May 20, 1996 (10)(j) New England Electric Companies' Incorporated Executive Supplemental Retirement by Reference Plan II, as amended through October 25, 1995 (10)(k) New England Electric Companies' Incorporated Incentive Compensation Plan I, by Reference as amended through January 1, 1995 (10)(l) New England Electric Companies' Incorporated Incentive Compensation Plan II, by Reference as amended through January 1, 1995 (10)(m) New England Electric Companies' Incorporated Incentive Compensation Plan III, by Reference as amended through January 1, 1996 (10)(n) New England Electric Companies' Incorporated Form of Deferred Compensation by Reference Agreement for Directors (10)(o) New England Electric Companies' Incorporated Senior Incentive Compensation by Reference Plan as amended through January 1, 1995 (10)(p) Forms of Life Insurance Program Incorporated and Form of Life Insurance by Reference (Collateral Assignment) (10)(q) New England Electric Companies' Incorporated Incentive Share Plan as amended by Reference through February 24, 1997 (10)(r) New England Power Service Incorporated Company and the Company: by Reference Form of Supplemental Pension Service Credit Agreement (10)(s) New England Electric Companies' Incorporated Long-Term Performance Share by Reference Award Plan as amended through February 24, 1997 (10)(t) New England Electric System Incorporated Directors' Retirement Plan by Reference dated May 1, 1994 (10)(u) Forms of Severance Protection Incorporated Agreement by Reference (10)(v)(i) Asset Purchase Agreement between Incorporated the Company and New England Power by Reference Company dated as of August 5, 1997 (10)(v)(ii) Amended and Restated Wholesale Filed herewith Standard Offer Service Agreement between the Company and USGen New England, Inc. dated as of October 29, 1997 (12) Statement re computation of Filed herewith ratios for incorporation by reference into the Narragansett registration statement on Form S-3, Commission File No. 33-61131 (13) 1997 Annual Report to Filed herewith Stockholders (24) Power of Attorney Filed herewith (27) Financial Data Schedule Filed herewith EX-4 3 NEES EXHIBIT 4(C) THE NARRAGANSETT ELECTRIC COMPANY PREFERRED STOCK PREFERENCE PROVISIONS That, effective upon December 15, 1997, the rights and preferences for the class of preferred stock of this Company which rights and preferences were initially voted by the common stockholders and the directors of this Company at meetings held May 28, 1940 and were amended at special meetings of said common stockholders and directors held on November 10, 1953, March 4, 1971, March 15, 1971, and March 23, 1993, be and hereby are further amended so that said preferred stock (all preferred stock, whether of the same or a different series, the same or a different class, the same or a different par value, so long as said preferred is on a parity as to dividends and assets, being hereinafter called the "Preferred Stock") shall entitle the holders thereof to the following rights and preferences as to dividends, voting power and other incidents: 1. Before any dividends on, or any distribution of assets (by purchase of shares or otherwise) to holders of, the Common Stock or any other stock ranking junior to the Preferred Stock as to dividends (both hereinafter in this subdivision 1 called "junior stock") shall be paid or set apart for payment or otherwise provided for, the holders of the Preferred Stock at the time outstanding shall be entitled to receive, but only when and as declared by the Board of Directors, out of any funds legally available for the declaration of dividends, cumulative dividends at the annual dividend rate per share fixed for the particular series payable quarterly on the first days of February, May, August and November in each year commencing on a date specified for the first dividend date as herein provided to shareholders of record on the respective dates, not exceeding forty-five (45) days preceding such dividend payment dates, fixed in advance for the purpose by the Board of Directors prior to the payment of each particular dividend. No dividends shall be declared on any series of the Preferred Stock in respect of any quarter-yearly dividend period, unless there shall likewise be declared on all shares of all series of the Preferred Stock at the time outstanding, like proportionate dividends, ratably, in proportion to the respective annual dividend rates fixed therefor, in respect of the same quarter-yearly dividend period, to the extent that such shares are entitled to receive dividends for such quarter-yearly dividend period. The dividends on shares of all series of the Preferred Stock shall be cumulative. In the case of all shares of each particular series, the dividends on shares of such series shall be cumulative: (i) on shares of Preferred Stock issued prior to the record date for the first dividend on the shares of such series, from the date for the particular series fixed therefor; (ii) on shares of Preferred Stock issued after a record date for a dividend, but prior to the dividend payment date for such dividend, from said dividend payment date; and (iii) otherwise from the quarter-yearly dividend payment date next preceding the date of issue of such shares; so that dividends accrued on all outstanding shares of Preferred Stock to the next succeeding dividend payment date shall have been paid in full or declared and set apart for payment before there shall be any dividend or distribution on, or purchase of, junior stock. The holders of the Preferred Stock shall not be entitled to receive any dividends thereon other than the dividends referred to in this subdivision 1 and other than distributions provided in subdivision 5 below. 2. As used herein, the expression "dividends accrued" shall mean the sum of amounts with respect to all shares of Preferred Stock then outstanding, which as to each share shall be an amount computed at the rate per annum of the par value thereof fixed for the particular series from the date from which dividends on such share become cumulative to the date with reference to which the expression is used, less the aggregate of all dividends paid on such share, irrespective of whether such amount shall have been declared as dividends or there shall have existed any assets available for the payment thereof. 3. The Company, pursuant to action of its Board of Directors or as provided in subparagraph (1) of subdivision 6 below, may redeem the whole or any part of any series of the Preferred Stock at the time outstanding, at any time or from time to time, by paying in cash as herein provided the redemption price of the shares of the particular series fixed therefor, together with dividends accrued to the date fixed for sch redemption (hereinafter called the "redemption date"), and by mailing, postage prepaid, at least thirty (30) days and not more than ninety (90) days prior to the date fixed for said redemption a notice specifying said redemption date to the holders of record of the Preferred Stock to be redeemed, at their respective addresses as the same shall appear on the books of the Company; provided, however, that the exercise by the Company of is right to redeem shares of any particular series may be subject to such restrictions as are determined for said series. In case of the redemption of a part only of any series of the Preferred Stock at the time outstanding, the Company shall select by lot or in such other manner as the Board of Directors may determine, the shares so to be redeemed. If such notice of redemption shall have been so mailed, and if on or before the redemption date specified in such notice all funds necessary for such redemption shall have been set aside by the Company, separate and apart from its other funds, in trust for the account of the holders of the shares to be redeemed, so as to be and continue to be available therefor, then, on and after said redemption date, notwithstanding that any certificate for the shares of the Preferred Stock so called for redemption shall not have been surrendered for cancellation, the shares represented thereby shall no longer be deemed outstanding, the right to receive dividends thereon shall cease to accrue, and all rights with respect to such shares of Preferred Stock so called for redemption shall forthwith cease and terminate, except only the right of the holders thereof to receive, out of the funds so set aside in trust, the amount payable upon redemption thereof, but without interest; provided, however, that if, after mailing said notice as aforesaid and prior to the redemption date specified in sch notice, said funds shall be set aside by deposit in trust, for the account of the holders of the Preferred Stock to be redeemed, with a bank or trust company in good standing, organized under the laws of the United States of America or of the State of Rhode Island, having a capital, undivided profits and surplus aggregating at least $5,000,000, thereupon all shares of the Preferred Stock with respect to which such deposit shall have been made shall no longer be deemed to be outstanding, and all rights with respect to such shares of Preferred Stock shall forthwith upon such deposit in trust cease and terminate, except only the right of the holders thereof to receive from such deposit the amount payable upon the redemption but without interest. In case the holders of the Preferred Stock which shall have been redeemed shall not within four years of the date of redemption thereof claim any amount so deposited in trust for the redemption of such shares, such bank or trust company shall, upon demand, pay over to the Company any such unclaimed amount so deposited with it and shall thereupon be relieved of all responsibility in respect thereof, and the Company shall not be required to hold the amount so paid over to it separate and apart from its other funds, and thereafter the holders of such shares of Preferred Stock shall as unsecured creditors look only to the Company for payment of the redemption price thereof, but without interest; provided, however, that before any such unclaimed amount so deposited shall be paid over to the Company notice of such payment shall be given to holders of such shares of Preferred Stock by mailing in the manner hereinbefore provided in this subdivision 3 at least sixty (60) days prior to the date of any such payment. If there are any dividends accrued to the last preceding quarterly dividend payment date or dates on the outstanding Preferred Stock, no Preferred Stock shall be redeemed, purchased or otherwise acquired by the Company unless all series of Preferred Stock which are redeemable shall be redeemed and unless an offer is made to purchase all Preferred Stock of any series which is not redeemable at the time under limited restrictions then applicable thereto at a price equal to the then redemption price for such series if such restrictions were not applicable and to purchase all Preferred Stock of any series which is not redeemable at the time at a price equal to the highest then redemption price on any outstanding shares of Preferred Stock, after giving effect to the difference in par value among series or classes of Preferred Stock, or unless a partial redemption or any purchase or other acquisition shall have been ordered, approved or permitted under the Public Utility Holding Company Act of 1935. All stock redeemed or purchased under the provisions of this subdivision 3 shall be retired. 4. If and while at any time a majority of the Common Stock shall be held by or for the benefit of a single stockholder, said holder may, upon such consent by the Board of Directors of the Company as would have been required in the event of a redemption under subdivision 3 above, purchase the whole or any part of any series of the Preferred Stock at the time outstanding, at any time or from time to time, at the same price, upon the same notice of purchase, and in the same manner as near as may be, and with the same effect on the rights of the then holders of Preferred Stock so purchased as is provided for the redemption of such series of the Preferred Stock by the Company itself, provided that when after deposit of funds the rights of the holders of Preferred Stock (except to receive payment therefrom) shall have ceased as above provided, the shares of Preferred Stock being purchased shall not be deemed to be redeemed but such shares shall vest in such holder of the Common Stock whether or not the certificates for such shares so purchased shall have been surrendered or whether or not the date specified for such purchase shall have arrived and such holder of the Common Stock shall be entitled to all dividends and other distributions on the Preferred Stock so purchased accruing from such purchase date; and provided further that if there be a deposit of funds in trust with a bank or trust company unclaimed funds shall not be paid over to such holder of Common Stock at the end of four years but shall remain in trust with said bank or trust company until claimed by the holders of Preferred Stock. 5. In the event of any liquidation, dissolution or winding up of the affairs of the Company or any distribution of its capital, then before any distribution shall be made to the holders of Common Stock or any other stock ranking junior to the Preferred Stock as to assets, the holders of each series of the Preferred Stock at the time outstanding shall be entitled to be paid in cash the amount for the particular series fixed therefor, together in each case with dividends accrued thereon to the date fixed for payment of such distributive amounts, and no more. No payments on account of such distributive amounts shall be made to the holders of any series of the Preferred Stock unless there shall likewise be paid at the same time to the holders of each other series of the Preferred Stock at the time outstanding like proportionate distributive amounts, ratably, in proportion to the full distributive amounts to which they are respectively entitled. After such payment to the holders of Preferred Stock, the remaining assets and funds of the Company shall be divided and distributed among the holders of Common Stock or any other stock ranking junior to the Preferred Stock as to assets then outstanding according to their respective rights. 6. (a) The holders of Preferred Stock shall have no right to vote except as hereinafter specifically provided. (b) If dividends accrued on the outstanding Preferred Stock shall at any time and from time to time equal or exceed an amount equivalent to four (4) full quarterly dividends on any shares of any series of the Preferred Stock at the time outstanding, then until all dividends in default on the Preferred Stock shall have been paid, the holders of Preferred Stock, voting separately as one class, shall be entitled to elect the smallest number of directors necessary to constitute a majority of the full Board of Directors, and the holders of stock generally entitled to vote, voting separately as one class, shall be entitled to elect the remaining members of the Board of Directors. If and when all dividends then in default on the Preferred Stock shall thereafter be paid (and such dividends shall be declared and paid out of any funds legally available therefor as soon as reasonably practicable), the Preferred Stock shall thereupon be divested of such special right to elect any member of the Board of Directors, but subject always to the same provisions for the vesting of such special right in the Preferred Stock in case of further like default or defaults. (c) Upon accrual of the right of the holders of the Preferred Stock to elect a majority of the Board of Directors as above provided in this subdivision 6, the president, a vice president or the secretary of the Company shall call a special meeting of the stockholders of the Company for the purpose of electing a new Board of Directors to be held not less than forty- five (45) nor more than sixty (60) days after the accrual of such right; provided, however, that no such special meeting shall be called if the date of such accrual of such right shall be less than one hundred twenty (120) days but not less than forty-five (45) days prior to the date otherwise fixed by the by-laws of the Company for the next annual meeting of the stockholders, in which event said annual meeting shall be held on the date specified in the by- laws or a special meeting in lieu thereof called to be held within three (3) days thereafter. If said officers fail to call such meeting, or fail to hold such annual meeting or special meeting in lieu thereof within three (3) days of the date provided therefor in the by-laws, any holder or holders of Preferred Stock holding in the aggregate one thousand (1,000) shares may call a special meeting for such purpose. (d) The notice of any such special meeting, any annual meeting of the Company or any special meeting in lieu thereof, at which the holders of the Preferred Stock shall have the right to elect directors, shall be mailed by the Company not less than thirty (30) days prior to the meeting and state (x) that by reason of the fact that dividends payable on the Preferred Stock are or have been in default in an amount equal to or in excess of four (4) full quarterly dividends on shares of the Preferred Stock, the holders of the Preferred Stock, voting together as a class, are entitled to elect the smallest number of directors necessary to constitute a majority of the full Board of Directors, (y) that any holder of the Preferred Stock has the right at any reasonable time to inspect and make copies of the list or lists of the holders of Preferred Stock maintained at the principal office of the Company or at the office of any transfer agent for the Preferred Stock, and (z) the substance of the next succeeding paragraph with respect to the number of shares of Preferred Stock required to be represented at any meeting or adjournment thereof for the election of directors of the Company at which such holders have the right to elect directors. (e) At any such special or annual meeting at which the holders of the Preferred Stock shall have the right to elect directors, the presence in person or by proxy of the holders of a majority of the outstanding stock generally entitled to vote shall be required to constitute a quorum of such class for the election of directors and the presence in person or by proxy of the holders of a majority of the outstanding Preferred Stock shall be required to constitute a quorum of such class for the election of directors; provided, however, that in the absence of such a quorum of the holders of the Preferred Stock, no election of directors shall be held but a majority of the holders of the Preferred Stock who are present in person or by proxy shall have the power to adjourn the meeting for election of directors to a date not less than twenty-five (25) nor more than sixty (60) days from the date of such original meeting. At such adjourned meeting the presence in person or by proxy of the holders of thirty-five per cent (35%) of the outstanding Preferred Stock shall constitute a quorum of such class for the election of directors. (f) In the event any such special or annual meeting of stockholders shall be adjourned as aforesaid, the president, any vice president or the secretary of the Company shall, within ten (10) days after the date of the original meeting, cause notice of the adjourned meeting to be given to all stockholders of the Company entitled to vote thereat. Such notice shall contain substantially the statements hereinabove required with respect to the original meeting, and shall further state that the required quorum of the holders of the Preferred Stock was not present at such original meeting and that the holders of thirty-five per cent (35%) of the outstanding Preferred Stock will constitute a quorum of such class for the election of directors at such adjourned meeting. (g) If the requisite quorum of holders of the Preferred Stock shall not be present at such adjourned meeting, then, in case the original meeting was a special meeting called as aforesaid, the directors of the Company then in office shall remain in office until the next annual meeting of the stockholders of the Company and until their successors have been elected and shall qualify; or if such original meeting was an annual meeting of the stockholders or special meeting in lieu thereof, all members of the Board of Directors to be elected at such meeting shall be elected by a vote of the holders of a majority of the shares of the stock generally entitled to vote present in person or represented by proxy at such adjourned meeting. (h) Upon reversion, pursuant to subparagraph (b) of this subdivision 6, of the voting powers to their status prior to default, a special or annual meeting of stockholders generally entitled to vote shall be held for the purpose of electing directors. Notice thereof shall be given promptly by the Company and in any case within fifteen (15) days after such reversion, such notice to be mailed by the Company not less than seven (7) nor more than ten (10) days prior to such meeting to all stockholders generally entitled to vote at their respective addresses appearing upon the books of the Company, unless such notice shall have been waived either before or after the holding of such meeting by all such stockholders. If the Company fails to call such meeting or fails to hold such annual meeting within three (3) days of the date provided therefor in the by-laws, any holder or holders of stock generally entitled to vote holding in the aggregate one thousand (1,000) shares may call a special meeting for such purpose. (i) Forthwith upon the initial election of a majority of the Board of Directors of the Company by the holders of Preferred Stock pursuant to subparagraph (b) of this subdivision 6, the terms of office of all persons who may be directors of the Company at the time shall terminate, whether or not the holders of stock generally entitled to vote shall then have elected the remaining members of the Board of Directors, and, if the holders of stock generally entitled to vote shall not have elected the remaining members of the Board of Directors, then the directors of the Company in office just prior to the election of the majority of the Board of Directors by the holders of Preferred Stock shall appoint the remaining directors of the Company pending such election by the holders of stock generally entitled to vote. Any director elected by holders of Preferred Stock shall hold office until the next annual meeting of the holders of Preferred Stock and until his successor is chosen and qualified, except that upon the reversion, pursuant to subparagraph (b) of this subdivision 6, of the voting powers to their status prior to default, then forthwith upon the election of new directors by the holders of stock generally entitled to vote, the terms of office of the directors elected by the holders of Preferred Stock shall terminate. (j) During any period in which the holders of Preferred Stock have the right, pursuant to subparagraph (b) of this subdivision 6, to elect a majority of the Board of Directors, the number of directors constituting the full Board of Directors shall be the number constituting the full Board of Directors immediately prior to said period unless it be changed at an annual meeting of stockholders, by a vote of the holders of at least two-thirds of the total number of shares of the Preferred Stock of all series then outstanding and by a vote of the holders of at least two-thirds of the total number of shares of stock generally entitled to vote and then outstanding, to such number as shall have been stated in the notice of said annual meeting. (k) In case of any vacancy in the office of a director elected by the holders of Preferred Stock pursuant to the foregoing provisions of this subdivision 6, the remaining directors elected by the holders of Preferred Stock by affirmative vote of a majority thereof, or the remaining director so elected if there be but one, may elect a successor or successors to hold office for the unexpired term of the director or directors whose place or places shall be vacant. The holders of the Preferred Stock at a special meeting called for the purpose by the holders of an aggregate of not less than one thousand (1,000) shares of the Preferred Stock, upon notice mailed not less than thirty (30) days prior to such meeting to all stockholders entitled to vote thereat, by a vote of a majority of the Preferred Stock issued and outstanding, may remove from office a director elected by the holders of Preferred Stock and may elect a successor for the remainder of his term. (l) Under all circumstances, however, the directors elected by the holders of stock generally entitled to vote shall have the right, and neither the holders of Preferred Stock nor any directors elected by the holders of Preferred Stock under these provisions shall have any right, to vote upon the question of calling for redemption, or of purchasing, all of the Preferred Stock at the time outstanding. (m) Except when some mandatory provision of law shall be controlling and except as otherwise provided in subparagraph (a) of subdivision 9 hereof and, as regards the special rights of any series or class of the Preferred Stock, as provided in the votes creating such series or class, whenever shares of two or more series or classes of the Preferred Stock are outstanding, no particular series or class of the Preferred Stock shall be entitled to vote as a separate series or class on any matter and all shares of the Preferred Stock of all series or classes shall be deemed to constitute but one class for any purpose for which a vote of the stockholders of the Company by classes may now or hereafter be required. (n) For the purposes of this subdivision 6, in the calculation of any number, majority, vote, or quorum of the Preferred Stock, each share of stock bearing $50 par value shall be counted as one and each share of stock with another par value shall be counted for that proportion of one as its par bears to $50. 7. No holder of Preferred Stock shall be entitled as such as a matter of right to subscribe for or purchase any part of any new or additional issue of stock or warrants carrying rights to stock, or securities convertible into stock, of any class whatever, whether now or hereafter authorized, and whether issued for cash, property, services or otherwise. The holders of Preferred Stock shall have no right to require any distribution to be made by the Company upon a reduction of the capital stock. 8. Subject to the limitations, if any, hereinafter contained, the Company may from time to time issue additional capital stock divided into classes with such preferences as to dividends, voting power and other incidents as may be determined in accordance with applicable provisions of law, the charter of the Company and the outstanding capital stock of the Company. Without limiting the generality of the foregoing, any such additional capital stock may be an additional series of Preferred Stock or additional shares of the initial or any other series of Preferred Stock. The shares of Preferred Stock of different series and classes, subject to any applicable provisions of law, may vary as to the following rights and preferences: (a) The annual dividend rate, or method of calculation thereof, and the date from which the dividends on shares issued prior to the record date for the first dividend shall be cumulative and the date for the first dividend; (b) The redemption price or prices, or method of calculation thereof, and any restriction on the exercise by the Company of its right to redeem such shares; (c) The amount or amounts payable upon any liquidation or dissolution or winding up; (d) The terms and amount of any sinking fund provided for the purchase or redemption of shares; and (e) The conversion, participation or other special rights. 9. So long as any Preferred Stock of any series is outstanding, the Company shall not, without the vote at a meeting called for that purpose of the holders of at least two-thirds of the total number of shares of the Preferred Stock of all series then outstanding and, so long as any shares of the 4-1/2% Series of the Preferred Stock are outstanding, of at least seventy- five per cent of the total number of shares of the Preferred Stock of all series present or represented at the meeting, at which meeting a quorum as hereinafter provided shall be present or represented: (a) Make any change in the provisions relative to the Preferred Stock, or of any outstanding series thereof, which would change the express terms and provisions of such stock in any manner prejudicial to the holders thereof except that if such change is prejudicial to the holders of one or more, but not all of such series, only such two-thirds vote and, so long as any shares of the 4-1/2% Series of the Preferred Stock are outstanding, such seventy-five per cent vote of the shares or classes of all series so affected shall be required; or (b) Create or authorize any class of stock which shall be preferred as to dividends or assets over the Preferred Stock or any security convertible into such class of stock. No preferred stock so preferred as to dividends or assets over the Preferred Stock (other than such preferred stock issued upon conversion of another security) shall be issued more than six months after the above referred to vote creating or authorizing such class of stock unless within six months prior to such issue approval thereof has been obtained, at a meeting called for the purpose, by vote of at least two-thirds of the total number of shares of Preferred Stock of all series outstanding. 10. So long as any shares of the Preferred Stock of any series are outstanding, the Company shall not, without the vote at a meeting called for that purpose of the holders of at least a majority of the total number of shares of the Preferred Stock of all series then outstanding and, so long as any shares of the 4-1/2% Series of the Preferred Stock are outstanding and with respect to subparagraphs (b)(i) and (b)(iv) only of this subdivision, of at least seventy-five per cent of the total number of shares of Preferred Stock of all series present or represented at the meeting, at which meeting a quorum as hereinafter provided shall be present or represented: (a) Issue shares of any series of Preferred Stock or of any other stock ranking on a parity therewith as to dividends or assets if after such issue the aggregate outstanding shares of all series of Preferred Stock and such parity stock would exceed $60,000,000 par value. (b) Issue additional shares of any series of Preferred Stock or of any other stock ranking prior thereto or on a parity therewith as to dividends or assets: (i) So long as any shares of the 4-1/2% Series of the Preferred Stock are outstanding, unless the par value of its stock ranking junior to the Preferred Stock as to dividends and assets to be outstanding immediately after such issue (plus, if the Company so elects, its surplus as shown by its books provided distribution on, or purchase of, such junior stock out of such surplus, or a part thereof to be included for this purpose, is prohibited while such additional preferred stock is outstanding) shall be at least equal to the greater of the aggregate par value of, the aggregate stated value of or the aggregate amount payable on involuntary liquidation, dissolution or winding up of the affairs of the Company upon all Preferred Stock of all series and of any other such prior or parity stock to be outstanding immediately after such issue; (ii) Unless the junior stock equity (as defined in subdivision 11 hereof) to be outstanding immediately after such issue shall be at least equal to the aggregate amount payable on involuntary liquidation, dissolution or winding up of the affairs of the Company upon all Preferred Stock of all series and of any other such prior or parity stock to be outstanding immediately after such issue; provided, however, that if for the purpose of meeting this requirement it shall have been necessary to take into consideration any portion of the earned surplus of the Company, the Company shall not (until such junior stock equity exclusive of such portion of earned surplus shall equal such aggregate) pay any dividends or make any distribution on shares of its stock ranking junior to the Preferred Stock as to dividends or assets which would result in reducing such junior stock equity to an amount less than such aggregate amount payable on involuntary liquidation, dissolution or winding up of the affairs of the Company. (iii) Unless the gross income of the Company after taxes available for interest on its indebtedness and for dividends on its Preferred Stock and any other such prior or parity stock, determined in accordance with generally accepted accounting principles, for a period of twelve (12) consecutive calendar months within the fifteen (15) calendar months immediately preceding the calendar month in which such additional stock is issued, or in which a contract for the issuance and sale thereof is made, is at least one and one-half (1-1/2) times the aggregate of the annual interest charges and dividend requirements on all interest bearing indebtedness and all series of Preferred Stock and of such prior or parity stock to be outstanding immediately after the proposed issue; and (iv) So long as any shares of the 4-1/2% Series of the Preferred Stock are outstanding, unless the net earnings of the Company available for dividends determined in accordance with sound accounting practice for the same twelve (12) month period are at least two and one-half (2-1/2) times the annual dividend requirements on all series of Preferred Stock and of such prior or parity stock to be outstanding immediately after the proposed issue. In said computations in subparagraphs (iii) and (iv) (aa) Interest on indebtedness and dividends on stock in each case to be retired with the proceeds of the proposed issue and similar charges on indebtedness and stock retired or to be retired prior to the proposed issue from the proceeds of any such junior stock issued by the Company are to be excluded; (bb) Such gross income or net earnings, respectively, similarly determined for said twelve (12) months period, from any property acquired by purchase, merger or otherwise during or after said period or to be acquired in connection with the proposed issue, may be included for such part of such period as shall have preceded such acquisition thereof by the Company; and (cc) The amount deducted for depreciation shall be the amount charged by the Company on its books for depreciation during such period but not less than the greater of (x) two and one-quarter per cent (2-1/4%) of the arithmetical average of the gross plant investment in depreciable property on the books of the Company on the first and last days of such period (not including in depreciable property any amounts carried in adjustment accounts on the books of the Company at each such date) or (y) the largest minimum depreciation requirement for such period of any mortgage indenture to which the Company is a party during such period, computed on the basis as set forth in said mortgage indenture for a calendar or fiscal year period. (c) Merge or consolidate with or into any other corporation or corporations or sell, lease or dispose of all or substantially all its assets, unless such merger, consolidation, sale, lease or disposition, or the issuance and assumption of all securities to be issued or assumed in connection therewith, shall have been ordered, approved, or permitted under the provisions of the Public Utility Holding Company Act of 1935; provided that the provisions of this subparagraph (c) shall not apply to a purchase or other acquisition by the Company of franchises or assets of another corporation in any manner which does not involve a merger or consolidation. 11. So long as any shares of the Preferred Stock of any series are outstanding, the payment of dividends on Common Stock or on any other stock of the Company ranking junior to the Preferred Stock as to dividends or assets (other than (i) dividends payable in stock ranking junior to the Preferred Stock as to dividends and assets or (ii) dividends paid in cash if immediately thereafter there shall be paid to the Company in cash an amount equal to such dividends for shares of or as a capital contribution with respect to stock ranking junior to the Preferred Stock as to dividends and assets) and the making of any distribution of assets to holders of stock ranking junior to the Preferred Stock as to dividends or assets by purchase of shares or otherwise (each of such actions being herein embraced within the term "payment of junior stock dividends") shall be subject to the following limitations: (a) If and so long as the junior stock equity is, or as a result of the proposed payment would become, less than twenty per cent (20%) of total capitalization the payment of junior stock dividends, including the proposed payment, during the twelve months ending with the last day of the month in which the proposed payment is to be made shall not exceed fifty per cent (50%) of the net income of the Company available for the payment of dividends on the stock ranking junior to the Preferred Stock as to dividends and assets for the twelve full calendar months immediately preceding the calendar month in which such dividend is declared; and (b) If and so long as the junior stock equity is, or as a result of the proposed payment would become, less than twenty-five per cent (25%) but is twenty per cent (20%) or more of total capitalization the payment of junior stock dividends, including the proposed payment, during the twelve months ending with the last day of the month in which the proposed payment is to be made shall not exceed seventy-five per cent (75%) of the net income of the Company available for the payment of dividends on the stock ranking junior to the Preferred Stock as to dividends and assets for the twelve full calendar months immediately preceding the calendar month in which such dividend is declared. For the purposes of this subdivision 11 "net income" shall be determined in accordance with generally accepted accounting principles, provided, however, that the amount deducted for depreciation shall be an amount computed in accordance with clause (cc) of subparagraph (b) of subdivision 10 hereof. The term "junior stock equity" as used in this subdivision 11 means the aggregate of the par vale of, or stated capital represented by, the outstanding shares of stock ranking junior to the Preferred Stock as to dividends and assets, of the premium on capital stock and of the surplus (including earned surplus, capital surplus and surplus invested in plant) of the Company less the excess, if any, of the aggregate amount payable on involuntary liquidation, dissolution or winding up of the affairs of the Company upon all outstanding Preferred Stock of the Company over the aggregate par or stated value thereof and less, unless the amounts or items are being amortized or are being provided for by reserves, (i) any amounts recorded on the books of the Company in adjustment accounts for utility plant and other plant in excess of the original cost thereof, (ii) any intangible items set forth on the asset side of the balance sheet of the Company as the result of accounting convention, such as unamortized debt discount and expense and capital stock discount and expense, and (iii) the excess, if any, during the period from January 1, 1954 to the end of a month within ninety (90) days preceding the date as of which junior stock equity is determined, over the amount charged by the Company on its books during such period for depreciation of an amount determined as follows: (x) for the calendar year 1954 and for each full calendar year thereafter, an amount equal to two and one-quarter per cent (2- 1/4%) of the arithmetical average of the gross plant investment in depreciable property on the books of the Company on January 1 and December 31 of such calendar year (not including in depreciable property any amounts carried in adjustment accounts on the books of the Company at each such date); and (y) for any other period an amount equal to the product of one- twelfth (1/12th) of two and one-quarter per cent (2-1/4%) of the gross plant investment in depreciable property on the books of the Company on the first day of the calendar year in such period (not including in depreciable property any amounts carried in adjustment accounts on the books of the Company at such date) multiplied by the number of full calendar months in such period. The term "total capitalization" as used in this subdivision 11 means the aggregate of (x) the junior stock equity, (y) the par value of, or stated capital represented by, the outstanding shares of Preferred Stock and any other stock ranking prior thereto or on a parity therewith as to dividends or assets and (z) the principal amount of all outstanding indebtedness of the Company represented by bonds, notes and other evidences of indebtedness maturing by their terms more than one year from the date of issue thereof. 12. No stockholders, director, officer or agent of the Company shall be held individually responsible for any action taken in good faith though subsequently adjudged to be in violation of these rights and preferences. 13. Every holder of Preferred Stock of the Company by becoming such shall be held to have consented to all of these provisions and to have agreed to be bound thereby and to have waived to the full extent permitted by law any right such holder may have either now or at any time in the future contrary to these provisions. EX-10 4 NEES EXHIBIT 10(A)(I) REMVEC II AGREEMENT ------------------- DATED AS OF JULY 1, 1994 ----------------------- REMVEC II AGREEMENT -------------------- This Agreement is made as of July 1, 1994, by and among various Entities (as that term is defined in Section 15.14 of the New England Power Pool Agreement dated as of September 1, 1971, as it may be amended from time to time (the "NEPOOL Agreement")) which are engaged in the electric utility business within the geographic area served as of June 30, 1994 through the Rhode Island, Eastern Massachusetts, Vermont Energy Control ("REMVEC") satellite dispatching center established under the Amended REMVEC Agreement dated as of August 12, 1977 (the "Expiring Agreement") and that have become participants in the New England Power Pool ("NEPOOL") in accordance with the terms of the NEPOOL Agreement. As of the effective date hereof, each entity or group of entities listed below constitutes a single original "REMVEC II Participant" under this Agreement. For the definition of "REMVEC II Participant" at subsequent times, see Article XII, below. ARTICLE I. Basic Understandings -------------------- As a result of the implementation by NEPOOL of recommendations made in the 1993 Strategic Pool Operations Review Task Force Report, New England Power Exchange ("NEPEX"), the central dispatch and interchange office established pursuant to the NEPOOL Agreement, will assume direct control over the generating units in New England on or about July 1, 1997. REMVEC, which was established to operate as a satellite of NEPEX by the Expiring Agreement, would be expected to become a transmission security analysis center and to assist NEPEX in the coordination and control of the transmission system. Thus, REMVEC's responsibilities as a NEPEX satellite organization would be significantly reduced. It would no longer have generation control responsibilities (voice communication with and dispatching of its participants' generation real power output). REMVEC's tasks would be limited to those directly related to preserving the security of its participants' bulk power systems. Following extensive discussion and deliberation by REMVEC's Participants, the REMVEC Operating Committee and the REMVEC Executive Committee, the REMVEC Executive Committee, by unanimous vote taken on April 22, 1994, accepted a proposal made by New England Power Company ("NEP") to provide security analysis services to participants in a new organization to be established and maintained by the participants for the purposes of operating as a satellite of NEPEX and fulfilling its satellite responsibilities by entering into, overseeing and administering on behalf of its participants a security analysis services agreement with NEP. This Agreement (to be called the "REMVEC II Agreement") establishes the contemplated organization, and sets forth the terms and conditions under which its Participants agree to be bound. In consideration of their mutual undertakings herein, the REMVEC II Participants hereby agree to establish and maintain an organization, called Rhode Island, Eastern Massachusetts, Vermont Energy Control II ("REMVEC II"). REMVEC II shall become and shall operate as a satellite of NEPEX as of the date on which NEP commences to provide "Base Services" under the provisions of the Security Analysis Services Agreement between and among NEP, REMVEC II and REMVEC II Participants (the "SAS Agreement") which is being executed concurrent with this Agreement. A copy of the SAS Agreement is attached to and incorporated into this Agreement as "Appendix A". Prior to that date, REMVEC will continue to operate as a satellite of NEPEX. It is expressly understood that the Expiring Agreement shall remain in effect until it is terminated in accordance with its terms and that, until it is so terminated, it will coexist with this Agreement. Any and all expenses incurred or to be incurred under the Expiring Agreement shall be treated as separate and distinct from any and all expenses incurred or to be incurred under this Agreement and/or the SAS Agreement. The REMVEC II Participants further agree to the following terms and conditions. ARTICLE II. Objectives ---------- The objectives of REMVEC II are: 1. To preserve the security of the bulk power systems of the REMVEC II Participants. 2. To operate as a satellite of NEPEX. ARTICLE III. Effective Date and Term ----------------------- Following (i) execution of this Agreement by all entities that were Participants in REMVEC as of July 1, 1994, and (ii) the receipt of all necessary regulatory approvals of this Agreement (including, without limitation, that of the Federal Energy Regulatory Commission), this Agreement shall become effective as of July 1, 1994. Each REMVEC II Participant shall remain a REMVEC II Participant at least through midnight on June 30, 1998. A REMVEC II Participant (with the sole exception of NEP) may terminate its participation in REMVEC II as of midnight on June 30 of any calendar year beginning with 1998 and ending with 2004 by providing REMVEC II not less than two (2) years' prior written notice; provided, however, that such REMVEC II Participant shall have received approval prior to the giving of such notice from the NEPOOL Management Committee allowing it to be a direct reporting entity to NEPEX under the NEPOOL Agreement. A REMVEC II Participant may terminate its participation in REMVEC II as of midnight on June 30, 2005 or as of midnight on June 30 of any subsequent year by providing REMVEC II not less than three (3) years prior written notice. REMVEC II shall cease to exist and this Agreement shall be terminated, except as to any remaining payment obligations, as of the date on which the last remaining REMVEC II Participant terminates its participation in REMVEC II in accordance with the foregoing provisions. If (i) a REMVEC II Participant or entity which is a member of a REMVEC II Participant ceases to be a member of NEPOOL pursuant to Section 16.2 of the NEPOOL Agreement or ceases to be a member of NEPOOL for any other reason or (ii) if the REMVEC II Executive Committee determines that any REMVEC II Participant or entity which is a member of a REMVEC II Participant has failed to take in good faith such steps as may reasonably be required to perform its obligations pursuant to this Agreement and such failure continues for an unreasonable length of time following appropriate notice to such REMVEC II Participant or entity, the REMVEC II Executive Committee may thereupon terminate such Participant's or entity's status as a REMVEC II Participant or member of a REMVEC II Participant. Any REMVEC II Participant or entity whose participation in REMVEC II is terminated pursuant to this Article or any other provision of this Agreement shall be responsible for and shall make provision for (i) any termination charges due NEP under the SAS Agreement; (ii) all debts and obligations then due or to become due from said REMVEC II Participant or entity from transactions up to said withdrawal; and (iii) making available to REMVEC II, at least until the remaining REMVEC II Participants can provide alternate facilities, any facilities said REMVEC II Participant or entity then has for use in whole or in part in connection with REMVEC II operations. Nothing herein shall be construed in such fashion as to make a REMVEC II Participant or entity, without its consent, a guarantor or endorser of, or otherwise liable for, any indebtedness (including any indebtedness for money borrowed or payments deferred) incurred by or on behalf of REMVEC II or others in connection with REMVEC II matters other than the REMVEC II Participant's or entity's obligation under this Agreement to pay its share of the expenses of REMVEC II referred to in this Article III, and in Articles IX and X hereof and contractual obligations referred to in Article VI hereof. ARTICLE IV. REMVEC II Participant Obligations with Respect to the SAS Agreement --------------------------------------------------------- Concurrent with execution of this Agreement, each REMVEC II Participant shall execute a copy of the SAS Agreement, and shall fulfill its obligations under that Agreement. ARTICLE V. Executive Committee ------------------- An Executive Committee shall be established. Each REMVEC II Participant whose Territorial KWH during the preceding calendar year represents 3% or more of the aggregate REMVEC II Territorial KWH for such period shall be entitled to one member and one alternate on the Executive Committee. The remaining REMVEC II Participants shall be divided into two groups, (a) one group consisting of investor-owned REMVEC II Participants and (b) the other group consisting of municipally-owned utilities, cooperatively-owned utilities and the balance of the REMVEC II Participants; and each group shall have the right to appoint and be represented by one member and one alternate. At its annual meeting the Executive committee shall elect from its membership a Chairperson and a Vice Chairperson and shall also elect a Secretary who need not be a member of the Committee. They shall have the powers and duties usually incident to such offices. The Executive Committee shall hold its annual meeting in January or at a special meeting called for such purpose in lieu thereof at such time and place as the Chairperson shall designate and shall hold other meetings at the call of the Chairperson. Any two or more members may call a meeting of the Executive Committee in case the Chairperson shall fail to call a meeting upon request. Normally, notices of meetings shall specify the subject matters to be acted upon at the meeting and shall be made available to each member of the Executive Committee at least five days prior to the date of the meeting. However, in the case of emergency, the Executive Committee may meet upon call of any member in such manner as the Executive Committee shall determine. Each member of the Executive Committee or his/her alternate shall have the right to cast a number of votes equal to the Territorial KWH of his/her REMVEC II Participant(s) during the preceding calendar year. The affirmative votes of at least three members representing REMVEC II Participants who have at least two-thirds (2/3) of the aggregate Territorial KWH of all REMVEC II Participants during the preceding calendar year shall be required for the adoption of a resolution which shall become binding upon the REMVEC II Participants, with respect to REMVEC II matters; provided, however, (i) No single member shall be capable of defeating the adoption of a resolution relating to any operational matter; (ii) the negative votes of any two or more members representing REMVEC II Participants having at least 15% of such total number of votes shall defeat any such action; and (iii) the unanimous affirmative vote of all members of the Executive Committee shall be required for the adoption of a resolution arranging for the addition of any "Supplemental Services" under Article IV ("Services") of the SAS Agreement. As used in this Agreement, "Territorial KWH" will be the annual KWH load of a REMVEC II Participant calculated by adding for the 12-month calendar year the REMVEC II Participant's net generated KWH, all non-firm purchases from other REMVEC II Participants, all purchases (firm and non-firm) from non- REMVEC II Participants, and subtracting all sales (firm and non-firm) to non- participants and all non-firm sales to other REMVEC II Participants. In the case of REMVEC II Participants that do not have load, a proxy shall be developed for use as the Participant's "Territorial KWH" by the Operating Committee and submitted for approval by the Executive Committee. Such proxy may be based on the Participant's generation on an equivalent load basis or on some other reasonable criteria. ARTICLE VI. Duties and Authority of the Executive Committee. ----------------------------------------------- The Executive Committee shall have and may exercise all powers of this REMVEC II Agreement and may administer, enforce and interpret the provisions of this Agreement in order to accomplish the objectives of REMVEC II consistent with the provisions of this Agreement. It may delegate powers to others, including the Operating Committee, and may arrange for accounting, engineering, legal and other required services. However, with the sole exception of the SAS Agreement, all contracts on account of REMVEC II shall be approved by resolution of the Executive Committee and when executed by at least three of the REMVEC II Participants who have at least two-thirds (2/3) of the aggregate Territorial KWH of all REMVEC II Participants during the preceding calendar year shall be binding on all REMVEC II Participants. The chairperson of the Executive Committee is hereby authorized to execute the SAS Agreement on behalf of REMVEC II and such other documents as may be necessary to seek and obtain approval of the same from the Federal Energy Regulatory Commission under the Federal Power Act. The Executive Committee shall direct the Operating Committee to conduct a review of all criteria, rules and standards and operating procedures in effect under the Existing Agreement and to make a recommendation to it concerning the criteria, rules and standards and operating procedures that should be adopted under this Agreement. Prior to January 1, 1997, the Executive Committee shall adopt appropriate criteria, rules and standards and operating procedures for REMVEC II. In the event that a notice of termination is received from NEP under the provisions of Article III or the SAS Agreement, the Executive Committee shall meet and explore alternative arrangements under which the objectives of REMVEC II might be met under this Agreement. Any disputes hereunder or related to the REMVEC II operations will be submitted to the Executive Committee, including, without limitation, disputes between NEP and a REMVEC II Participant or Participants of a technical and/or operational nature relating to the provision of service by NEP under the SAS Agreement that are not resolved by the Operating Committee in accordance with the provisions of Article VIII, below. Each REMVEC II Participant, subject to its right to arbitration pursuant to Article XI hereof, agrees to be bound by the decisions of the Executive Committee. The Secretary of the Executive Committee shall maintain a current list of addresses for the giving of notices to REMVEC II and all REMVEC II Participants under the provisions of the SAS Agreement and shall provide a copy of such list to all parties to the SAS Agreement upon any party's request. ARTICLE VII. Operating Committee ------------------- An Operating Committee shall be established. REMVEC II Participants and groups of REMVEC II Participants shall be entitled to membership on the Operating Committee in the same manner and to the same extent as they are entitled to membership on the Executive Committee. At its annual meetings the Operating Committee shall elect from its membership a Chairperson, who shall be a member other than NEP's member, and a Vice Chairperson and shall also elect a Secretary who need not be a member of the Committee. They shall have the powers and duties usually incident to such offices. The Operating Committee shall hold its annual meeting in January or at a special meeting called for such purpose in lieu thereof at such time and place as the Chairperson shall designate and shall hold other meetings at the call of the Chairperson. Any two or more members may call a meeting of the Operating Committee in case the Chairperson shall fail to call a meeting upon request. Normally, notices of meetings shall specify the subject matters to be acted upon at the meeting and shall be made available to each member of the Operating Committee at least five days prior to the date of the meeting. However, in case of emergency, the Operating Committee may meet upon call of any member in such manner as the Operating Committee shall determine. Each member of the Operating Committee or his/her alternate shall have the right to cast a number of votes equal to the Territorial KWH of its REMVEC II Participant(s) during the preceding calendar year. The affirmative votes of at least three members representing REMVEC II Participants who have at least two-thirds (2/3) of the aggregate Territorial KWH of all Participants during the preceding calendar year shall be required for the adoption of a resolution which shall become binding upon the Participants; provided, however, no single member shall be capable of defeating the adoption of a resolution relating to any operational matter. Any Participant may appeal to the Executive Committee any action taken by the Operating Committee. Such an appeal shall be taken prior to the end of the tenth business day following the meeting of the Operating Committee to which the appeal relates by delivering to the Secretary of the Executive Committee a signed and written notice of appeal and by mailing a copy of the notice to each member of the Executive Committee. Pending a vote of the Executive Committee affirming the action taken by the Operating Committee the filing of a notice of appeal as aforesaid shall suspend the action appealed. ARTICLE VIII. Duties and Authority of the Operating Committee ----------------------------------------------- Subject to direction from the Executive Committee, and to the terms of this Agreement, the Operating Committee shall be responsible for the day-to- day oversight and administration of the SAS Agreement and of this Agreement in such a manner as to achieve the objectives of REMVEC II as a satellite of NEPEX. Each of the REMVEC II Participants agrees to comply with directions from the Operating Committee in this regard, provided that such directions conform to sound principles of utility operation and to provisions of applicable laws and contracts. All disputes between NEP and a REMVEC II Participant or Participants of a technical and/or operational nature relating to the provision of service by NEP under the SAS Agreement shall be submitted by NEP and/or the REMVEC II Participant or Participants to the Operating Committee for resolution. The Operating Committee shall have the authority to appoint task forces for particular studies and shall name thereto available employees of REMVEC II Participants. A REMVEC II Participant may be reimbursed for the time and expenses of any of its employees engaged in such task force work in such manner as is determined by the Executive Committee. Subject to direction from the Executive Committee, the Operating Committee may delegate its specific duties to subcommittees, task forces, and others. The Operating Committee shall, to the extent appropriate to achieve the objectives of REMVEC II, establish reasonable standards, criteria and rules and operating procedures relating to protective equipment, metering, telemetering, communications, switching, voltage control, load shedding, operating and emergency procedures, and the operation and maintenance of the facilities of the REMVEC II Participants. The Operating Committee shall be responsible for the development of appropriate billing procedures in concert with the billing agent (New England Power Service Company) for any transactions pursuant to this Agreement. Each REMVEC II Participant shall furnish to the Operating Committee such data and information as the Operating Committee may reasonably expect for the performance of its duties. ARTICLE IX. Expenses of REMVEC II --------------------- All expenses of REMVEC II authorized under this Agreement, other than expenses incurred under the SAS Agreement, shall be paid by REMVEC II Participants monthly to New England Power Service Company as billing agent, upon receipt of bills, in proportion to their previous year's Territorial KWH as compared to the aggregate of such Territorial KWH for all Participants. All REMVEC II Participants agree that, as necessary, New England Power Service Company will render a bill to each REMVEC II Participant on the first working day of each month for all amounts payable by such REMVEC II Participant hereunder with respect to the particular month, on an estimated basis for that month to be adjusted to actual experience quarterly. All bills shall be due when rendered except as specified below in this paragraph. Unless New England Power Service Company and the REMVEC II Participant in arrears agree otherwise, when all or part of any bill shall remain unpaid for more than fifteen (15) days after the due date, interest at an annual rate of 2% above the lowest interest rate then being charged by the Bank of Boston, or its successor, on 90 day commercial loans shall accrue to New England Power Service Company from and after said due date and be payable to New England Power Service Company on such unpaid amount, or in the event the amount of the bill is disputed, on the amount finally determined to be due and payable. A REMVEC II Participant may require New England Power Service Company to render bills fifteen (15) days prior to said first working day. However such early rendered bills shall not be deemed due until such first working day. Whenever an additional entity which is a participant in NEPOOL becomes or joins a REMVEC II Participant in REMVEC II pursuant to the provisions of Article XII hereof, it shall pay a charge equal to the proportion of the REMVEC II expenses, if any, unpaid by it which it would have incurred if it had been a REMVEC II Participant during the period between the date it became a NEPOOL participant, not subject to composite treatment under Section 3.3 of the NEPOOL Agreement, and the date it actually becomes a REMVEC II Participant hereunder. The payments received for such charge shall be credited and paid to the REMVEC II Participants who incurred the corresponding charges. ARTICLE X. Amendment --------- This Agreement may be amended at any time upon the consent of all REMVEC II Participants, or upon six months' notice sent to the Participants by the Secretary of the Executive Committee following a duly approved resolution of the Executive Committee. Further, this Agreement shall be amended at anytime upon a determination by the Executive Committee, at a meeting called pursuant to Article V and upon a duly approved resolution taken pursuant to Article V, that such amendment is necessitated on account of REMVEC II operating as a satellite of NEPEX or a successor organization. However, (i) no amendment is to adversely affect any contractual arrangement entered into on account of the establishment and operation of REMVEC II pursuant to this Agreement; and (ii) without consent of all REMVEC II Participants, no amendment shall limit a REMVEC II Participant's rights under Article III to terminate its participation in REMVEC II or alter the provisions of the last paragraph of Article III, above. ARTICLE XI. Arbitration ----------- In case any dispute shall arise as to the interpretation or the performance of this Agreement which cannot be settled by the Executive Committee, or in the case any dispute so settled by the Executive Committee is considered by a REMVEC II Participant to work an undue hardship on it, such dispute shall be submitted to arbitration by the request of the complaining REMVEC II Participant. Copies of any such request shall be served on all REMVEC II Participants and it shall specify the issue or issues in dispute and summarize the REMVEC II Participant's claim with respect thereto. Within thirty (30) days after receipt of such a request authorized representatives of all REMVEC II Participants shall confer and attempt to agree upon appointment of a single arbitrator. If such agreement is not accomplished, the Chairperson of the Executive Committee shall request the American Arbitration Association to appoint an arbitrator in accordance with its Commercial Arbitration Rules, which rules shall govern the conduct of the arbitration in the absence of contrary agreement by all REMVEC II Participants. The arbitrator shall conduct a hearing at a place in Massachusetts of his/her designation, and within thirty (30) days thereafter, unless such time is extended by agreement of all REMVEC II Participants, shall notify the REMVEC II Participants in writing of his/her decision, stating his/her reasons for such decision and separately listing his/her findings of fact and conclusions of law. The arbitrator shall not have power to amend or add to this Agreement or, if involved, the SAS Agreement. Subject to such limitation, the decision of the arbitrator shall be final and binding on all REMVEC II Participants except that any REMVEC II Participant may petition to a court of competent jurisdiction for review of any conclusions of law. The decision of the arbitrator shall determine and specify how the expenses of the arbitration shall be allocated among the REMVEC II Participants. ARTICLE XII. Becoming a REMVEC II Participant -------------------------------- Any Entity (as that term is defined in Section 15.14 of the NEPOOL Agreement) which is engaged in the electric utility business within the geographic area served as of June 30, 1994 through the REMVEC satellite dispatching center, and which has become a Participant in NEPOOL in accordance with the terms of the NEPOOL Agreement may, upon compliance with such reasonable conditions as the Executive Committee shall prescribe, become a REMVEC II Participant by depositing a counterpart of this Agreement, as theretofore amended, duly executed by it, with the Secretary of the Executive Committee, accompanied by a certified copy of a vote of its board of directors, or such other body or bodies as may be appropriate, duly authorizing its execution and performance of this Agreement, and a check in payment of the charge provided by Article IX. The Executive Committee shall include in its prescribed conditions the requirement that the entity as a condition of membership in REMVEC II: (i) have installed specified protective equipment, metering, telemetering, communications, switching, voltage control and load shedding equipment and other specified facilities; (ii) adopt REMVEC II's current criteria, rules, standards and operating procedures; (iii) furnish in a timely manner such operating data and other information as may be needed to permit NEP, REMVEC II and NEPEX to coordinate the operation and maintenance of the entity's generation and transmission in accordance with Section 12 and other provisions of the NEPOOL Agreement; and (iv) if the entity has territorial load and/or owns or operates generation and/or transmission facilities, become a signatory to the SAS Agreement. Any entity which satisfies these requirements shall become a REMVEC II Participant, and this Agreement shall become fully binding and effective in accordance with its terms as to such entity, as of the first day of the second calendar month following its satisfaction of such requirements; provided that an earlier or later effective time may be fixed by the Executive Committee with the concurrence of such entity. ARTICLE XIII. Miscellaneous ------------- Without the consent of the Executive Committee, no REMVEC II Participant may assign its interest under this Agreement except in connection with a merger, consolidation or transfer of substantially all its assets. The signatories hereto shall not become partners by reason of this Agreement or their activities hereunder, but as to each other and to third persons, they shall be and remain independent contractors in all matters relating to this Agreement. This Agreement shall not be construed to create any liability on the part of any signatory to anyone not a party to this Agreement. Each signatory shall retain its separate identity and, to the extent not limited hereby, its individual freedom in rendering service to its customers. All amendments to this Agreement shall be in writing signed by the duly authorized representative(s) of the parties. This Agreement constitutes the entire understanding of the parties and there are no representations, understandings or agreements, oral or written, that are not included herein. Should any provision of this Agreement be held invalid, such provision shall be considered severable and such invalidity shall not affect the remainder of the provisions herein. This Agreement, and all the rights, obligations and performance of the REMVEC II Participants hereunder, are subject to applicable state and federal laws and to all duly promulgated rules, regulations and orders of regulatory bodies having jurisdiction in the premises. Each REMVEC II Participant agrees to proceed forthwith with the filing of this Agreement with, and the taking of any requisite action before, any regulatory authority having jurisdiction over said Participant and its interests herein. IN WITNESS WHEREOF the parties hereto comprising the REMVEC II Participants, for themselves and as agents for the other entities which from time to time become members of their respective REMVEC II Participant groups, have caused their corporate names to be subscribed by their respective officers or agents thereunto duly authorized, all as of July 1, 1994, but actually on the respective dates indicated below. BOSTON EDISON COMPANY /s/ Robert A. Ruscitto 2/16/96 By Date BLACKSTONE VALLEY ELECTRIC COMPANY EASTERN EDISON COMPANY MONTAUP ELECTRIC COMPANY NEWPORT ELECTRIC CORPORATION Subsidiaries of EASTERN UTILITIES ASSOCIATES /s/ Kevin A. Kirby 2/16/96 By Date NEW ENGLAND POWER COMPANY GRANITE STATE ELECTRIC COMPANY MASSACHUSETTS ELECTRIC COMPANY THE NARRAGANSETT ELECTRIC COMPANY Subsidiaries of NEW ENGLAND ELECTRIC SYSTEM /s/ R. P. Sergel 5/1/96 /s/ Jeffrey D. Tranen 4/8/96 By Date CAMBRIDGE ELECTRIC LIGHT COMPANY COMMONWEALTH ELECTRIC COMPANY CANAL ELECTRIC COMPANY Subsidiaries of COMMONWEALTH ENERGY SYSTEM /s/ James J. Keane 2/15/96 By Date FITCHBURG GAS AND ELECTRIC LIGHT COMPANY /s/David Foote 4/5/96 By Date VERMONT ELECTRIC POWER COMPANY, INC. By: VERMONT ELECTRIC POWER COMPANY, INC. For itself and as agent for the following Vermont electric utilities who have joined with it as a single participant under the terms of the NEPOOL Agreement : BARTON VILLAGE, INC. CITY OF BURLINGTON ELECTRIC DEPARTMENT CENTRAL VERMONT PUBLIC SERVICE CORPORATION CITIZENS UTILITIES COMPANY VILLAGE OF ENOSBURG FALLS WATER AND LIGHT DEPARTMENT GREEN MOUNTAIN POWER CORPORATION TOWN OF HARDWICK ELECTRIC DEPARTMENT VILLAGE OF HYDE PARK, INC. VILLAGE OF JACKSONVILLE ELECTRIC COMPANY VILLAGE OF JOHNSON ELECTRIC LIGHT DEPARTMENT VILLAGE OF LUDLOW ELECTRIC LIGHT DEPARTMENT VILLAGE OF LYNDONVILLE ELECTRIC DEPARTMENT VILLAGE OF MORRISVILLE WATER AND LIGHT DEPARTMENT VILLAGE OF NORTHFIELD ELECTRIC DEPARTMENT VILLAGE OF ORLEANS ELECTRIC DEPARTMENT VILLAGE OF READSBORO ELECTRIC LIGHT DEPARTMENT ROCHESTER ELECTRIC LIGHT AND POWER COMPANY VILLAGE OF STOWE WATER AND LIGHT DEPARTMENT VILLAGE OF SWANTON VERMONT ELECTRIC GENERATION & TRANSMISSION COORPERATIVE, INC. VERMONT MARBLE POWER DIVISION OF OMYA, INC. VERMONT PUBLIC POWER SUPPLY AUTHORITY WASHINGTON ELECTRIC COOPERATIVE, INC. /s/ 2/23/96 By Date Vice President ASHBURNHAM MUNICIPAL LIGHT DEPARTMENT /s/ Thomas E. Lewis 8/2/96 By Date TOWN OF BOYLSTON MUNICIPAL LIGHT DEPARTMENT /s H. Bradford White By Date TOWN OF BRAINTREE ELECTRIC LIGHT DEPARTMENT /s/ Walter R. McGrath 3/15/96 By Date TOWN OF DANVERS ELECTRIC DEPARTMENT /s/ Wayne P. Marquis 5/9/96 By Date Manager TOWN OF GEORGETOWN MUNICIPAL LIGHT DEPARTMENT /s/ Wayne Snow 8/5/96 By Date TOWN OF GROTON ELECTRIC LIGHT DEPARTMENT /s/ Roger H. Beeltje 3/14/96 By Date HINGHAM MUNICIPAL LIGHTING PLANT /s/ Joseph R. Spadea Jr. 3/12/96 By Date HOLDEN MUNICIPAL LIGHT DEPARTMENT /s/ Edla Ann Bloom 8/7/96 By Date HUDSON LIGHT AND POWER DEPARTMENT /s/ Anthony J. Monteiro 9/3/96 By Date TOWN OF HULL MUNICIPAL LIGHTING PLANT /s/ 9/4/96 By Date TOWN OF IPSWICH MUNICIPAL ELECTRIC DEPARTMENT /s/ Donald R. Stone Sr. 7/31/96 By Date LITTLETON ELECTRIC LIGHT DEPARTMENT /s/ Savas C. Danos 7/30/96 By Date TOWN OF MANSFIELD MUNICIPAL ELECTRIC DEPARTMENT /s/ John Larch 9/27/96 By Date MARBLEHEAD MUNICIPAL LIGHT DEPARTMENT /s/ Robert V. Jolly Jr. 4/2/96 By Date MIDDLEBOROUGH MUNICIPAL GAS AND ELECTRIC DEPARTMENT /s/ John W. Dunfey 4/19/96 By Date TOWN OF MIDDLETON MUNICIPAL LIGHT DEPARTMENT /s/ William E. Kelley Oct. 15, 1996 By Date TOWN OF NORTH ATTLEBOROUGH ELECTRIC DEPARTMENT /s/ David I. Sweetland 3/25/96 By Date PASCOAG FIRE DISTRICT /s/ Albert Palmisciano 8/5/96 By Date PAXTON MUNICIPAL LIGHT DEPARTMENT /s/ Harold L. Smith Mgr 08/01/96 By Date PEABODY MUNICIPAL LIGHT PLANT /s/ Bruce P. Patten 3/15/96 By Date PRINCETON MUNICIPAL LIGHT DEPARTMENT /s/ Sharon A. Staz 3/21/96 By Date TOWN OF READING MUNICIPAL LIGHT DEPARTMENT /s/ Leonard D. Rucker August 23, 1996 By Date ROWLEY MUNICIPAL LIGHT PLANT /s/ G. Robert Merry April 18, 1996 By Date SHREWSBURY'S ELECTRIC LIGHT PLANT /s/ Thomas R. Josie 8/5/96 By Date STERLING MUNICIPAL ELECTRIC LIGHT PLANT /s/ John Kilgo Jr. 6/18/96 By Date TAUNTON MUNICIPAL LIGHTING PLANT /s/ Joseph M. Blain 3/21/96 By Date TEMPLETON MUNICIPAL LIGHTING PLANT /s/ Gerald Skelton 3/5/96 By Date TOWN OF WAKEFIELD MUNICIPAL LIGHT DEPARTMENT /s/ William J. Wallace 3/13/96 By Date WEST BOYLSTON MUNICIPAL LIGHTING PLANT /s/ John Scirpoli 5/1/96 By Date APPENDIX A ---------- EX-10 5 NEES EXHIBIT 10(A)(II) SECURITY ANALYSIS SERVICES AGREEMENT BETWEEN AND AMONG NEW ENGLAND POWER COMPANY REMVEC II AND REMVEC II PARTICIPANTS AGREEMENT dated as of July 1, 1994 by and among NEW ENGLAND POWER COMPANY, a Massachusetts corporation, REMVEC II, an organization established by the REMVEC II Agreement, and REMVEC II PARTICIPANTS. Each REMVEC II Participant is (or, as a condition to becoming a REMVEC II Participant under the REMVEC II Agreement, will become) a signatory to this Agreement and, as such, agrees to be bound by this Agreement's terms and conditions. The signatories hereto shall not become partners by reason of this Agreement or their activities hereunder, but as to each other and to third persons, they shall be and remain independent contractors in all matters relating to this Agreement. This Agreement shall not be construed to create any liability on the part of any signatory to anyone not a party to this Agreement. Each signatory shall retain its separate identity and, to the extent not limited hereby, its individual freedom in rendering service to its customers. ARTICLE I. Definitions ----------- As used in this Agreement, the following words and terms shall have the meanings set forth herein: "Base Services" shall mean the scope of service defined in the document entitled "Case 1A Functional Analysis for REMVEC" dated August 24, 1993, a copy of which is attached to and incorporated into this Agreement as "Appendix A", and services reasonably deemed by NEP to be incidental and reasonably related to such scope of service. "Contract Year" shall mean an annual period from July 1 through June 30 (i.e. Contract Year 1994-5 shall constitute the annual period from July 1, 1994 through June 30, 1995). "Expiring Agreement" shall mean the Amended REMVEC Agreement dated as of August 12, 1977. "NEP" shall mean New England Power Company. "NEPEX" shall mean the New England Power Exchange, the central dispatch and interchange office established pursuant to the NEPOOL Agreement. "NEPOOL" shall mean the New England Power Pool. "NEPOOL Agreement" shall mean the New England Power Pool Agreement dated as of September 1, 1971, as it may be amended from time to time. The NEPOOL Agreement is incorporated into this Agreement by reference. "Participant" shall mean an entity or group of entities (other than NEP) that is or becomes a REMVEC II Participant in accordance with the terms of the REMVEC II Agreement. "REMVEC" shall mean Rhode Island, Eastern Massachusetts, Vermont Energy Control, an organization established by the Expiring Agreement and, until the date on which NEP commences to provide Base Services under this Agreement, a satellite of NEPEX. "REMVEC II" shall mean Rhode Island, Eastern Massachusetts, Vermont Energy Control II, an organization established by the REMVEC II Agreement and, as of the date on which NEP commences to provide Base Services under this Agreement, a satellite of NEPEX. "REMVEC II Agreement" shall mean the REMVEC II Agreement dated as of July 1, 1994, as it may be amended from time to time, by and among various Entities (as that term is defined in Section 15.4 of the NEPOOL Agreement) engaged in the electric utility business within the geographic area served as of June 30, 1994 under the Expiring Agreement through the REMVEC satellite dispatching center and that are or become a Participant in NEPOOL in accordance with the terms of the NEPOOL Agreement. A copy of the REMVEC II Agreement is attached to and incorporated into this Agreement as "Appendix B". "Supplemental Services" shall mean services in addition to Base Services to be provided by NEP under this Agreement that have been arranged for by REMVEC II under the provisions of Article IV ("Services"), below. ARTICLE II. Basic Understandings -------------------- As a result of the implementation by NEPOOL of recommendations made in the 1993 Strategic Pool Operations Review Task Force Report, NEPEX will assume direct control over the generating units in New England on or about July 1, 1997. REMVEC, which was established to operate as a satellite of NEPEX by the Expiring Agreement, would be expected to become a transmission security analysis center and to assist NEPEX in the coordination and control of the transmission system. Thus, REMVEC's responsibilities as a NEPEX satellite organization would be significantly reduced. It would no longer have generation control responsibilities (voice communication with and dispatching of participants' generation real power output). REMVEC's tasks would be limited to those directly related to preserving the security of its participants' bulk power systems. Following extensive discussion and deliberation by REMVEC's Participants, the REMVEC Operating Committee and the REMVEC Executive Committee, the REMVEC Executive Committee, by unanimous vote taken on April 22, 1994, accepted a proposal made by NEP to provide security analysis services to participants in a new organization to be established and maintained by the participants for the purposes of operating as a satellite of NEPEX and fulfilling its satellite responsibilities by entering into, overseeing and administering on behalf of its participants a security analysis services agreement with NEP. The REMVEC II Agreement establishes REMVEC II as the contemplated organization, and the terms and conditions under which its Participants agree to be bound. This Agreement provides the terms and conditions under which NEP agrees to provide the contemplated security analysis services to REMVEC II and the Participants. In consideration of their mutual undertakings herein, NEP, REMVEC II and each Participant hereby agree to the following terms and conditions. ARTICLE III. Term ---- Following (i) execution of this Agreement by all entities that were Participants in REMVEC as of July 1, 1994, and (ii) the receipt of all necessary regulatory approvals of this Agreement (including, without limitation, that of the Federal Energy Regulatory Commission), this Agreement shall become effective as of July 1, 1994 and shall remain in effect for a term coterminous with the term of the REMVEC II Agreement; provided, however, that NEP shall have the right to terminate its rights and obligations under this Agreement as of midnight on June 30, 2005 or of any subsequent year by providing REMVEC II not less than three (3) years' prior written notice, and further provided that each Participant shall have the right to terminate its rights and obligations under this Agreement coincident with the termination of its participation in REMVEC II in accordance with the provisions of Article III of the REMVEC II Agreement. In the event of the termination of the REMVEC II Agreement, or the termination by a Participant of its participation in REMVEC II, prior to June 30, 2002, each Participant, or the Participant terminating its participation in REMVEC II, as the case may be, agrees to pay NEP the termination charge specified in "Appendix C", attached to and incorporated into this Agreement. ARTICLE IV. Services -------- NEP is in the process of consolidating its North Andover and Worcester dispatch centers and procuring a new energy management system ("EMS") for installation in the space now occupied by REMVEC at the New England Electric complex in Westborough, Massachusetts. In conjunction with this effort, NEP agrees that the EMS that it designs, constructs and installs will be capable of providing Base Services to Participants under this Agreement. NEP agrees to keep REMVEC II advised concerning the selection of the EMS vendor and the design specifications being employed in the EMS that relate to Base Services to be provided hereunder. NEP shall take into consideration, but shall not be bound by, any recommendation made by REMVEC II regarding these matters. Finally, NEP agrees to provide Base Services to Participants in accordance with good utility practices using a segregated control room employing five (5) system operators and three full time equivalent employees performing engineering and support functions. NEP shall use its best efforts to begin providing Base Services to Participants on July 1, 1997. It is recognized, however, that circumstances may exist on that date under which NEPEX is not ready to commence generation control and connect to and operate with the new security analysis system(s) of its satellite organizations and/or NEP is not ready to commence providing Base Services despite its best efforts to be in a position to do so. If such circumstances exist, the existing arrangements under the Expiring Agreement shall be continued until the disability is removed, provided, however, that NEP shall bear all expenses associated with continuing such existing arrangements during any period that NEPEX is ready but NEP is not for reasons not excused under Article VIII ("Force Majeure"). REMVEC II may, in accordance with the provisions of Article V of the REMVEC II Agreement, arrange for NEP to provide Supplemental Services under this Agreement. It is expressly understood that such Supplemental Services may include, without limitation, the addition of a full-time manager reporting directly to the REMVEC II Executive Committee to oversee the provision of services under this Agreement. The price for any such Supplemental Services shall be established by mutual agreement between NEP and REMVEC II but shall be based on NEP's best estimate of the incremental cost to it of providing such Supplemental Services. If any such arrangements are made, each Participant agrees to be bound by the arrangement, including, without limitation, its pricing aspects, and this Agreement shall be amended as necessary to reflect the terms of the arrangement. Nothing in this Agreement shall be deemed to preclude any Participant or NEP from independently arranging for the provision of other services under separate agreement, provided that the cost or provision of such services shall not adversely affect the cost or provision of service under this Agreement. ARTICLE V. Participant Obligations ----------------------- Each Participant shall have installed and shall maintain (i) all protective equipment, metering, telemetering, communications, switching, voltage control and load shedding equipment required to fulfill the Participant's obligations as a Participant of NEPOOL and/or REMVEC II under the Criteria, Rules and Standards and Operating Procedures adopted under the NEPOOL Agreement and/or the REMVEC II Agreement and (ii) such other facilities as may be requested by NEP and approved by the REMVEC II Executive Committee to facilitate NEP's provision of Base Services and Supplemental Services, if any, under this Agreement. Each Participant shall also furnish in a timely manner the operating data and other information necessary to perform Base Services and Supplemental Services, if any, under this Agreement. NEP shall have the responsibility to establish, subject to review and approval by the REMVEC II Executive Committee, all such operating data and information requirements. To the extent that NEP is impeded from performing its obligations under this Agreement due to a Participant's failure to have installed or maintained any such equipment or facilities or to furnish any such data or information, NEP shall be relieved from such obligations. NEP agrees to establish, implement and follow procedures for the confidential treatment (both internally within its own organization and externally with any third party) of information provided it by Participants under this Agreement consistent with any requirements regarding the confidential treatment of such information established by (i) the Federal Energy Regulatory Commission under the Federal Power Act and (ii) NEPOOL. Such procedures, and any amendments thereto, shall be subject to the review and approval of the REMVEC II Executive Committee. Each Participant shall be responsible for the accuracy of the operating data and information it provides NEP. ARTICLE VI. Price ----- The price for Base Services to be provided hereunder in Contract Years 1994-5 through 2001-2 shall be fixed for each Participant at the price for the Contract Year specified for such Participant and for the Contract Year in "Appendix D", attached to and incorporated into this Agreement by reference. Thereafter, commencing with Contract Year 2002-3, and continuing with each subsequent Contract Year until this Agreement terminates, the price in effect on the last day of the preceding Contract Year shall be escalated as of midnight on such last day by the percent of annual change that occurred in the preceding calendar year in the Gross Domestic Product Implicit Price Deflator (expressed as a decimal fraction representing thousandths), as published by the Bureau of Economic Analysis in the United States Department of Commerce. The price for Base Services per Contract Year of any entity or group of entities that subsequently become or join REMVEC II shall be mutually agreed upon by NEP and such entity or group of entities. The price for Supplemental Services, if any, shall be as agreed upon between NEP and the REMVEC II Executive Committee under the provisions of Article IV ("Services"), above. ARTICLE VII. Billing ------- As soon as practicable following satisfaction of the conditions precedent to the effectiveness of this Agreement set forth in Article III ("Term"), above, NEP shall bill each Participant for amounts due under this Agreement from July 1, 1994 through the date of such billing. Thereafter, each month during the term of this Agreement, NEP shall bill each Participant one twelfth of the price specified in Article VI ("Price"), above, for the then current Contract Year. Bills will be rendered during the first week of each month covering amounts due for the month. Any amount remaining unpaid after fifteen days following receipt of the bill shall bear interest thereon from the date of the bill at an annual rate of 2% above the lowest interest rate then being charged by the Bank of Boston, or its successor, on 90 day commercial loans. ARTICLE VIII. Force Majeure ------------- The term "force majeure" as used herein shall mean a cause beyond the control of NEP, REMVEC II or a Participant, as the case may be, that wholly or partially prevents performance of its obligations under this Agreement. Examples (without limitation) of force majeure, but only if beyond the control of NEP, REMVEC II or the Participant, as the case may be, are the following: acts of God; acts of the public enemy; insurrection; riots; strikes; labor disputes (including wildcat strikes, slowdowns, sabotage and the like); fires; explosions; floods; extraordinary breakdowns of or damage to facilities or equipment; laws, regulations, orders or acts of regulatory agencies; orders or acts of civil or military authority; or any other cause of a similar nature that materially impairs the performance of this Agreement. If because of force majeure either NEP, REMVEC II or a Participant is unable to carry out its obligations under this Agreement, in whole or in part, and if such party promptly gives the other parties written notice of such force majeure then the obligations and liabilities of the party giving such notice and the corresponding obligations of the other parties shall be suspended to the extent made necessary by and during the continuance of such force majeure; provided, however, that the party giving notice shall use its best efforts to eliminate the cause of such force majeure in the shortest practicable time. Notwithstanding the foregoing, settlement of labor disputes shall be entirely at the discretion of the affected party, and force majeure shall not excuse any party from fulfilling its payment obligations under this Agreement. ARTICLE IX. Waivers ------- The failure of either NEP, REMVEC II or a Participant to insist in any one or more instance upon strict performance of any of the provisions of this Agreement or to take advantage of any of its rights under this Agreement shall not be construed as a general waiver of any such provision or the relinquishment of any such right, but the same shall continue and remain in full force and effect, except with respect to the particular instance or instances. ARTICLE X. Limitation of Liability ----------------------- To the fullest extent permissible under law, neither NEP, REMVEC II or any Participant, nor their agents, officers, directors, employees or affiliates or their agents, officers, directors or employees shall be liable to the other parties or their agents, officers, directors or employees for claims for incidental, indirect, punitive, multiple or consequential damages (including attorney's fees) connected with or resulting from performance or non-performance of this Agreement, irrespective of whether such claims are based upon warranty, tort, strict liability, contract, statute (including Mass. Gen. Laws ch. 93A), operation of law or otherwise. NEP shall be liable to REMVEC II and/or the Participants only for its gross negligence or willful misconduct in carrying out its contractual obligations under this Agreement. ARTICLE XI. Dispute Resolution ------------------ All disputes between NEP and a Participant or Participants of a technical or operational nature relating to the provision of service by NEP under this Agreement shall be referred exclusively to the REMVEC II Operating Committee and shall be resolved by REMVEC II under the terms of the REMVEC II Agreement. All other disputes between the parties arising out of or relating to this Agreement, regardless of the nature of the cause of action, including without limitation, disputed claims of force majeure, the exercise of termination rights, breach of contract, breach of duty of good faith and fair dealing, actions under Mass. Gen. Laws ch. 93A, tort (including without limitation negligence and misrepresentation), or any other cause of action under federal or state statute, common law or in equity shall be submitted to arbitration by the request of the complaining party. Copies of any such request shall be served on NEP, REMVEC II and all Participants and it shall specify the issue or issues in dispute and summarize the party's claim with respect thereto. Within thirty (30) days after receipt of such a request authorized representatives of NEP, REMVEC II and all Participants shall confer and attempt to agree upon appointment of a single arbitrator. If such agreement is not accomplished, the Chairperson of the REMVEC II Executive Committee shall request the American Arbitration Association to appoint an arbitrator in accordance with its Commercial Arbitration Rules, which rules shall govern the conduct of the arbitration in the absence of contrary agreement by all parties. The arbitrator shall conduct a hearing at a place in Massachusetts of his/her designation, and within thirty (30) days thereafter, unless such time is extended by agreement of all parties, shall notify the parties in writing of his/her decision, stating his/her reasons for such decision and separately listing his/her findings of fact and conclusions of law. The arbitrator shall not have power to amend or add to this Agreement or, if involved, the REMVEC II Agreement. Subject to such limitation, the decision of the arbitrator shall be final and binding on all parties except that any party may petition to a court of competent jurisdiction for review of any conclusions of law. The decision of the arbitrator shall determine and specify how the expenses of the arbitration shall be allocated among the parties. ARTICLE XII. Successors and Assigns ---------------------- This Agreement shall inure to the benefit of and shall be binding upon the parties hereto and their respective successors and assigns. No party may transfer or assign this Agreement in whole or in part, without the prior written consent of the others; provided, however, NEP may transfer and assign all or a portion of this Agreement, without such prior written consent, to any wholly owned subsidiary of New England Electric System. ARTICLE XIII. Notices ------- Any notice required or permitted to be given hereunder shall be given in writing and shall be delivered (i) in person, (ii) by registered mail, or (iii) by telecopy, addressed to NEP at: New England Power Company 25 Research Drive Westborough, Massachusetts 0l582 Telecopy: 508-389-3129 Attn: Chief System Dispatcher and addressed to the REMVEC II Executive Committee Chairperson and all Participants at addresses to be maintained on a current basis by the Secretary of the REMVEC II Executive Committee under the REMVEC II Agreement. REMVEC II shall cause the Secretary of its Executive Committee to provide all parties to this Agreement with a current list of all such addresses upon any party's request. NEP, upon any change of its address as above set forth, shall promptly notify the other parties in writing and from and after the giving of such notice the address therein specified shall be deemed to be the address of NEP for the giving of notices hereunder. ARTICLE XIV. Applicable Law -------------- This Agreement is made in and shall be governed by and interpreted in accordance with the laws of The Commonwealth of Massachusetts. ARTICLE XV. Compliance With Law ------------------- The parties hereto shall comply strictly with all applicable statutes, ordinances, rules, regulations, permits and orders lawfully imposed by any governmental authority on any activity of the parties hereunder, and this Agreement is made subject to all such applicable statutes, ordinances, rules, regulations, orders, and permits in effect now or in the future. ARTICLE XVI. Miscellaneous ------------- The headings in this Agreement are provided for convenience of reference only and are not to be considered a part of this Agreement for any other purpose. All amendments to this Agreement shall be in writing signed by the duly authorized representative(s) of the parties. This Agreement constitutes the entire understanding of the parties and there are no representations, understandings or agreements, oral or written, that are not included herein. Should any provision of this Agreement be held invalid, such provision shall be considered severable and such invalidity shall not affect the remainder of the provisions herein. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed effective as of the date first above written. New England Power Company Rhode Island, Eastern Massachusetts, Vermont Energy Control II /s/ Jeffrey D. Tranen /s/ Roger W. Bacon By: By: Its: Chairman, REMVEC II Executive Committee ACCEPTED AND AGREED: BOSTON EDISON COMPANY /s/ Robert A. Ruscitto 2/16/96 By Date BLACKSTONE VALLEY ELECTRIC COMPANY EASTERN EDISON COMPANY MONTAUP ELECTRIC COMPANY NEWPORT ELECTRIC CORPORATION Subsidiaries of EASTERN UTILITIES ASSOCIATES /s/ Kevin A. Kirby 2/16/96 By Date NEW ENGLAND POWER COMPANY GRANITE STATE ELECTRIC COMPANY MASSACHUSETTS ELECTRIC COMPANY THE NARRAGANSETT ELECTRIC COMPANY Subsidiaries of NEW ENGLAND ELECTRIC SYSTEM /s/ R. P. Sergel 5/1/96 Jeffrey D. Tranen 4/8/96 By Date CAMBRIDGE ELECTRIC LIGHT COMPANY COMMONWEALTH ELECTRIC COMPANY CANAL ELECTRIC COMPANY Subsidiaries of COMMONWEALTH ENERGY SYSTEM /s/ James J. Keane 2/15/96 By Date FITCHBURG GAS AND ELECTRIC LIGHT COMPANY /s/ David Foote 4/5/96 By Date VERMONT ELECTRIC POWER COMPANY, INC. By: VERMONT ELECTRIC POWER COMPANY, INC. For itself and as agent for the following Vermont electric utilities who have joined with it as a single participant under the terms of the NEPOOL Agreement : BARTON VILLAGE, INC. CITY OF BURLINGTON ELECTRIC DEPARTMENT CENTRAL VERMONT PUBLIC SERVICE CORPORATION CITIZENS UTILITIES COMPANY VILLAGE OF ENOSBURG FALLS WATER AND LIGHT DEPARTMENT GREEN MOUNTAIN POWER CORPORATION TOWN OF HARDWICK ELECTRIC DEPARTMENT VILLAGE OF HYDE PARK, INC. VILLAGE OF JACKSONVILLE ELECTRIC COMPANY VILLAGE OF JOHNSON ELECTRIC LIGHT DEPARTMENT VILLAGE OF LUDLOW ELECTRIC LIGHT DEPARTMENT VILLAGE OF LYNDONVILLE ELECTRIC DEPARTMENT VILLAGE OF MORRISVILLE WATER AND LIGHT DEPARTMENT VILLAGE OF NORTHFIELD ELECTRIC DEPARTMENT VILLAGE OF ORLEANS ELECTRIC DEPARTMENT VILLAGE OF READSBORO ELECTRIC LIGHT DEPARTMENT ROCHESTER ELECTRIC LIGHT AND POWER COMPANY VILLAGE OF STOWE WATER AND LIGHT DEPARTMENT VILLAGE OF SWANTON VERMONT ELECTRIC GENERATION & TRANSMISSION COORPERATIVE, INC. VERMONT MARBLE POWER DIVISION OF OMYA, INC. VERMONT PUBLIC POWER SUPPLY AUTHORITY WASHINGTON ELECTRIC COOPERATIVE, INC. /s/ 2/23/96 By Date Vice President ASHBURNHAM MUNICIPAL LIGHT DEPARTMENT /s/ Thomas E. Lewis 8/2/96 By Date TOWN OF BOYLSTON MUNICIPAL LIGHT DEPARTMENT /s/ H. Bradford White By Date TOWN OF BRAINTREE ELECTRIC LIGHT DEPARTMENT /s/ Walter R. McGrath 3/15/96 By Date TOWN OF DANVERS ELECTRIC DEPARTMENT /s/ Wayne P. Marquis 5/9/96 By Date TOWN OF GEORGETOWN MUNICIPAL LIGHT DEPARTMENT /s/ Wayne Snow Aug 5, 1996 By Date TOWN OF GROTON ELECTRIC LIGHT DEPARTMENT /s/ Roger H. Beeltje 3/14/96 By Date HINGHAM MUNICIPAL LIGHTING PLANT /s/ Joseph F. Spadea Jr. 3/12/96 By Date HOLDEN MUNICIPAL LIGHT DEPARTMENT /s/ Edla Ann Bloom August 7, 1996 By Date HUDSON LIGHT AND POWER DEPARTMENT /s/ Anthony J. Monteiro 9/30/96 By Date TOWN OF HULL MUNICIPAL LIGHTING PLANT /s/ 9/4/96 By Date TOWN OF IPSWICH MUNICIPAL ELECTRIC DEPARTMENT /s/ Donald R. Stone Sr. 7/31/96 By Date LITTLETON ELECTRIC LIGHT DEPARTMENT /s/ Savas C. Danos 7/30/96 By Date TOWN OF MANSFIELD MUNICIPAL ELECTRIC DEPARTMENT /s/ John Larch 9/27/96 By Date MARBLEHEAD MUNICIPAL LIGHT DEPARTMENT /s/ Robert V. Jolly Jr. 4/2/96 By Date MIDDLEBOROUGH MUNICIPAL GAS AND ELECTRIC DEPARTMENT /s/ John W. Dunfey 10/4/96 By Date TOWN OF MIDDLETON MUNICIPAL LIGHT DEPARTMENT /s/ William E. Kelley Oct 15, 1996 By Date TOWN OF NORTH ATTLEBOROUGH ELECTRIC DEPARTMENT /s/ David I. Sweetland 3/25/96 By Date PASCOAG FIRE DISTRICT /s/ Albert Palmisciano 8/5/96 By Date PAXTON MUNICIPAL LIGHT DEPARTMENT /s/ Harold L. Smith Mgr 08/01/96 By Date PEABODY MUNICIPAL LIGHT PLANT /s/ Bruce P. Patten 3/15/96 By Date PRINCETON MUNICIPAL LIGHT DEPARTMENT /s/ Sharon A. Staz 3/21/96 By Date TOWN OF READING MUNICIPAL LIGHT DEPARTMENT /s/ Leonard D. Rucker August 23, 1996 By Date ROWLEY MUNICIPAL LIGHT PLANT /s/ G. Robert Merry April 18, 1996 By Date SHREWSBURY'S ELECTRIC LIGHT PLANT /s/ Thomas R. Josie 5/21/96 By Date STERLING MUNICIPAL ELECTRIC LIGHT PLANT /s/ John Kilgo Jr. 6/18/96 By Date TAUNTON MUNICIPAL LIGHTING PLANT /s/ Joseph M. Blain 3/21/96 By Date TEMPLETON MUNICIPAL LIGHTING PLANT /s/ Gerald Skelton 11/22/96 By Date TOWN OF WAKEFIELD MUNICIPAL LIGHT DEPARTMENT /s/ William J. Wallace 7/26/96 By Date WEST BOYLSTON MUNICIPAL LIGHTING PLANT /s/ John Scirpoli 5/1/96 By Date APPENDIX A ---------- APPENDIX B ---------- APPENDIX C ---------- APPENDIX D ---------- EX-10 6 NEES EXHIBIT 10(D) MAINE YANKEE ATOMIC POWER COMPANY 1997 AMENDATORY AGREEMENT ------------------------- This 1997 Amendatory Agreement, dated as of August 6, 1997, is entered into by and between MAINE YANKEE ATOMIC POWER COMPANY, a Maine corporation ("Maine Yankee" or "Seller"), and NEW ENGLAND POWER COMPANY ("Purchaser"). For good and valuable consideration, the receipt of which is hereby acknowledged, it is agreed as follows: 1. Basic Understandings Maine Yankee was organized in 1966 to provide a supply of power to its sponsoring utility companies, including the Purchaser (collectively the "Purchasers"). It constructed a nuclear electric generating unit, having a net capability of approximately 830 megawatts electric (the "Unit") at a site on tidewater in the Town of Wiscasset, Maine. On June 27, 1973, Maine Yankee was issued a full-term, Facility Operating License for the Unit by the Atomic Energy Commission (predecessor to the Nuclear Regulatory Commission which, together with any successor agencies, is hereafter called the "NRC"), which license is now stated to expire on October 21, 2008. The Unit has been in commercial operation since January 1, 1973. The Unit was conceived to supply economic power on a cost of service formula basis to the Purchasers. Maine Yankee and the Purchaser are parties to a Power Contract dated as of May 20, 1968 (as herefore amended, the "Power Contract"). Pursuant to the Power Contract and other identical contracts (collectively, the "Power Contracts") between Maine Yankee and the other Purchasers, Maine Yankee contracted to supply to the Purchasers all of the capacity and electric energy available from the Unit for a term of thirty (30) years following January 1, 1973. Maine Yankee and the Purchaser are also parties to an Additional Power Contract, dated as of February 1, 1984 ("Additional Power Contract"). The Additional Power Contract and other similar contracts (collectively, the "Additional Power Contracts") between Maine Yankee and the other Purchasers provide for an operative term stated to commence on January 2, 2003 (when the Power Contracts terminate) and extending until a date which is the later to occur of (i) 30 days after the date on which the last of the financial obligations of Maine Yankee which constitute elements of the purchase price thereunder has been extinguished by Maine Yankee or (ii) 30 days after the date on which Maine Yankee is finally relieved of any obligations under the last of the licenses (operating and/or possessory) which it holds from, or which may hereafter be issued to it by, the NRC with respect to the Unit under applicable provisions of the Atomic Energy Act of 1954, as amended from time to time (the "Act"). Pursuant to the Power Contract and the Additional Power Contract, the Purchaser is entitled and obligated to take its entitlement percentage of the capacity and net electrical output of the Unit during the service life of the Unit and is obligated to pay therefor monthly its entitlement percentage of Maine Yankee's cost of service, including decommissioning costs, whether or not the Unit is operated or whether or not net electrical output is delivered. The Power Contracts and the Additional Power Contracts also provide, in the event of their earlier cancellation, for the survival of the decommissioning cost obligation and for the applicable provisions thereof to remain in effect to permit final billings of costs incurred prior to such cancellation. On August 6, 1997, the board of directors of Maine Yankee, after conducting a thorough review of the economics of continued operation of the Unit for the remainder of the term of the Facility Operating License for the Unit in light of other alternatives available to Maine Yankee and the Purchasers, determined that the Unit should be permanently shut down effective August 6, 1997. The Purchaser concurs in that decision. As a consequence of the shutdown decision, Maine Yankee and the Purchaser propose at this time to amend the Power Contract and the Additional Power Contract in various respects in order to clarify and confirm provisions for the recovery under said contracts of the full costs previously incurred by Maine Yankee in providing power from the Unit during its useful life and of all costs of decommissioning the Unit, including the costs of maintaining the Unit in a safe condition following the shutdown and prior to its decontamination and dismantlement. Maine Yankee and each of the other Purchasers are entering into agreements which are identical to this Agreement except for necessary changes in the names of the parties. 2. Parties' Contractual Commitments Maine Yankee reconfirms its existing contractual obligations to protect the Unit, to maintain in effect certain insurance and to prepare for and implement the decommissioning of the Unit in accordance with applicable laws and regulations. Consistent with public safety, Maine Yankee shall use its best efforts to accomplish the shutdown of the Unit, the protection and any necessary maintenance of the Unit after shutdown and the decommissioning of the Unit in a cost-effective manner and in compliance with the regulations of the NRC and other agencies having jurisdiction, and shall use its best efforts to ensure that any required storage and disposal of the nuclear fuel remaining in the reactor at shutdown and all spent nuclear fuel or other radioactive materials resulting from operating of the Unit are accomplished consistent with public health and safety considerations and at the lowest practicable cost. The Purchaser reconfirms its obligations under the Power Contract and Additional Power Contract to pay its entitlement percentage of Maine Yankee's costs as deferred payment in connection with the capacity and net electrical output of the Unit previously delivered by Maine Yankee and agrees that the decision to shut down the Unit described in Section 1 hereof does not give rise to any cancellation right under Section 9 of the Power Contract or Section 10 of the Additional Power Contract. Except as expressly modified by this Agreement, the provisions of the Power Contract and the Additional Power Contract remain in full force and effect, recognizing that the mutually accepted decision to shut down the Unit renders moot those provisions which by their terms relate solely to continuing operation of the Unit. 3. Amendment of Provisions of the Power Contract and the Additional Power Contract A. Section 2 of the Additional Power Contract is hereby amended to delete the first two paragraphs thereof and to insert in lieu thereof the following: This contract shall become effective on such date as may be authorized by the FERC after receipt by the Purchaser of notice that Maine Yankee has entered into Additional Power Contracts, as contemplated by Section 1 above, with each of the other sponsors. The operative term of this contract shall commence on the earlier of (a) the termination, cancellation or expiration of the Power Contract or (b) January 2, 2003, notwithstanding the fact that the useful service life of the Unit terminated prior to that date and shall terminate on the date (the "End of Term Date") which is the later to occur of (i) 30 days after the date on which the last of the financial obligations of Maine Yankee which constitute elements of the purchase price calculated pursuant to Section 7 of this contract has been satisfied in its entirety by Maine Yankee, or (ii) 30 days after the date on which Maine Yankee is finally relieved of any obligations under the last of any licenses (operating and/or possessory) which it now holds from, or which may hereafter be issued to it by, the NRC with respect to the Unit under applicable provisions of the Atomic Energy Act of 1954, as amended from time to time (the "Act"). B. The first paragraph of Section 7 of the Additional Power Contract is amended to read as follows: With respect to each month commencing on or after the commencement of the operative term of this contract, whether or not this contract continues fully or partially in effect, the Purchaser will pay Maine Yankee as further deferred payment for the capacity and output of the Unit provided to the Purchaser by Maine Yankee prior to the permanent shutdown of the Unit on August 6, 1997, 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, (b) the Total Decommissioning Costs for the month with respect to the Unit, plus (c) Maine Yankee's total operating expenses (as hereinafter defined) for the month with respect to the Unit, plus (d) 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. C. The eighth paragraph of Section 7 of the Power Contract and the eighth paragraph of Section 7 of the Additional Power Contract are each amended by (a) inserting before the semicolon in the first sentence thereof the following: , but including for purposes of this contract: (i) with respect to each month until the commencement of decommissioning of the Unit, the Purchaser's entitlement percentage of all expenses related to the storage or disposal of nuclear fuel or other radioactive materials, and all expenses related to protection and maintenance of the Unit during such period, including to the extent applicable all of the various sorts of expenses included in the definition of "Decommissioning Expenses", to the extent incurred during the period prior to the commencement of decommissioning; (ii) with respect to each month until the amount due from Maine Yankee to the U.S. Department of Energy ("DOE") for disposal of pre-April 7, 1983 spent nuclear fuel and associated high level radioactive material has been paid in full, the Purchaser's entitlement percentage of one-third (1/3) of the interest due to DOE during that calendar quarter on such obligation; and (iii) with respect to each month until End of License Term, the Purchaser's entitlement percentage of the monthly amortization of (a) the amount of any unamortized deferred expenses, as permitted from time to time by the Federal Energy Regulatory Commission or its successor agency, plus (b) the remaining unamortized amount of Maine Yankee's investment in plant, nuclear fuel and materials and supplies and other assets, such amortization to be accrued at a rate sufficient to amortize fully such unamortized deferred expenses and Maine Yankee's investments in plant, nuclear fuel and materials and supplies or other assets (the "total investment") over a period extending to October 21, 2008; [provided, that if during any calendar month ending on or before May 1, 2008 either of the following events shall occur: (a) Maine Yankee shall become insolvent or (b) Maine Yankee shall be unable, from available cash or other sources, to meet when due during such month its obligations to pay principal, interest, premium (if any) or other fees with respect to any indebtedness for money borrowed, then Maine Yankee may adjust upward the accrual for amortization of unrecovered total investment for such month to an amount not exceeding the applicable maximum level specified in Appendix A hereto, provided that concurrently therewith the total investment shall be reduced by an amount equal to the amount of such adjustment, it being understood that at the time of such event, Maine Yankee will furnish the Purchaser with a schedule setting forth the amount of such adjustment;] /1/ and (b) by adding at the end thereof the following: As used herein, "End of License Term" means October 21, 2008 or such later date as may be fixed, by amendment to the Facility Operating License for the Unit, as the end of the term of the Facility Operating License. ____________________ /1/ Bracketed language would be inserted only if satisfactory work-out is reached with lender banks and insurance companies. D. The definitions in Section 7 of the Power Contract and in Section 7 of the Additional Power Contract of "Total Decommissioning Costs" and "Decommissioning Expenses" are hereby amended to read as follows: "Total Decommissioning Costs" for any month shall mean the sum of (x) an amount equal to all accruals in such month to any reserve, as from time to time established by Maine Yankee and approved by its board of directors, to provide for the ultimate payment of the Decommissioning Expenses of the Unit, plus (y), during the Decommissioning Period, the Decommissioning Expenses for the month, to the extent such Decommissioning Expenses are not paid with funds from such reserve, plus (z) Decommissioning Tax Liability for such month. It is understood (i) that funds received pursuant to clause (x) may be held by Maine Yankee or by an independent trust or other separate fund, as determined by said board of directors, (ii) that, upon compliance with applicable regulatory requirements, the amount, custody and/or timing of such accruals may from time to time during the term hereof be modified by said board of directors in its discretion or to comply with applicable statutory or regulatory requirements or to reflect changes in the amount, custody or timing of anticipated Decommissioning Expenses, and (iii) that the use of the term "to decommission" herein encompasses compliance with all requirements of the NRC, as in effect from time to time, for permanent cessation of operation of a nuclear facility and any other activities reasonably related thereto, including provision for disposal of low level waste and the interim storage of spent nuclear fuel. "Decommissioning Expenses" shall include all expenses of decommissioning the Unit, and all expenses relating to ownership and protection of the Unit during the Decommissioning Period, and shall also include the following: (1) All costs and expenses of any NRC-approved method of removing the Unit from service, including without limitation: dismantling, mothballing and entombment of the Unit; removing nuclear fuel and other radioactive material to temporary and/or permanent storage sites; construction, operation, maintenance and dismantling of a spent fuel storage facility; decontaminating, restoring and supervising the site; and any costs and expenses incurred in connection with proceedings before governmental authorities relating to any authorization to decommission the Unit or remove the Unit from service; (2) All costs of labor and services, whether directly or indirectly incurred, including without limitation, services of foremen, inspectors, supervisors, surveyors, engineers, security personnel, counsel and accountants, performed or rendered in connection with the decommissioning of the Unit and the removal of the Unit from service, and all costs of materials, supplies, machinery, construction equipment and apparatus acquired or used (including rental charges for machinery, equipment or apparatus hired) for or in connection with the decommissioning of the Unit and the removal of the Unit from service, and all administrative costs, including services of counsel and financial advisers of any applicable independent trust or other separate fund; it being understood that any amount, exclusive of proceeds of insurance, realized by Maine Yankee as salvage on any machinery, construction equipment and apparatus, the cost of which was charged to Decommissioning Expense, shall be treated as a reduction of the amounts otherwise chargeable on account of the costs of decommissioning of the Unit; and (3) All overhead costs applicable to the Unit during the Decommissioning Period, or accrued during such period, including without limiting the generality of the foregoing, taxes (other than taxes on or in respect of income), charges, license fees, excises and assessments, casualties, health care costs, pension benefits and other employee benefits, surety bond premiums and insurance premiums. E. Section 7 of the Power Contract and Section 7 of the Additional Power Contract are each hereby amended by adding the following new paragraph after the definition of "Decommissioning Tax Liability": "Decommissioning Period" shall mean the period commencing with the notification by Maine Yankee to the NRC of the decision of the board of directors of Maine Yankee to cease permanently the operation of the Unit for the purpose of producing electric energy and ending with the date when Maine Yankee has completed the decommissioning of the Unit and the restoration of the site and has been relieved of all its obligations under the last of any licenses issued to it by the NRC. F. Section 8 of the Additional Power Contract is hereby amended to change the figure "1%" to "2%". G. Section 9 of the Power Contract and Section 10 of the Additional Power Contract are each amended to read as follows: 10. Cancellation of Contract. If 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, then and in any such case, the Purchaser may cancel the provisions of this contract, except that in all cases other than those described in clause (ii) above, the Purchaser shall be obligated to continue to make the payments of Total Decommissioning Costs and the other payments required by Section 7 hereof and the provisions of said Section 7 and the related provisions of this contract shall remain in full force and effect, it being recognized that the costs which Purchaser is required to pay pursuant to Section 7 represent deferred payments in connection with power heretofore delivered by Maine Yankee under its contractual commitments to the Purchaser. 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 hereunder as to subsequently incurred costs of Maine Yankee other than the obligations of the Purchaser to continue to make the payments required by Section 7 shall cease forthwith (it being understood that the continuing accrual of depreciation of net Unit investment and of fees, interest and other payments under pre-existing contracts subsequent to such cancellation shall not be deemed to be "subsequently incurred costs" for purposes of this sentence). Notwithstanding the preceding sentence, the applicable provisions of this contract shall continue in effect after the cancellation hereof to the extent necessary to permit final billings and adjustments hereunder with respect to obligations incurred through the date of cancellation and the collection thereof. 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 this contract. 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. 5. Effective Date This 1997 Amendatory Agreement shall become effective upon receipt by the Purchaser of notice that Maine Yankee has entered into 1997 Amendatory Agreements, as contemplated by Section 1 hereof, with each of the other Purchasers and receipt of requisite authorization from the FERC. 6. Interpretation The interpretation and performance of this 1997 Amendatory Agreement shall be in accordance with and controlled by the laws of the State of Maine. 7. Addresses Except as the parties may otherwise agree, any notice, request, bill or other communication from one party to the other relating to this 1997 Amendatory 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 mailed to the respective post office address of the other party shown following the signatures of such other party hereto, or such other post office address as may be designated by written notice given in the manner as provided in this Section. 8. Corporate Obligations This 1997 Amendatory Agreement is the corporate act and obligation of the parties hereto. 9. Counterparts This 1997 Amendatory Agreement may be executed in any number of counterparts and each executed counterpart shall have the same force and effect as an original instrument and as if all the parties to all of the counterparts had signed the same instrument. Any signature page of this 1997 Amendatory Agreement may be detached from any counterpart without impairing the legal effect of any signatures thereon, and may be attached to another counterpart of this 1997 Amendatory Agreement identical in form hereto but having attached to it one or more signature pages. IN WITNESS WHEREOF, the parties have executed this 1997 Amendatory Agreement by their respective duly authorized officers as of the day and year first named above. MAINE YANKEE ATOMIC POWER COMPANY By______________________________ Its Address: 329 Bath Road Brunswick, ME 04011 NEW ENGLAND POWER COMPANY By______________________________ Its Address: 25 Research Drive Westborough, MA 01582 Appendix A to 1997 Amendatory Agreement ------------------------- MAXIMUM AMORTIZATION SCHEDULE ------------------------------ If the event occurs during the calendar year: Maximum Amortization Accrual: /1/ 1998 $__________________ 1999 $__________________ 2000 $__________________ 2001 $__________________ 2002 $__________________ 2003 $__________________ 2004 $__________________ 2005 $__________________ 2006 $__________________ 2007 $__________________ 2008 $__________________ ___________________ /1/ This column will reflect the maximum amount scheduled to be outstanding during the applicable period, and will be completed as part of the satisfactory work-out with lender banks and insurance companies. EX-10 7 NEES EXHIBIT 10(I) THIRTY-FOURTH AGREEMENT AMENDING NEW ENGLAND POWER POOL AGREEMENT THIS THIRTY-FOURTH AGREEMENT, dated as of September 1, 1997, is entered into by the signatory Participants for the amendment by them of the New England Power Pool Agreement dated as of September 1, 1971 (the "NEPOOL Agreement"), as previously amended or proposed to be amended by thirty-one amendments, the most recent of which was dated as of December 31, 1996 (the "Thirty-Third Agreement"), and as further amended by one or more supplements. WHEREAS, on December 31, 1996, the New England Power Pool ("NEPOOL") Executive Committee, on behalf of the NEPOOL Participants, filed with the Federal Energy Regulatory Commission (the "Commission") a comprehensive proposal to restructure NEPOOL and the New England wholesale electric power market and to form an independent system operator that would have responsibility for the operation of the NEPOOL Control Area and Control Center, as well as the administration of the NEPOOL Agreement and the NEPOOL open access transmission tariff ("Tariff"), which is an exhibit thereto. WHEREAS, on June 25, 1997, the Commission issued an order conditionally approving the creation of an independent system operator for NEPOOL (the "ISO"), New England Power Pool, Docket No. EC97-35-000, Order Conditionally Authorizing Establishment of an Independent System Operator and Disposition of Control over Jurisdictional Facilities (June 25, 1997) (the "Order"); WHEREAS, certain of the conditions contained in the Order require amendments to the NEPOOL Agreement, as restated by the Thirty-Third Agreement, and as amended by supplements dated, respectively, as of February 7, 1997 and June 1, 1997 (the "Restated NEPOOL Agreement"); and WHEREAS, the signatory Participants desire to amend the Restated NEPOOL Agreement and the Tariff to comply with the requirements of the Order. NOW THEREFORE, the signatory Participants hereby agree as follows: SECTION I AMENDMENTS TO RESTATED NEPOOL AGREEMENT 1. Clause (b) of Section 1.12 of the Restated NEPOOL Agreement is amended to delete the words "on its system" so that the clause, as amended, reads as follows: (bc) kilowatthours of use by such Participant, plus 2. Section 1.16 of the Restated NEPOOL Agreement is amended in its entirety to read as follows: "Entity" is any person or organization whether the United States of America or Canada or a state or province or a political subdivision thereof or a duly established agency of any of them, a private corporation, a partnership, an individual, an electric cooperative or any other person or organization recognized in law as capable of owning property and contracting with respect thereto that is either: (a) engaged in the electric power business (the generation and/or transmission and/or distribution of electricity for consumption by the public or the purchase, as a principal or broker, of Installed Capability, Operable Capability, Energy, Operating Reserve, and/or AGC for resale); or (b) an end user of electricity that is taking or eligible to take unbundled transmission service pursuant to a state requirement that the Participant that is the Transmission Provider with which that end user is directly interconnected offer the transmission service, or pursuant to a voluntary offer of unbundled transmission service to that end user by the Participant that is the Transmission Provider with which that end user is directly interconnected. 3. Section 1.18 of the Restated NEPOOL Agreement is amended to delete the words "wholesale" and "for resale," so that the Section, as amended, reads as follows: "Firm Contract" is any contract, other than a Unit Contract, for the purchase of Installed Capability, Operable Capability, Energy, Operating Reserves, and/or AGC, pursuant to which the purchaser's right to receive such Installed Capability, Operable Capability, Energy, Operating Reserves, and/or AGC is subject only to the supplier's inability to make deliveries thereunder as the result of events beyond the supplier's reasonable control. 4. Clause (c) of Section 1.44 of the Restated NEPOOL Agreement is amended in its entirety to read as follows: (c) kilowatthours of use by such Participant, exclusive of use by such Participant for the operation and maintenance of its generating unit or units, plus 5. Section 1.74 of the Restated NEPOOL Agreement is amended by changing "more than 50%" to "10% or more," so that the Section, as amended, reads as follows: "Related Person" of a Participant is either (i) a corporation, partnership, business trust or other business organization 10% or more of the stock or equity interest in which is owned directly or indirectly by, or is under common control with, the Participant, or (ii) a corporation, partnership, business trust or other business organization which owns directly or indirectly 10% or more of the stock or other equity interest in the Participant, or (iii) a corporation, partnership, business trust or other business organization 10% or more of the stock or other equity interest in which is owned directly or indirectly by a corporation, partnership, business trust or other business organization which also owns 10% or more of the stock or other equity interest in the Participant. 6. Section 1.79 of the Restated NEPOOL Agreement is amended to delete the words "wholesale" and "for resale," so that the Section, as amended, reads as follows: "System Contract" is any contract for the purchase of Installed Capability, Operable Capability, Energy, Operating Reserves and/or AGC, other than a Unit Contract or Firm Contract, pursuant to which the purchaser is entitled to a specifically determined or determinable amount of such Installed Capability, Operable Capability, Energy, Operating Reserves, and/or AGC. 7. Section 1.84 of the Restated NEPOOL Agreement is amended to delete the word "wholesale," so that the Section, as amended, reads as follows: "Unit Contract" is a purchase contract pursuant to which the purchaser is in effect currently entitled either (i) to a specifically determined or determinable portion of the Installed Capability of a specific electric generating unit or units, or (ii) to a specifically determined or determinable amount of Operable Capability, Energy, Operating Reserves, and/or AGC if, or to the extent that, a specific electric generating unit or units is or can be operated. 8. The introductory clause of Section 1.92 of the Restated NEPOOL Agreement is amended to delete the words "for resale," so that the introductory clause, as amended, reads in its entirety as follows: Definitions marked by an asterisk (*) are modified as follows when a Participant purchases a portion of its requirements of electricity from another Participant pursuant to a Firm Contract: and the introductory clause of subsection 1.92(b) is amended to replace "the electric needs of its customers" with "its electric needs," so that the introductory clause of that subsection, as amended, reads in its entirety as follows: If the Firm Contract does not limit deliveries to a specifically stated number of Kilowatts, but entitles the Participant to receive such amounts of electricity as it may require to supply its electric needs (thus placing the responsibility for meeting additional demands on the supplying Participant): 9. The second paragraph of Section 3.1 of the Restated NEPOOL Agreement is amended to delete the requirement that an Entity engage or propose to engage in business in New England, so that the paragraph, as amended, reads in its entirety as follows: Any other Entity may, upon compliance with such reasonable conditions as the Management Committee may prescribe, become a Participant by depositing a counterpart of this Agreement as theretofore amended, duly executed by it, with the Secretary of the Management Committee, accompanied by a certified copy of a vote of its board of directors, or such other body or bodies as may be appropriate, duly authorizing its execution and performance of this Agreement, and a check in payment of the application fee described below. SECTION II AMENDMENTS TO TARIFF -------------------- Section 1.13 of the Tariff, as amended by the Second Supplement to the Thirty-Third Agreement, dated as of June 1, 1997, is amended in its entirety to read as follows: "Eligible Customer": (i) Any Participant that is engaged, or proposes to engage, in the wholesale or retail electric power business is an Eligible Customer under the Tariff. (ii) Any electric utility (including any power marketer), Federal power marketing agency, or any other entity generating electric energy for sale or for resale is an Eligible Customer under the Tariff; provided that electric energy sold or produced by such entity is electric energy produced in the United States, Canada or Mexico; and provided further, however, with respect to transmission service that the Commission is prohibited from ordering by Section 212(h) of the Federal Power Act, such entity is eligible only if the service is provided pursuant to a state requirement that the Transmission Provider with which that entity is directly interconnected offer the transmission service, or pursuant to a voluntary offer of such service by the Transmission Provider with which that entity is directly interconnected. (iii) Any end user of electricity which is taking or eligible to take unbundled transmission service pursuant to a state requirement that the Transmission Provider with which that end user is directly interconnected offer the transmission service, or pursuant to a voluntary offer of unbundled transmission service by the Transmission Provider with which that end user is directly interconnected, is an Eligible Customer under the Tariff. SECTION III INTERIM END USER PROVISIONS --------------------------- Portions of the Prior Agreement with respect to Capability Responsibilities, central dispatch and interchange transactions continue in effect and will not be fully superseded by the Restated NEPOOL Agreement until the Second Effective Date. In view of the difficulty of making these Prior Agreement provisions applicable to end users prior to the Second Effective Date, the provisions of the Prior Agreement that continue in effect shall not be applicable to Participants that qualify as Entities solely under Section 1.16(b) of the Restated NEPOOL Agreement. Until the Second Effective Date, or such date established by the Management Committee or pursuant to an order of the Commission: (i) the Load, Capability Responsibility, and obligations for and rights to energy and operating reserve of the Participants shall be calculated by the System Operator as if the Participants that qualify as Entities solely under Section 1.16(b) were not Participants; (ii) the Voting Shares of Participants that qualify as Entities solely under Section 1.16(b) shall be determined as if such Participants did not have any Load, Generation Ownership Shares, Transmission Ownership Shares, Annual Transmission Revenue Requirements, or Energy Entitlements; and (iii) Participants that qualify as Entities solely under Section 1.16(b) shall limit their electric power arrangements within the NEPOOL Control Area to suppliers that: (A) qualify as Entities under Section 1.16(a) and (B) are either Participants or have entered into contractual arrangements with a Participant to assure that such suppliers have adequate power supply resources to meet their electric power requirements and their share of the NEPOOL required operating reserves. If the Second Effective Date has not occurred on or before October 1, 1998, the provisions of this Section shall be of no further effect; provided, however, that such provisions shall continue in effect after October 1, 1998 if (i) the Commission so orders pursuant to a request by the ISO, or (ii) the Management Committee so establishes pursuant to a request by the ISO; provided, further, that the Management Committee may not extend the effectiveness of this Section beyond December 31, 1998. SECTION IV EFFECTIVENESS OF AGREEMENT -------------------------- Following its execution by the requisite number of Participants, this Thirty-Fourth Agreement, and the amendments provided for above, shall become effective on November 1, 1997, or on such later date as the Commission shall provide that such amendments shall become effective; provided that such amendments shall not become effective if the requisite number of Participants give notice in accordance with Section 21.11 of the Restated NEPOOL Agreement that they object to the amendments. SECTION V USAGE OF DEFINED TERMS ---------------------- The usage in this Thirty-Fourth Agreement of terms which are defined in the NEPOOL Agreement shall be deemed to be in accordance with the definitions thereof. SECTION VI COUNTERPARTS ------------ This Thirty-Fourth Agreement may be executed in any number of counterparts and each executed counterpart shall have the same force and effect as an original instrument as if all the parties to all the counterparts had signed the same instrument. Any signature page of this Thirty-Fourth Agreement may be detached from any counterpart of this Thirty-Fourth Agreement without impairing the legal effect of any signatures thereof, and may be attached to another counterpart of this Thirty-Fourth Agreement identical in form thereto but having attached to it one or more signature pages. IN WITNESS WHEREOF, each of the signatories has caused a counterpart signature page to be executed by its duly authorized representative, as of September 1, 1997. THIRTY-FIFTH AGREEMENT AMENDING NEW ENGLAND POWER POOL AGREEMENT THIS THIRTY-FIFTH AGREEMENT AMENDING NEW ENGLAND POWER POOL AGREEMENT, dated as of November 15, 1997, ("Thirty-Fifth Agreement") is entered into by the signatory Participants to amend the New England Power Pool Agreement (the "NEPOOL Agreement"), as amended. WHEREAS, the NEPOOL Agreement as in effect on December 1, 1996 ("Prior NEPOOL Agreement") was amended and restated by the Thirty-Third Agreement Amending New England Power Pool Agreement dated as of December 1, 1996 (the "Thirty-Third Agreement") in the form of the Restated New England Power Pool Agreement ("Restated NEPOOL Agreement") attached to the Thirty-Third Agreement as Exhibit A thereto, but certain portions of the Prior NEPOOL Agreement, including Section 9 thereof, have been continued in effect pending the occurrence of the Second Effective Date; and WHEREAS, the first supplement to the Thirty-Third Agreement ("First Supplement") dated as of February 7, 1997, among other things, corrected various provisions of the Restated NEPOOL Agreement and the NEPOOL Open Access Transmission Tariff ("Tariff") which is Attachment B to the Restated NEPOOL Agreement; and WHEREAS, the second supplement to the Thirty-Third Agreement ("Second Supplement") dated as of June 1, 1997, effected various changes in the Restated NEPOOL Agreement and the Tariff, and proposed that the Installed Capability provisions of Section 12 of the Restated NEPOOL Agreement supersede Section 9 of the Prior NEPOOL Agreement on November 1, 1997, in advance of the Second Effective Date; and WHEREAS, the third supplement to the Thirty-Third Agreement ("Third Supplement") dated as of September 1, 1997, provided for an extension of a standstill agreement with respect to the use of the transmission interconnections between the NEPOOL Control Area and New York or New Brunswick ("Ties"); WHEREAS, the Thirty-Fourth Agreement Amending New England Power Pool Agreement dated as of September 1, 1997 (the "Thirty-Fourth Agreement") further amended the Restated NEPOOL Agreement and the Tariff to comply with requirements imposed by the Federal Energy Regulatory Commission ("Commission") in its Order issued June 25, 1997 in Docket No. EC97-35-000; and WHEREAS, the fourth supplement to the Thirty-Third Agreement ("Fourth Supplement") dated as of November 1, 1997, will amend the Restated NEPOOL Agreement and the Tariff (i) to provide an interim treatment of congestion costs, (ii) to add a new Part IIIA to the Tariff to specify additional rules governing use of the Ties, and (iii) to make the other changes and corrections specified therein; and WHEREAS, the Commission's Order issued October 29, 1997 (the "Order") with respect to the Second and Third Supplements has suspended until April 1, 1998 the effectiveness of the Installed Capability provisions of Section 12 of the Restated NEPOOL Agreement, but permitted effectiveness in the interim of a change, from 16 months to one month, in the time period over which changes in load are recognized in pool billings for installed capability obligations; and WHEREAS, the signatories hereto desire to implement the Order through a compliance filing that amends the continuing Capability Responsibility provisions of the Prior NEPOOL Agreement, which are to continue in effect until April 1, 1998 and then be superseded by the Installed Capability provisions of Section 12 of the Restated NEPOOL Agreement, by modifying the time period over which changes in load are recognized, and to make related changes. NOW, THEREFORE, the signatory Participants agree as follows: SECTION 1 AMENDMENT TO PRIOR NEPOOL AGREEMENT 1.1 Amendment to Section 9.2(a). Section 9.2(a) of the Prior NEPOOL Agreement is amended to read as follows: (a) At the conclusion of each month commencing with November, 1997, the Operations Committee shall determine for each Participant a fraction P in accordance with the following formula: P = B - C P is the Participant's fraction for such month for use under Section 9.2(b). B is the Participant's Adjusted Monthly Peak for such month. C is the aggregate for the month of the Adjusted Monthly Peaks for all Participants. 1.2 Amendment of Section 9.2(b)(1). The definitions of "Q" and "S" in Section 9.2(b)(1) are amended to read as follows: Q for each month commencing with November, 1997, is the value of the Participant's fraction for the month as determined in accordance with Section 9.2(a). S for each month commencing with November, 1997, is equal to 1.00. 1.3 Amendment of Section 9.4(a). Section 9.4(a) is amended by inserting the following additional paragraph at the end: Upon application by a Participant to the Management Committee, the Management Committee shall, if it finds that such Participant's deficiency for the month of November, 1997 was due in whole or in part to causes beyond the Participant's reasonable control, excuse the Participant from all or a specified portion of the Capability Responsibility adjustment charge for the month of November, 1997. 1.4 Amendment of Section 15.7. The definition of "Capability Period" in Section 15.7 is amended to read as follows: 15.7 "Capability Period" is a period of six months commencing either on November 1 or May 1; provided that if any computation to be made for purposes of Section 9 is to be made with respect to a period which is shorter than six months, "Capability Period" shall mean such shorter period for purposes of such computation. SECTION 2 MISCELLANEOUS 2.1 Following execution by the requisite number of Participants in accordance with the Restated NEPOOL Agreement, this Thirty-Fifth Agreement shall become effective as of November 1, 1997 with respect to the computation of Capability Responsibilities for November, 1997 and subsequent months to and including March, 1998, or on such other date as the Commission shall provide that the amendments provided for in this Thirty-Fifth Agreement shall become effective; provided that such amendments shall not become effective if Participants having the requisite number of Voting Shares give notice in accordance with Section 21.11 of the Restated NEPOOL Agreement that they object to the amendments. 2.2. Terms used in this Thirty-Fifth Agreement that are not defined herein shall have the meanings ascribed to them in the Thirty- Third Agreement. 2.3. This Thirty-Fifth Agreement may be executed in any number of counterparts and each executed counterpart shall have the same force and effect as an original instrument and as if all the parties to all the counterparts had signed the same instrument. Any signature page of this Thirty-Fifth Agreement may be detached from any counterpart of this Thirty-Fifth Agreement without impairing the legal effect of any signatures thereof, and may be attached to another counterpart of this Thirty-Fifth Agreement identical in form thereto but having attached to it one or more signature pages. IN WITNESS WHEREOF, each of the signatories has caused a counterpart signature page for this Thirty-Fifth Agreement to be executed by its duly authorized representative as of November 15, 1997. EX-10 8 NEES EXHIBIT 10(JJ) ALLENERGY MARKETING COMPANY, L.L.C. AMENDMENT NO. 1 TO LIMITED LIABILITY COMPANY AGREEMENT AMENDMENT NO. 1 TO LIMITED LIABILITY COMPANY AGREEMENT dated as of December 3, 1997, by and among AllEnergy Marketing Company, Inc., a Massachusetts corporation (hereinafter called the "Assignor"), NEES Energy, Inc., a Massachusetts corporation ("NEI") and NEES Global Transmission, Inc., a Massachusetts corporation ("Global" and, together with NEI, the "Assignees"). WHEREAS, the Assignor has agreed to assign and convey all of its interest (the "Interest") in AllEnergy Marketing Company, L.L.C., a limited liability company organized under the laws of the Commonwealth of Massachusetts (hereinafter called the "LLC"), to the Assignees in accordance with the provisions of a Purchase and Sale Agreement of even date herewith; and WHEREAS, the Assignor holds its interest in the LLC pursuant to the terms of the Limited Liability Company Agreement dated as of September 18, 1996 (hereinafter called the "LLC Agreement"), by and between the Assignor and NEI; and WHEREAS, the parties hereto wish to amend the LLC Agreement to reflect the assignment of the Interest by the Assignor to the Assignees and the admission of Global as a Member of the LLC (as defined in the LLC Agreement). NOW, THEREFORE, in consideration of the mutual agreements and covenants contained herein, and other good and valuable consideration, the receipt, adequacy and sufficiency of which is hereby acknowledged, the Assignor and the Assignees agree as follows: 1. WITHDRAWAL OF ASSIGNOR AND ADMISSION OF GLOBAL AS A MEMBER OF THE LLC. Immediately upon the assignment of the Interest to the Assignees, AMCI shall cease to be a Member of the LLC and Global shall become a Member of the LLC for all purposes. 2. AMENDMENTS TO THE LLC AGREEMENT. 2.1 Section 2.7 of the LLC Agreement is hereby amended by striking "L. William Law, Jr." from the first sentence and replacing it with "Kirk L. Ramsauer." 2.2 Section 3.1 of the LLC Agreement is hereby amended by deleting the section in its entirety and replacing it with the following: "3.1 MEMBERS. The members of the Company are NEI and Global." 2.3 Section 3.3 of the LLC Agreement is hereby amended by deleting the section in its entirety and replacing it with the following: "3.3 PERCENTAGE INTERESTS. The percentage interests of each Member in the profits of the Company (each a "Percentage Interest") shall initially be as follows: NEI 99% Global 1% The Percentage Interests of the Members shall be subject to adjustment as provided in Section 3.6 and 3.7.4." 2.4 Section 5.14 of the LLC Agreement is hereby amended by deleting the reference to "L. William Law, Jr." as Secretary and replacing it with Kirk L. Ramsauer. 2.5 Section 9.4 of the LLC Agreement is hereby amended by deleting the reference to "Eastern." 2.6 Section 9.8 of the LLC Agreement is hereby amended by deleting the section in its entirety. 2.7 Section 16.4 of the LLC Agreement is hereby amended by deleting clause (a) of the last sentence and replacing it with the following: "(a) if to Global, at 25 Research Drive, Westborough, Massachusetts 01582." 2.8 The signature page of the LLC Agreement is hereby amended by striking "ALLENERGY MARKETING COMPANY, INC." and replacing it with "NEES GLOBAL TRANSMISSION, INC." 2.9 The definition of "Required Members" is hereby amended to read as follows: "Required Members" means NEI and Global. 3. RATIFICATION. Except for the foregoing amendments, all of terms and conditions of the LLC Agreement are hereby ratified, confirmed and approved in all respects. 4. CHOICE OF LAW. This Amendment shall be construed and enforced in accordance with the laws of the Commonwealth of Massachusetts. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as a sealed instrument as of the date first above written. ASSIGNOR: AllEnergy Marketing Company, Inc. s/ Walter J. Flaherty By: Name: Walter J. Flaherty Title: Vice President ASSIGNEES: NEES Energy, Inc. s/ Alfred D. Houston By: Name: Alfred D. Houston Title: Vice President NEES Global Transmission, Inc. s/ John G. Cochrane By: Name: John G. Cochrane Title: Treasurer EX-10 9 NEES EXHIBIT 10(LL) EMPLOYMENT AGREEMENT -------------------- This Agreement is made and entered into as of the 11th day of March, 1998, by and between New England Power Service Company, herein referred to as the "Company" and Robert L. McCabe herein referred to as "Mr. McCabe." WHEREAS, the Company and Mr. McCabe mutually desire to change the terms of Mr. McCabe's employment relationship with the Company and to agree as to certain benefits of said employment. NOW THEREFORE in consideration of the mutual rights and obligations of the parties, the parties hereby agree as follows: 1.0 Term 1.1 In accord with Mr. McCabe's desire and subject to the provisions of this Agreement, the Company agrees to employ Mr. McCabe and Mr. McCabe agrees to be employed by the Company as Chairman, Retail Electric Companies, for a period commencing October 1, 1997 and ending no later than May 31, 1999. 1.2 The parties agree that Mr. McCabe is under no obligation to remain with the Company for any designated period of time. However, if Mr. McCabe chooses to remain with the Company and is still in the employ of the Company as of December 31, 1998, Mr. McCabe will be eligible for a voluntary early retirement benefit set forth in Section 3.3 below. If Mr. McCabe chooses to retire, the Company will hire Mr. McCabe as a consultant for a period of one year at $1,000.00 per day with a 50 day minimum, which may be extended, at the sole discretion of the Company, for one year, under the same terms. 2.0 Position and Duties 2.1 Mr. McCabe shall be employed as Chairman, Retail Electric Companies and will have such duties, authority, rights, and obligations inherent in such corporate position. 2.2 As Chairman, Retail Electric Companies, Mr. McCabe shall diligently and conscientiously perform his duties and conduct, operate, manage, and use his utmost endeavor to promote the business of the Company. 3.0 Compensation and Benefits. 3.1 During the term of his employment as Chairman, Retail Electric Companies, the Company shall continue to compensate Mr. McCabe according to the compensation plans and policies in effect for employees in ICP IB, in accordance with the Company's payroll practices for salaried employees. 3.2 Mr. McCabe shall continue to be entitled to participate in all employee benefit programs made available to employees during the term of his employment as Chairman, Retail Electric Companies, in accordance with the terms and conditions of said programs. Mr. McCabe shall be deemed a participant in the ICP I bonus program for purposes of a partial pro rata payment of the 1999 ICP I bonus and incentive share match, if he remains in the employ of the Company for any portion of 1999 regardless of whether he is employed through July 1, 1999. 3.3 If Mr. McCabe remains in the employ of the Company through December 31, 1998, Mr. McCabe shall be entitled to elect a voluntary early retirement package (Package), effective on the first of the month following his retirement date, said retirement date to be mutually agreed upon by the parties and to be effective no earlier than January 1, 1999, and no later than June 1, 1999. Said package shall consist of 5 years age credit and 5 years service credit (5 + 5) added to his pension plus a lump sum payment of $225,000 or an equivalent annuity. This lump sum payment shall be made at the same time the Package becomes effective. Notwithstanding the foregoing, if Mr. McCabe elects to accept the Special Voluntary Early Retirement Offer (Offer) which he received on or about January 5, 1998, he will be entitled to receive the benefits included in the Package, except to the extent these benefits are duplicative of the benefits he receives under the Offer. Said duplicative benefits include but are not limited to, an additional (5 + 5) and the lump sum value of the $900 supplemental benefit. 3.4 Mr. McCabe agrees that in order to be eligible to receive the benefits under the Package that (1) he sign this Agreement, return it to the Company within 21 days and allow it to become effective by not revoking it within 7 days of signing and (2) he sign and return a second agreement and release within 21 days of his electing the Package. 3.5 Notwithstanding any other provision of this Agreement, in the event that any payment or benefit or portion thereof (Total Payments) received or to be received by Mr. McCabe in connection with this Employment Agreement, Special Voluntary Early Retirement offer, a Change in Control as used in Section 280G of the Internal Revenue Code or the termination of Mr. McCabe's employment, whether pursuant to this Agreement or any other plan, arrangement or agreement with the Company, including but not limited to the Agreement between New England Electric System and Robert L. McCabe dated February 25, 1997 or the Special Severance Plan, is subject, in whole or part, to the Excise Tax under Section 280G of the Internal Revenue Code, then the Company shall reduce the Total Payment, as the Company deems appropriate, to the extent necessary, so that no portion of the Total Payment is subject to the Excise Tax. Said reduction in Total Payment shall be applicable regardless of whether Mr. McCabe becomes entitled to portions of the Total Payment at different times or as a result of differing circumstances if the IRS would subject said payments to the Excise Tax. 3.6 In consideration of the benefits provided by the Company herein, which Mr. McCabe agrees he would not otherwise be entitled to receive, Mr. McCabe agrees, to the extent permitted by law, to the terms of the following release of liability. I, Robert L. McCabe fully and voluntarily forever release, waive, and discharge the Company, including all past, present and future subsidiaries, parents, affiliated companies, successors and assigns, and all past, present and future fiduciaries, trustees, directors, officers, agents, and employees of any such companies ("the Company and their Related Persons") from all claims, demands, causes of action, suits and liabilities of any kind and nature, known or unknown, asserted or unasserted, up to the date of the signing of this Agreement, including but not limited to, all such claims arising out of or related to this Agreement, or my employment with or termination of employment from the Company, including any claim for wrongful discharge, breach of contract or other common law claims and all claims under the Age Discrimination in Employment Act of 1967, as amended, Title VII of the Civil Rights Act of 1964, as amended, the Americans with Disabilities Act of 1990, Chapter 151B of the Massachusetts General Laws, as amended, and all other state or Federal laws and regulations. I, Robert L. McCabe, further covenant and represent that I have not filed any complaints, charges, or claims for relief and will not seek personal recovery or relief against the Company and its Related Persons arising out of the matters released, waived, or discharged under this Agreement. I give this Release individually and on behalf of any heirs and assigns and anyone else claiming by or through me. 4.0 Restrictive Covenants 4.1 Mr. McCabe acknowledges that the Company's business, financial and customer information constitutes a valuable asset of the Company which the Company has the right to protect and secure. Mr. McCabe therefore agrees to abide by the terms and conditions of the most recent version in effect of the Standards of Conduct for NEES Companies signed by Mr. McCabe. Mr. McCabe also acknowledges that if he accepts employment with a competitor without the prior written permission of New England Electric System's Chief Executive Officer, he will forfeit his benefit entitlement under the New England Electric System Companies' Executive Supplemental Retirement Plan. 4.2 Mr. McCabe recognizes and agrees that his obligations under this Article 4.0 are ongoing obligations which shall survive the expiration and/or termination of this Agreement. 5.0 Termination of Employment 5.1 If during the term of this Agreement, a Change in Control occurs, as defined in the Agreement between New England Electric System and Robert L. McCabe dated February 25, 1997, the Company shall provide Mr. McCabe with the benefits set forth in said agreement, and this agreement shall be null and void. 6.0 Death 6.1 Except as defined in compensation plans, benefits and policies to which Mr. McCabe is otherwise entitled outside of this Agreement, if Mr. McCabe dies during the term of this Agreement, the Company shall pay to the estate of Mr. McCabe the compensation [including any bonuses due Mr. McCabe as determined by an officer of the Company] which would otherwise be payable to Mr. McCabe up to the end of the month in which Mr. McCabe's death occurs. 7.0 Assignment 7.1 The Company shall have the right to assign this Agreement to an affiliate or its successors and/or assigns; and all covenants and agreements hereunder shall inure to the benefit of and shall be binding upon said successors and assigns of the Company. 7.2 Mr. McCabe acknowledges that the services to be rendered by him are unique and personal. Accordingly, Mr. McCabe may not delegate any of his duties under this Agreement. Mr. McCabe's obligations under Articles 3.0, 4.0, and 8.0 shall be binding upon his heirs, executives, administrators, and legal representatives. 8.0 Confidentiality 8.1 Mr. McCabe agrees, whether during the term of this Agreement or after, that he will keep the fact, terms and amount of this Agreement completely confidential unless waived in writing by the President of the Company or unless such disclosure is required in a legal proceeding to enforce its terms or as a defense to any claim or as otherwise required by law. Mr. McCabe agrees to notify the Company upon receipt of a subpoena and prior to disclosing such information. Notwithstanding the foregoing, Mr. McCabe may disclose the terms of this Agreement to his financial and/or tax advisor, attorney and family; provided said individuals agree to keep the terms of this Agreement confidential. 8.2 The Company agrees to handle this Agreement in a confidential manner. It will not disclose the terms or amount of this Agreement to anyone outside of the Company except to those who need to know to develop or effectuate the Agreement or except in a legal proceeding to enforce its terms, as a defense to any claim or as otherwise required by law. In addition, the Company will not disclose the terms or amount of this Agreement to anyone inside the Company except on a need to know basis. 9.0 Waiver and Election of Remedies 9.1 Waiver by the Company of any term, condition or provision of this Agreement shall not be considered a waiver of that term, condition or provision in the future or of any other term, condition, or provision. Any waiver by the Company of the rights listed in this Agreement shall be in writing and signed by a Company officer in order to be binding. 10.0 Severability 10.1 In the event that any portion or part of this Agreement is deemed invalid, against public policy, void or otherwise unenforceable by a court of law, the parties shall negotiate an equitable adjustment in the affected provision of this Agreement; however, the validity and enforceability of the remaining portions hereof shall otherwise be fully enforceable. 11.0 Notice 11.1 Any notice required or desired to be given hereunder shall be sufficient if in writing and if delivered by hand or mailed, postage prepaid to: For Employee For the Company Robert L. McCabe David C. Kennedy 126 Naugler Avenue 25 Research Drive Marlborough, MA 01752 Westborough, MA 01582 12.0 Captions and Paragraph Headings 12.1 The captions and paragraph headings used in this Agreement are for convenience only and are not to be construed as a part of this Agreement. 13.0 Applicable Law 13.1 To the extent not preempted by Federal law, this Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. Mr. McCabe agrees to submit to the personal jurisdiction of the Massachusetts courts in respect to any matter or dispute arising out of this Agreement. 14.0 Entire Agreement 14.1 This Agreement constitutes the entire Agreement between the Company and Mr. McCabe and all previous representations or agreements, whether written or oral are hereby annulled and superseded. No change, modification or alteration of any of the provisions of this Agreement shall be binding unless such change, modification or alteration shall have been approved in writing by a Company officer. Mr. McCabe acknowledges that he has read this Agreement and fully understands and agrees to its term; that he has had ample opportunity to discuss and consider the terms of this Agreement; that he has been advised to consult with an attorney; that he has been given a period of up to 21 days to consider this Agreement; and that he has voluntarily chosen to sign this Agreement. He understands that he has the right to revoke this Agreement within 7 days of the date he signs it. IN WITNESS WHEREOF, each party hereto has caused this Agreement to be executed by its duly authorized representatives on the day and year set forth below. ________________________________ _______________________________________ Employee Company By:____________________________________ Title:___________________________________ Witness:_________________________ Date:___________________________________ Date: EX-13 10 NEES ANNUAL REPORT 1997 Annual Report [FOLLOWING TEXT VERTICALLY PLACED TO LEFT OF COVER PHOTO] New England Electric System [COVER PHOTO] [NEES LOGO] On the Cover Caretakers of our wires include Thomas Boyle, Massachusetts Electric crew leader. [PHOTO OF NEES BUCKET TRUCK IN SNOWSTORM WITH LINEMAN WORKING ON LINES] [SIX MONTH TIME LINE ACROSS PAGE - DOTTED LINE FROM PHOTO THROUGH APRIL TO FOCUS ON WIRES TEXT] JANUARY FEBRUARY MARCH APRIL MAY JUNE Focus on Wires Business An April storm knocked out power to more than 130,000 customers. Our line crews responded with speed and precision, restoring most of those customers to service within 24 hours. [1997 IN GHOSTED PRINT ALONG RIGHT SIDE OF REPORT] The events of 1997 transformed our company and greatly increased the security of your investment in NEES. At the same time, our employees kept their focus on their first priorities: keeping the lights on and the revenues flowing. [PHOTO OF GOVERNOR CELLUCCI SIGNING NEW LEGISLATION INTO LAW] Generation Sales Agreement We reached an agreement to sell our fossil-fueled and hydroelectric generation business, an action that will dramatically reduce our stranded investment. [SIX MONTH TIME LINE ACROSS PAGE - DOTTED LINE FROM GENERATION SALES AGREEMENT TEXT THROUGH AUGUST AND FROM PHOTO THROUGH NOVEMBER TO MASSACHUSETTS LAW TEXT] JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER Massachusetts Law New legislation in Massachusetts [PHOTO OF POWER PLANT] opened electricity wires to competitive power suppliers while treating utilities fairly. To Our Shareholders New England Electric System (NEES) celebrated its fiftieth anniversary in 1997, amid events that both transformed our company and greatly increased the security of your investment in NEES. We have become one of the first utilities in the nation to open our wires to competitive power suppliers and guarantee savings to customers. We have done so while providing for recovery of generating plant and power purchase commitments that might otherwise be forfeited, or "stranded," when access is given to our wires. Since these stranded investments could have exceeded our total equity, their recovery has been our first priority. [PHOTO OF RICHARD P. SERGEL APPEARS HERE] Richard P. Sergel, President and Chief Executive Officer - - We implemented the Rhode Island Utility Restructuring Act so that on January 1, 1998, Rhode Island became the first state in the nation where all customers can choose their power supplier, just as they can choose their long-distance telephone carrier. Customers in Rhode Island have also received rate decreases averaging nearly 8 percent off of standard rates. - - We helped secure the passage of legislation in Massachusetts that made it the second state in the U.S. to fully open electricity wires to competitive power suppliers. - - We became the first utility in the country to reach an agreement to sell its fossil-fueled and hydroelectric generation business, an action that will halve our stranded investment and increase the safety of our right to recover the remainder. We believe that this national leadership in dealing with the onset of competition has served you well during a most difficult period. 1997 operating results Meanwhile, our employees have kept their focus on their first priorities: keeping the lights on and the revenues flowing. Their hard work produced our ninth consecutive year of solid financial performance and a dramatic list of service and operating improvements. Earnings per average common share in 1997 were $3.39, compared with $3.22 in 1996. Return on common equity was 12.8 percent, which placed us in the top quarter of both our region's and nation's electric utilities. Our average cost per kilowatthour was the second lowest among major New England utilities. In sum, 1997 was an excellent year for both shareholders and customers. [SIX MONTH EMPTY TIME LINE ACROSS PAGE] [FOLLOWING TEXT APPEARS AT BOTTOM OF PAGE] New England Electric System (NEES) is a public utility holding company headquartered in Westborough, Massachusetts. Its subsidiaries are engaged in the transmission, distribution, sale, and generation of electricity, and the marketing of energy commodities and services. The electricity delivery companies serve 1.3 million customers in Massachusetts, Rhode Island, and New Hampshire. Other business activities include independent transmission projects and telecommunications project management. NEES has entered into an agreement to sell its fossil-fueled and hydroelectric generation business. Vision and goals At our April 1997 annual shareholders meeting, we introduced NEES 2000, a set of five business goals that are aimed at preserving and enhancing your investment in our company. These goals continue to drive the efforts of our management team and our employees. The first goal is to get our stranded investment back, as this is absolutely vital to our financial health, the security of your investment, and NEES' constitutionally protected rights. In 1997, we built on our past progress through regulatory orders in Massachusetts and Rhode Island and at the Federal Energy Regulatory Commission (FERC), and through the Massachusetts Electric Utility Industry Restructuring Act signed into law in November by Governor Paul Cellucci. The Massachusetts Act permits customers to choose their electricity supplier beginning March 1, 1998. It opens our distribution and transmission systems to competitive suppliers, and calls for an immediate 10 percent reduction in electricity rates, plus an additional 5 percent by September 1, 1999. Our system does 75 percent of its electricity delivery business in Massachusetts. As with the statute passed the previous year in Rhode Island, the Massachusetts Act recognizes the right of our company and other utilities to recover stranded costs. In spite of the consensus that supported the Massachusetts legislation, certain opponents initiated a referendum for its repeal which will appear on the November 1998 ballot. Quick, effective implementation of the Rhode Island statute and Massachusetts Act will be possible through settlements approved by the FERC and supported by regulators in those two states. The Rhode Island Public Utilities Commission and Massachusetts Department of Telecommunications and Energy have also approved our company's implementation plans. We reached an agreement in February 1998 with New Hampshire Governor Jeanne Shaheen, key state legislators, and several consumer, business, and environmental groups on a plan to bring choice of power supplier to Granite State Electric's 36,000 customers no later than July 1, 1998. The agreement, which requires state and federal approvals, calls for 10 percent savings to customers, additional savings after our generation sale is completed, and recovery of our stranded costs. [PHOTO OF JOAN T. BOK APPEARS HERE] Joan T. Bok, Chairman of the Board [TEXT IN SHADED BOX IN CENTER COLUMN LEFT OF JOAN BOK PHOTO] In April 1998, Joan T. Bok will retire as chairman of the NEES board, a position she has held with distinction since 1984. She has provided wise counsel sparked by a keen intellect. Her many contributions include co-authoring the original NEESPLAN, setting NEES on its path of national leadership in resource planning. She will remain a member of the board. Generation sale The second goal we put forth at our April 1997 annual meeting was to get as much money as possible for our generating business. Reaching a sales agreement required an immense undertaking by our generation and administrative employees during an intense, six- month stretch. Their effort was without precedent. No other U.S. utility had sold its entire fossil-fueled and hydroelectric generation fleet and operations. [SIX MONTH TIME LINE ACROSS PAGE - DOTTED LINE FROM DECEMBER TO GRAPH] December [GRAPH APPEARS HERE, FINANCIAL RESULTS] USGen New England, Inc., a subsidiary of PG&E Corporation, was the winning bidder with an offer of $1.59 billion, and, in August, signed a purchase and sales agreement with our company. The price was approximately 45 percent over the book value of the generation being sold. We expect the sale to close later this year, subject to receipt of regulatory approvals. We are delighted to report that the purchase price will effectively recover our investments not only in our fossil and hydro plants, but in nuclear plants as well. The proceeds will reduce NEES' potential stranded costs by roughly 50 percent. This in turn will reduce, by about half, the related transition charge that customers will pay on their electric bills. We expect average rate reductions to exceed 15 percent in both Rhode Island and Massachusetts. In addition to reducing stranded costs, the sale will provide NEES with a substantial amount of cash that will require reinvestment. After paying taxes and other sale-related transaction costs, retiring debt, and repurchasing up to five million shares, that net amount will be approximately $500 million. This money will give us the flexibility to combine with other energy delivery companies, increase our investments in unregulated businesses, repurchase additional NEES shares, or complete a combination of these actions. We are carefully studying the options to determine the use of this money that will contribute the most to shareholder value. While a financial success, the sale hastens the day in which some of our most valued people - many with decades of experience in NEES' generation activities - will leave for employment with USGen or to seek opportunities with other firms. With additional reductions through early retirements and severances during 1998, we expect that our workforce for the reshaped NEES will be significantly reduced. In September, Senior Vice President Jeffrey Tranen left NEES to become president and chief executive officer of the California Independent System Operator, which manages the electricity transmission system in that state. We are pleased that Jeff's talents have been recognized by others, and believe this will be the case with many of the wonderful people who run the region's best generation fleet. Meanwhile, our generation employees turned in a record year, with only one lost-time accident and perfect environmental compliance at all 18 power plants; the highest total energy production on record from our Brayton Point and Salem Harbor coal units; and, at Manchester Street Station, the best thermal efficiency among New England's fossil-fueled plants. [NEES YEAR 2000 LOGO APPEARS UNDER COLUMNS ONE AND TWO] [SIX-MONTH TIME LINE ACROSS PAGE - DOTTED LINE FROM NEES 2000 LOGO THROUGH APRIL TO NEES 2000 BUSINESS GOALS TO PHOTO ON NEXT PAGE] APRIL [TEXT AND GOALS NUMBER 1 AND 2 ON BOTTOM QUARTER OF PAGE] Introduced in April 1997, the NEES 2000 Business goals guide the day-to-day activities of our management team and employees. 1 Get our stranded investment back 2 Get as much as possible for the generation business [PHOTO OF MANCHESTER STREET STATION SPANNING TWO COLUMNS APPEARS HERE] Reviewing operations at Manchester Street Station in Providence are USGen's Carl Cimino (top left) and New England Power's Bill Freddo, plant manager. Wires business Our third goal is to run the best wires business in the Northeast. In our region, storms provide the acid test of such aspirations. Once again, our people passed with honors. A snowstorm on April 1, 1997 dropped more than 25 inches of snow throughout our service area and knocked out power to about 135,000 of our customers. Our crews worked day and night to restore power to more than 100,000 of those customers within 24 hours. We matched our excellent service restoration record of other recent major storms, and exceeded the restoration performance of our neighboring utilities. Our customer service staffs in Northborough, Mass. and Providence, R.I. responded to more than 75,000 phone calls on outages and repair activities, and our automated phone system handled an additional 72,000 messages. The low cost and reliability of our performance, during emergencies and in day-to-day service, show that our wires operation is already one of the best in our region. Technology is enhancing the value of that business, and is helping our people do their jobs with even greater efficiency. For example, we are merging aerial photos and data from various departments to produce a computer-based map of all of our equipment, including poles, wires, and transformers. Having this information in one place will help our engineers and crews respond more quickly to customers' requests for new electrical service, information, or repairs. [EMPTY SIX-MONTH TIME LINE ACROSS PAGE - DOTTED LINE FROM PHOTO TO NEES 2000 BUSINESS GOALS ON PREVIOUS PAGE] [NEES GOALS NUMBER 3 THROUGH 5 ON BOTTOM QUARTER OF PAGE] 3 Run the best wires business in the Northeast 4 Increase the size of our energy delivery business 5 Profit from growth in unregulated ventures As a convenience to our customers, we have introduced an interactive feature on our Internet web site that allows customers to view their payment, billing, and energy usage history, using their home or office computer. Our popular energy efficiency programs marked their tenth anniversary in 1997. During the year, these programs helped more than 200,000 customers use energy more efficiently and contributed approximately seven cents per share to our bottom line. [PHOTO OF SYSTEM CONTROL CENTER IN WESTBOROUGH SPANNING TWO COLUMNS APPEARS HERE] The System Control Center in Westborough, Massachusetts is the hub for dispatching power throughout the NEES companies' network of transmission lines and substations Expansion Know-how, technology, customer focus... all are important ingredients as we build the best wires business. But scale matters, too, and our fourth goal is to increase the size of our energy delivery business. Two years ago, we began serving Nantucket Island's 9,700 customers by acquiring Nantucket Electric Company. Now, with the industry restructuring effort just about complete in two states and the generation sale process coming to an end, we can turn more of our attention to mergers and acquisitions, and are seeking the most promising possibilities, both in electricity and natural gas. Our low-cost position among electric utilities in the Northeast should prove an important element in forging potential combinations and for winning support from regulators, customers, and shareholders. While the cash from the generation sale gives us important capabilities for such expansion, we intend to use it conservatively. An expansion is only worthwhile to us if we can make it pay for you. [EMPTY SIX-MONTH TIME LINE ACROSS PAGE - DOTTED LINE FROM SYSTEM CONTROL CENTER PHOTO TO PHOTO OF JESSE LYONS] [PHOTO OF JESSE LYON APPEARS HERE WITH FOLLOWING TEXT TO ITS LEFT] The professionalism of our line workers, including Granite State Electric's Jesse Lyons, was of great benefit to utilities in New Hampshire, Maine, Vermont, and Canada, where our people helped local crews restore power following a devastating ice storm in January 1998. Building new businesses Our final NEES 2000 goal is to profit from growth in unregulated ventures. We are making carefully considered investments in ventures that are closely aligned with our core abilities. One such opportunity is represented by our purchase in December of Eastern Enterprises' 50 percent interest in our joint venture, AllEnergy Marketing Company, L.L.C., which offers energy commodities (electricity, gas, propane, oil) and related value- added services to customers in New England, New Jersey, and New York. With this purchase, AllEnergy became a wholly owned subsidiary of NEES. We are committed to making AllEnergy a regional leader in the emerging competitive energy marketplace. We are optimistic that the decision to increase our ownership, while costly in the short term, will yield value over the long term. Our subsidiary NEES Global Transmission, Inc. has teamed up with the Connecticut-based utility United Illuminating and Swedish equipment manufacturer ABB Power Systems AB in a proposal to build a cable under Long Island Sound. The cable would allow the transfer of competitively priced energy between New England and Long Island, New York. Our subsidiary NEES Communications, Inc. is exploring opportunities in the telecommunications industry, building on our successful experience with fiber optic cable projects in the Providence, R.I., Westborough, Mass., Nantucket, Mass., and Wilder, Vt., regions. NEES Communications' services include engineering, constructing, owning, and leasing fiber optic cable. [PHOTO OF CARMEN BERNAZAR APPEARS HERE] "The strength of our service to customers is our ability to understand their needs, provide reliable and accurate information, and go the extra mile to find solutions to their problems." Carmen Bernazar, Senior Customer Service Representative [EMPTY SIX-MONTH TIME LINE ACROSS PAGE] [JANUARY 1998 DOTTED LINE TO PHOTO ON PREVIOUS PAGE] January 1998 [PHOTO OF TIM BERTSCHMANN AND DAVID MCCAUGHEY SPANNING TWO COLUMNS APPEARS HERE] AllEnergy's Tim Bertschmann (left) and David McCaughey, facilities manager for the Brooks Pharmacy chain, discuss gas heating needs at the Pawcatuck, Connecticut location. Business opportunities are being created from our experience in industry restructuring. We've gleaned important lessons from our successful customer-choice pilot programs and our constructive record of collaboration and negotiation in electric industry restructuring. We have developed several marketable products and services related to this expertise, and have been engaged by utilities in a dozen states and in Alberta, Canada, to assist them with their transition to a competitive electricity industry. Commitment Although the restructuring of the electricity industry provides new opportunities such as those just described, it will reduce NEES earnings beginning in 1998. The reasons include limits on return on equity for our generation and electricity delivery businesses, and the eventual sale of the generation business, historically our most profitable enterprise. These measures were agreed to in order to assure recovery of our stranded costs and a fair opportunity to compete and thrive in the future. Our unregulated ventures will be under early pressure to perform against formidable competition. NEES has consistently overcome challenges - from the oil embargoes and inflation of the 1970s, to a severe recession in the early 1990s - to provide competitive financial performance for our shareholders. We are confident that, despite the new challenges of a restructured industry, NEES will remain a solid investment. One of the most compelling reasons for this confidence is that the employees of the NEES companies have a vital self-interest in performance for shareholders. Collectively, through various investment programs, our employees are our single largest shareholder, holding some 8 percent of all shares. From 12 to 46 percent of each employee's total pay (depending on position) hinges on NEES meeting annual targets for financial performance. We have agreements with labor unions that base part of union employees' pay on the company's financial performance for shareholders. Each executive has minimum shareholding requirements. In short, we succeed only when we succeed for you. [EMPTY SIX-MONTH TIME LINE ACROSS PAGE] [FOLLOWING TEXT ON LOWER QUARTER OF PAGE DOTTED LINE TO PHOTO OF CHRISTINE KEIGHER ON NEXT PAGE] "AllEnergy offers customized energy solutions to help our customers compete. We have the personnel, financial resources, and experience to offer the reliability and service our customers demand." Christine Keigher, Director of Marketing, AllEnergy Executive changes In February 1998, John W. Rowe resigned his position as NEES president and chief executive officer to become chairman, president, and chief executive officer of Chicago-based Unicom Corporation and its subsidiary Commonwealth Edison. In light of Mr. Rowe's departure, the NEES board of directors in February 1998 approved changes to the management team. Richard P. Sergel, senior vice president, was elected NEES president and chief executive officer and a member of the board of directors effective February 6, 1998, succeeding Mr. Rowe. Alfred D. Houston, executive vice president, was elected to the board of directors effective February 6, 1998. The board announced its intention to elect Mr. Houston NEES chairman when Joan Bok retires as chairman of the board in April 1998. [PHOTO OF JOHN ROWE APPEARS HERE UNDER FIRST COLUMN] John W. Rowe, former President and Chief Executive Officer of NEES We thank those people who helped make 1997 an historic and successful year: our employees in the generation business and other areas of our company, for their steadfastness during a time of change; John Rowe, for his bold leadership through the arduous process of industry restructuring which positioned NEES well to succeed in the future; our customers, for their business and for their help in encouraging workable restructuring legislation that will deliver the price and performance that are important to them; and our regulators and government officials, particularly the leaders of the state legislatures in Massachusetts and Rhode Island, for their willingness to shape restructuring legislation in which all stakeholders win. We believe that during the past few years our company has done more than any utility in the region - and has few peers in the nation - in preserving shareholder value in the midst of dramatic industry change. We thank you, fellow shareholders, for recognizing our efforts through your continued confidence in NEES and the employees of our companies. S/Joan T. Bok Chairman of the Board S/Richard P. Sergel President and Chief Executive Officer March 2, 1998 [EMPTY SIX-MONTH TIME LINE ACROSS PAGE] [PHOTO OF CHRISTINE KEIGHER DOTTED LINE TO TEXT ON PREVIOUS PAGE APPEARS ON BOTTOM OF PAGE] Financial Review Overview of Financial Results Earnings were $3.39 per share in 1997 compared with $3.22 and $3.15 per share in 1996 and 1995, respectively. The return on common equity was 12.8 percent in 1997, 12.6 percent in 1996, and 12.8 percent in 1995. The market price of New England Electric System (NEES) common shares was 42 3/4 per share at the end of 1997 compared with 34 7/8 per share and 39 5/8 per share at the end of 1996 and 1995, respectively. The increase in 1997 earnings reflects increased revenues from a 2.0 percent increase in kilowatthour (kWh) deliveries as well as rate increases and reversals of prior period refund accruals. Also contributing to the higher earnings was a decrease in the nonfuel component of purchased power expense. Partially offsetting the higher earnings were increased operation and maintenance expenses, increased expenses associated with NEES' unregulated ventures, and costs incurred to repurchase a portion of the preferred stock of NEES subsidiaries. The increase in 1996 earnings reflects retail rate increases and higher kWh deliveries as well as decreased purchased power costs, partially offset by a decreased allowance for funds used during construction (AFDC) and increased property tax expense. [GRAPH APPEARS HERE, EARNINGS PER AVERAGE SHARE ($)] Outlook Starting in 1998, NEES earnings will be reduced by the restructuring of the electric utility business in the states served by the NEES companies. During the first quarter of 1998, customers in Massachusetts and Rhode Island, representing approximately 95 percent of the NEES companies' revenues from the sale of electricity, will have the ability to choose their power supplier. Upon the introduction of consumer choice, settlement agreements related to recovery of stranded costs will limit the return on equity earned on the NEES companies' generating business to approximately 9.4 percent, before mitigation incentives, which is significantly lower than earned by the generating business in recent years. (The settlement agreements also will cap earnings for the majority of NEES' distribution business at 11.75 percent.) Following completion of the sale of the NEES companies' nonnuclear generating business, which is discussed in more detail below, NEES earnings will be affected by the return on the reinvestment of the sale proceeds, whether through retirement of debt, the repurchase of NEES shares, investments in new ventures, or otherwise. This reinvestment return is expected, at least in the near term, to be considerably less than the return historically earned in the generating business. This report contains statements that may be considered forward looking under the securities laws. Actual results may differ materially for the reasons discussed in this Financial Review. Industry Restructuring Historically, electric utilities have provided their customers bundled electric service within exclusive franchise service territories. As the result of a number of trends, including a disparity in electric rates among regions of the country and new regulations and legislation intended to foster competition, distribution customers are being allowed to choose their power supplier, with incumbent utilities required to deliver that electricity over their transmission and distribution systems. Because of legislation enacted in the states served by the NEES companies, most customers served by the NEES companies will have the ability to choose their power supplier during the first quarter of 1998. When customers are allowed to choose their power supplier, utilities face the risk that market prices may not be sufficient to recover the costs of the commitments incurred to supply customers under a regulated structure. The amounts by which such costs exceed market prices are commonly referred to as "stranded costs." As described below, the NEES companies have reached settlement agreements with parties representing all of their distribution customers. In each case, these settlements provide for recovery of stranded costs. Agreements have not yet been reached with certain wholesale customers that represent less than 2 percent of the NEES companies' stranded cost exposure; however, these customers continue to pay their share of NEES' generation and transmission subsidiary's, New England Power Company (NEP), costs through their wholesale rates. Massachusetts Legislation and Settlement Agreement In November 1997, legislation was enacted which provides customers of Massachusetts' investor-owned utilities with the ability to choose their power supplier beginning on March 1, 1998. The legislation requires electric companies to provide customers who do not choose a power supplier with a transition rate (or "standard offer generation service") which results in a 10 percent rate reduction, with the discount increasing to 15 percent on or before September 1, 1999. The legislation also provides a mechanism for the recovery of stranded costs resulting from the introduction of customer choice. In December 1997, the Massachusetts Department of Telecommunications and Energy (MDTE) found that a settlement agreement (the Massachusetts Settlement) previously reached among the NEES companies' Massachusetts subsidiaries (NEP, Massachusetts Electric Company (Massachusetts Electric), and Nantucket Electric Company (Nantucket Electric)) and various governmental agencies and other interested parties substantially complies with or is consistent with the Massachusetts statute. The Massachusetts Settlement was also conditionally approved by the Federal Energy Regulatory Commission (FERC) in November 1997, subject to a compliance filing to clarify the impact of the settlement on nonsettling parties. In accordance with the Massachusetts Settlement, NEP's wholesale contracts with Massachusetts Electric and Nantucket Electric have been amended effective March 1, 1998. The Massachusetts Settlement provides that Massachusetts Electric's and Nantucket Electric's share of NEP's stranded costs will be recovered from distribution customers through a transition access charge, which will be collected by these distribution companies. Under the Massachusetts Settlement, the recovery of NEP's stranded costs is divided into several categories. Unrecovered costs associated with generating plants and regulatory assets would be recovered over 12 years and would earn a return on equity of 9.4 percent. The above-market component of purchased power contracts and nuclear decommissioning costs would be recovered as incurred over the life of those obligations, a period expected to extend beyond 12 years. Initially, the transition access charge would be set at 2.8 cents per kWh and would be reduced upon completion of the sale of NEP's generating business, as described below. As the transition access charge declines, NEP would earn incentives based on successful mitigation of its stranded costs. These incentives would supplement NEP's return on equity. In addition to addressing customer choice and the recovery of stranded costs, the Massachusetts Settlement also required the NEES companies to divest their nonnuclear generating business. In August 1997, NEP and NEES' Rhode Island subsidiary, The Narragansett Electric Company (Narragansett Electric), entered into an agreement to sell substantially all of their nonnuclear generating business to USGen New England, Inc. (USGen), an indirect wholly owned subsidiary of PG&E Corporation (PG&E). See "Divestiture of Generating Business" below. The net proceeds from the sale of the nonnuclear generating business to USGen will be used to reduce the transition access charge from 2.8 cents per kWh to approximately 1.5 cents per kWh. In addition, the FERC accepted the NEES companies' proposal in conjunction with their divestiture filing that the recovery of the remaining above- market nuclear generating plant investment and regulatory assets be completed by the end of the year 2000. A referendum question which asks voters to repeal the Massachusetts statute is expected to be on the ballot in November 1998. The NEES companies are unable to predict the outcome. While by itself, repeal of the statute is not expected to materially impair the effectiveness of the previously approved Massachusetts Settlement, the potential exists that following repeal, there could be legislative or regulatory actions which could be materially adverse to the NEES companies. [GRAPH APPEARS HERE, DIVIDENDS DECLARED PER SHARE/ANNUAL RATE ($)] Rhode Island Legislation and Settlement Agreement In August 1996, the state of Rhode Island enacted legislation that allows customers in that state the opportunity to choose their power supplier. Under the Rhode Island statute, state accounts, certain new customers, and the largest manufacturing customers were able to choose their power supplier beginning on July 1, 1997. The balance of Rhode Island customers gained the ability to choose their power supplier on January 1, 1998. The Rhode Island statute also provided utilities with the ability to recover stranded costs. In November 1997, the FERC conditionally approved a settlement agreement (the Rhode Island Settlement) among NEP, Narragansett Electric, the Rhode Island Public Utilities Commission and the Rhode Island Division of Public Utilities and Carriers to implement the stranded cost recovery provisions of the Rhode Island statute, subject to a compliance filing to clarify the impact of the settlement on nonsettling parties. The terms of the Rhode Island Settlement are substantially the same as the Massachusetts Settlement. [GRAPH APPEARS HERE, DIVESTITURE REDUCES NEES' STRANDED COSTS] New Hampshire Legislation and Settlement Agreement On February 3, 1998, NEES' New Hampshire subsidiary, Granite State Electric Company (Granite State Electric), and NEP reached a comprehensive settlement agreement with the Governor's office of the State of New Hampshire and a number of other interested parties on a plan to provide choice of power supplier to its customers by no later than July 1, 1998. This settlement agreement was reached in response to a previously enacted New Hampshire statute which requires customer choice of power supplier. The principle terms of the New Hampshire settlement agreement, which require approval by state and federal regulators, are substantially similar to the Massachusetts Settlement and Rhode Island Settlement, including rate reductions for customers and the ability to recover stranded costs. Divestiture of Generating Business As described above, in August 1997, NEP and Narragansett Electric (collectively, the Sellers) reached an agreement to sell their nonnuclear generating business to USGen. The nonnuclear generating business includes three fossil-fueled and 15 hydroelectric generating stations, totaling approximately 4,000 megawatts (MW) of capacity, as well as NEES' 100 percent interest in Narragansett Energy Resources Company (NERC), a 20 percent general partner in the Ocean State Power project, all of which has a book value of $1.1 billion. USGen will pay the Sellers $1.59 billion in cash, of which $225 million will be contingent upon the introduction of customer choice of power supplier in Massachusetts. Based on the enactment of the Massachusetts statute, the NEES companies believe that the conditions for payment of the full purchase price have been met. USGen will also reimburse the NEES companies for $85 million of costs associated with early retirement and special severance programs for employees affected by industry restructuring. USGen will assume responsibility for environmental conditions at the Sellers' nonnuclear generating stations. USGen will also assume the Sellers' obligations under long-term fuel and fuel transportation contracts and certain collective bargaining agreements. In addition to the purchase of the nonnuclear generating stations, USGen will purchase NEP's entitlement to approximately 1,100 MW of power procured under long-term contracts. NEP will make a monthly fixed contribution towards the above-market cost of the purchased power of between $12.5 million and $14.2 million per month from closing through January 2008. USGen will be responsible for the balance of the costs under the purchased power contracts. The sale is subject to approval by various state and federal regulatory agencies. Several parties have objected to the sale on various grounds, including allegations that following the sale, USGen would be able to exercise unlawful levels of market power. On February 25, 1998, the FERC issued an order that rejected the market power allegations, approved the sale, and conditionally approved most supporting filings. While the timing of receipt of final regulatory approvals is uncertain, receipt of all approvals is unlikely before mid-1998. Closing is contingent upon all regulatory approvals being obtained by February 1999. In order to meet the terms of NEP's mortgage indenture, NEP will be required, prior to the consummation of the sale, to either defease or call approximately $278 million of its mortgage bonds. Any defeasance of bonds would be by deposit of cash representing principal and interest to the maturity date, or interest, principal, and general redemption premium to an earlier redemption date. In addition, NEP will retire approximately $372 million of mortgage bonds securing the issuance of a like amount of pollution control revenue bonds (PCRBs) by various public agencies. However, NEP expects that substantially all of the underlying PCRBs will remain outstanding as unsecured obligations of NEP. In addition, the long-term debt of NERC will be retired prior to the closing. As part of the divestiture plan, in February 1998, New England Energy Incorporated (NEEI) (a wholly owned subsidiary of NEES) sold its oil and gas properties for approximately $50 million. NEEI's loss on the sale of approximately $120 million, before tax, has been reimbursed by NEP. See the "Liquidity and Capital Resources" section of Financial Review for information on NEEI debt retirements. At the divestiture date, any gain or loss from the divestiture of nonnuclear generating assets and oil and gas assets will be recorded as a regulatory asset or liability to be recovered as part of NEP's stranded costs, through the ongoing transition access charge, consistent with the settlement agreements. NEP may be required to record a liability for the monthly fixed contribution towards the above-market cost of purchased power. In such an event, NEP would also record a regulatory asset consistent with the settlement agreements. In addition, NEP will endeavor to sell, or otherwise transfer, its minority interest in three nuclear power plants and a 60 MW interest in a fossil-fueled generating station in Maine to nonaffiliates. Until such time as the nuclear interests are divested, NEP will share with customers 80 percent of the revenues and operating costs related to the units, with shareholders retaining the balance. In the event that NEP determines that it has an impairment of its nuclear plant balances under Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (FAS 121), it will record any such impairment as a regulatory asset. Impact of Restructuring on Distribution Business The Massachusetts Settlement also establishes distribution rates for Massachusetts Electric. On March 1, 1998, Massachusetts Electric's distribution rates will be set at a level approximately $45 million above the level embedded in its previously bundled rates, with such rates then frozen through the year 2000. This increase reflects changes to the distribution cost of service that include an $11 million increase in annual depreciation expense, a $3 million annual contribution to a storm fund, and increased amortization of unfunded deferred income taxes of approximately $1 million over six years. The Massachusetts restructuring legislation also expanded the eligibility for certain rate discount programs, the cost of which is uncertain at this time. From 1998 through 2000, Massachusetts Electric's return on equity will be subject to a floor of 6 percent and a ceiling of 11 percent. Earnings over the ceiling will be shared equally between customers and shareholders up to a maximum of 12.5 percent. This sharing results in an effective cap on Massachusetts Electric's return on equity of 11.75 percent, excluding certain limited incentive opportunities. To the extent that earnings fall below the floor, Massachusetts Electric will be authorized to surcharge customers for the shortfall. [GRAPH APPEARS HERE, DIVESTITURE REDUCES NEES' TRANSITION ACCESS CHARGE] The Massachusetts Settlement also eliminated Massachusetts Electric's and Nantucket Electric's purchased power cost adjustment (PPCA) mechanisms as of July 31, 1996. These mechanisms allowed Massachusetts Electric and Nantucket Electric to recover purchased power rate changes from NEP and the effects of NEP's seasonal rates. The Massachusetts Settlement required that Massachusetts Electric's net $18 million PPCA refund liability balance at July 31, 1996 be transferred on its books to establish a storm contingency fund account of $3 million initially, with the remainder applied to reduce regulatory assets for hazardous waste costs. Under the Rhode Island statute, Narragansett Electric increased distribution rates by approximately $11 million in 1997 and another $7 million in 1998. The statute also provides that Narragansett Electric may request increased distribution rates which would take effect no earlier than 1999. Workforce Reduction The NEES companies expect to implement substantial workforce reductions beginning in 1998 as a result of industry restructuring and the sale of the nonnuclear generating business. The NEES companies are in the process of offering early retirement programs to their union and non-union employees, contingent upon the closing of the sale of the nonnuclear generating business to USGen. In addition, the NEES companies intend to offer enhanced severance benefits to affected employees. As previously described, the costs of the early retirement and severance programs are expected to be substantially recovered from the proceeds of the sale of the nonnuclear generating business. Since the early retirement program is contingent upon the divestiture, its cost will not be accrued until that time. [GRAPH APPEARS HERE, ANTICIPATED USE OF DIVESTITURE PROCEEDS] Risk Factors While the NEES companies believe that the previously described settlements and legislation and the sale agreement with USGen and other developments constitute substantial progress in reducing the impacts associated with industry restructuring, significant risks remain. These include, but are not limited to: (i) the potential that ultimately the settlements will not be implemented in the manner anticipated by NEES, (ii) the possibility that a voter referendum in November 1998 could overturn the Massachusetts legislation, followed by materially adverse legislative or regulatory actions, (iii) the possibility of federal legislation that would increase the risks to shareholders above those contained in the settlements and the Massachusetts and Rhode Island statutes, (iv) the potential for adverse stranded cost recovery decisions involving wholesale customers with whom settlements have not yet been reached, and (v) the failure to complete the sale of the nonnuclear generating business to USGen. Accounting Implications Historically, electric utility rates have been based on a utility's costs. As a result, electric utilities are subject to certain accounting standards that are not applicable to other business enterprises in general. Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (FAS 71), requires regulated entities, in appropriate circumstances, to establish regulatory assets, and thereby defer the income statement impact of certain items of income and expense expected to be reflected in future rates. At December 31, 1997, the NEES companies had approximately $600 million in regulatory assets in compliance with FAS 71, of which approximately $60 million relate to the transmission and distribution business. In response to concerns expressed by the staff of the Securities and Exchange Commission, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board took under consideration how FAS 71 should be applied in light of recent changes within the regulated utility industry. In July 1997, the EITF concluded that a utility whose ongoing generation operations would not permit the application of FAS 71, but had otherwise received approval to recover stranded costs through regulated transmission and distribution rates, would be permitted to continue to apply FAS 71 to the recovery of the stranded costs. The restructuring settlements and statutes each provide for recovery of stranded costs of generating assets and oil and gas related assets (including regulatory assets) not recoverable from the proceeds of the divestiture of NEP's generating business. The cost of these assets would be recovered as part of a cost-based transition access charge imposed on all distribution customers. Additionally, FERC Order No. 888 enables transmission companies to recover their specific costs of providing transmission service. Therefore, after the proposed divestiture, substantially all of NEP's business, including the recovery of its stranded costs, would remain under cost-based rate regulation. NEES further believes the restructuring settlements and statutes will enable the NEES distribution companies to recover through rates their specific costs of providing ongoing distribution services. NEES believes these factors and the EITF conclusion will allow its principal utility subsidiaries to continue to apply FAS 71. As a result of the FERC approval of the restructuring settlements in November 1997, NEP was required to cease to apply FAS 71 to 20 percent of its ongoing nuclear operations, as described under "Divestiture of Generation Business," the impact of which is expected to be immaterial. Despite the progress made to date, it is possible that future regulatory rules or other circumstances could cause the application of FAS 71 to be discontinued, which would result in a noncash write-off of previously established regulatory assets related to the affected operations. In addition, write-downs of plant assets under FAS 121 could be required, including a write- off of any gain or loss from the divestiture of the generating business. Operating Revenue Operating revenue increased $152 million in 1997 and reflects higher kWh deliveries, rate increases, increased revenues related to rate adjustment mechanisms, and increased fuel revenues. In 1997, kWh deliveries to ultimate customers increased 2.0 percent, reflecting the effects of an improving regional economy. Rate increases include a Narragansett Electric $11 million increase in distribution rates that became effective in January 1997, and a transmission rate increase that went into effect in mid-1996. Rate adjustment mechanisms referred to above include Massachusetts Electric's and Nantucket Electric's PPCA mechanisms, which, upon approval of the Massachusetts Settlement in November 1997, eliminated the mechanisms as of July 31, 1996. Pending final approval of the settlement, Massachusetts Electric and Nantucket Electric had accrued refund reserves of $9 million for the last five months of 1996 and an additional $9 million in the first nine months of 1997. Upon final approval of the settlement, these refund reserves were reversed in the fourth quarter of 1997, thereby increasing revenue. Massachusetts Electric also accrued refund reserves of $17 million during the first seven months of 1996, which were part of the net $18 million PPCA balance at July 31, 1996 discussed in "Impact of Restructuring on Distribution Business." [GRAPH APPEARS HERE, 1997 DISTRIBUTION OF REVENUE (%)] Operating revenue increased $79 million in 1996 and reflected growth in kWh deliveries and Massachusetts Electric and Narragansett Electric base rate increases in the fourth quarter of 1995. These increases were partially offset by decreases in revenues under rate adjustment mechanisms due to the accrued refund reserves booked in Massachusetts Electric related to the PPCA mechanism as discussed above. KWh deliveries to ultimate customers increased 1.7 percent in 1996. The increase was primarily due to an improving regional economy and the acquisition of Nantucket Electric, partially offset by the effects of milder weather in the last half of 1996. The distribution companies (Massachusetts Electric, Nantucket Electric, Narragansett Electric, and Granite State Electric) received approval from their respective regulatory agencies to recover demand-side management (DSM) program expenditures in rates on a current basis through 1997. These expenditures were $63 million, $59 million, and $64 million in 1997, 1996, and 1995, respectively. Narragansett Electric and Granite State Electric have received approvals from their respective state regulatory agencies to recover substantially all of their 1998 DSM program expenditures. The Massachusetts Settlement and statute provide for recovery of DSM-related costs. Massachusetts Electric and Nantucket Electric have filed DSM program expenditure recovery plans with the MDTE for the period 1998 through 2002, and are currently awaiting MDTE approval. Since 1990, the distribution companies have been allowed to earn incentives based on the results of their DSM programs and have recorded before-tax incentives of $7.6 million, $6.0 million, and $5.7 million in 1997, 1996, and 1995, respectively. [GRAPH APPEARS HERE, GROWTH IN KILOWATTHOUR DELIVERIES TO ULTIMATE CUSTOMERS (%)] Operating Expenses Operating expenses increased $133 million in 1997. This increase reflects increased fuel costs, including the fuel component of purchased power expense, and increased operation and maintenance expenses, partially offset by decreased depreciation and amortization expense. The increase in the fuel component of purchased power expense was partially offset by a reduction in the nonfuel component. Fuel costs, including the fuel component of purchased power expense, increased in 1997 primarily due to increased wholesale sales to other utilities and increased replacement power costs due to the reduced generation from partially owned nuclear units. See the "Nuclear Units" section. In 1997, the increase in operation and maintenance expenses reflects increased costs of partially owned nuclear plants, transmission wheeling costs, start-up costs associated with the new regional transmission control organization, increased distribution system related costs, and the NEES companies' share of costs associated with the restoration to service of previously idled generating facilities throughout New England, in response to a tightening regional power supply. The increase also reflects increased general and administrative costs, including the accelerated amortization, in accordance with a 1995 NEP rate agreement, of previously deferred costs associated with postretirement benefits other than pensions (PBOPs), as discussed below. The decrease in the nonfuel component of purchased power expense, which amounted to $6 million in 1997, reflects reduced charges from the Connecticut Yankee nuclear power plant which was permanently shut down in late 1996 and the expiration of certain purchased power contracts, partially offset by increased charges from the Maine Yankee nuclear power plant which was permanently shut down in mid-1997. The decrease in depreciation and amortization expense reflects the completion of the amortization of NEP's pre-1988 investment in the Seabrook 1 nuclear unit and NEP's investment in the canceled Seabrook 2 nuclear unit. In accordance with a FERC 1995 settlement agreement, upon completion of the amortization of Seabrook 1 and Seabrook 2, NEP agreed to accelerate its amortization of previously deferred costs associated with PBOPs. Upon completion of the PBOP amortization, which occurred in July 1997, NEP was required to accelerate its depreciation of its investment in the Millstone 3 nuclear unit. This accelerated depreciation is recorded as a regulatory liability. Total operating expenses increased $54 million in 1996 compared with 1995, reflecting increased fuel costs and increased taxes, partially offset by decreased maintenance expense, lower purchased power costs, and decreased depreciation and amortization expense. Fuel costs increased in 1996, reflecting increased generation due to growth in sales to ultimate customers and other utilities and fixed pipeline demand charges related to the Manchester Street plant that had been partially deferred until the completion of the plant in the second half of 1995. The nonfuel component of purchased power costs decreased in 1996 by $28 million as a result of the expiration of certain purchased power contracts and higher 1995 costs related to NEP's share of costs for repairs at the Maine Yankee nuclear power plant. The 1996 decrease in maintenance expense reflected reduced thermal and hydro generating plant overhaul activity, partially offset by costs to correct deficiencies at Millstone 3. Depreciation and amortization expense decreased in 1996, reflecting a decrease in oil and gas amortization expense as well as the completion in 1995 of the amortization of a portion of Seabrook 1 costs and Salem Harbor coal conversion costs, partially offset by increased depreciation of other plant assets, including the Manchester Street plant. Taxes other than income taxes increased in 1996 primarily as a result of increased taxes on the Manchester Street plant. Other Income The decrease in other income in 1997 reflects expenses associated with NEES' unregulated ventures. These costs are expected to be higher in 1998 due to NEES' increased involvement in such unregulated ventures. In the fourth quarter of 1997, AllEnergy Marketing Company, L.L.C. (AllEnergy) became a wholly owned indirect subsidiary of NEES. NEES previously owned a 50 percent interest. AllEnergy is an energy marketing company which offers energy commodities (electricity, gas, propane, and oil) and related value-added services to customers in the emerging competitive energy markets in the Northeast. The results of AllEnergy's operations are expected to negatively impact NEES' earnings in 1998. Allowance for Funds Used During Construction (AFDC) The decrease in AFDC in 1996 is due to the completion of the Manchester Street plant repowering project. [GRAPH APPEARS HERE, CUSTOMERS SERVED PER EMPLOYEE] Nuclear Units Nuclear Units Permanently Shut Down Three of the four regional nuclear generating companies in which NEP has a minority interest own nuclear generating units which have been permanently shut down. These three units are as follows:
Future Estimated NEP's Billings Investment Date To NEP Unit % $(millions) Retired $(millions) - -------------------------------------------------------------- Yankee Atomic 30 7 Feb 1992 44 Connecticut Yankee 15 17 Dec 1996 92 Maine Yankee 20 16 Aug 1997 164
In the case of each of these units, NEP has recorded an estimate of the total future payment obligation as a liability and an offsetting regulatory asset, reflecting estimated future billings from the companies. In a 1993 decision, the FERC allowed Yankee Atomic to recover its undepreciated investment in the plant as well as unfunded nuclear decommissioning costs and other costs. Connecticut Yankee and Maine Yankee have both filed similar requests with the FERC. Several parties have intervened in opposition to both filings. NEP's stranded cost settlements allow NEP to recover all costs that the FERC allows the Yankee companies to bill to NEP. In October 1997, the Citizen's Awareness Network and Nuclear Information and Resource Service filed a petition with the Nuclear Regulatory Commission (NRC) that would require formal NRC approval of a decommissioning plan for the Connecticut Yankee and Maine Yankee plants. In 1998, the petitioners indicated their intention to file a request with the NRC designed to overturn a current NRC rule on decommissioning. NEP cannot predict what impact, if any, these activities will have on the cost of decommissioning the plants. [GRAPH APPEARS HERE, NEES' RETURN ON COMMON EQUITY (%)] At Maine Yankee, the NRC has identified numerous apparent violations of its regulations, which may result in the assessment of significant civil penalties. In the 1970s, NEP and several other shareholders (Sponsors) of Maine Yankee entered into 27 contracts (Secondary Purchase Agreements) under which they sold portions of their entitlement to Maine Yankee power output through 2002 to various entities, primarily municipal and cooperative systems in New England (Secondary Purchasers). Virtually all of the Secondary Purchasers have ceased making payments under the Secondary Purchase Agreements and have demanded arbitration, claiming that such agreements excuse further payments upon plant shutdown. NEP has notified the Secondary Purchasers that the shutdown does not relieve them of their obligation to make payments under the Secondary Purchase Agreements and that they are in default of such agreements. NEP has asked the FERC to enforce NEP's rights under the agreements. In the event that no further payments are forthcoming from Secondary Purchasers, NEP, as a primary obligor to Maine Yankee, would be required to pay an additional $9 million of future shutdown costs. These costs are not included in the $164 million estimate disclosed in the table above. Shutdown costs are recoverable from customers under the stranded cost settlements. A Maine statute provides that if both Maine Yankee and its decommissioning trust fund have insufficient assets to pay for the plant decommissioning, the owners of Maine Yankee are jointly and severally liable for the shortfall. Operating Nuclear Units NEP has minority interests in three other nuclear generating units, Vermont Yankee, Millstone 3, and Seabrook 1. In October 1996, the NRC issued letters to operators of nuclear power plants requiring them to document that the plants are operated and maintained within their design and licensing bases, and that any deviations are reconciled in a timely manner. The Seabrook 1 and Vermont Yankee nuclear power plants responded to the NRC letters in February 1997. Millstone 3 is currently shut down and has been placed on the NRC "Watch List," signifying that its safety performance exhibits sufficient weakness to warrant increased NRC attention. Millstone 3 may not restart without NRC approval. Uncertainties regarding the future of nuclear generating stations, particularly older units, such as Vermont Yankee, are increasing rapidly and could adversely affect their service lives, availability, and costs. These uncertainties stem from a combination of factors, including the acceleration of competitive pressures in the power generation industry and increased NRC scrutiny. NEP performs periodic economic viability reviews of operating nuclear units in which it holds ownership interests. Millstone 3 In April 1996, the NRC ordered Millstone 3, which has experienced numerous technical and nontechnical problems, to remain shut down pending verification that the unit's operations are in accordance with NRC regulations and the unit's operating license. Millstone 3 is operated by a subsidiary of Northeast Utilities (NU). NEP is not an owner of the Millstone 1 and 2 nuclear generating units, which are also shut down under NRC orders. A number of significant prerequisites must be fulfilled prior to restart of Millstone 3, including certification by NU that the unit adequately conforms to its design and licensing bases, an independent verification of corrective actions taken at the unit, an NRC assessment concluding a safety conscious work environment exists, public meetings, and a vote of the NRC Commissioners. NEP cannot predict when Millstone 3 will be allowed by the NRC to restart, but believes restart of the unit is unlikely prior to the summer of 1998. Since April 1996, NEP has incurred an estimated $35 million in incremental replacement power costs, which it has been recovering from customers through its fuel clause. During the outage, NEP is incurring incremental replacement power costs of approximately $2 million per month. Several criminal investigations related to Millstone 3 are ongoing. In December 1997, the NRC assessed civil penalties totaling $2.1 million for numerous violations at the three Millstone units. NEP's share of this fine was less than $100,000. The Connecticut Department of Environmental Protection and Connecticut Attorney General have filed suit against NU for alleged wastewater discharge violations at the Millstone units, which may result in the assessment of substantial civil penalties. In August 1997, NEP filed suit against NU in Massachusetts Superior Court for damages resulting from the tortious conduct of NU relating to Millstone 3. NEP is seeking compensation for the losses it has suffered, including the costs of lost power and costs necessary to assure that Millstone 3 can safely return to operation. NEP also seeks punitive damages. NU has filed for dismissal of the suit and sought to consolidate it with suits filed by other joint owners in Massachusetts Superior Court. NEP also sent a demand for arbitration to Connecticut Light & Power Company and Western Massachusetts Electric Company, both subsidiaries of NU, seeking damages resulting from their breach of obligations under an agreement with NEP and others regarding the operation and ownership of Millstone 3. Brayton Point In October 1996, the Environmental Protection Agency (EPA) announced it was beginning a process to determine whether to modify or revoke and reissue NEP's water discharge permit for its Brayton Point 1,576 MW power plant. This action came two years before the permit expiration date. The EPA stated it took this step in response to a request from the Rhode Island Department of Environmental Management (RIDEM). A RIDEM report asserted a statistical correlation between the decline in the fish population in Mount Hope Bay and a change in operations at Brayton Point that occurred in the mid-1980s. In April 1997, NEP signed a memorandum of agreement negotiated with the various federal and state environmental agencies under which NEP will voluntarily operate under more stringent conditions than under its existing permit. The agreement was in lieu of any immediate action on the permit, and will remain in effect until a renewal permit is issued. On January 16, 1998, NEP applied for a new water discharge permit with both the EPA and the Massachusetts Department of Environmental Protection. NEP cannot predict at this time what permit changes will be required or the impact on Brayton Point's operations and economics. However, permit changes may substantially impact the plant's capacity and ability to produce energy and/or require substantial capital expenditures to construct equipment to address the concerns raised by the environmental agencies. Hazardous Waste The electric utility industry typically utilizes and/or generates in its operations a range of potentially hazardous products and by-products. The most prevalent types of hazardous waste sites with which NEES and its subsidiaries have been associated are manufactured gas locations. (Until the early 1970s, NEES was a combined electric and gas holding company system.) NEES is aware of approximately 40 such manufactured gas locations, including 10 for which the NEES companies have been identified by either federal or state environmental regulatory agencies as potentially responsible parties, mostly located in Massachusetts. NEES has reported the existence of all manufactured gas locations of which it is aware to state environmental regulatory agencies. NEES is engaged in various phases of investigation and remediation work at approximately 20 of the manufactured gas locations. NEES and its subsidiaries are currently aware of other possible hazardous waste sites, and may in the future become aware of additional sites, that they may be held responsible for remediating. In 1993, the Massachusetts Department of Public Utilities approved a settlement agreement that provides for rate recovery of remediation costs of former manufactured gas sites and certain other hazardous waste sites in Massachusetts. A more detailed discussion of this settlement agreement and of potential hazardous waste liabilities is contained in Note D-4 of the Notes to the Financial Statements. Predicting the potential costs to investigate and remediate hazardous waste sites continues to be difficult. At December 31, 1997, NEES had total reserves of $44 million. NEES believes that hazardous waste liabilities for all sites of which it is aware, and which are not covered by a rate agreement, are not material to its financial position. Year 2000 Computer Issues In the next two years, most large companies will face a potentially serious information systems (computer) problem because most software applications and operational programs written in the past will not properly recognize calendar dates beginning in the year 2000. This could force computers to either shut down or lead to incorrect calculations. The NEES companies began the process of identifying the changes required to their computer programs and hardware during 1996. The necessary modifications to the NEES companies' centralized financial, customer, and operational information systems are expected to be completed by the end of 1998. Noncentralized systems are also being reviewed for Year 2000 problems. The NEES companies believe total costs associated with making the necessary modifications to all centralized and noncentralized systems will be approximately $25 million, of which approximately $8 million has been incurred as of December 31, 1997. Most of the remaining costs are expected to be incurred prior to December 31, 1998. New Accounting Standards In 1997, the Financial Accounting Standards Board released two new Statements of Financial Accounting Standards (FAS), FAS 130 and FAS 131, both of which will go into effect in 1998. FAS 130, Reporting Comprehensive Income, requires the reporting in financial statements of a new additional item called comprehensive income, which will incorporate amounts not previously included in reported net income. FAS 131, Disclosure about Segments of an Enterprise and Related Information, requires the reporting in financial statements of certain new additional information about operating segments of a business. NEES is currently evaluating the impact that these new accounting standards will have on its future reporting requirements. Liquidity and Capital Resources Capital requirements for 1997 and projections for 1998 are shown below:
Year ended December 31 (millions of dollars) 1997 1998 ---- ---- Cash expenditures for utility plant $203 $200 Oil and gas exploration and development* 13 - ---- ---- Total capital expenditures 216 200 Maturing debt and prepayment requirements 80 90 ---- ---- Total capital requirements $296 $290 ---- ---- Cash from utility operations after payment of dividends $244 $200 Cash from oil and gas operations* 29 - ---- ---- Total cash from operations after the payment of dividends $273 $200 ---- ---- *NEEI oil and gas assets sold as of February 5, 1998.
The long-term debt financing activities of the NEES subsidiaries for 1997 and the projected long-term debt financings for 1998 are summarized as follows:
1997 Actual 1998 Projected (millions of dollars) Issues Retirements Issues Retirements ------ ----------- ------ ----------- NEP* $ - $ 38 $ - $ 50 Massachusetts Electric 15 30 55 40 Narragansett Electric 10 33 5 5 Granite State Electric - - 5 - Nantucket Electric - 1 - 1 Hydro-Transmission companies - 11 - 12 NERC** - 2 - 2 NEEI*** - 27 - 122 ------ ----------- ------ --------- $25 $142 $65 $232 * See"Divestiture of Generating Business"in Financial Review for information on potential NEP bond defeasance. ** $29 million of NERC debt will be retired in 1998 contingent upon completion of the sale of the nonnuclear generating business to USGen. *** NEEI debt retired on February 5, 1998.
The interest rate on the long-term debt issued in 1997 is 7.39 percent. In August 1997, the NEES Board of Directors authorized the repurchase of up to five million NEES common shares through open market purchases. Through December 31, 1997, NEES purchased 283,000 shares under the repurchase program. On December 19, 1997, NEES purchased, pursuant to a tender offer, preferred stock of its subsidiaries with an aggregate par value of $87 million. These purchases resulted in an after-tax charge to net income of approximately $5 million. At December 31, 1997, NEES and its consolidated subsidiaries had lines of credit and standby bond purchase facilities with banks totaling $1.2 billion. These lines and facilities were used at December 31, 1997 for liquidity support for $252 million of commercial paper borrowing and $372 million of NEP mortgage bonds in tax-exempt commercial paper mode. Fees are paid on the lines and facilities in lieu of compensating balances. New England Electric System and Subsidiaries Selected Financial Data Year ended December 31 (dollar amounts expressed in millions, except per share data)
1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- Operating revenue: Electric sales (excluding fuel cost recovery) $1,592 $1,531 $1,521 $1,518 $1,488 Fuel cost recovery 708 662 600 568 582 Other revenue 162 125 121 117 117 Oil and gas sales 41 33 30 40 47 ------- ------- ------- ------- ------- Total operating revenue $2,503 $2,351 $2,272 $2,243 $2,234 Net income $ 220 $ 209 $ 205 $ 199 $ 190 Average common shares (000's) Basic 64,899 64,960 64,970 64,970 64,970 Diluted 64,952 64,986 64,986 64,988 64,985 Per share data: Net income-Basic and Diluted $ 3.39 $ 3.22 $ 3.15 $ 3.07 $ 2.93 Dividends declared $ 2.36 $ 2.36 $2.345 $2.285 $ 2.22 Return on average common equity 12.8% 12.6% 12.8% 12.7% 12.6% Total assets $5,312 $5,223 $5,191 $5,085 $4,796 Capitalization: Common share equity $1,744 $1,685 $1,632 $1,581 $1,530 Minority interests 43 46 49 55 56 Cumulative preferred stock 39 126 147 147 147 Long-term debt 1,488 1,615 1,675 1,520 1,512 ------- ------- ------- ------- ------- Total capitalization $3,314 $3,472 $3,503 $3,303 $3,245 Deliveries to ultimate customers (millions of kWh) 22,097 21,674 21,311 21,155 20,832 Cost per kWh sold to ultimate customers (cents) 9.88 9.51 9.54 9.29 9.50 System maximum demand (MW) 4,326 4,091 4,381 4,385 4,081 Electric capability (net MW)-year end 5,093 5,276 5,482 5,533 5,362 Number of employees 4,665 4,787 4,832 4,990 4,969 Number of ultimate customers (in thousands) 1,349 1,333 1,314 1,300 1,288 ------- ------- ------ ------- -------
New England Electric System and Subsidiaries Statements of Consolidated Income Year ended December 31 (thousands of dollars, except per share data)
1997 1996 1995 ---------- ---------- ---------- Operating revenue $2,502,591 $2,350,698 $2,271,712 ---------- ---------- ---------- Operating expenses: Fuel for generation 372,461 334,994 237,498 Purchased electric energy 528,229 509,400 548,370 Other operation 556,658 501,090 500,721 Maintenance 143,372 127,785 136,058 Depreciation and amortization 236,492 246,379 264,666 Taxes, other than income taxes 146,494 143,733 132,631 Income taxes 152,024 139,199 128,340 ---------- ---------- ---------- Total operating expenses 2,135,730 2,002,580 1,948,284 ---------- ---------- ---------- Operating income 366,861 348,118 323,428 Other income: Allowance for equity funds used during construction - - 7,852 Equity in income of generating companies 10,240 10,334 10,552 Other income (expense), net (15,755) (8,166) (6,306) ---------- ---------- ---------- Operating and other income 361,346 350,286 335,526 ---------- ---------- ---------- Interest: Interest on long-term debt 107,311 110,479 108,365 Other interest 16,939 19,527 19,826 Allowance for borrowed funds used during construction (1,908) (2,246) (14,016) ---------- ---------- ---------- Total interest 122,342 127,760 114,175 ---------- ---------- ---------- Income after interest 239,004 222,526 221,351 Preferred dividends and net gain/loss on reacquisition of preferred stock of subsidiaries 12,319 6,463 8,690 Minority interests 6,647 7,127 7,904 ---------- ---------- ---------- Net income $ 220,038 $ 208,936 $ 204,757 ---------- ---------- ---------- Average common shares - Basic 64,899,322 64,960,496 64,969,652 Average common shares - Diluted 64,952,185 64,986,136 64,985,697 Per share data: Net income - Basic and Diluted $ 3.39 $ 3.22 $ 3.15 Dividends declared $ 2.36 $ 2.36 $ 2.345 ---------- ---------- ----------
Statements of Consolidated Retained Earnings Year ended December 31 (thousands of dollars)
1997 1996 1995 ---------- ---------- ---------- Retained earnings at beginning of year $ 887,292 $ 831,529 $ 779,045 Net income 220,038 208,936 204,757 Dividends declared on common shares (152,812) (153,173) (152,273) ---------- ---------- ---------- Retained earnings at end of year $ 954,518 $ 887,292 $ 831,529 ---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements. New England Electric System and Subsidiaries Consolidated Balance Sheets At December 31 (thousands of dollars)
1997 1996 ---------- ---------- Assets Utility plant, at original cost $5,860,101 $5,692,956 Less accumulated provisions for depreciation and amortization 1,995,017 1,853,003 ---------- ---------- 3,865,084 3,839,953 Construction work in progress 48,708 56,652 ---------- ---------- Net utility plant 3,913,792 3,896,605 ---------- ---------- Oil and gas properties, at full cost (Note A) 1,299,817 1,286,661 Less accumulated provision for amortization 1,128,659 1,081,940 ---------- ---------- Net oil and gas properties 171,158 204,721 ---------- ---------- Investments: Nuclear power companies, at equity (Note D) 49,825 47,902 Other subsidiaries, at equity 37,418 40,124 Other investments 117,645 96,399 ---------- ---------- Total investments 204,888 184,425 ---------- ---------- Current assets: Cash 14,264 8,477 Accounts receivable, less reserves of $17,834 and $18,702 257,185 262,103 Unbilled revenues 71,260 59,093 Fuel, materials, and supplies, at average cost 66,509 74,111 Prepaid and other current assets 64,265 85,096 ---------- ---------- Total current assets 473,483 488,880 ---------- ---------- Accrued Yankee nuclear plant costs (Note D) 299,564 166,413 Deferred charges and other assets (Note B) 248,762 282,207 ---------- ---------- $5,311,647 $5,223,251 ---------- ---------- Capitalization and liabilities Capitalization (see accompanying statements): Common share equity $1,744,442 $1,685,417 Minority interests in consolidated subsidiaries 43,062 46,293 Cumulative preferred stock of subsidiaries 39,113 126,166 Long-term debt 1,487,481 1,614,578 ---------- ---------- Total capitalization 3,314,098 3,472,454 ---------- ---------- Current liabilities: Long-term debt due within one year 89,910 79,705 Short-term debt 251,950 145,050 Accounts payable 136,218 148,592 Accrued taxes 14,831 14,911 Accrued interest 24,969 27,494 Dividends payable 36,162 37,276 Other current liabilities (Note G) 120,002 109,582 ---------- ---------- Total current liabilities 674,042 562,610 ---------- ---------- Deferred federal and state income taxes 720,375 750,929 Unamortized investment tax credits 90,018 91,936 Accrued Yankee nuclear plant costs (Note D) 299,564 166,413 Other reserves and deferred credits 213,550 178,909 Commitments and contingencies (Note D) ---------- ---------- $5,311,647 $5,223,251 ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements. New England Electric System and Subsidiaries Consolidated Statements of Cash Flows Year ended December 31 (thousands of dollars)
1997 1996 1995 -------- -------- -------- Operating activities Net income $220,038 $208,936 $204,757 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 239,654 250,508 270,292 Deferred income taxes and investment tax credits, net (31,178) (30,328) 24,056 Allowance for funds used during construction (1,908) (2,246) (21,868) Amortization of unbilled revenues - - (8,209) Minority interests 6,647 7,127 7,904 Decrease (increase) in accounts receivable, net and unbilled revenues 4,217 30,770 1,194 Decrease (increase) in fuel, materials, and supplies 10,664 126 20,707 Decrease (increase) in prepaid and other current assets 24,729 (7,209) (955) Increase (decrease) in accounts payable (15,710) (9,568) (11,451) Increase (decrease) in other current liabilities (2,718) 33,999 (4,784) Other, net 66,678 40,455 (11,790) -------- -------- -------- Net cash provided by operating activities $521,113 $522,570 $469,853 -------- -------- -------- Investing activities Plant expenditures, excluding allowance for funds used during construction $(203,095) $(234,409) $(329,385) Oil and gas exploration and development (13,156) (20,371) (17,947) Other investing activities (22,669) (10,309) (32,460) --------- --------- --------- Net cash used in investing activities $(238,920) $(265,089) $(379,792) --------- --------- --------- Financing activities Dividends paid to minority interests $ (6,809) $ (8,878) $ (12,159) Dividends paid on NEES common shares (152,763) (153,759) (151,335) Short-term debt 105,900 (59,862) (30,720) Long-term debt - issues 25,000 97,850 425,000 Long-term debt - retirements (142,205) (106,811) (311,920) Preferred stock - redemptions (87,221) (20,900) - Premium on reacquisition of long-term debt (2,163) - (2,003) Return of capital to minority interests and related premium (3,348) (1,633) (1,364) Repurchase of common shares (12,797) (2,075) (1,543) --------- --------- --------- Net cash provided by (used in) financing activities $(276,406) $(256,068) $ (86,044) --------- --------- --------- Net increase in cash and cash equivalents $ 5,787 $ 1,413 $ 4,017 Cash and cash equivalents at beginning of year 8,477 7,064 3,047 --------- --------- --------- Cash and cash equivalents at end of year $ 14,264 $ 8,477 $ 7,064 --------- --------- --------- Supplementary information Interest paid less amounts capitalized $ 115,545 $ 119,710 $ 105,459 --------- --------- --------- Federal and state income taxes paid $ 174,000 $ 168,255 $ 68,312 --------- --------- --------- Dividends received from investments at equity $ 10,802 $ 12,987 $ 14,748 --------- --------- ---------
The accompanying notes are an integral part of these consolidated financial statements. New England Electric System and Subsidiaries Consolidated Statements of Capitalization At December 31 (thousands of dollars)
Common share equity 1997 1996 ---------- ---------- Common shares, par value $1 per share Authorized - 150,000,000 shares Issued - 64,969,652 shares $ 64,970 $ 64,970 Paid-in capital 736,605 736,773 Retained earnings 954,518 887,292 Treasury stock - 431,875 and 102,957 shares, respectively (16,415) (3,618) Unrealized gain on securities, net 4,764 - ---------- ---------- Total common share equity $1,744,442 $1,685,417 ---------- ----------
Shares outstanding Cumulative preferred stock of subsidiaries 1997 1996 1997 1996 -------- -------- -------- -------- $100 Par value 4.44% to 4.76% 106,400 371,640 $10,640 $ 37,164 6.00% to 6.99% 108,690 375,020 10,869 37,502 $50 Par value 4.50% to 6.95% 256,000 730,000 12,800 36,500 $25 Par value 6.84% 192,160 600,000 4,804 15,000 -------- -------- -------- -------- Total cumulative preferred stock of subsidiaries (annual dividend requirement of $2,284 for 1997 and $7,332 for 1996) 663,250 2,076,660 $39,113 $126,166 -------- --------- -------- --------
Long-term debt (Note H) Maturity Rate 1997 1996 ----------------- ----------------------- ---------- Mortgage bonds - New England Power Company 1997 through 1999 6.040%-8.280%$ 60,000 $ 63,000 2000 through 2004 6.580%-8.330% 90,000 90,000 2015 through 2024 7.250%-8.530% 178,000 213,500 2018 through 2022 Variable 371,850 371,850 Mortgage bonds - All other NEES subsidiaries 1997 through 1999 5.700%-7.810% 48,000 110,500 2000 through 2004 6.240%-8.520% 153,500 153,500 2005 through 2014 6.110%-8.450% 94,000 94,000 2015 through 2026 7.050%-9.125% 254,200 229,200 Notes Granite State Electric Company 1997 through 2025 7.370%-9.440% 15,000 15,000 Nantucket Electric Company 1997 through 2016 4.100%-8.500% 30,735 31,500 New England Energy Incorporated 1998 through 2002 Variable 122,000 149,000 Hydro-Transmission companies 2001 through 2015 8.820%-9.410% 136,490 148,010 Narragansett Energy Resources Company 2010 7.250% 28,640 30,560 Unamortized discounts and premiums, net (5,024) (5,337) -------------------- Total long-term debt 1,577,391 1,694,283 -------------------- Long-term debt due in one year (89,910) (79,705) -------------------- $1,487,481$1,614,578 --------------------
The accompanying notes are an integral part of these consolidated financial statements. New England Electric System and Subsidiaries Notes to Consolidated Financial Statements Note A - Significant Accounting Policies 1. Nature of operations New England Electric System (NEES) is a public utility holding company headquartered in Westborough, Massachusetts. Its subsidiaries are engaged in the transmission, distribution, sale, and generation of electricity, and the marketing of energy commodities and services. NEES' electricity delivery subsidiaries serve 1.3 million customers in Massachusetts, Rhode Island, and New Hampshire. Other business activities include independent transmission projects and telecommunications project management. The NEES system provides electric service to distribution customers through separate distribution subsidiaries, Massachusetts Electric Company (Massachusetts Electric) and Nantucket Electric Company (Nantucket Electric), which operate in Massachusetts; The Narragansett Electric Company (Narragansett Electric), which operates in Rhode Island; and Granite State Electric Company (Granite State Electric), which operates in New Hampshire. Each of the distribution subsidiaries purchased electricity on behalf of its customers under wholesale all- requirements contracts with NEES' generation and transmission subsidiary, New England Power Company (NEP). See Note B for a discussion of industry restructuring and Note C for a discussion of NEP and Narragansett Electric's planned divestiture of their nonnuclear generating business. 2. Basis of consolidation and financial statement presentation The consolidated financial statements include the accounts of NEES and all subsidiaries except New England Electric Transmission Corporation, which is recorded under the equity method. Presentation of this subsidiary on the equity basis is not material to the consolidated financial statements. NEP has a minority interest in four regional nuclear generating companies (Yankees). Narragansett Energy Resources Company (NERC) has a 20 percent general partnership interest in the Ocean State Power (OSP) generating facility. NEP and NERC account for these ownership interests under the equity method. During 1997, NEES increased its ownership from 50 percent to 100 percent of AllEnergy Marketing Company, L.L.C. (AllEnergy), an energy marketing enterprise. NEES owns 50.4 percent of the outstanding common stock of both New England Hydro-Transmission Electric Company, Inc. and New England Hydro-Transmission Corporation (Hydro-Transmission companies). The consolidated financial statements include 100 percent of the assets, liabilities, and earnings of the Hydro- Transmission companies. Minority interests, which represent the minority stockholders' proportionate share of the equity and income of the Hydro-Transmission companies, have been separately disclosed on the NEES consolidated balance sheets and income statements. NEP is also a 12 percent and 10 percent joint owner, respectively, of the Millstone 3 and Seabrook 1 nuclear generating units, each 1,150 megawatts (MW). NEP's net investments in Millstone 3 and Seabrook 1 at December 31, 1997, included in "Net utility plant," were approximately $366 million and $54 million, respectively. NEP's share of the related expenses for these units is included in "Operating expenses." In addition, in a 1995 rate agreement, a provision was made for the accelerated recovery of NEP's investment in Millstone 3. This accumulated accelerated amortization at December 31, 1997 amounted to approximately $17 million and was included as a regulatory liability in "Other reserves and deferred credits" (see Note A-5 and Note B). NEES, through its wholly owned indirect subsidiary, AllEnergy, uses derivative instruments to manage exposure in fluctuations in commodity prices. At this time, AllEnergy has only held exchange- traded futures contracts to manage risks associated with natural gas, propane, and heating oil price risks. Hedge criteria used and accounting for hedge transactions are in accordance with Statement of Financial Accounting Standards No. 80, Accounting for Futures Contracts (FAS 80). FAS 80 states that in order to qualify as a hedge, price movements in commodity derivatives must be highly correlated with the underlying hedged commodity and must reduce exposure to market fluctuations throughout the hedged period. Any gain or loss on a derivative which qualifies as a hedge under FAS 80 is deferred until recognized in the income statement in the same period as the hedged item is recognized in the income statement. As of December 31, 1997, all of AllEnergy's existing futures contracts qualified as hedges. The accounts of NEES and its utility subsidiaries are maintained in accordance with the Uniform System of Accounts prescribed by regulatory bodies having jurisdiction. All significant intercompany transactions between consolidated subsidiaries have been eliminated. In preparing the financial statements, management is required to make estimates that affect the reported amounts of assets and liabilities and disclosures of asset recovery and contingent liabilities as of the date of the balance sheets, and revenues and expenses for the period. These estimates may differ from actual amounts if future circumstances cause a change in the assumptions used to calculate these estimates. 3. Electric sales revenue All of NEES' subsidiaries accrue revenues for electricity delivered but not yet billed (unbilled revenues), with the exception of Granite State Electric. Included in income is $8 million in 1995 which represents amortization of the initial effect of recording unbilled revenues, in accordance with the retail rate agreements. Accrued revenues are also recorded in accordance with rate adjustment mechanisms which include Massachusetts Electric's and Nantucket Electric's purchased power cost adjustment (PPCA) mechanisms. Upon approval of the Massachusetts Settlement in November 1997, the PPCA mechanisms were eliminated as of July 31, 1996. Pending final approval of the settlement, Massachusetts Electric and Nantucket Electric had accrued refund reserves of $9 million for the last five months of 1996 and an additional $9 million in the first nine months of 1997. Upon final approval of the settlement, these refund reserves were reversed in the fourth quarter of 1997, thereby increasing revenue. 4. Allowance for funds used during construction (AFDC) The utility subsidiaries capitalize AFDC as part of construction costs. AFDC represents the composite interest and equity costs of capital funds used to finance that portion of construction costs not yet eligible for inclusion in rate base. AFDC is capitalized in "Utility plant" with offsetting noncash credits to "Other income" and "Interest." This method is in accordance with an established rate-making practice under which a utility is permitted a return on, and the recovery of, prudently incurred capital costs through their ultimate inclusion in rate base and in the provision for depreciation. The composite AFDC rates were 5.9 percent, 5.6 percent, and 7.3 percent, in 1997, 1996, and 1995, respectively. 5. Depreciation and amortization The depreciation and amortization expense included in the statements of consolidated income is composed of the following:
Year ended December 31 (thousands of dollars) 1997 1996 1995 -------- -------- -------- Depreciation $172,010 $171,193 $159,510 Nuclear decommissioning costs (see Note D-5) 2,638 2,629 2,629 Amortization: Oil and gas properties (see Note A-6) 46,718 49,163 68,708 Investment in Seabrook 1 pursuant to rate settlement - 15,210 23,073 Oil Conservation Adjustment (OCA) - - 4,467 Seabrook 2 property losses 113 6,280 6,279 Millstone 3 additional amortization, pursuant to rate settlement 15,013 1,904 - -------- -------- -------- Total depreciation and amortization expense $236,492 $246,379 $264,666 -------- -------- --------
Depreciation is provided annually on a straight-line basis. The provision for depreciation as a percentage of weighted average depreciable property was 3.1 percent in 1997, 3.2 percent in 1996, and 3.3 percent in 1995. Revenues from the OCA were used to accelerate the amortization of expenditures for coal conversion facilities at NEP's Salem Harbor Station. In addition, Seabrook 1 costs under the 1988 rate settlement were fully amortized at December 31, 1996. Property losses associated with NEP's investment in the canceled Seabrook 2 nuclear unit were fully amortized by March 31, 1997. In 1996, New England Energy Incorporated (NEEI), a wholly owned subsidiary of NEES, reduced amortization expense of its oil and gas properties by $13 million to correct amounts recorded in the years 1990 through 1996. 6. Oil and gas investments NEEI participated in a rate-regulated domestic oil and gas exploration, development, and production program through a partnership with a nonaffiliated oil company. Losses from this program, calculated under the full cost method of accounting, have been charged to NEP, and ultimately to distribution customers, in accordance with Securities and Exchange Commission (SEC) and Federal Energy Regulatory Commission (FERC) approvals. Such losses were $11 million, $22 million, and $44 million in 1997, 1996, and 1995, respectively. In February 1998, after a competitive bidding process, NEEI sold all of its remaining oil and gas properties held as of December 31, 1997 to its partner for $50 million. The loss on such disposition, approximately $120 million, before tax, has been charged to NEP. The settlements provide for the recovery of the NEEI loss as part of NEP's stranded costs. See Note B for a discussion of industry restructuring and Note C for a discussion of NEP's planned divestiture of its nonnuclear generating business. 7. Cash NEES and its subsidiaries classify short-term investments with an original maturity of 90 days or less as cash. 8. Average common shares The following table summarizes the reconciling amounts between basic and diluted earnings per share (EPS) computations, in compliance with Statement of Financial Accounting Standards No. 128, Earnings per Share, which became effective during 1997, and requires restatement for all prior-period EPS data presented.
Year ended December 31 1997 1996 1995 -------- -------- -------- Income after interest and minority interest (000's) $232,357 $215,399 $213,447 Less: preferred stock dividends and net gain/loss on reacquisition of preferred stock of subsidiaries (000's) $ 12,319 $ 6,463 $ 8,690 Income available to common shareholders (000's) $220,038 $208,936 $204,757 Basic EPS $ 3.39 $ 3.22 $ 3.15 Diluted EPS $ 3.39 $ 3.22 $ 3.15 -------- -------- -------- Average common shares outstanding for Basic EPS 64,899,322 64,960,496 64,969,652 Effect of Dilutive Securities Average potential common shares related to share-based compensation plans 52,863 25,640 16,045 ---------- ---------- ---------- Average common shares outstanding for Diluted EPS 64,952,185 64,986,136 64,985,697 ---------- ---------- ----------
9. New accounting standards In 1997, the Financial Accounting Standards Board released two new Statements of Financial Accounting Standards (FAS), FAS 130 and FAS 131, both of which will go into effect in 1998. FAS 130, Reporting Comprehensive Income, requires the reporting in financial statements of a new additional item called comprehensive income, which will incorporate amounts not previously included in reported net income. FAS 131, Disclosure about Segments of an Enterprise and Related Information, requires the reporting in financial statements of certain new additional information about operating segments of a business. NEES is currently evaluating the impact that these new accounting standards will have on its future reporting requirements. Note B - Industry Restructuring As the result of legislation enacted in the states served by the NEES companies, most customers served by the NEES companies will have the ability to choose their power supplier during the first quarter of 1998. When customers are allowed to choose their power supplier, utilities face the risk that market prices may not be sufficient to recover the costs of the commitments incurred to supply customers under a regulated structure. The amounts by which such costs exceed market prices are commonly referred to as "stranded costs." As described below, the NEES companies have reached settlement agreements with parties representing all of their distribution customers. In each case, these settlements provide for recovery of stranded costs. See the "Industry Restructuring" section of Financial Review for a more in-depth discussion of current developments in this area. The settlements generally provide for the following: - - introduction of choice of power supplier in Rhode Island, Massachusetts, and New Hampshire by January 1, 1998, March 1, 1998, and July 1, 1998, respectively; - - a transition rate, or "standard offer generation service," for customers who do not choose an alternative power supplier, resulting in rate reductions of approximately 10 percent at the date of commencement of retail choice; - - termination of all-requirements contracts between NEP and NEES' distribution companies on terms that allow NEP to recover its stranded costs through a transition access charge, which the distribution companies will collect from customers; - - adjustments to stranded cost recovery to reflect the market value of fossil-fueled and hydroelectric generating assets, determined through divestiture of such assets. Under the various settlements, the recovery of NEP's stranded costs is divided into several categories. Unrecovered costs associated with generating plants and regulatory assets would be recovered over 12 years and would earn a return on equity of 9.4 percent. The above-market component of purchased power contracts and nuclear decommissioning costs would be recovered as incurred over the life of those obligations, a period expected to extend beyond 12 years. Initially, the transition access charge would be set at 2.8 cents per kilowatthour (kWh) and would be reduced upon completion of the sale of NEP's generating business, as described below. As the transition access charge declines, NEP would earn incentives based on successful mitigation of its stranded costs. These incentives would supplement NEP's return on equity. The Massachusetts and Rhode Island settlements were conditionally approved by the FERC in November 1997, subject to a compliance filing to clarify the impact of the settlements on nonsettling parties. The Massachusetts Settlement was also found by the Massachusetts Department of Telecommunications and Energy to be in substantial compliance with or consistent with the Massachusetts restructuring statute. The New Hampshire settlement is pending before the New Hampshire Public Utilities Commission and the FERC. In August 1997, NEP and Narragansett Electric entered into an agreement to sell substantially all of their nonnuclear generating business to USGen New England, Inc. (USGen), an indirect wholly owned subsidiary of PG&E Corporation (PG&E). The net proceeds from the sale of its nonnuclear generating business to USGen will be used to reduce the transition access charge from 2.8 cents per kWh to approximately 1.5 cents per kWh. In addition, the FERC accepted the NEES companies' proposal in conjunction with their divestiture filing that the recovery of the remaining above-market nuclear generating plant investment and regulatory assets be fully recovered by the end of the year 2000 (see Note C for a discussion of NEP and Narragansett Electric's planned divestiture of their nonnuclear generating business) Accounting implications Historically, electric utility rates have been based on a utility's costs. As a result, electric utilities are subject to certain accounting standards that are not applicable to other business enterprises in general. Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (FAS 71), requires regulated entities, in appropriate circumstances, to establish regulatory assets, and thereby defer the income statement impact of certain items of income and expense expected to be reflected in future rates. In response to concerns expressed by the staff of the SEC, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board took under consideration how FAS 71 should be applied in light of recent changes within the regulated utility industry. In July 1997, the EITF concluded that a utility whose ongoing generation operations would not permit the application of FAS 71, but had otherwise received approval to recover stranded costs through regulated transmission and distribution rates, would be permitted to continue to apply FAS 71 to the recovery of the stranded costs. The restructuring settlements and statutes each provide for recovery of stranded costs of generating assets and oil and gas related assets (including regulatory assets) not recoverable from the proceeds of the divestiture of NEP's generating business. The cost of these assets would be recovered as part of a cost-based transition access charge imposed on all distribution customers. Additionally, FERC Order No. 888 enables transmission companies to recover their specific costs of providing transmission service. Therefore, after the proposed divestiture, substantially all of NEP's business, including the recovery of its stranded costs, would remain under cost-based rate regulation. NEES further believes the restructuring settlements and statutes will enable the NEES distribution companies to recover through rates their specific costs of providing ongoing distribution services. NEES believes these factors and the EITF conclusion will allow its principal utility subsidiaries to continue to apply FAS 71. As a result of the FERC approval of the restructuring settlements in November 1997, NEP was required to cease to apply FAS 71 to 20 percent of its ongoing nuclear operations, as described in Note C, the impact of which is expected to be immaterial. Despite the progress made to date, it is possible that future regulatory rules or other circumstances could cause the application of FAS 71 to be discontinued, which would result in a noncash write-off of previously established regulatory assets related to the affected operations. In addition, write-downs of plant assets under Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (FAS 121) could be required, including a write-off of any gain or loss from the divestiture of the generating business. At December 31, 1997, the NEES companies had approximately $600 million in regulatory assets in compliance with FAS 71, as detailed in the table below, of which approximately $60 million relate to the transmission and distribution business.
The components of regulatory assets are as follows: At December 31 (thousands of dollars) 1997 1996 -------- -------- Oil and gas properties: in excess of market value (see Note A-6) $121,000 $149,100 -------- -------- Regulatory assets included in current assets & liabilities: Accrued NEEI losses (see Note A-6) 11,419 21,648 Rate adjustment mechanisms (see Note G) (15,306) (48,894) -------- -------- (3,887) (27,246) -------- -------- Regulatory assets included in deferred charges and other reserves and deferred credits: Accrued costs - Yankee nuclear plants (see Note D-5) 299,564 166,413 Unamortized losses on reacquired debt 50,605 52,167 Deferred FAS No. 106 costs (see Note E-2) 9,191 29,839 Deferred FAS No. 109 costs (see Note F) 72,145 72,075 Purchased power contract termination costs 15,662 19,578 Deferred gas pipeline charges (see Note D-2) 52,570 59,733 Deferred storm costs 4,522 6,530 Environmental response costs (see Note D-4) (15,753) 18,265 Accelerated amortization - Millstone 3 (16,917) (1,904) Other 9,459 8,383 -------- -------- 481,048 431,079 -------- -------- $598,161 $552,933 -------- --------
Note C - Divestiture of Generating Business As described above, in August 1997, NEP and Narragansett Electric (collectively, the Sellers) reached an agreement to sell their nonnuclear generating business to USGen. The nonnuclear generating business includes three fossil-fueled and 15 hydroelectric generating stations, totaling approximately 4,000 MW of capacity, as well as NERC's partnership interest in OSP, all of which has a book value of $1.1 billion. USGen will pay the Sellers $1.59 billion in cash, of which $225 million will be contingent upon the introduction of customer choice of power supplier. Based on the enactment of the Massachusetts statute, the NEES companies believe that the conditions for payment of the full purchase price have been met. USGen will also reimburse the NEES companies for $85 million of costs associated with early retirement and special severance programs for employees affected by industry restructuring. Since the early retirement program is contingent upon the divestiture, its cost will not be accrued until that time. USGen will assume responsibility for environmental conditions at the Sellers' nonnuclear generating stations. USGen will also assume the Sellers' obligations under long-term fuel and fuel transportation contracts and certain collective bargaining agreements. In addition to the purchase of the nonnuclear generating stations, USGen will purchase NEP's entitlement to approximately 1,100 MW of power procured under long-term contracts. NEP will make a monthly fixed contribution towards the above-market cost of the purchased power of between $12.5 million and $14.2 million per month from closing through January 2008. USGen will be responsible for the balance of the costs under the purchased power contracts. The sale is subject to approval by various state and federal regulatory agencies. Several parties have objected to the sale on various grounds, including allegations that, following the sale, USGen would be able to exercise unlawful levels of market power. On February 25, 1998, the FERC issued an order that rejected the market power allegations, approved the sale, and conditionally approved most supporting filings. While the timing of receipt of final regulatory approvals is uncertain, receipt of all approvals is unlikely before mid-1998. Closing is contingent upon all regulatory approvals being obtained by February 1999. In order to meet the terms of NEP's mortgage indenture, NEP will be required, prior to the consummation of the sale, to either defease or call approximately $278 million of its mortgage bonds. Any defeasance of bonds would be by deposit of cash representing principal and interest to the maturity date, or interest, principal, and general redemption premium to an earlier redemption date. In addition, NEP will retire approximately $372 million of mortgage bonds securing the issuance of a like amount of pollution control revenue bonds (PCRBs) by various public agencies. However, NEP expects that substantially all of the underlying PCRBs will remain outstanding as unsecured obligations of NEP. In addition, the long-term debt of NERC will be retired prior to the closing. As part of the divestiture plan, in February 1998, NEEI sold its oil and gas properties for approximately $50 million. NEEI's loss on the sale of approximately $120 million, before tax, has been reimbursed by NEP. See Note H for information on NEEI debt retirements. At the divestiture date, any gain or loss from the divestiture of nonnuclear generating assets and oil and gas assets will be recorded as a regulatory asset or liability to be recovered as part of NEP's stranded costs, through the ongoing transition access charge, consistent with the settlement agreements. NEP may be required to record a liability for the monthly fixed contribution towards the above-market cost of purchased power. In such an event, NEP would also record a regulatory asset consistent with the settlement agreements. In addition, NEP will endeavor to sell, or otherwise transfer, its minority interest in three nuclear power plants and a 60 MW interest in a fossil-fueled generating station in Maine to nonaffiliates. Until such time as the nuclear interests are divested, NEP will share with customers 80 percent of the revenues and operating costs related to the units, with shareholders retaining the balance. In the event that NEP determines that it has an impairment of its nuclear plant balances under FAS 121, it will record any such impairment as a regulatory asset. Note D - Commitments and Contingencies 1. Plant expenditures The NEES subsidiaries' utility plant expenditures are estimated to be $200 million in 1998. At December 31, 1997, substantial commitments had been made relative to future planned expenditures. 2. Natural gas pipeline capacity In connection with serving NEP's gas-fueled electric generation facilities, NEP has entered into several contracts for natural gas pipeline capacity and gas supply. These agreements require minimum fixed payments that are currently estimated to be $59 million to $62 million per year from 1998 to 2002. Under these agreements, remaining fixed payments from 2003 through 2014 total approximately $501 million. In connection with managing its fuel supply, NEP uses a portion of this pipeline capacity to sell natural gas. Proceeds from the sale of natural gas and pipeline capacity of $41 million, $50 million, and $71 million in 1997, 1996, and 1995, respectively, have been passed on to customers through NEP's fuel clause. These proceeds have been reflected as an offset to the related fuel expense in "Fuel for generation" in NEP's statements of income. Natural gas sales decreased in 1996 as a result of the Manchester Street plant entering commercial operation in the second half of 1995. See Note C for a discussion of NEP's planned divestiture of its nonnuclear generating business. 3. Long-term contracts for the purchase of electricity NEP purchases a portion of its electricity requirements pursuant to long-term contracts with owners of various generating units. These contracts expire in various years from 1998 to 2029. Certain of these contracts require NEP to make minimum fixed payments, even when the supplier is unable to deliver power, to cover NEP's proportionate share of the capital and fixed operating costs of these generating units. The fixed portion of payments under these contracts totaled $114 million in 1997, $127 million in 1996, and $150 million in 1995, excluding contracts with Yankee Atomic, Connecticut Yankee, and Maine Yankee (see Note D-5) for all periods presented. These contracts have minimum fixed payment requirements of $110 million annually from 1998 through 2001, $120 million in 2002, and approximately $950 million thereafter. Approximately 97 percent of the payments under these contracts are to Vermont Yankee and OSP, entities in which NEES subsidiaries hold ownership interests. NEP's other contracts, principally with nonutility generators, require NEP to make payments only if power supply capacity and energy are deliverable from such suppliers. NEP's payments under these contracts amounted to $265 million in 1997, $230 million in 1996, and $245 million in 1995. See Note C for a discussion of NEP's planned divestiture of its nonnuclear generating business. 4. Hazardous waste The Federal Comprehensive Environmental Response, Compensation and Liability Act, more commonly known as the "Superfund" law, imposes strict, joint and several liability, regardless of fault, for remediation of property contaminated with hazardous substances. A number of states, including Massachusetts, have enacted similar laws. The electric utility industry typically utilizes and/or generates in its operations a range of potentially hazardous products and by-products. NEES subsidiaries currently have in place an internal environmental audit program and an external waste disposal vendor audit and qualification program intended to enhance compliance with existing federal, state, and local requirements regarding the handling of potentially hazardous products and by-products. NEES and/or its subsidiaries have been named as potentially responsible parties (PRPs) by either the United States Environmental Protection Agency (EPA) or the Massachusetts Department of Environmental Protection for 20 sites at which hazardous waste is alleged to have been disposed. Private parties have also contacted or initiated legal proceedings against NEES and certain subsidiaries regarding hazardous waste cleanup. The most prevalent types of hazardous waste sites with which NEES and its subsidiaries have been associated are manufactured gas locations. (Until the early 1970s, NEES was a combined electric and gas holding company system.) NEES is aware of approximately 40 such manufactured gas locations, mostly located in Massachusetts. The NEES companies have been identified as PRPs at 10 of these manufactured gas locations, which are included in the 20 PRP sites discussed above. NEES has reported the existence of all manufactured gas locations of which it is aware to state environmental regulatory agencies. NEES is engaged in various phases of investigation and remediation work at approximately 20 of the manufactured gas locations. NEES and its subsidiaries are currently aware of other possible hazardous waste sites, and may in the future become aware of additional sites, that they may be held responsible for remediating. In 1993, the Massachusetts Department of Public Utilities approved a settlement agreement regarding the rate recovery of remediation costs of former manufactured gas sites and certain other hazardous waste sites located in Massachusetts. Under that agreement, qualified costs related to these sites are paid out of a special fund established on Massachusetts Electric's books. Massachusetts Electric made an initial $30 million contribution to the fund. Rate-recoverable contributions of $3 million, adjusted since 1993 for inflation, are added annually to the fund along with interest and any recoveries from insurance carriers. At December 31, 1997, the fund had a balance of $45 million. NEES had a regulatory liability of $16 million on its books at the end of 1997, all of which is included in the fund. This regulatory liability reflects $15 million, plus interest, transferred from existing reserves for refunds under a 1996 Massachusetts industry restructuring settlement, which is more fully described in Note B. Predicting the potential costs to investigate and remediate hazardous waste sites continues to be difficult. There are also significant uncertainties as to the portion, if any, of the investigation and remediation costs of any particular hazardous waste site that may ultimately be borne by NEES or its subsidiaries. The NEES companies have recovered amounts from certain insurers, and, where appropriate, intend to seek recovery from other insurers and from other PRPs, but it is uncertain whether, and to what extent, such efforts will be successful. At December 31, 1997, NEES had total reserves for environmental response costs of $44 million. NEES believes that hazardous waste liabilities for all sites of which it is aware, and which are not covered by a rate agreement, are not material to its financial position. In October 1996, the American Institute of Certified Public Accountants issued new accounting rules for Environmental Remediation Liabilities which became effective in 1997. These new rules did not have a material effect on NEES' financial position or results of operations. See Note C for a discussion of NEP's planned divestiture of its nonnuclear generating business. 5. Nuclear units Nuclear Units Permanently Shut Down Three of the four regional nuclear generating companies in which NEP has a minority interest own nuclear generating units which have been permanently shut down. These three units are as follows:
Future Estimated NEP's Investment Billings to NEP Unit % $(millions) Date Retired $(millions) - ---------------------------------------------------------------------------- Yankee Atomic 30 7 February 1992 44 Connecticut Yankee 15 17 December 1996 92 Maine Yankee 20 16 August 1997 164
In the case of each of these units, NEP has recorded an estimate of the total future payment obligation as a liability and an offsetting regulatory asset, reflecting estimated future billings from the companies. In a 1993 decision, the FERC allowed Yankee Atomic to recover its undepreciated investment in the plant as well as unfunded nuclear decommissioning costs and other costs. Connecticut Yankee and Maine Yankee have both filed similar requests with the FERC. Several parties have intervened in opposition to both filings. NEP's stranded cost settlements allow NEP to recover all costs that the FERC allows the Yankee companies to bill to NEP. In October 1997, the Citizen's Awareness Network and Nuclear Information and Resource Service filed a petition with the Nuclear Regulatory Commission (NRC) that would require formal NRC approval of a decommissioning plan for the Connecticut Yankee and Maine Yankee plants. In 1998, the petitioners indicated their intention to file a request with the NRC designed to overturn a current NRC rule on decommissioning. NEP cannot predict what impact, if any, these activities will have on the cost of decommissioning the plants. At Maine Yankee, the NRC has identified numerous apparent violations of its regulations, which may result in the assessment of significant civil penalties. In the 1970s, NEP and several other shareholders (Sponsors) of Maine Yankee entered into 27 contracts (Secondary Purchase Agreements) under which they sold portions of their entitlement to Maine Yankee power output through 2002 to various entities, primarily municipal and cooperative systems in New England (Secondary Purchasers). Virtually all of the Secondary Purchasers have ceased making payments under the Secondary Purchase Agreements and have demanded arbitration, claiming that such agreements excuse further payments upon plant shutdown. NEP has notified the Secondary Purchasers that the shutdown does not relieve them of their obligation to make payments under the Secondary Purchase Agreements and that they are in default of such agreements. NEP has further asked the FERC to enforce NEP's rights under the agreements. In the event that no further payments are forthcoming from Secondary Purchasers, NEP, as a primary obligor to Maine Yankee, would be required to pay an additional $9 million of future shutdown costs. These costs are not included in the $164 million estimate disclosed in the table above. Shutdown costs are recoverable from customers under the stranded cost settlements. A Maine statute provides that if both Maine Yankee and its decommissioning trust fund have insufficient assets to pay for the plant decommissioning, the owners of Maine Yankee are jointly and severally liable for the shortfall. Operating Nuclear Units NEP has minority interests in three other nuclear generating units, Vermont Yankee, Millstone 3, and Seabrook 1. In October 1996, the NRC issued letters to operators of nuclear power plants requiring them to document that the plants are operated and maintained within their design and licensing bases, and that any deviations are reconciled in a timely manner. The Seabrook 1 and Vermont Yankee nuclear power plants responded to the NRC letters in February 1997. Millstone 3 is currently shut down and has been placed on the NRC "Watch List," signifying that its safety performance exhibits sufficient weakness to warrant increased NRC attention. Millstone 3 may not restart without NRC approval. Uncertainties regarding the future of nuclear generating stations, particularly older units, such as Vermont Yankee, are increasing rapidly and could adversely affect their service lives, availability, and costs. These uncertainties stem from a combination of factors, including the acceleration of competitive pressures in the power generation industry and increased NRC scrutiny. NEP performs periodic economic viability reviews of operating nuclear units in which it holds ownership interests. Millstone 3 In April 1996, the NRC ordered Millstone 3, which has experienced numerous technical and nontechnical problems, to remain shut down pending verification that the unit's operations are in accordance with NRC regulations and the unit's operating license. Millstone 3 is operated by a subsidiary of Northeast Utilities (NU). NEP is not an owner of the Millstone 1 and 2 nuclear generating units, which are also shut down under NRC orders. A number of significant prerequisites must be fulfilled prior to restart of Millstone 3, including certification by NU that the unit adequately conforms to its design and licensing bases, an independent verification of corrective actions taken at the unit, an NRC assessment concluding a safety conscious work environment exists, public meetings, and a vote of the NRC Commissioners. NEP cannot predict when Millstone 3 will be allowed by the NRC to restart, but believes restart of the unit is not likely prior to the summer of 1998. Since April 1996, NEP has incurred an estimated $35 million in incremental replacement power costs, which it has been recovering from customers through its fuel clause. During the outage, NEP is incurring incremental replacement power costs of approximately $2 million per month. Several criminal investigations related to Millstone 3 are ongoing. In December 1997, the NRC assessed civil penalties totaling $2.1 million for numerous violations at the three Millstone units. NEP's share of this fine was less than $100,000. The Connecticut Department of Environmental Protection and the Connecticut Attorney General have filed suit against NU for alleged wastewater discharge violations at the Millstone units, which may result in the assessment of substantial civil penalties. In August 1997, NEP filed suit against NU in Massachusetts Superior Court for damages resulting from the tortious conduct of NU relating to Millstone 3. NEP is seeking compensation for the losses it has suffered, including the costs of lost power and costs necessary to assure that Millstone 3 can safely return to operation. NEP also seeks punitive damages. NU has filed for dismissal of the suit and sought to consolidate it with suits filed by other joint owners in Massachusetts Superior Court. NEP also sent a demand for arbitration to Connecticut Light & Power Company and Western Massachusetts Electric Company, both subsidiaries of NU, seeking damages resulting from their breach of obligations under an agreement with NEP and others regarding the operation and ownership of Millstone 3. Decommissioning Trust Funds Each nuclear unit in which NEP has an ownership interest has established a decommissioning trust fund or escrow fund into which payments are being made to meet the projected costs of decommissioning. Listed below is information on each operating nuclear plant in which NEP has an ownership interest. NEP is liable for its share of decommissioning costs for Millstone 3, Seabrook 1, and all of the Yankees. Decommissioning costs include not only estimated costs to decontaminate the units as required by the NRC, but also costs to dismantle the uncontaminated portion of the units. NEP records decommissioning costs on its books consistent with its rate recovery. NEP is recovering its share of projected decommissioning costs for Millstone 3 and Seabrook 1 through depreciation expense. In addition, NEP is paying its portion of projected decommissioning costs for all of the Yankees through purchased power expense. Such costs reflect estimates of total decommissioning costs approved by the FERC.
NEP's share of (millions of dollars) -------------------------------------------------- Nep's Estimated Decommissioning Ownership Net Decommissioning Fund License Unit Interest (%) Plant Assets Cost (in 1997 $) Balances* Expiration - ---- -------------------------------------- ---------- ---------- Vermont Yankee 20 35 77 34 2012 Millstone 3 12 366 66 18** 2025 Seabrook 1*** 10 54 47 9** 2026 * Certain additional amounts are anticipated to be available through tax deductions. ** Fund balances are included in "Other investments" on the balance sheets. Any differences from market value are not material. *** Proposed legislation in New Hampshire would make owners of Seabrook 1 proportional guarantors for decommissioning costs in the event that an owner without a franchise service territory fails to fund its share of decommissioning costs.
There is no assurance that decommissioning costs actually incurred by Vermont Yankee, Millstone 3, or Seabrook 1 will not substantially exceed these amounts. For example, decommissioning cost estimates assume the availability of permanent repositories for both low-level and high-level nuclear waste; those repositories do not currently exist. If any of the units were shut down prior to the end of their operating licenses, which NEP believes is likely, the funds collected for decommissioning to that point would be insufficient. Under the settlement agreements discussed in Note B, NEP will recover decommissioning costs through transition access charges. The Nuclear Waste Policy Act of 1982 establishes that the federal government (through the Department of Energy (DOE)) is responsible for the disposal of spent nuclear fuel. The federal government requires NEP to pay a fee based on its share of the net generation from the Millstone 3 and Seabrook 1 nuclear units. NEP is recovering this fee through its fuel clause. Similar costs are incurred by the Vermont Yankee nuclear generating unit. These costs are billed to NEP and also recovered from customers through NEP's fuel clause. Ruling on a lawsuit brought against the DOE by numerous utilities and state regulatory commissions, the Court of Appeals for the District of Columbia (Court) held that the DOE is obligated to begin disposing of utilities' spent nuclear fuel by January 31, 1998. The DOE failed to meet this deadline. The utilities, including the operators of the units in which NEP has an obligation, are assessing their future options. In February 1998, Maine Yankee petitioned the Court to compel the DOE to remove Maine Yankee's spent fuel from the plant site. Nuclear Insurance The Price-Anderson Act limits the amount of liability claims that would have to be paid in the event of a single incident at a nuclear plant to $8.9 billion (based upon 110 licensed reactors). The maximum amount of commercially available insurance coverage to pay such claims is $200 million. The remaining $8.7 billion would be provided by an assessment of up to $79.3 million per incident levied on each of the participating nuclear units in the United States, subject to a maximum assessment of $10 million per incident per nuclear unit in any year. The maximum assessment, which was most recently adjusted in 1993, is adjusted for inflation at least every five years. NEP's current interest in the Yankees (excluding Yankee Atomic), Millstone 3, and Seabrook 1 would subject NEP to a $58.0 million maximum assessment per incident. NEP's payment of any such assessment would be limited to a maximum of $7.3 million per incident per year. As a result of the permanent cessation of power operation of the Yankee Atomic plant, Yankee Atomic has received from the NRC a partial exemption from obligations under the Price-Anderson Act. However, Yankee Atomic must continue to maintain $100 million of commercially available nuclear insurance coverage. Connecticut Yankee and Maine Yankee have filed with the NRC for similar exemptions. Each of the nuclear units in which NEP has an ownership interest also carries nuclear property insurance to cover the costs of property damage, decontamination or premature decommissioning, and workers' claims resulting from a nuclear incident. These policies may require additional premium assessments if losses relating to nuclear incidents at units covered by this insurance occurring in a prior six-year period exceed the accumulated funds available. NEP's maximum potential exposure for these assessments, either directly, or indirectly through purchased power payments to the Yankees, is approximately $8 million per year. 6. Town of Norwood dispute In April 1997, the Town of Norwood, Massachusetts filed a lawsuit against NEP in the United States District Court for the District of Massachusetts. NEP is a wholesale power supplier for Norwood pursuant to rates approved by the FERC. Norwood alleges that NEP's proposed divestiture of its power generation assets would violate the terms of a 1983 power contract which settled an antitrust lawsuit brought by Norwood against NEP. Norwood also alleges that NEP's proposed divestiture plan and recovery of stranded investment costs contravene federal antitrust laws. Norwood seeks an injunction enjoining the divestiture and an unspecified amount of treble damages (a specific claim for $450 million was withdrawn). Norwood's motion for a preliminary injunction of the divestiture was denied on September 8, 1997. On November 21, 1997, Norwood filed an amended complaint making new allegations relating to the sale of NEP's generating assets and naming as additional defendants, NEES, USGen and USGen's affiliate, PG&E. NEP continues to believe that its divestiture plan will promote competition in the wholesale power generation market and that it has met and will continue to meet its contractual commitments to Norwood. On January 9, 1998, the defendants filed a motion to dismiss the lawsuit. 7. Hydro-Quebec arbitration In 1996, various New England utilities which are members of the New England Power Pool, including NEP, submitted a dispute to arbitration regarding their Firm Energy Purchased Power Contract with Hydro-Quebec. In June 1997, Hydro-Quebec presented a damage claim of approximately $37 million for past damages, of which NEP's share would have been approximately $6 to $9 million. The claims involved a dispute over the components of a pricing formula and additional costs under the contract. With respect to ongoing claims, NEP had been paying Hydro-Quebec the higher amount (additional costs of approximately $3 million per year) since July 1996 under protest and subject to refund. In October 1997, an arbitrator ruled in favor of the New England utilities in all respects. NEP has made a demand for refund. Hydro-Quebec has not yet refunded any monies and has appealed the decision. On November 9, 1997, NEP and the other utilities began a second arbitration to enforce the first decision. Refunds received from Hydro-Quebec will be passed on to customers through NEP's fuel clause. Note E - Employee Benefits 1. Pension plans The NEES companies' retirement plans are noncontributory defined-benefit plans covering substantially all employees. The plans provide pension benefits based on the employee's compensation during the five years prior to retirement. The NEES companies' funding policy is to contribute each year the net periodic pension cost for that year. However, the contribution for any year will not be less than the minimum contribution required by federal law or greater than the maximum tax deductible amount. Net pension cost for 1997, 1996, and 1995 included the following components:
Year ended December 31 (thousands of dollars) 1997 1996 1995 -------- -------- -------- Service cost - benefits earned during the period $ 15,019 $ 14,918 $ 14,167 Plus (less): Interest cost on projected benefit obligation 52,497 51,461 54,821 Return on plan assets at expected long-term rate (55,606) (52,085) (49,691) Amortization 1,580 2,887 5,589 -------- -------- -------- Net pension cost $ 13,490 $ 17,181 $ 24,886 -------- -------- -------- Actual return on plan assets $130,000 $ 91,571 $130,979 -------- -------- --------
Year ended December 31 1998 1997 1996 1995 ----- ----- ----- ----- Assumptions used to determine pension cost: Discount rate 6.75% 7.25% 7.25% 8.25% Average rate of increase in future compensation levels 4.13% 4.13% 4.13% 4.63% Expected long-term rate of return on assets 8.50% 8.50% 8.50% 8.75%
The decrease in 1996 costs reflects additional amounts recorded in the fourth quarter of 1995 related to certain supplemental benefit changes. The following table sets forth the retirement plans' funded status:
At December 31 (millions of dollars) 1997 1996 ----------------------------------------------------- Regular Supplemental Regular Supplemental Plans Plans Plans Plans ----- ----- ----- ----- Benefits earned Actuarial present value of accumulated benefit liability: Vested $647 $ 51 $640 $ 47 Nonvested 18 2 19 1 ---- ---- ---- ---- Total $665 $ 53 $659 $ 48 ---- ---- ---- ---- Reconciliation of funded status Actuarial present value of projected benefit liability $757 $ 62 $753 $ 54 Unrecognized prior service costs (8) - (9) - FAS No. 87 transition liability not yet recognized (amortized) (1) (3) (1) (3) Net gain (loss) not yet recognized (amortized) 61 (9) 40 (3) Additional minimum liability recognized - 4 - 3 ---- ---- ---- ---- 809 54 783 51 ---- ---- ---- ---- Pension fund assets at fair value 834 - 812 - FAS No. 87 transition asset not yet recognized (amortized) (8) - (10) - ---- ---- ---- ---- 826 - 802 - ---- ---- ---- ---- Accrued pension/(prepaid) payments recorded on books $(17) $ 54 $(19) $ 51 ---- ---- ---- ----
The plans' funded status at December 31, 1997 and 1996 were calculated using the assumed rates from 1998 and 1997, respectively, and the 1983 Group Annuity Mortality table. Plan assets are composed primarily of corporate equity, debt securities, and cash equivalents. In addition to its regular pension funds shown in the table above, NEES and its subsidiaries have a separate trust fund, commonly referred to as a Rabbi Trust, for certain supplemental pensions and deferred compensation for key executives and employees. The Rabbi Trust is currently invested in municipal bonds, equities, and NEES shares, and was invested in short-term investments and NEES shares in 1996. At December 31, 1997 and 1996, the Rabbi Trust held 148,875 and 102,957 NEES shares, respectively, accounted for as treasury stock. At the end of 1997 and 1996, the difference between cost and the market value of investments, other than NEES shares, in the Rabbi Trust was approximately $4.8 million, after tax, and $0, respectively. The market value of such external investments was $53 million and $45 million at December 31, 1997 and 1996, respectively. 2. Postretirement benefit plans other than pensions (PBOPs) The NEES subsidiaries provide health care and life insurance coverage to eligible retired employees. Eligibility is based on certain age and length of service requirements and in some cases retirees must contribute to the cost of their coverage. The total cost of PBOPs for 1997, 1996, and 1995 included the following components:
Year ended December 31 (thousands of dollars) 1997 1996 1995 -------- -------- -------- Service cost - benefits earned during the period $ 6,527 $ 6,794 $ 7,137 Plus (less): Interest cost on accumulated benefit obligation 24,249 24,667 29,377 Return on plan assets at expected long-term rate (16,397) (12,958) (9,742) Amortization 11,110 13,099 16,204 -------- -------- -------- Net postretirement benefit cost $ 25,489 $ 31,602 $ 42,976 -------- -------- -------- Actual return on plan assets $ 38,210 $ 24,881 $ 29,054 -------- -------- --------
Year ended December 31 1998 1997 1996 1995 ------ ------ ------ ------ Assumptions used to determine postretirement benefit cost: Discount rate 6.75% 7.25% 7.25% 8.25% Expected long-term rate of return on assets 8.25% 8.25% 8.25% 8.50% Health care cost rate - 1995 to 1999 5.25% 8.00% 8.00% 8.50% Health care cost rate - 2000 to 2004 5.25% 6.25% 6.25% 8.50% Health care cost rate - 2005 and beyond 5.25% 5.25% 5.25% 6.25%
The following table sets forth benefits earned and the plans' funded status:
At December 31 (millions of dollars) 1997 1996 ------ ------ Accumulated postretirement benefit obligation: Retirees $ 216 $ 236 Fully eligible active plan participants 28 24 Other active plan participants 104 109 ------ ------ Total benefits earned 348 369 Unrecognized prior service costs (1) (1) Unrecognized transition obligation (276) (294) Net gain not yet recognized 153 101 ------ ------ 224 175 ------ ------ Plan assets at fair value 239 202 ------ ------ Prepaid postretirement benefit costs recorded on books $ 15 $ 27 ------ ------
The plans' funded status at December 31, 1997 and 1996 were calculated using the assumed rates in effect for 1998 and 1997, respectively. The assumptions used in the health care cost trends have a significant effect on the amounts reported. Increasing the assumed rates by 1 percent in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997 by approximately $42 million and the net periodic cost for 1997 by approximately $5 million. The NEES subsidiaries fund the annual tax-deductible contributions. Plan assets are invested in equity and debt securities and cash equivalents. 3. Stock-based compensation At December 31, 1997, NEES has three stock-based compensation plans and measures its compensation cost for those plans using the method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. The compensation cost that has been charged against income for these plans was $3.3 million, $3.7 million, and $1.6 million for 1997, 1996, and 1995, respectively. If compensation cost for stock-based compensation had been accounted for under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the 1997 cost figures shown above would have been slightly smaller. Note F - Income Taxes Total income taxes in the statements of consolidated income are as follows:
Year ended December 31 (thousands of dollars) 1997 1996 1995 -------- -------- -------- Income taxes charged to operations $152,024 $139,199 $128,340 Income taxes charged to "Other income" (7,268) (3,018) 762 -------- -------- -------- Total income taxes $144,756 $136,181 $129,102 -------- -------- --------
Total income taxes, as shown above, consist of the following components:
Year ended December 31 (thousands of dollars) 1997 1996 1995 -------- -------- -------- Current income taxes $175,934 $166,509 $105,046 Deferred income taxes (29,260) (28,652) 25,578 Investment tax credits, net (1,918) (1,676) (1,522) -------- -------- -------- Total income taxes $144,756 $136,181 $129,102 -------- -------- --------
Total income taxes, as shown above, consist of federal and state components as follows:
Year ended December 31 (thousands of dollars) 1997 1996 1995 -------- -------- -------- Federal income taxes $118,317 $111,573 $103,503 State income taxes 26,439 24,608 25,599 -------- -------- -------- Total income taxes $144,756 $136,181 $129,102 -------- -------- --------
Investment tax credits of subsidiaries are deferred and amortized over the estimated lives of the property giving rise to the credits. Although investment tax credits were generally eliminated by the 1986 tax legislation, additional carryforward amounts continue to be recognized. With regulatory approval, the subsidiaries have adopted comprehensive interperiod tax allocation (normalization) for temporary book/tax differences. Total income taxes differ from the amounts computed by applying the federal statutory tax rates to income before taxes. The reasons for the differences are as follows:
Year ended December 31 (thousands of dollars) 1997 1996 1995 -------- -------- -------- Computed tax at statutory rate $131,989 $123,053 $119,892 Increases (reductions) in tax resulting from: Reversal of deferred taxes recorded at a higher rate (2,216) (2,175) (3,306) Amortization of investment tax credits (4,469) (4,347) (4,443) State income tax, net of federal income tax benefit 17,185 15,995 16,639 All other differences 2,267 3,655 320 -------- -------- -------- Total income taxes $144,756 $136,181 $129,102 -------- -------- --------
The following table identifies the major components of total deferred income taxes:
At December 31 (millions of dollars) 1997 1996 ------ ------ Deferred tax asset: Plant related $ 99 $ 110 Investment tax credits 39 37 All other 152 143 ------ ------ 290 290 ------ ------ Deferred tax liability: Plant related (821) (811) Equity AFDC (51) (53) All other (138) (177) ------ ------ (1,010) (1,041) ------ ------ Net deferred tax liability $ (720) $ (751) ------ ------
There were no valuation allowances for deferred tax assets deemed necessary. Federal income tax returns for NEES and its subsidiaries have been examined and reported on by the Internal Revenue Service through 1993. Note G - Short-Term Borrowings and Other Current Liabilities At December 31, 1997, NEES and its consolidated subsidiaries had lines of credit and standby bond purchase facilities with banks totaling $1.2 billion. These lines and facilities were used at December 31, 1997 for liquidity support for $252 million of commercial paper borrowings and $372 million of NEP mortgage bonds in tax-exempt commercial paper mode (see Note H). Fees are paid on the lines and facilities in lieu of compensating balances. The weighted average rate on outstanding short-term borrowings was 5.66 percent at December 31, 1997. The fair value of the NEES subsidiaries' short-term debt equals carrying value. The components of other current liabilities are as follows:
At December 31 (thousands of dollars) 1997 1996 -------- -------- Accrued wages and benefits $ 58,281 $ 37,872 Rate adjustment mechanisms 27,152 50,614 Customer deposits 11,059 10,595 Other 23,510 10,501 -------- -------- $120,002 $109,582 -------- --------
Note H - Long-Term Debt Substantially all of the properties of NEP, Massachusetts Electric, and Narragansett Electric are subject to the lien of mortgage indentures under which mortgage bonds have been issued. The aggregate payments to retire maturing long-term debt are as follows:
(thousands of dollars) 1998 1999 2000 2001 2002 ------- ------- -------- ------- ------- Maturing long-term debt: NEP* $50,000 $10,000 $ 55,000 $ - $ - Other NEES subsidiaries 26,470 24,480 37,485 6,495 41,500 Mandatory prepayments: Hydro-Transmission companies 11,520 11,520 11,520 10,790 10,440 NEEI** - 17,000 30,000 30,000 45,000 NERC*** 1,920 2,280 2,280 2,280 2,280 ------- ------- -------- ------- ------- Total $89,910 $65,280 $136,285 $49,565 $99,220 ------- ------- -------- ------- ------- * See Note C for information on potential NEP bond defeasance. ** NEEI debt retired on February 5, 1998. *** $29 million of NERC debt will be retired in 1998, upon completion of the sale of the nonnuclear generating business to USGen.
The terms of $372 million of variable rate PCRBs collateralized by NEP mortgage bonds at December 31, 1997 require NEP to reacquire the bonds under certain limited circumstances. At December 31, 1997, interest rates on NEP's variable rate bonds ranged from 3.70 percent to 4.85 percent. Also, at December 31, 1997, interest rates on NEEI's debt ranged from 6.11 percent to 6.17 percent. At December 31, 1997, the NEES subsidiaries' long-term debt had a carrying value of approximately $1,577,000,000 and a fair value of approximately $1,657,000,000. The fair value of debt that reprices frequently at market rates approximates carrying value. The fair market value of the NEES subsidiaries' long-term debt was estimated based on the quoted prices for similar issues or on the current rates offered to the NEES companies for debt of the same remaining maturity. Note I - Preferred Stock Tender Offer On December 19, 1997, NEES purchased, pursuant to a tender offer, preferred stock of its subsidiaries with an aggregate par value of $87 million. These purchases resulted in an after-tax charge to net income of approximately $5 million. Note J - Supplementary Quarterly Financial Information (unaudited)
1997 Quarter ended Mar. 31 June 30 Sept. 30 Dec. 31 -------- -------- -------- -------- (thousands of dollars, except per share amounts) Operating revenue $638,146 $577,625 $628,606 $658,214 Operating income $ 94,962 $ 66,583 $104,524 $100,792 Net income $ 61,820 $ 32,232 $ 67,746 $ 58,240 Net income per average common share, basic and diluted $ .95 $ .50 $ 1.04 $ .90* -------- -------- -------- --------
1996 Quarter ended Mar. 31 June 30 Sept. 30 Dec. 31 -------- -------- -------- ------- (thousands of dollars, except per share amounts) Operating revenue $586,220 $551,110 $616,857 $596,511 Operating income $ 94,955 $ 69,133 $ 97,384 $ 86,646 Net income $ 61,496 $ 35,001 $ 64,375 $ 48,064 Net income per average common share, basic and diluted $ .95 $ .54 $ .99 $ .74 -------- -------- -------- ------- * See "Overview of Financial Results" and "Operating Revenue" sections of Financial Review for a discussion of factors contributing to the fourth quarter increase in net income over prior year.
Report of Management The management of New England Electric System is responsible for the integrity of the consolidated financial statements included in this Annual Report. The financial statements were prepared in accordance with generally accepted accounting principles using management's informed best estimates and judgments where appropriate to fairly present the financial condition of the NEES companies and their results of operations. The information included elsewhere in this report is consistent with the financial statements. The NEES companies maintain an accounting system and system of internal controls which are designed to provide reasonable assurance as to the reliability of the financial records, the protection of assets, and the prevention of any material misstatement of the financial statements. The NEES companies' accounting controls have been designed to provide reasonable assurance that errors or irregularities, which could be material to the financial statements, are prevented or detected by employees within a timely period as they perform their assigned functions. The NEES companies' internal auditing staff independently assesses the effectiveness of internal controls and recommends improvements where appropriate. Coopers & Lybrand L.L.P., the NEES companies' independent accountants, are engaged to audit and express their opinion on the financial statements. Their audit includes a review of internal controls to the extent required by generally accepted auditing standards. The Audit Committee, composed solely of outside directors, meets periodically with management, the internal auditor, and the independent accountants to ensure that each is carrying out its responsibilities and to discuss auditing, internal accounting control, and financial reporting matters. Both the internal auditor and the independent accountants have free access to the Audit Committee, without management present, to discuss the results of their audit work. s/ Richard P. Sergel s/ Michael E. Jesanis Richard P. Sergel Michael E. Jesanis President and Senior Vice President Chief Executive Officer and Chief Financial Officer Report of Independent Accountants To the Board of Directors and Shareholders of New England Electric System: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of New England Electric System and subsidiaries (the Company) as of December 31, 1997 and 1996 and the related consolidated statements of income, retained earnings 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 consolidated financial position of the Company as of December 31, 1997 and 1996, and the consolidated 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. Boston, Massachusetts s/ Coopers & Lybrand L.L.P. March 2, 1998 Shareholder information For shareholder information or assistance, write or call Shareholder Services at: New England Electric System Shareholder Services P.O. Box 770 Westborough, MA 01581 Toll-free number: 1-800-466-7215 Local number: (508) 389-4900 Fax: (508) 836-0276 E-mail: shrser@neesnet.com Dividend reinvestment Shareholders of New England Electric System common shares who hold their shares in registered form are eligible to participate in the Dividend Reinvestment and Common Share Purchase Plan. The Plan provides participants the opportunity to reinvest their dividends and send in optional cash payments to purchase additional common shares. These shares will be newly issued shares or shares purchased in the open market. The Company will pay all brokerage commissions and service charges associated with the Plan. For more information on the Plan, please contact Shareholder Services at our toll-free number listed above. Direct deposit of dividends Shareholders who hold New England Electric System common shares in their own name may request to have their dividends directly deposited into their checking or savings account. This service is provided without fees. If you participate in Direct Deposit, you will receive a credit advice for your records. To sign up for this service, please call Shareholder Services on our toll-free number to request an authorization form. Change of address Please contact Shareholder Services on our toll-free number to notify us of your address change. Form 10-K Copies of the Annual Report on Form 10-K to the Securities and Exchange Commission for 1997 are available upon request at no charge by writing to the address at left. Annual meeting The annual meeting of New England Electric System will be held at Mechanics Hall in Worcester, MA on April 28, 1998 at 10:30 a.m. Stock exchange listings New England Electric System common shares are listed on the New York Stock Exchange and the Boston Stock Exchange under the symbol NES. Transfer agent Certificates for transfer should be mailed to our transfer agent at: Bank of Boston, c/o Boston EquiServe P.O. Box 8040, Boston, MA 02266-8040 Note NEES intends to transfer its record keeping and stock transfer functions to Bank of New York in 1998. A notice will be sent to all shareholders when the conversion date is determined.
New England Electric System common shares 1997 1996 ---- ---- Price Range ($) Price Range ($) -------------- -------------- High Low Dividend High Low Dividend Declared $ Declared $ - ---------------------------------------------------------------------------------------- First Quarter 35.625 33.375 .590 40.625 36.125 .590 Second Quarter 37.125 33.250 .590 38.875 32.875 .590 Third Quarter 39.6875 36.250 .590 36.375 31.125 .590 Fourth Quarter 43.3125 37.250 .590 35.625 31.000 .590
The total number of shareholders at December 31, 1997 was 47,978. [MAP OF SERVICE AREAS] NEES Subsidiaries As of March 1, 1998 Massachusetts Electric Company 25 Research Drive, Westborough, Massachusetts 01582 The Narragansett Electric Company 280 Melrose Street, Providence, Rhode Island 02901 Granite State Electric Company 407 Miracle Mile, Suite 1, Lebanon, New Hampshire 03766 Nantucket Electric Company 25 Research Drive, Westborough, Massachusetts 01582 AllEnergy Marketing Company, L.L.C. 95 Sawyer Road, Waltham, Massachusetts 02154 Granite State Energy, Inc. 4 Park Street, Concord, New Hampshire 03301 NEES Energy, Inc. 25 Research Drive, Westborough, Massachusetts 01582 Narragansett Energy Resources Company 280 Melrose Street, Providence, Rhode Island 02901 New England Power Company 25 Research Drive, Westborough, Massachusetts 01582 NEES Communications, Inc. 25 Research Drive, Westborough, Massachusetts 01582 NEES Global Transmission, Inc. 25 Research Drive, Westborough, Massachusetts 01582 New England Electric Transmission Corporation 4 Park Street, Concord, New Hampshire 03301 New England Hydro-Transmission Corporation 407 Miracle Mile, Suite 1, Lebanon, New Hampshire 03766 New England Hydro-Transmission Electric Company, Inc. 25 Research Drive, Westborough, Massachusetts 01582 New England Power Service Company 25 Research Drive, Westborough, Massachusetts 01582 [PHOTO OF EXECUTIVE TEAM] NEES Officers As of March 1, 1998 Richard P. Sergel President and Chief Executive Officer Alfred D. Houston* Executive Vice President Cheryl A. LaFleur Senior Vice President, General Counsel, and Secretary Michael E. Jesanis Senior Vice President and Chief Financial Officer David C. Kennedy Vice President John G. Cochrane Treasurer Executive Officers Of Major Subsidiaries Lawrence E. Bailey President of New England Power Company William H. Heil Chairman and Chief Executive Officer of AllEnergy Marketing Company, L.L.C. Robert L. McCabe Chairman of the electricity delivery subsidiaries (Massachusetts Electric Company, Nantucket Electric Company, The Narragansett Electric Company, and Granite State Electric Company) Lawrence J. Reilly President and Chief Executive Officer of the electricity delivery subsidiaries Executive Team Photo 1.Lawrence J. Reilly 2.Robert L. McCabe 3.Richard P. Sergel 4.John W. Rowe (resigned as president and CEO effective 2/6/98) 5.Alfred D. Houston 6.Michael E. Jesanis 7.William H. Heil 8.Cheryl A. LaFleur 9.Lawrence E. Bailey Not pictured John G. Cochrane, David C. Kennedy * The NEES board of directors has announced its intention to elect Mr. Houston NEES chairman following the April 1998 annual meeting. NEES Directors As of March 1, 1998 Joan T. Bok Chairman of the Board, New England Electric System, Westborough, Massachusetts - - Corporate Responsibility Committee - - Executive Committee William M. Bulger President, University of Massachusetts, Boston, Massachusetts - - Audit Committee Alfred D. Houston* Executive Vice President, New England Electric System, Westborough, Massachusetts - - Executive Committee Paul L. Joskow Chairman of the Department of Economics, Massachusetts Institute of Technology, Cambridge, Massachusetts - - Audit Committee - - Executive Committee - - Nominating Committee John M. Kucharski Chairman, President, and Chief Executive Officer, EG&G, Inc., Wellesley, Massachusetts - - Compensation Committee Edward H. Ladd Chairman, Standish, Ayer & Wood, Inc., investment counselors, Boston, Massachusetts - - Executive Committee - - Nominating Committee Joshua A. McClure Former President, American Custom Kitchens, Inc., Providence, Rhode Island - - Corporate Responsibility Committee George M. Sage President and Treasurer, Bonanza Bus Lines, Inc., Providence, Rhode Island - - Compensation Committee - - Executive Committee - - Nominating Committee Richard P. Sergel President and Chief Executive Officer, New England Electric System, Westborough, Massachusetts - - Corporate Responsibility Committee - - Executive Committee Charles E. Soule Retired President and Chief Executive Officer, Paul Revere Insurance Group, Worcester, Massachusetts - - Audit Committee Anne Wexler Chairman, The Wexler Group, management consultants, Washington, D.C. - - Compensation Committee - - Executive Committee - - Nominating Committee James Q. Wilson Professor Emeritus, University of California at Los Angeles - - Corporate Responsibility Committee James R. Winoker Chief Executive Officer, Belvoir Properties, Inc., Providence, Rhode Island - - Audit Committee - - Corporate Responsibility Committee The name "New England Electric System" means the trustee or trustees for the time being (as trustee or trustees but not personally) under an Agreement and Declaration of Trust dated January 2, 1926, as amended, which is hereby referred to, and a copy of which, as amended, has been filed with the Secretary of the Commonwealth of Massachusetts. Any agreement, obligation, or liability made, entered into, or incurred by or on behalf of New England Electric System binds only its trust estate, and no shareholder, director, trustee, officer, or agent thereof assumes or shall be held to any liability therefor. This report is not to be considered as an offer to sell or buy or solicitation of an offer to sell or buy any security. [PHOTO OF NEES DIRECTORS APPEARS AT BOTTOM OF INSIDE BACK COVER] NEES directors shown in September 1997 photo are, left to right, James R. Winoker, James Q. Wilson, George M. Sage, Anne Wexler, Joshua A. McClure, John W. Rowe (resigned effective 2/6/98), Edward H. Ladd, Joan T. Bok, Paul L. Joskow, William M. Bulger, John M. Kucharski, and Charles E. Soule. (Current directors not pictured are Alfred D. Houston and Richard P. Sergel.) * See footnote of previous page. [NEES LOGO] New England Electric System 25 Research Drive Westborough, Massachusetts 01582 Telephone 508.389.2000 www.nees.com EX-24 11 NEES POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY ----------------- Each of the undersigned directors of New England Electric System (the "Company"), individually as a director of the Company, hereby constitutes and appoints John G. Cochrane, Robert K. Wulff, and Geraldine M. Zipser, individually, as attorney-in-fact to execute on behalf of the undersigned the Company's annual report on Form 10-K for the year ended December 31, 1997, to be filed with the Securities and Exchange Commission, and to execute any appropriate amendment or amendments thereto as may be required by law. Dated this 24th day of February, 1998. s/Joan T. Bok s/Joshua A. McClure _________________________ _________________________ Joan T. Bok Joshua A. McClure s/William M. Bulger s/George M. Sage _________________________ _________________________ William M. Bulger George M. Sage s/Alfred D. Houston s/Richard P. Sergel _________________________ _________________________ Alfred D. Houston Richard P. Sergel s/Paul L. Joskow s/Charles E. Soule _________________________ _________________________ Paul L. Joskow Charles E. Soule s/John M. Kucharski s/Anne Wexler _________________________ _________________________ John M. Kucharski Anne Wexler s/Edward H. Ladd s/James Q. Wilson _________________________ _________________________ Edward H. Ladd James Q. Wilson s/James R. Winoker _________________________ James R. Winoker EX-27 12 NEES FDS
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED STATEMENTS OF INCOME, RETAINED EARNINGS AND CASH FLOWS OF NEW ENGLAND ELECTRIC SYSTEM, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000071297 NEW ENGLAND ELECTRIC SYSTEM 1,000 DEC-31-1997 DEC-31-1997 12-MOS PER-BOOK 3,913,792 376,046 473,483 548,326 0 5,311,647 64,970 736,605 954,518 1,744,442 0 39,113 1,487,481 0 0 251,950 89,910 0 0 0 1,698,751 5,311,647 2,502,591 152,024 1,983,706 2,135,730 366,861 (5,515) 361,346 122,342 220,038 6,851 220,038 152,812 107,311 521,113 $3.39 $3.39 Total deferred charges includes other assets. Preferred stock reflects preferred stock of subsidiaries. Preferred stock dividends reflect preferred stock dividends of subsidiaries. Total common stockholders equity includes treasury stock at cost and unrealized gain on securities. EX-3.(II) 13 NEP EXHIBIT 3(B) As amended December 12, 1997 BY-LAWS OF NEW ENGLAND POWER COMPANY ARTICLE 1. Classes of Capital Stock The capital stock of the corporation shall consist of common stock of the par value of $20 a share, and three classes of preferred stock, 6% Cumulative Preferred Stock of the par value of $100 a share, Dividend Series Preferred Stock of the par value of $100 a share and Preferred Stock-Cumulative of the par value of 425 a share, each having respective preferences, voting rights, restrictions and qualifications as follows: Section 1. 6% Cumulative Preferred Stock and Common Stock. (Whenever in this Section 1 reference is made to "preferred" or "preferred stock", it shall be deemed to be a reference to the 6% Cumulative Preferred Stock unless expressly provided otherwise.) At every meeting of the stockholders every holder of shares of stock, whether preferred or common, shall be entitled to one vote either in person or by proxy for every such share registered in his name. The holders of the preferred stock shall be entitled to receive or to have set apart, out of the surplus or net profits of the corporation, as and when declared by the board of directors, a dividend at the rate of, but never exceeding, six per centum per annum, cumulative, on all such preferred stock outstanding at the time, which dividend shall be payable yearly, half-yearly or quarterly as the board of directors may, from time to time, fix and determine, and before any dividend shall be set apart for or paid on the common stock. Whenever a dividend is declared or paid on the preferred stock and all prior dividends on the outstanding shares of such stock shall have been paid or set apart, the board of directors may, if in its judgment, the surplus or net profits, after deducting the amount of dividends to accrue on the said outstanding preferred stock during the current year, shall be sufficient for such purpose, then or thereafter declare and pay dividends on the common stock payable yearly, half-yearly or quarterly, and payable then or thereafter out of any remaining surplus or net profits of the year then current or last past and of any previous year in which full dividends shall have been paid on the preferred stock. In case of a liquidation or dissolution or winding up (whether voluntary or involuntary) of the corporation, the holders of the preferred stock shall receive cash to the amount of the par value of such preferred stock, together with all accrued and unpaid dividends thereon (but no more), before any payment is made to the holders of the common stock, and the holders of the common stock shall be solely entitled to the entire assets of the corporation or the proceeds thereof, remaining after the payment in full, at its par value, of the preferred stock then outstanding, together with all dividends thereon accrued and unpaid. But dividends shall not cumulate upon any preferred shares for any period during which the same were not outstanding preferred shares of the corporation. If the corporation at any time increases its capital stock, and the new or additional shares are required by law to be offered proportionately to its stockholders, the holders of all classes of preferred stock only shall be entitle to subscribe for new or additional preferred stock of any class 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 2. Dividend Series Preferred Stock. A. The shares of Dividend Series Preferred Stock may be issued, as the board of directors may determine, in one or more series designated "Cumulative Preferred Stock, % Series" or, with respect to issues subsequent to July 1, 1975, "Cumulative Preferred Stock, $100 Par Value, % Series" (inserting in each case the amount of the annual dividend rate, as determined by the board of directors for each such series) or, with respect to issues with an adjustable dividend rate, "Cumulative Preferred Stock, $100 Par Value, Adjustable Rate Series " (inserting in each case an appropriate designation, as determined by the board of directors for each such series). All shares of Dividend Series Preferred Stock, irrespective of series, shall constitute one and the same class of stock and shall be of equal rank as to dividends and assets with each other and with the 6% Cumulative Preferred Stock and the Preferred Stock-Cumulative. The shares of Dividend Series Preferred Stock of different series, subject to any applicable provisions of law, may vary, as the board of directors may determine, as to the following rights and preferences: (1) the dividend rate, or method of calculation thereof, and the date from which the dividends on shares issued prior to the record date for the first dividend shall be cumulative and the date for the first dividend; (2) the redemption price or prices, or method of calculation thereof, and any restriction on the exercise by the corporation of its right to redeem such series; (3) the amount or amounts payable upon any liquidation or dissolution or winding up. (4) the terms and amount of any sinking fund provided for the purchase or redemption of shares; and (5) the conversion, participation or other special rights. B. Before any dividends on, or any distribution of assets (by purchase of shares or otherwise) to holders of, the Common Stock or any other stock ranking junior to the Dividend Series Preferred Stock as to dividends (both hereinafter called "junior stock") shall be paid or set apart for payment or otherwise provided, the holders of the Dividend Series Preferred Stock shall be entitled to receive, but only when and as declared by the board of directors, out of any funds legally available for the declaration of dividends, cumulative dividends at the annual dividend rate per share fixed for the particular series payable quarterly on the first days of January, April, July and October in each year commencing on a date specified for the first dividend date as herein provided to stockholders of record on the respective dates, not exceeding forty-five (45) days preceding such dividend payment dates fixed in advance for the purpose by the board of directors prior to the payment of each particular dividend. No dividends shall be declared on any series of the Dividend Series Preferred Stock or of any other class of preferred stock ranking on a parity therewith, as to dividends, in respect of any quarter-yearly dividend period, unless there shall likewise be declared on all shares of all series of the Dividend Series Preferred Stock and of any other class of such parity preferred stock at the time outstanding, like proportionate dividends, ratably, in proportion to the respective annual dividend rates fixed therefor, in respect of the same quarter-yearly dividend period, to the extent that such share are entitled to receive dividends for such quarter-yearly dividend period. The dividends on shares of all series of the Dividend Series Preferred Stock shall be cumulative. In the case of all shares of each particular series, the dividends on shares of such series shall be cumulative: (1) on shares issued prior to the record date for the first dividend on the shares of such series, from the date for the particular series fixed therefor; (2) on shares issued after a record date for a dividend, but prior to the dividend payment date for such dividend, from said dividend payment date; and (3) otherwise from the quarter-yearly dividend payment date next preceding the date of issue of such shares; so that dividends accrued on all outstanding shares of Dividend Series Preferred Stock to the last preceding quarterly dividend payment date shall have been paid in full or declared and set apart for payment before there shall be any distribution on, or purchase of, junior stock. The holders of the Dividend Series Preferred Stock shall not be entitled to receive any dividends thereon other than the dividends referred to in this subsection B and other than distributions provided in subsection D below. As used in this Section 2, the expression "dividends accrued" shall mean the sum of amounts with respect to all shares of Dividend Series Preferred Stock then outstanding, which as to each share shall be an amount computed at the rate per annum of the par value thereof fixed for the particular series from the date from which dividends on such share become cumulative to the date with reference to which the expression is used, irrespective of whether such amount shall have been declared as dividends or there shall have existed any funds legally available for the payment thereof, less the aggregate of all dividends paid or declared payable on or before said last mentioned date and set aside for such payment on such share. (1) on shares issued prior to the record date for the first dividend on the shares of such series, from the date for the particular series fixed therefor; (2) on share issued after a record date for a dividend, but prior to the dividend payment date for such dividend, from said dividend payment date; and (3) otherwise from the quarter-yearly dividend payment date next preceding the date of issue of such shares; so that dividends accrued on all outstanding shares of Dividend Series Preferred Stock to the last preceding quarterly dividend payment date shall have been paid in full or declared and set apart for payment before there shall be any distribution on, or purchase of, junior stock. The holders of the Dividend Series Preferred Stock shall not be entitled to receive any dividends thereon other than the dividends referred to in this subsection B and other than distributions provided in subsection D below. As used in this Section 2, the expression "dividends accrued" shall mean the sum of amounts with respect to all shares of Dividend Series Preferred Stock then outstanding, which as to each share shall be an amount computed at the rate per annum of the par value thereof fixed for the particular series from the date from which dividends on such share become cumulative to the date with reference to which the expression is used, irrespective of whether such amount shall have been declared as dividends or there shall have existed any funds legally available for the payment thereof, less the aggregate of all dividends paid or declared payable on or before said last mentioned date and set aside for such payment on such share. C. The corporation, pursuant to action of its board of directors or as provided in subsection A(8) of Section 4 of this Article I, may redeem the whole or any part of the series of the Dividend Series Preferred Stock at the time outstanding, at any time or from time to time, by paying in cash as herein provided the redemption price of the shares of the particular series fixed therefor, together with dividends accrued to the date fixed for such redemption, and by mailing, postage prepaid, at least thirty (30) days and not more than ninety (90) days prior to the date fixed for said redemption a notice specifying said redemption date to the holders of record of the Dividend Series Preferred Stock to be redeemed, at their respective addresses as the same shall appear on the books of the corporation; provided, however, that the exercise by the corporation of its right to redeem shares of any particular series may be subject to such restrictions as are determined for said series. In case of the redemption of a part only of any series of the Dividend Series Preferred Stock at the time outstanding, the corporation shall select by lot in such manner as the board of directors determines, the shares so to be redeemed. If such notice of redemption shall have been so mailed, and if on or before the redemption date specified in such notice all funds necessary for such redemption shall have been set aside by the corporation, so as to be and continue to be available therefor, then, on and after said redemption date, notwithstanding that any certificate for the shares of the Dividend Series Preferred Stock so called for redemption shall not have been surrendered for cancellation, the shares represented thereby shall no longer be deemed outstanding, the right to receive dividends thereon shall cease to accrue, and all rights of the holders thereof shall forthwith cease and terminate, except only the right of the holders thereof to receive the amount payable upon redemption thereof, but without interest; provided, however, that if, after mailing said notice as aforesaid and prior to the date of redemption specified in such notice, said funds shall be set aside by deposit in trust, for the account of the holders of the Dividend Series Preferred Stock to be redeemed, with a bank or trust company in good standing, organized under the laws of the United States of America or of The Commonwealth of Massachusetts, having a capital, undivided profits and surplus aggregating at least $5,000,000, thereupon all shares of the Dividend Series Preferred Stock with respect to which such deposit shall have been made shall no longer be deemed to be outstanding, and all rights with respect to such shares of Dividend Series Preferred Stock shall forthwith upon such deposit in trusts cease and terminate, except only the right of the holders thereof to receive from such deposit the amount payable upon the redemption but without interest. In case the holders of the Dividend Series Preferred Stock which shall have been redeemed shall not within four years of the date of redemption thereof claim any amount so deposited in trust for the redemption of such shares, such bank or trust company shall, upon demand, pay over to the corporation any such unclaimed amount so deposited with it and shall thereupon be relieved of all responsibility in respect thereof, and the corporation shall not be required to hold the amount so paid over to it separate and apart from its other funds, and thereafter the holders of such shares of Dividend Series Preferred Stock shall look only to the corporation for payment of the redemption price thereof, but without interest. If there are any dividends accrued to the last preceding quarterly dividend payment date or dates on the outstanding Dividend Series Preferred Stock or any other class of preferred stock ranking on a parity therewith as to assets (both of which are hereinafter in this sentence collectively referred to as "Preferred Stock"), (i) no Preferred Stock which is redeemable shall be redeemed, unless all such Preferred Stock shall be redeemed and unless an offer is made (a) to purchase all Preferred Stock of any series which is not redeemable at the time under limited restrictions then applicable thereto at a price equal to the then redemption price for such series if such restrictions were not applicable and (b) to purchase all Preferred Stock which is not redeemable at the time at a price equivalent to the highest then redemption price on any outstanding shares of Preferred Stock, after giving effect to the differences in par value among classes of Preferred Stock, and (ii) no Preferred Stock shall be purchased, unless an offer is made to purchase all Preferred Stock for which redemption prices applicable at the time have been established (whether or not there is then any applicable restriction on the redemption thereof) at the same percentage (not in excess of one hundred per centum (100%)) of the then applicable redemption price of each series of said stock and unless an offer is made to purchase all Preferred Stock for which redemption prices applicable at the time have not been established at the same percentage of a price equal to the then highest redemption price for any of said stock for which a redemption price applicable at the time has been established. All stock redeemed or purchased under the provisions of this subsection C shall be retired. D. In the event of any liquidation, dissolution or winding up (whether voluntary or involuntary) of the affairs of the corporation or any distribution of its capital, then before any distribution shall be made to the holders of stock ranking junior to the Dividend Series Preferred Stock as to assets, the holders of each series of the Dividend Series Preferred Stock at the time outstanding shall be entitled to be paid in cash the amount for the particular series fixed therefor, together in each case with dividends accrued thereon to the date fixed for payment of such distributive amounts, and no more. No payments on account of such distributive amounts shall be made to the holders of any series of the Dividend Series Preferred Stock or of any other class of preferred stock ranking on a parity therewith, as to assets, unless there shall likewise be paid at the same time to the holders of each other series of the Dividend Series Preferred Stock and of such parity preferred stock at the time outstanding like proportionate distributive amounts, ratably, in proportion to the full distributive amounts to which they are respectively entitled. After such payment to the holders of Dividend Series Preferred Stock, the remaining assets and funds of the corporation shall be divided and distributed among the holders of junior stock then outstanding according to the respective rights. Neither the consolidation nor the merger of the corporation with or into any other corporation shall be deemed to be a liquidation, dissolution or winding up of the corporation. E. The holders of Dividend Series Preferred Stock shall have no right to vote except as provided by law and except as hereafter specifically provided in Section 4 of this Article I. F. Except as otherwise expressly provided by law, no holder of Dividend Series Preferred Stock shall be entitled as such as a matter of right to subscribe for or purchase any part of any new or additional issue of stock or warrants carrying rights to stock, or securities convertible into stock, of any class whatever, whether now or hereafter authorized, and whether issued for cash, property, services or otherwise. If it is expressly required by law that such new or additional issue be offered proportionately to the stockholders, the holders of all classes of preferred stock only shall be entitled to subscribe for new or additional preferred stock of any class 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. G. Subject to the limitations, if any, contained in Sections 4 and 5 of this Article I, the corporation may from time to time issue additional capital stock divided into classes with such preferences as to dividends, voting power and other incidents as may be determined in accordance with applicable provisions of law and terms of outstanding capital stock. Without limiting the generality of the foregoing, any such additional capital stock may be an additional series of Dividend Series Preferred Stock or additional shares of the initial or any other series of Dividend Series Preferred Stock. H. So long as any shares of the Dividend Series Preferred Stock of any series are outstanding, the payment of dividends on stock of the corporation ranking junior to the Dividend Series Preferred Stock as to dividends or assets (other than (i) dividends payable in stock ranking junior to the Dividend Series Preferred Stock as to dividends and assets or (ii) dividends paid in cash if immediately thereafter there shall be paid to the corporation in cash an amount equal to such dividends for shares of or as a capital contribution with respect to stock ranking junior to the Dividend Series Preferred Stock as to dividends or assets) and the making of any distribution of assets to holders of stock ranking junior to the Dividend Series Preferred Stock as to dividends or assets by purchase of shares or otherwise (each of such actions being herein embraced within the term "payment of junior stock dividends") shall be subject to the following limitations: (1) if and so long as the junior stock equity is less than twenty per cent (20%) of total capitalization, the payment of junior stock dividends, including the proposed payment, during the twelve months ending with and including the date on which the proposed payment is to be made shall not exceed fifty per cent (50%) of the net income of the corporation available for the payment of dividends on the stock ranking junior to the Dividend Series Preferred Stock as to dividends and assets for the twelve full calendar months immediately preceding the calendar month in which such dividend is declared; (2) if and so long as the junior stock equity is less than twenty-five per cent (25%) but is twenty per cent (20%) or more of total capitalization, the payment of junior stock dividends, including the proposed payment, during the twelve months ending with and including the date on which the proposed payment is to be made shall not exceed seventy-five per cent (75%) of the net income of the corporation available for the payment of dividends on the stock ranking junior to the Dividend Series Preferred Stock as to dividends and assets for the twelve full calendar months immediately preceding the calendar month in which such dividend is declared; and (3) except to the extent permitted under subsections (1) and (2) above, the corporation shall not make any payment of junior stock dividends which would reduce the junior stock equity to less than twenty-five per cent (25%) of total capitalization. For the purposes of this subsection H "net income" shall be determined in accordance with sound accounting practice, less the excess, if any, of the largest minimum depreciation requirement for the period of any mortgage indenture to which the corporation is a party during such period over the amount charged by the corporation on its books for depreciation during such period. The term "junior stock equity" is defined in subsection E(2)(i) of Section 4 of this Article I. The term "total capitalization" as used in this subsection H means the aggregate of (x) the junior stock equity, (y) the par value of, or stated capital represented by, the outstanding shares of Dividend Series Preferred Stock and any other stock ranking prior thereto or on a parity therewith as to dividends or assets and the premium thereon, and (z) the principal amount of all outstanding indebtedness of the corporation represented by bonds, notes and other evidences of indebtedness maturing by their terms more than one year from the date of issue thereof. I. No stockholder, director, officer or agent of the corporation shall be held individually responsible for any action taken in good faith though subsequently adjudged to be in violation of this Section 2. J. The shares of Dividend Series Preferred Stock from time to time duly authorized may be issued for such consideration as may be fixed from time to time either by the board of directors or otherwise, as provided by law. Any and all shares of Dividend Series Preferred Stock upon receipt by the corporation of the consideration so fixed shall be deemed fully paid stock and shall not be liable to any further call or assessment thereon. K. Every holder of Dividend Series Preferred Stock of the corporation by becoming such shall be held to have consented to all of these provisions and to have agreed to be bound thereby and to have waived to the full extent permitted by law any right such holder may have either now or at any time in the future contrary to these provisions. Section 3. Preferred Stock-Cumulative. A. The shares of Preferred Stock-Cumulative may be issued, as the board of directors may determine, in one or more series designated "Cumulative Preferred Stock, $25 Par Value, % Series" (inserting in each case the amount of the annual dividend rate, as determined by the board of directors for each such series) or, with respect to issues with an adjustable dividend rate, "Cumulative Preferred Stock, $100 Par Value, Adjustable Rate Series "(inserting in each case an appropriate designation, as determined by the board of directors for each such series). All shares of Preferred Stock-Cumulative, irrespective of series, shall constitute one and the same class of stock and shall be of equal rank as to dividends and assets with each other and with the 6% Cumulative Preferred Stock and the Dividend Series Preferred Stock. The shares of Preferred Stock-Cumulative of different series, subject to any applicable provisions of law, may vary, as the board of directors may determine, as to the following rights and preferences: (1) the dividend rate, or method of calculation thereof, and the date from which the dividends on shares issued prior to the record date for the first dividend shall be cumulative and the date for the first dividend; (2) the redemption price or prices, or method of calculation thereof, and any restriction on the exercise by the corporation of its right to redeem such series; (3) the amount or amounts payable upon any liquidation or dissolution or winding up; (4) the terms and amount of any sinking fund provided for the purchase or redemption of shares; and (5) the conversion, participation or other special rights. B. Before any dividends on, or any distribution of assets (by purchase of shares or otherwise) to holders of, the Common Stock or any other stock ranking junior to the Preferred Stock- Cumulative as to dividends (both hereinafter called "junior stock") shall be paid or set apart for payment or otherwise provided, the holders of the Preferred Stock-Cumulative shall be entitled to receive, but only when and as declared by the board of directors, out of any funds legally available for the declaration of dividends, cumulative dividends at the annual dividend rate per share fixed for the particular series payable quarterly on the first days of January, April, July and October in each year commencing on a date specified for the first dividend date as herein provided to stockholders of record on the respective dates, not exceeding forty-five (45) days preceding such dividend payment dates fixed in advance for the purpose by the board of directors prior to the payment of each particular dividend. No dividends shall be declared on any series of the Preferred Stock-Cumulative or of any other class of preferred stock ranking on a parity therewith, as to dividends, in respect of any quarter-yearly dividend period, unless there shall likewise be declared on all shares of all series of the Preferred Stock-Cumulative and of any other class of such parity preferred stock at the time outstanding, like proportionate dividends, ratably, in proportion to the respective annual dividend rates fixed therefor, in respect of the same quarter-yearly dividend period, to the extent that such shares are entitled to receive dividends for such quarter-yearly dividend period. The dividends on shares of all series of the Preferred Stock-Cumulative shall be cumulative. In the daze of all shares of each particular series, the dividends on shares of such series shall be cumulative. (1) on shares issued prior to the record date for the first dividend on the shares of such series, from the date for the particular series fixed therefor; (2) on shares issued after a record date for a dividend, but prior to the dividend payment date for such dividend, from said dividend payment date; and (3) otherwise from the quarter-yearly dividend payment date next preceding the date of issue of such shares; so that dividends accrued on all outstanding shares of Preferred Stock-Cumulative to the last preceding quarterly dividend payment date shall have been paid in full or declared and set apart for payment before there shall be any distribution on, or purchase of, junior stock. The holders of the Preferred Stock-Cumulative shall not be entitled to receive any dividends thereon other than the dividends referred to in this subsection B and other than distributions provided in subsection D below. As used in this Section 3, the expression "dividends accrued" shall mean the sum of amounts with respect to all shares of Preferred Stock- Cumulative then outstanding, which as to each share shall be an amount computed at the rate per annum of the par value thereof fixed for the particular series from the date from which dividends on such share become cumulative to the date with reference to which the expression is used, irrespective of whether such amount shall have been declared as dividends or thee shall have existed any funds legally available for the payment thereof, less the aggregate of all dividends paid or declared payable on or before said last mentioned date and set aside for such payment on such share. C. The corporation, pursuant to action of its board of directors or as provided in subsection A(8) of Section 4 of this Article I, may redeem the whole or any part of any series of the Preferred Stock-Cumulative at the time outstanding; at any time or from time to time, by paying in cash as herein provided the redemption price of the shares of the particular series fixed therefor, together with dividends accrued to the date fixed for such redemption, and by mailing, postage prepaid, at least thirty (30) days and not more than ninety (90) days prior to the date fixed for said redemption a notice specifying said redemption date to the holders of record of the Preferred Stock-Cumulative to be redeemed, at their respective addresses as the same shall appear on the books of the corporation; provided, however, that the exercise by the corporation of its right to redeem shares of any particular series may be subject to such restrictions as are determined for said series. In case of the redemption of a part only of any series of the Preferred Stock-Cumulative at the time outstanding, the corporation shall select by lot in such manner as the board of directors determines, the shares so to be redeemed. If such notice of redemption shall have been so mailed, and if on or before the redemption date specified in such notice all funds necessary for such redemption shall have been set aside by the corporation, so as to be and continue to be available therefor, then, on and after said redemption date, notwithstanding that any certificate for the shares of the Preferred Stock-Cumulative so called for redemption shall not have been surrendered for cancellation, the shares represented thereby shall no longer be deemed outstanding, the right to receive dividends thereon shall cease to accrue, and all rights of the holders thereof shall forthwith cease and terminate, except only the right of the holders thereof to receive the amount payable upon redemption thereof, but without interest; provided, however, that if, after mailing said notice as aforesaid and prior to the date of redemption specified in such notice, said funds shall be set aside by deposit in trust, for the account of the holders of the Preferred Stock-Cumulative to be redeemed, with a bank or trust company in good standing, organized under the laws of the United States of America or of The Commonwealth of Massachusetts, having a capital, undivided profits and surplus aggregating at least $5,000,000, thereupon all shares of the Preferred Stock-Cumulative with respect to which such deposit shall have been made shall no longer be deemed to be outstanding, and all rights with respect to such shares of Preferred Stock-Cumulative shall forthwith upon such deposit in trust cease and terminate, except only the right of the holders thereof to receive from such deposit the amount payable upon the redemption but without interest. In case the holders of the Preferred Stock-Cumulative which shall have been redeemed shall not within four years of the date of redemption thereof claim any amount so deposited in trust for the redemption of such shares, such bank or trust company shall, upon demand, pay over to the corporation any such unclaimed amount so deposited with it and shall thereupon be relieved of all responsibility in respect thereof, and the corporation shall not be required to hold the amount so paid over to it separate and apart from its other funds, and thereafter the holders of such shares of Preferred Stock-Cumulative shall look only to the corporation for payment of the redemption price thereof, but without interest. If there are any dividends accrued to the last preceding quarterly dividend payment date or dates on the outstanding Preferred Stock-Cumulative or any other class of preferred stock ranking on a parity therewith as to assets (both of which are hereinafter in this sentence collectively referred to as "Preferred Stock"), (i) no Preferred Stock which is redeemable shall be redeemed, unless all such Preferred Stock shall be redeemed and unless an offer is made (a) to purchase all Preferred Stock of any series which is not redeemable at the time under limited restrictions then applicable thereto at a price equal to the then redemption price for such series if such restrictions wee not applicable and (b) to purchase all Preferred Stock which is not redeemable at the time at a price equivalent to the highest then redemption price on any outstanding shares of Preferred Stock, after giving effect to the differences in par value among classes of Preferred Stock, and (ii) no Preferred Stock shall be purchased, unless an offer is made to purchase all Preferred Stock for which redemption prices applicable at the time have been established (whether or not there is then any applicable restriction on the redemption thereof) at the same percentage (not in excess of one hundred per centum (100%)) of the then applicable redemption price for each series of said stock and unless an offer is made to purchase all Preferred Stock for which redemption prices applicable at the time have not been established at the same percentage of a price equal to the then highest redemption price for any of said stock for which a redemption price applicable at the time has been established. All stock redeemed or purchased under the provisions of this subsection C shall be retired. D. In the event of any liquidation, dissolution or winding up (whether voluntary or involuntary) of the affairs of the corporation or any distribution of its capital, then before any distribution shall be made to the holders of stock ranking junior to the Preferred Stock-Cumulative as to assets, the holders of each series of the Preferred Stock-Cumulative at the time outstanding shall be entitled to be paid in cash the amount for the particular series fixed therefor, together in each case with dividends accrued thereon to the date fixed for payment of such distributive amounts, and no more. No payments on account of such distributive amounts shall be made to the holders of any series of the Preferred Stock-Cumulative or of any other class of preferred stock ranking on a parity therewith, as to assets, unless there shall likewise be paid at the same time to the holders of each other series of the Preferred Stock-Cumulative and of such parity preferred stock at the time outstanding like proportionate distributive amounts, ratably, in proportion to the full distributive amounts to which they are respectively entitled. After such payment to the holders of Preferred Stock- Cumulative, the remaining assets and funds of the corporation shall be divided and distributed among the holders of junior stock then outstanding according to the respective rights. Neither the consolidation nor the merger of the corporation with or into any other corporation shall be deemed to be a liquidation, dissolution or winding up of the corporation. E. The holders of Preferred Stock-Cumulative shall have no right to vote except as provided by law and except as hereafter specifically provided in Section 4 of this Article I. F. Except as otherwise expressly provided by law, no holder of Preferred Stock-Cumulative shall be entitled as such as a matter of right to subscribe for or purchase any part of any new or additional issue of stock or warrants carrying rights to stock, or securities convertible into stock, of any class whatever, whether now or hereafter authorized, and whether issued for cash, property, services or otherwise. If it is expressly required by law that such new or additional issue be offered proportionately to the stockholders, the holders of all classes of preferred stock only shall be entitled to subscribe for new or additional preferred stock of any class 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. G. Subject to the limitations, if any, contained in Sections 4 and 5 of this Article I, the corporation may from time to time issue additional capital stock divided into classes with such preferences as to dividends, voting power and other incidents as may be determined in accordance with applicable provisions of law and terms of outstanding capital stock. Without limiting the generality of the foregoing, any such capital stock may be an additional series of Preferred Stock- Cumulative or additional shares of the initial or any other series of Preferred Stock-Cumulative. H. So long as any shares of the Preferred Stock-Cumulative of any series are outstanding, the payment of dividends on stock of the corporation ranking junior to the Preferred Stock- Cumulative as to dividends or assets (other than (i) dividends payable in stock ranking junior to the Preferred Stock-Cumulative as to dividends and assets or (ii) dividends paid in cash if immediately thereafter there shall be paid to the corporation in cash an amount equal to such dividends for shares of or as a capital contribution with respect to stock ranking junior to the Preferred Stock-Cumulative as to dividends or assets) and the making of any distribution of assets to holders of stock ranking junior to the Preferred Stock-Cumulative as to dividends or assets by purchase of shares or otherwise (each of such actions being herein embraced within the term "payment of junior stock dividends") shall be subject to the following limitations: (1) if and so long as the junior stock equity is less than twenty per cent (20%) of total capitalization, the payment of junior stock dividends, including the proposed payment, during the twelve months ending with and including the date on which the proposed payment is to be made shall not exceed fifty per cent (50%) of the net income of the corporation available for the payment of dividends on the stock ranking junior to the Preferred Stock-Cumulative as to dividends and assets for the twelve full calendar months immediately preceding the calendar month in which such dividend is declared: (2) if and so long as the junior stock equity is less than twenty-five per cent (25%) but is twenty per cent (20%) or more of total capitalization, the payment of junior stock dividends, including the proposed payment, during the twelve months ending with and including the date on which the proposed payment is to be made shall not exceed seventy-five per cent (75%) of the net income of the corporation available for the payment of dividends on the stock ranking junior to the Preferred Stock-Cumulative as to dividends and assets for the twelve full calendar months immediately preceding the calendar month in which such dividend is declared; and (3) except to the extent permitted under subsections (1) and (2) above, the corporation shall not make any payment of junior stock dividends which would reduce the junior stock equity to less than twenty-five per cent (25%) of total capitalization. For the purposes of this subsection H "net income" shall be determined in accordance with sound accounting practice, less the excess, if any, of the largest minimum depreciation requirement or the period of any mortgage indenture to which the corporation is a party during such period over the amount charged by the corporation on its books for depreciation during such period. The term "junior stock equity" is defined in subsection E(2)(i) of Section 4 of this Article I. The term "total capitalization" as used in this subsection H means the aggregated of (x) the junior stock equity, (y) the par value of, or stated capital represented by, the outstanding shares of Preferred Stock-Cumulative and any other stock ranking prior thereto or on a parity therewith as to dividends or assets and the premium thereon, and (z) the principal mount of all outstanding indebtedness of the corporation represented by bonds, notes and other evidences of indebtedness maturing by their terms more than one year from the date of issue thereof. I. No stockholder, director, officer or agent of the corporation shall be held individually responsible for any action taken in good faith though subsequently adjudged to be in violation of this Section 3. J. The share of Preferred Stock-Cumulative from time to time duly authorized may be issued for such consideration as may be fixed from time to time either by the board of directors or otherwise, as provided by law. Any and all shares of Preferred Stock-Cumulative upon receipt by the corporation of the consideration so fixed shall be deemed fully paid stock and shall not be liable to any further call or assessment thereon. K. Every holder of Preferred Stock-Cumulative of the corporation by becoming such shall be held to have consented to all of these provisions and to have agreed to be bound thereby and to have waived to the full extent permitted by law any right such holder may have either now or at any time in the future contrary to these provisions Section 4. Certain Rights of Dividend Series Preferred Stock and Preferred Stock-Cumulative. A. (1) If dividends accrued to the last preceding quarterly dividend payment date or dates on the outstanding Dividend Series Preferred Stock, Preferred Stock-Cumulative and any other class of preferred stock ranking on a parity therewith, as to dividends, shall at any time and from time to time equal or exceed an amount equivalent to four (4) full quarterly dividends on any shares of any series of the Dividend Series Preferred Stock, Preferred Stock-Cumulative and such parity preferred stock at the time outstanding, then until all dividends in default on the Dividend Series Preferred Stock, Preferred Stock-Cumulative and such parity preferred stock shall have been paid, the holders of Dividend Series preferred Stock, Preferred Stock-Cumulative and such parity preferred stock, voting separately as one class, shall have the right to elect the smallest number of directors necessary to constitute a majority of the full board of directors, and the holders of stock generally entitled to vote, voting separately as one class, shall have the right to elect the remaining members of the board of directors. If and when all dividends in default on the Dividend Series Preferred Stock, Preferred Stock-Cumulative and such parity preferred stock shall be paid (and, except when prevented from so doing by any applicable restriction of law or contained in any agreement relating to indebtedness of the corporation, such dividends shall be declared and paid out of any funds legally available therefor as soon as reasonably practicable unless, by a majority vote of the directors elected by the holders of stock generally entitled to vote, it is determined that such payment is not in the best interests of the corporation), the Dividend Series Preferred Stock, Preferred Stock-Cumulative and such parity preferred stock shall thereupon be divested of such special right to elect any member of the board of directors, but subject always to the same provisions for the vesting of such special right in the Dividend Series Preferred Stock, Preferred Stock-Cumulative and such parity preferred stock in case of further like default or defaults. (2) Whenever under the provisions of this subsection A the holders of Dividend Series Preferred Stock, Preferred Stock- Cumulative and any other class of preferred stock ranking on parity therewith as to dividends become entitled to elect a majority of the board of directors, a special meeting of the holders of Dividend Series Preferred Stock, Preferred Stock- Cumulative and such parity preferred stock and a special meeting of the stockholders generally entitled to vote shall be held for the purpose of electing directors. Notices thereof shall be given promptly by the corporation and in any case within fifteen (15) days of the occurrence of such change in voting powers, the meetings to be held not sooner than forty-five (45) days nor later than sixty (60) days after the occurrence of such change in voting powers. However, if the change occurs within ninety (90) days prior to the date set for the annual meeting of the stockholders generally entitled to vote, no special meetings need be called prior thereto and an annual meeting of holders of Dividend Series Preferred Stock, Preferred Stock-Cumulative and any other such parity preferred stock shall be called for the same date as the date of the annual meeting of stockholders generally entitled to vote; provided, however, that, if the change occurs within forty-five (45) days prior to the date set for the annual meeting of the stockholders generally entitled to vote, special meetings in lieu of annual meetings shall be called to be held not later than sixty (60) days after such change occurs. If the corporation fails to call the special or annual meetings as above provided or fails to hold such annual meetings within three (3) days of the date provided therefor in the by- laws, any holder or holders of Dividend Series Preferred Stock, Preferred Stock-Cumulative, such parity preferred stock and/or stock generally entitled to vote holding in the aggregate one thousand (1,000) shares may call special meetings for such purpose. Notice of each such meeting of stockholders of the corporation setting forth the purpose or purposes of such meeting shall be mailed by the corporation not less than thirty (30) days prior to such meeting to all stockholders at their respective addresses appearing upon the books of the corporation entitled to vote thereat, unless such notice shall have been waived either before or after the holding of such meeting by all such stockholders. (3) Upon reversion, pursuant to subsection A(1), of the voting powers to their status prior to default, a special or annual meeting of stockholders generally entitled to vote shall be held for the purpose of electing directors. Notice thereof shall have been given promptly by the corporation and in any case within fifteen (15) days after such reversion, such notice to be mailed by the corporation not less than seven (7) nor more than ten (10) days prior to such meeting to all stockholders generally entitled to vote at their respective addresses appearing upon the books of the corporation, unless such notice shall have been waived either before or after the holding of such meeting by all such stockholders. If the corporation fails to call such meeting or fails to hold such annual meeting within three (3) days of the date provided therefor in the by-laws, any holder or holders of stock generally entitled to vote holding in the aggregate one thousand (1,000) shares may call a special meeting for such purpose. (4) Any director elected by holders of Dividend Series Preferred Stock, Preferred Stock-Cumulative and any other class of preferred stock ranking on a parity therewith, as to dividends, shall hold office until the next annual meeting of the holders of Dividend Series Preferred Stock, Preferred Stock- Cumulative and such parity preferred stock and until his successor is chosen and qualified, except as otherwise provided in this subsection A. Once any directors have been elected by holders of Dividend Series Preferred Stock, Preferred Stock- Cumulative and such parity preferred stock, and so long as such holders are entitled to elect such directors, annual meetings of such holders shall be held for the purpose of electing directors, such meetings to immediately follow the annual meetings of stockholders generally entitled to vote. During any period in which the holders of Dividend Series Preferred Stock, Preferred Stock-Cumulative and such parity preferred stock have the right to elect a majority of the board of directors, pursuant to subsection A(1), the number of directors constituting the full board of directors shall be the number constituting the full board of directors immediately prior to said period unless it be changed by a two-thirds vote at an annual meeting of such holders and by a two-thirds vote at an annual meeting in the same year of the holders of stock generally entitled to vote. In the event the number of directors is so increased or decreased, the holders of Dividend Series Preferred Stock, Preferred Stock-Cumulative and such parity preferred stock shall have the right at such annual meeting to elect the smallest number of directors necessary to constitute a majority of the new number of directors, and the holders of stock generally entitled to vote shall have the right to elect the remaining directors, provided, however, that neither group of directors so elected shall be entitled to hold office until both groups have been duly elected. (5) At all meetings of stockholders held for the purpose of electing directors, during such times as the holders of shares of the Dividend Series Preferred Stock, Preferred Stock-Cumulative and any other class of preferred stock ranking on a parity therewith, as to dividends, shall have the right to elect a majority of the board of directors, pursuant to the foregoing provisions of this subsection A, the presence in person or by proxy of the holders of a majority of the outstanding shares of the stock generally entitled to vote, as one class, shall be required to constitute a quorum of such class for the election of directors and the presence in person or by proxy of the holders of a majority of the outstanding shares of all series of the Dividend Series Preferred Stock, Preferred Stock-Cumulative and such parity preferred stock, voting separately as one class, shall be required to constitute a quorum of such class for the election of directors. The absence of a quorum of the holders of either such class shall not prevent or invalidate the election of directors by the other such class if the necessary quorum of the holders of stock of such class is present in person or by proxy at the meeting of such class or any adjournment thereof, except that in the case of the first election following the accrual of the special right of the holders of Dividend Series Preferred Stock, Preferred Stock-Cumulative and any such parity preferred stock to elect a majority of the board of directors, the directors elected by the holders of stock generally entitled to vote shall not take office until the election of such majority. In the absence of a quorum of the holders of stock of either such class, the meeting shall be adjourned from time to time, which may be without notice other than announcement at the meeting, until such quorum shall be obtained within ninety (90) days from the date of such meeting as originally called (or, in the case of any annual meeting held during the continuance of such special right, from the date fixed for such annual meeting) the presence in person or by proxy of the holders of one-third, instead of said majority, of said shares shall then be sufficient to constitute a quorum for the election of the directors whom such stockholders are then entitled to elect. In the calculation of any quorum of the class composed of the holders of the Dividend Series Preferred Stock, the Preferred Stock-Cumulative and parity preferred stock, each share of stock bearing $100 par value shall be counted as one and each share of stock bearing $25 par value shall be counted as one-quarter. (6) Forthwith upon the election of a majority of the board of directors of the corporation by the holders of Dividend Series Preferred Stock, Preferred Stock-Cumulative and any other class of preferred stock ranking on a parity therewith, as to dividends, pursuant to subsection A(1) hereof, the terms of office of all persons who may be directors of the corporation at the time shall terminate, whether or not the holders of stock generally entitled to vote shall then have elected the remaining members of the board of directors, and, if the holders of stock generally entitled to vote shall not have elected the remaining members of the board of directors, then the directors so elected by the holders of Dividend Series Preferred Stock, Preferred Stock-Cumulative and such parity preferred stock shall constitute the board of directors pending such election of the remaining members by such holders of stock generally entitled to vote. Upon the reversion, pursuant to subsection A(1), of the voting powers to their status prior to default, then forthwith upon the election of new directors by the holders of stock generally entitled to vote, the terms of office of the directors elected by the holders of Dividend Series Preferred Stock, Preferred Stock- Cumulative and such parity preferred stock shall terminate. (7) In case of any vacancy in the office of a director elected by the holders of Dividend Series Preferred Stock, Preferred Stock-Cumulative and any other class of preferred stock ranking on a parity therewith, as to dividends, pursuant to the foregoing provisions of this subsection A, the remaining directors elected by the holders of Dividend Series Preferred Stock, Preferred Stock-Cumulative and such parity preferred stock, by affirmative vote of a majority of said directors, or the remaining director so elected if there be but one, may elect a successor or successors to hold office for the unexpired term of the director or directors whose place or places shall be vacant. (8) Under all circumstances, however, the directors elected by the holders of stock generally entitled to vote shall have the right, and neither the holders of Dividend Series Preferred Stock, Preferred Stock-Cumulative or any other class of preferred stock ranking on a parity therewith, as to dividends, nor any directors elected under these provisions by the holders of Dividend Series Preferred Stock, Preferred Stock-Cumulative and any other class of preferred stock ranking on a parity therewith, as to dividends, shall have any right, to vote upon the question of calling for redemption, or of purchasing, all of the Dividend Series Preferred Stock, the Preferred Stock-Cumulative and such parity preferred stock at the time outstanding. (9) Except when some mandatory provision of law shall be controlling or as otherwise provided in this Section 4 and, with respect to any special rights of (i) the Dividend Series Preferred Stock as a class, or (ii) the Preferred Stock- Cumulative as a class, or (iii) any series of either such class as a series, in the provisions or of the by-laws or articles of organization controlling said class or in the votes creating said series, neither the Dividend Series Preferred Stock nor the Preferred Stock-Cumulative shall be entitled to vote as a separate class, and no outstanding series of either such class shall be entitled to vote as a separate series, on any matter and all shares of the Dividend Series Preferred Stock of all series and all shares of the Preferred Stock-Cumulative of all series shall be deemed to constitute but one class for any purpose for which a vote of the stockholders of the corporation by classes may now or hereafter be required. (10) During the period the Dividend Series Preferred Stock and the Preferred Stock-Cumulative have the special voting rights provided by this subsection A, the 6%Cumulative Preferred Stock, which is generally entitled to vote as specified in Section 1, may vote either as stock generally entitled to vote or as parity preferred stock or as both. B. So long as any shares of the Dividend Series Preferred Stock of any series are outstanding, the corporation shall not, without the vote at a meeting called for that purpose of the holders of at least two-thirds of the total number of shares of the Dividend Series Preferred Stock of all series then outstanding make any change in the provisions relative to the Dividend Series Preferred stock, or of any series thereof, which would change the express terms and provisions of such stock (other than the express terms and provisions thereof set forth in subsections A, D, and E of this Section 4) in any manner prejudicial to the holders thereof except that if such change is prejudicial to the holders of one or more, but not all of such series, only to the vote of the holders of two-thirds of the total number of shares of all series so affected and then outstanding shall be required. C. So long as any shares of the Preferred Stock-Cumulative of any series are outstanding, the corporation shall not, without the vote at a meeting called for that purpose of the holders of at least two-thirds of the total number of shares of the Preferred Stock-Cumulative of all series then outstanding make any change in the provisions relative to the Preferred Stock- Cumulative, or of any series thereof, which would change the express terms and provisions of such stock (other than the express terms and provisions thereof set forth in subsections A, D, and E of this Section 4) in any manner prejudicial to the holders thereof except that if such change is prejudicial to the holders of one or more, but not all of such series, only to the vote of the holders of two-thirds of the total number of shares of all series so affected and then outstanding shall be required. D. So long as any shares of the Dividend Series Preferred Stock or the Preferred Stock-Cumulative of any series are outstanding, the corporation shall not, without the vote at a meeting called for that purpose of at least two-thirds of the votes entitled to be cast by the holders of the total number of shares of the Dividend Series Preferred Stock and the Preferred Stock-Cumulative of all series then outstanding: (1) make any change in the provisions of this Section 4, which would change the express terms and provisions of subsections A, D, or E of this Section 4 in any manner prejudicial to the holders of the Dividend Series Preferred Stock and the Preferred Stock-Cumulative except that if such change is prejudicial to the holders of one class, but not both, only the vote of the holders of two-thirds of the total number of shares of the class so affected and then outstanding shall be required; or (2) create or authorize any class of stock which shall be preferred as to dividends or assets over the Dividend Series Preferred Stock or the Preferred Stock-Cumulative. No preferred stock so preferred as to dividends or assets over the Dividend Series Preferred Stock or the Preferred Stock-Cumulative shall be issued more than six months after the above referred to vote creating or authorizing such class of stock unless within six months prior to such issue approval thereof has been obtained, at a meeting called for the purpose, by vote of at least two-thirds of the total number of shares of Dividend Series Preferred Stock and the Preferred Stock-Cumulative of all series outstanding. "Premium" as used in this subsection D with reference to capital stock shall mean such premium on capital stock as has been paid in, or will have been paid in immediately after the proposed issue of additional capital stock, and is not available for distribution on, or purchase of, junior stock. If the corporation has outstanding at any time shares without par value, then references in subsection D (2) above to par value shall refer, in the case of such shares without par value, to that part of the stated capital represented by such share. E. So long as any shares of the Dividend Series Preferred Stock or the Preferred Stock-Cumulative of any series are outstanding, the corporation shall not, without the vote at a meeting called for that purpose of at least a majority of the votes entitled to be case by the holders of the total number of shares of the Dividend Series Preferred Stock and the Preferred Stock-Cumulative of all series then outstanding: (1) Issue shares of any series of Dividend Series Preferred Stock or Preferred Stock-Cumulative if after such issue the aggregate outstanding par value of all such series would exceed $250,000,000. (2) Issue additional shares of any series of Dividend Series Preferred Stock or Preferred Stock-Cumulative or of any other stock ranking prior thereto or on a parity therewith as to dividends or assets, except for refunding an equal par value of Dividend Series Preferred Stock or Preferred Stock-Cumulative, or other such prior or parity preferred stock, of the corporation theretofore outstanding: (i) unless the junior stock equity to be outstanding immediately after such issue shall be at least equal to the aggregate of the par or stated value of the Dividend Series Preferred Stock and the Preferred Stock-Cumulative and of any other such prior or parity stock to be outstanding immediately after such issue; provided, however, that if for the purpose of meeting this requirement it shall have been necessary to take into consideration any earned surplus of the corporation, such surplus shall not be available thereafter for distribution of or purchase of stock ranking junior to the Dividend Series Preferred Stock or the Preferred Stock-Cumulative as to dividends or assets while said additional issue is outstanding (the term "junior stock equity" as used in this subsection E and in subsections H of Sections 2 and 3 means the aggregate of the par value of, or stated capital represented by, the outstanding shares of stock ranking junior to the Dividend Series Preferred Stock and the Preferred Stock-Cumulative as to dividends and assets, of the premium on such junior stock and of the surplus (including Retained earnings and other paid-in capital) of the corporation less, unless the amounts or items are being amortized or are being provided for by reserves, (a) any amounts recorded on the books of the corporation for utility plant and other plant in excess of the original cost thereof, (b) unamortized debt discount and expense, capital stock discount and expense and any other intangible items set forth on the asset side of the balance sheet as a result of accounting convention, (c) the excess, if any of the aggregate amount payable on involuntary liquidation, dissolution or winding up of the affairs of the corporation upon all outstanding preferred stock of the corporation over the aggregate par or stated value thereof and any premiums thereon and (d) the aggregate of the excess, if any, for each year and the final fraction of a year, if any, during the period from January 1, 1953 to the end of a month within ninety (90) days preceding the date as of which junior stock equity is determined, of the largest minimum depreciation requirement for such year and such final fraction of a year of any mortgage indenture to which the corporation is a party during such year or such final fraction of a year over the amount charged by the corporation on its books for depreciation during such year or such final fraction of a year); (ii) unless the gross income of the corporation available for interest on its indebtedness and for dividends on the Dividend Series Preferred Stock, the Preferred Stock-Cumulative and any other such prior or parity stock, determined in accordance with sound accounting practice, for a period of twelve (12) consecutive calendar months within the fifteen (15) calendar months immediately preceding the calendar month in which such additional stock is issued, or in which a contract for the issuance and sale thereof is made, is at least one and one-half (1-1/2) times the aggregate of the annual interest charges and dividend requirements on all interest bearing indebtedness and all series of Dividend Series Preferred Stock, Preferred Stock-Cumulative and such prior or parity stock to be outstanding immediately after the proposed issue; and (iii) unless the net income of the corporation available for dividends on the Dividend Series Preferred Stock, the Preferred Stock-Cumulative and any other such prior or parity stock, determined in accordance with sound accounting practice, for the same twelve (12) months' period, is at least two (2) times the aggregate of the annual dividend requirements on all series of Dividend Series Preferred Stock, Preferred Stock-Cumulative and such prior or parity stock to be outstanding immediately after the proposed issue. In said computations in subsections (ii) and (111): (a) interest on indebtedness and dividends on stock in each case to be retired with the proceeds of the proposed issue are to be excluded; (b) such gross income or net income, respectively, similarly determined for said twelve (12) month period, from any property acquired by purchase, merger or otherwise during or after said period or to be acquired in connection with the proposed issue, may be included: (c) the amount deducted for taxes shall be the amount charged by the corporation on its books for taxes; and (d) the amount deducted for depreciation shall be the higher of the amount charged by the corporation on its books for depreciation during such period or the largest minimum depreciation requirement for such period of any mortgage indenture to which the corporation is a party during such period. (3) Merge or consolidate with or into any other corporation or corporations or sell, lease or dispose of all or substantially all its assets, unless such merger, consolidation or sale, lease or disposition, or the issuance and assumption of all securities to be issued or assumed in connection therewith, shall have been ordered, approved or permitted by the Securities and Exchange Commission under the provisions of the Public Utility Holding Company Act of 1935 or by any successor commission or regulatory authority of the United States of America having jurisdiction in the premises under said Act or by any court of the United States having such jurisdiction. F. No stockholder, director, officer or agent of the corporation shall be held individually responsible for any action taken in good faith though subsequently adjudged to be in violation of this Section 4. The voting rights set forth in subsection B, C and D shall not be effective if, in connection with any matter specified therein, provision is made for the purchase, redemption or retirement of all the Dividend Series Preferred Stock and the Preferred Stock-Cumulative at the time outstanding, or it is provided that the proposed action shall not be effective unless such provision is made. In the calculations in subsections D and E of "at least two- thirds of the total number of shares of the Dividend Series Preferred Stock and the Preferred Stock-Cumulative" or of "at least a majority of the total number" of such shares, each share of Dividend Series Preferred Stock bearing $100 par value shall be counted as one and each share of the Preferred Stock- Cumulative bearing $25 par value shall be counted as one-quarter. Section 5. Maximum Issues of Preferred Stock. The corporation shall not, without the vote at a meeting called for the purpose of at least a majority of the shares of stock generally entitled to vote, issue shares of any series of Dividend Series Preferred Stock or Preferred Stock-Cumulative if after such issue the aggregate outstanding par value of all such series would exceed $250 million. ARTICLE II. Stock Certificates and Transfers. Section 1. Certificates. Each stockholder shall be entitled to a certificate of the capital stock of the corporation owned by him in such form as shall, in conformity to law, be prescribed from time to time by the board of directors. Such certificate shall be signed by the president or a vice-president and by the treasurer or an assistant treasurer, and shall bear the seal of the corporation; provided, however, that when any such certificate is signed by a transfer agent and by a registrar and the registrar is not the same person, partnership, association, trust or corporation as the transfer agent, the signature of the president or a vice-president or of the treasurer or an assistant treasurer of the corporation, or both such signatures, or the seal of the corporation, or either or both of such signatures and such seal, upon such certificate may be facsimile, and such certificate shall be as valid and effectual for all purposes as if signed by such officer or officers, or sealed with the seal of the corporation, as the case may be. The fact that a person signing has ceased to be an officer shall not invalidate any such certificate. Section 2. Transfer Books. The Treasurer or such agent or agents as may be employed by the treasurer with the approval of the board of directors shall keep the stock and transfer books of the corporation and a record of all certificates of stock issued and of all transfers of stock and a register of all the stockholders, their addresses and the number of shares held by each. The board of directors may fix in advance a time, not more than thirty days preceding the date of any meeting of stockholders or the date for the payment of any dividend or the making of any distribution to stockholders or the last day on which the consent or dissent of stockholders may be effectively expressed for any purpose, as the record date for determining the stockholders having the right to notice of and to vote at such meeting and any adjournment thereof or the right to receive such dividend or distribution or the right to give such consent or dissent, and in such case only stockholders of record on such record date shall have such right, notwithstanding any transfer of stock on the books of the corporation after the record date; or without fixing such record date the board of directors may for any of such purposes close the transfer books for all or any part of such thirty-day period. Section 3. Transfer of Shares. Subject to the restrictions, if any, imposed by the agreement of association, title to a certificate of stock and to the shares represented thereby shall be transferred only by delivery of the certificate properly endorsed, or by delivery of the certificate accompanied by a written assignment of the same, or a written power or attorney to sell, assign or transfer the same or the share represented thereby, properly executed; but the person registered on the books of the corporation as the owner of shards shall have the exclusive right to receive dividends thereon and to vote thereon as such owner and, except only as may be required by law, may in all respects be treated by the corporation as the exclusive owner thereof. It shall be the duty of each stockholder to notify the corporation of his post office address. Section 4. Loss of Certificates. In case of the alleged loss or destruction, or the mutilation of a certificate of stock, a duplicate certificate may be issued in place thereof, upon such reasonable terms as the board or directors may prescribe. ARTICLE III. Stockholders. Section 1. Annual Meeting. The annual meeting of stockholders generally entitled to vote shall be held on the third Wednesday of April in each year, if it be not a legal holiday, and if it be a legal holiday, then on the next succeeding full business day not a legal holiday. Annual meetings of stockholders shall be held at the office of the corporation in the Town of Westborough, Massachusetts, or at such other place in Massachusetts as the president or a majority of the directors may designate. Purposes for which annual meetings are to be held additional to those prescribed by law, by the agreement of association and by these by-laws may be specified by the board of directors or by writing signed by the president or by a majority of the directors or by stockholders who hold at least one-tenth of the aggregated par value of the capital stock entitled to vote at the meeting. If any such annual meeting is omitted on the day herein provided therefor, a special meeting may be held in place thereof, and any business transacted or elections held at such meeting shall have the same effect as if transacted or held at said annual meeting. Section 2. Special Meetings. Special meetings of the stockholders may be called to be held anywhere in Massachusetts by the president or by a majority of 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 of the corporation, upon written application of stockholders who hold at least one- tenth of the aggregate par value of the capital stock entitled to vote at the meeting, stating the time, place and purpose of the meeting. Section 3. Notice of Meetings. Except as otherwise provided in Section 4 of Article I, a written or printed notice of each meeting of stockholders, stating the place, day and hour thereof and the purpose for which the meeting is called, shall be given by the clerk, at least seven days before such meeting, to each stockholder entitled to vote thereat, by leaving such notice with him or at his residence or usual place of business, or by mailing it, postage prepaid and addressed to such stockholder at his address as it appears upon the books of the corporation. In the absence or disability of the clerk, such notice may be given by a person designated either by the clerk or by the person or persons calling the meeting or by the board of directors. No notice of the time, place or purpose of any regular or special meeting of the stockholders shall be required if every stockholder entitled to notice thereof is present in person or is represented at the meeting by proxy or if every such stockholder, or his attorney thereunto authorized, by a writing which is filed with the records of the meeting, waives such notice. Section 4. Quorum. Except as otherwise provided in Section 4 of Article I, at any meeting of the stockholders, a majority in interest of all stock issued and outstanding and entitled to vote upon a question to be considered at the meeting shall constitute a quorum for the consideration of such question, but a lesser interest may adjourn any meeting from time to time, and the meeting may be held as adjourned without further action. When a quorum is present at any meeting, a majority of the stock represented thereat and entitled to vote shall, except where a larger vote is required by law, by the agreement of association or by these by-laws, decide any question brought before such meeting. Section 5. Proxies and Voting. Subject to the provisions of Article I hereof and to provisions of law, stockholders who are entitled to vote shall have one vote for each share of stock owned by them, except that holders of Preferred Stock-Cumulative shall have one-quarter vote for each share of such stock owned by them. Stockholders may vote either in person or by proxy in writing dated not more than six (6) months before the meeting named therein, which shall be filed with the clerk of the meeting before being voted. Such proxies shall entitle the holders thereof to vote at any adjournment of such meeting but shall not be valid after the final adjournment of such meeting. ARTICLE IV. Directors. Section 1. Powers. The board of directors shall have, and may exercise, all the powers of the corporation, except such as are conferred upon the stockholders by law, by the agreement of association and by these by-laws. Section 2. Election. A board of not less than three directors shall be chosen by ballot at the annual meeting of the stockholders or at the special meeting held in place thereof, or as provided in Section 4 of Article I. The number of directors for each corporate year shall be fixed by vote at the meeting at which they are elected but the stockholders may, at any special meeting held for the purpose during any such year, increase or decrease (within the limit above specified) the number of directors as thus fixed, and elect new directors to complete the number so fixed, or remove directors to reduce the number of directors to the number so fixed; provided, however, that while thee are four (4) full quarterly dividends in default on the Dividend Series Preferred Stock and the Preferred Stock- Cumulative the number of such directors shall be fixed in accordance with Section 4 of Article I. No director need be a stockholder. Subject to law, to the articles of organization, to the terms of the Dividend Series Preferred Stock and the Preferred Stock -Cumulative and to the other provisions of these by-laws, each director shall hold office until the next annual meeting of the stockholders electing such director and until his successor is chosen and qualified. Section 3. Regular Meeting. Regular meetings of the board of directors may be held at such places and at such times as the board may by vote from time to time determine, and if so determined, no notice thereof need be given. A regular meeting of the board of directors may be held without notice immediately after, and at the same place as the annual meeting of the stockholders, or the special meeting of the stockholders held in place of such annual meeting. Section 4. Special Meetings. Special meetings of the board of directors may be held at any time and at any place when called by the president, treasurer or two or more directors, reasonable notice thereof being given to each director, or at any time without call or formal notice, provided all the directors are present or waive notice thereof by a writing which is filed with the records of the meeting. In any case it shall be deemed sufficient notice to a director to send notice by mail or telegram at least forty-eight hours before the meeting addressed to him as his usual or last known business or residence address. Section 5. Quorum. A majority of the board of directors shall constitute a quorum for the transaction of business, but a less number may adjourn any meeting from time to time, and the meeting may be held as adjourned without further notice. Except as otherwise provided, when a quorum is present at any meeting, a majority of the members in attendance thereat shall decide any question brought before such meeting. Section 6. Vacancies. If the office of any director, one or more, elected by the stockholders generally entitled to vote, becomes vacant by reason of death, resignation, removal, disqualification or otherwise, the remaining directors so elected, though less than a quorum, may, unless such vacancy shall have been filled by the stockholders generally entitled to vote, choose by a majority vote of their entire number, a successor or successors, who shall hold office for the unexpired term. Any vacancy in the office of a director elected by holders of the Dividend Series Preferred Stock and the Preferred Stock- Cumulative shall be filled as provided in Section 4 of Article I. ARTICLE V. Officers. Section 1. Election and Appointment. The officers shall be a president, a clerk, a treasurer and such other officers and agents as the board of directors may in their discretion appoint. The treasurer and the clerk shall be chosen by ballot at the annual meeting of the stockholders generally entitled to vote. The president shall be elected annually by the board of directors after its election by the stockholders. The president shall be a director. The clerk shall be a resident of Massachusetts. So far as is permitted by law, any two or more offices may be filled by the same person. Subject to law, to the agreement of association and to the other provisions of theses by-laws, the treasurer and clerk shall each hold office until the next annual meeting of stockholders generally entitled to vote and until his successor is chosen and qualified, the president shall hold office until the first meeting of directors after the next annual meeting of stockholders generally entitled to vote and until his successor is chosen and qualified and the other officers and agents shall hold office during the pleasure of the board of directors or for such term as the board of directors shall prescribe. Each officer shall, subject to these by-laws, have in addition to the duties and powers herein set forth such duties and powers as are commonly incident to his office, and such duties and powers as the board of directors shall from time to time designate. Section 2. President. Except as otherwise determined by the board of directors, the president shall be the chief executive officer of the corporation and shall preside at all meetings of the stockholders and of the board of directors at which he is present. The president shall have custody of the treasurer's bond. Section 3. Clerk. The clerk shall keep an accurate record of the proceedings of all meetings of the stockholders in books provided for the purpose, which books shall be kept at the principal office of the corporation and shall be open at all reasonable times to the inspection of any stockholder. In the absence of the clerk at any such meeting, a temporary clerk shall be chosen, who shall record the proceedings of such meeting in the aforesaid books. The clerk and such temporary clerk shall be sworn. If no secretary is appointed, the clerk shall also keep accurate minutes of all meetings of the board of directors and in his absence from any such meeting a temporary clerk shall be chosen, who shall be sworn and shall record the proceedings of such meeting. Section 4. Secretary. If a secretary is appointed, he shall keep accurate minutes of all meetings of the board of directors, and in his absence from any such meeting a temporary secretary shall record the proceedings thereof. Section 5. Treasurer. The treasurer shall, subject to the direction and under the supervision of the board of directors, have general charge of the financial concerns of the corporation and the care and custody of the funds and valuable papers of the corporation, except his own bond, and he shall have power to endorse for deposit or collection all notes, checks, drafts, etc., payable to the corporation or its order, and to accept drafts on behalf of the corporation. He shall keep, or cause to be kept, accurate books of account, which shall be the property of the corporation. If required by the board of directors he shall give bond for the faithful performance of his duty in such form, in such sum, and with such sureties as the board of directors shall require. Any assistant treasurer shall have such powers as the board of directors shall from time to time designate. Section 6. Removals. The stockholders generally entitled to vote may, at any special meeting called for the purpose, by vote of a majority of the capital stock issued and outstanding and generally entitled to vote, remove from office the treasurer, clerk or any director elected by the stockholders generally entitled to vote, and elect his successor. The board of directors may likewise, by vote of a majority of their entire number, remove from office any officer or agent of the corporation; provided, however, that the board of directors may remove the treasurer or clerk for cause only. Section 7. Vacancies. If the office of any officer or agent, one or more, becomes vacant by reason of death, resignation, removal, disqualification or otherwise, the directors may, unless such vacancy, if in the office of the treasurer or clerk, shall have been filled by the stockholders generally entitled to vote, choose by a majority vote of their entire number, a successor or successors, who shall hold office for the unexpired term, subject to the provisions of Section 6 of this Article V. ARTICLE V-A Liability and Indemnification. No director of the corporation shall be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director notwithstanding any provision of law imposing such liability, except with respect to any matter as to which such liability shall have been imposed (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under section sixty-one or sixty- two of chapter one hundred and fifty-six B of the General Laws of Massachusetts, or (iv) for any transaction from which the director derived an improper personal benefit. The corporation shall indemnify each of its directors and officers against any loss, liability or expense, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees, imposed upon or reasonably incurred by him in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, including but not limited to derivative suits (to the extent permitted by law), 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 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, or, to the extent that such matter relates to service with respect to any employee benefit plan, as in the best interests of the participants or beneficiaries of such plan. As to any matter disposed of by a compromise payment by a 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, if no change in control has occurred (a) by a disinterested majority of the directors then in office, (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 vote, at a meeting duly called and held, of the holders of a majority of the shares outstanding and entitled to vote thereon, exclusive of any shares owned by any interested director or officer or, if a change in control shall have occurred, by 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. Expenses incurred with respect to the defense or disposition of any action, suit or proceeding heretofore referred to in this Article shall 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 if it is ultimately determined that he is not entitled to indemnification, which undertaking shall be accepted without reference to the financial ability of the recipient to make such repayment. If in an action, suit or proceeding brought by or in right of the corporation, a director is held not liable, whether because relieved of liability under the first paragraph of this Article or otherwise, he shall be deemed to have been entitled to indemnification for expenses incurred in defense of said action, suit or proceeding. (i) The term "officer" includes (a) persons who serve at the request of the corporation as directors, officers, or trustees of another organization and (b) employees of the corporation and its affiliates who serve in any capacity with respect to benefit plans for the corporation's employees. (ii) An "interested director" or officer is one against whom in such capacity the proceeding in question or another proceeding on the same or similar grounds is then pending. (iii) A "change in control" occurs when (a) any individual, corporation, association, partnership, joint venture, trust or other entity or association thereof acting in concert (excluding any employee benefit plan, dividend reinvestment plan or similar plan of the corporation, or any trustee thereof acting in such capacity) acquires more than 20% of the corporation's outstanding stock having general voting rights or more than 20% of the common shares of any entity owning more than 50% of the corporation's outstanding stock having general voting rights, whether in whole or in part, by means of an offer made publicly to the holders of all or substantially all of such outstanding stock or shares to acquire stock or shares for cash, other property, or a combination thereof or by any other means, unless the transaction is consented to by vote of a majority of the continuing directors; or (b) continuing directors cease to constitute a majority of the board. (iv) The term "continuing director" shall mean any director of the corporation who (a) was a member of the board of directors of the corporation on the later of January 1, 1987, or the date the director or officer seeking indemnification first became such, or (b) was recommended for his initial term of office by a majority of continuing directors in office at the time of such recommendation. Nothing contained in this Article shall (i) limit the power of the corporation to indemnify employees and agents of the corporation or its subsidiaries other than directors and officers on any terms it deems appropriate not prohibited by law, (ii) limit the power of the corporation to indemnify directors and officers for expenses incurred in suits, actions, or other proceedings initiated by such director of officer or (iii) affect any rights to indemnification to which corporation personnel other than directors and officers may be entitled by contract or otherwise. The rights provided in this Article shall not be exclusive of or affect any other right to which any director or officer may be entitled and such rights shall inure to the benefit of its or his successors, heirs, executors, administrators and other legal representatives. Such other rights shall include all powers, immunities and rights of reimbursement allowable under the laws of The Commonwealth of Massachusetts. The provisions of this Article shall not apply with respect to any act or omission occurring prior to June 25, 1987. No amendment to or repeal of this Article shall apply to or have any effect upon the liability, exoneration or indemnification of any director or officer for or with respect to any acts or omissions of the director or officer occurring prior to such amendment or repeal. ARTICLE VI. Seal. The seal of the corporation shall, subject to alteration by the board of directors, consist of a flat-faced circular die with the words "New England Power Company Massachusetts" on the periphery, and the words "Corporate Seal Consolidated 1916" within the circle, cut or engraved thereon. ARTICLE VII. Execution of Papers. Except as the board of directors may generally or in particular cases authorized the execution thereof in some other manner, all deeds, leases, transfers, contracts, bonds, notes, checks, drafts and other obligations made, accepted or endorsed by the corporation, shall be signed by the president, any vice- president, the treasurer or any assistant treasurer. ARTICLE VII. Fiscal Year. Except as from time to time otherwise provided by the board of directors, the fiscal year of the corporation shall be the calendar year. ARTICLE IX. Amendments. Subject to the provisions of law and of the Dividend Series Preferred Stock and the Preferred Stock-Cumulative, these by-laws may be amended, altered or repealed by a vote of a majority of the outstanding capital stock generally entitled to vote at any meeting of such stockholders, provided notice of the proposed amendment, alteration or repeal is given in the notice of said meeting. EX-10 14 NEP EXHIBIT 10(E) NEW ENGLAND POWER COMPANY -------------------------- Primary Service for Resale AMENDMENT TO SERVICE AGREEMENT ------------------------------ Effective Date Commencing on the later of July 1, 1996 or the date that all and Term: required regulatory approvals necessary to implement the Massachusetts Electric Company Pilot Programs are granted by the Federal Energy Regulatory Commission ("FERC") (on this amendment and in Docket No ER96-1309-000), the Securities and Exchange Commission and continuing through December 31, 1997 for the Residential and Small Commercial Pilot Program or until retail access is generally available for the MHTC Pilot Program (the "Term"). Parties: NEW ENGLAND POWER COMPANY A Massachusetts Corporation ("NEP" or the "Company") 25 Research Drive Westborough, Massachusetts 01582 and MASSACHUSETTS ELECTRIC COMPANY A Massachusetts Corporation ("Mass. Electric") 25 Research Drive Westborough, Massachusetts 01582 WHEREAS, Mass. Electric is an all-requirements customer under NEP's FERC Electric Tariff, Original Volume 1 ("Tariff No. 1"); WHEREAS, Mass. Electric wishes to implement two retail electric pilot programs (the "Pilot Programs"), the first for residential and small commercial and industrial customers located in the cities of Lawrence, Lynn, Northampton, and Worcester for up to 100 million kilowatthours per year (the "Residential and Small Commercial Pilot Program"), and the second for members of the Massachusetts High Technology Council ("MHTC") served under Mass. Electric's G-3 Rate for up to 200 million kilowatthours per year (the "MHTC Pilot Program"); WHEREAS, the implementation of the Pilot Programs requires Mass. Electric to allow the kilowatthour sales in the Pilot Programs to be served by suppliers other than Mass. Electric for the Term of the Pilot Programs; and WHEREAS, the Pilot Programs have been approved by the Massachusetts Department of Public Utilities; THEREFORE, NEP and Mass. Electric agree to amend Mass. Electric's Tariff No. 1 Service Agreement as follows: 1. NEP agrees to waive during the Term those requirements of Tariff No. 1 that obligate Mass. Electric to buy all of its electricity requirements under Tariff No. 1 only to the extent necessary to implement the Pilot Programs. This waiver is conditioned on Mass. Electric's payment of the access charges set forth in Paragraph 4. At the end of the Term, the foregoing waiver shall expire, and Mass. Electric shall again be bound by all of the requirements under its Tariff No. 1 Service Agreement; 2. NEP also agrees during the Term to credit its purchased power and fuel billings to assure that the implementation of the Pilot Programs is revenue neutral to NEP's other customers and that the NEP's fuel adjustment factor does not change for NEP's Tariff No. 1 sales despite the reduction in purchases by Mass. Electric during the Term. The calculation of this credit is shown on Attachment 1 to this amendment. In addition, NEP agrees during the Term to credit Mass. Electric's fixed payments to NEP to assure that the average cost of purchased power expense to Mass. Electric's customers who do not participate in the Pilot Programs remains unchanged as a result of the Pilot Programs. The calculation of this credit on Mass. Electric's bill is shown on Attachment 2 to this amendment. 3. NEP agrees to execute all appropriate waivers and consents necessary to allow its affiliate, NEES Transmission Company (NEES Trans), to provide access during the Term to the retail customers participating in the Pilot Programs through service agreements under NEES Trans network service tariff with Mass. Electric. Continuation of these consents and waivers shall be conditioned upon continued payment of the access charges listed below. 4. As consideration for NEP's waiver, as set forth in Paragraph 1, above, Mass. Electric agrees to pay NEP access charges equal to three cents per kilowatthour for all electricity transmitted or distributed under Mass. Electric's unbundled tariffs, or by any other party, to customers participating in the Pilot Programs who are located within Mass. Electric's service territory. IN WITNESS WHEREOF, Mass. Electric and NEP hereby, as of the date written below, execute this Amendment to Mass. Electric's Tariff No. 1 Service Agreement. NEW ENGLAND POWER COMPANY By ___________________________________ Title ___________________________________ Date ___________________________________ MASSACHUSETTS ELECTRIC COMPANY By ___________________________________ Title ___________________________________ Date ___________________________________ NEW ENGLAND POWER COMPANY -------------------------- PRIMARY SERVICE FOR RESALE --------------------------- AMENDMENT TO SERVICE AGREEMENT ------------------------------- Dated as of: February 1, 1997 Parties: NEW ENGLAND POWER COMPANY, a Massachusetts corporation (the "Company") and MASSACHUSETTS ELECTRIC COMPANY and NANTUCKET ELECTRIC COMPANY, Massachusetts corporations (the "Customer"), WHEREAS, the Customer is currently an all-requirements electric customer of the Company under the Company's FERC Tariff, Original Volume No. 1 (the "Tariff"), and a Service Agreement as amended (the "Service Agreement"); and WHEREAS, under the Service Agreement, the Customer purchases from the Company for resale all of the electric requirements of the ultimate customers in the Customer's service territory; and WHEREAS, the Customer desires to terminate the requirement that it purchase all of the electric requirements of the customers in its service territory from the Company under the Tariff before the term of the Service Agreement has expired, and to retain the flexibility to terminate such purchase requirement on or after January 1, 1998, upon the introduction of retail choice for all customers of investor-owned utilities in Massachusetts or upon another such date designated by the Customer; and WHEREAS, the Customer desires to continue to receive transmission service over the transmission facilities owned or operated by the Company after the termination of its purchases under the Tariff; and WHEREAS, the Customer desires to retain the option, but not the obligation, to purchase electricity from the Company after the termination of its purchases under the Tariff or the option for the ultimate customers in the Customer's service territory to do so; and WHEREAS, the Company is willing to permit the Customer to terminate its purchase requirement before the Term has expired and to provide the options desired by the Company, but only upon the terms and conditions set forth in this Amendment to Service Agreement ("Amendment"); NOW, THEREFORE, the Company and the Customer, in consideration of their mutual commitments set forth herein, agree as follows: 1. The Parties agree that, notwithstanding anything to the contrary in the Service Agreement or in the Tariff, the Customer's obligation to purchase electricity under the Service Agreement and the Company's obligation to provide electricity under the Service Agreement shall terminate as of the Contract Termination Date, which shall be determined pursuant to section 2 of this Amendment. Except as provided in Section 7, below, or in a separate contract for power supply, the Company shall have no further obligation to meet the electricity demands of the ultimate customers in the service territory of the Customer on or after the Contract Termination Date, or to make any plan, investment, purchase, or commitment to maintain sufficient generating capacity to provide adequate, continuous, or reliable electricity supplies to the Customer or its ultimate customers on or after such date. 2. The Contract Termination Date shall be defined as the first to occur of the Retail Access Date, determined in accordance with sub-paragraph (a) or the Wholesale Access Date, determined in accordance with sub-paragraph (b). (a) The Retail Access Date shall be the later of (i) January 1, 1998; or (ii) the date when retail access is made available to all ultimate customers of the investor-owned electric utilities in Massachusetts; provided, however, that in the event the condition stated in clause (ii) is not satisfied by January 1, 1998, the Customer in its sole discretion shall have the option to accelerate the Retail Access Date and implement retail access for its ultimate customers in its service territory by providing the Company at least 90 days advance written notice of the date such access shall be made available. (b) The Wholesale Access Date shall be the date upon which the Customer in its sole discretion decides to terminate purchases under Tariff 1 and the Service Agreement, provided that such date shall not be earlier than January 1, 1998 and provided further that the Customer shall give the Company at least 90 days advance written notice of its declaration of the Wholesale Access Date. 3. After the Contract Termination Date, the Customer shall pay to the Company the Contract Termination Charges determined in accordance with Appendix 1 and the Schedules attached to this Amendment, which set forth Base Contract Termination Charges and formulae for the adjustment of the Base Contract Termination Charges. 4. For service under the Tariff prior to the Contract Termination Date, the Company shall charge and the Customer shall pay the Demand and Energy Charges shown on Fifty-third Revised Page No. 1 of Schedule II-A, which sets forth the W-95(S) rates, and, except as provided in footnote 1 below, such charges shall not be subject to change during such period for service to the Customer/1/; provided, however, nothing in this agreement shall preclude the Company from requesting an increase in rates that may become effective after suspension on January 1, 2001, if the Contract Termination Date has not occurred by that time. ______________________ /1/ By April 1 of each year after 1998 during which the Retail Access Date or the Contract Termination Date pursuant to footnote 4 of the Agreement has not occurred, the Company shall file a report with the Commission calculating its return on equity for the prior calendar year using the earnings available for common equity as reported to the Securities and Exchange Commission in the Company's annual report divided by the average of the thirteen monthly common equity balances on the Company's books for the same period. The Company's earnings available for common equity and common equity balances shall be adjusted to eliminate the effects of any writedown and to restore expenses associated with any such writedown that may result from the implementation of industry restructuring or this Agreement. If the Company's return so calculated is above 11.75 percent, it shall calculate the revenue requirement associated with 72.6 percent of the excess above 11.75 percent and shall: (1) refund to the Customer revenues sufficient to cause the Customer's return on equity for the prior calendar year to reach 11.75 percent; and (2) accrue the balance to the Reconciliation Account established under Section 3.4 of this Agreement. The obligation in this footnote shall cease as of the Retail Access Date or the Contract Termination Date pursuant to footnote 4 of the Agreement. 5. Notwithstanding anything to the contrary in the Tariff or the Service Agreement, the Contract Termination Charges specified in Appendix 1 and attached Schedules to this Amendment shall remain in effect until the Company has collected all amounts subject to collection thereunder and neither the Customer's obligation to pay the Contract Termination Charges in full nor the formulae for the calculation of the Contract Termination Charges set forth in Appendix 1 and the attached Schedules to this Amendment shall be subject to change through application to the Federal Energy Regulatory Commission pursuant to the provisions of Section 205 or Section 206 of the Federal Power Act, absent the agreement of the Company or its successors or assigns. 6. Commencing on the Contract Termination Date, the Company (including any successor or assign of the Company that succeeds to the Company's obligations with respect to the operation of its transmission facilities) shall, upon request of the Customer, provide network integration transmission service to the Customer in accordance with the Service Agreement for Network Integration Transmission Service between the Customer and the Company of even date, and with the terms and conditions of the tariff maintained in effect by the Company for such service, or in accordance with the policy of the Federal Energy Regulatory Commission as in effect from time to time. Such service shall be provided to the Customer after the Wholesale Access Date to enable the Customer to integrate its loads and resources and shall be provided to the Customer after the Retail Access Date to enable the ultimate customers in the Customer's service territory to integrate their loads and resources. 7. For the period commencing on the Contract Termination Date and extending through December 31, 2004 (the "Standard Offer Period"), the Company shall provide service to the Customer in accordance with this section 7, such service being referred to as "Standard Offer Service." (a) Standard Offer Service shall be made available at the prices set forth in the Stipulation and Agreement, adjusted for a fuel index. The prices for Standard Offer Service do not include charges for transmission services provided in accordance with section 6 of this Amendment, or charges for distribution services under the Customer's rates for distribution services, but otherwise reflect the price of electricity delivered to the meters of the ultimate customers of the Customer. (b) Standard Offer Service shall be made available by the Company to the Customer after the Wholesale Access Date for the purposes set forth in paragraph D of Schedule I of the Tariff or to the Company for resale to those ultimate customers in the Customer's service territory who elect to purchase Standard Offer Service after the Retail Access Date and have not terminated Standard Offer Service to purchase electricity from another supplier, provided that, neither the Customer nor the ultimate customers shall be required to purchase Standard Offer Service from the Company. For the first year after the Retail Access Date, the Company shall make Standard Offer Service available to all residential or G-1 customers of the Customer, who have previously taken service from an alternative supplier, if such residential or G-1 customer elects to return to Standard Offer Service within 120 days of taking service from the alternative supplier. (c) In the event the Contract Termination Date is determined by the Wholesale Access Date, the Customer shall be free, either in its notice pursuant to section 2(b), or thereafter by giving the Company at least 90 days advance written notice directed to the first day of a calendar month, to terminate or reduce its purchases of Standard Offer Service from the Company in order to obtain electricity from other suppliers in the market. Once the Customer has reduced or terminated its purchases of Standard Offer Service from the Company, the Company shall have no obligation to supply Standard Offer Service to the Customer with respect to the terminated or reduced purchases. (d) No less than 90 days before the Retail Access Date, the Customer shall notify the Company in writing of the quantity of energy it shall purchase under Standard Offer Service for resale to ultimate customers in its service territory. The Customer shall provide the Company with at least 30 days prior advance written notice, directed to the first day of a calendar month, of reductions in the quantity of energy so purchased due to decisions by customers initially electing Standard Offer Service to purchase electricity from other suppliers after the Retail Access Date. Nothing in this Amendment shall restrict the right of any ultimate customer to purchase electricity from other suppliers after the Retail Access Date, provided that, except as set forth in section 7(b), above, once any such ultimate customer has purchased electricity from another supplier, the Company shall have no obligation to supply Standard Offer Service to the Customer for resale to such ultimate customer. (e) The Company acknowledges that the Customer will offer alternative power suppliers the opportunity in an auction to supply electricity to enable the Customer to provide Standard Offer Service to ultimate customers in its service territory after the Retail Access Date. The Company shall be free to bid in the auction, provided that the Company's bid shall not exceed the prices set forth in the Stipulation and Agreement, adjusted for the fuel index set forth in that Agreement. 8. This Amendment shall take effect as of the date it is permitted to become effective by the Federal Energy Regulatory Commission, which date shall be referred to as the "Effective Date." This Amendment, together with all provisions of the Tariff and the Service Agreement necessary to effectuate all provisions of this Amendment, shall remain in effect until all obligations of the parties under this Amendment, including, without limitation, the obligation of the Customer to pay to the Company the Contract Termination Charges, have been discharged in full. Upon the discharge in full of all such obligations, this Amendment and the Service Agreement shall terminate. 9. The provisions of this Amendment shall override any inconsistent provisions of the Service Agreement and, with respect to the Customer, all inconsistent provisions of the Tariff, but all provisions of the Tariff and the Service Agreement that are not inconsistent with this Amendment shall remain in full force and effect. 10. The rights conferred and obligations imposed on the Customer and Company under this Amendment shall be binding on or inure to the benefit of their successors in interest or assignees as if such successor or assignee was itself a signatory hereto. IN WITNESS WHEREOF, the parties have executed this Amendment of Service Agreement as of the date first written above. NEW ENGLAND POWER COMPANY By Its MASSACHUSETTS ELECTRIC COMPANY By Its NANTUCKET ELECTRIC COMPANY By Its EX-10 15 NEP EXHIBIT 10(F) NEW ENGLAND POWER COMPANY PRIMARY SERVICE FOR RESALE -------------------------- AMENDMENT OF SERVICE AGREEMENT ------------------------------ Dated: October 30, 1995 Parties: NEW ENGLAND POWER COMPANY a Massachusetts corporation (the "Company") 25 Research Drive Westboro, Massachusetts 01582 and THE NARRAGANSETT ELECTRIC COMPANY a Rhode Island corporation (the "Customer") 280 Melrose St. Providence, Rhode Island 02901 The undersigned hereby agree to the following amendment of the Service Agreement between them for Primary Service dated February 15, 1974, such amendment to become effective upon acceptance by the Federal Energy Regulatory Commission: In Appendix A forming part of said Service Agreement, "Thirty- fourth Revised Page No. 4", copy of which is attached to this agreement, supersedes and is substituted for "Thirty-third Revised Page No. 4". WITNESS the corporate names of the parties, by their proper officers thereunto duly authorized, on the date first above written. Executed in duplicate. NEW ENGLAND POWER COMPANY By Vice President THE NARRAGANSETT ELECTRIC COMPANY By President CERTIFICATE OF CONCURRENCE This is to certify that THE NARRAGANSETT ELECTRIC COMPANY assents to the filing of and concurs in the amendment described below, which NEW ENGLAND POWER COMPANY has filed, insofar as it is one of the parties providing electric service thereunder, and hereby files this certificate of concurrence in lieu of the filing of the amendment specified: Amendment to Service Agreement for the Primary Service for Resale with New England Power Company dated February 15, 1974 (The Narragansett Electric Company, FERC Electric Tariff, Original Volume Number 1). THE NARRAGANSETT ELECTRIC COMPANY By President Dated: October 30, 1995 NEW ENGLAND POWER COMPANY -------------------------- PRIMARY SERVICE FOR RESALE --------------------------- AMENDMENT TO SERVICE AGREEMENT ------------------------------ Dated as of: February 1, 1997 Parties: NEW ENGLAND POWER COMPANY, a Massachusetts corporation (the "Company" or "NEP") and THE NARRAGANSETT ELECTRIC COMPANY a Rhode Island corporation (the "Customer" or "Narragansett"), WHEREAS, the Customer is currently an all-requirements electric customer of the Company under the Company's FERC Tariff, Original Volume No. 1 (the "Tariff"), and a Service Agreement as amended (the "Service Agreement"); and WHEREAS, under the Service Agreement, the Customer purchases from the Company for resale all of the electric requirements of the ultimate customers in the Customer's service territory; and WHEREAS, the Rhode Island General Assembly passed into law the Rhode Island Utility Restructuring Act of 1996 ("URA"), which extends wholesale competition in power supply markets to retail customers through the provision of retail access directly to Narragansett's customers; and WHEREAS, the termination of all-requirements service under the Tariff and the provision of unbundled transmission service by the Company to Narragansett under the Company's open access tariff are necessary to implement retail access in a manner consistent with the URA; and WHEREAS, the Customer desires to comply with the URA to terminate the requirement that it purchase all of the electric requirements of the customers in its service territory from the Company under the Tariff before the term of the Service Agreement has expired, and to retain the flexibility to terminate its purchase requirement entirely on the date when standard offer service is made available to all distribution customers of Rhode Island electric utilities pursuant to the terms of the URA; and WHEREAS, the Customer desires to continue to receive transmission service over the transmission facilities owned or operated by the Company after the termination of its purchases under the Tariff; and WHEREAS, the Customer desires to retain the option, but not the obligation, to purchase electricity from the Company after the termination of its purchases under the Tariff or the option for the ultimate customers in the Customer's service territory to do so; and WHEREAS, the Company is willing to permit the Customer to terminate its purchase requirement before the Term has expired and to provide the options desired by the Customer, but only upon the terms and conditions set forth in this Amendment to Service Agreement ("Amendment"); NOW, THEREFORE, the Company and the Customer, in consideration of their mutual commitments set forth herein, agree as follows: 1. The Parties agree that, notwithstanding anything to the contrary in the Service Agreement or in the Tariff, the Customer's obligation to purchase electricity under the Service Agreement and the Company's obligation to provide electricity under the Service Agreement shall be reduced as of July 1, 1997, in accordance with the Retail Access Schedule (as defined in Section 2 of this Amendment), and shall terminate as of the Contract Termination Date, which shall be determined pursuant to Section 3 of this Amendment. Except as provided in Section 9 below, or in a separate contract for power supply, the Company shall have no further obligation to meet the electricity demands of the ultimate customers in the service territory of the Customer on or after the Contract Termination Date, or to make any plan, investment, purchase, or commitment to maintain sufficient generating capacity to provide adequate, continuous, or reliable electricity supplies to the Customer or its ultimate customers on or after such date. 2. The Customer shall not be obligated to purchase, and the Company shall not be obligated to supply, electricity required by any distribution service customer of the Customer, or its successor or assign, that is taking retail access in accordance with the following schedule ("Retail Access Schedule"): Phase 1: On July 1, 1997, the following customers shall have retail access: (i) all new commercial and industrial customers, including new manufacturing customers, commencing service on or after July 1, 1997, with an anticipated average annual demand of two hundred (200) kilowatts or greater; (ii) all existing manufacturing customers with an average annual demand of fifteen hundred (1500) kilowatts or greater; and (iii) all accounts in the name of the State of Rhode Island, provided, however, the Customer may limit retail access to no more than ten percent (10%) of its total kilowatt-hour sales. Phase 2: On January 1, 1998, retail access shall be extended to the following customers: all existing manufacturing customers with an average annual demand of two hundred (200) kilowatts or greater and all accounts in the name of the cities and towns in Rhode Island, provided, however, the Customer may limit retail access to no more than twenty percent (20%) of its total kilowatt-hour sales. Phase 3: The remaining customers shall have retail access on the earlier to occur of (i) the Retail Access Date defined in Section 3, below, (ii) within three months after retail access is available to forty percent (40%) or more of the kilowatt-hour sales in New England including the total kilowatt-hour sales in Rhode Island, or (iii) July 1, 1998, provided, however, if the Rhode Island Public Utilities Commission ("Rhode Island Commission") extends the deadline beyond July 1, 1998, then the remaining customers shall have access on the extended date established by the Rhode Island Commission. 3. The Contract Termination Date shall occur on the earlier of the Retail Access Date, determined in accordance with subparagraph (a) or the Wholesale Access Date, determined in accordance with subparagraph (b). (a) The Retail Access Date shall be the later of January 1, 1998, or the date of a final nonappealable order of the Rhode Island Commission approving the divestiture plan for the disposition of the Company's non-nuclear generating facilities, provided, however, that in any event, the Retail Access Date shall occur no later than three months after retail access is available to forty percent (40%) or more of the kilowatthour sales in New England, including the total kilowatthour sales in Rhode Island. (b) The Wholesale Access Date shall be the earlier of the Retail Access Date or the date on which the Customer in its sole discretion decides to terminate purchases under Tariff 1 and the Service Agreement, provided that such date shall not be earlier than January 1, 1998, and provided further that the Customer shall give the Company at least 90 days advance written notice of its declaration of the Wholesale Access Date. 4. The Customer shall pay to the Company the Contract Termination Charges determined in accordance with Appendix 1 and the Schedules attached to this Amendment, which set forth Base Contract Termination Charges and formulae for the adjustment of the Base Contract Termination Charges. Between July 1, 1997 and the Contract Termination Date, the Contract Termination Charges shall apply to all kilowatthours delivered but not sold by the Customer, or its successor or assign, in the Customer's Service Area. After the Contract Termination Date, the Contract Termination Charges shall apply to all kilowatthours delivered by the Customer, or its successor or assign in the Customer's Service Area, whether or not such kilowatthours are sold by the Customer. The Customer's Service Area is defined to include the area served by the Customer on August 6, 1996. Kilowatthours delivered are defined to include all kilowatthours delivered to electricity consumers in the Customer's Service Area, whether or not they are present customers of the Customer. 5. For the period between July 1, 1997 and the Contract Termination Date, the Company shall charge and the Customer shall pay the Demand and Energy Charges shown on Fifty-third Revised Page No. 1 of Schedule II-A, which sets forth the W-95(S) rates, for all kilowatts and kilowatthours purchased by the Customer from the Company for resale to retail customers, and such charges shall not be subject to change during such period for service to the Customer. For the same period, the Company shall charge and the Customer shall pay the Contract Termination Charges determined in accordance with Appendix 1 and the Schedules attached to this Amendment for all kilowatthours delivered, but not sold, to retail customers in its service territory, pursuant to the Retail Access Schedule. During this period the Company shall reconcile recoveries under W-95(S) rates and the Contract Termination Charge pursuant to procedure set forth in Section 1.1.4 of Appendix 1. After the Contract Termination Date, the Company's service under the W-95(S) rates will cease, and the Company will charge and the Customer will pay the Contract Termination Charges for all kilowatthours delivered to the Customer's Service Area. In addition, the Company shall be obligated to provide the Customer with standard offer service pursuant to Section 9, below. 6. For the period between July 1, 1997 and the Contract Termination Date, the Company will adjust non-fuel billings to the Customer to assure that the Customer's average purchased power expense is not increased solely as a result of the phase-in of retail access in Rhode Island. This adjustment is necessary because of the Company's marginal cost rate design. The sales lost as the result of the Customer's retail load beginning to purchase electricity from other power producers would have been billed by the Company at its lower- cost tail block rates. Thus, a billing adjustment is necessary to prevent the average cost of power supply to the Customer and its remaining retail load from increasing solely as a result of the phase-in of retail access. Base rate adjustments will be established using estimated and/or actual hourly loads provided to the Company on a monthly basis for Tariff No. 1 billing. The hourly loads will be summed to determine usage during On-Peak Hours and Off-Peak Hours. The Customer will provide the average rate of delivery associated with retail customers in its service territory who purchased electricity from a power producer other than the Company during the sixty-minute clock hour occurring at the time of the Company's peak load for the month. These amounts ("the Retail Access Loads") need to be estimated because the wholesale meter reads at the Company's interconnections with the Customer cannot distinguish between requirements loads under the Company's Tariff No. 1 and Retail Access Loads. The Company will adjust the Customer's base rate purchased power expense excluding the Retail Access Loads to equal what the base rate purchased power expense would have been if the Retail Access Loads had continued to purchase requirements service from the Customer. Adjustments will be made for demand, on-peak energy and off-peak energy. The total adjustment shall equal the sum of the: (1) Adjustment to Demand Related Expense, (2) Adjustment to On-Peak Energy Expense, and (3) Adjustment to Off-Peak Energy Expense. Formulas for each of these three adjustments are shown below. ADJUSTMENT TO (Average Demand Average Demand ) Total kW DEMAND RELATED = (Charge Including - Charge Excluding )x Purchases Excluding EXPENSE (Retail Access Load Retail Access Load) Retail Access Load ADJUSTMENT TO (Avg Peak Energy Avg Peak Energy ) Total Peak kWh ON-PEAK = (Charge Including - Charge Excluding )x Purchases Excluding ENERGY EXPENSE (Retail Access Load Retail Access Load) Retail Access Load ADJUSTMENT TO (Avg Off-Pk Energy Avg OffPk Energy ) Total Off-Pk kWh OFF-PEAK = (Charge Including - Charge Excluding )x Purchases Excluding ENERGY EXPENSE (Retail Access Load Retail Access Load) Retail Access Load After the Contract Termination Date, the adjustments pursuant to this paragraph shall cease. 7. Notwithstanding anything to the contrary in the Tariff or the Service Agreement, the Contract Termination Charges specified in Appendix 1 and the attached Schedules to this Amendment shall remain in effect until the Company has collected all amounts subject to collection thereunder and neither the Customer's obligation to pay the Contract Termination Charges in full nor the formulae for the calculation of the Contract Termination Charges set forth in Appendix 1 and the attached Schedules to this Amendment shall be subject to change through application to the Federal Energy Regulatory Commission pursuant to the provisions of Section 205 or Section 206 of the Federal Power Act, absent the agreement of the Company or its successors or assigns. 8. Notwithstanding anything to the contrary in Schedule III-B of the Tariff, the Company will discontinue fixed credits to the Customer for generation and transmission effective on the date or dates that the Customer's integrated generation or transmission facilities are transferred to the Company, a separate affiliate, or an unaffiliated third party. During any period in which the Customer has transferred some, but less than all of its generation or transmission facilities, the amount of the applicable fixed credit, excluding municipal taxes and cost of removal expenses associated with the South Street Station, will be prorated to reflect the remaining facilities by multiplying the appropriate fixed credit for either generation or transmission by the ratio of gross plant investment remaining to the total gross plant. Nothing in this Amendment shall preclude the Company from otherwise petitioning the FERC to adjust the level of the fixed credits in accordance with the terms of the Tariff. 9. For the period commencing on the Contract Termination Date and extending through December 31, 2009 (the "Standard Offer Period"),/1/ the _______________________ /1/ Company and Customer shall have the right in their sole discretion to shorten the period of standard offer service to December 31, 2004, if Customer no longer has the obligation under the Rhode Island URA to extend standard offer service through 2009. Company shall provide service to the Customer in accordance with this section, such service being referred to as "Standard Offer Service." (a) Standard Offer Service shall be made available at the prices set forth in the Stipulation and Agreement, adjusted for a fuel index. The prices for Standard Offer Service do not include charges for transmission services provided in accordance with section 10 of this Amendment, or charges for distribution services under the Customer's rates for distribution services, but otherwise reflect the price of electricity delivered to the meters of the ultimate customers of the Customer. (b) Standard Offer Service shall be made available by the Company to the Customer after the Wholesale Access Date for the purposes set forth in paragraph D of Schedule I of the Tariff or to the Customer for resale to those ultimate customers in the Customer's service territory who elect to purchase Standard Offer Service after the Retail Access Date and have not terminated Standard Offer Service to purchase electricity from another supplier, provided that, neither the Customer nor the ultimate customers shall be required to purchase Standard Offer Service from the Company. For the first year after the Retail Access Date, the Company shall make Standard Offer Service available to all residential or Rate C-2 customers of the Customer, who have previously taken service from an alternative supplier, if such residential or Rate C-2 customer elects to return to Standard Offer Service within 120 days of taking service from the alternative supplier. (c) In the event the Contract Termination Date is determined by the Wholesale Access Date, the Customer shall be free, either in its notice pursuant to section 3(b), or thereafter by giving the Company at least 90 days advance written notice directed to the first day of a calendar month, to terminate or reduce its purchases of Standard Offer Service from the Company in order to obtain electricity from other suppliers in the market. Once the Customer has reduced or terminated its purchases of Standard Offer Service from the Company, the Company shall have no obligation to supply Standard Offer Service to the Customer with respect to the terminated or reduced purchases. (d) No less than 90 days before the Retail Access Date, the Customer shall notify the Company in writing of the quantity of energy it shall purchase under Standard Offer Service for resale to ultimate customers in its service territory. The Customer shall provide the Company with at least 30 days prior advance written notice, directed to the first day of a calendar month, of reductions in the quantity of energy so purchased due to decisions by customers initially electing Standard Offer Service to purchase electricity from other suppliers after the Retail Access Date. Nothing in this Amendment shall restrict the right of any ultimate customer to purchase electricity from other suppliers after the Retail Access Date, provided that, except as set forth in section 9(b), above, once any such ultimate customer has purchased electricity from another supplier, the Company shall have no obligation to supply Standard Offer Service to the Customer for resale to such ultimate customer. (e) The Company acknowledges that the Customer will offer alternative power suppliers the opportunity in an auction to supply electricity to enable the Customer to provide Standard Offer Service to ultimate customers in its service territory after the Retail Access Date. The Company shall be free to bid in the auction, provided that the Company's bid shall not exceed the prices set forth in the Stipulation and Agreement, adjusted for the fuel index set forth in that Agreement. 10. In accordance with the Retail Access Schedule, the Company (including any successor or assign of the Company that succeeds to the Company's obligations with respect to the operation of its transmission facilities) shall, upon request of the Customer, provide network integration transmission service to the Customer in accordance with the Service Agreement for Network Integration Transmission Service between the Customer and the Company included in Attachment 3 to the Stipulation and Agreement, and with the terms and conditions of the tariff maintained in effect by the Company for such service, or in accordance with the policy of the Federal Energy Regulatory Commission as in effect from time to time. Such service shall be provided to the Customer after the Wholesale Access Date to enable the Customer to integrate its loads and resources and shall be provided to the Customer after the Retail Access Date to enable the ultimate customers in the Customer's service territory to integrate their loads and resources. From July 1, 1997 through the Contract Termination Date, the Network Integration Transmission Service shall only apply to kilowatthours delivered, but not sold, by the Customer in the Customer's Service Area, and the Company shall continue to provide transmission service to the Customer pursuant to the W-95(S) wholesale rate for the retail customers continuing to purchase power from the Customer. After the Contract Termination Date, the Network Transmission Service shall apply to all kilowatthours delivered in the Customer's Service Area. 11. This Amendment shall take effect as of the date it is permitted to become effective by the Federal Energy Regulatory Commission, which date shall be referred to as the "Effective Date." This Amendment, together with all provisions of the Tariff and the Service Agreement necessary to effectuate all provisions of this Amendment, shall remain in effect until all obligations of the parties under this Amendment, including, without limitation, the obligation of the Customer to pay to the Company the Contract Termination Charges, have been discharged in full. Upon the discharge in full of all such obligations, this Amendment and the Service Agreement shall terminate. 12. The provisions of this Amendment shall override any inconsistent provisions of the Service Agreement and, with respect to the Customer, all inconsistent provisions of the Tariff, but all provisions of the Tariff and the Service Agreement that are not inconsistent with this Amendment shall remain in full force and effect. 13. The rights conferred and obligations imposed on the Customer and Company under this Amendment shall be binding on or inure to the benefit of their successors in interest or assignees as if such successor or assignee was itself a signatory hereto. IN WITNESS WHEREOF, the parties have executed this Amendment of Service Agreement as of the date first written above. NEW ENGLAND POWER COMPANY By Its THE NARRAGANSETT ELECTRIC COMPANY By Its EX-10 16 NEP EXHIBIT 10(GG)(II) WHOLESALE SALES AGREEMENT WHOLESALE SALES AGREEMENT between NEW ENGLAND POWER COMPANY and USGEN ACQUISITION CORPORATION Dated as of August 5, 1997 Table of Contents ARTICLE 1. BASIC UNDERSTANDINGS........................................ 1 ARTICLE 2. DEFINITIONS................................................. 1 ARTICLE 3. TERM AND REGULATORY APPROVAL................................ 3 3.1 Term........................................................ 3 3.2 Filings..................................................... 4 ARTICLE 4. SALE AND PURCHASE........................................... 4 4.1 Sale and Purchase........................................... 4 4.2 Quantities.................................................. 4 ARTICLE 5. PRICE AND BILLING........................................... 5 5.1 Price....................................................... 5 5.3 Taxes, Fees and Levies...................................... 7 ARTICLE 6. DELIVERY AND LOSSES......................................... 7 6.1 Delivery.................................................... 7 ARTICLE 7. DEFAULT AND TERMINATION..................................... 7 7.1 Material Breach and Termination............................. 7 ARTICLE 8. NOTICES, REPRESENTATIVES OF THE PARTIES..................... 9 8.1 Notices..................................................... 9 8.2 Authority of Representative................................. 9 ARTICLE 9. LIABILITY, INDEMNIFICATION, AND RELATIONSHIP OF PARTIES..................................... 10 9.1 Limitation on Consequential, Incidental and Indirect Damages..................................................... 10 9.2 Indemnification............................................. 10 9.3 Independent Contractor Status............................... 11 ARTICLE 10. ASSIGNMENT.................................................. 11 10.1 General Prohibition Against Assignments..................... 11 10.2 Exceptions to Prohibition Against Assignments............... 11 ARTICLE 11. SUCCESSORS AND ASSIGNS...................................... 11 ARTICLE 12. FORCE MAJEURE............................................... 12 12.1 Force Majeure Standard...................................... 12 12.2 Force Majeure Definition.................................... 12 12.3 Obligation to Diligently Cure Force Majeure................. 12 ARTICLE 13. WAIVERS..................................................... 13 ARTICLE 14. REGULATION.................................................. 13 14.1 Laws and Regulations........................................ 13 14.2 NEPOOL Requirements......................................... 13 ARTICLE 15. INTERPRETATION.............................................. 13 ARTICLE 16. SEVERABILITY................................................ 14 ARTICLE 17. MODIFICATIONS............................................... 14 ARTICLE 18. SUPERSESSION................................................ 14 ARTICLE 19. COUNTERPARTS................................................ 14 ARTICLE 20. HEADINGS.................................................... 14 WHOLESALE SALES AGREEMENT ------------------------- This WHOLESALE SALES AGREEMENT ("Agreement") is dated as of August 5, 1997 and is by and between NEW ENGLAND POWER COMPANY ("NEP"), a Massachusetts corporation, and USGen Acquisition Corporation, a Delaware corporation ("Buyer"). This Agreement provides for the purchase by Buyer and the sale by NEP of Wholesale Nuclear Entitlement as defined in this Agreement. ARTICLE 1. BASIC UNDERSTANDINGS NEP has ownership and/or contractual interests in certain nuclear generating units and is willing to supply electric energy, capacity, and any other associated electric products from those interests to Buyer on the terms specified in this Agreement. Buyer desires to purchase that electric energy, capacity, and any other associated electric products from NEP. Nothing in this Agreement shall be deemed to cause Buyer to have acquired any Ownership Interest or otherwise be treated as an owner of any Nuclear Interest. ARTICLE 2. DEFINITIONS The following words and terms shall be understood to have the following meanings when used in this Agreement, or in any associated documents entered into in conjunction with this Agreement. In addition, except as otherwise expressly provided, where terms used in this Agreement are defined in the NEPOOL Agreement and not otherwise defined herein, such definitions are expressly incorporated into this Agreement by reference. CLOSING DATE - The date upon which Buyer acquires control of the generating assets it purchases from NEP. COMMISSION OR FERC - The Federal Energy Regulatory Commission or such successor federal regulatory agency as may have jurisdiction over this Agreement. CONTRACT PERIOD - A three month period during the term of this Agreement, except that the first Contract Period shall begin on the Closing Date and end on the last day of the third month following the month in which the Closing Date occurred and, if the term of this Agreement expires on a date other than the last day of any three month period, the last Contract Period shall also end on that date. DEPARTMENT - The Massachusetts Department of Public Utilities. GOOD UTILITY PRACTICE(S) - The practices, methods and acts (including but not limited to the practices, methods and acts engaged in or approved by a significant portion of the electric utility industry) that at a particular time, in the exercise of reasonable judgment in light of the facts known or that should reasonably have been known at the time a decision was made, would have been expected to accomplish the desired result in a manner consistent with law, regulation, codes, standards, equipment manufacturer's recommendations, reliability, safety, environmental protection, economy and expedition. GWH - Gigawatt hour. ISO - The Independent System Operator to be established in accordance with the NEPOOL Agreement and the Interim Independent System Operator Agreement as amended, superseded or restated from time to time. KW - Kilowatt. KWH - Kilowatt- hour. MMBTU - Million British thermal units. NUCLEAR INTERESTS - NEP's interests as a joint owner in Seabrook Unit 1 and Millstone Unit 3 and as a purchaser under power contracts with Vermont Yankee Nuclear Power Corporation and Maine Yankee Atomic Power Company. NEPEX - The New England Power Exchange. NEPOOL - The New England Power Pool. NEPOOL AGREEMENT - The New England Power Pool Agreement dated as of September 1, 1971, as amended and as may be amended or restated from time to time. OWNERSHIP INTERESTS - NEP's interests as a joint owner in Seabrook Unit 1 and Millstone Unit 3 and as a stockholder of Vermont Yankee Power Corporation and Maine Yankee Atomic Power Company. PRICE - The price set forth in SECTION 5, below. PRIME RATE - The prime (or comparable) rate announced from time to time as its prime rate by the Bank of Boston or its successor, which rate may differ from the rate offered to its more substantial and creditworthy customers. PTF - Facilities categorized as Pool Transmission Facilities under the NEPOOL Agreement. WHOLESALE NUCLEAR ENTITLEMENT - NEP's generation and delivery to Buyer at any location on the NEPOOL PTF system of electric energy, capacity, and any other associated electric product produced by NEP's Nuclear Interests in the quantities determined in accordance with ARTICLE 4, SECTION 4.2. WHOLESALE STANDARD OFFER SERVICE AGREEMENTS - The Agreement(s) of even date herewith entered into between the Buyer and certain of NEP's affiliates under which Buyer supplies Wholesale Standard Offer Service, as defined therein, to NEP's affiliates. ARTICLE 3. TERM AND REGULATORY APPROVAL 3.1 Term The term of this Agreement shall begin at 12:01 am on the Closing Date and continue until the earlier of: (a) the day that the last Wholesale Standard Offer Service Agreement terminates; (b) the day NEP consummates a permanent sale or other disposition of the last of its Nuclear Interests; or (c) the day the last of NEP's Nuclear Interests has been permanently retired by decision of the owners or board of directors of the unit or by order of the Nuclear Regulatory Commission. 3.2 Filings NEP will file this Agreement with FERC (and any other regulatory agency as may have jurisdiction over the Agreement) in accordance with the provisions of applicable laws, rules and regulations. Buyer will be responsible for any filing fees for filing this Agreement with FERC (and any other regulatory agency as may have jurisdiction over the Agreement). ARTICLE 4. SALE AND PURCHASE 4.1 Sale and Purchase NEP shall sell and deliver to the Delivery Points and Buyer shall purchase the quantity of Wholesale Nuclear Energy determined for each Contract Period in accordance with SECTION 4.2. The price for such sale and purchase shall be as set forth in ARTICLE 5, SECTION 5.1, below. 4.2 Quantities On or before the Closing Date, with respect to the first Contract Period and, thereafter, at least thirty (30) days prior to the beginning of each Contract Period, Buyer will notify NEP of the quantity of Wholesale Nuclear Entitlement that Buyer desires to purchase from NEP during the next Contract Period (the "Purchased Quantity"). Such quantity shall be expressed in a stated number of kilowatts for each Nuclear Interest during each month of the Contract Period, Buyer having the right to nominate different quantities (including zero) for different months during any Contract Period. Failure by Buyer to nominate a quantity of Wholesale Nuclear Entitlement in a timely fashion as set forth in the first sentence of this section, for any Contract Period, shall be deemed a nomination of zero kilowatts for each Nuclear Interest for each month during the Contract Period. During each month of a Contract Period, NEP shall sell and deliver and Buyer shall purchase a quantity of Wholesale Nuclear Entitlement equal to the lesser of: (a) the quantity nominated by the Buyer with respect to the month and (b)(1) if Buyer has purchased NEP's fossil generating stations, 88.2% of the total of the winter maximum claimed capability ratings of NEP's Nuclear Interests during the month and (2) if Buyer has purchased NEP's hydroelectric generating stations, 9.8% of the total of the winter maximum claimed capability ratings of NEP's Nuclear Interests during the month. Notwithstanding anything in this Agreement to the contrary, NEP shall not be required to deliver any Wholesale Nuclear Entitlement from any plant that fails to operate for any reason whatsoever, nor shall anything in this Agreement be construed to constrain NEP in any way from exercising its judgment as to when any Nuclear Interests should be temporarily shut down or permanently retired. ARTICLE 5. PRICE AND BILLING 5.1 Price (a) For each month during any Contract Period that kW or kWh are sold and delivered under this Agreement, Buyer shall pay NEP the NEPOOL Market Price, which shall be the sum of: (1) the NEPOOL Installed Capability Clearing Price for the month (expressed in dollars per kilowatt) times the Purchased Quantity for the month; plus (2) the NEPOOL Energy Clearing Price (expressed in dollars per megawatt-hour) times the megawatt-hours delivered by NEP from the Purchased Quantity, for each hour of the month; plus (3) the NEPOOL Operable Capability Clearing Price (expressed in dollars per megawatt-hour) times the operable megawatt-hours made available from the Purchased Quantity, for each hour of the month. It is understood by the parties that the Nuclear Interests do not currently provide Automatic Generation Control, 10-Minute Spinning Reserve, 10-Minute Non-Spinning Reserve and 30-Minute Operating Reserve. In the event one or more of the Nuclear Interests provide one or more of these services in the future, the parties will modify the price in this paragraph to include the appropriate NEPOOL market-clearing price for such service provided. (b) For any month during a Contract Period in which Buyer provides service under a Wholesale Standard Offer Service Agreement and the average Energy Price (as defined below) exceeds the prices set forth below, NEP shall credit the amount owed to NEP by Buyer with an amount as defined below: Contract Period Price in Cents per kWh --------------- ---------------------- 1998 3.0 Cents 1999 3.2 Cents 2000 3.5 Cents 2001 3.5 Cents 2002 3.9 Cents 2003 4.3 Cents 2004 4.7 Cents Please see Amendment No. 1 attached 5.2 Payment (a) On or before the tenth (10th) day of each month during the term of this Agreement, NEP shall calculate the amount due and payable pursuant to this ARTICLE 5 with respect to the preceding month and shall render a bill to Buyer for that amount. The amount payable shall be as calculated in ARTICLE 5, SECTION 5.1, above, for the applicable Contract Period. (b) Buyer shall pay NEP any amounts due and payable on or before the twenty-fifth (25th) day after a bill is rendered pursuant to paragraph (a). In the event a bill is rendered after the date specified in paragraph (a), Buyer shall have an additional period of time to make payment equal to the period of the delay in issuance of the bill. If all or any part of any amount due and payable pursuant to paragraph (a) shall remain unpaid thereafter, interest shall thereafter accrue and be payable to NEP on such unpaid amount at a rate per annum equal to two percent (2%) above the Prime Rate in effect on the date of such bill; provided, however, if the amount due and payable is disputed, interest shall accrue and be payable to NEP on the unpaid amount finally determined to be due and payable at a rate per annum equal to the Prime Rate in effect on the date the bill is rendered. (c) If either party discovers an error in a bill (whether the amount is paid or not), the calculation may be corrected, and any overpayment or underpayment will be refunded or paid up, as appropriate. Interest shall accrue from the date of the error and be payable on the unpaid amount finally determined to be due and payable at a rate per annum equal to the Prime Rate in effect on the date the error is originally discovered. 5.3 Taxes, Fees and Levies Buyer shall be obligated to pay all present and future taxes, fees and levies which may be assessed by any entity upon the purchase or sale of electricity covered by the Agreement. ARTICLE 6. DELIVERY AND LOSSES 6.1 Delivery All electricity shall be delivered by NEP to Buyer in the form of three- phase sixty-hertz alternating current at any location on the NEPOOL PTF system or MECO's System ("Delivery Points"). Title shall pass to the Buyer at the Delivery Point. If the NEPOOL control area experiences congestion, Buyer will be responsible for any congestion costs incurred in delivering power across the PTF system to the extent such costs are imposed by NEPOOL or the ISO on suppliers. NEP shall be responsible for any local point to point charges and distribution charges needed to deliver the power to the NEPOOL PTF, it being anticipated that there will be no such costs. ARTICLE 7. DEFAULT AND TERMINATION 7.1 Material Breach and Termination (a) (i) If NEP fails in any material respect to comply with, observe or perform any covenant, warranty or obligation under this Agreement (except due to causes excused by force majeure or attributable to Buyer's wrongful act or wrongful failure to act); and (ii) After receipt of written notice from Buyer such failure continues for a period of forty-five (45) days, or, if such failure cannot be reasonably cured within such forty-five (45) day period, such further period as shall reasonably be required to effect such cure, provided that NEP commences within such forty-five (45) day period to effect such cure and at all times thereafter proceeds diligently to complete such cure as quickly as possible; then (iii) Buyer shall have the right to terminate this Agreement; and subject to the duty to mitigate, Buyer shall be entitled to collect from Seller the difference between the NEPOOL Market Price and the price it would have paid had Seller performed. (b) (i) If Buyer fails in any material respect to comply with, observe, or perform any covenant, warranty or obligation under this Agreement (except due to causes excused by force majeure or attributable to NEP's wrongful act or wrongful failure to act); and (ii) After receipt of written notice from Buyer such failure continues for the Cure Period (as defined below) or, if such failure cannot be reasonably cured within the Cure Period, such further period as shall reasonably be required to effect such cure, provided that Buyer commences within the Cure Period to effect such cure and at all times thereafter proceeds diligently to complete such cure as quickly as possible; then (iii) NEP shall have the right to terminate this Agreement. For purposes of this Section 7.1(a), the Cure Period shall mean five (5) days in the case of a failure by Buyer to fulfill its payment obligations pursuant to Section 5.2 and forty-five (45) days in the case of a failure by Buyer to comply with, observe or perform any other covenant, warranty or obligation under this Agreement. (c) Nothing in this SECTION 7.1 shall be construed to limit the right of any party to seek any remedies for damages, as limited by ARTICLE 9 of this Agreement, even if a cure of an alleged breach is made within the periods of time specified for curing any such breach stated above. The provisions of this SECTION 7.1 are intended only to provide the exclusive process through which one party may exercise and effectuate its right to terminate this Agreement as a result of a material breach of this Agreement. ARTICLE 8. NOTICES, REPRESENTATIVES OF THE PARTIES 8.1 Notices Any notice, demand, or request required or authorized by this Agreement to be given by one party to another party shall be in writing. It shall either be sent by facsimile (confirmed by telephone), overnight courier, personally delivered and acknowledged in writing or by registered or certified mail (return receipt requested), postage prepaid, to the representative of the other party designated in this ARTICLE 8. Any such notice, demand, or request shall be deemed to be given (i) when sent by facsimile confirmed by telephone, (ii) when actually received if delivered by courier or personal deliver or (iii) three (3) days after deposit in the United States mail, if sent by first class mail. Notices and other communications by Buyer to NEP shall be addressed to: New England Power Company 25 Research Drive Westborough, MA 01582 Attention: Michael J. Hager Fax: (508) 389-3001 Notices and other communications by NEP to Buyer shall be addressed to: USGen Acquisition Corporation 7500 Old Georgetown Road, 13th Floor Bethesda, MD 20814 Attention: Stephen A. Herman, Esq. Fax: (301) 718-6913 Any party may change its representative by written notice to the others. 8.2 Authority of Representative The parties' representatives designated in ARTICLE 8, SECTION 8.1 shall have full authority to act for their respective principals in all technical matters relating to the performance of this Agreement. They shall not, however, have the authority to amend, modify, or waive any provision of this Agreement unless they are authorized officers of their respective entities. ARTICLE 9. LIABILITY, INDEMNIFICATION, AND RELATIONSHIP OF PARTIES 9.1 Limitation on Consequential, Incidental and Indirect Damages To the fullest extent permissible by law, neither NEP nor Buyer, nor their respective officers, directors, agents, employees, parent or affiliates, successor or assigns, or their respective officers, directors, agents, or employees, successors, or assigns, shall be liable to the other parties or its parent, subsidiaries, affiliates, officers, directors, agents, employees, successors or assigns, for claims, suits, actions or causes of action for incidental, indirect, special, punitive, multiple or consequential damages (including attorney's fees or litigation costs) connected with or resulting from performance or non-performance of this Agreement, or any actions undertaken in connection with or related to this Agreement, including without limitation any such damages which are based upon causes of action for breach of contract, tort (including negligence and misrepresentation), breach of warranty, strict liability, Massachusetts Gen. Laws ch 93A, statute, operation of law, or any other theory of recovery. The provisions of this SECTION 9.1 shall apply regardless of fault and shall survive termination, cancellation, suspension, completion or expiration of this Agreement. 9.2 Indemnification (a) Buyer agrees to defend, indemnify and save NEP, its officers, directors, employees, agents, successors, assigns, and affiliates and their officers, directors, employees, and agents harmless from and against any and all claims, suits, actions or causes of action for damage by reason of bodily injury, death, or damage to property caused by Buyer, its officers, directors, employees, agents or affiliates or caused by or sustained on its facilities, except to the extent caused by an act of negligence or willful misconduct by an officer, director, agent, employee or Affiliate of NEP or their successors or assigns. (b) NEP agrees to defend, indemnify and save Buyer, its officers, directors, employees, agents, successors, assigns, and affiliates and their officers, directors, employees, and agents harmless from and against any and all claims, suits, actions or causes of action for damage by reason of bodily injury, death, or damage to property caused by NEP, its officers, directors, employees, agents or affiliates or caused by or sustained on its facilities, except to the extent caused by an act of negligence or willful misconduct by an officer, director, agent, employee or Affiliate of Buyer or their successors or assigns. (c) If any party intends to seek indemnification under this ARTICLE from another party with respect to any action or claim, the party seeking indemnification shall give the other party notice of such claim or action within fifteen (15) days of the commencement of, or actual knowledge of, such claim or action. Such party seeking indemnification shall have the right, at its sole cost and expense, to participate in the defense of any such claim or action. The party seeking indemnification shall not compensate or settle any such claim or action without the prior consent of the other parties, which consent shall not be unreasonably withheld. 9.3 Independent Contractor Status Nothing in this Agreement shall be construed as creating any relationship between NEP and Buyer other than that of independent contractors for the sale and purchase of electricity. ARTICLE 10. ASSIGNMENT 10.1 Assignment This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party hereto, including by operation of law without the prior written consent of the other party, nor is this Agreement intended to confer upon any other Person except the parties hereto any rights or remedies hereunder. Notwithstanding the foregoing, (i) NEP may, without Buyer's prior written consent, (A) assign all or a portion of its rights and obligations under this Agreement to any Affiliate of NEP or (B) assign its rights and obligations hereunder, or transfer such rights and obligations by operation of law, to any corporation or other entity with which or into which NEP shall merge or consolidate or to which NEP shall transfer all or substantially all of its assets, provided that such Affiliate or other entity agrees to be bound by the terms thereof; (ii) the Buyer may assign all of its rights and obligations hereunder to any wholly owned Subsidiary (direct or indirect) of PG&E Corporation and upon NEP's receipt of notice from Buyer of any such assignment, the Buyer will be released from all liabilities and obligations hereunder, accrued and unaccrued, such assignee will be deemed to have assumed, ratified, agreed to be bound by and perform all such liabilities and obligations, and all references herein to "Buyer" shall thereafter be deemed references to such assignee, in each case without the necessity for further act or evidence by the parties hereto or such assignee; provided, however, that no such assignment and assumption shall release the Buyer from its liabilities and obligations hereunder unless the assignee shall have acquired all or substantially all of the Buyer's assets; provided, further, however, that no such assignment and assumption shall relieve or in any way discharge PG&E Corporation from the performance of its duties and obligations under the Guaranty dated as of the date of this Agreement executed by PG&E Corporation, and (iii) the Buyer or its permitted assignee may assign, transfer, pledge or otherwise dispose of its rights and interests hereunder to a trustee or lending institution(s) for the purposes of financing or refinancing the Purchased Assets, including upon or pursuant to the exercise of remedies under such financing or refinancing, or by way of assignments, transfers, conveyances or dispositions in lieu thereof; provided, however, that no such assignment or disposition shall relieve or in any way discharge the Buyer or such assignee from the performance of its duties and obligations under this Agreement. NEP agrees to execute and deliver such documents as may be reasonably necessary to accomplish any such assignment, transfer, conveyance, pledge or disposition of rights hereunder so long as NEP's rights under this Agreement are not thereby altered, amended, diminished or otherwise impaired. ARTICLE 11. SUCCESSORS AND ASSIGNS This Agreement shall inure to the benefit of and shall be binding upon the parties hereto and their respective permitted successors and assigns. ARTICLE 12. FORCE MAJEURE 12.1 Force Majeure Standard The parties shall be excused from performing their respective obligations hereunder and shall not be liable in damages or otherwise, if and only to the extent that they are unable to so perform or are prevented from performing by an event of force majeure. 12.2 Force Majeure Definition An event of force majeure includes, without limitation, storm, flood, lightning, drought, earthquake, fire, explosion, equipment failure, civil disturbance, labor dispute, act of God or the public enemy, action of a court or public authority, or any other cause beyond a party's control. 12.3 Obligation to Diligently Cure Force Majeure If any party shall rely on the occurrence of an event or condition described in ARTICLE 12, SECTION 12.2, above, as a basis for being excused from performance of its obligations under this Agreement, then the party relying on the event or condition shall: a. provide written notice to the other parties promptly, but in no event later than 5 days of the occurrence of the event or condition giving an estimation of its expected duration and the probable impact on the performance of its obligations hereunder; b. exercise all reasonable efforts to continue to perform its obligations hereunder; c. expeditiously take reasonable action to correct or cure the event or condition excusing performance; provided that settlement of strikes or other labor disputes will be completely within the sole discretion of the party affected by such strike or labor dispute; d. exercise all reasonable efforts to mitigate or limit damages to the other parties to the extent such action will not adversely affect its own interests; and e. provide prompt notice to the other parties of the cessation of the event or condition giving rise to its excuse from performance. ARTICLE 13. WAIVERS The failure of any party to insist in any one or more instance upon strict performance of any of the provisions of this Agreement or to take advantage of any of its rights under this Agreement shall not be construed as a general waiver of any such provision or the relinquishment of any such right, but the same shall continue and remain in full force and effect, except with respect to the particular instance or instances. ARTICLE 14. REGULATION 14.1 Laws and Regulations This Agreement and all rights, obligations, and performances of the parties hereunder, are subject to all applicable Federal and state laws, and to all duly promulgated orders and other duly authorized action of governmental authority having jurisdiction. 14.2 NEPOOL Requirements This Agreement must comply with all NEPOOL Criteria, Rules, and Standard Operating Procedures ("Rules"). If, during the term of this Agreement, the NEPOOL Agreement is terminated or amended in a manner that would eliminate or materially alter a Rule affecting a right or obligation of a party hereunder, or if such a Rule is eliminated or materially altered by NEPOOL, the parties agree to negotiate in good faith in an attempt to amend this Agreement to incorporate a replacement Rule ("Replacement Rule"). The intent of the parties is that any such Replacement Rule reflect, as closely as possible, the intent and substance of the Rule being replaced as such Rule was in effect prior to such termination or amendment of the NEPOOL Agreement or elimination or alteration of the Rule. ARTICLE 15. INTERPRETATION The interpretation and performance of this Agreement shall be in accordance with and controlled by the laws of The Commonwealth of Massachusetts. ARTICLE 16. SEVERABILITY If any provision or provisions of this Agreement shall be held invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall in no way be affected or impaired thereby. ARTICLE 17. MODIFICATIONS No modification to this Agreement will be binding on any party unless it is in writing and signed by all parties. ARTICLE 18. SUPERSESSION This Agreement constitutes the entire agreement between the parties relating to the subject matter hereof and its execution supersedes any other agreements, written or oral, between the parties concerning such subject matter. ARTICLE 19. COUNTERPARTS This Agreement may be executed in any number of counterparts, and each executed counterpart shall have the same force and effect as an original instrument. ARTICLE 20. HEADINGS Article and Section headings used throughout this Agreement are for the convenience of the parties only and are not to be construed as part of this Agreement. IN WITNESS WHEREOF, the parties have caused their duly authorized representatives to execute this Agreement on their behalf as of the date first above written. NEW ENGLAND POWER COMPANY /s/ Michael E. Jesanis BY: Its Treasurer USGEN ACQUISITION CORPORATION /s/ Joseph P. Kearney BY: Its President AMENDMENT NO. 1 TO WHOLESALE SALES AGREEMENT Amendment No. 1, dated as of September 25, 1997, to the Wholesale Sales Agreement, dated as of August 5, 1997 (the "Agreement"), by and among New England Power Company, a Massachusetts corporation ("NEP") and USGen New England, Inc. (formerly named USGen Acquisition Corporation), a Delaware corporation (the "Buyer"). Whereas, NEP and the Buyer are parties to the Agreement. Whereas, NEP and the Buyer desire to amend the Agreement in certain respects. Now, therefore, in consideration of the premises and the representations and warranties, covenants and other agreements hereinafter set forth, the parties hereto, intending to be legally bound hereby, agree as follows: Section 1. Section 5.1 of the Agreement is hereby amended by adding the following text at the end of Section 5.1 following the table and immediately prior to the beginning of Section 5.2: "For purposes of this paragraph, "average Energy Price" shall be the value obtained by dividing (i) the amount determined in accordance with paragraph 5.1(a)(2) above and (ii) the total number of megawatt-hours delivered by NEP from the Purchased Quantity during the month. The amount of the credit, if any, shall be the product of (i) the difference between (a) the average Energy Price (as expressed in dollars per megawatt-hour) and (b) the applicable value from the above table (expressed in dollars per megawatt-hour) and (ii) the lesser of (a) the number of megawatt-hours delivered under the Wholesale Standard Offer Service Agreements during the month or (b) the total number of megawatt-hours delivered by NEP from the Purchased Quantity for the month." IN WITNESS WHEREOF, the undersigned parties hereto have executed this Amendment No. 1 as of the date first written above. NEW ENGLAND POWER COMPANY By:_________________________ Name: Title: USGEN NEW ENGLAND, INC. By:_________________________ Name: Title: EX-10 17 NEP EXHIBIT 10(GG)(III) PPA TRANSFER AGREEMENT This PPA TRANSFER AGREEMENT ("Agreement") is dated as of August 5, 1997 and is made by and between NEW ENGLAND POWER COMPANY, a Massachusetts corporation ("NEP"), and USGEN ACQUISITION CORPORATION, a Delaware corporation ("Asset Purchaser"). This Agreement sets forth the terms and conditions under which NEP will transfer to Asset Purchaser the economic benefits and performance obligations, subject to NEP's continuing obligations to make certain payments, associated with certain Power Purchase Agreements between NEP and third party power suppliers (the "Power Sellers") that NEP and Asset Purchaser desire to be transferred concurrently with the sale of NEP's generation business to Asset Purchaser pursuant to the Asset Purchase Agreement, dated as of August 5, 1997 (the "APA"), by and among NEP, The Narragansett Electric Company and Asset Purchaser. 1. The following Power Purchase Agreements (each, as amended or supplemented, a "Commitment") are incorporated into this Agreement by reference:
Doc. No. Party Date - --- ----- ---- 2076 Ocean State Power 5/14/86* 2077 Ocean State Power II 6/15/88* 2068 Altresco Pittsfield, L.P. 12/9/87* 2071 Milford Power L.P. 4/24/96 2072 Pawtucket Power Associates L.P. 12/14/87* 2062 Ogden Haverhill Associates 12/30/85* 2065 SES Millbury Company, L.P. 12/17/85 2063 Massachusetts Refusetech, Inc. 1/6/81* 2064 Refuse Energy Systems Company 1/1/6 2075 L'Energia L.P. 2/26/91 2058 Lawrence Hydroelectric Associates 1/1/85 2061 Ridgewood Providence Power Partners, L.P. 11/6/87* 2060 Pontook Hydro L.P. 1/26/85 2102 Waste Management of New Hampshire, Inc. 5/20/91* 2067 Suncook Energy Corporation 9/7/94* 2059 Mascoma Hydro Corporation 11/14/86 2066 Phillip's Energy, Inc. 9/7/94* 2073 Massachusetts Water Resources Authority 9/21/95 2069 Clark University 2/12/82* 2070 Clark University 2/12/82* 2078 General Electric Lynn River Works 7/7/92 2079 Refuse Fuels Associates 6/12/80* 2080 Simpson Paper 1/1/85 2074 Canal I 12/1/65* 2035 HydroQuebec Phase II 10/14/85 2033 HydroQuebec Phase I 3/21/83 2103 Connecticut Light & Power 1/4/89* 2592 Cambridge Electric Light Company, Commonwealth Electric Light Company 7/3/93* * Indicates agreement has been amended or supplemented.
A Commitment shall be automatically deleted from the above Commitment list without further action by the parties: (i) on the effective date of any Novation (as defined in Section 7, below), (ii) upon the expiration of a Commitment pursuant to its terms, or (iii) upon the termination of a Commitment pursuant to the written agreement of the parties thereto. 2. This Agreement shall become effective on the Effective Date (as defined in Section 13) and shall remain in effect until Asset Purchaser has made payment to NEP of amounts owed pursuant to Section 4(a), below, and NEP has made payment to Asset Purchaser and/or the Power Sellers of amounts owed pursuant to Sections 3, 4(b) and 8, below, for the last month in which a Commitment is listed on the Section 1 Commitment list; provided however that the provisions of Section 8 of this Agreement shall survive until NEP has paid all amounts due thereunder. 3. Commencing as of the Effective Date, NEP agrees to provide to Asset Purchaser all electric capacity, energy and any other benefits it receives under each Commitment listed on the Section 1 Commitment list as of the first day of the month simultaneously with NEP's receipt thereof from each Power Seller. All electric energy shall be delivered to Asset Purchaser at the point at which the Power Seller makes delivery to NEP as established under the Commitment. Asset Purchaser shall be responsible for making all arrangements necessary for the further transmission of such energy. NEP shall, however, promptly reimburse Asset Purchaser for all costs actually and reasonably incurred by Asset Purchaser in transmitting such energy from such delivery points to the NEPOOL Pool Transmission Facility system either pursuant to this Section 3 or pursuant to a Commitment which has been amended and assigned pursuant to Section 7, provided that NEP shall not be responsible for an increase in such cost attributable to any amendment to a Commitment by the Asset Purchaser. 4. (a) Commencing as of the month following the Effective Date, Asset Purchaser agrees to pay to NEP each month all amounts properly due from NEP to the Power Seller for the preceding month associated with capacity, energy and any other benefits made available to NEP by the Power Seller and accordingly by NEP to it from each Commitment listed on the preceding month's Section 1 Commitment list, less the amount of NEP's Monthly Payment Obligation specified in Section 8 below. For purposes of the first monthly payment due from Asset Purchaser to NEP under this Agreement in connection with each Commitment, energy payments shall be based on meter readings taken on the first day for which Asset Purchaser has a payment obligation under this Agreement and capacity payments shall be based on the ratio of the number of days in the month for which Asset Purchaser has a payment obligation under this Agreement to the total number of days in the month. Asset Purchaser shall make such payment sufficiently in advance of the time that such payment is due by NEP to the Power Seller as to allow NEP to make timely payment under such Commitment. In turn, each month NEP agrees to timely pay each Power Seller all amounts due under each Commitment, which includes the amount NEP receives from Asset Purchaser in connection with such Commitment and the amount of NEP's payment obligation specified in Section 8 below. (b) Upon the Effective Date, NEP shall irrevocably and unconditionally assign and thereafter hold for the benefit of and/or credit to Asset Purchaser against payments due from it to NEP under Section 4(a) hereof or at the termination of this Agreement pay to Asset Purchaser any and all amounts which are then or thereafter received by NEP from the Power Sellers under the Commitments, including, without limitation, any aggregate differential balances under any Commitment and the benefit of and proceeds from any security deposits, letters of credit or other similar instruments or accounts established for the benefit of NEP by the Power Seller, but excluding any credits or refunds received by NEP after the Effective Date which relate to billing errors or reconciliations of pre-Effective Date bills, and any amounts paid by the Power Sellers to NEP with respect to disputes arising before the Effective Date that are attributable to a period prior to the Effective Date. 5. (a) Effective as of the Effective Date, NEP hereby irrevocably and unconditionally appoints Asset Purchaser as its representative and agent for all purposes under each Commitment. Asset Purchaser is hereby authorized to take all actions that NEP may lawfully take under the Commitment without further approval by NEP, including, without limitation, the following: with respect to all matters arising under the Commitments, deal directly with the Power Sellers, the New England Power Pool ("NEPOOL"), the Independent System Operator (as designated under the Restated NEPOOL Agreement as filed with the Federal Energy Regulatory Commission on December 31, 1996, and as amended from time to time), other transporters of electric energy, federal, state and local governmental authorities, and any other persons; act on NEP's behalf in the prosecution or defense, as the case may be, of any rights or liabilities arising under the Commitments; monitor the Power Sellers' performance under the Commitments; review and audit all bills and related documentation rendered by the Power Sellers; and on NEP's behalf enter into amendments to the Commitments of any nature; provided, however Asset Purchaser shall not amend any Commitment with respect to any of NEP's interconnection rights and obligations, or extend the term thereof or increase NEP's obligations thereunder without NEP's consent, which shall not be unreasonably withheld. Asset Purchaser shall have the right to delegate to its affiliates or third parties any of its responsibilities under this Section 5. NEP hereby agrees to provide and deliver to Asset Purchaser all information which NEP now has or hereafter acquires or to which it is entitled with respect to each Commitment and Asset Purchaser hereby agrees to be subject to any confidentiality provisions of such Commitment with respect to such information. NEP also agrees to participate at Asset Purchaser's request and under Asset Purchaser's direction in any governmental proceeding with respect to the Commitments or this Agreement. (b) NEP agrees not to agree to any amendment to or waiver of rights under a Commitment without Asset Purchaser's consent, which Asset Purchaser may grant or withhold in its sole discretion, and will not take any actions inconsistent with the provisions of this Section 5. 6. (a) NEP will indemnify, defend and hold harmless the Asset Purchaser from and against any and all claims, demands or suits (by any person), losses, liabilities, damages (excluding consequential or special damages), obligations, payments, costs and expenses (including, without limitation, the costs and expenses of any and all actions, suits, proceedings, assessments, judgments, settlements, and compromises relating thereto and reasonable attorneys' fees and reasonable disbursements in connection therewith) to the extent the foregoing are not covered by insurance (each, an "Indemnifiable Loss"), asserted against or suffered by Asset Purchaser relating to, resulting from or arising out of any relationship or payment obligation of NEP resulting from or contained in this Agreement or any obligation of NEP for any acts or omissions under the Commitments incurred prior to the Effective Date. For purposes hereof, any willful or negligent failure of NEP to perform any act required to be performed by it under a Commitment which increases the amounts payable by Asset Purchaser under Section 4(a) hereof shall be an Indemnifiable Loss for which Asset Purchaser shall be entitled to indemnification hereunder. (b) Asset Purchaser will indemnify, defend and hold harmless NEP from and against any and all Indemnifiable Losses asserted against or suffered by NEP relating to, resulting from or arising out of any relationship or payment obligation of Asset Purchaser resulting from or contained in this Agreement. For purposes hereof, NEP's costs incurred in administering the Commitments and performing its obligations under this Agreement shall not be an Indemnifiable Loss. (c) Any person entitled to receive indemnification under this Agreement (an "Indemnitee") having a claim under these indemnification provisions shall make a good faith effort to recover all losses, damages, costs and expenses from insurers of such Indemnitee under applicable insurance policies so as to reduce the amount of any Indemnifiable Loss hereunder. The amount of any Indemnifiable Loss shall be reduced (i) to the extent that Indemnitee receives any insurance proceeds with respect to an Indemnifiable Loss and (ii) to take into account any net Tax benefit recognized by the Indemnitee arising from the recognition of the Indemnifiable Loss and any payment actually received with respect to an Indemnifiable Loss. (d) The expiration, termination or extinguishment of any covenant or agreement shall not affect the parties' obligations under this Section 6 if the Indemnitee provided the person required to provide indemnification under this Agreement (the "Indemnifying Party") with proper notice of the claim or event for which indemnification is sought prior to such expiration, termination or extinguishment. (e) The rights and remedies of NEP and Asset Purchaser under this Section 6 are exclusive and in lieu of any and all other rights and remedies which NEP and Asset Purchaser may have under this Agreement or otherwise for monetary relief with respect to any relationship or payment obligation resulting from this Agreement. (f) NEP and Asset Purchaser each agree that, notwithstanding any provisions in this Agreement to the contrary, all parties to this Agreement retain their remedies at law or in equity with respect to willful or intentional breaches of this Agreement. (g) If any Indemnitee receives notice of the assertion of any claim or of the commencement of any claim, action, or proceeding made or brought by any person who is not a party to this Agreement or any affiliate of a party to this Agreement (a "Third Party Claim") with respect to which indemnification is to be sought from an Indemnifying Party, the Indemnitee will give such Indemnifying Party reasonably prompt written notice thereof, but in any event not later than ten (10) calendar days after the Indemnitee's receipt of notice of such Third Party Claim. Such notice shall describe the nature of the Third Party Claim in reasonable detail and will indicate the estimated amount, if practicable, of the Indemnifiable Loss that has been or may be sustained by the Indemnitee. The Indemnifying Party will have the right to participate in or, by giving written notice to the Indemnitee, to elect to assume the defense of any Third Party Claim at such Indemnifying Party's own expense and by such Indemnifying Party's own counsel, and the Indemnitee will cooperate in good faith in such defense at such Indemnitee's own expense. (h) If within ten (10) calendar days after an Indemnitee provides written notice to the Indemnifying Party of any Third Party Claim the Indemnitee receives written notice from the Indemnifying Party that such Indemnifying Party has elected to assume the defense of such Third Party Claim as provided in the last sentence of clause (g), the Indemnifying Party will not be liable for any legal expenses subsequently incurred by the Indemnitee in connection with the defense thereof; provided, however, that if the Indemnifying Party fails to take reasonable steps necessary to defend diligently such Third Party Claim within twenty (20) calendar days after receiving notice from the Indemnitee that the Indemnitee believes the Indemnifying Party has failed to take such steps, the Indemnitee may assume its own defense, and the Indemnifying Party will be liable for all reasonable expenses thereof. Without the prior written consent of the Indemnitee, the Indemnifying Party will not enter into any settlement of any Third Party Claim which would lead to liability or create any financial or other obligation on the part of the Indemnitee for which the Indemnitee is not entitled to indemnification hereunder. If a firm offer is made to settle a Third Party Claim without leading to liability or the creation of a financial or other obligation on the part of the Indemnitee for which the Indemnitee is not entitled to indemnification hereunder and the Indemnifying Party desires to accept and agree to such offer, the Indemnifying Party will give written notice to the Indemnitee to that effect. If the Indemnitee fails to consent to such firm offer within ten (10) calendar days after its receipt of such notice, the Indemnitee may continue to contest or defend such Third Party Claim and, in such event, the maximum liability of the Indemnifying Party as to such Third Party Claim will be the amount of such settlement offer, plus reasonable costs and expenses paid or incurred by the Indemnitee up to the date of such notice. (i) Any claim by an Indemnitee on account of an Indemnifiable Loss which does not result from a Third Party Claim (a "Direct Claim") will be asserted by giving the Indemnifying Party reasonably prompt written notice thereof, stating the nature of such claim in reasonable detail and indicating the estimated amount, if practicable, but in any event not later than ten (10) calendar days after the Indemnitee becomes aware of such Direct Claim, and the Indemnifying Party will have a period of thirty (30) calendar days within which to respond to such Direct Claim. If the Indemnifying Party does not respond within such thirty (30) calendar day period, the Indemnifying Party will be deemed to have accepted such claim. If the Indemnifying Party rejects such claim, the Indemnitee will be free to seek enforcement of its rights to indemnification under this Agreement. (j) If the amount of any Indemnifiable Loss, at any time subsequent to the making of an indemnity payment in respect thereof, is reduced by recovery, settlement or otherwise under or pursuant to any insurance coverage, or pursuant to any claim, recovery, settlement or payment by or against any other entity, the amount of such reduction, less any costs, expenses or premiums incurred in connection therewith (together with interest thereon from the date of payment thereof at the prime rate then in effect of the Bank of Boston), will promptly be repaid by the Indemnitee to the Indemnifying Party. Upon making any indemnity payment, the Indemnifying Party will, to the extent of such indemnity payment, be subrogated to all rights of the Indemnitee against any third party in respect of the Indemnifiable Loss to which the indemnity payment relates; provided, however, that (i) the Indemnifying Party will then be in compliance with its obligations under this Agreement in respect of such Indemnifiable Loss and (ii) until the Indemnitee recovers full payment of its Indemnifiable Loss, any and all claims of the Indemnifying Party against any such third party on account of said indemnity payment is hereby made expressly subordinated and subjected in right of payment to the Indemnitee's rights against such third party. Without limiting the generality or effect of any other provision hereof, each such Indemnitee and Indemnifying Party will duly execute upon request all instruments reasonably necessary to evidence and perfect the above-described subrogation and subordination rights, and otherwise cooperate in the prosecution of such claims at the direction of the Indemnifying Party. Nothing in this clause (j) shall be construed to require any party hereto to obtain or maintain any insurance coverage. (k) A failure to give timely notice as provided herein will not affect the rights or obligations of any party hereunder except if, and only to the extent that, as a result of such failure, the party which was entitled to receive such notice was actually prejudiced as a result of such failure. 7. NEP and Asset Purchaser agree to work cooperatively and use all reasonable efforts to amend each Commitment and assign each such amended Commitment to Asset Purchaser so that NEP will be released of all further liabilities and obligations under the Commitment and Asset Purchaser will be directly in contract with the Power Seller (a "Novation"). Any such Novation shall include all modifications necessary to reflect the substitution of Asset Purchaser for NEP as the purchasing party under the Commitment (including modifications to Commitment price indices, where appropriate) and to properly describe interconnection, delivery point and transmission system references and obligations in the Commitment. The provisions of Section 8(d) shall apply to all such Novations. It is intended by the parties that all such Novations preserve the economic benefit and other rights of the Commitment to the Asset Purchaser without increasing the Asset Purchaser's obligations under the Commitment while continuing to afford to NEP the protections for its transmission system embodied in the interconnection provisions of the Commitment; provided however that nothing contained herein is intended to limit the ability of Asset Purchaser to direct the availability, dispatch, quantity or timing of the capacity or electrical output of a plant, facility or system which is the subject of a Commitment, subject to the current terms of such Commitment. NEP and Asset Purchaser agree to execute all agreements and documents reasonably required by the other in connection with all such Novations. 8. (a) In the month in which the Effective Date occurs, NEP shall be obligated to pay the Power Sellers an aggregate amount equal to (i) the Monthly Payment Obligation (as defined in 8(d)(1) below), as adjusted in accordance with Section 8(d)(4) below, multiplied by (ii) a fraction, the numerator of which is the total number of days in the month in which the Effective Date occurs, less the number of days in such month up to the Effective Date, and the denominator of which is the total number of days in the month in which the Effective Date occurs, and such adjusted amount shall be deducted by Asset Purchaser from the amount due NEP under Section 4 above for such month. (b) Commencing as of the month following the Effective Date and continuing for each succeeding month through and including January 2008, NEP shall be obligated to pay the Power Sellers each month an aggregate amount equal to the Monthly Payment Obligation, as adjusted in accordance with Section 8(c) and Section 8(d)(4) below, and such adjusted amount shall be deducted by Asset Purchaser from the amount due NEP under Section 4 above. (c) In the event that the amount of NEP's Monthly Payment Obligation set forth in Section 8(b) (as adjusted to reflect any increases pursuant to this Section 8(c)) shall in any month exceed the amount due NEP from Asset Purchaser under Section 4, NEP shall increase the amount of its obligation in the next month (in addition to its obligation set forth in Section 8(b)) by the amount of such excess plus interest thereon at the Applicable Discount Rate (as defined in Section 8(d)(3)) from the date payment from Asset Purchaser for such month would have been due to the date of the next payment by Asset Purchaser under Section 4 (the "Excess Obligation") and Asset Purchaser shall also be allowed to deduct such Excess Obligation from the amount due NEP under Section 4 for such month. Should there be an Excess Obligation as of January 31, 2008, NEP shall within thirty days thereafter pay at the direction of Asset Purchaser the amount of such Excess Obligation. (d) To the extent that a "Trigger Event" (as hereinafter defined) shall occur with respect to any Commitment, NEP will, with the consent of Asset Purchaser, make a full or a partial lump-sum payment ("Trigger Payment") to the appropriate Power Seller or such other party as the Asset Purchaser may direct, as the case may be. Subject to subsection (6) below, Trigger Payments shall, unless otherwise agreed to by Asset Purchaser, be made concurrently with the Trigger Event, or as soon thereafter as is practicable (but not later than the later of (x) sixty (60) days thereafter and (y) one hundred twenty (120) days after reasonable notice was given by Asset Purchaser that a Trigger Event was likely to occur) ("Trigger Payment Date"). (1) NEP's monthly payment obligations under Sections 8(a) and (b) above, and before adjustment in accordance with subsection (5) below, are detailed on Schedule B hereto ("Monthly Payment Obligation"). For each Commitment, and for each year from 1998 through 2007, a corresponding percentage of the Monthly Payment Obligation is set forth on Schedule A hereto (the "Applicable Percentage"). (2) "Trigger Event" shall mean: (i) a Novation; (ii) a termination of a Commitment; (iii) a negotiated modification of a Commitment under which the obligations of NEP are reduced; or (iv) a legislative, regulatory or court-ordered change in the terms of a Commitment under which the obligations of NEP are reduced; provided, however, that if at the time any one of the events specified in (i), (ii), or (iii) above shall occur, Asset Purchaser shall be in default with respect to indemnification as to its payment obligations under Section 6(b) hereof, no Trigger Event shall be deemed to have arisen from any such event unless and until such default shall have been cured. (3) The amount of any Trigger Payment (i) if in respect of a Trigger Event listed in subsection (2)(i) or (ii) above, shall, except as otherwise approved by Asset Purchaser, be the discounted amount as of the Trigger Payment Date (using as the discount rate a percentage equal to the sum of (x) the yield reported on page PX1 of the Bloomberg Financial Market Services Screen (or, if not available, any other nationally recognized trading screen reporting on-line intraday trading in United States government securities) at 4:00 p.m. (New York time) on the day prior to the Trigger Payment Date for the off-the-run 5-year Treasury Note plus (y).50% (the "Applicable Discount Rate")) of (A) NEP's remaining Monthly Payment Obligations as of the Trigger Payment Date multiplied by (B) the Commitment's Applicable Percentage for the year in which the Trigger Payment Date occurs, and (ii) if in respect of a Trigger Event listed in subsection (2)(iii) or (iv) above, shall, except as otherwise approved by Asset Purchaser, equal (x) the amount calculated under clause (i) above multiplied by (y) a fraction (but in no event less than zero nor greater than one (1)) calculated by mutual agreement in accordance with the following sentence (the "Reduction Factor"). The parties shall mutually agree to a Reduction Factor for each applicable Trigger Event that represents the proportion by which the discounted present value, using the Applicable Discount Rate, of the projected costs under the affected Commitment minus $.032 per kWh (as adjusted to be held constant in 1998 dollars using the Consumer Price Index), has been reduced as a result of such Trigger Event. Any controversy in connection with the calculation of the Reduction Factor shall be determined and settled by arbitration in New York, New York, by a person or persons mutually agreed upon, or in the event of a disagreement as to the selection of the arbitrator or arbitrators, in accordance with the rules of the American Arbitration Association. Any award rendered therein shall specify the findings of fact of the arbitrator or arbitrators and the reasons for such award, with the reference to and reliance on relevant law. Any such award shall be final and binding on each and all of the parties thereto and their personal representatives, and judgment may be entered thereon in any court having jurisdiction thereof and the fees of such arbitrators in connection with the determination shall be paid by the party against whom the award was made, or if a compromise was made, shared equally. (4) Upon the making of any such Trigger Payment, except as otherwise agreed to by Asset Purchaser, the amounts thereafter payable in accordance with Section 8(a) or Section 8(b) shall be reduced by the sum of (i) the reductions arising under this subsection (4) from all previous Trigger Payments made by NEP plus (ii)(x) in the case of a Trigger Payment made under Section 8(d)(4)(i), by an amount equal to (A) the Applicable Percentage used in calculating such Trigger Payment multiplied by (B) the Monthly Payment Obligation and (y) in the case of a Trigger Payment made under Section 8(d)(4)(ii), by an amount equal to (A) the Applicable Percentage used in calculating such Trigger Payment multiplied by (B) the Monthly Payment Obligation multiplied by (C) the Reduction Factor. (5) Notwithstanding the foregoing, NEP's obligation to make any Trigger Payment shall, at the option of NEP, be deferred, in whole or in part, pending satisfaction of the following conditions: (i) NEP shall be reasonably satisfied that the full amount of such Trigger Payment will be currently deductible for Federal and state income tax purposes and that such deduction shall be fully utilized in its Federal and state tax returns and (ii) NEP shall have received approval from all necessary regulatory authorities for any financing that NEP reasonably requires in order to fund such Trigger Payment. NEP shall use reasonable efforts to obtain and maintain, from all regulatory authorities having jurisdiction, approvals for the issuance of up to $100,000,000 in long-term securities for the purpose of funding Trigger Payments. (6) If NEP shall elect to defer making a Trigger Payment pursuant to subsection (5) above, then not later than the date that such Trigger Payment is otherwise due, NEP will grant a first priority, perfected security interest to Asset Purchaser in such portion of NEP's Contract Termination Charge revenues and related Service Agreements (the "CTCs") with Massachusetts Electric Company ("MECO") and The Narragansett Electric Company ("NECO") as is equal to the amount by which each Monthly Payment Obligation would be reduced pursuant to subsection (4) above had the Trigger Payment not been deferred. Such security interest shall be granted pursuant to a duly executed security agreement in form and substance reasonably satisfactory to Asset Purchaser, and shall provide that proceeds of the collateral shall be assigned to Asset Purchaser and paid by MECO and NECO to Asset Purchaser or as otherwise directed by Asset Purchaser; provided, however, that unless and until there shall occur an event of default under such security agreement, the Asset Purchaser will waive its right to receive proceeds directly from MECO and NECO pursuant to such assignment. Further, NEP shall not be permitted to exercise its election under subsection (5) unless the granting of the security interest contemplated in this subsection (6) and the assignment of proceeds in connection therewith shall be consented to by MECO and NECO. (7) During the term of this Agreement, NEP shall not grant, permit or suffer to exist any encumbrance, pledge, security interest, assignment, lien or other disposition of its rights to such portion of the CTCs referred to in subsection (7) above as is sufficient at all times to cover NEP's then remaining aggregate Monthly Payment Obligations and will at its sole expense take all actions required to remove and/or defend against any claim or encumbrance that may be created or asserted by any other party thereon. (8) Asset Purchaser shall release any security interest granted hereunder with respect to any Trigger Payment if: (a) NEP has provided Asset Purchaser with a letter of credit, collateral or other security in substitution for, and replacement of, the collateral referred to in Section 8(d)(6) which shall be at least equivalent in value to the security represented by such collateral as agreed between NEP and the Asset Purchaser, in the exercise of by each of its reasonable commercial judgment, or (b) NEP has paid Asset Purchaser the present value of the remaining security, using the Applicable Discount Rate applied in calculating the related deferred Trigger Payment. 9. This Agreement and all rights, obligations, and performances of the parties hereunder, are subject to all applicable Federal and state laws, and to all duly promulgated orders and other duly authorized action of governmental authority having jurisdiction. 10. Except as otherwise set forth in Section 5 hereof, this Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party hereto, including by operation of law without the prior written consent of the other party, nor is this Agreement intended to confer upon any other person except the parties hereto any rights or remedies hereunder. Notwithstanding the foregoing, (i) the Asset Purchaser may assign all of its rights and obligations hereunder to any wholly owned Subsidiary (direct or indirect) of PG&E Corporation and upon NEP's receipt of notice from Asset Purchaser of any such assignment, the Asset Purchaser will be released from all liabilities and obligations hereunder, accrued and unaccrued, such assignee will be deemed to have assumed, ratified, agreed to be bound by and perform all such liabilities and obligations, and all references herein to Asset Purchaser shall thereafter be deemed references to such assignee, in each case without the necessity for further act or evidence by the parties hereto or such assignee; provided, however, that no such assignment and assumption shall release the Asset Purchaser from its liabilities and obligations hereunder unless the assignee shall have acquired all or substantially all of the Asset Purchaser's assets; provided, further, however, that no such assignment and assumption shall relieve or in any way discharge PG&E Corporation from the performance of its duties and obligations under the Guaranty dated as of the date of this Agreement executed by PG&E Corporation for the purpose of financing or refinancing the Purchased Assets (as defined in the APA); and (ii) the Asset Purchaser or its permitted assignee may assign, transfer, pledge or otherwise dispose of its rights and interests hereunder to a trustee or lending institution(s) for the purpose of financing or refinancing the Purchased Assets (as defined in the APA), including upon or pursuant to the exercise of remedies under a financing or refinancing, or by way of assignments, transfers, conveyances or dispositions in lieu thereof; provided, however, that no such assignment or disposition shall relieve or in any way discharge the Asset Purchaser or such assignee from the performance of its duties and obligations under this Agreement. NEP agrees to execute and deliver such documents as may be reasonably necessary to accomplish any such assignment, transfer, conveyance, pledge or disposition of rights hereunder so long as NEP's rights under this Agreement are not thereby altered, amended, diminished or otherwise impaired. 11. This Agreement, the APA and any other agreement entered into by the parties pursuant to the APA constitute the entire agreement between the parties and supersede all previous offers, negotiations, discussions, communications and correspondence. This Agreement may be amended only by a written agreement signed by the parties. This Agreement is not intended to confer upon any other person (including, without limitation, the Power Sellers) except the parties hereto any rights or remedies. The interpretation and performance of this Agreement shall be according to and controlled by the laws of The Commonwealth of Massachusetts (regardless of the laws that might otherwise govern under applicable Massachusetts principles of conflicts of laws). 12. All payments required under this Agreement shall be paid in cash by federal or other wire transfer of immediately available funds to an account designated by the party to receive such payment. 13. This Agreement shall be of no force and effect until the Effective Date. If the APA shall have been terminated before the occurrence of the Closing Date (as defined in the APA), this Agreement shall, without any action of the parties hereto, terminate as of the time of the termination of the APA. As used in this Agreement, "Effective Date" shall mean the Closing Date (as defined in the APA). IN WITNESS WHEREOF, the parties have caused their duly authorized representatives to execute this Agreement on their behalf as of the date first above written. NEW ENGLAND POWER COMPANY By: Name: Title: USGEN ACQUISITION CORPORATION By: Name: Title: EX-10 18 NEP EXHIBIT 10(GG)(IV) PSA PERFORMANCE SUPPORT AGREEMENT This PSA PERFORMANCE SUPPORT AGREEMENT ("Agreement") is dated as of August 5, 1997 and is made by and between NEW ENGLAND POWER COMPANY, a Massachusetts corporation ("NEP"), and USGEN ACQUISITION CORPORATION, a Delaware corporation ("Asset Purchaser"). This Agreement sets forth the terms and conditions under which Asset Purchaser will make available certain electric energy and capacity to NEP in order to assist NEP in performing its obligations under a certain Power Sales Agreement between NEP and __________________ dated _____________ (the "Commitment"), and NEP will transfer to Asset Purchaser the economic benefits of the Commitment and Asset Purchaser will undertake certain responsibilities for administering the Commitment. This Agreement is being entered into in connection with the transactions contemplated by the Asset Purchase Agreement, dated as of August 5, 1997, by and among NEP, The Narragansett Electric Company and Asset Purchaser (the "APA"), under which NEP is selling its electric generation business to Asset Purchaser. 1. This Agreement shall become effective on the Effective Date (as defined in Section 11) and shall remain in effect until NEP has made payment to Asset Purchaser of amounts owed pursuant to Section 3, below. 2. Commencing as of the Effective Date, Asset Purchaser agrees to provide to NEP each month all electric capacity and energy necessary for NEP to perform its obligations under the Commitment. All electric energy shall be delivered to NEP at the point at which ____________ (the "Power Buyer") takes delivery from NEP under the terms of the Commitment. Asset Purchaser shall be responsible for making all arrangements necessary, if any, for the transmission of such energy to such delivery points. 3. Commencing as of the Effective Date, and in consideration of Asset Purchaser's undertakings hereunder, NEP agrees to pay to Asset Purchaser all amounts payable by Power Buyer under the Commitment. For purposes of the first and last monthly payments due from NEP to Asset Purchaser under this Agreement, energy payments shall be based on meter readings taken on the first and last day, respectively, for which NEP has a payment obligation under this Agreement and capacity payments shall be based on the ratio of the number of days in the month for which NEP has a payment obligation under this Agreement to the total number of days in the month. At the request of Asset Purchaser, NEP shall direct Power Buyer to make all payments due under the Commitment into such bank account of Asset Purchaser as Asset Purchaser shall notify NEP of in such request. 4. Effective as of the Effective Date, NEP hereby appoints Asset Purchaser as its agent for purposes of administering the Commitment. Asset Purchaser is authorized to take all actions that NEP may lawfully take under the Commitment without further approval by NEP, including, without limitation, initiating legal or other actions to enforce the obligations of Power Buyer thereunder and calculating and rendering bills to the Power Buyer on NEP's behalf; except that NEP's prior written consent shall be required for (i) actions that materially affect the price charged for or the quantity of power to be sold by NEP under the Commitment and (ii) Commitment option exercises, term extensions and/or amendments. NEP shall not unreasonably withhold such consent. NEP agrees not to agree to any amendment of, or to waive any rights under, the Commitment without Asset Purchaser's consent. Asset Purchaser and NEP shall cooperate in maintaining such cost indices as is necessary for NEP (or Asset Purchaser on NEP's behalf) to calculate the amount due from Power Buyer under the Commitment. 5. Each party shall be entitled to indemnification under this Agreement to the extent and in the manner set forth in Article X of the APA which is hereby incorporated herein by reference. 6. NEP and Asset Purchaser agree to work cooperatively and use all reasonable efforts to amend the Commitment and assign such amended Commitment to Asset Purchaser so that NEP will be released of all further liabilities and obligations under the Commitment and Asset Purchaser will be directly under contract with the Power Buyer. Any such amendment and assignment shall include all modifications necessary to reflect the substitution of Asset Purchaser for NEP as the selling party under the Commitment (including modification of Commitment price indices, where appropriate) and to properly describe delivery point and transmission system references made in the Commitment. It is intended by the parties and a condition to the obligation of Asset Purchaser to agree to any such Commitment amendment and assignment that such Commitment amendment and assignment preserve the economic benefit and other rights of the Commitment to the Asset Purchaser without increasing the Asset Purchaser's obligations under the Commitment. NEP and Asset Purchaser agree to execute all agreements and documents reasonably requested by the other in connection with such Commitment amendment and assignment. Where a complete assignment is not immediately feasible, the parties shall work cooperatively to achieve such partial assignment of rights and obligations as is consistent with the Commitment. 7. This Agreement and all rights, obligations, and performance of the parties hereunder, are subject to all applicable Federal and state laws, including, without limitation, the approval of the Federal Energy Regulatory Commission, and to all duly promulgated orders and other duly authorized actions of any governmental authority having jurisdiction. 8. This Agreement, the APA and any other agreement entered into by the parties pursuant to the APA constitute the entire agreement between the parties and supersedes all previous offers, negotiations, discussions, communications and correspondence. This Agreement may be amended only by a written agreement signed by the parties. The interpretation and performance of this Agreement shall be according to and controlled by the laws of The Commonwealth of Massachusetts. 9. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party hereto, including by operation of law without the prior written consent of the other party, nor is this Agreement intended to confer upon any other person except the parties hereto any rights or remedies hereunder. Notwithstanding the foregoing, (i) the Asset Purchaser may assign all of its rights and obligations hereunder to any wholly owned Subsidiary (direct or indirect) of PG&E Corporation and upon NEP's receipt of notice from Asset Purchaser of any such assignment, the Asset Purchaser will be released from all liabilities and obligations hereunder, accrued and unaccrued, such assignee will be deemed to have assumed, ratified, agreed to be bound by and perform all such liabilities and obligations, and all references herein to Asset Purchaser shall thereafter be deemed references to such assignee, in each case without the necessity for further act or evidence by the parties hereto or such assignee; provided, however, that no such assignment and assumption shall release the Asset Purchaser from its liabilities and obligations hereunder unless the assignee shall have acquired all or substantially all of the Asset Purchaser's assets; provided, further however, that no such assignment and assumption shall relieve or in any way discharge PG&E Corporation from the performance of its duties and obligations under the Guaranty dated as of the date of this Agreement executed by PG&E Corporation; and (ii) the Asset Purchaser or its permitted assignee may assign, transfer, pledge or otherwise dispose of its rights and interests hereunder to a trustee or lending institution(s) for the purposes of financing or refinancing the Purchased Assets (as defined in the APA), including upon or pursuant to the exercise of remedies under a financing or refinancing, or by way of assignments, transfers, conveyances or dispositions in lieu thereof; provided, however, that no such assignment or disposition shall relieve or in any way discharge the Asset Purchaser or such assignee from the performance of its duties and obligations under this Agreement. NEP agrees to execute and deliver such documents as may be reasonably necessary to accomplish any such assignment, transfer, conveyance, pledge or disposition of rights hereunder so long as NEP's rights under this Agreement are not thereby altered, amended, diminished or otherwise impaired. 10. Subject to the provisions of Section 3 hereof, all payments required under this Agreement shall be paid in cash by federal or other wire transfer of immediately available funds to an account designated by the party to receive the payment. 11. This Agreement shall be of no force and effect until the Effective Date. If the APA shall have been terminated before the occurrence of the Closing Date (as defined in the APA), this Agreement shall, without any action of the parties hereto, terminate as of the time of the termination of the APA. As used in this Agreement, "Effective Date" shall mean the Closing Date (as defined in the APA). IN WITNESS WHEREOF, the parties have caused their duly authorized representatives to execute this Agreement on their behalf as of the date first above written. NEW ENGLAND POWER COMPANY By: Name: Title: USGEN ACQUISITION CORPORATION By: Name: Title: EX-10 19 NEP EXHIBIT 10(HH) EMPLOYMENT AGREEMENT --------------------- This Employment Agreement is made and entered into as of the 9th day of December, 1997, by and between New England Power Company, hereinafter referred to as "the Company" and Andrew H. Aitken hereinafter referred to as "Employee". WHEREAS, the Company would like to have the option to retain the employment of Employee until the closing date of sale of the Company's generation assets to USGen Acquisition (USGen) under the Asset Purchase Agreement by and among New England Power Company, The Narragansett Electric Company and USGen Acquisition Corporation, dated as of August 5, 1997 ("the Agreement"). WHEREAS, Employee is willing to change the terms of his employment relationship with the Company and remain an employee of the Company as set forth below. NOW THEREFORE, in consideration of the mutual rights and obligations of the parties, the parties hereby agree as follows: 1.0 Term 1.1 Subject to the provisions of this Employment Agreement, the Company agrees to employ Employee and Employee agrees to remain in the Company's employ, at the Company's sole option, until the earlier of February 5, 1999 or the Closing Date of the sale of the Company's generation assets to USGen as set forth in Section 4.1 of the Agreement; provided, however, if (1) the Agreement is terminated pursuant to Section 11.1 of the Agreement prior to the Closing Date and the Company has given Employee notice under Section 3.1 below that it will not require Employee to remain with the Company after August 7, 1998 (Notification Letter) or (2) the Company gives Employee a Notification Letter, Employee shall be free to terminate his employment or this Employment Agreement, except for the obligations set forth in Articles 3.0, 5.0 and 10.0 below, after the earlier of the Termination Date set forth in Section 11.1 of the Agreement or August 7, 1998. 2.0 Duties 2.1 Employee shall diligently and conscientiously perform those duties customarily rendered by a Vice President and Director of Environmental and Safety and shall conduct his business in the usual, regular and ordinary course consistent with good industry practice. 3.0 Compensation and Benefits 3.1 In exchange for entering into this Employment Agreement, the Company shall pay Employee 4-1/2 months base pay (non-pensionable) in a lump sum payment of Forty Seven Thousand Three Hundred Forty Five dollars ($47,345.00) taxes withheld, eight to ten days following execution of this Employment Agreement. On August 7, 1998, the Company shall pay Employee an additional 4- 1/2 months base pay based upon Employee's 1998 salary rate (non- pensionable) in a lump sum payment taxes withheld, if and only if, the Company desires to have Employee remain in its employ until the earlier of February 5, 1999 or the Closing Date. If the Company is not going to require Employee to remain in its employ until the earlier of February 5, 1999 or the Closing Date, the Company shall send Employee a Notification Letter by July 6, 1998 and Employee shall be free to terminate his employment or this Employment Agreement, except for the obligations set forth in Articles 5.0 and 10.0 below anytime after August 7, 1998. If Employee has accepted a position with USGen effective upon closing prior to July 6, 1998, the Company will not factor such information into its decision. Notwithstanding the foregoing, if the Company terminates Employee's employment pursuant to Section 4.1(1), Employee shall be required to repay the Company the amount of said lump sum payment, which Employee agrees, the Company may, at its option, offset from Employee's final paychecks or any other amount owing Employee. 3.2 Notwithstanding any other provision of this Employment Agreement, in the event that any payment or benefit or portion thereof including any Special Severance Plan Payments (Total Payment) received or to be received by Employee in connection with a Change in Control as used in Section 280G of the Internal Revenue Code or the termination of Employee's employment (whether pursuant to the terms of this Employment Agreement or any other plan, arrangement or agreement with the Company) is subject, in whole or part to the Excise Tax under Section 280G of the Internal Revenue Code, then the Company shall reduce the Total Payment to the extent necessary so that no portion of the Total Payment is subject to the excise tax. 3.3 During the term of this Employment Agreement, the Company shall continue to compensate Employee according to the compensation plans and policies in effect for employees in ICP IC, in accordance with the Company's payroll practices for salaried employees. 3.4 Employee shall continue to be entitled to participate in employee benefit programs made available to employees in effect during the term of this Employment Agreement in accordance with the terms and conditions of said programs. 3.5 Employee shall continue to be eligible for the Special Severance Plan made available to employees in ICP IC, in accordance with the qualifications for and terms and conditions of said Special Severance Plan. 3.6 Except for claims to enforce this Employment Agreement, in consideration of the payments provided under this Employment Agreement, Employee on behalf of himself and his heirs and assigns fully and voluntarily forever releases, waives and discharges the Company, including all past, present and future subsidiaries, parents, affiliated companies and assigns and all past, present, and future fiduciaries trustees, directors, officers, agents and employees of any such companies from all claims, demands, causes of action, suits and liabilities of any kind and nature, known or unknown, asserted or unasserted up to the date of the signing of this Employment Agreement pertaining to any and all such claims arising out of or related to this Employment Agreement. 4.0 Termination of Employment 4.1 During the term of this Employment Agreement, the Company may only terminate this Employment Agreement as set forth in Section 1.1 above or for cause. For purposes of this Employment Agreement, cause shall mean (1) a willful breach of duty or misconduct by Employee or (2) death of Employee. 4.2 During the term of this Employment Agreement, Employee may not terminate this Employment Agreement for any reasons other than as set forth in Section 1.1 above or due to death of Employee. 4.3 Except as defined in compensation plans, benefits or policies to which Employee is otherwise entitled outside of this Employment Agreement, if Employee dies during the term of this Employment Agreement, the Company shall only be responsible for paying to the estate of Employee the compensation, including any bonuses due Employee, which would otherwise be payable to Employee up to the end of the month in which Employee's death occurs. 5.0 Standards of Conduct 5.1 Employee agrees to abide by the most recent version in effect of the Standards of Conduct for NEES Companies signed by Employee. 5.2 Employee recognizes and agrees that Employee's obligations under Section 5.1 herein are ongoing obligations which shall survive the expiration and/or termination of this Employment Agreement. 6.0 Assignment 6.1 The Company shall have the right to assign this Employment Agreement to an affiliate, and all covenants and agreements hereunder shall inure to the benefit of and shall be binding upon said assigns. 6.2 Employee's obligations under this Employment Agreement shall be binding upon Employee's heirs, executors, administrators and legal representatives. 7.0 Legal Remedies 7.1 Departure of Employee in breach of this Employment Agreement would be greatly detrimental to the Company, would be in violation of Article 1.0 and would cause the Company irreparable harm. Therefore, the parties agree, that the Company may pursue any legal remedies available to it for any breach or threatened breach by Employee, including without limitation, money damages. 8.0 Waiver and Election of Remedies 8.1 Waiver by the Company of any term, condition or provision of this Employment Agreement shall not be considered a waiver of that term, condition or provision in the future. Any waiver by the Company of the rights listed in this Employment Agreement shall be in writing and signed by a Company officer in order to be binding. 9.0 Severability 9.1 In the event that any portion or part of this Employment Agreement is deemed invalid, against public policy, void or otherwise unenforceable by a court of law, the parties shall negotiate an equitable adjustment in the affected provision of this Employment Agreement; however, the validity and enforceability of the remaining portions hereof shall otherwise be fully enforceable. 10.0 Confidentiality 10.1 Employee agrees, whether during the term of this Employment Agreement or after, that he will keep the fact, terms, and amount of this Employment Agreement completely confidential unless the fact (and only the fact) that this Employment Agreement exists is waived in writing by the President of the Company or unless such disclosure is required in a legal proceeding to enforce its terms, as a defense to any claim or as otherwise required by law. Notwithstanding the foregoing, Employee may disclose the terms of this Employment Agreement to his financial and/or tax advisor, attorney and family; provided said individuals agree to keep the terms of this Employment Agreement confidential. 10.2 The Company agrees to handle this Employment Agreement in a confidential manner. It will not disclose the terms or amount of this Employment Agreement to anyone outside of the Company except to those at USGen, or others who need to know to develop or effectuate this Employment Agreement or except in a legal proceeding to enforce its terms, as a defense to any claim or as otherwise required by law. In addition, the Company will not disclose the terms or amount of this Employment Agreement to anyone inside the Company except on a need to know basis. 11.0 Captions and Paragraph Headings 11.1 The captions and paragraph headings used in this Employment Agreement are for convenience only and are not to be construed as a part of this Employment Agreement. 12.0 Applicable Law 12.1 This Employment Agreement shall be construed under the laws of the Commonwealth of Massachusetts. Employee agrees to submit to the personal jurisdiction of the Massachusetts courts in respect to any matter or dispute arising out of this Employment Agreement. 13.0 Notice Any notice required or permitted to be given under this Employment Agreement shall be sufficient if in writing, and if sent by registered mail, return receipt requested, postage prepaid, addressed as set forth below or to such other address as either party may specify to the other party, in writing, from time to time: The Company: Employee: New England Power Company Andrew H. Aitken 25 Research Drive _______________________ Westborough, MA 01582 _______________________ Attn: Lawrence E. Bailey 14.0 Entire Agreement 14.1 This Employment Agreement constitutes the entire agreement between Company and Employee with respect to the subject matter hereof and all previous representations or agreements, whether written or oral are hereby annulled and superseded. No change, modification or alteration of any of the provisions of this Employment Agreement shall be binding unless such change, modification or alteration shall have been approved in writing by a Company officer. Employee acknowledges that he has read this Employment Agreement, understands it and is bound by its terms and conditions. Employee further acknowledges that he has voluntarily executed this Employment Agreement in accordance with the terms and conditions set forth herein. IN WITNESS WHEREOF, each party hereto has caused this Employment Agreement to be executed by its duly authorized representatives on the day and year set forth below. s/Andrew H. Aitken s/Lawrence E. Bailey Employee Company Date: December 9, 1997 EX-13 20 NEP ANNUAL REPORT Annual Report 1997 New England Power Company A Subsidiary of New England Electric System [LOGO] New England Power A NEES Company New England Power Company 25 Research Drive Westborough, Massachusetts 01582 Directors (As of March 18, 1998) Lawrence E. Bailey President of the Company Alfred D. Houston Chairman of the Company and Executive Vice President of New England Electric System Cheryl A. LaFleur Vice President and General Counsel of the Company and Senior Vice President, General Counsel, and Secretary of New England Electric System Richard P. Sergel President and Chief Executive Officer of New England Electric System Officers (As of March 18, 1998) Alfred D. Houston Chairman of the Company and Executive Vice President of New England Electric System Lawrence E. Bailey President of the Company Andrew H. Aitken Vice President of the Company Michael E. Hachey Vice President of the Company Michael E. Jesanis Vice President of the Company and Senior Vice President and Chief Financial Officer of New England Electric System Cheryl A. LaFleur Vice President and General Counsel of the Company and Senior Vice President, General Counsel, and Secretary of New England Electric System John F. Malley Vice President of the Company Masheed H. Rosenqvist* Vice President of the Company Arnold H. Turner** Vice President of the Company Jeffrey W. VanSant Vice President of the Company Robert King Wulff Clerk of the Company and of certain affiliates, Secretary or Assistant Clerk of certain affiliates and Assistant Secretary of an affiliate John G. Cochrane Treasurer of the Company and of certain affiliates, Vice President of an affiliate, Assistant Treasurer of an affiliate and Treasurer of New England Electric System Kirk L. Ramsauer Assistant Clerk of the Company and of certain affiliates, and Secretary, Assistant Secretary or Clerk of certain affiliates Howard W. McDowell Assistant Treasurer and Controller of the Company and of certain affiliates, Treasurer or Controller of certain affiliates and Assistant Secretary of an affiliate * Effective April 1, 1998 ** Mr. Turner plans to retire effective April 1, 1998. Transfer Agent and Dividend Paying Agent of Preferred Stock Bank of Boston, Boston, Massachusetts Registrar of Preferred Stock State Street Bank and Trust Company, Boston, Massachusetts This report is not to be considered an offer to sell or buy or solicitation of an offer to sell or buy any security. New England Power Company New England Power Company, (the Company) a wholly owned subsidiary of New England Electric System (NEES), is a Massachusetts corporation qualified to do business in Massachusetts, New Hampshire, Rhode Island, Connecticut, Maine, and Vermont. The Company is subject, for certain purposes, to the jurisdiction of the regulatory commissions of these six states, the Securities and Exchange Commission (SEC), and the Federal Energy Regulatory Commission (FERC). The Company's business is currently that of generating, purchasing, transmitting, and selling electric energy in wholesale quantities to other electric utilities, principally its distribution affiliates Granite State Electric Company (Granite State Electric), Massachusetts Electric Company (Massachusetts Electric), Nantucket Electric Company (Nantucket Electric), and The Narragansett Electric Company (Narragansett Electric). In August 1997, the Company and Narragansett Electric entered into an agreement to sell their nonnuclear generating business to an independent third party. See the "Divestiture of Generation Business" section of Financial Review. In accordance with industry restructuring settlements in both Massachusetts and Rhode Island, the Company's wholesale contracts with its distribution affiliates have been amended. These amendments allow for termination of the all-requirements services under those contracts. They also allow the Company to recover the cost of its above-market generation commitments allocable to Massachusetts Electric and Narragansett Electric (95 percent of the total costs) through a transition access charge, which the distribution affiliates will collect from customers. In February 1998, a comprehensive settlement agreement was reached with parties in the state of New Hampshire, which, upon receipt of all required regulatory approvals, would provide for arrangements similar to those of the Massachusetts and Rhode Island settlements. Efforts are ongoing with unaffiliated customers to secure recovery of the balance of the Company's above-market commitments. See the "Industry Restructuring" section of Financial Review for further discussion. Report of Independent Accountants New England Power Company, Westborough, Massachusetts: We have audited the accompanying balance sheets of New England Power Company (the Company), a wholly owned subsidiary of New England Electric System, as of December 31, 1997 and 1996 and the related statements of income, retained earnings, 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 Company 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. Boston, Massachusetts COOPERS & LYBRAND L.L.P. March 2, 1998 New England Power Company Financial Review Industry Restructuring On August 5, 1997, the Company and its Rhode Island distribution affiliate Narragansett Electric reached an agreement to sell their nonnuclear generating business to USGen New England, Inc (USGen), an indirect wholly owned subsidiary of PG&E Corporation. The divestiture of the nonnuclear generating business is in connection with the restructuring of the electric utility industry. Historically, electric utilities have provided their customers bundled electric service within exclusive franchise service territories. As the result of a number of trends, including a disparity in electric rates among regions of the country and new regulations and legislation intended to foster competition, retail customers are being allowed to choose their power supplier, with incumbent utilities required to deliver that electricity over their transmission and distribution systems. Because of legislation enacted in the states served by the NEES companies, most customers served by the NEES companies will have the ability to choose their power supplier by the first quarter of 1998. When customers are allowed to choose their power supplier, utilities face the risk that market prices may not be sufficient to recover the costs of the commitments incurred to supply customers under a regulated structure. The amounts by which such costs exceed market prices are commonly referred to as stranded costs." As described below, the Company has reached settlement agreements with all of its distribution affiliates and with parties representing the distribution customers of those affiliates. In each case, these settlements provide for recovery of stranded costs. Massachusetts Legislation and Settlement Agreement In November 1997, legislation was enacted which provides customers of Massachusetts' investor-owned utilities with the ability to choose their power supplier beginning on March 1, 1998. The legislation requires electric companies to provide customers who do not choose a power supplier with a transition rate (or "standard offer generation service") which results in a 10 percent rate reduction, with the discount increasing to 15 percent on or before September 1, 1999. The legislation also provides a mechanism for the recovery of stranded costs resulting from the introduction of customer choice. In December 1997, the Massachusetts Department of Telecommunications and Energy (MDTE) (formerly the Massachusetts Department of Public Utilities (MDPU)) found that a settlement agreement (the Massachusetts Settlement) previously reached among the Company, the Company's Massachusetts distribution affiliates Massachusetts Electric and Nantucket Electric, and various governmental agencies and other interested parties substantially complies with or is consistent with the Massachusetts statute. The Massachusetts Settlement was also conditionally approved by the FERC in November 1997, subject to a compliance filing to clarify the impact of the settlement on nonsettling parties. In accordance with the Massachusetts Settlement, the Company's wholesale contracts with Massachusetts Electric and Nantucket Electric have been amended effective March 1, 1998. The Massachusetts Settlement provides that Massachusetts Electric's and Nantucket Electric's share of the Company's stranded costs will be recovered from distribution customers through a transition access charge, which will be collected by these distribution companies. Under the Massachusetts Settlement, the recovery of the Company's stranded costs is divided into several categories. Unrecovered costs associated with generating plants and regulatory assets would be recovered over 12 years and would earn a return on equity of 9.4 percent. The above-market component of purchased power contracts and nuclear decommissioning costs would be recovered as incurred over the life of those obligations, a period expected to extend beyond 12 years. Initially, the transition access charge was set at 2.8 cents per kilowatthour (kWh). The MDTE has approved a reduction of the initial transition access charge to 2.7 cents per kWh for Massachusetts Electric and Nantucket Electric, effective March 1, 1998. The Company's filing with the FERC to approve this reduction is pending. The transition access charge would be reduced further upon completion of the sale of the Company's generating business, as described below. As the transition access charge declines, the Company would earn incentives based on successful mitigation of its stranded costs. These incentives would supplement the Company's return on equity. In addition to addressing customer choice and the recovery of stranded costs, the Massachusetts Settlement also required the NEES companies to divest their nonnuclear generating business. In August 1997, the Company and Narragansett Electric entered into an agreement to sell substantially all of their nonnuclear generating business to USGen. See "Divestiture of Generating Business" below. The net proceeds from the sale of the nonnuclear generating business to USGen will be used to reduce the transition access charge to approximately 1.5 cents per kWh. In addition, the FERC accepted the NEES companies proposal in conjunction with their divestiture filing that the recovery of the remaining above-market nuclear generating plant investment and regulatory assets be completed by the end of the year 2000. A referendum question which asks voters to repeal the Massachusetts statute is expected to be on the ballot in November 1998. The NEES companies are unable to predict the outcome. While by itself, repeal of the statute is not expected to materially impair the effectiveness of the previously approved Massachusetts Settlement, the potential exists that following repeal, there could be legislative or regulatory actions which could be materially adverse to the NEES companies. Rhode Island Legislation and Settlement Agreement In August 1996, the state of Rhode Island enacted legislation that allows customers in that state the opportunity to choose their power supplier. Under the Rhode Island statute, state accounts, certain new customers, and the largest manufacturing customers were able to choose their power supplier beginning on July 1, 1997. The balance of Rhode Island customers gained the ability to choose their power supplier on January 1, 1998. The Rhode Island statute also provided utilities with the ability to recover stranded costs. In November 1997, the FERC conditionally approved a settlement agreement among the Company, its Rhode Island distribution affiliate Narragansett Electric, the Rhode Island Public Utilities Commission and the Rhode Island Division of Public Utilities and Carriers, to implement the stranded cost recovery provisions of the Rhode Island statute, subject to a compliance filing to clarify the impact of the settlement on nonsettling parties. The terms of the Rhode Island Settlement are substantially the same as the Massachusetts Settlement. New Hampshire Legislation and Settlement Agreement On February 3, 1998, the Company and its New Hampshire distribution affiliate Granite State Electric reached a comprehensive settlement agreement with the Governor's office of the State of New Hampshire and a number of other interested parties on a plan to provide choice of power supplier to its customers by no later than July 1, 1998. This settlement agreement was reached in response to a previously enacted New Hampshire statute which requires customer choice of power supplier. The principal terms of the New Hampshire settlement agreement, which require approval by state and federal regulators, are substantially similar to the Massachusetts Settlement and the Rhode Island Settlement, including rate reductions for customers and the ability to recover stranded costs. Unaffiliated Customers Agreements have not yet been reached with certain wholesale customers that represent less than 2 percent of the Company's stranded cost exposure. In March 1998, the largest of these customers, the Town of Norwood, Massachusetts, gave notice of its intent to terminate its contract with the Company, without accepting responsibility for its share of the Company's stranded costs, and to begin taking power from another supplier. The Company has filed with the FERC for permission to charge Norwood a contract termination charge for its share of the Company's stranded costs. Divestiture of Generating Business As described above, in August 1997, the Company and Narragansett Electric (collectively, the Sellers) reached an agreement to sell their nonnuclear generating business to USGen. The nonnuclear generating business includes three fossil-fueled generating stations and 15 hydroelectric generating stations, totaling approximately 4,000 megawatts (MW) of capacity, as well as NEES' interest in Narragansett Energy Resources Company (NERC), a 20 percent general partner in the Ocean State Power project, all of which has a book value of $1.1 billion. USGen will pay the Sellers $1.59 billion in cash, of which $225 million will be contingent upon the introduction of customer choice of power supplier in Massachusetts. Based on the enactment of the Massachusetts statute, the NEES companies believe that the conditions for payment of the full purchase price have been met. USGen will also reimburse the NEES companies for $85 million of costs associated with early retirement and special severance programs for employees affected by industry restructuring. USGen will assume responsibility for environmental conditions at the Sellers' nonnuclear generating stations. USGen will also assume the Sellers' obligations under long-term fuel and fuel transportation contracts and certain collective bargaining agreements for nonnuclear facilities. In addition to the purchase of the generating stations, USGen will purchase the Company's entitlement to approximately 1,100 MW of power procured under long-term contracts. The Company will make a monthly fixed contribution toward the above-market cost of the purchased power of between $12.5 million and $14.2 million per month from closing through January 2008. USGen will be responsible for the balance of the costs under the purchased power contracts. The sale is subject to approval by various state and federal regulatory agencies. Several parties have objected to the sale on various grounds, including allegations that following the sale, USGen would be able to exercise unlawful levels of market power. On February 25, 1998, the FERC issued an order that rejected the market power allegations, approved the sale and conditionally approved most supporting filings. On February 27, 1998, the FERC approved the transfer of the hydroelectric generating licenses to USGen. While the timing of receipt of final regulatory approvals is uncertain, receipt of all approvals is unlikely before mid-1998. Closing is contingent upon all regulatory approvals being obtained by February 1999. In order to meet the terms of the Company's mortgage indenture, the Company will be required, prior to the consummation of the sale, to either defease or call approximately $278 million of its mortgage bonds. Any defeasance of bonds would be by deposit of cash representing principal and interest to the maturity date, or interest, principal, and general redemption premium to an earlier redemption date. In addition, the Company will retire approximately $372 million of mortgage bonds securing the issuance of a like amount of pollution control revenue bonds (PCRBs) by various public agencies. However, the Company expects that substantially all of the underlying PCRBs will remain outstanding as unsecured obligations of the Company. In addition, the long-term debt of NERC will be retired prior to the closing. Upon completion of the divestiture of the Company's nonnuclear generation business, the Company's stranded costs that will be recovered from distribution customers through a transition access charge, which will be collected by the Company's distribution affiliates, will be reduced from $4.5 billion to $2.1 billion. As part of the divestiture plan, in February 1998, New England Energy Incorporated (NEEI) (a wholly owned subsidiary of NEES) sold its oil and gas properties for approximately $50 million. NEEI's loss on the sale of approximately $120 million, before tax, has been reimbursed by the Company. At the divestiture date, any gain or loss from the divestiture of nonnuclear generating assets and oil and gas assets will be recorded as a regulatory asset or liability to be recovered as part of the Company's stranded costs, through the ongoing transition access charge, consistent with the settlement agreements. The Company may be required to record a liability for the monthly fixed contribution towards the above-market cost of purchased power. In such an event, the Company would also record a regulatory asset consistent with the settlement agreements. In addition, the Company will endeavor to sell, or otherwise transfer, its minority interest in three nuclear power plants and a 60 MW interest in a fossil-fueled generating station in Maine to nonaffiliates. Until such time as the nuclear interests are divested, the Company will share with customers 80 percent of the revenues and operating costs related to the units, with shareholders retaining the balance. In the event that the Company determines that it has an impairment of its nuclear plant balances under Statement of Financial Accounting Standards No. 121, Accounting for Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (FAS 121), it will record any such impairment as a regulatory asset. Workforce Reduction The NEES companies expect to implement substantial workforce reductions beginning in 1998 as a result of industry restructuring and the sale of the nonnuclear generating business. The NEES companies are in the process of offering early retirement programs to their union and non-union employees, contingent upon the closing of the sale of the nonnuclear generating business to USGen. In addition, the NEES companies intend to offer enhanced severance benefits to affected employees. As previously described, the costs of the early retirement and severance programs for all NEES companies are expected to be substantially recovered from the proceeds of the sale of the nonnuclear generating business. Since the early retirement program is contingent upon the divestiture, its cost will not be accrued until that time. Risk Factors While the Company believes that the previously described settlements and legislation and the sale agreement with USGen and other developments, including the New Hampshire Settlement, constitute substantial progress in reducing the impacts associated with industry restructuring, significant risks remain. These include, but are not limited to: (i) the potential that ultimately the settlements will not be implemented in the manner anticipated by the Company, (ii) the possibility that a voter referendum in November 1998 could overturn the Massachusetts legislation, followed by materially adverse legislative or regulatory actions, (iii) the possibility of federal legislation that would increase the risks above those contained in the settlements and the Massachusetts and Rhode Island statutes, (iv) the potential for adverse stranded cost recovery decisions involving wholesale customers with whom settlements have not yet been reached and (v) the failure to complete the sale of the generating business to USGen. This report contains statements that may be considered forward looking under the securities laws. Actual results may differ materially for the reasons discussed in this Financial Review. Upon the introduction of consumer choice, settlement agreements related to recovery of stranded costs will limit the Company's return on equity to approximately 9.4 percent, before mitigation incentives, which is significantly lower than that earned by the Company in recent years. Following completion of the sale of the nonnuclear generating business, the Company's earnings will also be affected by the return on the reinvestment of sale proceeds, which is expected, at least in the near term, to be considerably less than the return historically earned by the generating business. Accounting Implications Historically, electric utility rates have been based on a utility's costs. As a result, electric utilities are subject to certain accounting standards that are not applicable to other business enterprises in general. Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (FAS 71), requires regulated entities, in appropriate circumstances, to establish regulatory assets, and thereby defer the income statement impact of certain items of income and expense expected to be reflected in future rates. At December 31, 1997, the Company had approximately $420 million in net regulatory assets in compliance with FAS 71. This amount excludes any effects related to the divestiture of NEEI's oil and gas properties discussed above. In response to concerns expressed by the staff of the SEC, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board took under consideration how FAS 71 should be applied in light of recent changes within the regulated utility industry. In July 1997, the EITF concluded that a utility whose ongoing generation operations would not permit the application of FAS 71, but had otherwise received approval to recover stranded costs through regulated transmission and distribution rates, would be permitted to continue to apply FAS 71 to the recovery of the stranded costs. The restructuring settlements and statutes each provide for recovery of substantially all applicable stranded costs of generating assets and oil and gas related assets (including regulatory assets) not recoverable from the proceeds of the divestiture of the Company's generating business. The cost of these assets would be recovered as part of a cost-based transition access charge imposed on all distribution customers. Additionally, FERC Order No. 888 enables transmission companies to recover their specific costs of providing transmission service. Therefore, after the proposed divestiture, substantially all of the Company's business, including the recovery of its stranded costs, would remain under cost-based rate regulation. The Company believes these factors and the EITF conclusion will allow it to continue to apply FAS 71. As a result of the FERC approval of the restructuring settlements in November 1997, the Company was required to cease to apply FAS 71 to the 20 percent of its ongoing nuclear operations, as described under "Divestiture of Generation Business," the impact of which is expected to be immaterial. Despite the progress made to date, it is possible that future regulatory rules or other circumstances could cause the application of FAS 71 to be discontinued, which would result in a noncash write-off of previously established regulatory assets related to the affected operations. In addition, write-downs of plant assets under FAS 121 could be required, including a write-off of any gain or loss from the divestiture of the generating business. Overview of Financial Results Net income for 1997 decreased $8 million compared with 1996. The decrease was primarily due to increased operation and maintenance costs. The decrease was partially offset by a transmission rate increase, decreased purchased electric energy costs, excluding fuel, and decreased depreciation and amortization. Net income increased by $1 million in 1996. This increase reflected a reduction in purchased electric energy, excluding fuel and a reduction in operation and maintenance expense. Partially offsetting these increases were decreases in allowance for funds used during construction (AFDC) and increased property taxes, both primarily due to the completion in the second half of 1995 of the Manchester Street generating station, as well as increased integrated facilities credits to the Company's affiliate, Narragansett Electric. The Company also experienced reduced peak demand charge billings in 1996. Operating Revenue The following table summarizes the changes in operating revenue:
Increase (Decrease) in Operating Revenue (In millions) 1997 1996 ---- ---- Sales growth, peak demand charges, and stranded investment recovery $ 2 $(4) Fuel recovery 55 48 Narragansett integrated facilities credit 5 (9) Other, including transmission revenues 16 (5) --- --- $78 $30 === ===
Sales decreased in 1997 primarily due to a decrease in peak demand billing as a result of milder weather in the first quarter of 1997, as well as reduced load due to retail wheeling pilot programs instituted by Massachusetts Electric and Granite State Electric. These decreases are more than offset by stranded investment recovery, which represents amounts being recovered in connection with these retail wheeling pilot programs, and with the first phase of retail competition by Narragansett Electric. For a discussion of fuel recovery revenues, see the fuel costs discussion in the "Operating Expenses" section. The entire output of Narragansett Electric's generating capacity is made available to the Company. Narragansett Electric receives a credit on its purchased power bill from the Company for its fuel costs and other generation and transmission related costs. The reduction in these credits in 1997 reflects a reduction in dismantlement costs being incurred by Narragansett Electric on a previously retired generating facility. The increased credits in 1996 relate to costs associated with the dismantlement of the previously retired South Street generating facility and with Narragansett Electric's portion of costs associated with the repowered Manchester Street generating station that entered commercial operation in the second half of 1995. The increase in other revenues in 1997 is primarily due to a transmission rate increase that went into effect in mid-1996. Operating Expenses The following table summarizes the changes in operating expenses:
Increase (Decrease) in Operating Expenses (In millions) 1997 1996 ---- ---- Fuel costs $ 55 $ 52 Purchased energy excluding fuel (6) (28) Other operation and maintenance 49 (22) Depreciation and amortization (6) 1 Taxes (1) 8 ---- ---- $ 91 $ 11 ==== ====
Fuel costs represent fuel for generation and the portion of purchased electric energy permitted in the past to be recovered through the Company's fuel adjustment clause. After the divestiture of the nonnuclear generating business, the Company will not require such a mechanism. The increase in fuel costs in 1997 and 1996 reflects increased power supply to other utilities, increased replacement power costs due to the reduced generation from partially owned nuclear units, and an increase in the cost of short-term purchased power. The increase in 1996 is also due to fixed pipeline demand charges that, prior to the completion of the Manchester Street Station, were being partially deferred for amortization and recovery after the unit went into service in the second half of 1995. The decrease in purchased power costs, excluding fuel, during 1997 reflects reduced charges from the Connecticut Yankee nuclear power plant, which was permanently closed in December 1996. This decrease was partially offset by increased charges from the Maine Yankee nuclear power plant, which was permanently closed in mid- 1997. The decrease in 1996 reflected the expiration of certain purchased power contracts. The decrease in depreciation and amortization expense reflects the completion of the amortization of the Company's pre-1988 investment in the Seabrook 1 nuclear unit and the Company's investment in the canceled Seabrook 2 nuclear unit. In accordance with 1995 settlement agreement, upon completion of the amortization of Seabrook 1 and Seabrook 2, the Company agreed to accelerate its amortization of previously deferred costs associated with postretirement benefits other than pensions (PBOPs). Upon completion of the PBOP amortization, which occurred in July 1997, the Company was required to accelerate its depreciation of its investment in the Millstone 3 nuclear unit. This accelerated depreciation is recorded as a regulatory liability. The increase in other operation and maintenance expenses in 1997 is due to an increase of $8 million in transmission wheeling costs, increased maintenance costs of $14 million at the partially owned Millstone 3 and Seabrook 1 nuclear facilities, an $11 million increase in deferred PBOP amortization mentioned above, an overall increase in general and administrative costs, start-up costs associated with the new regional transmission control organization, and the Company's share of costs associated with the restoration to service of previously idled facilities throughout New England in response to a tightening regional power supply. The decrease in operation and maintenance in 1996 reflected reduced thermal and hydro generating plant overhaul activity, partially offset by $13 million of costs to correct deficiencies at the Millstone 3 nuclear unit, in which the Company has a 12 percent ownership interest. The Company also experienced a reduction in transmission wheeling costs, pension costs, PBOPs, and other general and administrative costs. Allowance for Funds Used During Construction (AFDC) The decrease in AFDC in 1996 is due to the completion of the Manchester Street plant repowering project. Nuclear Units Nuclear Units Permanently Shut Down Three of the four regional nuclear generating companies in which the Company has a minority interest own nuclear generating units which have been permanently shut down. These three units are as follows:
NEP's Investment Future Estimated Unit Percent Amount Date Retired Billings to NEP($) - ----------------------------------------------------------------------------- Yankee Atomic 30 7 million Feb 1992 44 million Connecticut Yankee 15 17 million Dec 1996 92 million Maine Yankee 20 16 million Aug 1997 164 million
In the case of each of these units, the Company has recorded an estimate of the total future payment obligation as a liability and an offsetting regulatory asset, reflecting estimated future billings from the companies. In a 1993 decision, the FERC allowed Yankee Atomic to recover its undepreciated investment in the plant as well as unfunded nuclear decommissioning costs and other costs. Connecticut Yankee and Maine Yankee have both filed similar requests with the FERC. Several parties have intervened in opposition to both filings. The Company's stranded cost settlements allow it to recover all costs that the FERC allows the Yankee companies to bill to the Company. In October 1997, the Citizen's Awareness Network and Nuclear Information and Resource Service filed a petition with the Nuclear Regulatory Commission (NRC) that would require formal NRC approval of a plant decommissioning plan for the Connecticut Yankee and Maine Yankee plants. In 1998, the petitioners indicated their intention to file a request with the NRC designed to overturn a current NRC rule on decommissioning. The Company cannot predict what impact, if any, these activities will have on the cost of decommissioning the plants. At Maine Yankee, the NRC has identified numerous apparent violations of its regulations, which may result in the assessment of significant civil penalties. In the 1970s, the Company and several other shareholders (Sponsors) of Maine Yankee entered into 27 contracts (Secondary Purchase Agreements) under which they sold portions of their entitlement to Maine Yankee power output through 2002 to various entities, primarily municipal and cooperative systems in New England (Secondary Purchasers). Virtually all of the Secondary Purchasers have ceased making payments under the Secondary Purchase Agreements and have demanded arbitration, claiming that such agreements excuse further payments upon plant shutdown. The Company has notified the Secondary Purchasers that the shutdown does not relieve them of their obligation to make payments under the Secondary Purchase Agreements and that they are in default of such agreements. The Company has asked the FERC to enforce the Company's rights under the agreements. In the event that no further payments are forthcoming from Secondary Purchasers, the Company, as a primary obligor to Maine Yankee, would be required to pay an additional $9 million of future shutdown costs. These costs are not included in the $164 million estimate disclosed in the table above. Shutdown costs are recoverable from customers under the stranded cost settlements. A Maine statute provides that if both Maine Yankee and its decommissioning trust fund have insufficient assets to pay for the plant decommissioning, the owners of Maine Yankee are jointly and severally liable for the shortfall. Operating Nuclear Units The Company has minority interests in three other nuclear generating units, Vermont Yankee, Millstone 3, and Seabrook 1. In October 1996, the NRC issued letters to operators of nuclear power plants requiring them to document that the plants are operated and maintained within their design and licensing bases, and that any deviations are reconciled in a timely manner. The Seabrook 1 and Vermont Yankee nuclear power plants responded to the NRC letters in February 1997. Millstone 3 is currently shut down and has been placed on the NRC "Watch List," signifying that its safety performance exhibits sufficient weakness to warrant increased NRC attention. Millstone 3 may not restart without NRC approval. Uncertainties regarding the future of nuclear generating stations, particularly older units, such as Vermont Yankee, are increasing rapidly and could adversely affect their service lives, availability, and costs. These uncertainties stem from a combination of factors, including the acceleration of competitive pressures in the power generation industry and increased NRC scrutiny. The Company performs periodic economic viability reviews of operating nuclear units in which it holds ownership interests. Millstone 3 In April 1996, the NRC ordered Millstone 3, which has experienced numerous technical and nontechnical problems, to remain shut down pending verification that the unit's operations are in accordance with NRC regulations and the unit's operating license. Millstone 3 is operated by a subsidiary of Northeast Utilities (NU). The Company is not an owner of the Millstone 1 and 2 nuclear generating units, which are also shut down under NRC orders. A number of significant prerequisites must be fulfilled prior to restart of Millstone 3, including certification by NU that the unit adequately conforms to its design and licensing bases, an independent verification of corrective actions taken at the unit, an NRC assessment concluding a safety conscious work environment exists, public meetings, and a vote of the NRC Commissioners. The Company cannot predict when Millstone 3 will be allowed by the NRC to restart, but believes restart of the unit is unlikely prior to the summer of 1998. Since April 1996, the Company has incurred an estimated $35 million in incremental replacement power costs, which it has been recovering from customers through its fuel clause. During the outage, the Company is incurring incremental replacement power costs of approximately $2 million per month. Several criminal investigations related to Millstone 3 are ongoing. In December 1997, the NRC assessed civil penalties totaling $2.1 million for numerous violations at the three Millstone units. The Company's share of this fine was less than $100,000. The Connecticut Department of Environmental Protection and Connecticut Attorney General have filed suit against NU for alleged wastewater discharge violations at the Millstone units, which may result in the assessment of substantial civil penalties. In August 1997, the Company filed suit against NU in Massachusetts Superior Court for damages resulting from the tortious conduct of NU relating to Millstone 3. The Company is seeking compensation for the losses it has suffered, including the costs of lost power and costs necessary to assure that Millstone 3 can safely return to operation. The Company also seeks punitive damages. NU has filed for dismissal of the suit and sought to consolidate it with suits filed by other joint owners in Massachusetts Superior Court. The Company also sent a demand for arbitration to Connecticut Light & Power Company and Western Massachusetts Electric Company, both subsidiaries of NU, seeking damages resulting from their breach of obligations under an agreement with the Company and others regarding the operation and ownership of Millstone 3. Brayton Point In October 1996, the Environmental Protection Agency (EPA) announced it was beginning a process to determine whether to modify or revoke and reissue the Company's water discharge permit for its Brayton Point 1,576 MW power plant. This action came two years before the permit expiration date. The EPA stated it took this step in response to a request from the Rhode Island Department of Environmental Management (RIDEM). A RIDEM report asserted a statistical correlation between the decline in the fish population in Mount Hope Bay and a change in operations at Brayton Point that occurred in the mid-1980s. In April 1997, the Company signed a memorandum of agreement negotiated with the various federal and state environmental agencies under which the Company will voluntarily operate under more stringent conditions than under its existing permit. The agreement was in lieu of any immediate action on the permit, and will remain in effect until a renewal permit is issued. On January 16, 1998, the Company applied for a new water discharge permit with both the EPA and the Massachusetts Department of Environmental Protection. The Company cannot predict at this time what permit changes will be required or the impact on Brayton Point's operations and economics. However, permit changes may substantially impact the plant's capacity and ability to produce energy and/or require substantial capital expenditures to construct equipment to address the concerns raised by the environmental agencies. Year 2000 Computer Issues In the next two years, most large companies will face a potentially serious information systems (computer) problem because most software applications and operational programs written in the past will not properly recognize calendar dates beginning in the year 2000. This could force computers to either shut down or lead to incorrect calculations. The NEES companies began the process of identifying the changes required to their computer programs and hardware during 1996. The necessary modifications to the NEES companies' centralized financial, customer, and operational information systems are expected to be completed by the end of 1998. Noncentralized systems are also being reviewed for Year 2000 problems. The NEES companies believe total costs associated with making the necessary modifications to all centralized and noncentralized systems will be approximately $25 million, of which approximately $8 million has been incurred as of December 31, 1997. Most of the remaining costs are expected to be incurred prior to December 31, 1998. The Company's share of the total costs is expected to be approximately $10 million. Utility Plant Expenditures and Financing Cash expenditures for utility plant totaled $70 million for 1997. The funds necessary for utility plant expenditures during the period were provided by net cash from operating activities, after the payment of dividends. Cash expenditures for utility plant for 1998 are estimated to be $55 million, principally related to transmission functions. Internally generated funds are expected to fully cover the Company's 1998 capital expenditures in 1998. In 1997, the Company retired $3 million of maturing long-term debt. The Company also retired $35 million of mortgage bonds prior to maturity and incurred premiums of $2.2 million associated with the early retirement. At December 31, 1997, the Company had $111 million of short-term debt outstanding including $108 million of commercial paper borrowings and $3 million of borrowings from affiliates. At December 31, 1997, the Company had lines of credit and bond purchase facilities with banks totaling $580 million which are available to provide liquidity support for commercial paper borrowings and for $372 million of the Company's outstanding variable rate mortgage bonds in tax-exempt commercial paper mode and for other corporate purposes. There were no borrowings under these lines of credit at December 31, 1997. New Accounting Standards In 1997, the Financial Accounting Standards Board released two new Statements of Financial Accounting Standards (FAS), FAS 130 and FAS 131, both of which will go into effect in 1998. FAS 130, Reporting Comprehensive Income, requires the reporting in financial statements of a new additional item called comprehensive income, which will incorporate amounts not previously included in reported net income. FAS 131, Disclosure about Segments of an Enterprise and Related Information, requires the reporting in financial statements of certain new additional information about operating segments of a business. The Company is currently evaluating the impact that these new accounting standards will have on its future reporting requirements. New England Power Company Statements of Income
Year ended December 31, (In thousands) 1997 1996 1995 - ----------------------------------------------------------------------------- Operating revenue, principally from affiliates $1,677,903 $1,600,309 $1,570,539 Operating expenses: Fuel for generation 372,734 342,545 279,849 Purchased electric energy 527,647 508,910 547,926 Other operation 241,506 203,456 211,872 Maintenance 89,820 79,118 92,954 Depreciation and amortization 98,024 104,209 102,758 Taxes, other than income taxes 67,311 66,416 58,716 Income taxes 90,009 91,894 91,051 ---------- ---------- ---------- Total operating expenses 1,487,051 1,396,548 1,385,126 ---------- ---------- ---------- Operating income 190,852 203,761 185,413 Other income: Allowance for equity funds used during construction - - 7,746 Equity in income of nuclear power companies 5,189 5,159 5,721 Other income (expense), net (3,404) (1,851) (1,610) ---------- ---------- ---------- Operating and other income 192,637 207,069 197,270 ---------- ---------- ---------- Interest: Interest on long-term debt 42,277 45,111 46,797 Other interest 7,055 10,066 10,525 Allowance for borrowed funds used during construction - credit (1,238) (591) (11,479) ---------- ---------- ---------- Total interest 48,094 54,586 45,843 ---------- ---------- ---------- Net income $ 144,543 $ 152,483 $ 151,427 ========== ========== ========== Statements of Retained Earnings Year ended December 31, (In thousands) 1997 1996 1995 - ----------------------------------------------------------------------------- Retained earnings at beginning of year $ 400,610 $ 385,309 $ 372,763 Net income 144,543 152,483 151,427 Dividends declared on cumulative preferred stock (2,075) (2,574) (3,433) Dividends declared on common stock, $21.00, $20.80, and $21.00 per share, respectively (135,448) (134,158) (135,448) Premium on redemption of preferred stock - (450) - ---------- --------- ---------- Retained earnings at end of year $ 407,630 $ 400,610 $ 385,309 ========== ========= ========== The accompanying notes are an integral part of these financial statements.
New England Power Company Balance Sheets
At December 31, (In thousands) 1997 1996 - ----------------------------------------------------------------------------- Assets Utility plant, at original cost $3,057,749 $2,991,797 Less accumulated provisions for depreciation and amortization 1,196,972 1,118,340 ---------- ---------- 1,860,777 1,873,457 Construction work in progress 29,015 36,836 ---------- ---------- Net utility plant 1,889,792 1,910,293 ---------- ---------- Investments: Nuclear power companies, at equity (Note D-1) 49,825 47,902 Nonutility property and other investments 34,723 30,591 ---------- ---------- Total investments 84,548 78,493 ---------- ---------- Current assets: Cash 1,643 3,046 Accounts receivable: Affiliated companies 233,308 201,370 Accrued NEEI revenues (Note D-3) 11,419 21,648 Others 26,638 23,219 Fuel, materials, and supplies, at average cost 47,492 58,709 Prepaid and other current assets 17,837 25,050 ---------- ---------- Total current assets 338,337 333,042 ---------- ---------- Accrued Yankee nuclear plant costs (Note D-2) 299,564 166,413 Deferred charges and other assets (Note B) 150,851 159,474 ---------- ---------- $2,763,092 $2,647,715 ========== ========== Capitalization and Liabilities Capitalization: Common stock, par value $20 per share, authorized and outstanding 6,449,896 shares $ 128,998 $ 128,998 Premium on capital stock 86,779 86,779 Other paid-in capital 289,818 289,818 Retained earnings 407,630 400,610 Unrealized gain on securities, net 34 - ---------- ---------- Total common equity 913,259 906,205 Cumulative preferred stock, par value $100 per share (Note H) 39,666 39,666 Long-term debt 647,720 733,006 ---------- ---------- Total capitalization 1,600,645 1,678,877 ---------- ---------- Current liabilities: Long-term debt due in one year 50,000 3,000 Short-term debt (including $3,125 and $5,275 to affiliates) 111,250 93,600 Accounts payable (including $14,373 and $25,301 to affiliates) 109,121 127,226 Accrued liabilities: Taxes 39 8,158 Interest 8,905 9,668 Other accrued expenses (Note G) 23,554 16,577 Dividends payable 35,474 27,412 ---------- ---------- Total current liabilities 338,343 285,641 ---------- ---------- Deferred federal and state income taxes 369,757 382,164 Unamortized investment tax credits 53,463 55,486 Accrued Yankee nuclear plant costs (Note D-2) 299,564 166,413 Other reserves and deferred credits 101,320 79,134 Commitments and contingencies (Note D) ---------- ---------- $2,763,092 $2,647,715 ========== ========== The accompanying notes are an integral part of these financial statements.
New England Power Company Statements of Cash Flows
Year ended December 31, (In thousands) 1997 1996 1995 - ----------------------------------------------------------------------------- Operating activities: Net income $ 144,543 $ 152,483 $ 151,427 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 101,186 108,338 108,384 Deferred income taxes and investment tax credits, net (12,728) (7,458) 25,683 Allowance for funds used during construction (1,238) (591) (19,225) Decrease (increase) in accounts receivable (25,128) 19,629 1,321 Decrease (increase) in fuel, materials, and supplies 11,217 (4,045) 18,697 Decrease (increase) in prepaid and other current assets 7,213 2,936 5,743 Increase (decrease) in accounts payable (18,105) (36,565) (15,970) Increase (decrease) in other current liabilities (1,905) 9,640 (2,150) Other, net 19,919 28,582 (28,244) --------- --------- --------- Net cash provided by operating activities $ 224,974 $ 272,949 $ 245,666 ========== ========= ========= Investing activities: Plant expenditures, excluding allowance for funds used during construction $ (69,863) $ (65,981) $(162,766) Other investing activities (4,040) (3,878) (3,614) ---------- --------- --------- Net cash used in investing activities $ (73,903) $ (69,859) $(166,380) --------- --------- --------- Financing activities: Dividends paid on common stock $(127,386) $(138,995) $(103,198) Dividends paid on preferred stock (2,075) (2,574) (3,433) Changes in short-term debt 17,650 (31,550) (20,425) Long-term debt - issues - 47,850 60,000 Long-term debt - retirements (38,500) (57,850) (10,000) Preferred stock - retirements - (20,900) - Premium on reacquisition of long-term debt (2,163) - - Gain on redemption of preferred stock - 1,368 - --------- --------- --------- Net cash used in financing activities $(152,474) $(202,651) $ (77,056) --------- --------- --------- Net increase (decrease) in cash and cash equivalents $ (1,403) $ 439 $ 2,230 Cash and cash equivalents at beginning of year 3,046 2,607 377 --------- --------- --------- Cash and cash equivalents at end of year $ 1,643 $ 3,046 $ 2,607 ========= ========= ========= Supplementary Information: Interest paid less amounts capitalized $ 46,033 $ 51,212 $ 41,557 --------- --------- --------- Federal and state income taxes paid $ 109,109 $ 96,006 $ 57,948 --------- --------- --------- Dividends received from investments at equity $ 3,267 $ 4,313 $ 5,014 --------- --------- --------- The accompanying notes are an integral part of these financial statements.
New England Power Notes to Financial Statements Note A - Significant Accounting Policies 1. Nature of operations: The Company, a wholly owned subsidiary of New England Electric System (NEES), is a Massachusetts corporation and is qualified to do business in Massachusetts, New Hampshire, Rhode Island, Connecticut, Maine, and Vermont. The Company is subject, for certain purposes, to the jurisdiction of the regulatory commissions of these six states, the Securities and Exchange Commission (SEC), and the Federal Energy Regulatory Commission (FERC). The Company's business is currently that of generating, purchasing, transmitting, and selling electric energy in wholesale quantities to other electric utilities, principally its affiliates Granite State Electric Company (Granite State Electric), Massachusetts Electric Company (Massachusetts Electric), Nantucket Electric Company (Nantucket Electric), and The Narragansett Electric Company (Narragansett Electric). See Note B for a discussion of industry restructuring and Note C for a discussion of the Company's planned divestiture of its nonnuclear generating business. 2. System of accounts: The accounts of the Company are maintained in accordance with the Uniform System of Accounts prescribed by regulatory bodies having jurisdiction. In preparing the financial statements, management is required to make estimates that affect the reported amounts of assets and liabilities and disclosures of asset recovery and contingent liabilities as of the date of the balance sheets, and revenues and expenses for the period. These estimates may differ from actual amounts if future circumstances cause a change in the assumptions used to calculate these estimates. 3. Allowance for funds used during construction (AFDC): The Company capitalizes AFDC as part of construction costs. AFDC represents the composite interest and equity costs of capital funds used to finance that portion of construction costs not yet eligible for inclusion in rate base. AFDC is capitalized in "Utility plant" with offsetting noncash credits to "Other income" and "Interest." This method is in accordance with an established rate-making practice under which a utility is permitted a return on, and the recovery of, prudently incurred capital costs through their ultimate inclusion in rate base and in the provision for depreciation. The composite AFDC rates were 5.9 percent, 5.8 percent, and 7.5 percent, in 1997, 1996, and 1995, respectively. 4. Depreciation and amortization: The depreciation and amortization expense included in the statements of income is composed of the following:
Year Ended December 31, (In thousands) 1997 1996 1995 - ----------------------------------------------------------------------------- Depreciation $80,260 $ 78,187 $ 66,309 Nuclear decommissioning costs (Note D-2) 2,638 2,629 2,629 Amortization: Investment in Seabrook 1 pursuant to rate settlement - 15,210 23,074 Oil Conservation Adjustment (OCA) - - 4,467 Seabrook 2 property losses 113 6,279 6,279 Millstone 3 additional amortization, pursuant to rate settlement 15,013 1,904 - ------- -------- -------- Total depreciation and amortization expense $98,024 $104,209 $102,758 ======= ======== ========
Depreciation is provided annually on a straight-line basis. The provision for depreciation as a percentage of weighted average depreciable property was 2.9 percent in 1997 and 1996, and 2.7 percent in 1995. Revenues from the OCA were used to accelerate the amortization of expenditures for coal conversion facilities at the Company's Salem Harbor Station. In addition, Seabrook 1 costs under the 1988 rate settlement were fully amortized at December 31, 1996. Property losses associated with the Company's investment in the canceled Seabrook 2 nuclear unit were fully amortized by March 31, 1997. 5. Cash: The Company classifies short-term investments with a maturity of 90 days or less at time of purchase as cash. 6. New Accounting Standards: In 1997, the Financial Accounting Standards Board released two new Statements of Financial Accounting Standards (FAS), FAS 130 and FAS 131, both of which will go into effect in 1998. FAS 130, Reporting Comprehensive Income, requires the reporting in financial statements of a new additional item called comprehensive income, which will incorporate amounts not previously included in reported net income. FAS 131, Disclosure about Segments of an Enterprise and Related Information, requires the reporting in financial statements of certain new additional information about operating segments of a business. The Company is currently evaluating the impact that these new accounting standards will have on its future reporting requirements. Note B - Industry Restructuring As the result of legislation enacted in the states served by the NEES companies, most customers served by the NEES companies will have the ability to choose their power supplier by the first quarter of 1998. When customers are allowed to choose their power supplier, utilities face the risk that market prices may not be sufficient to recover the costs of the commitments incurred to supply customers under a regulated structure. The amounts by which such costs exceed market prices are commonly referred to as "stranded costs." As described below, the Company has reached settlement agreements with all of its distribution affiliates and with parties representing the distribution customers of those affiliates. In each case, these settlements provide for recovery of stranded costs. See the "Industry Restructuring" section of Financial Review for a more in-depth discussion of current developments in this area. The settlements generally provide for the following: - - introduction of choice of power supplier in Rhode Island, Massachusetts, and New Hampshire by January 1, 1998, March 1, 1998, and July 1, 1998, respectively; - - a transition rate, or "standard offer generation service," resulting in rate reductions of approximately 10 percent at the date of commencement of retail choice; - - termination of all-requirements contracts between the Company and its distribution affiliates on terms which allow the Company to recover its stranded costs through a transition access charge, which the distribution affiliates will collect from customers; - - adjustments to stranded cost recovery to reflect the market value of fossil-fueled and hydroelectric generating assets, determined through divestiture of such assets. Under the various settlements, the recovery of the Company's stranded costs is divided into several categories. Unrecovered costs associated with generating plants and regulatory assets would be recovered over 12 years and would earn a return on equity of approximately 9.4 percent. The above-market component of purchased power contracts and nuclear decommissioning costs would be recovered as incurred over the life of those obligations, a period expected to extend beyond 12 years. Initially, the transition access charge was set at 2.8 cents per kilowatthour (kWh). The MDTE has approved a reduction of the initial transition access charge to 2.7 cents per kWh for Massachusetts Electric and Nantucket Electric, effective March 1, 1998. The Company's filing with the FERC to approve this reduction is pending. The transition access charge would be reduced further upon completion of the sale of the Company's generating business, as described below. As the transition access charge declines, the Company would earn incentives based on successful mitigation of its stranded costs. These incentives would supplement the Company's return on equity. The Massachusetts and Rhode Island settlements were approved by the FERC in November 1997, subject to a compliance filing to clarify the impact of the settlements on nonsettling parties. The Massachusetts Settlement was also found by the Massachusetts Department of Telecommunications and Energy (formerly the Massachusetts Department of Public Utilities) to be in substantial compliance with or consistent with the Massachusetts restructuring statute. The New Hampshire settlement is pending before the New Hampshire Public Utilities Commission and the FERC. In August 1997, the Company and Narragansett Electric entered into an agreement to sell substantially all of their nonnuclear generating business to USGen New England, Inc. (USGen), an indirect wholly owned subsidiary of PG&E Corporation. The net proceeds from the sale of its nonnuclear generating business to USGen will be used to reduce the transition access charge to approximately 1.5 cents per kWh. In addition, the FERC accepted the NEES companies proposal in conjunction with their divestiture filing that the recovery of the remaining above-market nuclear generating plant costs and regulatory assets be fully recovered by the end of the year 2000. (see Note C for a discussion of the Company's planned divestiture of its nonnuclear generating business). Accounting implications Historically, electric utility rates have been based on a utility's costs. As a result, electric utilities are subject to certain accounting standards that are not applicable to other business enterprises in general. Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (FAS 71), requires regulated entities, in appropriate circumstances, to establish regulatory assets, and thereby defer the income statement impact of certain items of income and expense expected to be reflected in future rates. In response to concerns expressed by the staff of the SEC, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board took under consideration how FAS 71 should be applied in light of recent changes within the regulated utility industry. In July 1997, the EITF concluded that a utility whose ongoing generation operations would not permit the application of FAS 71, but had otherwise received approval to recover stranded costs through regulated transmission and distribution rates, would be permitted to continue to apply FAS 71 to the recovery of the stranded costs. The restructuring settlements and statutes each provide for recovery of substantially all applicable stranded costs of generating assets and oil and gas related assets (including regulatory assets) not recoverable from the proceeds of the divestiture of the Company's generating business. The cost of these assets would be recovered as part of a cost-based transition access charge imposed on all distribution customers. Additionally, FERC Order No. 888 enables transmission companies to recover their specific costs of providing transmission service. Therefore, after the proposed divestiture, substantially all of the Company's business, including the recovery of its stranded costs, would remain under cost-based rate regulation. The Company believes these factors and the EITF conclusion will allow it to continue to apply FAS 71. As a result of the FERC approval of the industry restructuring settlements, the Company was required to cease to apply FAS 71 to the 20 percent of its ongoing nuclear operations, as described in Note C, the impact of which is expected to be immaterial. Despite the progress made to date, it is possible that future regulatory rules or other circumstances could cause the application of FAS 71 to be discontinued, which would result in a noncash write-off of previously established regulatory assets related to the affected operations. In addition, write-downs of plant assets under Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (FAS 121) could be required, including a write-off of any gain or loss from the divestiture of the generating business. At December 31, 1997, the Company had approximately $420 million in regulatory assets in compliance with FAS 71, as detailed in the table below. This amount excludes any effects related to the divestiture of New England Energy Incorporated's (NEEI) (a wholly owned subsidiary of NEES) oil and gas properties, discussed in Note C. The components of regulatory assets are as follows:
At December 31, (In Thousands) 1997 1996 - ---------------------------------------------------------------------------- Regulatory assets included in current assets and liabilities: Accrued NEEI losses (see Note D-3) $ 11,419 $ 21,648 Rate adjustment mechanisms (6,957) (4,790) ------- -------- 4,462 16,858 Regulatory assets included in deferred charges and other reserves and deferred credits: Accrued costs - Yankee nuclear plants (See Note D-2) 299,564 166,413 Unamortized losses on reacquired debt 31,197 31,353 Deferred FAS No. 106 costs (see Note E-2) - 13,680 Deferred FAS No. 109 costs (see Note F) 25,738 27,461 Purchased power contract termination costs 15,662 19,578 Deferred gas pipeline charges (see Note D-6) 52,570 59,733 Accelerated amortization - Millstone 3 (16,917) (1,904) Other 4,837 4,884 ------- -------- 412,651 321,198 -------- -------- $417,113 $338,056 ======== ========
Note C - Divestiture of Generating Business As described above, in August 1997, the Company and Narragansett Electric (collectively, the Sellers) reached an agreement to sell their nonnuclear generating business to USGen. The nonnuclear generating business includes three fossil-fueled generating stations and 15 hydroelectric generating stations, totaling approximately 4,000 megawatts (MW) of capacity, as well as Narragansett Energy Resources Company's (NERC) partnership interest in the Ocean State Power project, all of which has a book value of $1.1 billion. USGen will pay the Sellers $1.59 billion in cash, of which $225 million will be contingent upon the introduction of customer choice of power supplier in Massachusetts. Based on the enactment of the Massachusetts statute, the NEES companies believe that the conditions for payment of the full purchase price have been met. USGen will also reimburse the NEES companies for $85 million of costs associated with early retirement and special severance programs for employees affected by industry restructuring. Since the early retirement program is contingent upon the divestiture, its cost will not be accrued until that time. USGen will assume responsibility for environmental conditions at the Sellers' nonnuclear generating stations. USGen will also assume the Sellers' obligations under long-term fuel and fuel transportation contracts and certain collective bargaining agreements for nonnuclear facilities. In addition to the purchase of the generating stations, USGen will purchase the Company's entitlement to approximately 1,100 MW of power procured under long-term contracts. The Company will make a monthly fixed contribution toward the above-market cost of the purchased power of between $12.5 million and $14.2 million per month from closing through January 2008. USGen will be responsible for the balance of the costs under the purchased power contracts. The sale is subject to approval by various state and federal regulatory agencies. Several parties have objected to the sale on various grounds, including allegations that following the sale, USGen would be able to exercise unlawful levels of market power. On February 25, 1998, the FERC issued an order that rejected the market power allegations, approved the sale and conditionally approved most supporting filings. On February 27, 1998, the FERC approved the transfer of the hydroelectric generating licenses to USGen. While the timing of receipt of final regulatory approvals is uncertain, receipt of all approvals is unlikely before mid-1998. Closing is contingent upon all regulatory approvals being obtained by February 1999. In order to meet the terms of the Company's mortgage indenture, the Company will be required, prior to the consummation of the sale, to either defease or call approximately $278 million of its mortgage bonds. Any defeasance of bonds would be by deposit of cash representing principal and interest to the maturity date, or interest, principal, and general redemption premium to an earlier redemption date. In addition, the Company will retire approximately $372 million of mortgage bonds securing the issuance of a like amount of pollution control revenue bonds (PCRBs) by various public agencies. However, the Company expects that substantially all of the underlying PCRBs will remain outstanding as unsecured obligations of the Company. In addition, the long-term debt of NERC will be retired prior to the closing. As part of the divestiture plan, in February 1998, NEEI sold its oil and gas properties for approximately $50 million. NEEI's loss on the sale of approximately $120 million, before tax, has been reimbursed by the Company. At the divestiture date, any gain or loss from the divestiture of nonnuclear generating assets and oil and gas assets will be recorded as a regulatory asset or liability to be recovered as part of the Company's stranded costs, through the ongoing transition access charge, consistent with the settlement agreements. The Company may be required to record a liability for the monthly fixed contribution towards the above-market cost of purchased power. In such an event, the Company would also record a regulatory asset consistent with the settlement agreements. In addition, the Company will endeavor to sell, or otherwise transfer, its minority interest in three nuclear power plants and a 60 MW interest in a fossil-fueled generating station in Maine to nonaffiliates. Until such time as the nuclear interests are divested, the Company will share with customers 80 percent of the revenues and operating costs related to the units, with shareholders retaining the balance. In the event that the Company determines that it has an impairment of its nuclear plant balances under FAS 121, it will record any such impairment as a regulatory asset. Note D - Commitments and Contingencies 1. Yankee Nuclear Power Companies (Yankees): The Company has minority interests in four Yankee Nuclear Power Companies. These ownership interests are accounted for on the equity method. The Company's share of the expenses of the Yankees is accounted for in "Purchased electric energy" on the statements of income. A summary of combined results of operations, assets, and liabilities of the four Yankees is as follows:
(In thousands) 1997 1996 1995 - ---------------------------------------------------------------------------- Operating revenue $ 660,742$ 697,054$ 695,781 ================================= Net income $ 29,959$ 27,567$ 31,657 ================================= Company's equity in net income $ 5,189$ 5,159$ 5,721 ================================= Net plant 204,689 401,049 443,967 Other assets 3,100,589 2,031,336 1,418,681 Liabilities and debt (3,036,845) (2,177,068) (1,612,843) --------------------------------- Net assets $ 268,433$ 255,317$ 249,805 ================================= Company's equity in net assets $ 49,825$ 47,902$ 47,055 ================================= Company's purchased electric energy $ 107,140$ 110,778$ 115,647 =================================
At December 31, 1997, $16 million of undistributed earnings of the Yankees were included in the Company's retained earnings. 2. Nuclear Units Nuclear Units Permanently Shut Down Three of the four regional nuclear generating companies in which the Company has a minority interest own nuclear generating units which have been permanently shut down. These three units are as follows:
NEP's Investment Future Estimated Unit Percent Amount Date Retired Billings to NEP($) - ---------------------------------------------------------------------------- Yankee Atomic 30 7 million Feb 1992 44 million Connecticut Yankee 15 17 million Dec 1996 92 million Maine Yankee 20 16 million Aug 1997 164 million - -----------------------------------------------------------------------------
In the case of each of these units, the Company has recorded an estimate of the total future payment obligation as a liability and an offsetting regulatory asset, reflecting estimated future billings from the companies. In a 1993 decision, the FERC allowed Yankee Atomic to recover its undepreciated investment in the plant as well as unfunded nuclear decommissioning costs and other costs. Connecticut Yankee and Maine Yankee have both filed similar requests with the FERC. Several parties have intervened in opposition to both filings. The Company's stranded cost settlements allow it to recover all costs that the FERC allows the Yankee companies to bill to the Company. In October 1997, the Citizen's Awareness Network and Nuclear Information and Resource Service filed a petition with the Nuclear Regulatory Commission (NRC) that would require formal NRC approval of a plant decommissioning plan for the Connecticut Yankee and Maine Yankee plants. In 1998, the petitioners indicated their intention to file a request with the NRC designed to overturn a current NRC rule on decommissioning. The Company cannot predict what impact, if any, these activities will have on the cost of decommissioning the plants. At Maine Yankee, the NRC has identified numerous apparent violations of its regulations, which may result in the assessment of significant civil penalties. In the 1970s, the Company and several other shareholders (Sponsors) of Maine Yankee entered into 27 contracts (Secondary Purchase Agreements) under which they sold portions of their entitlement to Maine Yankee power output through 2002 to various entities, primarily municipal and cooperative systems in New England (Secondary Purchasers). Virtually all of the Secondary Purchasers have ceased making payments under the Secondary Purchase Agreements and have demanded arbitration, claiming that such agreements excuse further payments upon plant shutdown. The Company has notified the Secondary Purchasers that the shutdown does not relieve them of their obligation to make payments under the Secondary Purchase Agreements and that they are in default of such agreements. The Company has asked the FERC to enforce the Company's rights under the agreements. In the event that no further payments are forthcoming from Secondary Purchasers, the Company, as a primary obligor to Maine Yankee, would be required to pay an additional $9 million of future shutdown costs. These costs are not included in the $164 million estimate disclosed in the table above. Shutdown costs are recoverable from customers under the stranded cost settlements. A Maine statute provides that if both Maine Yankee and its decommissioning trust fund have insufficient assets to pay for the plant decommissioning, the owners of Maine Yankee are jointly and severally liable for the shortfall. Operating Nuclear Units The Company has minority interests in three other nuclear generating units, Vermont Yankee, Millstone 3, and Seabrook 1. In October 1996, the NRC issued letters to operators of nuclear power plants requiring them to document that the plants are operated and maintained within their design and licensing bases, and that any deviations are reconciled in a timely manner. The Seabrook 1 and Vermont Yankee nuclear power plants responded to the NRC letters in February 1997. Millstone 3 is currently shut down and has been placed on the NRC "Watch List," signifying that its safety performance exhibits sufficient weakness to warrant increased NRC attention. Millstone 3 may not restart without NRC approval. Uncertainties regarding the future of nuclear generating stations, particularly older units, such as Vermont Yankee, are increasing rapidly and could adversely affect their service lives, availability, and costs. These uncertainties stem from a combination of factors, including the acceleration of competitive pressures in the power generation industry and increased NRC scrutiny. The Company performs periodic economic viability reviews of operating nuclear units in which it holds ownership interests. Millstone 3 In April 1996, the NRC ordered Millstone 3, which has experienced numerous technical and nontechnical problems, to remain shut down pending verification that the unit's operations are in accordance with NRC regulations and the unit's operating license. Millstone 3 is operated by a subsidiary of Northeast Utilities (NU). The Company is not an owner of the Millstone 1 and 2 nuclear generating units, which are also shut down under NRC orders. A number of significant prerequisites must be fulfilled prior to restart of Millstone 3, including certification by NU that the unit adequately conforms to its design and licensing bases, an independent verification of corrective actions taken at the unit, an NRC assessment concluding a safety conscious work environment exists, public meetings, and a vote of the NRC Commissioners. The Company cannot predict when Millstone 3 will be allowed by the NRC to restart, but believes restart of the unit is unlikely prior to the summer of 1998. Since April 1996, the Company has incurred an estimated $35 million in incremental replacement power costs, which it has been recovering from customers through its fuel clause. During the outage, the Company is incurring incremental replacement power costs of approximately $2 million per month. Several criminal investigations related to Millstone 3 are ongoing. In December 1997, the NRC assessed civil penalties totaling $2.1 million for numerous violations at the three Millstone units. The Company's share of this fine was less than $100,000. The Connecticut Department of Environmental Protection and Connecticut Attorney General have filed suit against NU for alleged wastewater discharge violations at the Millstone units, which may result in the assessment of substantial civil penalties. In August 1997, the Company filed suit against NU in Massachusetts Superior Court for damages resulting from the tortious conduct of NU relating to Millstone 3. The Company is seeking compensation for the losses it has suffered, including the costs of lost power and costs necessary to assure that Millstone 3 can safely return to operation. The Company also seeks punitive damages. NU has filed for dismissal of the suit and sought to consolidate it with suits filed by other joint owners in Massachusetts Superior Court. The Company also sent a demand for arbitration to Connecticut Light & Power Company and Western Massachusetts Electric Company, both subsidiaries of NU, seeking damages resulting from their breach of obligations under an agreement with the Company and others regarding the operation and ownership of Millstone 3. Decommissioning Trust Funds Each nuclear unit in which the Company has an ownership interest has established a decommissioning trust fund or escrow fund into which payments are being made to meet the projected costs of decommissioning. Listed below is information on each operating nuclear plant in which the Company has an ownership interest. The Company is liable for its share of decommissioning costs for Millstone 3, Seabrook 1, and all of the Yankees. Decommissioning costs include not only estimated costs to decontaminate the units as required by the NRC, but also costs to dismantle the uncontaminated portion of the units. The Company records decommissioning costs on its books consistent with its rate recovery. The Company is recovering its share of projected decommissioning costs for Millstone 3 and Seabrook 1 through depreciation expense. In addition, the Company is paying its portion of projected decommissioning costs for all of the Yankees through purchased power expense. Such costs reflect estimates of total decommissioning costs approved by the FERC.
NEP's share of (millions of dollars) ------------------------------------ NEP's EstimatedDecommissioning Ownership Net Decommissioning Fund License Unit Interest (%)Plant Assets Cost (in 1997 $) Balances* Expiration - ---- ----------- ------------ --------------- --------------- ---------- Vermont Yankee 20 35 77 34 2012 Millstone 3 12 366 66 18** 2025 Seabrook 1*** 10 54 47 9** 2026 *Certain additional amounts are anticipated to be available through tax deductions. **Fund balances are included in "Other investments" on the balance sheets. Any differences from market value are not material. ***Proposed legislation in New Hampshire would make owners of Seabrook 1 proportional guarantors for decommissioning costs in the event that an owner without a franchise territory fails to fund its share of decommissioning costs.
There is no assurance that decommissioning costs actually incurred by Vermont Yankee, Millstone 3, or Seabrook 1 will not substantially exceed these amounts. For example, decommissioning cost estimates assume the availability of permanent repositories for both low-level and high-level nuclear waste; those repositories do not currently exist. If any of the units were shut down prior to the end of their operating licenses, which the Company believes is likely, the funds collected for decommissioning to that point would be insufficient. Under the settlement agreements discussed in Note B, the Company will recover decommissioning costs through transition access charges. The Nuclear Waste Policy Act of 1982 establishes that the federal government (through the Department of Energy (DOE)) is responsible for the disposal of spent nuclear fuel. The federal government requires the Company to pay a fee based on its share of the net generation from the Millstone 3 and Seabrook 1 nuclear units. The Company is recovering this fee through its fuel clause. Similar costs are incurred by the Vermont Yankee nuclear generating unit. These costs are billed to the Company and also recovered from customers through the Company's fuel clause. In November 1997, ruling on a lawsuit brought against the DOE by numerous utilities and state regulatory commissions, the Court of Appeals for the District of Columbia (Court) held that the DOE is obligated to begin disposing of utilities' spent nuclear fuel by January 31, 1998. The DOE failed to meet this deadline. The utilities, including the operators of the units in which the Company has an obligation, are assessing their future options. In February 1998, Maine Yankee petitioned the Court to compel the DOE to remove Maine Yankee's spent fuel from the site. Nuclear insurance The Price-Anderson Act limits the amount of liability claims that would have to be paid in the event of a single incident at a nuclear plant to $8.9 billion (based upon 110 licensed reactors). The maximum amount of commercially available insurance coverage to pay such claims is $200 million. The remaining $8.7 billion would be provided by an assessment of up to $79.3 million per incident levied on each of the participating nuclear units in the United States, subject to a maximum assessment of $10 million per incident per nuclear unit in any year. The maximum assessment, which was most recently adjusted in 1993, is adjusted for inflation at least every five years. The Company's current interest in the Yankees (excluding Yankee Atomic), Millstone 3, and Seabrook 1 would subject the Company to a $58 million maximum assessment per incident. The Company's payment of any such assessment would be limited to a maximum of $7.3 million per incident per year. As a result of the permanent cessation of power operation of the Yankee Atomic plant, Yankee Atomic has received from the NRC a partial exemption from obligations under the Price-Anderson Act. However, Yankee Atomic must continue to maintain $100 million of commercially available nuclear insurance coverage. Connecticut Yankee and Maine Yankee have filed with the NRC for similar exemptions. Each of the nuclear units in which the Company has an ownership interest also carries nuclear property insurance to cover the costs of property damage, decontamination or premature decommissioning, and workers' claims resulting from a nuclear incident. These policies may require additional premium assessments if losses relating to nuclear incidents at units covered by this insurance occurring in a prior six-year period exceed the accumulated funds available. The Company's maximum potential exposure for these assessments, either directly, or indirectly through purchased power payments to the Yankees, is approximately $8 million per year. 3. Oil and gas operations: The Company's affiliate, NEEI, participated in a rate-regulated domestic oil and gas exploration, development, and production program through a partnership with a nonaffiliated oil company. Losses from this program, calculated under the full cost method of accounting, have been charged to the Company, and ultimately to distribution customers, in accordance with SEC and FERC approvals. Such losses were $11 million, $22 million, and $44 million in 1997, 1996, and 1995, respectively. In February 1998, after a competitive bidding process, NEEI sold all of its remaining oil and gas properties held as of December 31, 1997 to its partner for $50 million. The loss on such disposition, approximately $120 million, before tax, has been charged to the Company. The settlements provide for the recovery of the NEEI loss as part of the Company's stranded costs. See Note B for a discussion of industry restructuring and Note C for a discussion of the Company's planned divestiture of its nonnuclear generating business. 4. Plant expenditures: The Company's utility plant expenditures are estimated to be approximately $55 million in 1998. At December 31, 1997, substantial commitments had been made relative to future planned expenditures. 5. Hydro-Quebec Interconnection and arbitration: The Company is a participant in both the Hydro-Quebec Phase I and Phase II projects. The Company's participation percentage in both projects is approximately 18 percent. The Hydro-Quebec Phase I and Phase II projects were established to transmit power from Hydro-Quebec to New England. Three affiliates of the Company were created to construct and operate transmission facilities related to these projects. The participants, including the Company, have entered into support agreements that end in 2020, to pay monthly their proportionate share of the total cost of constructing, owning, and operating the transmission facilities. The Company accounts for these support agreements as capital leases and accordingly recorded approximately $65 million in utility plant at December 31, 1997. Under the support agreements, the Company has agreed, in conjunction with any Hydro-Quebec Phase II project debt financings to guarantee its share of project debt. At December 31, 1997, the Company had guaranteed approximately $25 million of project debt. In the event any Interconnection facilities are abandoned for any reason, each participant is contractually committed to pay its pro-rata share of the net investment in the abandoned facilities. The Company's rights and obligations under its support agreements will be transferred to USGen upon completion of the sale of the Company's nonnuclear generating business. In 1996, various New England utilities which are members of the New England Power Pool, including the Company, submitted a dispute to arbitration regarding their Firm Energy Purchased Power Contract with Hydro-Quebec. In June 1997, Hydro-Quebec presented a damage claim of approximately $37 million for past damages, of which the Company's share would have been approximately $6 to $9 million. The claims involved a dispute over the components of a pricing formula and additional costs under the contract. With respect to on-going claims, the Company had been paying Hydro-Quebec the higher amount (additional costs of approximately $3 million per year) since July 1996 under protest and subject to refund. In October 1997, an arbitrator ruled in favor of the New England utilities in all respects. The Company has made a demand for refund. Hydro-Quebec has not yet refunded any monies and has appealed the decision. On November 9, 1997, the Company and the other utilities began a second arbitration to enforce the first decision. Refunds received from Hydro-Quebec will be passed on to customers. 6. Natural gas pipeline capacity: In connection with serving the Company's gas-fueled electric generation facilities, the Company has entered into several contracts for natural gas pipeline capacity and gas supply. These agreements require minimum fixed payments that are currently estimated to be $59 million to $62 million per year from 1998 to 2002. Under these agreements, remaining fixed payments from 2003 through 2014 total approximately $501 million. In connection with managing its fuel supply, the Company uses a portion of this pipeline capacity to sell natural gas. Proceeds from the sale of natural gas and pipeline capacity of $41 million, $50 million, and $71 million in 1997, 1996, and 1995, respectively, have been passed on to customers through the Company's fuel clause. These proceeds have been reflected as an offset to the related fuel expense in "Fuel for generation" in the Company's statements of income. Natural gas sales decreased in 1996 as a result of the Manchester Street plant entering commercial operation in the second half of 1995. See Note C for a discussion of the Company's planned divestiture of its nonnuclear generating business. 7. Hazardous waste: The Federal Comprehensive Environmental Response, Compensation and Liability Act, more commonly known as the "Superfund" law, imposes strict, joint and several liability, regardless of fault, for remediation of property contaminated with hazardous substances. A number of states, including Massachusetts, have enacted similar laws. The electric utility industry typically utilizes and/or generates in its operations a range of potentially hazardous products and by-products. The Company currently has in place an internal environmental audit program and an external waste disposal vendor audit and qualification program intended to enhance compliance with existing federal, state, and local requirements regarding the handling of potentially hazardous products and by-products. The Company has been named as a potentially responsible party (PRP) by either the United States Environmental Protection Agency or the Massachusetts Department of Environmental Protection for six sites at which hazardous waste is alleged to have been disposed. Private parties have also contacted or initiated legal proceedings against the Company regarding hazardous waste cleanup. The Company is currently aware of other sites, and may in the future become aware of additional sites, that it may be held responsible for remediating. Predicting the potential costs to investigate and remediate hazardous waste sites continues to be difficult. There are also significant uncertainties as to the portion, if any, of the investigation and remediation costs of any particular hazardous waste site that may ultimately be borne by the Company. The NEES companies have recovered amounts from certain insurers, and, where appropriate, the Company intends to seek recovery from its insurers and from other PRPs, but it is uncertain whether, and to what extent, such efforts will be successful. The Company believes that hazardous waste liabilities for all sites of which it is aware are not material to its financial position. In October 1996, the American Institute of Certified Public Accountants issued new accounting rules for Environmental Remediation Liabilities which became effective in 1997. These new rules did not have a material effect on the Company's financial position or results of operations. 8. Long-term contracts for the purchase of electricity: The Company purchases a portion of its electricity requirements pursuant to long-term contracts with owners of various generating units. These contracts expire in various years from 1998 to 2029. Certain of these contracts require the Company to make minimum fixed payments, even when the supplier is unable to deliver power, to cover the Company's proportionate share of the capital and fixed operating costs of these generating units. The fixed portion of payments under these contracts totaled $114 million in 1997, $127 million in 1996, and $150 million in 1995, excluding contracts with Yankee Atomic, Connecticut Yankee, and Maine Yankee (see Note D-2) for all periods presented. These contracts have minimum fixed payment requirements of $110 million annually from 1998 through 2001, $120 million in 2002, and approximately $950 million thereafter. Approximately 97 percent of the payments under these contracts are to Vermont Yankee and OSP, entities in which NEES subsidiaries hold ownership interests. The Company's other contracts, principally with nonutility generators, require the Company to make payments only if power supply capacity and energy are deliverable from such suppliers. The Company's payments under these contracts amounted to $265 million in 1997, $230 million in 1996, and $245 million in 1995. See Note C for a discussion of the Company's planned divestiture of its nonnuclear generating business. 9. Town of Norwood dispute: In April 1997, the Town of Norwood, Massachusetts filed a lawsuit against the Company in the United States District Court for the District of Massachusetts. The Company is a wholesale power supplier for Norwood pursuant to rates approved by the FERC. Norwood alleges that the Company's proposed divestiture of its power generation assets would violate the terms of a 1983 power contract which settled an antitrust lawsuit brought by Norwood against the Company. Norwood also alleges that the Company's proposed divestiture plan and recovery of stranded investment costs contravene federal antitrust laws. Norwood seeks an injunction enjoining the divestiture and an unspecified amount of treble damages (a specific claim for $450 million was withdrawn). Norwood's motion for a preliminary injunction of the divestiture was denied on September 8, 1997. On November 21, 1997, Norwood filed an amended complaint making new allegations relating to the sale of the Company's generating assets and naming as additional defendants, NEES, USGen and USGen's affiliate, PG&E. The Company continues to believe that its divestiture plan will promote competition in the wholesale power generation market and that it has met and will continue to meet its contractual commitments to Norwood. On January 9, 1998, the defendants, including NEES and the Company, filed a motion to dismiss the lawsuit. In March 1998, Norwood gave notice of its intent to terminate its contract with the Company, without accepting responsibility for its share of the Company's stranded costs, and to begin taking power from another supplier. The Company has filed with the FERC for permission to charge Norwood a contract termination charge for its share of the Company's stranded costs. Note E - Employee Benefits 1. Pension plans: The Company participates with other subsidiaries of NEES in noncontributory, defined-benefit plans covering substantially all employees of the Company. The plans provide pension benefits based on the employee's compensation during the five years prior to retirement. The Company's funding policy is to contribute each year the net periodic pension cost for that year. However, the contribution for any year will not be less than the minimum contribution required by federal law or greater than the maximum tax deductible amount. The Company's net pension cost for 1997, 1996, and 1995 included the following components:
Year ended December 31, (In thousands) 1997 1996 1995 - ---------------------------------------------------------------------------- Service cost - benefits earned during the period $ 2,887 $ 2,769 $ 2,231 Plus (less): Interest cost on projected benefit obligation 7,003 6,669 6,406 Return on plan assets at expected long-term rate (7,842) (7,204) (6,488) Amortization 61 270 131 ------- ------- ------- Net pension cost $ 2,109 $ 2,504 $ 2,280 ======= ======= ======= Actual return on plan assets $18,362 $12,672 $17,108 ======= ======= ======= Year ended December 31, 1998 1997 1996 1995 ---- ---- ---- ---- Assumptions used to determine pension cost: Discount rate 6.75% 7.25% 7.25% 8.25% Average rate of increase in future compensation levels 4.13% 4.13% 4.13% 4.63% Expected long-term rate of return on assets 8.50% 8.50% 8.50% 8.75%
The funded status of the plans cannot be presented separately for the Company as the Company participates in the plans with other NEES subsidiaries. The following table sets forth the funded status of the NEES companies' plans at December 31:
At December 31, (In millions) 1997 1996 - ----------------------------------------------------------------------- Benefits earned Actuarial present value of accumulated benefit liability: Vested $647 $640 Non-vested 18 19 ---- ---- Total $665 $659 ==== ==== Reconciliation of funded status Actuarial present value of projected benefit liability $757 $753 Unrecognized prior service costs (8) (9) FAS No. 87 transition liability not yet recognized (amortized) (1) (1) Net gain (loss) not yet recognized (amortized) 61 40 ---- ---- 809 783 ---- ---- Pension fund assets at fair value 834 812 FAS No. 87 transition asset not yet recognized (amortized) (8) (10) ---- ---- 826 802 ---- ---- Accrued pension/(prepaid) payments recorded on books $(17) $(19) ---- ----
The plans' funded status at December 31, 1997 and 1996 were calculated using the assumed rates from 1998 and 1997, respectively, and the 1983 Group Annuity Mortality table. Plan assets are composed primarily of corporate equity, debt securities, and cash equivalents. 2. Postretirement Benefit Plans Other Than Pensions (PBOPs): The Company provides health care and life insurance coverage to eligible retired employees. Eligibility is based on certain age and length of service requirements and in some cases retirees must contribute to the cost of their coverage. The Company's total cost of PBOPs for 1997, 1996, and 1995 included the following components:
Year ended December 31, (In thousands) 1997 1996 1995 - ---------------------------------------------------------------------------- Service cost - benefits earned during the period $ 1,363 $ 1,407 $ 1,344 Plus (less): Interest cost on accumulated benefit obligation 3,545 3,580 4,013 Return on plan assets at expected long-term rate (2,343) (1,832) (1,374) Amortization 1,581 1,867 2,079 ------- ------- ------- Net postretirement benefit cost $ 4,146 $ 5,022 $ 6,062 ======= ======= ======= Actual return on plan assets $ 5,387 $ 3,572 $ 4,137 ======= ======= ======= Year ended December 31 1998 1997 1996 1995 - ---------------------------------------------------------------------------- Assumptions used to determine postretirement benefit cost: Discount rate 6.75% 7.25% 7.25% 8.25% Expected long-term rate of return on assets 8.25% 8.25% 8.25% 8.50% Health care cost rate - 1995 to 1999 5.25% 8.00% 8.00% 8.50% Health care cost rate - 2000 to 2004 5.25% 6.25% 6.25% 8.50% Health care cost rate - 2005 and beyond 5.25% 5.25% 5.25% 6.25%
The following table sets forth the Company's benefits earned and the plans' funded status:
At December 31, (In millions) 1997 1996 - ---------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $29 $32 Fully eligible active plan participants 2 2 Other active plan participants 20 20 --- --- Total benefits earned 51 54 Unrecognized transition obligation (38) (41) Unrecognized net gain 21 13 --- --- 34 26 --- --- Plan assets at fair value 34 29 --- --- Prepaid postretirement benefit costs recorded on books $ - $3 === ===
The plans' funded status at December 31, 1997 and 1996 were calculated using the assumed rates in effect for 1998 and 1997, respectively. The assumptions used in the health care cost trends have a significant effect on the amounts reported. Increasing the assumed rates by 1 percent in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997 by approximately $6 million and the net periodic cost for 1997 by approximately $0.8 million. The Company funds the annual tax-deductible contributions. Plan assets are invested in equity and debt securities and cash equivalents. Note F - Income Taxes The Company and other subsidiaries participate with NEES in filing consolidated federal income tax returns. The Company's income tax provision is calculated on a separate return basis. Federal income tax returns have been examined and reported on by the Internal Revenue Service through 1993. Total income taxes in the statements of income are as follows:
Year ended December 31, (In thousands) 1997 1996 1995 - ---------------------------------------------------------------- Income taxes charged to operations $90,009 $91,894 $91,051 Income taxes charged (credited) to "Other income" (373) 555 353 ------- ------- ------- Total income taxes $89,636 $92,449 $91,404 ======= ======= =======
Total income taxes, as shown above, consist of the following components:
Year ended December 31, (In thousands) 1997 1996 1995 - ---------------------------------------------------------------- Current income taxes $102,364 $99,907 $65,721 Deferred income taxes (10,705) (5,435) 27,188 Investment tax credits, net (2,023) (2,023) (1,505) -------- ------- ------- Total income taxes $ 89,636 $92,449 $91,404 ======== ======= =======
Investment tax credits have been deferred and are being amortized over the estimated lives of the property giving rise to the credits. Total income taxes, as shown above, consist of federal and state components as follows:
Year ended December 31, (In thousands) 1997 1996 1995 - ---------------------------------------------------------------- Federal income taxes $73,077 $76,656 $74,590 State income taxes 16,559 15,793 16,814 ------- ------- ------- Total income taxes $89,636 $92,449 $91,404 ======= ======= =======
With regulatory approval from the FERC, the Company has adopted comprehensive interperiod tax allocation (normalization) for temporary book/tax differences. Total income taxes differ from the amounts computed by applying the federal statutory tax rates to income before taxes. The reasons for the differences are as follows:
Year ended December 31, (In thousands) 1997 1996 1995 - ---------------------------------------------------------------- Computed tax at statutory rate $81,963 $85,726 $84,991 Increases (reductions) in tax resulting from: Amortization of investment tax credits (2,023) (2,023) (2,227) State income taxes, net of federal income tax benefit 10,763 10,265 10,929 All other differences (1,067) (1,519) (2,289) ------- ------- ------- Total income taxes $89,636 $92,449 $91,404 ======= ======= =======
The following table identifies the major components of total deferred income taxes:
At December 31, (In millions) 1997 1996 - ---------------------------------------------------------------- Deferred tax asset: Plant related $ 87 $ 97 Investment tax credits 22 23 All other 44 46 ----- ----- 153 166 ----- ----- Deferred tax liability: Plant related (418) (415) Equity AFDC (43) (45) All other (62) (88) ----- ----- (523) (548) ----- ----- Net deferred tax liability $(370) $(382) ===== =====
Note G - Short-term Borrowings and Other Accrued Expenses At December 31, 1997, the Company had $111 million of short-term debt outstanding including $108 million in commercial paper borrowings and $3 million of borrowings from affiliates. NEES and certain subsidiaries, including the Company, with regulatory approval, operate a money pool to more effectively utilize cash resources and to reduce outside short-term borrowings. Short-term borrowing needs are met first by available funds of the money pool participants. Borrowing companies pay interest at a rate designed to approximate the cost of outside short-term borrowings. Companies which invest in the pool share the interest earned on a basis proportionate to their average monthly investment in the money pool. Funds may be withdrawn from or repaid to the pool at any time without prior notice. At December 31, 1997, the Company had lines of credit and standby bond purchase facilities with banks totaling $375 million which are available to provide liquidity support for commercial paper borrowings and for $372 million of the Company's outstanding variable rate mortgage bonds in tax-exempt commercial paper mode (see Note I) and for other corporate purposes. There were no borrowings under these lines of credit at December 31, 1997. Fees are paid on the lines and facilities in lieu of compensating balances. The weighted average rate on outstanding short-term borrowings was 5.7 percent at December 31, 1997. The fair value of the Company's short-term debt equals carrying value. The components of other accrued expenses are as follows:
At December 31, (In thousands) 1997 1996 - ---------------------------------------------------------------- Accrued wages and benefits $ 9,838 $ 7,190 Capital lease obligations due within one year 4,333 4,328 Rate adjustment mechanisms 6,957 4,790 Other 2,426 269 ------- ------- $23,554 $16,577 ------- -------
Note H - Cumulative Preferred Stock A summary of cumulative preferred stock at December 31, 1997 and 1996 is as follows (in thousands of dollars except for share data):
Shares Authorized Dividends Call and Outstanding Amount Declared Price - ------------------------------------------------------------------------------ 1997 1996 1997 1996 1997 1996 - ------------------------------------------------------------------------------ $100 Par value 6.00% Series 75,020 75,020 $ 7,502 $ 7,502 $ 451 $ 451 (a) 4.56% Series 100,000 100,000 10,000 10,000 456 456 $104.08 4.60% Series 80,140 80,140 8,014 8,014 368 368 $101.00 4.64% Series 41,500 41,500 4,150 4,150 192 328 $102.56 6.08% Series 100,000 100,000 10,000 10,000 608 608 $102.34 7.24% Series - - - - - 363 $103.06 - ------------------------------------------------------------------------------ Total 396,660 396,660 $39,666 $39,666 $2,075 $2,574 (a) Noncallable.
The annual dividend requirement for total cumulative preferred stock was $2,075,000 for 1997 and for 1996. During 1997, the Company's parent, NEES, purchased preferred stock of the Company with a par value of $29 million. In August 1996, the Company repurchased $6 million of its 4.64 percent series of cumulative preferred stock. In May 1996, the Company redeemed all ($15 million) of its 7.24 percent series of cumulative preferred stock. Note I - Long-term Debt A summary of long-term debt is as follows:
At December 31, (In thousands) Series Rate % Maturity 1997 1996 - ----------------------------------------------------------------------------- General and Refunding Mortgage Bonds: Y(94-3) 8.10 December 22, 1997 $3,000 W(93-2) 6.17 February 2, 1998 $4,300 4,300 W(93-4) 6.14 February 2, 1998 1,300 1,300 W(93-5) 6.17 February 3, 1998 5,000 5,000 W(93-7) 6.10 February 4, 1998 10,000 10,000 W(93-9) 6.04 February 4, 1998 29,400 29,400 Y(94-4) 8.28 December 21, 1999 10,000 10,000 W(93-6) 6.58 February 10, 2000 5,000 5,000 Y(95-1) 7.94 February 14, 2000 5,000 5,000 Y(95-2) 7.93 February 14, 2000 10,000 10,000 Y(95-3) 7.40 March 21, 2000 10,000 10,000 Y(95-4) 6.69 June 5, 2000 25,000 25,000 W(93-1) 7.00 February 3, 2003 25,000 25,000 Y(94-2) 8.33 November 8, 2004 10,000 10,000 K 7.25 October 15, 2015 38,500 38,500 X variable March 1, 2018 79,250 79,250 R variable November 1, 2020 135,850 135,850 S variable November 1, 2020 50,600 50,600 U 8.00 August 1, 2022 134,500 170,000 V variable October 1, 2022 106,150 106,150 Y(94-1) 8.53 September 20, 2024 5,000 5,000 Unamortized discounts (2,130) (2,344) -------- -------- Total long-term debt 697,720 736,006 ======== ======== Long-term debt due in one year (50,000) (3,000) -------- -------- $647,720 $733,006 ======== ========
Substantially all of the properties and franchises of the Company are subject to the lien of the mortgage indentures under which the general and refunding mortgage bonds have been issued. The Company will make cash payments of $50 million in 1998, $10 million in 1999, and $55 million in 2000 to retire maturing mortgage bonds. There are no cash payments required in either 2001 or 2002. The terms of $372 million of variable rate PCRBs collateralized by the Company's mortgage bonds at December 31, 1997 require the Company to reacquire the bonds under certain limited circumstances. At December 31, 1997, interest rates on the Company's variable rate bonds ranged from 3.70 percent to 4.85 percent. See Note C for information on potential bond defeasance. At December 31, 1997, the Company's long-term debt had a carrying value of $700,000,000 and had a fair value of approximately $721,000,000. The fair value of debt that reprices frequently at market rates approximates carrying value. For all other debt, the fair market value of the Company's long-term debt was estimated based on the quoted prices for similar issues or on the current rates offered to the Company for debt of the same remaining maturity. Note J - Restrictions on Retained Earnings Available for Dividends on Common Stock Pursuant to the provisions of the Articles of Organization and the By-Laws relating to the Dividend Series Preferred Stock, certain restrictions on payment of dividends on common stock would come into effect if the "junior stock equity" was, or by reason of payment of such dividends became, less than 25 percent of "Total capitalization." However, the junior stock equity at December 31, 1997 was 55 percent of total capitalization, including long-term debt due in one year, and, accordingly, none of the Company's retained earnings at December 31, 1997 were restricted as to dividends on common stock under the foregoing provisions. Under restrictions contained in the indentures relating to general and refunding mortgage bonds (Series K), none of the Company's retained earnings at December 31, 1997 were restricted as to dividends on common stock. However, a portion of the Company's retained earnings (less than $30 million) may be restricted due to regulatory requirements related to hydroelectric licensed projects. Note K - Supplementary Income Statement Information Advertising expenses, expenditures for research and development, and rents were not material and there were no royalties paid in 1997, 1996, or 1995. Taxes, other than income taxes, charged to operating expenses are set forth by classes as follows:
Year ended December 31, (In thousands) 1997 1996 1995 - ---------------------------------------------------------------- Municipal property taxes $59,102 $58,942 $49,807 Federal and state payroll and other taxes 8,209 7,474 8,909 ------- ------- ------- $67,311 $66,416 $58,716 ======= ======= =======
New England Power Service Company, an affiliated service company operating pursuant to the provisions of Section 13 of the Public Utility Holding Company Act of 1935, furnished services to the Company at the cost of such services. These costs amounted to $91,985,000, $85,124,000, and $106,411,000, including capitalized construction costs of $24,347,000, $19,412,000, and $24,671,000, for each of the years 1997, 1996, and 1995, respectively.
New England Power Company Selected Financial Information Year ended December 31, (In millions) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------- Operating revenue: Electric sales (excluding fuel cost recovery) $ 921 $ 918 $ 941 $ 942 $ 939 Fuel cost recovery 696 642 594 563 576 Other 61 40 36 36 34 ------ ------ ------ ------ ------ Total operating revenue $1,678 $1,600 $1,571 $1,541 $1,549 Net income $ 145 $ 152 $ 151 $ 149 $ 141 Total assets $2,763 $2,648 $2,648 $2,613 $2,441 Capitalization: Common equity $ 913 $ 906 $ 889 $ 877 $ 850 Cumulative preferred stock 40 40 61 61 61 Long-term debt 648 733 735 695 667 ------ ------ ------ ------ ------ Total capitalization $1,601 $1,679 $1,685 $1,633 $1,578 Preferred dividends declared $ 2 $ 3 $ 3 $ 3 $ 5 Common dividends declared $ 135 $ 134 $ 135 $ 119 $ 111 ------ ------ ------ ------ ------
Selected Quarterly Financial Information (Unaudited)
First Second Third Fourth (In thousands) Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1997 Operating revenue $438,048 $396,049 $443,774 $400,032 Operating income $ 50,652 $ 30,028 $ 64,535 $ 45,637 Net income $ 37,945 $ 19,515 $ 52,019 $ 35,064 1996 Operating revenue $400,460 $375,001 $431,420 $393,428 Operating income $ 55,277 $ 39,628 $ 63,782 $ 45,074 Net income $ 40,973 $ 26,768 $ 52,559 $ 32,183
Per share data is not relevant because the Company's common stock is wholly owned by New England Electric System. A copy of New England Power Company's Annual Report on Form 10-K to the Securities and Exchange Commission for the year ended December 31, 1997 will be available on or about April 1, 1998, without charge, upon written request to New England Power Company, Shareholder Services Department, 25 Research Drive, Westborough, Massachusetts 01582. EX-21 21 SUBSIDIARY LIST EXHIBIT (21) Subsidiaries of New England Power Company -----------------------------------------
State of Incorporation or Name of Company Organization - --------------- ------------------------- Connecticut Yankee Atomic Connecticut Power Company Maine Yankee Atomic Maine Power Company Vermont Yankee Nuclear Vermont Power Corporation Yankee Atomic Electric Company Massachusetts
EX-24 22 NEP POWER OF ATTORNEY EXHIBIT (24) POWER OF ATTORNEY ----------------- Each of the undersigned directors of New England Power Company (the "Company"), individually as a director of the Company, hereby constitutes and appoints John G. Cochrane, Robert K. Wulff, and Geraldine M. Zipser, individually, as attorney-in-fact to execute on behalf of the undersigned the Company's annual report on Form 10-K for the year ended December 31, 1997, to be filed with the Securities and Exchange Commission, and to execute any appropriate amendment or amendments thereto as may be required by law. Dated this 17th day of March, 1998. s/Lawrence E. Bailey s/Cheryl A. LaFleur _________________________ _________________________ Lawrence E. Bailey Cheryl A. LaFleur s/Alfred D. Houston _________________________ Alfred D. Houston EX-27 23 NEP FDS WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND RELATED STATEMENTS OF INCOME, RETAINED EARNINGS AND CASH FLOWS OF NEW ENGLAND POWER COMPANY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. NEW ENGLAND POWER COMPANY 1 0000071337 1,000 DEC-31-1997 DEC-31-1997 12-MOS PER-BOOK 1,889,792 84,548 338,337 450,415 0 2,763,092 128,998 376,597 407,630 913,259 0 39,666 647,720 3,125 0 108,125 50,000 0 0 0 1,001,197 2,763,092 1,677,903 90,009 1,397,042 1,487,051 190,852 1,785 192,637 48,094 144,543 2,075 142,468 135,448 42,277 224,974 0 0 Total deferred charges includes other assets. Per share data is not relevant because the Company's common stock is wholly-owned by New England Electric System. Total common stockholders equity includes the unrealized gain on securities. EX-3 24 MECO EXHIBIT (3)(B) As Amended December 12, 1997 BY-LAWS of MASSACHUSETTS ELECTRIC COMPANY ARTICLE I. PLACE OF STOCKHOLDERS' MEETINGS. All meetings of the stockholders shall be held in Massachusetts either at the principal office of the corporation or at such other place as is stated in the call. ARTICLE II. ANNUAL MEETING. The annual meeting of the stockholders shall be held at the principal office of the corporation or such other place in Massachusetts as is stated in the call of the meeting on the third Wednesday of March in each year, if it be not a legal holiday, and if it be a legal holiday, then on the next succeeding day not a legal holiday. Purposes for which the annual meeting is to be held additional to those prescribed by law, by the agreement of association and by these by-laws may be specified by the board of directors or by writing signed by the president or by a majority of the directors or by stockholders who hold at least one-tenth of the aggregate par value of the capital stock generally entitled to vote. If such annual meeting is omitted on the day herein provided therefor, a special meeting may be held in place thereof, and any business transacted or elections held at such meeting shall have the same effect as if transacted or held at the annual meeting. ARTICLE III. SPECIAL MEETINGS OF STOCKHOLDERS. Except as otherwise provided in Section 4 of Article XVIII, special meetings of the stockholders may be called by the president or by a majority of the directors, and shall be called by the clerk, or in the case of the death, absence, incapacity or refusal of the clerk by any other officer of the corporation, upon written application of stockholders who hold at least one- tenth of the aggregate par value of the capital stock entitled to vote at the meeting, stating the time, place and purpose of the meeting. ARTICLE IV. NOTICE OF STOCKHOLDERS' MEETINGS. Except as otherwise provided in Section 4 of Article XVIII, a written or printed notice of each meeting of stockholders, stating the place, day and hour thereof and the purpose for which the meeting is called, shall be given by the clerk, at least seven days before such meeting, to each stockholder entitled to vote thereat, by leaving such notice with him or at his residence or usual place of business, or by mailing it, postage prepaid and addressed to such stockholder at his address as it appears upon the books of the corporation. In the absence or disability of the clerk, such notice may be given by a person designated either by the clerk or by the person or persons calling the meeting or by the board of directors. No notice of the time, place or purpose of any regular or special meeting of the stockholders shall be required if every stockholder entitled to notice thereof is present in person or is represented at the meeting by proxy or if every such stockholder, or his attorney thereunto authorized, by a writing which is filed with the records of the meeting, waives such notice. ARTICLE V. QUORUM OF STOCKHOLDERS. Except as otherwise provided in Section 4 of Article XVIII, at any meeting of the stockholders, a majority in interest of all stock issued and outstanding and entitled to vote upon a question to be considered at the meeting shall constitute a quorum for the consideration of such question, but a less interest may adjourn any meeting from time to time, and the meeting may be held as adjourned without further notice. When a quorum is present at any meeting, a majority of the stock represented thereat and entitled to vote shall, except where a larger vote is required by law, by the agreement of association or by these by-laws, decide any question brought before such meeting. ARTICLE VI. PROXIES AND VOTING. Stockholders who are entitled to vote shall have one vote for each share of stock owned by them. Stockholders may vote either in person or by proxy in writing dated not more than six (6) months before the meeting named therein, which shall be filed with the clerk of the meeting before being voted. Such proxies shall entitle the holders thereof to vote at any adjournment of such meeting but shall not be valid after the final adjournment of such meeting. ARTICLE VII. BOARD OF DIRECTORS. A board of not less than three directors shall be chosen by ballot at the annual meeting of the stockholders or at the special meeting held in place thereof, or as provided in Section 4 of Article XVIII. The number of directors for each corporate year shall be fixed by vote at the meeting at which they are elected but the stockholders may, at any special meeting held for the purpose during any such year, increase or decrease (within the limit above specified) the number of directors as thus fixed, and elect new directors to complete the number so fixed, or remove directors to reduce the number of directors to the number so fixed; provided, however, that while there are four (4) full quarterly dividends in default on the Preferred Stock and the Preferred Stock-Cumulative the number of such directors shall be fixed in accordance with Section 4 of Article XVIII. No director need be a stockholder. Subject to law, to the agreement of association, to the terms of the Preferred Stock and the Preferred Stock-Cumulative and to the other provisions of these by-laws, each director shall hold office until the next annual meeting of the stockholders and until his successor is chosen and qualified. ARTICLE VIII. POWERS OF DIRECTORS. The board of directors shall have, and may exercise, all the powers of the corporation, except such as are conferred upon the stockholders by law, by the agreement of association and by these by-laws. ARTICLE IX. MEETINGS OF THE BOARD OF DIRECTORS. Regular meetings of the board of directors may be held at such places and at such times as the board may by vote from time to time determine, and if so determined, no notice thereof need be given. A regular meeting of the board of directors may be held without notice immediately after, and at the same place as the annual meeting of the stockholders, or the special meeting of the stockholders held in place of such annual meeting. Special meetings of the board of directors may be held at any time and at any place when called by the president, treasurer, or two or more directors, reasonable notice thereof being given to each director, or at any time without call or formal notice, provided all the directors are present or waive notice thereof by a writing which is filed with the records of the meeting. In any case it shall be deemed sufficient notice to a director to send notice by mail or telegram at least forty-eight hours before the meeting addressed to him at his usual or last known business or residence address. ARTICLE X. QUORUM OF THE BOARD OF DIRECTORS. A majority of the board of directors shall constitute a quorum for the transaction of business, but a less number may adjourn any meeting from time to time, and the meeting may be held as adjourned without further notice. Except as otherwise provided, when a quorum is present at any meeting, a majority of the members in attendance thereat shall decide any question brought before such meeting. ARTICLE XI. VACANCIES IN BOARD OF DIRECTORS. If the office of any director, one or more, elected by the stockholders generally entitled to vote, becomes vacant by reason of death, resignation, removal, disqualification or otherwise, the remaining directors so elected, though less than a quorum, may, unless such vacancy shall have been filled by the stockholders generally entitled to vote, choose by a majority vote of their entire number, a successor or successors, who shall hold office for the unexpired term. Any vacancy in the office of a director elected by holders of the Preferred Stock and the Preferred Stock-Cumulative shall be filled as provided in Section 4 of Article XVIII. ARTICLE XII. OFFICERS AND AGENTS. The officers shall be a president, a clerk, a treasurer and such other officers and agents as the board of directors may in their discretion appoint. The treasurer and the clerk shall be chosen by ballot at the annual meeting of the stockholders. The president shall be elected annually by the board of directors after its election by the stockholders. The president shall be a director. The clerk shall be a resident of Massachusetts. So far as is permitted by law, any two or more offices may be filled by the same person. Subject to law, to the agreement of association and to the other provisions of these by-laws, the treasurer and clerk shall each hold office until the next annual meeting of stockholders and until his successor is chosen and qualified, the president shall hold office until the first meeting of directors after the next annual meeting of stockholders and until his successor is chosen and qualified and the other officers and agents shall hold office during the pleasure of the board of directors or for such term as the board of directors shall prescribe. Each officer shall, subject to these by- laws, have in addition to the duties and powers herein set forth such duties and powers as are commonly incident to his office, and such duties and powers as the board of directors shall from time to time designate. ARTICLE XIII. PRESIDENT AND VICE PRESIDENTS. Except as otherwise determined by the board of directors the president shall be the chief executive officer of the corporation and shall preside at all meetings of the stockholders and of the board of directors at which he is present. The president shall have custody of the treasurer's bond. Any vice president shall have such powers as the board of directors shall from time to time designate. ARTICLE XIV. CLERK. The clerk shall keep an accurate record of the proceedings of all meetings of the stockholders in books provided for the purpose, which books shall be kept at the principal office of the corporation and shall be open at all reasonable times to the inspection of any stockholder. In the absence of the clerk or an assistant clerk at any such meeting a temporary clerk shall be chosen, who shall record the proceedings of such meeting in the aforesaid books. The clerk, any assistant clerk and such temporary clerk shall be sworn. The clerk or an assistant clerk shall also keep accurate minutes of all meetings of the board of directors and in their absence from any such meeting a temporary clerk shall be chosen, who shall be sworn and shall record the proceedings of such meeting. ARTICLE XV. TREASURER. The treasurer shall, subject to the direction and under the supervision of the board of directors, have general charge of the financial concerns of the corporation and the care and custody of the funds and valuable papers of the corporation, except his own bond, and he shall have power to endorse for deposit or collection all notes, checks, drafts, etc., payable to the corporation or its order, and to accept drafts on behalf of the corporation. He shall keep, or cause to be kept, accurate books of account which shall be the property of the corporation. If required by the board of directors he shall give bond for the faithful performance of his duty in such form, in such sum, and with such sureties as the board of directors shall require. Any assistant treasurer shall have such powers as the board of directors shall from time to time designate. ARTICLE XVI. REMOVALS. The stockholders generally entitled to vote may, at any special meeting called for the purpose, by vote of a majority of the capital stock issued and outstanding and generally entitled to vote, remove from office the treasurer, clerk or any director elected by the stockholders generally entitled to vote, and elect his successor. The board of directors may likewise, by vote of a majority of their entire number, remove from office any officer or agent of the corporation; provided, however, that the board of directors may remove the treasurer or clerk for cause only. ARTICLE XVII. VACANCIES. If the office of any officer or agent, one or more, becomes vacant by reason of death, resignation, removal, disqualification or otherwise, the directors may, unless such vacancy, if in the office of the treasurer or clerk, shall have been filled by the stockholders generally entitled to vote, choose by a majority vote of their entire number, a successor or successors, who shall hold office for the unexpired term, subject to the provisions of Article XVI. ARTICLE XVIII. CLASSES OF STOCK. The capital stock of the corporation shall consist of Common Stock of the par value of $25 a share and two classes of preferred stock, Preferred Stock of the par value of $100 a share and Preferred Stock - Cumulative of the par value of $25 a share, each having respectively preferences, voting rights, restrictions and qualifications as follows: SECTION 1. Common Stock. Each share of the Common Stock shall be equal to every other share thereof in every respect. Except as required by law and except as hereafter specifically provided in Section 2 of this Article XVIII, the holders of Common Stock shall have the exclusive right to vote. SECTION 2. Preferred Stock. A. The shares of Preferred Stock may be issued, as the board of directors may determine, in one or more series each bearing such designation as to distinguish the shares thereof from the shares of all other series and classes of capital stock of the corporation. All shares of Preferred Stock, irrespective of series, shall constitute one and the same class of stock and shall be of equal rank as to dividends and assets with each other and with the Preferred Stock - Cumulative. Subject to any applicable provisions of law, the shares of Preferred Stock of different series may vary, as determined by the board of directors and, if required by law, by the stockholders, as to the following rights and preferences: (1) The annual dividend rate, or method of calculation thereof, and the date from which the dividends on shares issued prior to the record date for the first dividend shall be cumulative and the date for the first dividend; (2) The redemption price or prices, or method of calculation thereof, and any restriction on the exercise by the corporation of its right to redeem such series; (3) The amount or amounts payable upon any liquidation or dissolution or winding up; (4) The terms and amount of any sinking fund provided for the purchase or redemption of shares; and (5) The conversion, participation or other special rights. B. Before any dividends on, or any distribution of assets (by purchase of shares or otherwise) to holders of, the Common Stock or any other stock ranking junior to the Preferred Stock as to dividends (both hereinafter in this subsection B called "junior stock") shall be paid or set apart for payment or otherwise provided for, the holders of the Preferred Stock shall be entitled to receive, but only when and as declared by the board of directors, out of any funds legally available for the declaration of dividends, cumulative dividends at the annual dividend rate per share fixed for the particular series payable quarterly on the first days of February, May, August and November in each year commencing on a date specified for the first dividend date as herein provided to stockholders of record on the respective dates, not exceeding thirty (30) days preceding such dividend payment dates, fixed in advance for the purpose by the board of directors prior to the payment of each particular dividend. No dividends shall be declared on any series of the Preferred Stock or on any other class of preferred stock ranking on a parity therewith, as to dividends, in respect of any quarter-yearly dividend period, unless there shall likewise be declared on all shares of all series of the Preferred Stock and of any other class of such parity preferred stock at the time outstanding, like proportionate dividends, ratably, in proportion to the respective annual dividend rates fixed therefor, in respect of the same quarter-yearly dividend period, to the extent that such shares are entitled to receive dividends for such quarter-yearly dividend period. The dividends on shares of all series of the Preferred Stock shall be cumulative. In the case of all shares of each particular series, the dividends on shares of such series shall be cumulative: (1) On shares issued prior to the record date for the first dividend on the shares of such series, from the date for the particular series fixed therefor; (2) On shares issued after a record date for a dividend, but prior to the dividend payment date for such dividend, from said dividend payment; and (3) Otherwise from the quarter-yearly dividend payment date next preceding the date of issue of such shares; so that dividends accrued on all outstanding shares of Preferred Stock to the last preceding quarterly dividend payment shall have been paid in full or declared and set apart for payment before there shall be any dividend or distribution on, or purchase of, junior stock. The holders of the Preferred Stock shall not be entitled to receive any dividends thereon other than the dividends referred to in this subsection B and other than distributions provided for in subsection D below. Whenever dividends accrued on all outstanding shares of Preferred Stock to the last preceding quarterly dividend payment date shall have been paid in full or declared and set apart for payment, and subject to the limitations set forth in subsection H below and, when applicable, in subsection E(2)(i) of Section 4 of this Article XVIII, the board of directors may, without waiting for the expiration of the current dividend period for the Preferred Stock, declare and pay dividends on any junior stock out of funds legally available therefor. As used in this Section 2, the expression "dividends accrued" shall mean the sum of amounts with respect to all shares of Preferred Stock then outstanding, which as to each share shall be an amount computed at the rate per annum of the par value thereof fixed for the particular series from the date from which dividends on such share become cumulative to the date with reference to which the expression is used, irrespective of whether such amount shall have been declared as dividends or there shall have existed any funds legally available for the payment thereof, less the aggregate of all dividends paid or declared payable on or before said last mentioned date and set aside for such payment on such share. C. The corporation, pursuant to action of its board of directors or as provided in subsection A(11) of Section 4 of this Article XVIII, may redeem the whole or any part of any series of the Preferred Stock at the time outstanding, at any time or from time to time, by paying in cash as herein provided the redemption price of the shares of the particular series fixed therefor, together with dividends accrued to the date fixed for such redemption, and by mailing, postage prepaid, at least thirty (30) days and not more than ninety (90) days prior to the date fixed for said redemption a notice specifying said redemption date to the holders of record of the Preferred Stock to be redeemed, at their respective addresses as the same shall appear on the books of the corporation; provided, however, that the exercise by the corporation of its right to redeem shares of any particular series may be subject to such restrictions as are determined for said series. In case of the redemption of a part only of any series of the Preferred Stock at the time outstanding, the corporation shall select by lot in such manner as the board of directors determines, the shares so to be redeemed. If such notice of redemption shall have been so mailed, and if on or before the redemption date specified in such notice all funds necessary for such redemption shall have been set aside by the corporation, so as to be and continue to be available therefor, then, on and after said redemption date, notwithstanding that any certificate for the shares of the Preferred Stock so called for redemption shall not have been surrendered for cancellation, the shares represented thereby shall no longer be deemed outstanding, the right to receive dividends thereon shall cease to accrue, and all rights of the holders thereof shall forthwith cease and terminate, except only the right of the holders thereof to receive the amount payable upon redemption thereof, but without interest; provided, however, that if, after mailing said notice as aforesaid and prior to the date of redemption specified in such notice, said funds shall be set aside by deposit in trust, for the account of the holders of the Preferred Stock to be redeemed, with a bank or trust company in good standing, organized under the laws of the United States of America or The Commonwealth of Massachusetts, having a capital, undivided profits and surplus aggregating at least $5,000,000, thereupon all shares of the Preferred Stock with respect to which such deposit shall have been made shall no longer be deemed to be outstanding, and all rights with respect to such shares of Preferred Stock shall forthwith upon such deposit in trust cease and terminate, except only the right of the holders thereof to receive from such deposit the amount payable upon the redemption but without interest. In case the holders of the Preferred Stock which shall have been redeemed shall not within four years of the date of redemption thereof claim any amount so deposited in trust for the redemption of such shares, such bank or trust company shall, upon demand, pay over to the corporation any such unclaimed amount so deposited with it and shall thereupon be relieved of all responsibility in respect thereof, and the corporation shall not be required to hold the amount so paid over to it separate and apart from its other funds, and thereafter the holders of such shares of Preferred Stock shall look only to the corporation for payment of the redemption price thereof, but without interest. If there are any dividends accrued to the last preceding quarterly dividend payment date or dates on the outstanding Preferred Stock or any other class of preferred stock ranking on a parity therewith as to assets, no Preferred Stock or such parity stock shall be redeemed, purchased or otherwise acquired by the corporation unless all series of Preferred Stock and such parity stock which are redeemable shall be redeemed and unless an offer is made to (a) purchase all Preferred Stock and such parity stock of any series which is not redeemable at the time under limited restrictions then applicable thereto at a price equal to the then redemption price for such series if such restrictions were not applicable and (b) to purchase all Preferred Stock and such parity stock of any series which is not redeemable at the time at a price equal to the highest then redemption price on any outstanding shares of Preferred Stock and such parity stock, after giving effect to the differences in par value among classes of preferred stock, or unless a partial redemption or any purchase or other acquisition shall have been ordered, approved or permitted under the Public Utility Holding Company Act of 1935. All stock redeemed or purchased under the provisions of this subsection C shall be retired. D. In the event of any liquidation, dissolution or winding up (whether voluntarily or involuntarily) of the affairs of the corporation or any distribution of its capital, then before any distribution shall be made to the holders of Common Stock or any other stock ranking junior to the Preferred Stock as to assets, the holders of each series of the Preferred Stock at the time outstanding shall be entitled to be paid in cash the amount for the particular series fixed therefor, together in each case with dividends accrued thereon to the date fixed for payment of such distributive amounts, and no more. No payments on account of such distributive amounts shall be made to the holders of any series of the Preferred Stock or any other class of preferred stock ranking on a parity therewith, as to assets, unless there shall likewise be paid at the same time to the holders of each other series of the Preferred Stock or such parity stock like proportionate distributive amounts, ratably, in proportion to the full distributive amounts to which they are respectively entitled. After such payment to the holders of Preferred Stock or such parity stock, the remaining assets and funds of the corporation shall be divided and distributed among the holders of Common Stock or any other stock ranking junior to the Preferred Stock as to assets then outstanding according to their respective rights. Neither the consolidation nor the merger of the corporation with or into any other corporation shall be deemed to be a liquidation, dissolution or winding up of the corporation. E. Except as required by law and except as hereafter specifically provided in this Section 4 of this Article XVIII, the holders of Preferred Stock shall have no right to vote. F. Except as otherwise expressly provided by law, no holder of Preferred Stock shall be entitled as such as a matter of right to subscribe for or purchase any part of any new or additional issue of stock or warrant carrying rights to stock, or securities convertible into stock, of any class whatever, whether now or hereafter authorized, and whether issued for cash, property, services or otherwise. If it is expressly required by law that such new or additional issue be offered proportionately to the stockholders, then, unless otherwise provided by law, the holders of all classes of preferred stock only shall be entitled to subscribe for new or additional preferred stock of any class 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. G. Subject to the limitations, if any, contained in Sections 4 and 5 of this Article XVIII, the corporation may from time to time issue additional capital stock divided into classes with such preferences as to dividends, voting power and other incidents as may be determined in accordance with applicable provisions of law and terms of outstanding capital stock. Without limiting the generality of the foregoing, any such additional capital stock may be an additional series of Preferred Stock or additional shares of the initial or any other series of Preferred Stock. H. So long as any shares of the Preferred Stock of any series are outstanding, the payment of dividends on Common Stock or on any other stock of the corporation ranking junior to the Preferred Stock as to dividends or assets (other than (i) dividends payable in stock ranking junior to the Preferred Stock as to dividends and assets or (ii) dividends paid in cash if immediately thereafter there shall be paid to the corporation in cash an amount equal to such dividends for shares of or as a capital contribution with respect to stock ranking junior to the Preferred Stock as to dividends or assets) and the making of any distribution of assets to holders of stock ranking junior to the Preferred Stock as to dividends or assets by purchase of shares or otherwise (each of such actions being herein embraced within the term "payment of junior stock dividends") shall be subject to the following limitations: (1) If and so long as the junior stock equity is, or as a result of the proposed payment would become, less than twenty per cent (20%) of total capitalization the payment of junior stock dividends, including the proposed payment, during the twelve months ending with the last day of the month in which the proposed payment is to be made shall not exceed fifty per cent (50%) of the net income of the corporation available for the payment of dividends on the stock ranking junior to the Preferred Stock as to dividends and assets for the twelve full calendar months immediately preceding the calendar month in which such dividend is declared; and (2) If and so long as the junior stock equity is, or as a result of the proposed payment would become, less than twenty-five per cent (25%) but is twenty per cent (20%) or more of total capitalization the payment of junior stock dividends, including the proposed payment, during the twelve months ending with the last day of the month in which the proposed payment is to be made shall not exceed seventy-five per cent (75%) of the net income of the corporation available for the payment of dividends on the stock ranking junior to the Preferred Stock as to dividends and assets for the twelve full calendar months immediately preceding the calendar month in which such dividend is declared. For the purposes of this subsection H "net income" shall be determined in accordance with generally accepted accounting principles, provided, however, that the amount deducted for depreciation shall be an amount computed in accordance with clause (c) of Section 4E hereof. The term "junior stock equity" is defined in subsection E(2)(i) of Section 4 of this Article XVIII. The term "total capitalization" as used in this subsection H means the aggregate of (x) the junior stock equity, (y) the par value of, or stated capital represented by, the outstanding shares of Preferred Stock and any other stock ranking prior thereto or on a parity therewith as to dividends or assets, and (z) the principal amount of all outstanding indebtedness of the corporation represented by bonds, notes and other evidences of indebtedness maturing by their terms more than one year from the date of issue thereof. I. No stockholder, director, officer or agent of the corporation shall be held individually responsible for any action taken in good faith though subsequently adjudged to be in violation of this Section 2. J. The shares of Preferred Stock from time to time duly authorized may be issued for such consideration as may be fixed from time to time either by the board of directors or as otherwise provided by law. Any and all shares of Preferred Stock upon receipt by the corporation of the consideration so fixed shall be deemed fully paid stock and shall not be liable to any further call or assessment thereon. K. Every holder of Preferred Stock of the corporation by becoming such shall be held to have consented to all of these provisions and to have agreed to be bound thereby and to have waived to the full extent permitted by law any right such holder may have either now or at any time in the future contrary to these provisions. SECTION 3. Preferred Stock - Cumulative. A. The shares of Preferred Stock - Cumulative may be issued, as the board of directors may determine, in one or more series each bearing such designation as to distinguish the shares thereof from the shares of all other series and classes of capital stock of the corporation. All shares of Preferred Stock - Cumulative, irrespective of series, shall constitute one and the same class of stock and shall be of equal rank as to dividends and assets with each other and with the Preferred Stock. Subject to any applicable provisions of law, the shares of Preferred Stock - Cumulative of different series may vary, as determined by the board of directors and, if required by law, by the stockholders, as to the following rights and preferences: (1) The annual dividend rate, or method of calculation thereof, and the date from which the dividends on shares issued prior to the record date for the first dividend shall be cumulative and the date for the first dividend; (2) The redemption price or prices, or method of calculation thereof, and any restriction on the exercise by the corporation of its right to redeem such series; (3) The amount or amounts payable upon any liquidation or dissolution or winding up; (4) The terms and amount of any sinking fund provided for the purchase or redemption of shares; and (5) The conversion, participation or other special rights. B. Before any dividends on, or any distribution of assets (by purchase of shares or otherwise) to holders of, the Common Stock or any other stock ranking junior to the Preferred Stock - Cumulative as to dividends (both hereinafter in this subsection B called "junior stock") shall be paid or set apart for payment or otherwise provided for, the holders of the Preferred Stock - Cumulative shall be entitled to receive, but only when and as declared by the board of directors, out of any funds legally available for the declaration of dividends, cumulative dividends at the annual dividend rate per share fixed for the particular series payable quarterly on the first days of February, May, August and November in each year commencing on a date specified for the first dividend date as herein provided to stockholders of record on the respective dates, not exceeding thirty (30) days preceding such dividend payment dates, fixed in advance for the purpose by the board of directors prior to the payment of each particular dividend. No dividends shall be declared on any series of the Preferred Stock - Cumulative or on any other class of preferred stock ranking on a parity therewith, as to dividends, in respect of any quarter-yearly dividend period, unless there shall likewise be declared on all shares of all series of the Preferred Stock - Cumulative and of any other class of such parity preferred stock at the time outstanding, like proportionate dividends, ratably, in proportion to the respective annual dividend rates fixed therefor, in respect of the same quarter-yearly dividend period, to the extent that such shares are entitled to receive dividends for such quarter-yearly dividend period. The dividends on shares of all series of the Preferred Stock - Cumulative shall be cumulative. In the case of all shares of each particular series, the dividends on shares of such series shall be cumulative: (1) On shares issued prior to the record date for the first dividend on the shares of such series, from the date for the particular series fixed therefor; (2) On shares issued after a record date for a dividend, but prior to the dividend payment date for such dividend, from said dividend payment; and (3) Otherwise from the quarter-yearly dividend payment date next preceding the date of issue of such shares; so that dividends accrued on all outstanding shares of Preferred Stock - Cumulative to the last preceding quarterly dividend payment shall have been paid in full or declared and set apart for payment before there shall be any dividend or distribution on, or purchase of, junior stock. The holders of the Preferred Stock - Cumulative shall not be entitled to receive any dividends thereon other than the dividends referred to in this subsection B and other than distributions provided for in subsection D below. Whenever dividends accrued on all outstanding shares of Preferred Stock - Cumulative to the last preceding quarterly dividend payment date shall have been paid in full or declared and set apart for payment, and subject to the limitations set forth in subsection H below and, when applicable, in subsection E(2)(i) of Section 4 of this Article XVIII, the board of directors may, without waiting for the expiration of the current dividend period for the Preferred Stock - Cumulative, declare and pay dividends on any junior stock out of funds legally available therefor. As used in this Section 3, the expression "dividends accrued" shall mean the sum of amounts with respect to all shares of Preferred Stock - Cumulative then outstanding, which as to each share shall be an amount computed at the rate per annum of the par value thereof fixed for the particular series from the date from which dividends on such share become cumulative to the date with reference to which the expression is used, irrespective of whether such amount shall have been declared as dividends or there shall have existed any funds legally available for the payment thereof, less the aggregate of all dividends paid or declared payable on or before said last mentioned date and set aside for such payment on such share. C. The corporation, pursuant to action of its board of directors or as provided in subsection A(11) of Section 4 of this Article XVIII, may redeem the whole or any part of any series of the Preferred Stock - Cumulative at the time outstanding, at any time or from time to time, by paying in cash as herein provided the redemption price of the shares of the particular series fixed therefor, together with dividends accrued to the date fixed for such redemption, and by mailing, postage prepaid, at least thirty (30) days and not more than ninety (90) days prior to the date fixed for said redemption a notice specifying said redemption date to the holders of record of the Preferred Stock - Cumulative to be redeemed, at their respective addresses as the same shall appear on the books of the corporation; provided, however, that the exercise by the corporation of its right to redeem shares of any particular series may be subject to such restrictions as are determined for said series. In case of the redemption of a part only of any series of the Preferred Stock - Cumulative at the time outstanding, the corporation shall select by lot in such manner as the board of directors determines, the shares so to be redeemed. If such notice of redemption shall have been so mailed, and if on or before the redemption date specified in such notice all funds necessary for such redemption shall have been set aside by the corporation, so as to be and continue to be available therefor, then, on and after said redemption date, notwithstanding that any certificate for the shares of the Preferred Stock - Cumulative so called for redemption shall not have been surrendered for cancellation, the shares represented thereby shall no longer be deemed outstanding, the right to receive dividends thereon shall cease to accrue, and all rights of the holders thereof shall forthwith cease and terminate, except only the right of the holders thereof to receive the amount payable upon redemption thereof, but without interest; provided, however, that if, after mailing said notice as aforesaid and prior to the date of redemption specified in such notice, said funds shall be set aside by deposit in trust, for the account of the holders of the Preferred Stock - Cumulative to be redeemed, with a bank or trust company in good standing, organized under the laws of the United States of America or The Commonwealth of Massachusetts, having a capital, undivided profits and surplus aggregating at least $5,000,000, thereupon all shares of the Preferred Stock - Cumulative with respect to which such deposit shall have been made shall no longer be deemed to be outstanding, and all rights with respect to such shares of Preferred Stock - Cumulative shall forthwith upon such deposit in trust cease and terminate, except only the right of the holders thereof to receive from such deposit the amount payable upon the redemption but without interest. In case the holders of the Preferred Stock - Cumulative which shall have been redeemed shall not within four years of the date of redemption thereof claim any amount so deposited in trust for the redemption of such shares, such bank or trust company shall, upon demand, pay over to the corporation any such unclaimed amount so deposited with it and shall thereupon be relieved of all responsibility in respect thereof, and the corporation shall not be required to hold the amount so paid over to it separate and apart from its other funds, and thereafter the holders of such shares of Preferred Stock - Cumulative shall look only to the corporation for payment of the redemption price thereof, but without interest. If there are any dividends accrued to the last preceding quarterly dividend payment date or dates on the outstanding Preferred Stock - Cumulative or any other class of preferred stock ranking on a parity therewith as to assets, no Preferred Stock - Cumulative or such parity stock shall be redeemed, purchased or otherwise acquired by the corporation unless all series of Preferred Stock - Cumulative and such parity stock which are redeemable shall be redeemed and unless an offer is made to (a) purchase all Preferred Stock - Cumulative and such parity stock of any series which is not redeemable at the time under limited restrictions then applicable thereto at a price equal to the then redemption price for such series if such restrictions were not applicable and (b) to purchase all Preferred Stock - Cumulative and such parity stock of any series which is not redeemable at the time at a price equal to the highest then redemption price on any outstanding shares of Preferred Stock - Cumulative and such parity stock, after giving effect to the differences in par value among classes of preferred stock, or unless a partial redemption or any purchase or other acquisition shall have been ordered, approved or permitted under the Public Utility Holding Company Act of 1935. All stock redeemed or purchased under the provisions of this subsection C shall be retired. D. In the event of any liquidation, dissolution or winding up (whether voluntarily or involuntarily) of the affairs of the corporation or any distribution of its capital, then before any distribution shall be made to the holders of Common Stock or any other stock ranking junior to the Preferred Stock - Cumulative as to assets, the holders of each series of the Preferred Stock - Cumulative at the time outstanding shall be entitled to be paid in cash the amount for the particular series fixed therefor, together in each case with dividends accrued thereon to the date fixed for payment of such distributive amounts, and no more. No payments on account of such distributive amounts shall be made to the holders of any series of the Preferred Stock - Cumulative or any other class of preferred stock ranking on a parity therewith, as to assets, unless there shall likewise be paid at the same time to the holders of each other series of the Preferred Stock - Cumulative or such parity stock like proportionate distributive amounts, ratably, in proportion to the full distributive amounts to which they are respectively entitled. After such payment to the holders of Preferred Stock - Cumulative or such parity stock, the remaining assets and funds of the corporation shall be divided and distributed among the holders of Common Stock or any other stock ranking junior to the Preferred Stock - Cumulative as to assets then outstanding according to their respective rights. Neither the consolidation nor the merger of the corporation with or into any other corporation shall be deemed to be a liquidation, dissolution or winding up of the corporation. E. Except as required by law and except as hereafter specifically provided in this Section 4 of this Article XVIII, the holders of Preferred Stock - Cumulative shall have no right to vote. F. Except as otherwise expressly provided by law, no holder of Preferred Stock - Cumulative shall be entitled as such as a matter of right to subscribe for or purchase any part of any new or additional issue of stock or warrant carrying rights to stock, or securities convertible into stock, of any class whatever, whether now or hereafter authorized, and whether issued for cash, property, services or otherwise. If it is expressly required by law that such new or additional issue be offered proportionately to the stockholders, then, unless otherwise provided by law, the holders of all classes of preferred stock only shall be entitled to subscribe for new or additional preferred stock of any class 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. G. Subject to the limitations, if any, contained in Sections 4 and 5 of this Article XVIII, the corporation may from time to time issue additional capital stock divided into classes with such preferences as to dividends, voting power and other incidents as may be determined in accordance with applicable provisions of law and terms of outstanding capital stock. Without limiting the generality of the foregoing, any such additional capital stock may be an additional series of Preferred Stock - Cumulative or additional shares of the initial or any other series of Preferred Stock - Cumulative. H. So long as any shares of the Preferred Stock - Cumulative of any series are outstanding, the payment of dividends on Common Stock or on any other stock of the corporation ranking junior to the Preferred Stock - Cumulative as to dividends or assets (other than (i) dividends payable in stock ranking junior to the Preferred Stock - Cumulative as to dividends and assets or (ii) dividends paid in cash if immediately thereafter there shall be paid to the corporation in cash an amount equal to such dividends for shares of or as a capital contribution with respect to stock ranking junior to the Preferred Stock - Cumulative as to dividends or assets) and the making of any distribution of assets to holders of stock ranking junior to the Preferred Stock - Cumulative as to dividends or assets by purchase of shares or otherwise (each of such actions being herein embraced within the term "payment of junior stock dividends") shall be subject to the following limitations: (1) If and so long as the junior stock equity is, or as a result of the proposed payment would become, less than twenty per cent (20%) of total capitalization the payment of junior stock dividends, including the proposed payment, during the twelve months ending with the last day of the month in which the proposed payment is to be made shall not exceed fifty per cent (50%) of the net income of the corporation available for the payment of dividends on the stock ranking junior to the Preferred Stock - Cumulative as to dividends and assets for the twelve full calendar months immediately preceding the calendar month in which such dividend is declared; and (2) If and so long as the junior stock equity is, or as a result of the proposed payment would become, less than twenty-five per cent (25%) but is twenty per cent (20%) or more of total capitalization the payment of junior stock dividends, including the proposed payment, during the twelve months ending with the last day of the month in which the proposed payment is to be made shall not exceed seventy-five per cent (75%) of the net income of the corporation available for the payment of dividends on the stock ranking junior to the Preferred Stock - Cumulative as to dividends and assets for the twelve full calendar months immediately preceding the calendar month in which such dividend is declared. For the purposes of this subsection H "net income" shall be determined in accordance with generally accepted accounting principles, provided, however, that the amount deducted for depreciation shall be an amount computed in accordance with clause (c) of subsection I(2) hereof. The term "junior stock equity" is defined in subsection E(2)(i) of Section 4 of this Article XVIII. The term "total capitalization" as used in this subsection H means the aggregate of (x) the junior stock equity, (y) the par value of, or stated capital represented by, the outstanding shares of Preferred Stock - Cumulative and any other stock ranking prior thereto or on a parity therewith as to dividends or assets, and (z) the principal amount of all outstanding indebtedness of the corporation represented by bonds, notes and other evidences of indebtedness maturing by their terms more than one year from the date of issue thereof. I. No stockholder, director, officer or agent of the corporation shall be held individually responsible for any action taken in good faith though subsequently adjudged to be in violation of this Section 3. J. The shares of Preferred Stock - Cumulative from time to time duly authorized may be issued for such consideration as may be fixed from time to time either by the board of directors or as otherwise provided by law. Any and all shares of Preferred Stock - Cumulative upon receipt by the corporation of the consideration so fixed shall be deemed fully paid stock and shall not be liable to any further call or assessment thereon. K. Every holder of Preferred Stock - Cumulative of the corporation by becoming such shall be held to have consented to all of these provisions and to have agreed to be bound thereby and to have waived to the full extent permitted by law any right such holder may have either now or at any time in the future contrary to these provisions. SECTION 4. Certain Rights of Preferred Stock and Preferred Stock - Cumulative. A. (1) "Equal Preference Stock" as used in this subsection A shall mean the Preferred Stock, the Preferred Stock - Cumulative, and any other class of preferred stock ranking on a parity therewith as to dividends. If dividends accrued to the last preceding quarterly dividend payment date or dates on the outstanding Equal Preference Stock shall at any time and from time to time equal or exceed an amount equivalent to four (4) full quarterly dividends on any shares of any series of the Equal Preference Stock at the time outstanding, then until all dividends in default on the Equal Preference Stock shall have been paid, the holders of Equal Preference Stock, voting separately as one class, shall have the right to elect the smallest number of directors necessary to constitute a majority of the full board of directors, and the holders of the stock generally entitled to vote, voting separately as one class, shall have the right to elect the remaining members of the board of directors. If and when all dividends in default on the Equal Preference Stock shall be paid (and, except when prevented from so doing by any applicable restriction of law or contained in any agreement relating to indebtedness of the corporation, such dividends shall be declared and paid out of any funds legally available therefor as soon as reasonably practicable unless, by a majority vote of the directors elected by the holders of stock generally entitled to vote, such directors determine such payment not to be in the best interests of the corporation), the Equal Preference Stock shall thereupon be divested of such special right to elect any member of the board of directors, but subject always to the same provisions for the vesting of such special right in the Equal Preference Stock in case of further like default or defaults. (2) Upon accrual of the right of the holders of the Equal Preference Stock to elect a majority of the board of directors as above provided in this subsection A, the president, a vice president or the clerk of the corporation shall call a special meeting of the stockholders of the corporation for the purpose of electing a new board of directors to be held not less than forty-five (45) nor more than sixty (60) days after the accrual of such right; provided, however, that no such special meeting shall be called if the date of such accrual of such right shall be less than one hundred twenty (120) days but not less than forty-five (45) days prior to the date otherwise fixed by the by- laws of the corporation for the next annual meeting of the stockholders, in which event said annual meeting shall be held on the date specified in the by-laws or a special meeting in lieu thereof called to be held within three (3) days thereafter. If said officers fail to call such meeting, or fail to hold such annual meeting or special meeting in lieu thereof within three (3) days of the date provided therefor in the by- laws, any holder or holders of Equal Preference Stock holding in the aggregate one thousand (1,000) shares may call a special meeting for such purpose. (3) The notice of any such special meeting, any annual meeting of the corporation or any special meeting in lieu thereof, at which the holders of the Equal Preference Stock shall have the right to elect directors, shall be mailed by the corporation not less than thirty (30) days prior to the meeting and state (x) that by reason of the fact that dividends payable on the Equal Preference Stock are or have been in default in an amount equal to or in excess of four (4) full quarterly dividends, the holders of the Equal Preference Stock, voting together as a class, are entitled to elect the smallest number of directors necessary to constitute a majority of the full board of directors, (y) that any holder of the Equal Preference Stock has the right at any reasonable time to inspect and make copies of the list or lists of the holders of Equal Preference Stock maintained at the principal office of the corporation or at the office of any transfer agent for the Equal Preference Stock, and (z) the substance of the next succeeding paragraph with respect to the number of shares of Equal Preference Stock required to be represented at any meeting or adjournment thereof for the election of directors of the corporation at which such holders have the right to elect directors. (4) At any such special or annual meeting at which the holders of the Equal Preference Stock shall have the right to elect directors, the presence in person or by proxy of the holders of a majority of the outstanding stock generally entitled to vote shall be required to constitute a quorum of such class for the election of directors and the presence in person or by proxy of the holders of a majority of the outstanding Equal Preference Stock shall be required to constitute a quorum of such class for the election of directors; provided, however, that in the absence of such a quorum of the holders of the Equal Preference Stock, no election of directors shall be held but a majority of the holders of the Equal Preference Stock who are present in person or by proxy shall have the power to adjourn the meeting for election of directors to a date not less than twenty-five (25) nor more than sixty (60) days for the date of such original meeting. At such adjourned meeting the presence in person or by proxy of the holders of thirty-five per cent (35%) of the outstanding Equal Preference Stock shall constitute a quorum of such class for the election of directors. In the calculation of any quorum, majority, or percentage, of the Equal Preference Stock, each share of stock bearing $100 par value shall be counted as one and each share of stock bearing $25 par value shall be counted as one-quarter. The Equal Preference Stock, when voting as such, shall vote as a single class. (5) In the event any such special or annual meeting of stockholders shall be adjourned as aforesaid, the president, any vice president or the clerk of the corporation shall, within ten (10) days after the date of the original meeting, cause notice of the adjourned meeting to be given to all stockholders of the corporation entitled to vote thereat. Such notice shall contain substantially the statements hereinabove required with respect to the original meeting, and shall further state that the required quorum of the holders of the Equal Preference Stock was not present at such original meeting and that the holders of thirty-five per cent (35%) of the outstanding Equal Preference Stock will constitute a quorum of such class for the election of directors at such adjourned meeting. (6) If the requisite quorum of holders of the Equal Preference Stock shall not be present at such adjourned meeting, then, in case the original meeting was a special meeting called as aforesaid, the directors of the corporation then in office shall remain in office until the next annual meeting of the stockholders of the corporation and until their successors have been elected and shall qualify; or if such original meeting was an annual meeting of the stockholders or special meeting in lieu thereof, all members of the board of directors to be elected at such meeting shall be elected by a vote of the holders of a majority of the shares of the stock generally entitled to vote present in person or represented by proxy at such adjourned meeting. (7) Upon reversion, pursuant to subsection A(1), of the voting powers to their status prior to default, a special or annual meeting of stockholders generally entitled to vote shall be held for the purpose of electing directors. Notice thereof shall be given promptly by the corporation and in any case within fifteen (15) days after such reversion, such notice to be mailed by the corporation not less than seven (7) nor more than ten (10) days prior to such meeting to all stockholders generally entitled to vote at their respective addresses appearing upon the books of the corporation, unless such notice shall have been waived either before or after the holding of such meeting by all such stockholders. If the corporation fails to call such meeting or fails to hold such annual meeting within three (3) days of the date provided therefor in the by-laws, any holder or holders of stock generally entitled to vote holding in the aggregate one thousand (1,000) shares may call a special meeting for such purpose. (8) Forthwith upon the election of a majority of the board of directors of the corporation by the holders of Equal Preference Stock pursuant to subsection A(1) hereof, the terms of office of all persons who may be directors of the corporation at the time shall terminate, whether or not the holders of stock generally entitled to vote shall then have elected the remaining members of the board of directors, and, if the holders of stock generally entitled to vote shall not have elected the remaining members of the board of directors, then the directors of the corporation in office just prior to the election of the majority of the board of directors by the holders of Equal Preference Stock shall appoint the remaining directors of the corporation pending such election by the holders of stock generally entitled to vote. Any director elected by holders of Equal Preference Stock shall hold office until the next annual meeting of the holders of Equal Preference Stock and until his successor is chosen and qualified, except that upon the reversion, pursuant to subsection A(1), of the voting powers to their status prior to default, then forthwith upon the election of new directors by the holders of stock generally entitled to vote, the terms of office of the directors elected by the holders of Equal Preference Stock shall terminate. (9) During any period in which the holders of Equal Preference Stock have the right to elect a majority of the board of directors, pursuant to subsection A(1), the number of directors constituting the full board of directors shall be the number constituting the full board of directors immediately prior to said period unless it be changed at an annual meeting of stockholders by a two-thirds vote of the holders of Equal Preference Stock and by a two-thirds vote of the holders of stock generally entitled to vote to such number as shall have been stated in the notice of said annual meeting. (10) In case of any vacancy in the office of a director elected by the holders of Equal Preference Stock pursuant to the foregoing provisions of this subsection A, the remaining directors elected by the holders of Equal Preference Stock by affirmative vote of a majority thereof, or the remaining director so elected if there be but one, may elect a successor or successors to hold office for the unexpired term of the director or directors whose place or places shall be vacant. The holders of the Equal Preference Stock, at a special meeting called for the purpose by the holders of an aggregate of not less than one thousand (1,000) shares of the Equal Preference Stock, upon notice mailed not less than thirty (30) days prior to such meeting to all stockholders entitled to vote thereat, by a vote of a majority of the Equal Preference Stock issued and outstanding, may remove from office a director elected by the holders of Equal Preference Stock and may elect a successor for the remainder of his term. (11) Under all circumstances, however, the directors elected by the holders of stock generally entitled to vote shall have the right, and neither the holders of Equal Preference Stock nor any directors elected under these provisions by the holders of Equal Preference Stock shall have any right, to vote upon the question of calling for redemption, or of purchasing, all of the Equal Preference Stock at the time outstanding. (12) Except when some mandatory provision of law shall be controlling or as otherwise provided in this Section 4 and, with respect to any special rights of (i) the Preferred Stock as a class, or (ii) the Preferred Stock - Cumulative as a class, or (iii) any series of either such class as a series, in the provisions of the by-laws or articles of organization controlling said class or in the votes creating said series, neither the Preferred Stock nor the Preferred Stock - Cumulative shall be entitled to vote as a separate class, and no outstanding series of either such class shall be entitled to vote as a separate series, on any matter and all shares of the Preferred Stock of all series and all shares of the Preferred Stock - Cumulative of all series shall be deemed to constitute but one class for any purpose for which a vote of the stockholders of the corporation by classes may now or hereafter be required. B. So long as any shares of the Preferred Stock of any series are outstanding, the corporation shall not, without the vote at a meeting called for that purpose of the holders of at least two-thirds of the total number of shares of the Preferred Stock of all series then outstanding make any change in the provisions relative to the Preferred Stock, or of any series thereof, which would change the express terms and provisions of such stock (other than the express terms and provisions thereof set forth in subsections A, D, and E of this Section 4) in any manner prejudicial to the holders thereof except that if such change is prejudicial to the holders of one or more, but not all of such series, only to the vote of the holders of two-thirds of the total number of shares of all series so affected and then outstanding shall be required. C. So long as any shares of the Preferred Stock - Cumulative of any series are outstanding, the corporation shall not, without the vote at a meeting called for that purpose of the holders of at least two-thirds of the total number of shares of the Preferred Stock - Cumulative of all series then outstanding make any change in the provisions relative to the Preferred Stock - - Cumulative, or of any series thereof, which would change the express terms and provisions of such stock (other than the express terms and provisions thereof set forth in subsections A, D, and E of this Section 4) in any manner prejudicial to the holders thereof except that if such change is prejudicial to the holders of one or more, but not all, of such series, only the vote of the holders of two-third of the total number of shares of all series so affected and then outstanding shall be required. D. So long as any shares of the Preferred Stock or the Preferred Stock - Cumulative of any series are outstanding, the corporation shall not, without the vote at a meeting called for that purpose of the holders of at least two-thirds of the total number of shares of the Preferred Stock and the Preferred Stock - Cumulative of all series then outstanding: (1) Make any change in the provisions of this Section 4, which would change the express terms and provisions of subsections A, D, or E, or such stock in any manner prejudicial to the holders of the Preferred Stock and the Preferred Stock - Cumulative, except that if such change is prejudicial to the holders of one class, but not both, only the vote of the holders of two-thirds of the total number of shares of the class so affected and then outstanding shall be required; or (2) Create or authorize any class of stock which shall be preferred as to dividends or assets over the Preferred Stock, the Preferred Stock - Cumulative or any security convertible into either class. No preferred stock so preferred as to dividends or assets over the Preferred Stock or the Preferred Stock - Cumulative (other than either of such preferred stocks issued upon conversion of another security) shall be issued more than six months after the above referred to vote creating or authorizing such class of stock unless within six months prior to such issue approval thereof has been obtained, at a meeting called for the purpose, by vote of at least two- thirds of the total number of shares of Preferred Stock and Preferred Stock - Cumulative of all series outstanding. E. So long as any shares of the Preferred Stock or the Preferred Stock - Cumulative of any series are outstanding, the corporation shall not, without the vote at a meeting called for that purpose of the holders of at least a majority of the total number of shares of the Preferred Stock and Preferred Stock - Cumulative of all series then outstanding: (1) Issue shares of Preferred Stock or the Preferred Stock - Cumulative of any series if after such issue the aggregate combined outstanding par value of all series thereof would exceed $120 million. (2) Issue additional shares of any series of Preferred Stock or the Preferred Stock - Cumulative or of any other stock ranking prior thereto or on a parity therewith as to dividends or assets, except for refunding an equal par or stated value of Preferred Stock or Preferred Stock - Cumulative, or other such prior or parity preferred stock, of the corporation theretofore outstanding: (i) Unless the junior stock equity to be outstanding immediately after such issue shall be at least equal to the aggregate amount payable on involuntary liquidation, dissolution or winding up of the affairs of the corporation upon all Preferred Stock and Preferred Stock - Cumulative of all series and of any other such prior or parity stock to be outstanding immediately after such issue; provided, however, that if for the purpose of meeting this requirement it shall have been necessary to take into consideration any portion of the earned surplus of the corporation, the corporation shall not (until such junior stock equity exclusive of such portion of earned surplus shall equal such aggregate) pay any dividends or make any distribution on shares of its stock ranking junior to the Preferred Stock and Preferred Stock - Cumulative as to dividends or assets which would result in reducing such junior stock equity to an amount less than such aggregate amount payable on involuntary liquidation, dissolution or winding up of the affairs of the corporation; and (ii) Unless the gross income of the corporation after taxes available for interest on its indebtedness and for dividends on the Preferred Stock, the Preferred Stock - Cumulative and any other such prior or parity stock, determined in accordance with generally accepted accounting principles, for a period of twelve (12) consecutive calendar months within the fifteen (15) calendar months immediately preceding the calendar month in which such additional stock is issued, or in which a contract for the issuance and sale thereof is made, is at least one and one-half (1 1/2) times the aggregate of the annual interest charges and dividend requirements on all interest bearing indebtedness and all series of Preferred Stock, Preferred Stock - Cumulative and such prior or parity stock to be outstanding immediately after the proposed issue. In said computations under this subsection (ii): (a) Interest on indebtedness and dividends on stock in each case to be retired with the proceeds of the proposed issue and similar charges on indebtedness and stock retired or to be retired prior to the proposed issue from the proceeds of any junior stock issued by the corporation are to be excluded; (b) Such gross income, similarly determined for said twelve (12) months period, from any property acquired by purchase, merger or otherwise during or after said period or to be acquired in connection with the proposed issue, may be included; and (c) The amount deducted for depreciation shall be the amount charged by the corporation on its books for depreciation during such period but not less than the greater of (x) two and one-tenth per cent (2.1%) of the arithmetical average of the gross plant investment in depreciable property on the books of the corporation on the first and last days of such period or (y) the largest minimum depreciation requirement for such period of any mortgage indenture to which the corporation is a party during such period. "Junior stock equity" as used in this subsection E and in subsections H of Sections 2 and 3 of this Article XVIII means the aggregate of the par value of, or stated capital represented by, the outstanding shares of stock ranking junior to the Preferred Stock as to dividends and assets, of the premium on capital stock and of the surplus (including earned surplus, capital surplus and surplus invested in plant) of the corporation less the excess, if any, of the aggregate amount payable on involuntary liquidation, dissolution or winding up of the affairs of the corporation upon all outstanding preferred stock of the corporation over the aggregate par or stated value thereof and less, unless the amounts or items are being amortized or are being provided for by reserves, (a) any amounts recorded on the books of the corporation in adjustment accounts for utility plant and other plant in excess of the original cost thereof, (b) unamortized debt discount and expense and capital stock discount and expense, and (c) the excess, if any, during the period from January 1, 1954 to the end of a month within ninety (90) days preceding the date as of which junior stock equity is determined, over the amount charged by the corporation on its books during such period for depreciation of an amount determined as follows: (x) For the calendar year 1954 and for each full calendar year thereafter, an amount equal to two and one-tenth per cent (2.1%) of the arithmetical average of the gross plant investment in depreciable property on the books of the corporation on January 1 and December 31 of such calendar year; and (y) For any other period, an amount equal to one-twelfth (1/12) of two and one-tenth per cent (2.1%) of the gross plant investment in depreciable property on the books of the corporation on the first day of the calendar year in such period multiplied by the number of full calendar months in such period. (3) Merge or consolidate with or into any other corporation or corporations or sell, lease or dispose of all or substantially all its assets, unless such merger, consolidation, sale, lease or disposition, or the issuance and assumption of all securities to be issued or assumed in connection therewith, shall have been ordered, approved or permitted under the provisions of the Public Utility Holding Company Act of 1935 or by any successor commission or regulatory authority of the United States of America having jurisdiction in the premises under said Act or by any court of the United States having such jurisdiction. F. No stockholder, directors, officer or agent of the corporation shall be held individually responsible for any action taken in good faith though subsequently adjudged to be in violation of this Section 4. The voting rights set forth in subsections B, C, and D shall not be effective if, in connection with any matter specified therein, provision is made for the purchase, redemption or retirement of all the Preferred Stock and Preferred Stock - Cumulative at the time outstanding, or it is provided that the proposed action shall not be effective unless such provision is made. In the calculations in subsections D and E of "at least two-thirds of the total number of shares of Preferred Stock and the Preferred Stock - Cumulative" or of "at least a majority of the total number" of such shares, each share of Preferred Stock bearing $100 par value shall be counted as one and each share of Preferred Stock - Cumulative bearing $25 par value shall be counted as one- quarter. SECTION 5. Maximum Issues of Preferred Stock and Preferred Stock - Cumulative. The corporation shall not, without the vote at a meeting called for the purpose of at least a majority of the shares of stock generally entitled to vote, issue shares of any series of Preferred Stock or Preferred Stock - Cumulative if after such issue the aggregate outstanding par value of all such series would exceed $120 million. SECTION 6. Terms Applicable to Specific Series of the Preferred Stock. A. The first series of the Preferred Stock of the corporation shall be designated "Cumulative Preferred Stock, 4.44% Series"; the annual dividend rate per share shall be four and forty-four hundredths per cent (4.44%) of the par value thereof (such dividends on shares of the initial issue of said first series to be cumulative from November 18, 1953, and the first dividend date to be February 1, 1954); the redemption prices therefor shall be as follows: If the redemption date is: Redemption Price On or prior to December 31, 1958............................... $106.568 January 1, 1959 through December 31, 1961...................... 106.068 January 1, 1962 through December 31, 1964...................... 105.568 January 1, 1965 through December 31, 1967...................... 105.068 January 1, 1968 through December 31, 1970...................... 104.568 After December 31, 1970........................................ 104.068 together in each case with accrued dividends; and the amounts payable upon any liquidation, dissolution or winding up, if voluntary, shall be equal to said redemption prices plus accrued dividends and, if involuntary, shall be $100.00 per share plus accrued dividends. B. The second series of the Preferred Stock of the corporation shall be designated "Cumulative Preferred Stock, 4.76% Series"; the annual dividend rate per share shall be four and seventy-six hundredths per cent (4.76%) of the par value thereof (such dividends on shares of the initial issue of said second series to be cumulative from August 27, 1962, and the first dividend date to be November 1, 1962); the redemption prices therefor shall be as follows: If the redemption date is: Redemption Price On or prior to October 31, 1967..................................$106.58 November 1, 1967 through October 31, 1972........................ 105.63 November 1, 1972 through October 31, 1977........................ 104.68 After October 31, 1977........................................... 103.73 together in each case with accrued dividends; and the amounts payable upon any liquidation, dissolution or winding up, if voluntary, shall be equal to said redemption prices plus accrued dividends and, if involuntary, shall be $100.00 per share plus accrued dividends. C. The third series of the Preferred Stock of the corporation shall be designated "Cumulative Preferred Stock, 9.44% Series"; the annual dividend rate per share shall be nine and forty-four hundredths per cent (9.44%) of the par value thereof (such dividends on shares of the initial issue of said third series to be cumulative from October 19, 1970, and the first dividend date to be February 1, 1971); the redemption prices therefor shall be as follows: If the redemption date is: Redemption Price On or prior to January 31, 1976................................. $110.95 February 1, 1976 through January 31, 1981....................... 108.59 February 1, 1981 through January 31, 1986....................... 106.23 After January 31, 1986.......................................... 103.87 together in each case with accrued dividends, provided, however, that none of the Cumulative Preferred Stock, 9.44% Series, shall be so redeemed prior to October 1, 1975, if such redemption is for the purpose or in anticipation of refunding such Preferred Stock through the use directly or indirectly of funds obtained by the issuance of debt securities at an effective interest cost to the corporation or other preferred stocks at an effective dividend cost to the corporation (both as computed in accordance with generally accepted financial practice) of less than 9.44% per annum; and the amounts payable upon any liquidation, dissolution or winding up, if voluntary, shall be equal to said redemption prices plus accrued dividends and, if involuntary, shall be $100.00 per share plus accrued dividends. D. The fourth series of the Preferred Stock of the corporation shall be designated "Cumulative Preferred Stock, 7.80% Series"; the annual dividend rate per share shall be seven and eighty hundredths per cent (7.80%) of the par value thereof (such dividends on shares of the initial issue of said fourth series to be cumulative from December 14, 1971, and the first dividend date to be February 1, 1972); the redemption prices therefor shall be as follows: If the redemption date is: Redemption Price On or prior to January 31, 1977................................. $109.10 February 1, 1977 through January 31, 1982....................... 107.15 February 1, 1982 through January 31, 1987....................... 105.20 After January 31, 1987.......................................... 103.25 together in each case with accrued dividends, provided, however, that none of the Cumulative Preferred Stock, 7.80% Series, shall be so redeemed prior to December 1, 1976, if such redemption is for the purpose or in anticipation of refunding such Preferred Stock through the use directly or indirectly of funds obtained by the issuance of debt securities at an effective interest cost to the corporation or other preferred stocks at an effective dividend cost to the corporation (both as computed in accordance with generally accepted financial practice) of less than 7.80% per annum; and the amounts payable upon any liquidation, dissolution or winding up, if voluntary, shall be equal to said redemption prices plus accrued dividends and, if involuntary, shall be $100.00 per share plus accrued dividends. E. The fifth series of the Preferred Stock of the corporation shall be designated "Cumulative Preferred Stock, 7.84% Series"; the annual dividend rate per share shall be seven and eighty-four hundredths per cent (7.84%) of the par value thereof (such dividends on shares of the initial issue of said fifth series to be cumulative from October 31, 1973, and the first dividend date to be February 1, 1974); the redemption prices therefor shall be as follows: If the redemption date is: Redemption Price On or prior to October 31, 1978................................. $109.00 November 1, 1978 through October 31, 1983....................... 107.04 November 1, 1983 through October 31, 1988....................... 105.08 November 1, 1988 through October 31, 1993....................... 103.12 After October 31, 1993.......................................... 101.95 together in each case with accrued dividends, provided, however, that none of the Cumulative Preferred Stock, 7.84% Series, shall be so redeemed prior to October 1, 1978, if such redemption is for the purpose or in anticipation of refunding such Preferred Stock through the use, directly or indirectly, of funds obtained by the issuance of debt securities at an effective interest cost to the corporation or other preferred stocks at an effective dividend cost to the corporation (both as computed in accordance with generally accepted financial practice) of less than 7.83% per annum; and the amounts payable upon any liquidation, dissolution, or winding up, if voluntary, shall be equal to said redemption prices plus accrued dividends and, if involuntary, shall be $100.00 per share plus accrued dividends. F. The sixth series of Preferred Stock of the Company be designated "Cumulative Preferred Stock, 6.99% Series"; the annual dividend rate per share be six and ninety-nine hundredths percent (6.99%) of the par value thereof (such dividends on shares of the initial issue of said sixth series to be cumulative from August 12, 1993, and the first dividend date to be November 1, 1993); that none of said sixth series will be redeemable until after August 1, 2003; that redemption prices per share if redeemed during the twelve-month periods beginning August 1 in each of the years indicated in the table below be as follows: Year Redemption Price ---- ---------------- 2003 103.50 2004 103.15 2005 102.80 2006 102.45 2007 102.10 2008 101.75 2009 101.40 2010 101.05 2011 100.70 2012 100.35 2013 and thereafter $100.00 together in each case with accrued dividends; and that the amounts payable upon liquidation, dissolution or winding up, if voluntary, shall be equal to said redemption prices plus accrued dividends, and, if involuntary, shall be $100.00 per share plus accrued dividends. SECTION 7. Terms Applicable to Specific Series of the Preferred Stock-Cumulative The first series of Preferred Stock-Cumulative of the Company be designated "Preferred Stock-Cumulative, 6.84% Series"; the annual dividend rate per share be six and eighty-four hundredths percent (6.84%) of the par value thereof (such dividends on shares of the initial issue of said first series to be cumulative from the date of such initial issue, and the first dividend date to be November 1, 1993); that none of said first series will be redeemable until after October 1, 1998; that the redemption price per share be $25.80 plus accrued dividends; and that the amount payable upon liquidation, dissolution or winding up, if voluntary, shall be equal to said redemption price plus accrued dividends, and, if involuntary, shall be $25.00 per share plus accrued dividends. ARTICLE XIX. CERTIFICATES OF STOCK. Each stockholder shall be entitled to a certificate of capital stock of the corporation owned by him in such form as shall, in conformity to law, be prescribed from time to time by the board of directors. Such certificate shall be signed by the president or a vice president and by the treasurer or an assistant treasurer, and shall bear the seal of the corporation; provided, however, that the signature of the president or a vice president or of the treasurer or an assistant treasurer of the corporation, or both such signatures, or the seal of the corporation, or either or both of such signatures and such seal, upon such certificate may be facsimile, and such certificate shall be as valid and effectual for all purposes as if signed by such officer or officers, or sealed with the seal of the corporation, as the case may be. The fact that a person signing has ceased to be an officer shall not invalidate any such certificate. ARTICLE XX. TRANSFER OF SHARES OF STOCK. Subject to the restrictions, if any, imposed by the agreement of association, title to a certificate of stock and to the shares represented thereby shall be transferred only by delivery of the certificate properly endorsed, or by delivery of the certificate accompanied by a written assignment of the same, or a written power of attorney to sell, assign, or transfer the same or the shares represented thereby, properly executed; but the person registered on the books of the corporation as the owner of shares shall have the exclusive right to receive dividends thereon and to vote thereon as such owner, and except only as may be required by law, may in all respects be treated by the corporation as the exclusive owner thereof. It shall be the duty of each stockholder to notify the corporation of his post office address. ARTICLE XXI. TRANSFER BOOKS. The treasurer or such agent or agents as may be employed by the treasurer with the approval of the board of directors shall keep the stock and transfer books of the corporation and a record of all certificates of stock issued and of all transfers of stock and a register of all the stockholders, their addresses and the number of shares held by each. For the purpose of determining stockholders who are entitled to receive payment of any dividend, to vote or act at a meeting and any adjournment thereof or to receive any offering of additional stock, or for any other purpose permitted by law, the board of directors may from time to time close the transfer books for such period, not exceeding thirty days, as the board may determine or, without closing said books, may fix a record date, not more than thirty days in advance of such payment, meeting, offering or other action, as of which stockholders entitled to such dividend, vote, offering or other right shall be determined. ARTICLE XXII. LOSS OF CERTIFICATES. In case of the alleged loss or destruction, or the mutilation of a certificate of stock, a duplicate certificate may be issued in place thereof, upon such reasonable terms as the board of directors may prescribe. ARTICLE XXIII. SEAL. The seal of the corporation shall, subject to alteration by the board of directors, consist of a flat-faced circular die with the words "MASSACHUSETTS ELECTRIC COMPANY -- CORPORATE SEAL" cut or engraved thereon. ARTICLE XXIV. EXECUTION OF PAPERS. Except as the board of directors may generally or in particular cases authorize the execution thereof in some other manner, all deeds, leases, transfers, contracts, bonds, notes, checks, drafts and other obligations made, accepted or endorsed by the corporation, shall be signed by the president, any vice president, the treasurer or any assistant treasurer. ARTICLE XXV. FISCAL YEAR. Except as from time to time otherwise provided by the board of directors, the fiscal year of the corporation shall be the calendar year. ARTICLE XXVI. AMENDMENTS. Subject to the provisions of law and of the Preferred Stock and the Preferred Stock-Cumulative, these by-laws may be amended, altered or repealed by a vote of a majority of the outstanding capital stock generally entitled to vote at any meeting of such stockholders, provided notice of the proposed amendment, alteration or repeal is given in the notice of said meeting. ARTICLE XXVII. LIABILITY AND INDEMNIFICATION. No director of the corporation shall be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director notwithstanding any provision of law imposing such liability, except with respect to any matter as to which such liability shall have been imposed (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under section sixty-one or sixty-two of chapter one hundred and fifty-six B of the General Laws of Massachusetts, or (iv) for any transaction from which the director derived an improper personal benefit. The corporation shall indemnify each of its directors and officers against any loss, liability or expense, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees, imposed upon or reasonably incurred by him in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, including but not limited to derivative suits (to the extent permitted by law), 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 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, or, to the extent that such matter relates to service with respect to any employee benefit plan, as in the best interests of the participants or beneficiaries of such plan. As to any matter disposed of by a compromise payment by a 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, if no change in control has occurred (a) by a disinterested majority of the directors then in office, (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 vote, at a meeting duly called and held, of the holders of a majority of the shares outstanding and entitled to vote thereon, exclusive of any shares owned by any interested director or officer or, if a change in control shall have occurred, by 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. Expenses incurred with respect to the defense or disposition of any action, suit or proceeding heretofore referred to in this Article shall 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 if it is ultimately determined that he is not entitled to indemnification, which undertaking shall be accepted without reference to the financial ability of the recipient to make such repayment. If in an action, suit or proceeding brought by or in right of the corporation, a director is held not liable, whether because relieved of liability under the first paragraph of this Article or otherwise, he shall be deemed to have been entitled to indemnification for expenses incurred in defense of said action, suit or proceeding. As used in this Article: (i) The term "officer" includes (a) persons who serve at the request of the corporation as directors, officers, or trustees of another organization and (b) employees of the corporation and its affiliates who serve in any capacity with respect to benefit plans for the corporation's employees. (ii) An "interested" director or officer is one against whom in such capacity the proceeding in question or another proceeding on the same or similar grounds is then pending. (iii) A "change in control" occurs when: (a) any individual, corporation, association, partnership, joint venture, trust or other entity or association thereof acting in concert (excluding any employee benefit plan, dividend reinvestment plan or similar plan of the corporation, or any trustee thereof acting in such capacity) acquires more than 20% of the corporation's outstanding stock having general voting rights or more than 20% of the common shares of any entity owning more than 50% of the corporation's outstanding stock having general voting rights, whether in whole or in part, by means of an offer made publicly to the holders of all or substantially all of such outstanding stock or shares to acquire stock or shares for cash, other property, or a combination thereof or by any other means, unless the transaction is consented to by vote of a majority of the continuing directors; or (b) continuing directors cease to constitute a majority of the board. (iv) The term "continuing director" shall mean any director of the corporation who (a) was a member of the board of directors of the corporation on the later of January 1, 1987, or the date the director or officer seeking indemnification first became such, or (b) was recommended for his initial term of office by a majority of continuing directors in office at the time of such recommendation. Nothing contained in this Article shall (i) limit the power of the corporation to indemnify employees and agents of the corporation or its subsidiaries other than directors and officers on any terms it deems appropriate not prohibited by law, (ii) limit the power of the corporation to indemnify directors and officers for expenses incurred in suits, actions, or other proceedings initiated by such director or officer or (iii) affect any rights to indemnification to which corporation personnel other than directors and officers may be entitled by contract or otherwise. The rights provided in this Article shall not be exclusive of or affect any other right to which any director or officer may be entitled and such rights shall inure to the benefit of its or his successors, heirs, executors, administrators and other legal representatives. Such other rights shall include all powers, immunities and rights of reimbursement allowable under the laws of The Commonwealth of Massachusetts. The provisions of this Article shall not apply with respect to any act or omission occurring prior to June 25, 1987. No amendment to or repeal of this Article shall apply to or have any effect upon the liability, exoneration or indemnification of any director or officer for or with respect to any acts or omissions of the director or officer occurring prior to such amendment or repeal. EX-10 25 MECO EXHIBIT 10(W) AMENDED AND RESTATED WHOLESALE STANDARD OFFER SERVICE AGREEMENT WHOLESALE STANDARD OFFER SERVICE AGREEMENT among MASSACHUSETTS ELECTRIC COMPANY, NANTUCKET ELECTRIC COMPANY, and USGEN NEW ENGLAND, INC. Dated as of October 29, 1997 TABLE OF CONTENTS ARTICLE 1. BASIC UNDERSTANDINGS........................................... 1 ARTICLE 2. DEFINITIONS.................................................... 2 ARTICLE 3. TERM AND REGULATORY APPROVAL................................... 5 3.1 Term..................................................... 5 3.2 Obtaining and Maintaining Required Permits............... 5 ARTICLE 4. SALE AND PURCHASE.............................................. 5 ARTICLE 5. PRICE AND BILLING.............................................. 6 5.1 Price.................................................... 6 5.2 Payment.................................................. 6 5.3 Taxes, Fees and Levies................................... 7 ARTICLE 6. DELIVERY, LOSSES, AND DETERMINATION AND REPORTING OF HOURLY LOADS................................................ 8 6.1 Delivery................................................. 8 6.2 Losses................................................... 8 6.3 Determination and Reporting of Hourly Loads.............. 8 ARTICLE 7. DEFAULT AND TERMINATION........................................ 9 7.1 Material Breach and Termination.......................... 9 ARTICLE 8. NOTICES, REPRESENTATIVES OF THE PARTIES........................ 11 8.1 Notices.................................................. 11 8.2 Authority of Representative.............................. 11 ARTICLE 9. LIABILITY, INDEMNIFICATION, AND RELATIONSHIP OF PARTIES........ 12 9.1 Limitation on Consequential, Incidental and Indirect Damages.................................................. 12 9.2 Recovery of Direct Damages Permitted..................... 12 9.3 Indemnification.......................................... 13 9.4 Independent Contractor Status............................ 14 ARTICLE 10. ASSIGNMENT..................................................... 14 10.1 Assignment.............................................. 14 ARTICLE 11. SUCCESSORS AND ASSIGNS......................................... 15 ARTICLE 12. FORCE MAJEURE.................................................. 15 12.1 Force Majeure Standard.................................. 15 12.2 Force Majeure Definition................................ 15 12.3 Obligation to Diligently Cure Force Majeure............. 15 ARTICLE 13. WAIVERS........................................................ 16 ARTICLE 14. REGULATION..................................................... 16 14.1 Laws and Regulations.................................... 16 14.2 NEPOOL Requirements..................................... 16 ARTICLE 15. INTERPRETATION, DISPUTE RESOLUTION............................. 17 15.1 Interpretation.......................................... 17 15.2 Dispute Resolution...................................... 17 ARTICLE 16. SEVERABILITY................................................... 17 ARTICLE 17. MODIFICATIONS.................................................. 17 ARTICLE 18. SUPERSESSION................................................... 17 ARTICLE 19. COUNTERPARTS................................................... 18 ARTICLE 20. HEADINGS....................................................... 18 Appendix A. Incremental Revenues...........................................A-1 Appendix B. Estimation of Supplier Hourly Loads............................B-1 Appendix C. Arbitration Agreement..........................................C-1 AMENDED AND RESTATED WHOLESALE STANDARD OFFER SERVICE AGREEMENT This AMENDED AND RESTATED WHOLESALE STANDARD OFFER SERVICE AGREEMENT ("Agreement") is dated as of October 29, 1997 and is by and among MASSACHUSETTS ELECTRIC COMPANY, a Massachusetts corporation, NANTUCKET ELECTRIC COMPANY, a Massachusetts corporation (these two parties being referred to collectively as "MECO"), and USGen New England, Inc. (formerly named USGen Acquisition Corporation), a Delaware corporation ("Seller"), and amends and restates and, together with the MECO Wholesale Standard Offer Service Agreement II dated as of the date hereof between MECO and Seller, supersedes in its entirety the Wholesale Standard Offer Service Agreement dated as of August 5, 1997 between NECO and Seller. This Agreement provides for the purchase by MECO and the sale by Seller of Wholesale Standard Offer Service, as defined in this Agreement. ARTICLE 1. BASIC UNDERSTANDINGS MECO purchases all of its requirements of electricity for resale to its retail electric customers from its affiliate, New England Power Company ("NEP"). NEP, MECO and other parties have entered into an agreement in settlement of regulatory proceedings before the Federal Energy Regulatory Commission and the Massachusetts Department of Public Utilities (the "Massachusetts Restructuring Agreement") that, among other things, permits MECO to terminate wholesale purchases from NEP, permits current retail customers of MECO to purchase electricity from other suppliers on and after a date defined therein as the "Retail Access Date," or, for a limited time, to purchase Standard Offer Service from MECO, obligates NEP to supply MECO with power sufficient to meet the latter's obligations to supply Standard Offer Service, and obligates NEP to transfer its interests in the electric generating business to another party or parties. NEP and Seller have entered an agreement under which Seller will acquire certain NEP generating assets. NEP and Seller desire that Seller shall supply electric capacity and energy to MECO to fulfill a portion of NEP's power supply obligations under the Massachusetts Restructuring Agreement. Under the Massachusetts Restructuring Agreement, MECO is obligated to afford wholesale power suppliers other than NEP the opportunity to commit to supply MECO with power sufficient to meet MECO's obligation to supply retail Standard Offer Service after the Retail Access Date. This Agreement sets forth the terms under which Seller will supply Wholesale Standard Offer Service to MECO, for a period beginning on the Closing Date, to enable MECO to meet the needs of its retail customers for electricity, including all or a portion of the needs of customers receiving retail Standard Offer Service after the Retail Access Date. 1. DEFINITIONS The following words and terms shall be understood to have the following meanings when used in this Agreement, or in any associated documents entered into in conjunction with this Agreement. In addition, except as otherwise expressly provided, where terms used in this Agreement are defined in the NEPOOL Agreement and not otherwise defined herein, such definitions are expressly incorporated into this Agreement by reference. AFFILIATE OF MECO - Any company that is a subsidiary of New England Electric System and its successors. CLOSING DATE - The date upon which the Seller acquires ownership of generating assets it purchases from NEP. COMMISSION OR FERC - The Federal Energy Regulatory Commission or such successor federal regulatory agency as may have jurisdiction over this Agreement. CONTRACT TERMINATION DATE - The date established by the Massachusetts Restructuring Agreement when the respective obligations of NEP and MECO under NEP's FERC Electric Tariff, Original Volume No. 1, to sell and purchase wholesale electric requirements service shall cease. The Contract Termination Date shall occur on the earlier of the Retail Access Date or the Wholesale Access Date. DEPARTMENT - The Massachusetts Department of Public Utilities. GWh - Gigawatt hour. ISO - The Independent System Operator to be established in accordance with the NEPOOL Agreement and the Interim Independent System Operator Agreement as amended, superseded or restated from time to time. kWh - Kilowatt- hour. MASSACHUSETTS RESTRUCTURING AGREEMENT - The Offer of Settlement dated May 28, 1997, entered into by and among the Office of the Attorney General of Massachusetts, American National Power, American Tractebel Corporation, Conservation Law Foundation, Division of Energy Resources, KCS Power Marketing, Inc., Low-Income Intervenors, Massachusetts Community Action Directors Association, Massachusetts Energy Directors Association, Massachusetts High Technology Council, Northeast Energy and Commerce Association, Northeast Energy Efficiency Council, Inc., The Energy Consortium, Union of Concerned Scientists, U.S. Generating Company, Massachusetts Electric Company and Nantucket Electric Company, and New England Power Company, as amended and accepted or approved by the Department and the FERC. MECO'S SERVICE TERRITORY - The geographic area in which MECO provided electric service to retail customers on August 6, 1996. MECO's System - The electrical system of MECO and/or the electrical system of any Affiliate of MECO. MMBTU - Million British thermal units. NEP - New England Power Company, an Affiliate of MECO. NEPEX - The New England Power Exchange. NEPOOL - The New England Power Pool. NEPOOL AGREEMENT - The New England Power Pool Agreement dated as of September 1, 1971, as amended and as may be amended or restated from time to time. PRICE - The price set forth in SECTION 5.1, below. PRIME RATE - The prime (or comparable) rate announced from time to time as its prime rate by the Bank of Boston or its successor, which rate may differ from the rate offered to its more substantial and creditworthy customers. PTF - Facilities categorized as Pool Transmission Facilities under the NEPOOL Agreement. RETAIL ACCESS DATE - The date so defined under the Massachusetts Restructuring Agreement, as the later of January 1, 1998, or the date when retail access is made available to all customers of investor-owned utilities in Massachusetts; provided, however, in the event that retail access is not yet available to all customer of the investor-owned utilities in Massachusetts by January 1, 1998, MECO in its sole discretion shall have the option to accelerate the Retail Access Date and implement retail access for its customers by providing the Commission and the Signatories to the Massachusetts Restructuring Agreement with 90 days' advance notice in writing; and provided further, MECO agrees not to accelerate, without Seller's consent, the Retail Access Date unless customers representing 89% of the retail consumption in Massachusetts currently served by investor-owned utilities or 50% of the retail consumption in New England (both including the consumption represented by MECO's customers) have access to retail choice. STANDARD OFFER AUCTION - The solicitation by MECO of offers from wholesale power suppliers, including, at their option, NEP and Seller, of electric energy and associated capacity and ancillary services necessary to meet the needs of ultimate customers of MECO eligible for and accepting retail Standard Offer Service on or after the Retail Access Date, and any wholesale electric supply contracts resulting from that solicitation. The solicitation and any contract(s) entered into as a result thereof shall not be on terms that are materially different from those described by MECO in the Massachusetts Restructuring Agreement, the RFQ dated April 3, 1997, and the letter to potential asset purchasers dated June 16, 1997, or result in a material adverse impact on Seller. MECO shall not, without Seller's consent, conduct the Standard Offer Auction more than once or more than six (6) months prior to and in no event later than the Retail Access Date, which date shall be as reasonably determined by MECO. STANDARD OFFER SERVICE - The electric service provided by MECO pursuant to the Massachusetts Restructuring Agreement: (i) to retail customers in MECO's Service Territory during the period, if any, during the term of this Agreement preceding the Retail Access Date; and (ii) to all of MECO's retail customers on the Retail Access Date that do not elect to obtain their electric supply from an alternative supplier on or after the Retail Access Date through December 31, 2004. WHOLESALE ACCESS DATE - The date so defined under the Massachusetts Restructuring Agreement, as the date on which MECO in its sole discretion decides to terminate its purchase from NEP of wholesale requirements service pursuant to NEP's FERC Electric Tariff, Original Volume No. 1, by providing the Commission and the Signatories to the Massachusetts Restructuring Agreement with 90 days advance notice in writing, said date not to be earlier than January 1, 1998. WHOLESALE STANDARD OFFER SERVICE - The generation and delivery, to any location on the NEPOOL PTF system or MECO's system, of the portion of the electric capacity, energy and ancillary services required by MECO to meet the needs of MECO's ultimate customers taking Standard Offer Service, excluding, after the Retail Access Date, any portion of such requirements that MECO obtains or has contracted to obtain through the Standard Offer Auction, determined in accordance with ARTICLE 4. Seller, as the supplier of Wholesale Standard Offer Service capacity and energy, will be responsible for all present, or future requirements and associated costs for installed capability, operable capability, energy, operating reserves, automatic generation control, including tie benefit payments, losses and any congestion charges associated with Seller's supply of Wholesale Standard Offer Service and any other requirements imposed by NEPOOL or the ISO, as they may be in effect from time to time. To the extent that any NEPOOL, ISO or any successor entity expenses or uplift costs are allocated to wholesale suppliers, the portion of such costs associated with Seller's supply of Standard Offer Service will also be the responsibility of Seller. To the extent any costs contemplated by this paragraph are applicable to MECO and recoverable by MECO from its customers, MECO shall be responsible for such costs. 2. TERM AND REGULATORY APPROVAL a. Term The term of this Agreement shall begin at 12:01 am on the Closing Date and continue until the earlier of: (a) 11:59 pm on December 31, 2004; or (b) the first date that MECO has no requirements for electric capacity and energy to supply Standard Offer Service that are not satisfied by contracts resulting from the Standard Offer Auction. b. Obtaining and Maintaining Required Permits i. Performance under this Agreement is conditioned upon all Parties securing and maintaining such federal, state or local approvals, grants or permits as may be necessary for the sale and purchase of Wholesale Standard Offer Service, which shall not include any approvals, grants, or permits necessary for the operation of any particular generating facility. Each Party shall use reasonable efforts to acquire and maintain such approvals, grants or permits. If the acquisition or maintenance of a particular approval, grant, or permit requires a modification to this Agreement, then the Parties agree to negotiate in good-faith to reach a mutually agreeable modification of the Agreement. The Parties are not required to reach such a mutually acceptable modification. ii. Seller will file this Agreement with FERC (and any other regulatory agency as may have jurisdiction over the Agreement) in accordance with the provisions of applicable laws, rules and regulations. Seller will be responsible for any filing fees for filing this Agreement with FERC (and any other regulatory agency as may have jurisdiction over the Agreement) and for any regulatory assessments associated with sales under this Agreement. FERC approval of this Agreement shall be a condition to the obligations of the Parties hereunder. 3. SALE AND PURCHASE Seller shall sell and deliver to the Delivery Points, as defined in ARTICLE 6, SECTION 6.1, and MECO shall purchase 90.78% of MECO's requirements for Wholesale Standard Offer Service. MECO's requirements for Wholesale Standard Offer Service shall be determined on the basis of ARTICLE 6, SECTION 6.3, below, and the price for such sale and purchase shall be as set forth in ARTICLE 5, SECTION 5.1, below. 4. PRICE AND BILLING a. Price For each kilowatt hour of Wholesale Standard Offer Service that Seller delivers to the Delivery Points, in accordance with ARTICLE 6, SECTION 6.3, below, MECO shall pay Seller a price equal to the following amounts for each period during the term of this Agreement: Period Price in Cents per kWh 1998 3.2 Cents 1999 3.5 Cents 2000 3.8 Cents 2001 3.8 Cents 2002 4.2 Cents 2003 4.7 Cents 2004 5.1 Cents In addition, in the event of substantial increases in the market price of No. 6 residual fuel oil (1% sulphur) and natural gas after 1999 as described in Appendix A, MECO shall pay Seller a percentage of any incremental revenues received by MECO as a result of MECO's Customer Rate Fuel Adjustment, described in Appendix A, attached and incorporated herein by reference. Such percentage, with respect to the billing month, shall equal the percentage of MECO's total Standard Offer Service requirements during the month that Seller delivers under this Agreement. a. Payment i. On or before the tenth (10th) day of each month during the term of this Agreement, MECO shall: (i) calculate the amount due and payable to Seller pursuant to this ARTICLE 5 with respect to the preceding month; and (ii) advise Seller of the schedule upon which it shall pay the amount so calculated, which schedule shall comply with paragraph (b), below. The amount payable shall be calculated by multiplying the Price specified in the first paragraph of ARTICLE 5, SECTION 5.1, above, for the applicable Contract Period by the quantity of Wholesale Standard Offer Service delivered by Seller to the Delivery Points for MECO's Standard Offer Service customers in the month, as determined in accordance with ARTICLE 6, SECTION 6.3, below. Because quantities determined under SECTION 6.3 are estimated, subject to a reconciliation process described in SECTION 6.3(d), quantities used in calculations under this paragraph (a) shall be subject to adjustment, whether positive or negative, in subsequent months' calculations, to reflect that reconciliation process, and any adjusted quantities shall be applied to the Price applicable during the month of the calculation being adjusted. Seller's proportional share of Customer Rate Fuel Adjustment incremental revenue shall be added to such amount. ii. MECO shall pay Seller any amounts due and payable on or before the twenty-fifth (25th) day after the date a calculation is made pursuant to paragraph (a), provided that, if and to the extent MECO pays Seller any portion of the amount due and payable before the twenty-fifth (25th) day after a calculation is made, it shall be entitled, without interest or penalty, to defer payment of an equal portion of the amount due and payable for that month by the lesser of: (i) the same number of days that the early payment preceded the twenty-fifth day after the calculation; and (ii) twenty-five (25) days. If all or any part of any amount due and payable pursuant to paragraph (a) shall remain unpaid thereafter, interest shall thereafter accrue and be payable to Seller on such unpaid amount at a rate per annum equal to two percent (2%) above the Prime Rate in effect on the date of such bill; provided, however, if the amount due and payable is disputed, interest shall accrue and be payable to Seller on the unpaid amount finally determined to be due and payable at a rate per annum equal to the Prime Rate in effect on the date of the calculation pursuant to paragraph (a); and provided, further, no interest shall accrue in favor of Seller or MECO on amounts that are added to or credited against a calculation due to the adjustment of estimated quantities in accordance with paragraph (a) and ARTICLE 6, SECTION 6.3. iii. With respect to reconciliation adjustments pursuant to SECTION 6.3(d) or any error in a calculation (whether the amount is paid or not), any overpayment, underpayment, or reconciliation adjustment will be refunded or paid up, as appropriate. Interest shall accrue from the date of the error or adjustment on the unpaid or overpaid amount finally determined to be due and shall be calculated pursuant to Section 35.19a of the Commission regulations. b. Taxes, Fees and Levies Seller shall be obligated to pay all present and future taxes, fees and levies which may be assessed upon Seller by any entity upon the purchase or sale of electricity covered by the Agreement. To the extent such taxes, fees, and levies are allowed to be, and are actually, recoverable by MECO from its customers, MECO shall reimburse Seller for such taxes, fees, and levies paid by Seller. 5. DELIVERY, LOSSES, AND DETERMINATION AND REPORTING OF HOURLY LOADS a. Delivery All electricity shall be delivered to MECO in the form of three-phase sixty-hertz alternating current at any location on the NEPOOL PTF system or MECO's System ("Delivery Points"). Title shall pass to MECO at the Delivery Point and Seller shall incur no expense or risk beyond the Delivery Point other than those described in SECTION 6.2. If the NEPOOL control area experiences congestion, Seller will be responsible for any congestion costs incurred in delivering power across the PTF system to MECO to the extent such costs are imposed by NEPOOL or the ISO on suppliers. Seller shall be responsible for all transmission and distribution costs associated with the use of transmission systems outside of NEPOOL and any local point to point charges and distribution charges needed to deliver the power to the NEPOOL PTF. b. Losses Seller shall be responsible for all transmission and distribution losses associated with the delivery of electricity supplied under this Agreement to the meters of ultimate customers of MECO receiving retail Standard Offer Service, provided, however, that losses do not include service to unmetered facilities for which estimates of kWh use are available and provided, further, that Seller shall not be responsible for unmetered use or consumption of electricity by MECO's Affiliates. Seller shall provide MECO at the Delivery Points with additional quantities of electricity and ancillary services to cover such losses, but Seller shall not be entitled to payment under ARTICLE 5 of this Agreement for such additional quantity. The quantities required for this purpose in each hour of a billing period shall be determined in accordance with NEPOOL's, NEP's and MECO's filed procedures for loss determination. c. Determination and Reporting of Hourly Loads i. To meet its NEPOOL obligations, Seller, or a NEPOOL member having an own-load dispatch or settlement account with the NEPOOL billing system with whom Seller has a load inclusion agreement, must report to NEPOOL or the ISO the Standard Offer Service load for which Seller is providing Wholesale Standard Offer Service pursuant to this Agreement, including losses. To accomplish this, MECO will estimate its total hourly Standard Offer Service load based upon average load profiles developed for each MECO customer class and MECO's actual total hourly load. Appendix B, attached and incorporated herein by reference, provides a general description of the estimation process that MECO will initially employ (the "Estimation Process"). MECO reserves the right, subject to the approval of appropriate regulatory authorities having jurisdiction, to modify the Estimation Process in the future, provided that any such modification be designed to improve the accuracy of its results and provided further that MECO shall consult with Seller and other similarly situated sellers to the maximum extent permitted by any applicable standards of conduct. MECO will report to NEPOOL, on behalf of Seller or such other NEPOOL member, Seller's hourly Standard Offer Service load, which shall equal the portion of MECO's estimated total Standard Offer Service hourly load for which Seller is responsible for supplying Wholesale Standard Offer Service under this Agreement. ii. MECO will report to NEPOOL or the ISO Seller's hourly adjusted Standard Offer Service loads by 12:00 noon of the second following business day. This adjusted load should be added by NEPOOL or the ISO to the other NEPOOL load of Seller or such other NEPOOL member. iii. At the end of each month, MECO shall aggregate Seller's hourly loads for the month as determined by the Estimation Process. For purposes of SECTION 5.1, above, the result of the Estimation Process, less losses to the Standard Offer Service customers' meters determined as specified in ARTICLE 6 SECTION 6.2, above, will be deemed to be the quantity of Wholesale Standard Offer Service delivered by Seller to the Delivery Points in a month. iv. To refine the estimates of Seller's monthly Standard Offer Service load developed by the Estimation Process, a monthly calculation will be performed to reconcile the original estimate of Seller's Standard Offer Service loads to actual customer usage based on meter reads. MECO will apply any resulting billing adjustment (debit or credit) to Seller's account no later than the last day of the third month following the billing month. Appendix B, attached and incorporated herein by reference, also provides a general description of this reconciliation process. 6. DEFAULT AND TERMINATION a. Material Breach and Termination i. (1) If MECO fails in any material respect to comply with, observe or perform any covenant, warranty or obligation under this Agreement (except due to causes excused by force majeure or attributable to Seller's wrongful act or wrongful failure to act); and (2) After receipt of written notice from Seller such failure continues for the Cure Period (as defined below), or, if such failure cannot be reasonably cured within the Cure Period, such further period as shall reasonably be required to effect such cure (except in the case of a payment default), provided that MECO commences within the Cure Period to effect such cure and at all times thereafter proceeds diligently to complete such cure as quickly as possible; then (3) Seller shall have the right to terminate this Agreement, subject to paragraph (c) below. For purposes of this Section 7.1(a), the Cure Period shall mean five days in the case of a failure by MECO to fulfill its payment obligations pursuant to Section 5.2 and forty-five (45) days in the case of a failure by MECO to comply with, observe or perform any other covenant, warranty or obligation under this Agreement. If an unexcused failure to pay continues for fifteen (15) days Seller shall have the right to suspend service until payment is made in full and appropriate security is posted for future payments or terminate this Agreement. ii. (1) If Seller fails in any material respect to comply with, observe, or perform any covenant, warranty or obligation under this Agreement (except due to causes excused by force majeure or attributable to MECO's wrongful act or wrongful failure to act); and (2) After receipt of written notice from MECO such failure continues for a period of forty-five (45) days, or, if such failure cannot be reasonably cured within such forty-five (45) day period, such further period as shall reasonably be required to effect such cure, provided that Seller commences within such forty-five (45) day period to effect such cure and at all times thereafter proceeds diligently to complete such cure as quickly as possible; then (3) MECO shall have the right to terminate this Agreement, subject to paragraph (c) below. iii. Any termination arising out of the exercise of the termination rights specified in paragraphs (a) or (b) above (with the exception of termination for a payment default) may not take effect unless and until an arbitrator (pursuant to ARTICLE 15, SECTION 15.2 of this Agreement) has made a ruling that the exercise of such termination right was valid. The fact that one party alleged to be in material breach of this Agreement ("Alleged Breaching Party") complies with the request of the other to cure an alleged material breach shall not be considered by the arbitrator as an admission against the Alleged Breaching Party or evidence that such party was or was not in material breach. iv. Nothing in this SECTION 7.1 shall be construed to limit the right of any party to seek any remedies for damages, as limited by ARTICLE 9 of this Agreement, even if a cure of an alleged breach is made within the periods of time specified for curing any such breach stated above. The provisions of this SECTION 7.1 are intended only to provide the exclusive process through which one party may exercise and effectuate its right to terminate this Agreement as a result of a material breach of this Agreement. 7. NOTICES, REPRESENTATIVES OF THE PARTIES a. Notices Any notice, demand, or request required or authorized by this Agreement to be given by one party to another party shall be in writing. It shall either be sent by facsimile (confirmed by telephone), overnight courier, personally delivered and acknowledged in writing or by registered or certified mail, (return receipt requested) postage prepaid, to the representative of the other party designated in this ARTICLE 8. Any such notice, demand, or request shall be deemed to be given (i) when sent by facsimile confirmed by telephone, (ii) when actually received if delivered by courier or personal deliver or (iii) three (3) days after deposit in the United States mail, if sent by first class mail. Notices and other communications by Seller to MECO shall be addressed to: Michael J. Hager Massachusetts Electric Company 25 Research Drive Westborough MA 01582 Fax (508) 389-3001 Notices and other communications by MECO to Seller shall be addressed to: USGen New England, Inc. 7500 Old Georgetown Road, 13th Floor Bethesda, MD 20814 Attention: Stephen A. Herman, Esq. Fax: (301) 718-6913 Any party may change its representative by written notice to the others. b. Authority of Representative The parties' representatives designated in ARTICLE 8, SECTION 8.1 shall have full authority to act for their respective principals in all technical matters relating to the performance of this Agreement. They shall not, however, have the authority to amend, modify, or waive any provision of this Agreement unless they are authorized officers of their respective entities. 8. LIABILITY, INDEMNIFICATION, AND RELATIONSHIP OF PARTIES a. Limitation on Consequential, Incidental and Indirect Damages To the fullest extent permissible by law, neither MECO nor Seller, nor their respective officers, directors, agents, employees, parent or affiliates, successor or assigns, or their respective officers, directors, agents, or employees, successors, or assigns, shall be liable to the other party or its parent, subsidiaries, affiliates, officers, directors, agents, employees, successors or assigns, for claims, suits, actions or causes of action for incidental, indirect, special, punitive, multiple or consequential damages (including attorney's fees or litigation costs) connected with or resulting from performance or non-performance of this Agreement, or any actions undertaken in connection with or related to this Agreement, including without limitation any such damages which are based upon causes of action for breach of contract, tort (including negligence and misrepresentation), breach of warranty, strict liability, Massachusetts Gen. Laws ch 93A, statute, operation of law, or any other theory of recovery. The provisions of this SECTION 9.1 shall apply regardless of fault and shall survive termination, cancellation, suspension, completion or expiration of this Agreement. b. Recovery of Direct Damages Permitted Notwithstanding the provisions of ARTICLE 9, SECTION 9.1, subject to the duty to mitigate damages as provided under common law of damages recovery, both MECO and Seller shall be entitled to recover their actual, direct damages (i) incurred as a result of the other party's breach of this Agreement or (ii) incurred as a result of any other claim arising out of any action undertaken in connection with or related to this Agreement. For purposes of avoiding any disputes about the difference between direct damages and consequential damages, the parties agree as follows: i. (1) To the extent that MECO is found to be in breach of this Agreement or liable under another cause of action; and (b) as a result of such breach or event giving rise to the cause of action, Seller suffers loss of profits that Seller reasonably expected to have received from MECO under this Agreement had MECO performed under this Agreement; then (c) Seller shall be entitled to recover any lost profits that Seller can demonstrate it lost or will lose as a result of MECO's breach, subject to the duty to mitigate. ii. (1) To the extent that Seller fails to provide MECO Wholesale Standard Offer Service Power under the terms of this Agreement; and (b) as a result, Seller is found to be in material breach of this Agreement or liable under another cause of action; and (c) subject to the duty to mitigate, MECO purchases (as a result of Seller's failure) power from a third party at a price that is higher than what MECO would have paid under the terms of this Agreement, MECO may recover the difference between the price MECO paid to such third party and the price it would have paid had Seller performed; provided, however, Seller shall not be liable to MECO for lost profits associated with any expected revenue streams from the sale of power to third parties or lost profits from any other contracts or sales. iii. Except as provided in paragraphs (a) and (b) above, neither MECO nor Seller shall be liable to the other for lost profits arising out of performance, or non-performance of this Agreement, whether such lost profits may be categorized as direct, incidental, indirect, or consequential damages and irrespective of whether such claims are based upon warranty, tort, strict liability, contract, statute (including Mass. G.L. ch 93A), operation of law or otherwise. c. Indemnification i. Seller agrees to defend, indemnify and save MECO, its officers, directors, employees, agents, successors, assigns, and Affiliates and their officers, directors, employees, and agents harmless from and against any and all claims, suits, actions or causes of action for damage by reason of bodily injury, death, or damage to property caused by Seller, its officers, directors, employees, agents or affiliates or caused by or sustained on its facilities, except to the extent caused by an act of negligence or willful misconduct by an officer, director, agent, employee or Affiliate of MECO or their successors or assigns. ii. MECO agrees to defend, indemnify and save Seller, its officers, directors, employees, agents, successors, assigns, and affiliates and their officers, directors, employees, and agents harmless from and against any and all claims, suits, actions or causes of action for damage by reason of bodily injury, death, or damage to property caused by MECO, its officers, directors, employees, agents or affiliates or caused by or sustained on its facilities, except to the extent caused by an act of negligence or willful misconduct by an officer, director, agent, employee or Affiliate of Seller or their successors or assigns. iii. If any party intends to seek indemnification under this ARTICLE from the other party with respect to any action or claim, the party seeking indemnification shall give the other party notice of such claim or action within fifteen (15) days of the commencement of, or actual knowledge of, such claim or action. Such party seeking indemnification shall have the right, at its sole cost and expense, to participate in the defense of any such claim or action. The party seeking indemnification shall not compromise or settle any such claim or action without the prior consent of the other party, which consent shall not be unreasonably withheld. d. Independent Contractor Status Nothing in this Agreement shall be construed as creating any relationship between MECO and Seller other than that of independent contractors for the sale and purchase of electricity provided as Wholesale Standard Offer Service. 9. ASSIGNMENT a. Assignment This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party hereto, including by operation of law without the prior written consent of the other party, nor is this Agreement intended to confer upon any other Person except the parties hereto any rights or remedies hereunder. Notwithstanding the foregoing, (i) MECO may, without Seller's prior written consent, (A) assign all or a portion of its rights and obligations under this Agreement to any Affiliate of MECO or (B) assign its rights and obligations hereunder, or transfer such rights and obligations by operation of law, to any corporation or other entity with which or into which MECO shall merge or consolidate or to which MECO shall transfer all or substantially all of its assets, provided that such Affiliate or other entity agrees to be bound by the terms thereof; provided, in either case, that the assignee or transferor shall have senior securities rated investment grade or better; (ii) the Seller may assign all of its rights and obligations hereunder to any wholly owned Subsidiary (direct or indirect) of PG&E Corporation and upon the MECO's receipt of notice from Seller of any such assignment, the Seller will be released from all liabilities and obligations hereunder, accrued and unaccrued, such assignee will be deemed to have assumed, ratified, agreed to be bound by and perform all such liabilities and obligations, and all references herein to "Seller" shall thereafter be deemed references to such assignee, in each case without the necessity for further act or evidence by the parties hereto or such assignee; provided, however, that no such assignment and assumption shall release the Buyer from its liabilities and obligations hereunder unless the assignee shall have acquired all or substantially all of the Buyer's assets; provided, further, however, that no such assignment and assumption shall relieve or in any way discharge PG&E Corporation from the performance of its duties and obligations under the Guaranty dated as of the date of this Agreement executed by PG&E Corporation, and (iii) the Seller or its permitted assignee may assign, transfer, pledge or otherwise dispose of its rights and interests hereunder to a trustee or lending institution(s) for the purposes of financing or refinancing the Purchased Assets, including upon or pursuant to the exercise of remedies under such financing or refinancing, or by way of assignments, transfers, conveyances or dispositions in lieu thereof; provided, however, that no such assignment or disposition shall relieve or in any way discharge the Seller or such assignee from the performance of its duties and obligations under this Agreement. MECO agrees to execute and deliver such documents as may be reasonably necessary to accomplish any such assignment, transfer, conveyance, pledge or disposition of rights hereunder so long as MECO's rights under this Agreement are not thereby altered, amended, diminished or otherwise impaired. 10. SUCCESSORS AND ASSIGNS This Agreement shall inure to the benefit of and shall be binding upon the parties hereto and their respective permitted successors and assigns. 11. FORCE MAJEURE a. Force Majeure Standard The parties shall be excused from performing their respective obligations hereunder and shall not be liable in damages or otherwise, if and only to the extent that they are unable to so perform or are prevented from performing by an event of force majeure. b. Force Majeure Definition An event of force majeure includes, without limitation, storm, flood, lightning, drought, earthquake, fire, explosion, equipment failure, civil disturbance, labor dispute, act of God or the public enemy, action of a court or public authority, or any other cause beyond a party's control but only if and to the extent that the event directly affects the availability of the transmission or distribution facilities of NEPOOL, MECO or an Affiliate of MECO necessary to deliver Wholesale Standard Offer Service to MECO's customers. Events affecting the availability or cost of operating any generating facility shall not be events of force majeure. c. Obligation to Diligently Cure Force Majeure If any party shall rely on the occurrence of an event or condition described in ARTICLE 12, SECTION 12.2, above, as a basis for being excused from performance of its obligations under this Agreement, then the party relying on the event or condition shall: a. provide written notice to the other parties promptly but in no event later than 5 days of the occurrence of the event or condition giving an estimation of its expected duration and the probable impact on the performance of its obligations hereunder; b. exercise all reasonable efforts to continue to perform its obligations hereunder; c. expeditiously take reasonable action to correct or cure the event or condition excusing performance; provided that settlement of strikes or other labor disputes will be completely within the sole discretion of the party affected by such strike or labor dispute; d. exercise all reasonable efforts to mitigate or limit damages to the other parties to the extent such action will not adversely affect its own interests; and e. provide prompt notice to the other parties of the cessation of the event or condition giving rise to its excuse from performance. 12. WAIVERS The failure of either party to insist in any one or more instance upon strict performance of any of the provisions of this Agreement or to take advantage of any of its rights under this Agreement shall not be construed as a general waiver of any such provision or the relinquishment of any such right, but the same shall continue and remain in full force and effect, except with respect to the particular instance or instances. 13. REGULATION a. Laws and Regulations This Agreement and all rights, obligations, and performances of the parties hereunder, are subject to all applicable Federal and state laws, and to all duly promulgated orders and other duly authorized action of governmental authority having jurisdiction. b. NEPOOL Requirements This Agreement must comply with all NEPOOL Criteria, Rules, and Standard Operating Procedures ("Rules"). If, during the term of this Agreement, the NEPOOL Agreement is terminated or amended in a manner that would eliminate or materially alter a Rule affecting a right or obligation of a party hereunder, or if such a Rule is eliminated or materially altered by NEPOOL, the parties agree to negotiate in good faith in an attempt to amend this Agreement to incorporate a replacement Rule ("Replacement Rule"). The intent of the parties is that any such Replacement Rule reflect, as closely as possible, the intent and substance of the Rule being replaced as such Rule was in effect prior to such termination or amendment of the NEPOOL Agreement or elimination or alteration of the Rule. If the parties are unable to reach agreement on such an amendment, the parties agree to submit the matter to arbitration under the terms of Appendix C, attached and incorporated herein by reference, and to seek a resolution of the matter consistent with the above stated intent. 14. INTERPRETATION, DISPUTE RESOLUTION a. Interpretation The interpretation and performance of this Agreement shall be in accordance with and controlled by the laws of The Commonwealth of Massachusetts. b. Dispute Resolution All disputes between MECO and Seller arising out of or relating to this Agreement which are defined as "Arbitrable Claims" in SECTION 2 of Appendix C, attached and incorporated herein by reference, shall be resolved by binding arbitration and be governed by the terms of such Arbitration Agreement. Any arbitration of an Arbitrable Claim that is substantially related to an arbitrable claim under a Wholesale Standard Offer Service Agreement between Seller and The Narragansett Electric Company shall be conducted jointly with the arbitration of the latter claim, before the same panel of arbitrators, with MECO and The Narragansett Electric Company jointly exercising their rights regarding the selection of arbitrators. Any decisions of the arbitrators shall be final and binding upon the parties. 15. SEVERABILITY If any provision or provisions of this Agreement shall be held invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall in no way be affected or impaired thereby. 16. MODIFICATIONS No modification to this Agreement will be binding on any party unless it is in writing and signed by all parties. 17. SUPERSESSION This Agreement constitutes the entire agreement between the parties relating to the subject matter hereof and its execution supersedes any other agreements, written or oral, between the parties concerning such subject matter. 18. COUNTERPARTS This Agreement may be executed in any number of counterparts, and each executed counterpart shall have the same force and effect as an original instrument. 19. HEADINGS Article and Section headings used throughout this Agreement are for the convenience of the parties only and are not to be construed as part of this Agreement. IN WITNESS WHEREOF, the parties have caused their duly authorized representatives to execute this Agreement on their behalf as of the date first above written. MASSACHUSETTS ELECTRIC COMPANY BY: Its NANTUCKET ELECTRIC COMPANY BY: Its USGEN NEW ENGLAND, INC. BY: Its APPENDIX A. INCREMENTAL REVENUES From MECO Customer Rate Fuel Adjustment In the event of substantial increases in the market prices of No. 6 residual fuel oil (1% sulphur) and natural gas after 1999, incremental revenues received by MECO as a result of MECO's Customer Rate Fuel Adjustment, described below, will be fully allocated among suppliers of Wholesale Standard Offer Service Power in proportion to the percentage of MECO's total Standard Offer Service requirements during the month that such supplier delivers under its respective agreement with MECO. MECO's Customer Rate in effect for a given billing month is multiplied by a "Fuel Adjustment" that is set equal to 1.0 and thus has no impact on the Customer Rate unless the "Market Gas Price" plus "Market Oil Price" for the billing month exceeds the "Fuel Trigger Point" then in effect, where: The MECO Customer rate for retail customers who elect Standard Offer Service by choice or inaction is the following predetermined, flat rate for energy consumed: Calendar Year Price per Kilowatt hour 1998 2.8 cents 1999 3.1 cents 2000 3.4 cents 2001 3.8 cents 2002 4.2 cents 2003 4.7 cents 2004 5.1 cents Market Gas Price is the average of the values of "Gas Index" for the most recent available twelve months, where: Gas Index is the average of the daily settlement prices for the last three days that the NYMEX Contract (as defined below) for the month of delivery trades as reported in the "Wall Street Journal", expressed in dollars per MMBtu. NYMEX Contract shall mean the New York Mercantile Exchange Natural Gas Futures Contract as approved by the Commodity Futures Trading Commission for the purchase and sale of natural gas at Henry Hub; Market Oil Price is the average of the values of "Oil Index" for the most recent available twelve months, where: Oil Index is the average for the month of the daily low quotations for cargo delivery of 1.0% sulphur No. 6 residual fuel oil into New York harbor, as reported in "Platt's Oilgram U.S. Marketscan" in dollars per barrel and converted to dollars per MMBtu by dividing by 6.3; and If the indices referred to above should become obsolete or no longer suitable, MECO shall file alternate indices with the Massachusetts Department of Public Utilities. Fuel Trigger Point is the following amounts, expressed in dollars per MMBtu, applicable for all months in the specified calendar year: 2000 $5.35/MMBtu 2001 $5.35 2002 $6.09 2003 $7.01 2004 $7.74 In the event that the Fuel Trigger Point is exceeded, the Fuel Adjustment value for the billing month is determined based according to the following formula: Fuel = (Market Gas Price +$.60/MMBtu)+(Market Oil Price +$.04/MMBtu) ------------------------------------------------------------- Adjustment Fuel Trigger Point+$.60+$.04/MMBtu Where: Market Gas Price, Market Oil Price and Fuel Trigger Point are as defined above. The values of $.60 and $.04/MMBtu represent for gas and oil respectively, estimated basis differentials or market costs of transportation from the point where the index is calculated to a proxy power plant in the New England market. For example if at a point in the year 2002 the Market Gas Price and Market Oil Price total $6.50 ($3.50/MMBtu plus $3.00/MMBtu respectively), the Fuel Trigger Point of 6.09 would be exceeded. In this case the Fuel Adjustment value would be: ($3.50+$.60/MMBtu)+($3.00+$.04/MMBtu) = 1.0609 ------------------------------------- $6.09+$.60+$.04/MMBtu The Customer Rate paid to MECO is increased by this Fuel Adjustment factor for the billing month, becoming 4.4548 cents/kWh (4.2 x 1.0609). In subsequent months the same comparisons are made and, if applicable, a Fuel Adjustment determined. APPENDIX B. ESTIMATION OF SUPPLIER HOURLY LOADS OVERVIEW Generating units operated by suppliers are dispatched by the power pool to meet the region's electrical requirements reliably, and at the lowest possible cost. As a result, a supplier's electricity production may not match the demand of its customers. In each hour some suppliers with low cost production units are net sellers of electricity to the pool, while other suppliers are purchasing power from the pool to meet the demand of their customers. To determine the extent to which suppliers are net buyers or sellers on an hourly basis, it is necessary to estimate the hourly aggregate demand for all of the customers served by each supplier ("own-load"). MECO will estimate Seller's Wholesale Standard Offer Service "own-load" within MECO's service territory and report the hourly results to NEPOOL or the ISO on a daily basis. The estimation process is a cost effective approach to producing results that are reliable, unbiased and reasonably accurate. The hourly load estimates will be based on rate class load profiles which will be developed from statistically designed samples. Each day, the class load shapes will be scaled to the population of customers served by each supplier contracting with MECO as a result of the Standard Offer Auction ("Standard Offer Auction Supplier"), Seller, and any other entity providing Wholesale Standard Offer Service. In cases where telemetered data on individual customers are available, they will be used in place of the estimated shapes. On a monthly basis, the estimates will be refined by incorporating actual usage data obtained from meter readings. In both processes, the sum of all suppliers' estimated Standard Offer Service loads will match the total load delivered into the distribution system. A description of the estimation process follows. DAILY ESTIMATION OF SUPPLIERS' OWN LOAD The daily process estimates the hourly load for each Standard Offer Auction Supplier, Seller, and any other entity providing Wholesale Standard Offer Service, for the previous day. There are four components in this process: - Select a proxy date from the previous year with characteristics which best match the day for which the hourly demand estimates are being produced. Extract class load shapes for the selected proxy date from the load research data base. - Scale the class load shapes appropriately for each individual customer based on the usage level of the customer relative to the class average usage level. - Calculate a factor for each customer which reflects their relative usage level and includes an adjustment for losses ("load adjustment factor"). Aggregate the load adjustment factors across the customers served by each supplier in each class. - Produce a preliminary estimate of each supplier's hourly loads by combining the proxy day class load shapes with the supplier's total load adjustment factors. Aggregate the loads across the classes for each supplier. - Adjust the preliminary hourly supplier estimates so that their sum is equal to MECO's actual hourly metered loads (as metered at the point of delivery to the distribution system) by allocating any differences to suppliers in proportion to their estimated load. MONTHLY RECONCILIATION PROCESS The monthly process will improve the estimates of Standard Offer Service supplier loads by incorporating the most recent customer usage information, which will be available after the monthly meter readings are processed. A comparison will be made between customers' estimated and actual usage, by billing cycle, then summed across billing cycles for each supplier. The ratio between the actual kWh and the estimated kWh reflects the kWh amount for which the supplier may have been overcharged or undercharged by NEPOOL or the ISO during the month. This ratio will be used to develop a kWh adjustment amount for each supplier for the calendar month. The sum of the adjustments will be zero because the total kWh will still be constrained to equal MECO's actual hourly metered Standard Offer Service loads during the month. APPENDIX C. ARBITRATION AGREEMENT ARBITRATION AGREEMENT This Arbitration Agreement, dated as of _______________________ (date of Wholesale Standard Offer Service Agreement), is entered into between Massachusetts Electric Company and Nantucket Electric Company, both Massachusetts corporations (referred to collectively as MECO") and ________________________, a __________ (describe entity) ("Seller"). Reference is made to that certain Wholesale Standard Offer Service Agreement dated as of ____________________, 199_ (the "Service Agreement") between MECO and Seller. Unless otherwise specified or apparent from the context of this Arbitration Agreement, the term "Party" shall mean either MECO or Seller, or both of them. WHEREAS, MECO and Seller wish to avoid the burden, time, and expense of court proceedings with respect to any disputes that may arise from or relate to the Service Agreement, and to submit such disputes to mandatory binding arbitration if they cannot first be resolved through negotiation and mediation. NOW, THEREFORE, MECO and SELLER AGREE AS FOLLOWS: (i) Mediation Before resorting to mediation or arbitration under this Arbitration Agreement, the Parties will try to resolve promptly through negotiation any Arbitrable claim, as defined below. If the Arbitrable Claim has not been resolved through negotiation within ten (10) days after the existence of the Arbitrable Claim has been brought to the attention of the other Party in a writing, any Party may request in writing to resolve the Arbitrable Claim through mediation conducted by a mediator selected by agreement of the Parties. The mediation procedure shall be determined by the Parties in consultation with the mediator. Any medication pursuant hereto shall be kept confidential in accordance with Mass. G.L. c. 233, sec. 23C. The fees and expenses of the mediator shall be borne equally by the Parties. If the Parties are unable to agree upon the identity of a mediator or a mediation procedure within ten (10) days after a Party has requested mediation in writing or if the Arbitrable Claim has not been resolved to the satisfaction of either MECO or Seller within forty (40) days after the Parties have selected a mediator and agreed upon a mediation procedure, either Party may invoke arbitration pursuant to the following sections by notifying the other Party of such selection in writing consistent with Section 3(c), below. (ii) Mandatory Arbitration (1) Except as provided in paragraph (b) of this Section 2 and in Section 8, below, any case, controversy or claim arising out of or relating to the Service Agreement, its breach, or any other disputes arising out of the business relationship created by the Service Agreement, of whatever nature, including but not limited to any claim based in contract, in law, in equity, any statute, regulation, or theory of law now in existence or which may come into existence in the future, whether known or unknown, including without limitation, claims based upon deceit, fraudulent inducement, misrepresentation, 18 U.S.C sec. 1962 and 1964 (RICO), and Mass. G.L. c. 93A, the federal and state antitrust laws (collectively, the "Arbitrable Claims"), which cannot be resolved by negotiation or mediation, as provided in Section 1 above, shall be submitted to mandatory, binding, and final arbitration in accordance with procedures set forth in this Agreement, which shall constitute the exclusive remedy for any and all Arbitrable Claims. (2) Notwithstanding paragraph (a) above, physical accidents or events giving rise to negligence or intentional tort claims for the recovery of property damages and/or damages for personal injury and failure to make payments due under Section 5.2 of the Service Agreement shall not be considered "Arbitrable Claims." However disputes regarding the interpretation or scope of any indemnification clauses in the Service Agreement shall be subject to arbitration, even if the dispute relates to whether one Party must indemnify the other for property damages and/or damages for personal injury, the recovery of which was or will be determined in a court of law. (1) Each Party agrees that it will not attempt to circumvent this Arbitration Agreement by coordinating or cooperating with their respective parent companies of affiliates or guarantors in the filing of a legal action in the name of any of the parent companies or affiliates or guarantors of the Parties to this Arbitration Agreement regarding claims that otherwise are subject to this Arbitration Agreement. Any Party failing to comply with this provision shall indemnify the other Party against, and hold the other harmless from, the costs (including reasonable litigation costs) incurred by the other in defending any and all claims brought by a parent company or affiliate or guarantor of the other in a court of law regarding claims that otherwise would be Arbitrable Claims under this Arbitration Agreement. (i) Selection and Qualification of Arbitrators 1) Any arbitration shall be conducted by a panel of three neutral arbitrators, consisting of (i) a practicing lawyer admitted to practice in the Commonwealth of Massachusetts; (ii) a person with professional experience in and substantial knowledge of the power generation industry in any one or more of the New England States, who may be, but need not be a lawyer, and (iii) a person with professional experience in and substantial knowledge of power markets in any one or more of the New England States, who may, but need not be, a lawyer (collectively, the "Arbitration Panel"). For purposes of this Arbitration Agreement, an arbitrator or candidate shall be considered "neutral" only if the arbitrator or candidate has not previously served as an arbitrator for a Party or one of its affiliates or guarantors and is not a present or former lawyer, employee or consultant of a Party or any of its affiliates or guarantors. 2) Any Party entitled to commence arbitration hereunder shall do so by serving a written Notice of Arbitration briefly describing the Arbitrable Claims and the Agreements under which they are brought. Service of such Notice of Arbitration shall be complete upon receipt by the person designated for each party at the addresses specified in Section 12 below. 3) Within twenty (20) days after service of a Notice of Arbitration, each Party shall serve upon the other Party a list of seven neutral candidates for each of the three panel members described in subparagraph (a) above. 4) Within twenty (20) days after service of the lists referred to in subparagraph (c), MECO and Seller shall then strike from the other's lists any two candidates from each of the lists, for any reason whatsoever. For the remaining candidates each Party shall rank each candidate on its three lists from one to five and shall do the same for the other Party's lists. 5) The candidates in each of the three categories with the lowest total score shall be invited to serve as panel members. In the event that the candidate in any of the three categories with the lowest total score is unable or unwilling to serve, or has a potential conflict of interest not consented to by each Party, then the candidate with the next lowest score in that category shall be invited to serve, subject to full disclosure by each candidate of, and consent by each Party to any potential conflicts of interests. This process shall be repeated until a full arbitration Panel is selected or the list of candidates for that category is exhausted. If the list of candidates for a category is exhausted the Parties shall exchange a new list of candidates for that category and the procedures set forth above shall be repeated a second time. 6) If the parties cannot select a full Arbitration Panel in accordance with these procedures than any Party may request that a court of competent jurisdiction appoint the remaining members subject to their qualifications, willingness and ability to serve as provided above. 7) The American Arbitration Association shall be appointed to facilitate and administer the parties' compliance with the procedures set forth above. (iii) Time Schedule The Arbitration shall be conducted as expeditiously as possible. The Arbitration Panel shall schedule a pre-hearing conference and hearings as it deems advisable and shall use its best efforts to schedule consecutive days of hearings. Hearings shall be limited to a total of ten (10) days. The Arbitration Panel shall issue its final decision and award within thirty (30) days of the close of the hearings, which shall be accompanied by a written, reasoned opinion. (iv) Remedies (1) The Arbitration Panel shall not award punitive or multiple damages or any other damages not measured by the prevailing Party's actual damages - except that the Arbitration Panel, in its sole discretion, may shift all or a portion of the costs of the Arbitration to any Party. (2) Any award of damages by the Arbitration Panel shall be determined, limited and controlled by the damages limitation clauses of the Service Agreement applicable to the dispute before the Arbitration Panel. (3) The Arbitration Panel may, in its discretion, award pre-award and post-award interest on any damages award; provided, however, that the rate of pre-award or post-award interest shall not exceed a rate equal to the rate provided for post-judgment interest by 28 U.S.C. sec. 1961 as published from time to time by the Administrative Office of the United States Courts based on the equivalent coupon issue yield for auctions of 52-week Treasury bills. (iv) Confidentiality In accordance with Mass. G.L. c. 233 sec. 23C. the existence, contents, or results of any mediation or arbitration hereunder may not be disclosed without the prior written consent of both Parties; provided, however, either Party may make disclosures as may be necessary to fulfill regulatory obligations to any regulatory bodies having jurisdiction, and may inform their lenders, affiliates, auditors and insurers, as necessary, under pledge of confidentiality and can consult with experts as required in connection with the arbitration under pledge of confidentiality. If any Party seeks preliminary injunctive relief from any court to preserve the status quo or avoid irreparable harm pending mediation or arbitration, the Parties agree to use best efforts to keep the court proceedings confidential, to the maximum extent permitted by law. (v) FERC Jurisdiction over Certain Disputes 1) Nothing in this Arbitration Agreement shall preclude, or be construed to preclude, any Party from filing a petition or complaint with the Federal Energy Regulatory Commission ("FERC") with respect to any Arbitrable Claim. In such case, the other Party may request FERC to reject or to waive jurisdiction. If the FERC rejects or waives jurisdiction, with respect to all or a portion of the claim, the portion of the claim not so accepted by FERC shall be resolved through arbitration, as provided in this Arbitration Agreement. To the extent that FERC asserts or accepts jurisdiction over the claim, the decision, finding of fact, or order of FERC shall be final and binding, and any arbitration proceedings that may have commenced prior to the assertion or acceptance of jurisdiction by FERC shall be stayed, pending the outcome of the FERC proceedings. 2) The Arbitration Panel shall have no authority to modify, and shall be conclusively bound by, any decision, finding of fact, or order of FERC. However, to the extent that a decision finding of fact, or order of FERC does not provide a final or complete remedy to the Party seeking relief, such Party may proceed to arbitration under this Arbitration Agreement to secure such remedy, subject to the FERC decision, finding or order. (vi) Preliminary Injunctive Relief Nothing in this Arbitration Agreement shall preclude, or be construed to preclude, the resort by either Party to a court of competent jurisdiction solely for the purposes of securing a temporary or preliminary injunction to preserve the status quo or avoid irreparable harm pending mediation or arbitration pursuant to this Arbitration Agreement. (vii) Governing Law This Arbitration Agreement shall be construed, enforced in accordance with, and governed by, the laws of the Commonwealth of Massachusetts. (viii) Location of Arbitration Any arbitration hereunder shall be conducted in Boston, Massachusetts. (ix) Severability If any section, subsection, sentence, or clause of this Arbitration Agreement is adjudged illegal, invalid, or unenforceable, such illegality, invalidity, or enforceability shall not affect the legality, validity, or enforceability of the Arbitration Agreement as a whole or of any section, subsection, sentence or clause hereof not so adjudged. (x) Notices Any notices required to be given pursuant to this Arbitration Agreement shall be in writing and sent to the receiving party by (i) certified mail, return receipt requested, (ii) overnight delivery service, or (iii) facsimile transmission (confirmed by telephone), addressed to the receiving party at the address shown below or such other address as a party may subsequently designate in writing. Any such notice shall be deemed to be given (i) three days after deposit in the United States mail, if sent by mail, (ii) when actually received if sent by overnight delivery service, or (iii) when sent, if sent by facsimile and confirmed by telephone. If to MECO: Massachusetts Electric Company 25 Research Drive Westborough, Massachusetts 01582 Attention: General Counsel Facsimile: (508) 389-2463 If to Seller Attention: Facsimile: ( ) In addition, the parties shall send copies of any notices required by the terms of any of the Agreements, in accordance with the terms of each Agreement. IN WITNESS WHEREOF, Each Party has caused its duly authorized officers to execute this Arbitration Agreement on the dates set forth below. MASSACHUSETTS ELECTRIC COMPANY BY: Its NANTUCKET ELECTRIC COMPANY BY: Its USGEN NEW ENGLAND, INC. BY: Its EX-12 26 MECO COMPUTATION OF RATIOS
MASSACHUSETTS ELECTRIC COMPANY Computation of Ratio of Earnings to Fixed Charges (SEC Coverage) (Unaudited) Years Ended December 31, ------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (In Thousands) Net Income $ 65,758 $37,926 $29,101 $34,726 $23,779 - ---------- Add income taxes and fixed charges - ---------------------------------- Current federal income taxes 34,244 25,867 9,437 (6,762) 5,606 Deferred federal income taxes 912 (6,052) 6,156 24,932 3,430 Investment tax credits - net (1,103) (1,118) (1,132) (1,228) (1,228) Massachusetts franchise tax 7,514 4,479 3,935 4,681 3,348 Interest on long-term debt 27,612 27,089 25,901 20,967 23,403 Interest on short-term debt and other 7,214 6,473 6,784 6,366 3,638 -------- ------- ------- ------- ------- Net earnings available for fixed charges $142,151 $94,664 $80,182 $83,682 $61,976 -------- ------- ------- ------- ------- Fixed charges: Interest on long-term debt $ 27,612 $27,089 $25,901 $20,967 $23,403 Interest on short-term debt and other 7,214 6,473 6,784 6,366 3,638 -------- ------- ------- ------- ------- Total fixed charges $ 34,826 $33,562 $32,685 $27,333 $27,041 ======== ======= ======= ======= ======= Ratio of earnings to fixed charges 4.08 2.82 2.45 3.06 2.29 - ----------------------------------
EX-13 27 MECO ANNUAL REPORT Annual Report 1997 Massachusetts Electric Company A Subsidiary of New England Electric System [LOGO] Massachusetts Electric A NEES Company Massachusetts Electric Company 25 Research Drive, Westborough, Massachusetts 01582 Directors (As of March 18, 1998) Cheryl A. LaFleur Senior Vice President, General Counsel, and Secretary of New England Electric System Robert L. McCabe Chairman of the Company and of certain affiliates Lydia M. Pastuszek Senior Vice President of the Company and of certain affiliates Lawrence J. Reilly President and Chief Executive Officer of the Company and of certain affiliates Christopher E. Root Senior Vice President of the Company and of certain affiliates Richard P. Sergel President and Chief Executive Officer of New England Electric System Dennis E. Snay Senior Vice President of the Company and of an affiliate Officers (As of March 18, 1998) Robert L. McCabe Chairman of the Company and of certain affiliates Lawrence J. Reilly President and Chief Executive Officer of the Company and of certain affiliates Lydia M. Pastuszek Senior Vice President of the Company and of certain affiliates Christopher E. Root Senior Vice President of the Company and of certain affiliates Dennis E. Snay Senior Vice President of the Company and of an affiliate John C. Amoroso Vice President of the Company and of an affiliate William J. Flaherty Vice President of the Company Andrea Foley-Stapleford Vice President of the Company Richard W. Frost Vice President of the Company and of certain affiliates Charles H. Moser Vice President of the Company Joseph D. Newman* Vice President of the Company Kwong O. Nuey Vice President of the Company Nancy H. Sala Vice President of the Company John G. Upham II Vice President of the Company John G. Cochrane Treasurer of the Company and of certain affiliates, Assistant Treasurer of an affiliate, Vice President of an affiliate and Treasurer of New England Electric System Thomas G. Robinson Assistant Clerk and General Counsel of the Company Robert King Wulff Clerk of the Company and of certain affiliates, Secretary or Assistant Clerk of certain affiliates and Assistant Secretary of an affiliate Howard W. McDowell Assistant Treasurer and Controller of the Company and of certain affiliates, Treasurer or Controller of certain affiliates and Assistant Secretary of an affiliate * Effective April 1, 1998 Transfer Agent, Dividend Paying Agent, and Registrar of Preferred Stock State Street Bank and Trust Company, Boston, Massachusetts This report is not to be considered an offer to sell or buy or solicitation of an offer to sell or buy any security. Massachusetts Electric Company Massachusetts Electric Company (the Company) is a wholly owned subsidiary of New England Electric System (NEES) operating in Massachusetts. The Company's business is the distribution of electricity at retail. Electric service is provided to approximately 970,000 customers in 146 cities and towns having a population of approximately 2,160,000 (1990 Census). The Company's service area covers approximately 43 percent of Massachusetts. The cities and towns served by the Company include the highly diversified commercial and industrial cities of Worcester, Lowell, and Quincy, the Interstate 495 high technology belt, and many suburban communities and rural towns. The principal industries served include computer manufacturing and related businesses, electrical and industrial machinery, plastic goods, fabricated metals and paper, and chemical products. In addition, a broad range of professional, banking, medical, and educational institutions is served. In November 1997, legislation was enacted in the Commonwealth of Massachusetts which provides the Company's customers with choice of power supplier beginning on March 1, 1998. The properties of the Company consist principally of substations and distribution lines interconnected with transmission and other facilities of New England Power Company (NEP), the Company's generation and transmission affiliate. The Company purchased all of its electrical requirements from NEP under a contract which obligated NEP to furnish such requirements at its standard resale rate. In accordance with a settlement reached in February 1997 and approved in November 1997, this contract has been amended, effective March 1, 1998. The amendment both terminates the all-requirements provision of the contract and allows NEP to recover its above-market generation commitments through a transition access charge, which the Company will collect from its customers. For further information, please refer to the "Industry Restructuring" section of Financial Review. Report of Independent Accountants Massachusetts Electric Company, Westborough, Massachusetts: We have audited the accompanying balance sheets of Massachusetts Electric Company (the Company), a wholly owned subsidiary of New England Electric System, as of December 31, 1997 and 1996 and the related statements of income, retained earnings, 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 Company 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. Boston, Massachusetts COOPERS & LYBRAND L.L.P. March 2, 1998 Massachusetts Electric Company Financial Review Industry Restructuring Historically, electric utilities have provided their customers bundled electric service within exclusive service territories. As a result of a number of trends, including a disparity in electric rates among regions of the country and new regulations and legislation intended to foster competition, distribution customers are being allowed to choose their power supplier, with incumbent utilities required to deliver that electricity over their transmission and distribution systems. When customers are allowed to choose their power supplier, utilities face the risk that market prices may not be sufficient to recover the costs of the commitments (generation related) incurred to supply customers under a regulated structure. The amounts by which such costs exceed market prices are commonly referred to as "stranded costs." The Company and NEP reached a settlement agreement with parties representing all of the Company's distribution customers (the Massachusetts Settlement). The Massachusetts Settlement provides for the recovery of stranded costs. In November 1997, legislation was enacted which provides customers of Massachusetts' investor-owned utilities with the ability to choose their power supplier beginning on March 1, 1998. The legislation requires electric companies to provide customers who do not choose a power supplier with a transition rate (or "standard offer generation service") which results in a 10 percent rate reduction, with the discount increasing to 15 percent on or before September 1, 1999. The legislation also provides a mechanism for the recovery of stranded costs resulting from the introduction of customer choice. In December 1997, the Massachusetts Department of Telecommunications and Energy (MDTE) (formerly the Massachusetts Department of Public Utilities (MDPU)) found that the Massachusetts Settlement substantially complies with or is consistent with the Massachusetts statute. The Massachusetts Settlement was also conditionally approved by the Federal Energy Regulatory Commission (FERC) in November 1997, subject to a compliance filing to clarify the impact of the settlement on nonsettling parties. In accordance with the Massachusetts Settlement, NEP's wholesale contract with the Company has been amended effective March 1, 1998. The Massachusetts Settlement provides that NEP's stranded costs (the Company's share is 73 percent) will be recovered from distribution customers through a transition access charge, which will be collected by the Company. Under the Massachusetts Settlement, the recovery of NEP's stranded costs is divided into several categories. Unrecovered costs associated with generating plants and regulatory assets would be recovered over 12 years and would earn a return on equity of 9.4 percent. The above-market component of purchased power contracts and nuclear decommissioning costs would be recovered as incurred over the life of those obligations, a period expected to extend beyond 12 years. Initially, the transition access charge was set at 2.8 cents per kilowatthour (kWh). The MDTE has approved a reduction of the initial transition access charge to 2.7 cents per kWh. NEP's filing with the FERC to approve this reduction is pending. The Company has already reflected the lower transition access charge amount in its rates. The transition access charge would be reduced further upon completion of the sale of NEP's nonnuclear generating business, as described below. In addition to addressing customer choice and the recovery of stranded costs, the Massachusetts Settlement also required the NEES companies to divest their nonnuclear generating business. In August 1997, NEP and the Company's Rhode Island affiliate, The Narragansett Electric Company (Narragansett Electric), entered into an agreement to sell substantially all of their nonnuclear generating business to USGen New England, Inc. (USGen), an indirect wholly owned subsidiary of PG&E Corporation. See "Divestiture of Generating Business" below. The net proceeds from the sale of the nonnuclear generating business to USGen will be used to reduce the transition access charge to approximately 1.5 cents per kWh. In addition, the FERC accepted the NEES companies' proposal in conjunction with their divestiture filing that the recovery of the remaining above-market nuclear generating plant investment and regulatory assets be completed by the end of the year 2000. The Massachusetts Settlement also establishes distribution rates for the Company. On March 1, 1998, the Company's distribution rates were set at a level approximately $45 million above the level embedded in its previously bundled rates, with such rates then frozen through the year 2000. This increase reflects changes to the distribution cost of service that include an $11 million increase in annual depreciation expense, a $3 million annual contribution to a storm fund, and increased amortization of unfunded deferred income taxes of approximately $1 million over six years. The Massachusetts restructuring legislation also expanded the eligibility for certain rate discount programs, the cost of which is uncertain at this time. From 1998 through 2000, the Company's return on equity will be subject to a floor of 6 percent and a ceiling of 11 percent. Earnings over the ceiling will be shared equally between customers and shareholders up to a maximum of 12.5 percent. This sharing results in an effective cap on the Company's return on equity of 11.75 percent, excluding certain limited incentive opportunities. To the extent that earnings fall below the floor, the Company will be authorized to surcharge customers for the shortfall. The statute also imposes an inflation cap through March 1, 2005 on the total rates for customers who have not chosen a power supplier. If this inflation cap is triggered, under the Massachusetts Settlement the recovery of stranded investment costs would be deferred. This inflation cap does not apply to any surcharge triggered by the rate of return floor. The Massachusetts Settlement also eliminated the Company's purchased power cost adjustment (PPCA) mechanism as of July 31, 1996. This mechanism allowed the Company to recover purchased power rate changes from NEP and the effects of NEP's seasonal rates. The Massachusetts Settlement required that the Company's net $18 million PPCA refund liability balance at July 31, 1996 be transferred on its books to establish a storm contingency fund account of $3 million initially, with the remainder applied to reduce regulatory assets for hazardous waste costs. A referendum question which asks voters to repeal the Massachusetts statute is expected to be on the ballot in November 1998. The Company is unable to predict the outcome. While by itself, repeal of the statute is not expected to materially impair the effectiveness of the previously approved Massachusetts Settlement, the potential exists that following repeal, there could be legislative or regulatory actions which could be materially adverse to the Company. Divestiture of Generating Business As described above, in August 1997, NEP and Narragansett Electric (collectively, the Sellers) reached an agreement to sell their nonnuclear generating business to USGen. The nonnuclear generating business includes three fossil-fueled and 15 hydroelectric generating stations, totaling approximately 4,000 megawatts (MW) of capacity, as well as NEES' 100 percent interest in Narragansett Energy Resources Company, a 20 percent general partner in the Ocean State Power project, all of which has a book value of $1.1 billion. USGen will pay the Sellers $1.59 billion in cash, of which $225 million will be contingent upon the introduction of customer choice of power supplier in Massachusetts. Based on the enactment of the Massachusetts statute, the NEES companies believe that the conditions for payment of the full purchase price have been met. USGen will also reimburse the NEES companies for $85 million of costs associated with early retirement and special severance programs for employees affected by industry restructuring. In addition to the purchase of the nonnuclear generating stations, USGen will purchase NEP's entitlement to approximately 1,100 MW of power procured under long-term contracts. NEP will make a monthly fixed contribution towards the above-market cost of the purchased power of between $12.5 million and $14.2 million per month from closing through January 2008. USGen will be responsible for the balance of the costs under the purchased power contracts. The sale is subject to approval by various state and federal regulatory agencies. Several parties have objected to the sale on various grounds, including allegations that following the sale, USGen would be able to exercise unlawful levels of market power. On February 25, 1998, the FERC issued an order that rejected the market power allegations, approved the sale, and conditionally approved most supporting filings. While the timing of receipt of final regulatory approvals is uncertain, receipt of all approvals is unlikely before mid-1998. Closing is contingent upon all regulatory approvals being obtained by February 1999. Upon completion of the divestiture of NEP's nonnuclear generating business, the Company's share of NEP's stranded costs that will be recovered from the Company's customers through the transition access charge will be reduced from approximately $3.3 billion to $1.5 billion. Workforce Reduction The NEES companies expect to implement substantial workforce reductions beginning in 1998 as a result of industry restructuring and the sale of the nonnuclear generating business. The NEES companies are in the process of offering early retirement programs to their union and non-union employees, contingent upon the closing of the sale of the nonnuclear generating business to USGen. In addition, the NEES companies intend to offer enhanced severance benefits to affected employees. As previously described, the costs of the early retirement and severance programs for all NEES companies are expected to be substantially recovered from the proceeds of the sale of the nonnuclear generating business. Since the early retirement program is contingent upon the divestiture, its cost will not be accrued until that time. Risk Factors This annual report contains statements that may be considered forward looking statements as defined under the securities laws. Actual results may differ materially for the reasons discussed in this Financial Review. While the Company believes that the previously described settlement and legislation and the sale agreement with USGen and other developments constitute substantial progress in reducing the impacts associated with industry restructuring, significant risks remain. These include, but are not limited to: (i) the potential that ultimately the Massachusetts Settlement will not be implemented in the manner anticipated by the Company, (ii) the possibility that a voter referendum in November 1998 could overturn the Massachusetts legislation, followed by materially adverse legislative or regulatory actions, (iii) the possibility of federal legislation that would increase the risks above those contained in the Massachusetts Settlement and statute, and (iv) the failure of NEP and Narragansett Electric to complete the sale of the nonnuclear generating business to USGen. The major risk factors affecting the Company relate to the possibility of adverse regulatory or judicial decisions or legislation which limit the level of revenues the Company is allowed to charge for its services or affect the costs the Company incurs. Accounting Implications Historically, electric utility rates have been based on a utility's costs. As a result, electric utilities are subject to certain accounting standards that are not applicable to other business enterprises in general. Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (FAS 71), requires regulated entities, in appropriate circumstances, to establish regulatory assets, and thereby defer the income statement impact of certain items of income and expense expected to be reflected in future rates. At December 31, 1997, the Company had approximately $18 million in net regulatory assets in compliance with FAS 71. The Company believes the Massachusetts Settlement and statute will enable the Company to recover through rates its specific costs of providing ongoing distribution services and stranded costs billed to it by NEP. The Company believes these factors will allow it to continue to apply FAS 71. Despite the progress made to date, it is possible that future regulatory rules or other circumstances could cause the application of FAS 71 to be discontinued, which would result in a noncash write-off of previously established regulatory assets related to the affected operations. Overview of Financial Results Net income for 1997 increased $28 million compared with 1996. The increase was primarily due to the reversal of prior period refund accruals related to the Company's rate mechanisms and a 2.0 percent increase in kWh deliveries. Partially offsetting the higher earnings were increased operation and maintenance costs, increased depreciation, and increased income taxes. Net income for 1996 increased $9 million compared with 1995, reflecting a 1995 rate increase, growth in sales, and decreased demand charges from NEP, partially offset by increased operation and maintenance expense and reduced revenues due to rate adjustment mechanisms. Operating Revenue The following table summarizes the changes in operating revenue:
Increase (Decrease) in Operating Revenue (In millions) 1997 1996 ---- ---- Sales and deliveries growth $19 $ 5 Fuel recovery 26 13 PPCA mechanism 35 (6) Rate changes - 23 Demand-side management (DSM) recovery 4 (5) Other 2 3 --- --- $ 86 $ 33 === ===
For a discussion of fuel recovery, see the fuel costs discussion in the "Operating Expenses" section. The PPCA rate mechanism was designed to allow the Company to pass on to its customers changes in purchased energy costs resulting from rate increases or decreases by NEP. The mechanism was eliminated as of July 31, 1996 upon approval of the Massachusetts Settlement in November 1997. Pending final approval of the settlement, the Company accrued additional potential refund provisions of $9 million for the last five months of 1996 and $7 million for the first nine months of 1997. Upon approval of the settlement, these refund provisions were all reversed in the fourth quarter of 1997, thereby increasing revenues. The Company had accrued refund provisions of $17 million during the first seven months of 1996, which were part of the net $18 million PPCA balance at July 31, 1996 discussed in "Industry Restructuring." In the future, to the extent the Company is required to purchase energy for customers, a reconciliation mechanism will allow the Company to recover its purchased energy costs. KWh deliveries increased 2.0 percent in 1997 and reflects the effects of an improving regional economy. The Company received approval from the MDPU to recover demand- side management (DSM) program expenditures in rates on a current basis through 1997. These expenditures were $51 million, $48 million, and $53 million in 1997, 1996, and 1995, respectively. The Massachusetts Settlement and statute provide for recovery of DSM-related costs. The Company has filed DSM program expenditure plans with the MDTE for the period 1998 through 2002, and has received interim MDTE approval, subject to further MDTE review and modification based on comments by the Massachusetts Division of Energy Resources (DOER) and other parties. The Company subsequently filed a comprehensive Offer of Settlement with the MDTE resolving all issues raised by the DOER and other settling parties relating to the Company's DSM program for the period 1998-2002. Since 1990, the Company has been allowed to earn incentives based upon the results of its DSM programs. The Company recorded before-tax incentives of $7.0 million, $5.7 million, and $5.1 million in 1997, 1996, and 1995, respectively. Operating Expenses The following table summarizes the changes in operating expenses:
Increase (Decrease) in Operating Expenses (In millions) 1997 1996 ---- ---- Purchased electric energy: Fuel costs $26 $13 Purchases and demand charges from NEP (2) (6) Other operation and maintenance: DSM 3 (5) Other 9 12 Depreciation 2 3 Taxes 18 6 --- --- $56 $23 === ===
The increase in fuel costs in 1997 is due to increased replacement power fuel purchases by NEP due to the reduced generation from partially owned nuclear units. These costs were passed on to the Company through NEP's fuel clause. The Company, in turn, passed these costs on to its customers. The 1996 increase reflects increased purchases as well as increased gas pipeline demand charges being recovered by NEP through its fuel adjustment clause in connection with NEP's Manchester Street plant entering service in the second half of 1995. Effective March 1, 1998, the Company terminated its power purchases under NEP's fuel clause, and the rates in effect for sales on and after March 1, 1998 no longer include a fuel clause. Other operation and maintenance expenses increased in 1997 primarily due to increased distribution-system related costs, including increased tree-trimming expenditures. The increase also reflects increased transmission wheeling charges from NEP related to the use of NEP's transmission network for the Company's pilot program. The increase in 1996 reflects start-up costs of a new customer service center, and increased general and administrative expenses including increased postretirement benefits other than pensions (PBOPs) commensurate with additional amounts being recovered from customers. The Company is recovering deferred PBOP expenses over five years. Hazardous Waste The electric utility industry typically utilizes and/or generates in its operations a range of potentially hazardous products and by-products. The most prevalent types of hazardous waste sites with which the Company has been associated are manufactured gas locations. (Until the early 1970's, NEES was a combined electric and gas holding company system.) The Company is aware of approximately 35 such manufactured gas locations, including eight for which the Company has been identified by either federal or state environmental regulatory agencies as a potentially responsible party, located in Massachusetts. The Company has reported the existence of all manufactured gas locations of which it is aware to state environmental regulatory agencies. The Company is engaged in various phases of investigation and remediation work at 17 of the manufactured gas locations. The Company is currently aware of other possible hazardous waste sites, and may in the future become aware of additional sites, that they may be held responsible for remediating. In 1993, the MDPU approved a settlement agreement that provides for rate recovery of remediation costs of former manufactured gas sites and certain other hazardous waste sites in Massachusetts. A more detailed discussion of this settlement agreement and of potential hazardous waste liabilities is contained in Note D-2 of the Notes to the Financial Statements. Predicting the potential costs to investigate and remediate hazardous waste sites continues to be difficult. At December 31, 1997, the Company had total reserves of $35 million. The Company believes that hazardous waste liabilities for all sites of which it is aware, and which are not covered by a rate agreement, are not material to its financial position. Year 2000 Computer Issues In the next two years, most large companies will face a potentially serious information systems (computer) problem because most software applications and operational programs written in the past will not properly recognize calendar dates beginning in the year 2000. This could force computers to either shut down or lead to incorrect calculations. The NEES companies began the process of identifying the changes required to their computer programs and hardware during 1996. The necessary modifications to the NEES companies' centralized financial, customer, and operational information systems are expected to be completed by the end of 1998. Noncentralized systems are also being reviewed for Year 2000 problems. The NEES companies believe total costs associated with making the necessary modifications to all centralized and noncentralized systems will be approximately $25 million, of which approximately $8 million has been incurred as of December 31, 1997. Most of the remaining costs are expected to be incurred prior to December 31, 1998. The Company's share of the total costs is expected to be approximately $12 million. New Accounting Standards In 1997, the Financial Accounting Standards Board released two new Statements of Financial Accounting Standards (FAS), FAS 130 and FAS 131, both of which will go into effect in 1998. FAS 130, Reporting Comprehensive Income, requires the reporting in financial statements of a new additional item called comprehensive income, which will incorporate amounts not previously included in reported net income. FAS 131, Disclosure about Segments of an Enterprise and Related Information, requires the reporting in financial statements of certain new additional information about operating segments of a business. The Company does not believe these new accounting standards will have a significant impact on its future reporting requirements. Utility Plant Expenditures and Financing Cash expenditures for utility plant totaled $88 million in 1997. The funds necessary for utility plant expenditures during 1997 were primarily provided by net cash from operating activities, after the payment of dividends and long-term debt issuances. Cash expenditures for utility plant for 1998 are estimated to be approximately $85 million. Internally generated funds are expected to meet approximately 80 percent of capital expenditure requirements in 1998. In 1997, the Company issued $15 million of first mortgage bonds, bearing an interest rate of 7.39 percent. In 1997, the Company also retired $30 million of maturing long-term debt. The Company plans to issue $15 million of long-term debt in 1998 to fund capital expenditures and $40 million to retire $20 million of maturing debt and refinance higher rate bonds. The Company has issued $25 million of this long-term debt to date in 1998. In 1997, the Company retired preferred stock with an aggregate par value of $34 million. Total premiums paid of $3.7 million in connection with the preferred stock retirement were charged to retained earnings. At December 31, 1997, the Company had $35 million of short-term debt outstanding including $30 million of commercial paper borrowings and $5 million of borrowings from affiliates. As of December 31, 1997, the Company had lines of credit with banks totaling $65 million which are available to provide liquidity support for commercial paper borrowings and other corporate purposes. There were no borrowings under these lines of credit at December 31, 1997.
Massachusetts Electric Company Statements of Income Year Ended December 31, (In thousands) 1997 1996 1995 - ---------------------------------------------------------------------------------- Operating revenue $1,624,085 $1,538,537 $1,505,676 ---------- ---------- ---------- Operating expenses: Purchased electric energy, principally from New England Power Company, an affiliate 1,145,047 1,120,709 1,113,673 Other operation 217,150 211,663 206,660 Maintenance 36,906 31,102 29,525 Depreciation 49,694 47,357 44,829 Taxes, other than income taxes 31,143 30,559 30,022 Income taxes 42,454 25,186 19,297 ---------- ---------- ---------- Total operating expenses 1,522,394 1,466,576 1,444,006 ---------- ---------- ---------- Operating income 101,691 71,961 61,670 Other income (expense), net (1,536) (1,213) (541) ---------- ---------- ---------- Operating and other income 100,155 70,748 61,129 ---------- ---------- ---------- Interest: Interest on long-term debt 27,612 27,089 25,901 Other interest 7,214 6,473 6,784 Allowance for borrowed funds used during construction - credit (429) (740) (657) ---------- ---------- ---------- Total interest 34,397 32,822 32,028 ---------- ---------- ---------- Net income $ 65,758 $ 37,926 $ 29,101 ========== ========== ========== Statements of Retained Earnings Year Ended December 31, (In thousands) 1997 1996 1995 - ----------------------------------------------------------------------------- Retained earnings at beginning of year $ 165,936 $ 150,308 $ 136,911 Net income 65,758 37,926 29,101 Dividends declared on cumulative preferred stock (2,821) (3,114) (3,114) Dividends declared on common stock, $10.00, $8.00, and $5.25 per share, respectively (23,981) (19,184) (12,590) Premium on redemption of preferred stock (3,736) - - ---------- ---------- ---------- Retained earnings at end of year $ 201,156 $ 165,936 $ 150,308 ========== ========== ========== The accompanying notes are an integral part of these financial statements.
Massachusetts Electric Company Balance Sheets At December 31, (In thousands) 1997 1996 - ------------------------------------------------------------------------------ Assets Utility plant, at original cost $1,579,309 $1,509,896 Less accumulated provisions for depreciation 465,796 430,585 ---------- ---------- 1,113,513 1,079,311 Construction work in progress 13,363 9,119 ---------- ---------- Net utility plant 1,126,876 1,088,430 ---------- ---------- Current assets: Cash 6,743 2,356 Accounts receivable: From sales of electric energy 158,627 165,866 Other (including $1,321 and $1,605 from affiliates) 2,112 2,600 Less reserves for doubtful accounts 12,808 13,146 ---------- ---------- 147,931 155,320 Unbilled revenues (Note A-3) 49,513 43,390 Materials and supplies, at average cost 9,599 8,820 Prepaid and other current assets 22,255 25,923 ---------- ---------- Total current assets 236,041 235,809 ---------- ---------- Deferred charges and other assets (Note B) 45,450 66,019 ---------- ---------- $1,408,367 $1,390,258 ========== ========== Capitalization and Liabilities Capitalization: Common stock, par value $25 per share, authorized and outstanding 2,398,111 shares $ 59,953 $ 59,953 Premium on capital stock 45,945 45,862 Other paid-in capital 193,224 155,310 Retained earnings 201,156 165,936 Unrealized gain on securities, net 129 - ---------- ---------- Total common equity 500,407 427,061 Cumulative preferred stock (Note H) 15,739 50,000 Long-term debt 338,387 343,321 ---------- ---------- Total capitalization 854,533 820,382 ---------- ---------- Current liabilities: Long-term debt due in one year 20,000 30,000 Short-term debt (including $4,800 and $5,275 to affiliates) 34,700 43,775 Accounts payable (including $179,211 and $157,603 to affiliates) 195,023 178,263 Accrued liabilities: Taxes 8,275 961 Interest 9,183 9,635 Other accrued expenses (Note G) 22,081 54,833 Customer deposits 4,487 4,308 Dividends payable 5,036 7,973 ---------- ---------- Total current liabilities 298,785 329,748 ---------- ---------- Deferred federal and state income taxes 179,474 177,778 Unamortized investment tax credits 15,463 16,566 Other reserves and deferred credits 60,112 45,784 Commitments and contingencies (Note D) ---------- ---------- $1,408,367 $1,390,258 ========== ========== The accompanying notes are an integral part of these financial statements.
Massachusetts Electric Company Statements of Cash Flows
Year Ended December 31, (In thousands) 1997 1996 1995 - ----------------------------------------------------------------------------- Operating activities: Net income $ 65,758 $ 37,926 $ 29,101 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 49,694 47,357 44,829 Deferred income taxes and investment tax credits, net 478 (7,850) 6,666 Allowance for borrowed funds used during construction (429) (740) (657) Amortization of unbilled revenues Decrease (increase) in accounts receivable, net and unbilled revenues 1,266 2,868 4,281 Decrease (increase) in materials and supplies (779) 1,782 922 Decrease (increase) in prepaid and other current assets 3,668 (3,409) (931) Increase (decrease) in accounts payable 16,760 (3,680) (159) Increase (decrease) in other current liabilities (25,711) 31,095 (2,326) Other, net 36,902 (2,430) (2,340) -------- -------- -------- Net cash provided by operating activities $147,607 $102,919 $ 79,386 -------- -------- ------- Investing activities: Plant expenditures, excluding allowance for funds used during construction $(87,998) $(93,828) $(89,735) Other investing activities (1,408) (598) (1,972) -------- -------- -------- Net cash used in investing activities $(89,406) $(94,426) $(91,707) -------- -------- -------- Financing activities: Capital contributions from parent $ 37,914 $ - $ 14,000 Dividends paid on common stock (26,380) (13,188) (24,580) Dividends paid on preferred stock (3,359) (3,114) (3,114) Long-term debt - issues 15,000 20,000 88,000 Long-term debt - retirements (30,000) - (35,000) Preferred stock - retirements (34,178) - - Premium on redemption of preferred stock (3,736) - - Changes in short-term debt (9,075) (11,675) (26,370) -------- -------- -------- Net cash provided by(used in) financing activities $(53,814) $ (7,977) $ 12,936 -------- -------- -------- Net increase in cash and cash equivalents $ 4,387 $ 516 $ 615 Cash and cash equivalents at beginning of year 2,356 1,840 1,225 -------- -------- -------- Cash and cash equivalents at end of year $ 6,743 $ 2,356 $ 1,840 ======== ======== ======== Supplementary information: Interest paid less amounts capitalized $ 31,251 $ 30,569 $ 29,130 -------- -------- -------- Federal and state income taxes paid (refunded) $ 31,711 $ 39,174 $ (8,026) -------- -------- -------- The accompanying notes are an integral part of these financial statements.
Massachusetts Electric Company Notes to Financial Statements Note A - Significant Accounting Policies 1. Nature of Operations: The Company is a wholly owned subsidiary of New England Electric System (NEES) operating in Massachusetts. The Company's business is the distribution of electricity at retail. Electric service is provided to approximately 970,000 customers in 146 cities and towns having a population of approximately 2,160,000 (1990 Census). The Company's service area covers approximately 43 percent of Massachusetts. The properties of the Company consist principally of substations and distribution lines interconnected with transmission and other facilities of New England Power Company (NEP), the Company's generation and transmission affiliate. The Company purchased all of its electric energy requirements from NEP under a contract which obligates NEP to furnish such requirements at its standard resale rate. This contract has been amended to terminate the all- requirements provision of the contract and to allow NEP to recover its above-market generation commitments through a transition access charge, which the Company will collect from its customers. See Note B for a discussion of industry restructuring and Note C for a discussion of NEP's planned divestiture of its nonnuclear generating business. 2. System of Accounts: The accounts of the Company are maintained in accordance with the Uniform System of Accounts prescribed by regulatory bodies having jurisdiction. In preparing the financial statements, management is required to make estimates that affect the reported amounts of assets and liabilities and disclosures of asset recovery and contingent liabilities as of the date of the balance sheets and revenues and expenses for the period. These estimates may differ from actual amounts if future circumstances cause a change in the assumptions used to calculate these estimates. 3. Electric Sales Revenue: The Company accrues revenues for electricity delivered but not yet billed (unbilled revenues). Accrued revenues are also recorded in accordance with rate adjustment mechanisms, which include the Company's purchased power cost adjustment (PPCA) mechanism. Upon approval of the Massachusetts Settlement in November 1997, the PPCA mechanism was eliminated as of July 31, 1996. Pending final approval of the settlement, the Company had accrued refund reserves of $9 million for the last five months of 1996 and an additional $7 million in the first nine months of 1997. Upon final approval of the settlement, these refund reserves were reversed in the fourth quarter of 1997, thereby increasing revenue. 4. Allowance for Funds Used During Construction (AFDC): The Company capitalizes AFDC as part of construction costs. AFDC represents an allowance for the cost of funds used to finance construction. AFDC is capitalized in "Utility plant" with offsetting noncash credits to "Interest." This method is in accordance with an established rate-making practice under which a utility is permitted a return on, and the recovery of, prudently incurred capital costs through their ultimate inclusion in rate base and in the provision for depreciation. The composite AFDC rates were 5.7 percent, 5.4 percent, and 6.0 percent, in 1997, 1996, and 1995, respectively. 5. Depreciation: Depreciation is provided annually on a straight-line basis. The provision for depreciation as a percentage of weighted average depreciable property was 3.3 percent in each of the years 1997, 1996, and 1995. 6. Cash: The Company classifies short-term investments with a maturity of 90 days or less at time of purchase as cash. 7. New Accounting Standards: In 1997, the Financial Accounting Standards Board released two new Statements of Financial Accounting Standards (FAS), FAS 130 and FAS 131, both of which will go into effect in 1998. FAS 130, Reporting Comprehensive Income, requires the reporting in financial statements of a new additional item called comprehensive income, which will incorporate amounts not previously included in reported net income. FAS 131, Disclosure about Segments of an Enterprise and Related Information, requires the reporting in financial statements of certain new additional information about operating segments of a business. The Company does not believe these new accounting standards will have a significant impact on its future reporting requirements. Note B - Industry Restructuring Historically, electric utilities have provided their customers bundled electric service within exclusive service territories. As a result of a number of trends, including a disparity in electric rates among regions of the country and new regulations and legislation intended to foster competition, distribution customers are being allowed to choose their power supplier, with incumbent utilities required to deliver that electricity over their transmission and distribution systems. When customers are allowed to choose their power supplier, utilities face the risk that market prices may not be sufficient to recover the costs of the commitments (generation related) incurred to supply customers under a regulated structure. The amounts by which such costs exceed market prices are commonly referred to as "stranded costs." The Company and NEP reached a settlement agreement with parties representing all of the Company's distribution customers (the Massachusetts Settlement). The Massachusetts Settlement provides for the recovery of stranded costs. In November 1997, legislation was enacted which provides customers of Massachusetts' investor-owned utilities with the ability to choose their power supplier beginning on March 1, 1998. The legislation requires electric companies to provide customers who do not choose a power supplier with a transition rate (or "standard offer generation service") which results in a 10 percent rate reduction, with the discount increasing to 15 percent on or before September 1, 1999. The legislation also provides a mechanism for the recovery of stranded costs resulting from the introduction of customer choice. In December 1997, the Massachusetts Department of Telecommunications and Energy (MDTE) (formerly the Massachusetts Department of Public Utilities (MDPU)) found that the Massachusetts Settlement substantially complies with or is consistent with the Massachusetts statute. The Massachusetts Settlement was also conditionally approved by the Federal Energy Regulatory Commission (FERC) in November 1997, subject to a compliance filing to clarify the impact of the settlement on nonsettling parties. In accordance with the Massachusetts Settlement, NEP's wholesale contract with the Company has been amended effective March 1, 1998. The Massachusetts Settlement provides that NEP's stranded costs (the Company's share is 73 percent) will be recovered from distribution customers through a transition access charge, which will be collected by the Company. Under the Massachusetts Settlement, the recovery of NEP's stranded costs is divided into several categories. Unrecovered costs associated with generating plants and regulatory assets would be recovered over 12 years and would earn a return on equity of 9.4 percent. The above-market component of purchased power contracts and nuclear decommissioning costs would be recovered as incurred over the life of those obligations, a period expected to extend beyond 12 years. Initially, the transition access charge was set at 2.8 cents per kilowatthour (kWh). The MDTE has approved a reduction of the initial transition access charge to 2.7 cents per kWh. NEP's filing with the FERC to approve this reduction is pending. The Company has already reflected the lower transition access charge amount in its rates. The transition access charge would be reduced further upon completion of the sale of NEP's nonnuclear generating business, as described below. In addition to addressing customer choice and the recovery of stranded costs, the Massachusetts Settlement also required the NEES companies to divest their nonnuclear generating business. In August 1997, NEP and the Company's Rhode Island affiliate, The Narragansett Electric Company (Narragansett Electric), entered into an agreement to sell substantially all of their nonnuclear generating business to USGen New England, Inc. (USGen), an indirect wholly owned subsidiary of PG&E Corporation. See "Divestiture of Generating Business" below. The net proceeds from the sale of the nonnuclear generating business to USGen will be used to reduce the transition access charge to approximately 1.5 cents per kWh. In addition, the FERC accepted the NEES companies' proposal in conjunction with their divestiture filing that the recovery of the remaining above-market nuclear generating plant investment and regulatory assets be completed by the end of the year 2000. The Massachusetts Settlement also establishes distribution rates for the Company. On March 1, 1998, the Company's distribution rates were set at a level approximately $45 million above the level embedded in its previously bundled rates, with such rates then frozen through the year 2000. This increase reflects changes to the distribution cost of service that include an $11 million increase in annual depreciation expense, a $3 million annual contribution to a storm fund, and increased amortization of unfunded deferred income taxes of approximately $1 million over six years. The Massachusetts restructuring legislation also expanded the eligibility for certain rate discount programs, the cost of which is uncertain at this time. From 1998 through 2000, the Company's return on equity will be subject to a floor of 6 percent and a ceiling of 11 percent. Earnings over the ceiling will be shared equally between customers and shareholders up to a maximum of 12.5 percent. This sharing results in an effective cap on the Company's return on equity of 11.75 percent, excluding certain limited incentive opportunities. To the extent that earnings fall below the floor, the Company will be authorized to surcharge customers for the shortfall. The statute also imposes an inflation cap through March 1, 2005 on the total rates for customers who have not chosen a power supplier. If this inflation cap is triggered, under the Massachusetts Settlement the recovery of stranded investment costs would be deferred. This inflation cap does not apply to any surcharge triggered by the rate of return floor. The Massachusetts Settlement also eliminated the Company's PPCA mechanism as of July 31, 1996. This mechanism allowed the Company to recover purchased power rate changes from NEP and the effects of NEP's seasonal rates. The Massachusetts Settlement required that the Company's net $18 million PPCA refund liability balance at July 31, 1996 be transferred on its books to establish a storm contingency fund account of $3 million initially, with the remainder applied to reduce regulatory assets for hazardous waste costs. Accounting Implications Historically, electric utility rates have been based on a utility's costs. As a result, electric utilities are subject to certain accounting standards that are not applicable to other business enterprises in general. Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (FAS 71), requires regulated entities, in appropriate circumstances, to establish regulatory assets, and thereby defer the income statement impact of certain items of income and expense expected to be reflected in future rates. At December 31, 1997, the Company had approximately $18 million in net regulatory assets in compliance with FAS 71. The Company believes the Massachusetts Settlement and statute will enable the Company to recover through rates its specific costs of providing ongoing distribution services and stranded costs billed to it by NEP. The Company believes these factors will allow it to continue to apply FAS 71. Despite the progress made to date, it is possible that future regulatory rules or other circumstances could cause the application of FAS 71 to be discontinued, which would result in a noncash write-off of previously established regulatory assets related to the affected operations. The components of regulatory assets are as follows:
At December 31, (In thousands) 1997 1996 - ------------------------------------------------------------------------------ Regulatory assets (liabilities) included in current assets and liabilities: Rate adjustment mechanisms (see Note G) $ 2,960 $(40,264) -------- -------- Regulatory assets included in deferred charges and other reserves and deferred credits: Unamortized losses on reacquired debt 6,939 7,482 Deferred FAS No. 106 costs (see Note E-2) 9,950 13,568 Deferred FAS No. 109 costs (see Note F) 8,275 8,244 Environmental response costs (see Note D-2) (18,294) 14,546 Deferred storm costs 8,108 11,221 Other 412 862 -------- -------- 15,390 55,923 -------- -------- $ 18,350 $ 15,659 ======== ========
Note C - Divestiture of Generating Business As described above, in August 1997, NEP and Narragansett Electric (collectively, the Sellers) reached an agreement to sell their nonnuclear generating business to USGen. The nonnuclear generating business includes three fossil-fueled and 15 hydroelectric generating stations, totaling approximately 4,000 megawatts (MW) of capacity, as well as NEES' 100 percent interest in Narragansett Energy Resources Company, a 20 percent general partner in the Ocean State Power project, all of which has a book value of $1.1 billion. USGen will pay the Sellers $1.59 billion in cash, of which $225 million will be contingent upon the introduction of customer choice of power supplier in Massachusetts. Based on the enactment of the Massachusetts statute, the NEES companies believe that the conditions for payment of the full purchase price have been met. USGen will also reimburse the NEES companies for $85 million of costs associated with early retirement and special severance programs for employees affected by industry restructuring. In addition to the purchase of the nonnuclear generating stations, USGen will purchase NEP's entitlement to approximately 1,100 MW of power procured under long-term contracts. NEP will make a monthly fixed contribution towards the above-market cost of the purchased power of between $12.5 million and $14.2 million per month from closing through January 2008. USGen will be responsible for the balance of the costs under the purchased power contracts. The sale is subject to approval by various state and federal regulatory agencies. Several parties have objected to the sale on various grounds, including allegations that following the sale, USGen would be able to exercise unlawful levels of market power. On February 25, 1998, the FERC issued an order that rejected the market power allegations, approved the sale, and conditionally approved most supporting filings. While the timing of receipt of final regulatory approvals is uncertain, receipt of all approvals is unlikely before mid-1998. Closing is contingent upon all regulatory approvals being obtained by February 1999. Note D - Commitments and Contingencies 1. Plant Expenditures: The Company's utility plant expenditures are estimated to be approximately $85 million in 1998. At December 31, 1997, substantial commitments had been made relative to future planned expenditures. 2. Hazardous Waste: The Federal Comprehensive Environmental Response, Compensation and Liability Act, more commonly known as the "Superfund" law, imposes strict, joint and several liability, regardless of fault, for remediation of property contaminated with hazardous substances. A number of states, including Massachusetts, have enacted similar laws. The electric utility industry typically utilizes and/or generates in its operations a range of potentially hazardous products and by-products. NEES subsidiaries currently have in place an internal environmental audit program and an external waste disposal vendor audit and qualification program intended to enhance compliance with existing federal, state, and local requirements regarding the handling of potentially hazardous products and by-products. The Company has been named as a potentially responsible party (PRP) by either the United States Environmental Protection Agency or the Massachusetts Department of Environmental Protection for 16 sites at which hazardous waste is alleged to have been disposed. Private parties have also contacted or initiated legal proceedings against the Company regarding hazardous waste cleanup. The most prevalent types of hazardous waste sites with which the Company has been associated are manufactured gas locations. (Until the 1970s, NEES was a combined electric and gas holding company system.) The Company is aware of approximately 35 such manufactured gas locations in Massachusetts. The Company has been identified as a PRP at eight of these manufactured gas locations, which are included in the 16 PRP sites discussed above. The Company has reported the existence of all manufactured gas locations of which it is aware to state environmental regulatory agencies. The Company is engaged in various phases of investigation and remediation work at 17 of the manufactured gas locations. The Company is currently aware of other possible hazardous waste sites, and may in the future become aware of additional sites, that it may be held responsible for remediating. In 1993, the MDPU approved a settlement agreement regarding the rate recovery of remediation costs of former manufactured gas sites and certain other hazardous waste sites located in Massachusetts. Under that agreement, qualified costs related to these sites are paid out of a special fund established on the Company's books. The Company made an initial $30 million contribution to the fund. Rate-recoverable contributions of $3 million, adjusted since 1993 for inflation, are added annually to the fund along with interest and any recoveries from insurance carriers. At December 31, 1997, the fund had a balance of $45 million, including $15 million transferred to the fund in 1997 out of existing reserves for refunds under terms of the 1996 Massachusetts Settlement. Predicting the potential costs to investigate and remediate hazardous waste sites continues to be difficult. There are also significant uncertainties as to the portion, if any, of the investigation and remediation costs of any particular hazardous waste site that may ultimately be borne by the Company. The NEES Companies have recovered amounts from certain insurers, and, where appropriate, the Company intends to seek recovery from other insurers and from other PRPs, but it is uncertain whether, and to what extent, such efforts will be successful. At December 31, 1997, the Company had total reserves for environmental response costs of $35 million. The Company believes that hazardous waste liabilities for all sites of which it is aware, and which are not covered by a rate agreement, are not material to its financial position. In October 1996, the American Institute of Certified Public Accountants issued new accounting rules for Environmental Remediation Liabilities which became effective in 1997. These new rules did not have a material effect on the Company's financial position or results of operations. Note E - Employee Benefits 1. Pension Plans: The Company participates with other subsidiaries of NEES in noncontributory, defined-benefit plans covering substantially all employees of the Company. The plans provide pension benefits based on the employee's compensation during the five years prior to retirement. The Company's funding policy is to contribute each year the net periodic pension cost for that year. However, the contribution for any year will not be less than the minimum contribution required by federal law or greater than the maximum tax deductible amount. The Company's net pension cost for 1997, 1996, and 1995 included the following components:
Year ended December 31, (In thousands) 1997 1996 1995 - ------------------------------------------------------------------------------ Service cost - benefits earned during the period $ 4,474 $ 4,429 $ 3,992 Plus (less): Interest cost on projected benefit obligation 17,413 16,935 17,576 Return on plan assets at expected long-term rate (19,961) (18,562) (18,122) Amortization (95) 316 99 -------- -------- -------- Net pension cost $ 1,831 $ 3,118 $ 3,545 ======== ======== ======== Actual return on plan assets $ 46,452 $ 32,675 $ 47,717 ======== ======== ========
1998 1997 1996 1995 ---- ---- ---- ---- Assumptions used to determine pension cost: Discount rate 6.75% 7.25% 7.25% 8.25% Average rate of increase in future compensation levels 4.13% 4.13% 4.13% 4.63% Expected long-term rate of return on assets 8.50% 8.50% 8.50% 8.75% The funded status of the plans cannot be presented separately for the Company as the Company participates in the plans with other NEES subsidiaries.
The following table sets forth the funded status of the NEES companies' plans:
At December 31, (In millions) 1997 1996 ---- ---- Benefits earned Actuarial present value of accumulated benefit liability: Vested $647 $640 Nonvested 18 19 --- ---- Total $665 $659 ==== ==== Reconciliation of funded status Actuarial present value of projected benefit liability 757 753 Unrecognized prior service costs (8) (9) FAS No. 87 transition liability not yet recognized (amortized) (1) (1) Net gain (loss) not yet recognized (amortized) 61 40 ---- ---- 809 783 ---- ---- Pension fund assets at fair value 834 812 FAS No. 87 transition asset not yet recognized (amortized) (8) (10) ---- ---- 826 802 ---- ---- Accrued pension/(prepaid) payments recorded on books $(17) $(19) ==== ====
The plans' funded status at December 31, 1997 and 1996 were calculated using the assumed rates from 1998 and 1997, respectively, and the 1983 Group Annuity Mortality table. Plan assets are composed primarily of corporate equity, debt securities, and cash equivalents. 2. Postretirement Benefit Plans Other Than Pensions (PBOPs): The Company provides health care and life insurance coverage to eligible retired employees. Eligibility is based on certain age and length of service requirements and in some cases retirees must contribute to the cost of their coverage. The Company's total cost of PBOPs for 1997, 1996, and 1995 included the following components:
Year ended December 31, (In thousands) 1997 1996 1995 - --------------------------------------------------------------------------- Service cost - benefits earned during the period $ 2,164 $ 2,232$ 2,368 Plus (less): Interest cost on accumulated benefit obligation 9,486 9,661 11,699 Return on plan assets at expected long-term rate (6,871) (5,455) (4,165) Amortization 4,465 5,267 6,628 ------- ------- ------- Net postretirement benefit cost $ 9,244 $11,705 $16,530 ======= ======= ======= Actual return on plan assets $16,189 $10,857 $12,209 ======= ======= =======
1998 1997 1996 1995 ==== ==== ==== ==== Assumptions used to determine postretirement benefit cost: Discount rate 6.75% 7.25% 7.25% 8.25% Expected long-term rate of return on assets 8.25% 8.25% 8.25% 8.50% Health care cost rate - 1995 to 1999 5.25% 8.00% 8.00% 8.50% Health care cost rate - 2000 to 2004 5.25% 6.25% 6.25% 8.50% Health care cost rate - 2005 and beyond 5.25% 5.25% 5.25% 6.25%
The following table sets forth the Company's benefits earned and the plans' funded status:
At December 31, (In millions) 1997 1996 ---- ---- Accumulated postretirement benefit obligation: Retirees $ 87 $ 94 Fully eligible active plan participants 12 11 Other active plan participants 37 39 ----- ----- Total benefits earned 136 144 Unrecognized transition obligation (109) (117) Unrecognized net gain 60 40 ----- ----- 87 67 ----- ----- Plan assets at fair value 98 82 ----- ----- Prepaid postretirement benefit costs recorded on books $ 11 $ 15 ===== =====
The plans' funded status at December 31, 1997 and 1996 were calculated using the assumed rates in effect for 1998 and 1997, respectively. The assumptions used in the health care cost trends have a significant effect on the amounts reported. Increasing the assumed rates by 1 percent in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997 by approximately $17 million and the net periodic cost for 1997 by approximately $2 million. The Company funds the annual tax-deductible contributions. Plan assets are invested in equity and debt securities and cash equivalents. Note F - Income Taxes The Company and other subsidiaries participate with NEES in filing consolidated federal income tax returns. The Company's income tax provision is calculated on a separate return basis. Federal income tax returns have been examined and reported on by the Internal Revenue Service through 1993. Total income taxes in the statements of income are as follows:
Year Ended December 31, (In thousands) 1997 1996 1995 - ----------------------------------------------------------------------------- Income taxes charged to operations $42,454 $25,186 $19,297 Income taxes charged (credited) to "Other income" (887) (2,010) (901) ------- ------- ------- Total income taxes $41,567 $23,176 $18,396 ======= ======= ======= Total income taxes, as shown above, consist of the following components: Year Ended December 31, (In thousands) 1997 1996 1995 ---- ---- ---- Current income taxes $41,089 $31,026 $11,730 Deferred income taxes 1,581 (6,732) 7,798 Investment tax credits, net (1,103) (1,118) (1,132) ------- ------- ------- Total income taxes $41,567 $23,176 $18,396 ======= ======= ======= Investment tax credits have been deferred and are being amortized over the estimated lives of the property giving rise to the credits. Total income taxes, as shown above, consist of federal and state components as follows: Year Ended December 31, (In thousands) 1997 1996 1995 ---- ---- ---- Federal income taxes $34,053 $18,697 $14,461 State income taxes 7,514 4,479 3,935 ------- ------- ------- Total income taxes $41,567 $23,176 $18,396 ======= ======= =======
Consistent with rate-making policies of the MDPU, the Company has adopted comprehensive interperiod tax allocation (normalization) for temporary book/tax differences. Total income taxes differ from the amounts computed by applying the federal statutory tax rates to income before taxes. The reasons for the differences are as follows:
Year Ended December 31, (In thousands) 1997 1996 1995 ---- ---- ---- Computed tax at statutory rate $37,564 $21,386 $16,624 Increases (reductions) in tax resulting from: Amortization of investment tax credits (1,103) (1,118) (1,132) State income taxes, net of federal income tax benefit 4,884 2,911 2,558 All other differences 222 (3) 346 ------- ------- ------- Total income taxes $41,567 $23,176 $18,396 ======= ======= ======= The following table identifies the major components of total deferred income taxes:
At December 31, (In millions) 1997 1996 ---- ---- Deferred tax asset: Plant related $ 9 $ 9 Investment tax credits 6 7 All other 57 57 ----- ----- 72 73 ----- ----- Deferred tax liability: Plant related (223) (216) All other (28) (35) ----- ----- (251) (251) ----- ----- Net deferred tax liability $(179) $(178) ===== =====
Note G - Short-term Borrowings and Other Accrued Expenses At December 31, 1997, the Company had $35 million of short-term debt outstanding including $30 million in commercial paper borrowings and $5 million of borrowings from affiliates. NEES and certain subsidiaries, including the Company, with regulatory approval, operate a money pool to more effectively utilize cash resources and to reduce outside short-term borrowings. Short-term borrowing needs are met first by available funds of the money pool participants. Borrowing companies pay interest at a rate designed to approximate the cost of outside short-term borrowings. Companies which invest in the pool share the interest earned on a basis proportionate to their average monthly investment in the money pool. Funds may be withdrawn from or repaid to the pool at any time without prior notice. At December 31, 1997, the Company had lines of credit with banks totaling $65 million which are available to provide liquidity support for commercial paper borrowings and other corporate purposes. There were no borrowings under these lines of credit at December 31, 1997. Fees are paid in lieu of compensating balances on most lines of credit. The weighted average rate on outstanding short-term borrowings was 5.6 percent at December 31, 1997. The fair value of the Company's short-term debt equals carrying value. The components of other accrued expenses are as follows:
- ---------------------------------------------------------------- At December 31, (In thousands) 1997 1996 - ---------------------------------------------------------------- Rate adjustment mechanisms $ 4,227 $ 39,863 Accrued wages and benefits 15,244 12,591 Other 2,610 2,379 ------- ------- $22,081 $54,833 ======= =======
Note H - Cumulative Preferred Stock A summary of cumulative preferred stock at December 31, 1997 and 1996 is as follows (dollar amounts expressed in thousands except for share data):
Shares Authorized Dividends Call and Outstanding Amount Declared Price - ----------------------------------------------------------------------------------- 1997 1996 1997 1996 1997 1996 - ----------------------------------------------------------------------------------- $25 Par value - 6.84% Series 192,161 600,000 $ 4,804$15,000 $ 931 $1,026 (a) $100 Par value - 4.44% Series 27,815 75,000 2,782 7,500 305 333 $104.068 4.76% Series 27,530 75,000 2,753 7,500 326 357 $103.730 6.99% Series 54,000 200,000 5,400 20,000 1,259 1,398 (b) - ----------------------------------------------------------------------------------- Total 301,506 950,000 $15,739$50,000 $2,821 $3,114 =================================================================================== (a) Callable on or after October 1, 1998 at $25.80. (b) Callable on or after August 1, 2003 at $103.50.
The annual dividend requirement for total cumulative preferred stock was $961,000 for 1997 and $3,114,000 for 1996. There are no mandatory redemption provisions on the Company's cumulative preferred stock. In 1997, the Company retired preferred stock with an aggregate par value of $34 million. Total premiums paid of $3.7 million in connection with the preferred stock retirement were charged to retained earnings. Note I - Long-term Debt A summary of long-term debt is as follows:
At December 31, (In thousands) - --------------------------------------------------------------------------- Series Rate % Maturity 1997 1996 =========================================================================== First Mortgage Bonds: R(92-4) 7.230 June 3, 1997 $ 10,000 R(92-5) 7.210 June 3, 1997 5,000 S(92-6) 6.120 August 15, 1997 12,000 S(92-7) 6.010 August 15, 1997 3,000 U(95-3) 7.800 February 13, 1998 $ 5,000 5,000 U(95-4) 7.790 February 16, 1998 5,000 5,000 R(92-1) 7.240 December 30, 1998 10,000 10,000 S(92-3) 6.630 August 12, 1999 7,500 7,500 S(92-4) 6.600 August 12, 1999 7,500 7,500 U(95-5) 7.930 February 14, 2000 6,000 6,000 S(92-2) 6.980 July 17, 2000 5,000 5,000 S(92-9) 6.310 September 15, 2000 10,000 10,000 R(92-6) 7.710 July 1, 2002 10,000 10,000 S(92-11) 7.250 October 28, 2002 5,000 5,000 S(92-12) 7.340 November 25, 2002 10,000 10,000 T(93-2) 7.090 January 27, 2003 20,000 20,000 T(93-5) 6.400 June 24, 2003 10,000 10,000 U(93-1) 6.240 November 17, 2003 5,000 5,000 U(94-6) 8.520 November 30, 2004 10,000 10,000 U(95-1) 8.450 January 10, 2005 10,000 10,000 U(95-2) 8.220 January 24, 2005 10,000 10,000 U(95-7) 7.920 March 3, 2005 9,000 9,000 V(95-1) 6.720 June 23, 2005 10,000 10,000 V(96-1) 6.780 November 20, 2006 20,000 20,000 T(93-7) 6.660 June 23, 2008 5,000 5,000 T(93-8) 6.660 June 30, 2008 5,000 5,000 T(93-10) 6.110 September 8, 2008 10,000 10,000 T(93-11) 6.375 November 17, 2008 10,000 10,000 R(92-3) 8.550 February 7, 2022 5,000 5,000 S(92-5) 8.180 August 1, 2022 10,000 10,000 S(92-10) 8.400 October 26, 2022 5,000 5,000 T(93-1) 8.150 January 20, 2023 10,000 10,000 T(93-3) 7.980 January 27, 2023 10,000 10,000 T(93-4) 7.690 February 24, 2023 10,000 10,000 T(93-6) 7.500 June 23, 2023 3,000 3,000 T(93-9) 7.500 June 29, 2023 7,000 7,000 U(93-2) 7.200 November 15, 2023 10,000 10,000 U(93-3) 7.150 November 24, 2023 1,000 1,000 U(94-1) 7.050 February 2, 2024 10,000 10,000 U(94-2) 8.080 May 2, 2024 5,000 5,000 U(94-3) 8.030 June 14, 2024 5,000 5,000 U(94-4) 8.160 August 9, 2024 5,000 5,000 U(94-5) 8.850 November 7, 2024 1,000 1,000 U(95-6) 8.460 February 28, 2025 3,000 3,000 V(95-2) 7.630 June 27, 2025 10,000 10,000 V(95-3) 7.600 September 12, 2025 10,000 10,000 V(95-4) 7.630 September 12, 2025 10,000 10,000 V(97-1) 7.390 October 1, 2027 15,000 Unamortized discounts (1,613) (1,679) -------- -------- Total long-term debt 358,387 373,321 ======== ======== Long-term debt due in one year 20,000 30,000 -------- -------- $338,387 $343,321 ======== ========
Substantially all of the properties and franchises of the Company are subject to the lien of mortgage indentures under which the first mortgage bonds have been issued. In July 1996, Nantucket Electric issued $28 million of tax- exempt long-term debt at rates ranging from 4.10 percent to 6.75 percent to fund construction of an undersea cable. The Company guaranteed the debt on behalf of Nantucket Electric. The Company will make cash payments of $20,000,000 in 1998, $15,000,000 in 1999, $21,000,000 in 2000, and $25,000,000 in 2002 to retire maturing mortgage bonds. There are no cash payments required in 2001. At December 31, 1997, the Company's long-term debt had a carrying value of approximately $360,000,000 and had a fair value of approximately $377,000,000. The fair market value of the Company's long-term debt was estimated based on the quoted prices for similar issues or on the current rates offered to the Company for debt of the same remaining maturity. Note J - Restrictions on Retained Earnings Available for Dividends on Common Stock As long as any preferred stock is outstanding, certain restrictions on payment of dividends on common stock would come into effect if the "junior stock equity" was, or by reason of payment of such dividends became, less than 25 percent of "Total capitalization." However, the junior stock equity at December 31, 1997 was 57 percent of total capitalization, and accordingly, none of the Company's retained earnings at December 31, 1997 were restricted as to dividends on common stock under the foregoing provisions. Under restrictions contained in the indentures relating to first mortgage bonds, $20,113,000 of the Company's retained earnings at December 31, 1997 were restricted as to dividends on common stock. Note K - Supplementary Income Statement Information Advertising expenses, expenditures for research and development, and rents were not material and there were no royalties paid in 1997, 1996, or 1995. Taxes, other than income taxes, charged to operating expenses are set forth by classes as follows:
Year Ended December 31, (In thousands) 1997 1996 1995 - ---------------------------------------------------------------------------- Municipal property taxes $23,796 $23,304 $23,119 Federal and state payroll and other taxes 7,347 7,255 6,903 ------- ------- ------- $31,143 $30,559 $30,022 ======= ======= =======
New England Power Service Company, an affiliated service company operating pursuant to the provisions of Section 13 of the Public Utility Holding Company Act of 1935, furnished services to the Company at the cost of such services. These costs amounted to $73,145,000, $67,756,000, and $67,680,000, including capitalized construction costs of $7,907,000, $9,330,000, and $7,660,000 for each of the years 1997, 1996, and 1995, respectively.
Selected Financial Information Year Ended December 31, (In millions) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------- Operating revenue: Electric sales (excluding fuel cost recovery) $1,132 $1,084 $1,072 $1,088 $1,062 Fuel cost recovery 453 427 414 376 392 Other 39 28 20 18 15 ------ ------ ------ ------ ------ Total operating revenue $1,624 $1,539 $1,506 $1,482 $1,469 Net income $ 66 $ 38 $ 29 $ 35 $ 24 Total assets $1,408 $1,390 $1,343 $1,296 $1,232 Capitalization: Common equity $ 500 $ 427 $ 412 $ 384 $ 382 Cumulative preferred stock 16 50 50 50 50 Long-term debt 339 343 353 266 265 ------ ------ ------ ------ ------ Total capitalization $ 855 $ 820 $ 815 $ 700 $ 697 Preferred dividends declared $ 3 $ 3 $ 3 $ 3 $ 4 Common dividends declared $ 24 $ 19 $ 13 $ 30 $ 19
Selected Quarterly Financial Information (Unaudited) - --------------------------------------------------------------------------- First Second Third Fourth (In Thousands) Quarter Quarter Quarter Quarter =========================================================================== 1997 Operating revenue $405,518 $369,542 $404,990 $444,035 Operating income $ 24,241 $ 19,697 $ 17,621 $ 40,132 Net income $ 13,636 $ 10,353 $ 8,041 $ 33,728 * 1996 Operating revenue $390,819 $358,479 $398,542 $390,697 Operating income $ 20,687 $ 13,783 $ 13,538 $ 23,953 Net income $ 10,734 $ 5,456 $ 4,774 $ 16,962 * See "Overview of Financial Results" and "Operating Revenue" sections of Financial Review for a discussion of factors contributing to the fourth quarter increase in net income over prior year.
Per share data is not relevant because the Company's common stock is wholly owned by New England Electric System. A copy of Massachusetts Electric Company's Annual Report on Form 10-K to the Securities and Exchange Commission for the year ended December 31, 1997 will be available on or about April 1, 1998, without charge, upon written request to Massachusetts Electric Company, Shareholder Services Department, 25 Research Drive, Westborough, Massachusetts 01582. EX-24 28 MECO POWER OF ATTORNEY EXHIBIT (24) POWER OF ATTORNEY ----------------- Each of the undersigned directors of Massachusetts Electric Company (the "Company"), individually as a director of the Company, hereby constitutes and appoints John G. Cochrane, Robert King Wulff, and Geraldine M. Zipser, individually, as attorney-in-fact to execute on behalf of the undersigned the Company's annual report on Form 10-K for the year ended December 31, 1997, to be filed with the Securities and Exchange Commission, and to execute any appropriate amendment or amendments thereto as may be required by law. Dated this 18th day of March, 1998. s/Cheryl A. LaFleur s/Christopher E. Root _________________________ _________________________ Cheryl A. LaFleur Christopher E. Root s/Robert L. McCabe s/Richard P. Sergel _________________________ _________________________ Robert L. McCabe Richard P. Sergel s/Lydia M. Pastuszek s/Dennis E. Snay _________________________ _________________________ Lydia M. Pastuszek Dennis E. Snay s/Lawrence J. Reilly _________________________ Lawrence J. Reilly EX-27 29 MECO FDS WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND RELATED STATEMENTS OF INCOME, RETAINED EARNINGS AND CASH FLOWS OF MASSACHUSETTS ELECTRIC COMPANY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. MASSACHUSETTS ELECTRIC COMPANY 2 0000063073 1,000 DEC-31-1997 DEC-31-1997 12-MOS PER-BOOK 1,126,876 0 236,041 45,450 0 1,408,367 59,953 239,169 201,156 500,407 0 15,739 338,387 4,800 0 29,900 20,000 0 0 0 499,134 1,408,367 1,624,085 42,454 1,479,940 1,522,394 101,691 (1,536) 100,155 34,397 65,758 2,821 62,937 23,981 27,612 147,607 0 0 Total deferred charges includes other assets. Per share data is not relevant because the Company's common stock is wholly-owned by New England Electric System. Total common stockholders equity includes the unrealized gain on securities. EX-10 30 EXHIBIT 10(V)(II) AMENDED AND RESTATED WHOLESALE STANDARD OFFER SERVICE AGREEMENT WHOLESALE STANDARD OFFER SERVICE AGREEMENT between THE NARRAGANSETT ELECTRIC COMPANY and USGEN ACQUISITION CORPORATION Dated as of October 29, 1997 Table of Contents ARTICLE 1. BASIC UNDERSTANDINGS.......................................... 1 ARTICLE 2. DEFINITIONS................................................... 2 ARTICLE 3. TERM AND REGULATORY APPROVAL.................................. 4 3.1 Term.................................................... 4 3.2 Obtaining and Maintaining Required Permits.............. 5 ARTICLE 4. SALE AND PURCHASE............................................. 5 ARTICLE 5. PRICE AND BILLING............................................. 6 5.1 Price................................................... 6 5.2 Payment................................................. 7 5.3 Taxes, Fees and Levies.................................. 8 ARTICLE 6. DELIVERY, LOSSES, AND DETERMINATION AND REPORTING OF HOURLY LOADS..................................... 8 6.1 Delivery................................................ 8 6.2 Losses.................................................. 8 6.3 Determination and Reporting of Hourly Loads............. 9 ARTICLE 7. DEFAULT AND TERMINATION....................................... 10 7.1 Material Breach and Termination......................... 10 ARTICLE 8. NOTICES, REPRESENTATIVES OF THE PARTIES....................... 11 8.1 Notices................................................. 11 8.2 Authority of Representative............................. 12 ARTICLE 9. LIABILITY, INDEMNIFICATION, AND RELATIONSHIP OF PARTIES....................................... 12 9.1 Limitation on Consequential, Incidental and Indirect Damages........................................ 12 9.2 Recovery of Direct Damages Permitted.................... 12 9.3 Indemnification......................................... 13 9.4 Independent Contractor Status........................... 14 ARTICLE 10. ASSIGNMENT.................................................... 14 10.1 Assignment............................................. 14 ARTICLE 11. SUCCESSORS AND ASSIGNS........................................ 15 ARTICLE 12. FORCE MAJEURE................................................. 15 12.1 Force Majeure Standard................................. 15 12.2 Force Majeure Definition............................... 15 12.3 Obligation to Diligently Cure Force Majeure............ 16 ARTICLE 13. WAIVERS....................................................... 16 ARTICLE 14. REGULATION.................................................... 16 14.1 Laws and Regulations................................... 16 14.2 NEPOOL Requirements.................................... 17 ARTICLE 15. INTERPRETATION, DISPUTE RESOLUTION............................ 17 15.1 Interpretation......................................... 17 15.2 Dispute Resolution..................................... 17 ARTICLE 16. SEVERABILITY.................................................. 17 ARTICLE 17. MODIFICATIONS................................................. 18 ARTICLE 18. SUPERSESSION.................................................. 18 ARTICLE 19. COUNTERPARTS.................................................. 18 ARTICLE 20. HEADINGS...................................................... 18 Appendix A. Incremental Revenues..........................................A-1 Appendix B. Estimation of Supplier Hourly Loads...........................B-1 Appendix C. Arbitration Agreement.........................................C-1 AMENDED AND RESTATED WHOLESALE STANDARD OFFER SERVICE AGREEMENT This AMENDED AND RESTATED WHOLESALE STANDARD OFFER SERVICE AGREEMENT ("Agreement") is dated as of October 29, 1997 and is by and between THE NARRAGANSETT ELECTRIC COMPANY, a Rhode Island corporation ("NECO"), and USGen Acquisition Corporation, a Delaware corporation ("Seller"), and amends and restates and, together with the NECO Wholesale Standard Offer Service Agreement II dated as of the date hereof between NECO and Seller, supersedes in its entirety the Wholesale Standard Offer Service Agreement dated as of August 5, 1997 between NECO and Seller. This Agreement provides for the purchase by NECO and the sale by Seller of Wholesale Standard Offer Service, as defined in this Agreement. ARTICLE 1. BASIC UNDERSTANDINGS NECO purchases all of its requirements of electricity for resale to its retail electric customers from its affiliate, New England Power Company ("NEP"). NEP, NECO and other parties have entered into an agreement in settlement of regulatory proceedings before the Federal Energy Regulatory Commission (the "Rhode Island Restructuring Agreement") that, among other things, implements certain requirements of the Rhode Island Utility Restructuring Act of 1996 (the "Act"), permits NECO to terminate wholesale purchases from NEP, permits current retail customers of NECO to purchase electricity from other suppliers on and after a date defined therein as the "Retail Access Date," or, for a limited time, to purchase Standard Offer Service from NECO, obligates NEP to supply NECO with power sufficient to meet the latter's obligations to supply Standard Offer Service, and obligates NEP to transfer its interests in the electric generating business to another party or parties. NEP, NECO, and Seller have entered an agreement under which Seller will acquire certain NEP and NECO generating assets. NEP and Seller desire that Seller shall supply electric capacity and energy to NECO to fulfill a portion of NEP's power supply obligations under the Rhode Island Restructuring Agreement. Under the Rhode Island Restructuring Agreement, NECO is obligated to afford wholesale power suppliers other than NEP the opportunity to commit to supply NECO with power sufficient to meet NECO's obligation to supply retail Standard Offer Service after the Retail Access Date. This Agreement sets forth the terms under which Seller will supply Wholesale Standard Offer Service to NECO, for a period beginning on the Closing Date, to enable NECO to meet the needs of its retail customers for electricity, including all or a portion of the needs of customers receiving retail Standard Offer Service after the Retail Access Date. ARTICLE 2. DEFINITIONS The following words and terms shall be understood to have the following meanings when used in this Agreement, or in any associated documents entered into in conjunction with this Agreement. In addition, except as otherwise expressly provided, where terms used in this Agreement are defined in the NEPOOL Agreement and not otherwise defined herein, such definitions are expressly incorporated into this Agreement by reference. Affiliate of NECO - Any company that is a subsidiary of New England Electric System and its successors. Closing Date - The date upon which the Seller acquires ownership of generating assets it purchases from NEP. Commission or FERC - The Federal Energy Regulatory Commission or such successor federal regulatory agency as may have jurisdiction over this Agreement. Contract Termination Date - The date established by the Rhode Island Restructuring Agreement when the respective obligations of NEP and NECO under NEP's FERC Electric Tariff, Original Volume No. 1, to sell and purchase wholesale electric requirements service shall cease. The Contract Termination Date shall occur on the earlier of the Retail Access Date or the Wholesale Access Date. GWh - Gigawatt hour. ISO - The Independent System Operator to be established in accordance with the NEPOOL Agreement and the Interim Independent System Operator Agreement as amended, superseded or restated from time to time. kWh - Kilowatt- hour. MECO - Massachusetts Electric Company. MECO Wholesale Standard Offer Service Agreement - The Wholesale Standard Offer Service Agreement of even date herewith between MECO and the Seller. NECO's Service Territory - The geographic area in which NECO provided electric service to retail customers on August 6, 1996. NECO's System - The electrical system of NECO and/or the electrical system of any Affiliate of NECO. MMBtu - Million British thermal units. NEP - New England Power Company, an Affiliate of NECO. NEPEX - The New England Power Exchange. NEPOOL - The New England Power Pool. NEPOOL Agreement - The New England Power Pool Agreement dated as of September 1, 1971, as amended and as may be amended or restated from time to time. Price - The price set forth in SECTION 5.1, below. Prime Rate - The prime (or comparable) rate announced from time to time as its prime rate by the Bank of Boston or its successor, which rate may differ from the rate offered to its more substantial and creditworthy customers. PTF - Facilities categorized as Pool Transmission Facilities under the NEPOOL Agreement. Retail Access Date - The date so defined under the Rhode Island Restructuring Agreement, as the later of January 1, 1998, or the date of a final, nonappealable order of the RIPUC approving the divestiture plan for the disposition of NEP's non-nuclear generating facilities provided, however, that in any event the Retail Access Date shall occur no later than three (3) months after retail access is available to forty percent (40%) or more of the kilowatt hour sales in New England including the total kilowatt hour sales in Rhode Island. Rhode Island Restructuring Agreement - The Offer of Settlement dated May 30, 1997, entered into by and among the RIPUC, the Rhode Island Division of Public Utilities and Carriers, NECO, and NEP, as amended and accepted or approved by the FERC. RIPUC - The Rhode Island Public Utilities Commission. Standard Offer Auction - The solicitation by NECO of offers from wholesale power suppliers, including, at their option, NEP and Seller, of electric energy and associated capacity and ancillary services necessary to meet the needs of ultimate customers of NECO eligible for and accepting retail Standard Offer Service on or after the Retail Access Date, and any wholesale electric supply contracts resulting from that solicitation. The solicitation and any contract(s) entered into as a result thereof shall not be on terms that are materially different from those described by MECO in the Massachusetts Restructuring Agreement (as defined in the MECO Wholesale Standard Offer Service Agreement), the RFQ dated April 3, 1997, and the letter to potential asset purchasers dated June 16, 1997, or result in a material adverse impact on Seller. NECO shall not, without Seller's consent, conduct the Standard Offer Auction more than once or more than six (6) months prior to the Retail Access Date, which date shall be as reasonably determined by NECO. Standard Offer Service - The electric service provided by NECO pursuant to the Rhode Island Restructuring Agreement: (i) to retail customers in NECO's Service Territory during the period, if any, during the term of this Agreement preceding the Retail Access Date; and (ii) to NECO's retail customers on the Retail Access Date that do not elect to obtain their electric supply from an alternative supplier on or after the Retail Access Date through December 31, 2009. Wholesale Access Date - The date so defined under the Rhode Island Restructuring Agreement, as the date on which NECO in its sole discretion decides to terminate its purchase from NEP of wholesale requirements service pursuant to NEP's FERC Electric Tariff, Original Volume No. 1, by providing the Commission and the Signatories to the Rhode Island Restructuring Agreement with 90 days advance notice in writing, said date not to be earlier than January 1, 1998. Wholesale Standard Offer Service - The generation and delivery, to any location on the NEPOOL PTF system or NECO's system, of the portion of the electric capacity, energy and ancillary services required by NECO to meet the needs of NECO's ultimate customers taking Standard Offer Service, excluding, after the Retail Access Date, any portion of such requirements that NECO has contracted to obtain through the Standard Offer Auction, determined in accordance with ARTICLE 4. Seller, as the supplier of Wholesale Standard Offer Service capacity and energy, will be responsible for all present, or future requirements and associated costs for installed capability, operable capability, energy, operating reserves, and automatic generation control, including tie benefit payments, losses and any congestion charges associated with Seller's supply of Wholesale Standard Offer Service and any other requirements imposed by NEPOOL or the ISO, as they may be in effect from time to time. To the extent that any NEPOOL, ISO or any successor entity expenses or uplift costs are allocated to wholesale suppliers, the portion of such costs associated with Seller's supply of Standard Offer Service will also be the responsibility of Seller. To the extent any costs contemplated by this paragraph are applicable to NECO and recoverable by NECO from its customers, NECO shall be responsible for such costs. ARTICLE 3. TERM AND REGULATORY APPROVAL 3.1 Term The term of this Agreement shall begin at 12:01 am on the Closing Date and continue until the earlier of: (a)11:59 pm on December 31, 2009; or (b) the first date that NECO has no requirements for electric capacity and energy to supply Standard Offer Service that are not satisfied by contracts resulting from the Standard Offer Auction. 3.2 Obtaining and Maintaining Required Permits (a) Performance under this Agreement is conditioned upon both Parties securing and maintaining such federal, state or local approvals, grants or permits as may be necessary for the sale and purchase of Wholesale Standard Offer Service, which shall not include any approvals, grants, or permits necessary for the operation of any particular generating facility. Each Party shall use reasonable efforts to acquire and maintain such approvals, grants or permits. If the acquisition or maintenance of a particular approval, grant, or permit requires a modification to this Agreement, then the Parties agree to negotiate in good-faith to reach a mutually agreeable modification of the Agreement. The Parties are not required to reach such a mutually acceptable modification. (b) Seller will file this Agreement with FERC (and any other regulatory agency as may have jurisdiction over the Agreement) in accordance with the provisions of applicable laws, rules and regulations. Seller will be responsible for any filing fees for filing this Agreement with FERC (and any other regulatory agency as may have jurisdiction over the Agreement) and for any regulatory assessments associated with sales under this Agreement. FERC approval of this Agreement shall be a condition to the obligations of the Parties hereunder. ARTICLE 4. SALE AND PURCHASE Seller shall sell and deliver to the Delivery Points, as defined in ARTICLE 6, SECTION 6.1, and NECO shall purchase 90.78% of NECO's requirements for Wholesale Standard Offer Service. NECO's requirements for Wholesale Standard Offer Service shall be determined on the basis of ARTICLE 6, SECTION 6.3, below, and the price for such sale and purchase shall be as set forth in ARTICLE 5, SECTION 5.1, below. ARTICLE 5. PRICE AND BILLING 5.1 Price For each kilowatt hour of Wholesale Standard Offer Service that Seller delivers to the Delivery Points, in accordance with ARTICLE 6, SECTION 6.3, below, NECO shall pay Seller a price equal to the following amounts for each period during the term of this Agreement: Period Price in Cents per kWh 1998 3.2 Cents 1999 3.5 Cents 2000 3.8 Cents 2001 3.8 Cents 2002 4.2 Cents 2003 4.7 Cents 2004 5.1 Cents 2005 5.5 Cents 2006 5.9 Cents 2007 6.3 Cents 2008 6.7 Cents 2009 7.1 Cents In addition, in the event of increases in the market price of No. 6 residual fuel oil (1% sulphur) and natural gas after 1999 as described in Appendix A, NECO shall pay Seller a percentage of any incremental revenues received by NECO as a result of NECO's Customer Rate Fuel Adjustment, described in Appendix A, attached and incorporated herein by reference. Such percentage, with respect to the billing month, shall equal the percentage of NECO's total Standard Offer Service requirements during the month that Seller delivers under this Agreement. 5.2 Payment (a) On or before the tenth (10th) day of each month during the term of this Agreement, NECO shall: (i) calculate the amount due and payable to Seller pursuant to this ARTICLE 5 with respect to the preceding month; and (ii) advise Seller of the schedule upon which it shall pay the amount so calculated, which schedule shall comply with paragraph (b), below. The amount payable shall be calculated by multiplying the Price specified in the first paragraph of ARTICLE 5, SECTION 5.1, above, for the applicable Contract Period by the quantity of Wholesale Standard Offer Service delivered by Seller to the Delivery Points for NECO's Standard Offer Service customers in the month, as determined in accordance with ARTICLE 6, SECTION 6.3, below. Because quantities determined under SECTION 6.3 are estimated, subject to a reconciliation process described in SECTION 6.3(d), quantities used in calculations under this paragraph (a) shall be subject to adjustment, whether positive or negative, in subsequent months' calculations, to reflect that reconciliation process, and any adjusted quantities shall be applied to the Price applicable during the month of the calculation being adjusted. Seller's percentage of any Customer Rate Fuel Adjustment incremental revenue shall be added to such amount. (b) NECO shall pay Seller any amounts due and payable on or before the twenty-fifth (25th) day after the date a calculation is made pursuant to paragraph (a), provided that, if and to the extent NECO pays Seller any portion of the amount due and payable before the twenty-fifth (25th) day after a calculation is made, it shall be entitled, without interest or penalty, to defer payment of an equal portion of the amount due and payable for that month by the lesser of: (i) the same number of days that the early payment preceded the twenty-fifth day after the calculation; and (ii) twenty-five (25) days. If all or any part of any amount due and payable pursuant to paragraph (a) shall remain unpaid thereafter, interest shall thereafter accrue and be payable to Seller on such unpaid amount at a rate per annum equal to two percent (2%) above the Prime Rate in effect on the date of such bill; provided, however, if the amount due and payable is disputed, interest shall accrue and be payable to Seller on the unpaid amount finally determined to be due and payable at a rate per annum equal to the Prime Rate in effect on the date of the calculation pursuant to paragraph (a); and provided, further, no interest shall accrue in favor of Seller or NECO on amounts that are added to or credited against a calculation due to the adjustment of estimated quantities in accordance with paragraph (a) and ARTICLE 6, SECTION 6.3. (c) With respect to reconciliation adjustments pursuant to SECTION 6.3(d) or any error in a calculation (whether the amount is paid or not), any overpayment, underpayment, or reconciliation adjustment will be refunded or paid up, as appropriate. Interest shall accrue from the date of the error or adjustment on the unpaid or overpaid amount finally determined to be due and shall be calculated pursuant to Section 35.19a of the Commission regulations. 5.3 Taxes, Fees and Levies Seller shall be obligated to pay all present and future taxes, fees and levies which may be assessed upon Seller by any entity upon the purchase or sale of electricity covered by the Agreement. To the extent such taxes, fees, and levies are allowed to be, and are actually, recoverable by NECO from its customers, NECO shall reimburse Seller for such taxes, fees, and levies paid by Seller. It is expressly agreed that Seller shall not be responsible for, and shall be held harmless from, the Rhode Island Tax on gross receipts or earnings (Public Service Corporation Tax, Chapter 44-13 of the Rhode Island General Laws, as amended or superseded). ARTICLE 6. DELIVERY, LOSSES, AND DETERMINATION AND REPORTING OF HOURLY LOADS 6.1 Delivery All electricity shall be delivered to NECO in the form of three-phase sixty-hertz alternating current at any location on the NEPOOL PTF system or NECO's System ("Delivery Points"). Title shall pass to NECO at the Delivery Point and Seller shall incur no expense or risk beyond the Delivery Point other than those described in SECTION 6.2. If the NEPOOL control area experiences congestion, Seller will be responsible for any congestion costs incurred in delivering power across the PTF system to NECO to the extent such costs are imposed by NEPOOL or the ISO on suppliers. Seller shall be responsible for all transmission and distribution costs associated with the use of transmission systems outside of NEPOOL and any local point to point charges and distribution charges needed to deliver the power to the NEPOOL PTF. 6.2 Losses Seller shall be responsible for all transmission and distribution losses associated with the delivery of electricity supplied under this Agreement to the meters of ultimate customers of NECO receiving retail Standard Offer Service, provided, however, that losses do not include service to unmetered facilities for which estimates of kWh use are available and provided, further, that Seller shall not be responsible for unmetered use or consumption of electricity by NECO's Affiliates. Seller shall provide NECO at the Delivery Points with additional quantities of electricity and ancillary services to cover such losses, but Seller shall not be entitled to payment under ARTICLE 5 of this Agreement for such additional quantity. The quantities required for this purpose in each hour of a billing period shall be determined in accordance with NEPOOL's, NEP's and NECO's filed procedures for loss determination. 6.3 Determination and Reporting of Hourly Loads (a) To meet its NEPOOL obligations, Seller, or a NEPOOL member having an own-load dispatch or settlement account with the NEPOOL billing system with whom Seller has a load inclusion agreement, must report to NEPOOL or the ISO the Standard Offer Service load for which Seller is providing Wholesale Standard Offer Service pursuant to this Agreement, including losses. To accomplish this, NECO will estimate its total hourly Standard Offer Service load based upon average load profiles developed for each NECO customer class and NECO's actual total hourly load. Appendix B, attached and incorporated herein by reference, provides a general description of the estimation process that NECO will initially employ (the "Estimation Process"). NECO reserves the right, subject to the approval of appropriate regulatory authorities having jurisdiction to modify the Estimation Process in the future, provided that any such modification be designed to improve the accuracy of its results, and provided further that NECO shall consult with Seller and other similarly situated sellers to the maximum extent permitted by any applicable standards of conduct. NECO will report to NEPOOL, on behalf of Seller or such other NEPOOL member, Seller's hourly Standard Offer Service load, which shall equal the portion of NECO's estimated total Standard Offer Service hourly load for which Seller is responsible for supplying Wholesale Standard Offer Service under this Agreement. (b) NECO will report to NEPOOL or the ISO Seller's hourly adjusted Standard Offer Service loads by 12:00 noon of the second following business day. This adjusted load should be added by NEPOOL or the ISO to the other NEPOOL load of Seller or such other NEPOOL member. (c) At the end of each month, NECO shall aggregate Seller's hourly loads for the month as determined by the Estimation Process. For purposes of SECTION 5.1, above, the result of the Estimation Process, less losses to the Standard Offer Service customers' meters determined as specified in ARTICLE 6 SECTION 6.2, above, will be deemed to be the quantity of Wholesale Standard Offer Service delivered by Seller to the Delivery Points in a month. (d) To refine the estimates of Seller's monthly Standard Offer Service load developed by the Estimation Process, a monthly calculation will be performed to reconcile the original estimate of Seller's Standard Offer Service loads to actual customer usage based on meter reads. NECO will apply any resulting billing adjustment (debit or credit) to Seller's account no later than the last day of the third month following the billing month. Appendix B, attached and incorporated herein by reference, also provides a general description of this reconciliation process. ARTICLE 7. DEFAULT AND TERMINATION 7.1 Material Breach and Termination (a) (i) If NECO fails in any material respect to comply with, observe or perform any covenant, warranty or obligation under this Agreement (except due to causes excused by force majeure or attributable to Seller's wrongful act or wrongful failure to act); and (ii) After receipt of written notice from Seller such failure continues for the Cure Period (as defined below), or, if such failure cannot be reasonably cured within the Cure Period, such further period as shall reasonably be required to effect such cure (except in the case of a payment default), provided that NECO commences within the Cure Period to effect such cure and at all times thereafter proceeds diligently to complete such cure as quickly as possible; then (iii) Seller shall have the right to terminate this Agreement, subject to paragraph (c) below. For purposes of this Section 7.1(a), the Cure Period shall mean five days in the case of a failure by NECO to fulfill its payment obligations pursuant to Section 5.2 and forty-five (45) days in the case of a failure by NECO to comply with, observe or perform any other covenant, warranty or obligation under this Agreement. If an unexcused failure to pay continues for fifteen (15) days, Seller shall have the right to suspend service until payment is made in full and appropriate security is posted for future payments or to terminate this Agreement. (b) (i) If Seller fails in any material respect to comply with, observe, or perform any covenant, warranty or obligation under this Agreement (except due to causes excused by force majeure or attributable to NECO's wrongful act or wrongful failure to act); and (ii) After receipt of written notice from NECO such failure continues for a period of forty-five (45) days, or, if such failure cannot be reasonably cured within such forty-five (45) day period, such further period as shall reasonably be required to effect such cure, provided that Seller commences within such forty-five (45) day period to effect such cure and at all times thereafter proceeds diligently to complete such cure as quickly as possible; then (iii) NECO shall have the right to terminate this Agreement, subject to paragraph (c) below. (c) Any termination arising out of the exercise of the termination rights specified in paragraphs (a) or (b) above (with the exception of termination for a payment default) may not take effect unless and until an arbitrator (pursuant to ARTICLE 15, SECTION 15.2 of this Agreement) has made a ruling that the exercise of such termination right was valid. The fact that one party alleged to be in material breach of this Agreement ("Alleged Breaching Party") complies with the request of the other to cure an alleged material breach shall not be considered by the arbitrator as an admission against the Alleged Breaching Party or evidence that such party was or was not in material breach. (d) Nothing in this SECTION 7.1 shall be construed to limit the right of any party to seek any remedies for damages, as limited by ARTICLE 9 of this Agreement, even if a cure of an alleged breach is made within the periods of time specified for curing any such breach stated above. The provisions of this SECTION 7.1 are intended only to provide the exclusive process through which one party may exercise and effectuate its right to terminate this Agreement as a result of a material breach of this Agreement. ARTICLE 8. NOTICES, REPRESENTATIVES OF THE PARTIES 8.1 Notices Any notice, demand, or request required or authorized by this Agreement to be given by one party to another party shall be in writing. It shall either be sent by facsimile (confirmed by telephone), overnight courier, personally delivered and acknowledged in writing or by registered or certified mail, (return receipt requested) postage prepaid, to the representative of the other party designated in this ARTICLE 8. Any such notice, demand, or request shall be deemed to be given (i) when sent by facsimile confirmed by telephone, (ii) when actually received if delivered by courier or personal deliver or (iii) three (3) days after deposit in the United States mail, if sent by first class mail. Notices and other communications by Seller to NECO shall be addressed to: The Narragansett Electric Company c/o New England Power Service Company 25 Research Drive Westborough, MA 01582 Attention: Michael J. Hager Fax: (508) 389-3001 Notices and other communications by NECO to Seller shall be addressed to: USGen Acquisition Corporation 7500 Old Georgetown Road, 13th Floor Bethesda, MD 20814 Attention: Stephen A. Herman Fax: (301) 718-6913 Any party may change its representative by written notice to the others. 8.2 Authority of Representative The parties' representatives designated in ARTICLE 8, SECTION 8.1 shall have full authority to act for their respective principals in all technical matters relating to the performance of this Agreement. They shall not, however, have the authority to amend, modify, or waive any provision of this Agreement unless they are authorized officers of their respective entities. ARTICLE 9. LIABILITY, INDEMNIFICATION, AND RELATIONSHIP OF PARTIES 9.1 Limitation on Consequential, Incidental and Indirect Damages To the fullest extent permissible by law, neither NECO nor Seller, nor their respective officers, directors, agents, employees, parent or affiliates, successor or assigns, or their respective officers, directors, agents, or employees, successors, or assigns, shall be liable to the other party or its parent, subsidiaries, affiliates, officers, directors, agents, employees, successors or assigns, for claims, suits, actions or causes of action for incidental, indirect, special, punitive, multiple or consequential damages (including attorney's fees or litigation costs) connected with or resulting from performance or non-performance of this Agreement, or any actions undertaken in connection with or related to this Agreement, including without limitation any such damages which are based upon causes of action for breach of contract, tort (including negligence and misrepresentation), breach of warranty, strict liability, Rhode Island Gen. Laws Title 6, c. 13.1, statute, operation of law, or any other theory of recovery. The provisions of this SECTION 9.1 shall apply regardless of fault and shall survive termination, cancellation, suspension, completion or expiration of this Agreement. 9.2 Recovery of Direct Damages Permitted Notwithstanding the provisions of ARTICLE 9, SECTION 9.1, subject to the duty to mitigate damages as provided under common law of damages recovery, both NECO and Seller shall be entitled to recover their actual, direct damages (i) incurred as a result of the other party's breach of this Agreement or (ii) incurred as a result of any other claim arising out of any action undertaken in connection with or related to this Agreement. For purposes of avoiding any disputes about the difference between direct damages and consequential damages, the parties agree as follows: (a) (1) To the extent that NECO is found to be in breach of this Agreement or liable under another cause of action; and (2) as a result of such breach or event giving rise to the cause of action, Seller suffers loss of profits that Seller reasonably expected to have received from NECO under this Agreement had NECO performed under this Agreement; then (3) Seller shall be entitled to recover any lost profits that Seller can demonstrate it lost or will lose as a result of NECO's breach, subject to the duty to mitigate. (b) (1) To the extent that Seller fails to provide NECO Wholesale Standard Offer Service Power under the terms of this Agreement; and (2) as a result, Seller is found to be in material breach of this Agreement or liable under another cause of action; and (3) subject to the duty to mitigate, NECO purchases (as a result of Seller's failure) power from a third party at a price that is higher than what NECO would have paid under the terms of this Agreement, NECO may recover the difference between the price NECO paid to such third party and the price it would have paid had Seller performed; provided, however, Seller shall not be liable to NECO for lost profits associated with any expected revenue streams from the sale of power to third parties or lost profits from any other contracts or sales. (c) Except as provided in paragraphs (a) and (b) above, neither NECO nor Seller shall be liable to the other for lost profits arising out of performance, or non-performance of this Agreement, whether such lost profits may be categorized as direct, incidental, indirect, or consequential damages and irrespective of whether such claims are based upon warranty, tort, strict liability, contract, statute (including R.I. G.L. Title 6, c. 13.1), operation of law or otherwise. 9.3 Indemnification (a) Seller agrees to defend, indemnify and save NECO, its officers, directors, employees, agents, successors, assigns, and Affiliates and their officers, directors, employees, and agents harmless from and against any and all claims, suits, actions or causes of action for damage by reason of bodily injury, death, or damage to property caused by Seller, its officers, directors, employees, agents or affiliates or caused by or sustained on its facilities, except to the extent caused by an act of negligence or willful misconduct by an officer, director, agent, employee or Affiliate of NECO or their successors or assigns. (b) NECO agrees to defend, indemnify and save Seller, its officers, directors, employees, agents, successors, assigns, and affiliates and their officers, directors, employees, and agents harmless from and against any and all claims, suits, actions or causes of action for damage by reason of bodily injury, death, or damage to property caused by NECO, its officers, directors, employees, agents or affiliates or caused by or sustained on its facilities, except to the extent caused by an act of negligence or willful misconduct by an officer, director, agent, employee or Affiliate of Seller or their successors or assigns. (c) If any party intends to seek indemnification under this ARTICLE from the other party with respect to any action or claim, the party seeking indemnification shall give the other party notice of such claim or action within fifteen (15) days of the commencement of, or actual knowledge of, such claim or action. Such party seeking indemnification shall have the right, at its sole cost and expense, to participate in the defense of any such claim or action. The party seeking indemnification shall not compromise or settle any such claim or action without the prior consent of the other party, which consent shall not be unreasonably withheld. 9.4 Independent Contractor Status Nothing in this Agreement shall be construed as creating any relationship between NECO and Seller other than that of independent contractors for the sale and purchase of electricity provided as Wholesale Standard Offer Service. ARTICLE 10. ASSIGNMENT 10.1 Assignment This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party hereto, including by operation of law without the prior written consent of the other party, nor is this Agreement intended to confer upon any other Person except the parties hereto any rights or remedies hereunder. Notwithstanding the foregoing, (i) NECO may, without Seller's prior written consent, (A) assign all or a portion of its rights and obligations under this Agreement to any Affiliate of NECO or (B) assign its rights and obligations hereunder, or transfer such rights and obligations by operation of law, to any corporation or other entity with which or into which NECO shall merge or consolidate or to which NECO shall transfer all or substantially all of its assets, provided that such Affiliate or other entity agrees to be bound by the terms thereof; provided, in either case, that the assignee or transferor shall have senior securities rated investment grade or better; (ii) the Seller may assign all of its rights and obligations hereunder to any wholly owned Subsidiary (direct or indirect) of PG&E Corporation and upon NECO's receipt of notice from Seller of any such assignment, the Seller will be released from all liabilities and obligations hereunder, accrued and unaccrued, such assignee will be deemed to have assumed, ratified, agreed to be bound by and perform all such liabilities and obligations, and all references herein to "Seller" shall thereafter be deemed references to such assignee, in each case without the necessity for further act or evidence by the parties hereto or such assignee; provided, however, that no such assignment and assumption shall release the Buyer from its liabilities and obligations hereunder unless the assignee shall have acquired all or substantially all of the Buyer's assets; provided, further, however, that no such assignment and assumption shall relieve or in any way discharge PG&E Corporation from the performance of its duties and obligations under the Guaranty dated as of the date of this Agreement executed by PG&E Corporation, and (iii) the Seller or its permitted assignee may assign, transfer, pledge or otherwise dispose of its rights and interests hereunder to a trustee or lending institution(s) for the purposes of financing or refinancing the Purchased Assets, including upon or pursuant to the exercise of remedies under such financing or refinancing, or by way of assignments, transfers, conveyances or dispositions in lieu thereof; provided, however, that no such assignment or disposition shall relieve or in any way discharge the Seller or such assignee from the performance of its duties and obligations under this Agreement. NECO agrees to execute and deliver such documents as may be reasonably necessary to accomplish any such assignment, transfer, conveyance, pledge or disposition of rights hereunder so long as NECO's rights under this Agreement are not thereby altered, amended, diminished or otherwise impaired. ARTICLE 11. SUCCESSORS AND ASSIGNS This Agreement shall inure to the benefit of and shall be binding upon the parties hereto and their respective permitted successors and assigns. ARTICLE 12. FORCE MAJEURE 12.1 Force Majeure Standard The parties shall be excused from performing their respective obligations hereunder and shall not be liable in damages or otherwise, if and only to the extent that they are unable to so perform or are prevented from performing by an event of force majeure. 12.2 Force Majeure Definition An event of force majeure includes, without limitation, storm, flood, lightning, drought, earthquake, fire, explosion, equipment failure, civil disturbance, labor dispute, act of God or the public enemy, action of a court or public authority, or any other cause beyond a party's control, but only if and to the extent that the event directly affects the availability of the transmission or distribution facilities of NEPOOL, NECO or an Affiliate necessary to deliver Wholesale Standard Offer Service to NECO's customers. Events affecting the availability or cost of operating any generating facility shall not be events of force majeure. 12.3 Obligation to Diligently Cure Force Majeure If any party shall rely on the occurrence of an event or condition described in ARTICLE 12, SECTION 12.2, above, as a basis for being excused from performance of its obligations under this Agreement, then the party relying on the event or condition shall: a. provide written notice to the other parties promptly but in no event later than 5 days of the occurrence of the event or condition giving an estimation of its expected duration and the probable impact on the performance of its obligations hereunder; b. exercise all reasonable efforts to continue to perform its obligations hereunder; c. expeditiously take reasonable action to correct or cure the event or condition excusing performance; provided that settlement of strikes or other labor disputes will be completely within the sole discretion of the party affected by such strike or labor dispute; d. exercise all reasonable efforts to mitigate or limit damages to the other parties to the extent such action will not adversely affect its own interests; and e. provide prompt notice to the other parties of the cessation of the event or condition giving rise to its excuse from performance. ARTICLE 13. WAIVERS The failure of either party to insist in any one or more instance upon strict performance of any of the provisions of this Agreement or to take advantage of any of its rights under this Agreement shall not be construed as a general waiver of any such provision or the relinquishment of any such right, but the same shall continue and remain in full force and effect, except with respect to the particular instance or instances. ARTICLE 14. REGULATION 14.1 Laws and Regulations This Agreement and all rights, obligations, and performances of the parties hereunder, are subject to all applicable Federal and state laws, and to all duly promulgated orders and other duly authorized action of governmental authority having jurisdiction. 14.2 NEPOOL Requirements This Agreement must comply with all NEPOOL Criteria, Rules, and Standard Operating Procedures ("Rules"). If, during the term of this Agreement, the NEPOOL Agreement is terminated or amended in a manner that would eliminate or materially alter a Rule affecting a right or obligation of a party hereunder, or if such a Rule is eliminated or materially altered by NEPOOL, the parties agree to negotiate in good faith in an attempt to amend this Agreement to incorporate a replacement Rule ("Replacement Rule"). The intent of the parties is that any such Replacement Rule reflect, as closely as possible, the intent and substance of the Rule being replaced as such Rule was in effect prior to such termination or amendment of the NEPOOL Agreement or elimination or alteration of the Rule. If the parties are unable to reach agreement on such an amendment, the parties agree to submit the matter to arbitration under the terms of Appendix C, attached and incorporated herein by reference, and to seek a resolution of the matter consistent with the above stated intent. ARTICLE 15. INTERPRETATION, DISPUTE RESOLUTION 15.1 Interpretation The interpretation and performance of this Agreement shall be in accordance with and controlled by the laws of The State of Rhode Island. 15.2 Dispute Resolution All disputes between NECO and Seller arising out of or relating to this Agreement which are defined as "Arbitrable Claims" in SECTION 2 of Appendix C, attached and incorporated herein by reference, shall be resolved by binding arbitration and be governed by the terms of such Arbitration Agreement. Any arbitration of an Arbitrable Claim that is substantially related to an arbitrable claim under a Wholesale Standard Offer Service Agreement among Seller, Massachusetts Electric Company, and Nantucket Electric Company shall be conducted jointly with the arbitration of the latter claim, before the same panel of arbitrators, with NECO, Massachusetts Electric Company, and Nantucket Electric Company jointly exercising their rights regarding the selection of arbitrators. Any decisions of the arbitrators shall be final and binding upon the parties. ARTICLE 16. SEVERABILITY If any provision or provisions of this Agreement shall be held invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall in no way be affected or impaired thereby. ARTICLE 17. MODIFICATIONS No modification to this Agreement will be binding on any party unless it is in writing and signed by all parties. ARTICLE 18. SUPERSESSION This Agreement constitutes the entire agreement between the parties relating to the subject matter hereof and its execution supersedes any other agreements, written or oral, between the parties concerning such subject matter. ARTICLE 19. COUNTERPARTS This Agreement may be executed in any number of counterparts, and each executed counterpart shall have the same force and effect as an original instrument. ARTICLE 20. HEADINGS Article and Section headings used throughout this Agreement are for the convenience of the parties only and are not to be construed as part of this Agreement. IN WITNESS WHEREOF, the parties have caused their duly authorized representatives to execute this Agreement on their behalf as of the date first above written. THE NARRAGANSETT ELECTRIC COMPANY BY: Its USGEN ACQUISITION CORPORATION BY: Its APPENDIX A. INCREMENTAL REVENUES FROM NECO CUSTOMER RATE FUEL ADJUSTMENT In the event of substantial increases in the market prices of No. 6 residual fuel oil (1% sulphur) and natural gas after 1999, incremental revenues received by NECO as a result of NECO's Customer Rate Fuel Adjustment, described below, will be fully allocated among suppliers of Wholesale Standard Offer Service Power in proportion to the percentage of NECO's total Standard Offer Service requirements during the month that such supplier delivers under its respective agreement with NECO. NECO's Customer Rate in effect for a given billing month is multiplied by a "Fuel Adjustment" that is set equal to 1.0 and thus has no impact on the Customer Rate unless the "Market Gas Price" plus "Market Oil Price" for the billing month exceeds the "Fuel Trigger Point" then in effect, where: The NECO Customer rate for retail customers who elect Standard Offer Service by choice or inaction is the following predetermined, flat rate for energy consumed: Calendar Year Price per Kilowatt hour 1998 3.2 cents 1999 3.5 cents 2000 3.8 cents 2001 3.8 cents 2002 4.2 cents 2003 4.7 cents 2004 5.1 cents 2005 5.5 cents 2006 5.9 cents 2007 6.3 cents 2008 6.7 cents 2009 7.1 cents Market Gas Price is the average of the values of "Gas Index" for the most recent available twelve months, where: Gas Index is the average of the daily settlement prices for the last three days that the NYMEX Contract (as defined below) for the month of delivery trades as reported in the "Wall Street Journal", expressed in dollars per MMBtu. NYMEX Contract shall mean the New York Mercantile Exchange Natural Gas Futures Contract as approved by the Commodity Futures Trading Commission for the purchase and sale of natural gas at Henry Hub; Market Oil Price is the average of the values of "Oil Index" for the most recent available twelve months, where: Oil Index is the average for the month of the daily low quotations for cargo delivery of 1.0% sulphur No. 6 residual fuel oil into New York harbor, as reported in "Platt's Oilgram U.S. Marketscan" in dollars per barrel and converted to dollars per MMBtu by dividing by 6.3; and If the indices referred to above should become obsolete or no longer suitable, NECO shall file alternate indices with the RIPUC. Fuel Trigger Point is the following amounts, expressed in dollars per MMBtu, applicable for all months in the specified calendar year: 2000 $5.35/MMBtu 2001 $5.35 2002 $6.09 2003 $7.01 2004 $7.74 2005 $8.48 2006 $9.22 2007 $9.95 2008 $10.69 2009 $11.42 In the event that the Fuel Trigger Point is exceeded, the Fuel Adjustment value for the billing month is determined based according to the following formula: Fuel = (Market Gas Price +$.60/MMBtu)+(Market Oil Price +$.04/MMBtu) Adjustment ____________________________________________________________ Fuel Trigger Point+$.60+$.04/MMBtu Where: Market Gas Price, Market Oil Price and Fuel Trigger Point are as defined above. The values of $.60 and $.04/MMBtu represent for gas and oil respectively, estimated basis differentials or market costs of transportation from the point where the index is calculated to a proxy power plant in the New England market. For example if at a point in the year 2002 the Market Gas Price and Market Oil Price total $6.50 ($3.50/MMBtu plus $3.00/MMBtu respectively), the Fuel Trigger Point of 6.09 would be exceeded. In this case the Fuel Adjustment value would be: ($3.50+$.60/MMBtu)+($3.00+$.04/MMBtu) = 1.0609 _____________________________________ $6.09+$.60+$.04/MMBtu The Customer Rate paid to NECO is increased by this Fuel Adjustment factor for the billing month, becoming 4.4548 cents/kWh (4.2 x 1.0609). In subsequent months the same comparisons are made and, if applicable, a Fuel Adjustment determined. APPENDIX B. ESTIMATION OF SUPPLIER HOURLY LOADS OVERVIEW Generating units operated by suppliers are dispatched by the power pool to meet the region's electrical requirements reliably, and at the lowest possible cost. As a result, a supplier's electricity production may not match the demand of its customers. In each hour some suppliers with low cost production units are net sellers of electricity to the pool, while other suppliers are purchasing power from the pool to meet the demand of their customers. To determine the extent to which suppliers are net buyers or sellers on an hourly basis, it is necessary to estimate the hourly aggregate demand for all of the customers served by each supplier ("own-load"). NECO will estimate Seller's Wholesale Standard Offer Service "own-load" within NECO's service territory and report the hourly results to NEPOOL or the ISO on a daily basis. The estimation process is a cost effective approach to producing results that are reliable, unbiased and reasonably accurate. The hourly load estimates will be based on rate class load profiles which will be developed from statistically designed samples. Each day, the class load shapes will be scaled to the population of customers served by each supplier contracting with NECO as a result of the Standard Offer Auction ("Standard Offer Auction Supplier"), Seller, and any other entity providing Wholesale Standard Offer Service. In cases where telemetered data on individual customers are available, they will be used in place of the estimated shapes. On a monthly basis, the estimates will be refined by incorporating actual usage data obtained from meter readings. In both processes, the sum of all suppliers' estimated Standard Offer Service loads will match the total load delivered into the distribution system. A description of the estimation process follows. DAILY ESTIMATION OF SUPPLIERS' OWN LOAD The daily process estimates the hourly load for each Standard Offer Auction Supplier, Seller, and any other entity providing Wholesale Standard Offer Service, for the previous day. There are four components in this process: - Select a proxy date from the previous year with characteristics which best match the day for which the hourly demand estimates are being produced. Extract class load shapes for the selected proxy date from the load research data base. - Scale the class load shapes appropriately for each individual customer based on the usage level of the customer relative to the class average usage level. - Calculate a factor for each customer which reflects their relative usage level and includes an adjustment for losses ("load adjustment factor"). Aggregate the load adjustment factors across the customers served by each supplier in each class. - Produce a preliminary estimate of each supplier's hourly loads by combining the proxy day class load shapes with the supplier's total load adjustment factors. Aggregate the loads across the classes for each supplier. - Adjust the preliminary hourly supplier estimates so that their sum is equal to NECO's actual hourly metered loads (as metered at the point of delivery to the distribution system) by allocating any differences to suppliers in proportion to their estimated load. MONTHLY RECONCILIATION PROCESS The monthly process will improve the estimates of Standard Offer Service supplier loads by incorporating the most recent customer usage information, which will be available after the monthly meter readings are processed. A comparison will be made between customers' estimated and actual usage, by billing cycle, then summed across billing cycles for each supplier. The ratio between the actual kWh and the estimated kWh reflects the kWh amount for which the supplier may have been overcharged or undercharged by NEPOOL or the ISO during the month. This ratio will be used to develop a kWh adjustment amount for each supplier for the calendar month. The sum of the adjustments will be zero because the total kWh will still be constrained to equal NECO's actual hourly metered Standard Offer Service loads during the month. APPENDIX C. ARBITRATION AGREEMENT ARBITRATION AGREEMENT This Arbitration Agreement, dated as of _______________________ (date of Wholesale Standard Offer Service Agreement), is entered into between The Narragansett Electric Company, a Rhode Island corporation ("NECO") and _______________________________, a _______________________ (describe entity) ("Seller"). Reference is made to that certain Wholesale Standard Offer Service Agreement dated as of ___________________, 199__ (the "Service Agreement") between NECO and Seller. Unless otherwise specified or apparent from the context of this Arbitration Agreement, the term "Party" shall mean either NECO or Seller, or both of them. WHEREAS, NECO and Seller wish to avoid the burden, time, and expense of court proceedings with respect to any disputes that may arise from or relate to the Service Agreement, and to submit such disputes to mandatory binding arbitration if they cannot first be resolved through negotiation and mediation. NOW, THEREFORE, NECO and SELLER AGREE AS FOLLOWS: 1. Mediation Before resorting to mediation or arbitration under this Arbitration Agreement, the Parties will try to resolve promptly through negotiation any Arbitrable claim, as defined below. If the Arbitrable Claim has not been resolved through negotiation within ten (10) days after the existence of the Arbitrable Claim has been brought to the attention of the other Party in a writing, any Party may request in writing to resolve the Arbitrable Claim through mediation conducted by a mediator selected by agreement of the Parties. The mediation procedure shall be determined by the Parties in consultation with the mediator. Any medication pursuant hereto shall be kept confidential. The fees and expenses of the mediator shall be borne equally by the Parties. If the Parties are unable to agree upon the identity of a mediator or a mediation procedure within ten (10) days after a Party has requested mediation in writing or if the Arbitrable Claim has not been resolved to the satisfaction of either NECO or Seller within forty (40) days after the Parties have selected a mediator and agreed upon a mediation procedure, either Party may invoke arbitration pursuant to the following sections by notifying the other Party of such selection in writing consistent with Section 3(c), below. 2. Mandatory Arbitration (a) Except as provided in paragraph (b) of this Section 2 and in Section 8, below, any case, controversy or claim arising out of or relating to the Service Agreement, its breach, or any other disputes arising out of the business relationship created by the Service Agreement, of whatever nature, including but not limited to any claim based in contract, in law, in equity, any statute, regulation, or theory of law now in existence or which may come into existence in the future, whether known or unknown, including without limitation, claims based upon deceit, fraudulent inducement, misrepresentation, 18 U.S.C sec. 1962 and 1964 (RICO), and R.I. G.L. Title 6, c. 13.1, the federal and state antitrust laws (collectively, the "Arbitrable Claims"), which cannot be resolved by negotiation or mediation, as provided in Section 1 above, shall be submitted to mandatory, binding, and final arbitration in accordance with procedures set forth in this Agreement, which shall constitute the exclusive remedy for any and all Arbitrable Claims. (b) Notwithstanding paragraph (a) above, physical accidents or events giving rise to negligence or intentional tort claims for the recovery of property damages and/or damages for personal injury and failure to make payments due under Section 5.2 of the Service Agreement shall not be considered "Arbitrable Claims." However disputes regarding the interpretation or scope of any indemnification clauses in the Service Agreement shall be subject to arbitration, even if the dispute relates to whether one Party must indemnify the other for property damages and/or damages for personal injury, the recovery of which was or will be determined in a court of law. (c) Each Party agrees that it will not attempt to circumvent this Arbitration Agreement by coordinating or cooperating with their respective parent companies of affiliates or guarantors in the filing of a legal action in the name of any of the parent companies or affiliates or guarantors of the Parties to this Arbitration Agreement regarding claims that otherwise are subject to this Arbitration Agreement. Any Party failing to comply with this provision shall indemnify the other Party against, and hold the other harmless from, the costs (including reasonable litigation costs) incurred by the other in defending any and all claims brought by a parent company or affiliate or guarantor of the other in a court of law regarding claims that otherwise would be Arbitrable Claims under this Arbitration Agreement. 3. Selection and Qualification of Arbitrators (a) Any arbitration shall be conducted by a panel of three neutral arbitrators, consisting of (i) a practicing lawyer admitted to practice in the Commonwealth of Massachusetts; (ii) a person with professional experience in and substantial knowledge of the power generation industry in any one or more of the New England States, who may be, but need not be a lawyer, and (iii) a person with professional experience in and substantial knowledge of power markets in any one or more of the New England States, who may, but need not be, a lawyer (collectively, the "Arbitration Panel"). For purposes of this Arbitration Agreement, an arbitrator or candidate shall be considered "neutral" only if the arbitrator or candidate has not previously served as an arbitrator for a Party or one of its affiliates or guarantors and is not a present or former lawyer, employee or consultant of a Party or any of its affiliates or guarantors. (b) Any Party entitled to commence arbitration hereunder shall do so by serving a written Notice of Arbitration briefly describing the Arbitrable Claims and the Agreements under which they are brought. Service of such Notice of Arbitration shall be complete upon receipt by the person designated for each party at the addresses specified in Section 12 below. (c) Within twenty (20) days after service of a Notice of Arbitration, each Party shall serve upon the other Party a list of seven neutral candidates for each of the three panel members described in subparagraph (a) above. (d) Within twenty (20) days after service of the lists referred to in subparagraph (c), NECO and Seller shall then strike from the other's lists any two candidates from each of the lists, for any reason whatsoever. For the remaining candidates each Party shall rank each candidate on its three lists from one to five and shall do the same for the other Party's lists. (e) The candidates in each of the three categories with the lowest total score shall be invited to serve as panel members. In the event that the candidate in any of the three categories with the lowest total score is unable or unwilling to serve, or has a potential conflict of interest not consented to by each Party, then the candidate with the next lowest score in that category shall be invited to serve, subject to full disclosure by each candidate of, and consent by each Party to any potential conflicts of interests. This process shall be repeated until a full arbitration Panel is selected or the list of candidates for that category is exhausted. If the list of candidates for a category is exhausted the Parties shall exchange a new list of candidates for that category and the procedures set forth above shall be repeated a second time. (f) If the parties cannot select a full Arbitration Panel in accordance with these procedures than any Party may request that a court of competent jurisdiction appoint the remaining members subject to their qualifications, willingness and ability to serve as provided above. (g) The American Arbitration Association shall be appointed to facilitate and administer the parties' compliance with the procedures set forth above. 4. Time Schedule The Arbitration shall be conducted as expeditiously as possible. The Arbitration Panel shall schedule a pre-hearing conference and hearings as it deems advisable and shall use its best efforts to schedule consecutive days of hearings. Hearings shall be limited to a total of ten (10) days. The Arbitration Panel shall issue its final decision and award within thirty (30) days of the close of the hearings, which shall be accompanied by a written, reasoned opinion. 5. Remedies (a) The Arbitration Panel shall not award punitive or multiple damages or any other damages not measured by the prevailing Party's actual damages - except that the Arbitration Panel, in its sole discretion, may shift all or a portion of the costs of the Arbitration to any Party. (b) Any award of damages by the Arbitration Panel shall be determined, limited and controlled by the damages limitation clauses of the Service Aereement applicable to the dispute before the Arbitration Panel. (c) The Arbitration Panel may, in its discretion, award pre-award and post-award interest on any damages award; provided, however, that the rate of pre-award or post-award interest shall not exceed a rate equal to the rate provided for post-judgment interest by 28 U.S.C. sec. 1961 as published from time to time by the Administrative Office of the United States Courts based on the equivalent coupon issue yield for auctions of 52-week Treasury bills. 6. Confidentiality The existence, contents, or results of any mediation or arbitration hereunder may not be disclosed without the prior written consent of both Parties; provided, however, either Party may make disclosures as may be necessary to fulfill regulatory obligations to any regulatory bodies having jurisdiction, and may inform their lenders, affiliates, auditors and insurers, as necessary, under pledge of confidentiality and can consult with experts as required in connection with the arbitration under pledge of confidentiality. If any Party seeks preliminary injunctive relief from any court to preserve the status quo or avoid irreparable harm pending mediation or arbitration, the Parties agree to use best efforts to keep the court proceedings confidential, to the maximum extent permitted by law. 7. FERC Jurisdiction over Certain Disputes (a) Nothing in this Arbitration Agreement shall preclude, or be construed to preclude, any Party from filing a petition or complaint with the Federal Energy Regulatory Commission ("FERC") with respect to any Arbitrable Claim. In such case, the other Party may request FERC to reject or to waive jurisdiction. If the FERC rejects or waives jurisdiction, with respect to all or a portion of the claim, the portion of the claim not so accepted by FERC shall be resolved through arbitration, as provided in this Arbitration Agreement. To the extent that FERC asserts or accepts jurisdiction over the claim, the decision, finding of fact, or order of FERC shall be final and binding, and any arbitration proceedings that may have commenced prior to the assertion or acceptance of jurisdiction by FERC shall be stayed, pending the outcome of the FERC proceedings. (b) The Arbitration Panel shall have no authority to modify, and shall be conclusively bound by, any decision, finding of fact, or order of FERC. However, to the extent that a decision finding of fact, or order of FERC does not provide a final or complete remedy to the Party seeking relief, such Party may proceed to arbitration under this Arbitration Agreement to secure such remedy, subject to the FERC decision, finding or order. 8. Preliminary Injunctive Relief Nothing in this Arbitration Agreement shall preclude, or be construed to preclude, the resort by either Party to a court of competent jurisdiction solely for the purposes of securing a temporary or preliminary injunction to preserve the status quo or avoid irreparable harm pending mediation or arbitration pursuant to this Arbitration Agreement. 9. Governing Law This Arbitration Agreement shall be construed, enforced in accordance with, and governed by, the laws of the State of Rhode Island. 10. Location of Arbitration Any arbitration hereunder shall be conducted in Boston, Massachusetts. 11. Severability If any section, subsection, sentence, or clause of this Arbitration Agreement is adjudged illegal, invalid, or unenforceable, such illegality, invalidity, or enforceability shall not affect the legality, validity, or enforceability of the Arbitration Agreement as a whole or of any section, subsection, sentence or clause hereof not so adjudged. 12. Notices Any notices required to be given pursuant to this Arbitration Agreement shall be in writing and sent to the receiving party by (i) certified mail, return receipt requested, (ii) overnight delivery service, or (iii) facsimile transmission (confirmed by telephone), addressed to the receiving party at the address shown below or such other address as a party may subsequently designate in writing. Any such notice shall be deemed to be given (i) three days after deposit in the United States mail, if sent by mail, (ii) when actually received if sent by overnight delivery service, or (iii) when sent, if sent by facsimile and confirmed by telephone. If to NECO: The Narragansett Electric Company 25 Research Drive Westborough, Massachusetts 01582 Attention: General Counsel Facsimile: (508) 389-2463 If to Seller Attention: Facsimile: ( ) In addition, the parties shall send copies of any notices required by the terms of any of the Agreements, in accordance with the terms of each Agreement. IN WITNESS WHEREOF, Each Party has caused its duly authorized officers to execute this Arbitration Agreement on the dates set forth below. THE NARRAGANSETT ELECTRIC COMPANY BY: Its USGEN ACQUISITION CORPORATION BY: Its EX-12 31 NARRA COMPUTATION OF RATIOS
THE NARRAGANSETT ELECTRIC COMPANY Computation of Ratio of Earnings to Fixed Charges (SEC Coverage) (Unaudited) Years Ended December 31, ------------------------------------------------------------ 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (In Thousands) Net Income $27,932 $22,954 $23,910 $14,589 $14,274 - ---------- Add income taxes and fixed charges - ---------------------------------- Current federal income taxes 14,185 6,918 7,212 1,020 2,183 Deferred federal income taxes 79 4,675 3,512 3,930 2,199 Investment tax credits - net (495) (498) (503) (508) (508) Interest on long-term debt 16,179 17,205 16,627 14,334 12,715 Interest on short-term debt and other 2,475 2,883 3,663 2,897 2,074 ------- ------- ------- ------- ------- Net earnings available for fixed charges $60,355 $54,137 $54,421 $36,262 $32,937 ------- ------- ------- ------- ------- Fixed charges: Interest on long-term debt $16,179 $17,205 $16,627 $14,334 $12,715 Interest on short-term debt and other 2,475 2,883 3,663 2,897 2,074 ------- ------- ------- ------- ------- Total fixed charges $18,654 $20,088 $20,290 $17,231 $14,789 ======= ======= ======= ======= ======= Ratio of earnings to fixed charges 3.24 2.69 2.68 2.10 2.23 - ----------------------------------
EX-13 32 NARRA ANNUAL REPORT Annual Report 1997 The Narragansett Electric Company A Subsidiary of New England Electric System [LOGO] Narragansett Electric A NEES Company The Narragansett Electric Company 280 Melrose Street Providence, Rhode Island 02901 Directors (As of March 18, 1998) Richard W. Frost Vice President of the Company and of certain affiliates Cheryl A. LaFleur Senior Vice President, General Counsel, and Secretary of New England Electric System Robert L. McCabe Chairman of the Company and of certain affiliates Lawrence J. Reilly President and Chief Executive Officer of the Company and of certain affiliates Michael F. Ryan Vice President of the Company Richard P. Sergel President and Chief Executive Officer of New England Electric System Ronald L. Thomas Manager of Labor Relations of the Company and of certain affiliates Officers (As of March 18, 1998) Robert L. McCabe Chairman of the Company and of certain affiliates Lawrence J. Reilly President and Chief Executive Officer of the Company and of certain affiliates Lydia M. Pastuszek Senior Vice President of the Company and of certain affiliates Christopher E. Root Senior Vice President of the Company and of certain affiliates Richard W. Frost Vice President of the Company and of certain affiliates Michael E. Jesanis Vice President of the Company and Senior Vice President and Chief Financial Officer of New England Electric System Shannon M. Larson Vice President of the Company Richard Nadeau Vice President of the Company Michael F. Ryan Vice President of the Company Peter T. Zschokke* Vice President of the Company Ronald T. Gerwatowski Secretary and General Counsel of the Company John G. Cochrane Treasurer of the Company and of certain affiliates, Vice President of an affiliate, Assistant Treasurer of an affiliate and Treasurer of New England Electric System Robert King Wulff Assistant Secretary of the Company and Clerk, Assistant Clerk or Secretary of certain affiliates Howard W. McDowell Assistant Treasurer and Controller of the Company and of certain affiliates, Treasurer or Controller of certain affiliates and Assistant Secretary of an affiliate * Effective April 1, 1998. Transfer Agent, Dividend Paying Agent, and Registrar of Preferred Stock, Fleet National Bank, Providence, Rhode Island This report is not to be considered an offer to sell or buy or solicitation of an offer to sell or buy any security. The Narragansett Electric Company The Narragansett Electric Company (the Company) is a wholly owned subsidiary of New England Electric System (NEES) operating in Rhode Island. The Company's business is the distribution of electricity at retail. Electric service is provided to approximately 330,000 customers in 27 cities and towns having a population of approximately 725,000 (1990 Census). The Company's service area, which includes urban, suburban, and rural areas, covers approximately 80 percent of Rhode Island, and includes the cities of Providence, East Providence, Cranston, and Warwick. The diversified economy of the Company's service area produces fabricated metal products, electrical and industrial machinery, transportation equipment, textiles, silverware, and chemical products. In addition, a broad range of professional, banking, medical, and educational institutions is served. In 1996, legislation was enacted in the state of Rhode Island which provided certain customers with choice of power supplier as early as July 1, 1997. The balance of customers gained such choice on January 1, 1998. The properties of the Company include an integrated system of transmission and distribution lines and substations. In addition, the Company owns a 10 percent share of the 489 megawatt Manchester Street generating station. The entire output of this plant is made available to New England Power Company (NEP), the Company's generation and transmission affiliate, as part of the integrated NEES system. Under an all-requirements contract with NEP, the Company purchased its electric energy requirements from NEP. This contract has been amended to terminate the all- requirements provision of the contract and allow NEP to recover its above-market generation commitments through a transition access charge, which the Company will collect from its customers. For further information, refer to the "Industry Restructuring" section of Financial Review. In August 1997, the Company and NEP agreed to sell their nonnuclear generating business, which includes Manchester Street, to an independent third party. See the "Divestiture of Generating Business" section of Financial Review. Report of Independent Accountants The Narragansett Electric Company, Providence, Rhode Island: We have audited the accompanying balance sheets of The Narragansett Electric Company (the Company), a wholly owned subsidiary of New England Electric System, as of December 31, 1997 and 1996 and the related statements of income, retained earnings, 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 Company 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. Boston, Massachusetts COOPERS & LYBRAND L.L.P. March 2, 1998 The Narragansett Electric Company Financial Review Industry Restructuring Historically, electric utilities have provided their customers bundled electric service within exclusive service territories. As a result of a number of trends, including a disparity in electric rates among regions of the country and new regulations and legislation intended to foster competition, distribution customers are being allowed to choose their power supplier, with incumbent utilities required to deliver that electricity over their transmission and distribution systems. When customers are allowed to choose their power supplier, utilities face the risk that market prices may not be sufficient to recover the costs of the commitments (generation related) incurred to supply customers under a regulated structure. The amounts by which such costs exceed market prices are commonly referred to as "stranded costs." In August 1996, the state of Rhode Island enacted legislation that allows customers in that state the opportunity to choose their power supplier. Under the Rhode Island statute, state accounts, certain new customers, and the largest manufacturing customers were able to choose their power supplier beginning on July 1, 1997. The balance of Rhode Island customers gained the ability to choose their power supplier on January 1, 1998. The statute also provides a mechanism for the recovery of stranded costs resulting from the introduction of customer choice of power supplier. As part of the implementation of the statute, the Company and its affiliate, New England Power Company (NEP), reached a settlement agreement with the Rhode Island Public Utilities Commission (RIPUC), the Rhode Island Division of Public Utilities and Carriers, and other parties representing all of its distribution customers (the Rhode Island Settlement). The Rhode Island Settlement provides for the recovery of stranded costs. In November 1997, the Federal Energy Regulatory Commission (FERC) conditionally approved the Rhode Island Settlement, subject to a compliance filing to clarify the impact of the settlement on nonsettling parties. The Rhode Island Settlement requires NEP to sell power to the Company at specified prices for resale to distribution customers who do not choose a power supplier ("standard offer generation service"). The total rates for customers purchasing this interim power service from the Company are approximately 7 percent below the total rates that were in effect during 1997. Pursuant to the Rhode Island statute, the total rate for customers who do not choose a power supplier is capped through 2009 at a level equal to the 1996 rate adjusted upward for 80 percent of inflation and for other factors beyond the control of the Company. The statute also provided for the Company to increase distribution rates by approximately $11 million in January 1997 and another $7 million in January 1998. The statute also provides that the Company may request increased distribution rates which would take effect no earlier than 1999. In accordance with the Rhode Island Settlement, NEP's wholesale contract with the Company has been amended effective January 1, 1998. The Rhode Island statute provides that NEP's stranded costs (the Company's share is 22 percent) will be recovered from distribution customers through a transition access charge, which will be collected by the Company. Under the Rhode Island Settlement, the recovery of NEP's stranded costs is divided into several categories. Unrecovered costs associated with generating plants and regulatory assets would be recovered over 12 years and would earn a return on equity of 11 percent. The above-market component of purchased power contracts and nuclear decommissioning costs would be recovered as incurred over the life of those obligations, a period expected to extend beyond 12 years. Initially, the transition access charge would be set at 2.8 cents per kilowatthour (kWh) and would be reduced upon completion of the sale of NEP's generating business, as described below. In addition to addressing customer choice and the recovery of stranded costs, the Rhode Island Settlement also required the NEES companies to divest their nonnuclear generating business. In August 1997, the Company and NEP entered into an agreement to sell substantially all of their nonnuclear generating business to USGen New England, Inc. (USGen), an indirect wholly owned subsidiary of PG&E Corporation (PG&E). See "Divestiture of Generating Business" below. The net proceeds from the sale of the nonnuclear generating business to USGen will be used to reduce the transition access charge from 2.8 cents per kWh to approximately 1.5 cents per kWh. In addition, the FERC accepted the NEES companies' proposal in conjunction with their divestiture filing that the recovery of the remaining above- market nuclear generating plant investment and regulatory assets be completed by the end of the year 2000. Divestiture of Generating Business As described above, in August 1997, the Company and NEP (collectively, the Sellers) reached an agreement to sell their nonnuclear generating business to USGen. The nonnuclear generating business includes three fossil-fueled and 15 hydroelectric generating stations, totaling approximately 4,000 megawatts (MW) of capacity, as well as NEES' 100 percent interest in Narragansett Energy Resources Company, a 20 percent general partner in the Ocean State Power project, all of which has a book value of $1.1 billion. USGen will pay the Sellers $1.59 billion in cash, of which $225 million will be contingent upon the introduction of customer choice of power supplier in Massachusetts. Based on the enactment of the Massachusetts statute, the NEES companies believe that the conditions for payment of the full purchase price have been met. NEP will remit to the Company a portion of the proceeds from the sale equal to the Company's net book value of the Manchester Street plant. USGen will also reimburse the NEES companies for $85 million of costs associated with early retirement and special severance programs for employees affected by industry restructuring. USGen will assume responsibility for environmental conditions at the Sellers' nonnuclear generating stations. USGen will also assume the Sellers' obligations under long-term fuel and fuel transportation contracts and certain collective bargaining agreements. In addition to the purchase of the nonnuclear generating stations, USGen will purchase NEP's entitlement to approximately 1,100 MW of power procured under long-term contracts. NEP will make a monthly fixed contribution towards the above-market cost of the purchased power of between $12.5 million and $14.2 million per month from closing through January 2008. USGen will be responsible for the balance of the costs under the purchased power contracts. The sale is subject to approval by various state and federal regulatory agencies. Several parties have objected to the sale on various grounds, including allegations that following the sale, USGen would be able to exercise unlawful levels of market power. On February 25, 1998, the FERC issued an order that rejected the market power allegations, approved the sale, and conditionally approved most supporting filings. While the timing of receipt of final regulatory approvals is uncertain, receipt of all approvals is unlikely before mid-1998. Closing is contingent upon all regulatory approvals being obtained by February 1999. Upon completion of the divestiture of the nonnuclear generating business, the Company's share of NEP's stranded costs which will be recovered from the Company's customers through the transition access charge will be reduced from approximately $1 billion to $0.5 billion. Workforce Reduction The NEES companies expect to implement substantial workforce reductions beginning in 1998 as a result of industry restructuring and the sale of the nonnuclear generating business. The NEES companies are in the process of offering early retirement programs to their union and non-union employees, contingent upon the closing of the sale of the nonnuclear generating business to USGen. In addition, the NEES companies intend to offer enhanced severance benefits to affected employees. As previously described, the costs of the early retirement and severance programs for all NEES companies are expected to be substantially recovered from the proceeds of the sale of the nonnuclear generating business. Since the early retirement program is contingent upon the divestiture, its cost will not be accrued until that time. Risk Factors This annual report contains statements that may be considered forward looking statements as defined under the securities laws. Actual results may differ materially for the reasons discussed in this Financial Review. While the Company believes that the previously described settlement and legislation and the sale agreement with USGen and other developments constitute substantial progress in reducing the impacts associated with industry restructuring, significant risks remain. These include, but are not limited to: (i) the potential that ultimately the Rhode Island Settlement will not be implemented in the manner anticipated by the Company, (ii) the possibility of federal legislation that would increase the risks above those contained in the Rhode Island Settlement and statute, and (iii) the failure to complete the sale of the nonnuclear generating business to USGen. The major risk factors affecting the Company relate to the possibility of adverse regulatory or judicial decisions or legislation which limit the level of revenues the Company is allowed to charge for its services or affect the costs the Company incurs. Accounting Implications Historically, electric utility rates have been based on a utility's costs. As a result, electric utilities are subject to certain accounting standards that are not applicable to other business enterprises in general. Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (FAS 71), requires regulated entities, in appropriate circumstances, to establish regulatory assets, and thereby defer the income statement impact of certain items of income and expense expected to be reflected in future rates. At December 31, 1997, the Company had approximately $35 million in net regulatory assets in compliance with FAS 71. The Company believes the Rhode Island Settlement and statute will enable the Company to recover through rates its specific costs of providing ongoing distribution services and stranded costs billed to it by NEP. The Company believes these factors will allow it to continue to apply FAS 71. Despite the progress made to date, it is possible that future regulatory rules or other circumstances could cause the application of FAS 71 to be discontinued, which would result in a noncash write-off of previously established regulatory assets related to the affected operations. Overview of Financial Results Net income for 1997 increased $5 million compared with 1996. The increase was primarily due a rate increase in base distribution rates which became effective January 1, 1997, and an increase in kWh deliveries. Net income in 1996 decreased by $1 million. This decrease was primarily due to (i) the completion of the amortization, in accordance with a rate agreement, of the initial effect of recording unbilled revenues, as well as (ii) a decrease in allowance for funds used during construction (AFDC) primarily due to the completion in the second half of 1995 of the Manchester Street Station. These decreases were partially offset by the effects of a rate increase that went into effect in late 1995. Operating Revenue The following table summarizes the changes in operating revenue:
Increase (Decrease) in Operating Revenue (In Millions) 1997 1996 ---- ---- Sales and deliveries growth $ 2 $ 1 Fuel recovery 7 3 Rate changes 11 11 Unbilled revenues recognized under rate agreements - (8) Purchased power cost adjustment (PPCA) mechanism (3) (4) Other - 1 --- --- $17 $ 4 === ===
KWh deliveries increased by 1.3 percent in 1997 and less than 1 percent in 1996. The Company's rates previously contained a fuel clause and a PPCA provision. These mechanisms were designed to allow the Company to pass on to its customers changes in purchased energy costs. Rates in effect during the first five months of 1998 include a reconciliation mechanism that will allow the Company to recover its purchased energy costs. Rates have not yet been established for the period beyond May 1998. For a discussion of fuel recovery, see the fuel costs discussion in the "Operating Expenses" section. The increase in revenues due to rate changes in 1997 reflects an $11 million increase in base rates, approved by the RIPUC, effective January 1, 1997, in accordance with the Utility Restructuring Act of 1996. In 1996, the increase in revenues due to rate changes represents a $12 million general rate increase that went into effect in December 1995. The Company has received approval from the RIPUC to recover demand-side management (DSM) program expenditures in rates on a current basis through 1997. These expenditures were $10 million, $10 million, and $9 million in 1997, 1996 and 1995, respectively. The Company has received approval from the RIPUC to recover its 1998 DSM program expenditures. Since 1990, the Company has been allowed to earn incentives based upon the results of its DSM programs. The Company recorded before-tax incentives of $0.3 million, $0.2 million, and $0.5 million in 1997, 1996 and 1995, respectively. Operating Expenses The following table summarizes the changes in operating expenses:
Increase (Decrease) in Operating Expenses (In millions) 1997 1996 ---- ---- Fuel for generation and electric energy: Fuel costs $ 7 $ 3 Integrated facilities credit from NEP 5 3 Purchases and demand charges and other - (4) Other operation and maintenance: DSM - 1 Other 3 1 Depreciation (5) (4) Taxes, other than income taxes 1 2 Income taxes 2 1 --- --- $13 $ 3 === ===
The increase in fuel costs is due to increased replacement power fuel purchases by NEP due to the reduced generation from partially owned nuclear units. These costs were passed on to the Company through NEP's fuel clause. The Company, in turn, passed these costs on to its customers. Effective January 1, 1998, the Company terminated its power purchases under NEP's fuel clause. The Company's rates in effect for sales on or after January 1, 1998 no longer include a fuel clause. The entire output of the Company's generating capacity is made available to NEP. The Company is compensated by NEP for its fuel costs and other generation and transmission related costs. The reduction in this compensation in 1997 and 1996, and the associated reduction in depreciation expenses, reflects a reduction in dismantlement costs associated with the previously retired South Street generating facility. The increase in other operation and maintenance expenses is primarily due to increased customer accounts expenses, transmission and distribution system related expenses and increased general and administrative expense. Allowance for Funds Used During Construction (AFDC) The decrease in AFDC in 1996 is due to the completion of the Manchester Street plant repowering project. Hazardous Waste The electric utility industry typically utilizes and/or generates in its operations a range of potentially hazardous products and by-products. The Company has been named as a potentially responsible party by either federal or state environmental regulatory agencies for three sites at which hazardous waste is alleged to have been disposed. The Company is currently aware of other sites, and may in the future become aware of additional sites, that it may be held responsible for remediating. The Company is aware of approximately five sites on which gas was manufactured or manufactured gas was stored that were owned either by the Company or by its predecessor companies. A more detailed discussion of potential hazardous waste liabilities is contained in Note D-2 of the Notes to the Financial Statements. Predicting the potential costs to investigate and remediate hazardous waste sites continues to be difficult. The Company believes that hazardous waste liabilities for all sites of which it is aware are not material to its financial position. Year 2000 Computer Issues In the next two years, most large companies will face a potentially serious information systems (computer) problem because most software applications and operational programs written in the past will not properly recognize calendar dates beginning in the year 2000. This could force computers to either shut down or lead to incorrect calculations. The NEES companies began the process of identifying the changes required to their computer programs and hardware during 1996. The necessary modifications to the NEES companies' centralized financial, customer, and operational information systems are expected to be completed by the end of 1998. Noncentralized systems are also being reviewed for Year 2000 problems. The NEES companies believe total costs associated with making the necessary modifications to all centralized and noncentralized systems will be approximately $25 million, of which approximately $8 million has been incurred as of December 31, 1997. Most of the remaining costs are expected to be incurred prior to December 31, 1998. The Company's share of the total costs is expected to be approximately $5 million. New Accounting Standards In 1997, the Financial Accounting Standards Board released two new Statements of Financial Accounting Standards (FAS), FAS 130 and FAS 131, both of which will go into effect in 1998. FAS 130, Reporting Comprehensive Income, requires the reporting in financial statements of a new additional item called comprehensive income, which will incorporate amounts not previously included in reported net income. FAS 131, Disclosure about Segments of an Enterprise and Related Information, requires the reporting in financial statements of certain new additional information about operating segments of a business. The Company does not believe these new accounting standards will have a significant impact on its future reporting requirements. Utility Plant Expenditures and Financing Cash expenditures for utility plant totaled $31 million in 1997. The funds necessary for utility plant expenditures during 1997 were primarily provided by net cash from operating activities, after the payment of dividends. Cash expenditures for utility plant for 1998 are estimated to be approximately $35 million. Internally generated funds and the Company's share of proceeds from the divestiture of the nonnuclear generating business are expected to fully meet capital expenditures in 1998. In 1997, the Company retired $33 million of maturing long-term debt and issued $10 million of first mortgage bonds bearing an interest rate of 7.39 percent to finance capital expenditures. The Company plans to issue $5 million of long-term debt in 1998 to retire maturing debt. In 1997, the Company retired preferred stock with an aggregate par value of $24 million. Total premiums paid of $1.7 million in connection with the preferred stock retirement were charged to retained earnings. At December 31, 1997, the Company had $16 million of short- term debt outstanding including $12 million of commercial paper borrowings and $4 million of borrowings from affiliates. As of December 31, 1997, the Company had lines of credit with banks totaling $31 million. There were no borrowings under these lines of credit at December 31, 1997. The Narragansett Electric Company Statements of Income
Year Ended December 31, (In thousands) 1997 1996 1995 - ----------------------------------------------------------------------------- Operating revenue $520,038 $503,585 $499,113 -------- -------- -------- Operating expenses: Fuel for generation and purchased electric energy, (principally from New England Power Company, an affiliate) 309,430 297,060 294,652 Other operation 74,375 71,625 71,814 Maintenance 12,447 13,009 11,174 Depreciation 22,957 27,899 31,533 Taxes, other than federal income taxes 39,366 38,530 36,627 Federal income taxes 14,247 11,951 10,888 -------- -------- -------- Total operating expenses 472,822 460,074 456,688 -------- -------- -------- Operating income 47,216 43,511 42,425 -------- -------- -------- Other income: Allowance for equity funds used during construction - - 106 Other income (expense), net (750) (732) (192) -------- -------- -------- Operating and other income 46,466 42,779 42,339 -------- -------- -------- Interest: Interest on long-term debt 16,179 17,205 16,627 Other interest 2,475 2,883 3,663 Allowance for borrowed funds used during construction credit (120) (263) (1,861) -------- -------- -------- Total interest 18,534 19,825 18,429 -------- -------- -------- Net income $ 27,932 $ 22,954 $ 23,910 ======== ======== ======== Statements of Retained Earnings Year Ended December 31, (In thousands) 1997 1996 1995 - ----------------------------------------------------------------------------- Retained earnings at beginning of year $119,978 $108,227 $ 91,556 Net income 27,932 22,954 23,910 Dividends declared on cumulative preferred stock (1,955) (2,143) (2,143) Dividends declared on common stock, $13.00, $8.00, and $4.50 per share, respectively (14,722) (9,060) (5,096) Premium on redemption of preferred stock (1,666) - - -------- -------- -------- Retained earnings at end of year $129,567 $119,978 $108,227 ======== ======== ======== The accompanying notes are an integral part of these financial statements.
The Narragansett Electric Company Balance Sheets
At December 31, (In thousands) 1997 1996 - ----------------------------------------------------------------------------- Assets Utility plant, at original cost $760,923 $742,481 Less accumulated provisions for depreciation 198,551 187,690 -------- -------- 562,372 554,791 Construction work in progress 5,739 5,392 -------- -------- Net utility plant 568,111 560,183 -------- -------- Current assets: Cash 3,122 1,727 Accounts receivable: From sales of electric energy 54,109 54,426 Other (including $1,112 and $1,253 from affiliates) 2,571 3,415 Less reserves for doubtful accounts 4,707 5,149 -------- -------- 51,973 52,692 Unbilled revenues (Note A-3) 15,997 15,300 Fuel, materials, and supplies, at average cost 4,165 4,300 Prepaid and other current assets 14,202 15,919 -------- -------- Total current assets 89,459 89,938 -------- -------- Deferred charges and other assets (Note B) 55,285 56,881 -------- -------- $712,855 $707,002 ======== ======== Capitalization and Liabilities Capitalization: Common stock, par value $50 per share, authorized and outstanding 1,132,487 shares $ 56,624 $ 56,624 Premium on preferred stock 36 170 Other paid-in capital 105,500 80,000 Retained earnings 129,567 119,978 Unrealized gain on securities, net 112 -------- -------- Total common equity 291,839 256,772 Cumulative preferred stock, par value $50 per share 12,800 36,500 Long-term debt 183,545 178,517 -------- -------- Total capitalization 488,184 471,789 -------- -------- Current liabilities: Long-term debt due in one year 5,000 32,500 Short-term debt (including $4,425 and $5,300 to affiliates) 16,350 19,025 Accounts payable (including $50,751 and $40,425 to affiliates) 56,048 45,221 Accrued liabilities: Taxes 4,314 3,877 Interest 4,810 5,677 Other accrued expenses (Note G) 21,519 11,949 Customer deposits 5,982 5,638 Dividends payable 3,587 2,801 -------- -------- Total current liabilities 117,610 126,688 -------- -------- Deferred federal income taxes 82,871 81,880 Unamortized investment tax credits 7,023 7,517 Other reserves and deferred credits 17,167 19,128 Commitments and contingencies (Note D) -------- -------- $712,855 $707,002 ======== ======== The accompanying notes are an integral part of these financial statements.
The Narragansett Electric Company Statements of Cash Flows
Year Ended December 31, (In thousands) 1997 1996 1995 - ----------------------------------------------------------------------------- Operating activities: Net income $ 27,932 $ 22,954 $ 23,910 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 22,957 27,899 31,533 Deferred federal income taxes and investment tax credits, net (415) 4,177 3,009 Allowance for funds used during construction (120) (263) (1,967) Amortization of unbilled revenues - - (8,209) Decrease (increase) in accounts receivable, net and unbilled revenues 22 12,082 (2,215) Decrease (increase) in fuel, materials, and supplies 135 1,945 (1,075) Decrease (increase) in prepaid and other current assets 1,717 (32) (1,894) Increase (decrease) in accounts payable 10,827 (1,026) (9,892) Increase (decrease) in other current liabilities 9,484 (10,335) 9,320 Other, net 1,181 8,236 5,931 ------- ------- ------- Net cash provided by operating activities $73,720 $65,637 $48,451 ------- ------- ------- Investing activities: Plant expenditures, excluding allowance for funds used during construction $(30,965) $(52,574) $(72,897) Other investing activities (294) (181) (251) -------- -------- -------- Net cash used in investing activities $(31,259) $(52,755) $(73,148) -------- -------- -------- Financing activities: Capital contributions from parent $ 25,500 $ - $ 20,000 Dividends paid on common stock (13,590) (7,361) (4,813) Dividends paid on preferred stock (2,301) (2,143) (2,143) Changes in short-term debt (2,675) (3,650) (7,125) Long-term debt issues 10,000 2,000 38,000 Long-term debt retirements (32,500) (2,000) (16,000) Preferred stock - retirements (23,834) - - Premium on reacquisition of preferred stock (1,666) - - Premium of reacquisition of long-term debt - - (1,936) -------- -------- -------- Net cash provided by (used in) financing activities $(41,066) $(13,154) $ 25,983 -------- -------- -------- Net increase (decrease) in cash and cash equivalents $ 1,395 $ (272) $ 1,286 Cash and cash equivalents at beginning of year 1,727 1,999 713 -------- -------- -------- Cash and cash equivalents at end of year $ 3,122 $ 1,727 $ 1,999 ======== ======== ======== Supplementary Information: Interest paid less amounts capitalized $ 17,911 $ 18,620 $ 17,050 -------- -------- -------- Federal income taxes paid $ 13,825 $ 8,873 $ 1,084 ======== ======== ======== The accompanying notes are an integral part of these financial statements.
The Narragansett Electric Company Notes to Financial Statements Note A - Significant Accounting Policies 1. Nature of Operations: The Company is a wholly owned subsidiary of New England Electric System (NEES) operating in Rhode Island. The Company's business is the distribution of electricity at retail. Electric service is provided to approximately 330,000 customers in 27 cities and towns having a population of approximately 725,000 (1990 Census). The Company's service area, which includes urban, suburban, and rural areas, covers approximately 80 percent of Rhode Island. The properties of the Company include an integrated system of transmission and distribution lines and substations. In addition, the Company owns a 10 percent share of the 489 megawatt (MW) Manchester Street generating station. The entire output of this plant is made available to New England Power Company (NEP), the Company's generation and transmission affiliate, as part of the integrated NEES system. Under an all- requirements contract with NEP, the Company purchased its electric energy requirements from NEP. This contract has been amended to terminate the all-requirements provision of the contract and allow NEP to recover its above-market generation commitments through a transition access charge, which the Company will collect from its customers. See Note B for a discussion of industry restructuring and Note C for a discussion of the Company's and NEP's planned divestiture of their nonnuclear generating business. 2. System of Accounts: The accounts of the Company are maintained in accordance with the Uniform System of Accounts prescribed by regulatory bodies having jurisdiction. In preparing the financial statements, management is required to make estimates that affect the reported amounts of assets and liabilities and disclosures of asset recovery and contingent liabilities as of the date of the balance sheets and revenues and expenses for the period. These estimates may differ from actual amounts if future circumstances cause a change in the assumptions used to calculate these estimates. 3. Electric Sales Revenue: The Company accrues revenues for electricity delivered but not yet billed (unbilled revenues). Included in income is $8 million in 1995, which represents the amortization over 21 months of the initial effect of recording unbilled revenues, in accordance with a rate agreement. Accrued revenues are also recorded in accordance with rate adjustment mechanisms. 4. Allowance for Funds Used During Construction (AFDC): The Company capitalizes AFDC as part of construction costs. AFDC represents the composite interest and equity costs of capital funds used to finance that portion of construction costs not yet eligible for inclusion in rate base. AFDC is capitalized in "Utility plant" with offsetting noncash credits to "Other income" and "Interest." This method is in accordance with an established rate-making practice under which a utility is permitted a return on, and the recovery of, prudently incurred capital costs through their ultimate inclusion in rate base and in the provision for depreciation. The composite AFDC rates were 5.7 percent, 5.3 percent, and 6.2 percent in 1997, 1996, and 1995, respectively. 5. Depreciation: Depreciation is provided annually on a straight-line basis. The provision for depreciation as a percentage of weighted average depreciable property was 3.2 percent, 4.0 percent, and 5.0 percent in 1997, 1996, and 1995, respectively. The change in the depreciation rates is primarily due to the recognition through depreciation expense of dismantlement costs for a retired generating facility. 6. Cash: The Company classifies short-term investments with a maturity of 90 days or less at time of purchase as cash. 7. New Accounting Standards: In 1997, the Financial Accounting Standards Board released two new Statements of Financial Accounting Standards (FAS), FAS 130 and FAS 131, both of which will go into effect in 1998. FAS 130, Reporting Comprehensive Income, requires the reporting in financial statements of a new additional item called comprehensive income, which will incorporate amounts not previously included in reported net income. FAS 131, Disclosure about Segments of an Enterprise and Related Information, requires the reporting in financial statements of certain new additional information about operating segments of a business. The Company does not believe these new accounting standards will have a significant impact on its future reporting requirements. Note B - Industry Restructuring Historically, electric utilities have provided their customers bundled electric service within exclusive service territories. As a result of a number of trends, including a disparity in electric rates among regions of the country and new regulations and legislation intended to foster competition, distribution customers are being allowed to choose their power supplier, with incumbent utilities required to deliver that electricity over their transmission and distribution systems. When customers are allowed to choose their power supplier, utilities face the risk that market prices may not be sufficient to recover the costs of the commitments (generation related) incurred to supply customers under a regulated structure. The amounts by which such costs exceed market prices are commonly referred to as "stranded costs." In August 1996, the state of Rhode Island enacted legislation that allows customers in that state the opportunity to choose their power supplier. Under the Rhode Island statute, state accounts, certain new customers, and the largest manufacturing customers were able to choose their power supplier beginning on July 1, 1997. The balance of Rhode Island customers gained the ability to choose their power supplier on January 1, 1998. The statute also provides a mechanism for the recovery of stranded costs resulting from the introduction of customer choice of power supplier. As part of the implementation of the statute, the Company and NEP reached a settlement agreement with the Rhode Island Public Utilities Commission (RIPUC), the Rhode Island Division of Public Utilities and Carriers, and other parties representing all of its distribution customers (the Rhode Island Settlement). The Rhode Island Settlement provides for the recovery of stranded costs. In November 1997, the Federal Energy Regulatory Commission (FERC) conditionally approved the Rhode Island settlement, subject to a compliance filing to clarify the impact of the settlement on nonsettling parties. The Rhode Island Settlement requires NEP to sell power to the Company at specified prices for resale to distribution customers who do not choose a power supplier ("standard offer generation service"). The total rates for customers purchasing this interim power service from the Company are approximately 7 percent below the total rates that were in effect during 1997. Pursuant to the Rhode Island statute, the total rate for customers who do not choose a power supplier is capped through 2009 at a level equal to the 1996 rate adjusted upward for 80 percent of inflation and for other factors beyond the control of the Company. The statute also provided for the Company to increase distribution rates by approximately $11 million in January 1997 and another $7 million in January 1998. The statute also provides that the Company may request increased distribution rates which would take effect no earlier than 1999. In accordance with the Rhode Island Settlement, NEP's wholesale contract with the Company has been amended effective January 1, 1998. The Rhode Island statute provides that NEP's stranded costs (the Company's share is 22 percent) will be recovered from distribution customers through a transition access charge, which will be collected by the Company. Under the Rhode Island Settlement, the recovery of NEP's stranded costs is divided into several categories. Unrecovered costs associated with generating plants and regulatory assets would be recovered over 12 years and would earn a return on equity of 11 percent. The above-market component of purchased power contracts and nuclear decommissioning costs would be recovered as incurred over the life of those obligations, a period expected to extend beyond 12 years. Initially, the transition access charge would be set at 2.8 cents per kilowatthour (kWh) and would be reduced upon completion of the sale of NEP's generating business, as described below. In addition to addressing customer choice and the recovery of stranded costs, the Rhode Island Settlement also required the NEES companies to divest their nonnuclear generating business. In August 1997, the Company and NEP entered into an agreement to sell substantially all of their nonnuclear generating business to USGen New England, Inc. (USGen), an indirect wholly owned subsidiary of PG&E Corporation (PG&E). See "Divestiture of Generating Business" below. The net proceeds from the sale of the nonnuclear generating business to USGen will be used to reduce the transition access charge from 2.8 cents per kWh to approximately 1.5 cents per kWh. In addition, the FERC accepted the NEES companies' proposal in conjunction with their divestiture filing that the recovery of the remaining above-market nuclear generating plant investment and regulatory assets be completed by the end of the year 2000. Accounting Implications Historically, electric utility rates have been based on a utility's costs. As a result, electric utilities are subject to certain accounting standards that are not applicable to other business enterprises in general. Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (FAS 71), requires regulated entities, in appropriate circumstances, to establish regulatory assets, and thereby defer the income statement impact of certain items of income and expense expected to be reflected in future rates. At December 31, 1997, the Company had approximately $35 million in net regulatory assets in compliance with FAS 71. The Company believes the Rhode Island Settlement and statute will enable the Company to recover through rates its specific costs of providing ongoing distribution services and stranded costs billed to it by NEP. The Company believes these factors will allow it to continue to apply FAS 71. Despite the progress made to date, it is possible that future regulatory rules or other circumstances could cause the application of FAS 71 to be discontinued, which would result in a noncash write-off of previously established regulatory assets related to the affected operations. The components of regulatory assets are as follows:
At December 31, (In thousands) 1997 1996 - ---------------------------------------------------------------- Regulatory assets (liabilities) included in current assets and liabilities: Rate adjustment mechanisms (see Note G) $(9,794) $(2,870) ------- ------- Regulatory assets included in deferred charges and other reserves and deferred credits: Deferred FAS No. 109 costs (see Note F) 31,291 30,439 Unamortized losses on reacquired debt 12,438 13,287 Storm fund (3,586) (4,691) Deferred FAS No. 106 costs (see Note E-2) (795) 2,487 Other 6,020 5,656 ------- ------- 45,368 47,178 ------- ------- $35,574 $44,308 ======= =======
Note C - Divestiture of Generating Business As described above, in August 1997, the Company and NEP (collectively, the Sellers) reached an agreement to sell their nonnuclear generating business to USGen. The nonnuclear generating business includes three fossil-fueled and 15 hydroelectric generating stations, totaling approximately 4,000 MW of capacity, as well as NEES' 100 percent interest in Narragansett Energy Resources Company, a 20 percent general partner in the Ocean State Power project, all of which has a book value of $1.1 billion. USGen will pay the Sellers $1.59 billion in cash, of which $225 million will be contingent upon the introduction of customer choice of power supplier in Massachusetts. Based on the enactment of the Massachusetts statute, the NEES companies believe that the conditions for payment of the full purchase price have been met. NEP will remit to the Company a portion of the proceeds from the sale equal to the Company's net book value of the Manchester Street plant. USGen will also reimburse the NEES companies for $85 million of costs associated with early retirement and special severance programs for employees affected by industry restructuring. USGen will assume responsibility for environmental conditions at the Sellers' nonnuclear generating stations. USGen will also assume the Sellers' obligations under long-term fuel and fuel transportation contracts and certain collective bargaining agreements. In addition to the purchase of the nonnuclear generating stations, USGen will purchase NEP's entitlement to approximately 1,100 MW of power procured under long-term contracts. NEP will make a monthly fixed contribution towards the above-market cost of the purchased power of between $12.5 million and $14.2 million per month from closing through January 2008. USGen will be responsible for the balance of the costs under the purchased power contracts. The sale is subject to approval by various state and federal regulatory agencies. Several parties have objected to the sale on various grounds, including allegations that following the sale, USGen would be able to exercise unlawful levels of market power. On February 25, 1998, the FERC issued an order that rejected the market power allegations, approved the sale, and conditionally approved most supporting filings. While the timing of receipt of final regulatory approvals is uncertain, receipt of all approvals is unlikely before mid-1998. Closing is contingent upon all regulatory approvals being obtained by February 1999. Note D - Commitments and Contingencies 1. Plant Expenditures: The Company's utility plant expenditures are estimated to be approximately $35 million in 1998. At December 31, 1997, substantial commitments had been made relative to future planned expenditures. 2. Hazardous Waste: The Federal Comprehensive Environmental Response, Compensation and Liability Act, more commonly known as the "Superfund" law, imposes strict, joint and several liability, regardless of fault, for remediation of property contaminated with hazardous substances. The electric utility industry typically utilizes and/or generates in its operations a range of potentially hazardous products and by-products. NEES subsidiaries currently have in place an internal environmental audit program and an external waste disposal vendor audit and qualification program intended to enhance compliance with existing federal, state, and local requirements regarding the handling of potentially hazardous products and by-products. The Company has been named as a potentially responsible party (PRP) by either the United States Environmental Protection Agency or the Massachusetts Department of Environmental Protection for three sites (two of which are located in Massachusetts) at which hazardous waste is alleged to have been disposed. The Company is currently aware of other sites, and may in the future become aware of additional sites, that it may be held responsible for remediating. Gas was manufactured from coal in Rhode Island in the past. The Company is aware of five sites on which gas was manufactured or manufactured gas was stored that were owned either by the Company or by its predecessor companies. It is not known to what extent the Company would be held liable for hazardous wastes, if any, left at these manufactured gas locations. Predicting the potential costs to investigate and remediate hazardous waste sites continues to be difficult. There are also significant uncertainties as to the portion, if any, of the investigation and remediation costs of any particular hazardous waste site that may ultimately be borne by the Company. A preliminary review by a consultant hired by the NEES companies of the potential cost of investigating and, if necessary, remediating Rhode Island manufactured gas sites resulted in costs per site ranging from less than $1 million to $11 million. An informal survey of other utilities conducted on behalf of NEES and its subsidiaries indicated costs in a similar range. The NEES companies have recovered amounts from certain insurers, and, where appropriate, the Company intends to seek recovery from its insurers and from other PRPs, but it is uncertain whether, and to what extent, such efforts will be successful. The Company believes that hazardous waste liabilities for all sites of which it is aware are not material to its financial position. In October 1996, the American Institute of Certified Public Accountants issued new accounting rules for Environmental Remediation Liabilities which became effective in 1997. These new rules did not have a material effect on the Company's financial position or results of operations. Note E - Employee Benefits 1. Pension Plans: The Company participates with other subsidiaries of NEES in noncontributory, defined-benefit plans covering substantially all employees of the Company. The plans provide pension benefits based on the employee's compensation during the five years prior to retirement. The Company's funding policy is to contribute each year the net periodic pension cost for that year. However, the contribution for any year will not be less than the minimum contribution required by federal law or greater than the maximum tax deductible amount. The Company's net pension cost for 1997, 1996, and 1995 included the following components:
Year ended December 31, (In thousands) 1997 1996 1995 - ---------------------------------------------------------------- Service cost benefits earned during the period $ 2,092 $ 2,007 $ 1,963 Plus (less): Interest cost on projected benefit obligation 9,027 8,954 9,327 Return on plan assets at expected long-term rate (10,311) (9,787) (9,567) Amortization (50) 165 67 -------- ------- ------- Net pension cost $ 758 $ 1,339 $ 1,790 ======== ======= ======= Actual return on plan assets $ 23,999 $17,228 $25,192 ======== ======= ======= Year ended December 31, 1998 1997 1996 1995 - ---------------------------------------------------------------- Assumptions used to determine pension cost: Discount rate 6.75% 7.25% 7.25% 8.25% Average rate of increase in future compensation levels 4.13% 4.13% 4.13% 4.63% Expected long-term rate of return on assets 8.50% 8.50% 8.50% 8.75%
The funded status of the plans cannot be presented separately for the Company as the Company participates in the plans with other NEES subsidiaries. The following table sets forth the funded status of the NEES companies' plans at December 31:
Retirement Plans, (In millions) 1997 1996 - ---------------------------------------------------------------- Benefits earned Actuarial present value of accumulated benefit liability: Vested $647 $640 Nonvested 18 19 ---- ---- Total $665 $659 ==== ==== Reconciliation of funded status Actuarial present value of projected benefit liability $757 $753 Unrecognized prior service costs (8) (9) FAS No. 87 transition liability not yet recognized (amortized) (1) (1) Net gain (loss) not yet recognized (amortized) 61 40 ---- ---- 809 783 ---- ---- Pension fund assets at fair value 834 812 FAS No. 87 transition asset not yet recognized (amortized) (8) (10) ---- ---- 826 802 ---- ---- Accrued pension/(prepaid) payments recorded on books $(17) $(19) ==== ====
The plans' funded status at December 31, 1997 and 1996 were calculated using the assumed rates from 1998 and 1997, respectively, and the 1983 Group Annuity Mortality table. Plan assets are composed primarily of corporate equity, debt securities, and cash equivalents. 2. Postretirement Benefit Plans Other Than Pensions (PBOPs) The Company provides health care and life insurance coverage to eligible retired employees. Eligibility is based on certain age and length of service requirements and in some cases retirees must contribute to the cost of their coverage. The Company's total cost of PBOPs for 1997, 1996, and 1995 included the following components:
Year ended December 31, (In thousands) 1997 1996 1995 - ---------------------------------------------------------------- Service cost - benefits earned during the period $ 990 $ 1,030 $ 1,072 Plus (less): Interest cost on accumulated benefit obligation 4,843 5,034 6,006 Return on plan assets at expected long-term rate (3,513) (2,803) (2,080) Amortization 2,257 2,739 3,539 ------- ------- ------- Net postretirement benefit cost $ 4,577 $ 6,000 $ 8,537 ======= ======= ======= Actual return (loss) on plan assets $ 8,195 $ 5,469 $ 6,161 ======= ======= ======= Year ended December 31, 1998 1997 1996 1995 - ---------------------------------------------------------------- Assumptions used to determine postretirement benefit cost: Discount rate 6.75% 7.25% 7.25% 8.25% Expected long-term rate of return on assets 8.25% 8.25% 8.25% 8.50% Health care cost rate 1995 to 1999 5.25% 8.00% 8.00% 8.50% Health care cost rate 2000 to 2004 5.25% 6.25% 6.25% 8.50% Health care cost rate 2005 and beyond 5.25% 5.25% 5.25% 6.25% The following table sets forth the Company's benefits earned and the plans' funded status: At December 31, (In millions) 1997 1996 - ---------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $ 46 $ 51 Fully eligible active plan participants 6 5 Other active plan participants 17 19 ---- ---- Total benefits earned 69 75 Unrecognized transition obligation (58) (62) Net gain not yet recognized 33 22 ---- ---- 44 35 ---- ---- Plan assets at fair value 50 42 ---- ---- Prepaid postretirement benefit costs recorded on books $ 6 $ 7 ==== ====
The plans' funded status at December 31, 1997 and 1996 were calculated using the assumed rates in effect for 1998 and 1997, respectively. The assumptions used in the health care cost trends have a significant effect on the amounts reported. Increasing the assumed rates by 1 percent in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997 by approximately $8 million and the net periodic cost for 1997 by approximately $0.8 million. The Company funds the annual tax-deductible contributions. Plan assets are invested in equity and debt securities and cash equivalents. Note F - Federal Income Taxes The Company and other subsidiaries participate with NEES in filing consolidated federal income tax returns. The Company's income tax provision is calculated on a separate return basis. Federal income tax returns have been examined and reported on by the Internal Revenue Service through 1993. Total federal income taxes consist of the following components:
Year Ended December 31, (In thousands) 1997 1996 1995 ---- ---- ---- Income taxes charged (credited) to operations: Current income taxes $14,648 $ 7,499 $ 7,560 Deferred income taxes 93 4,950 3,831 Investment tax credits, net (494) (498) (503) ------- ------- ------- Total income taxes charged to operations 14,247 11,951 10,888 ------- ------- ------- Income taxes charged (credited) to "Other income": Current income taxes (464) (581) (348) Deferred income taxes (14) (275) (319) ------- ------- ------- Total income taxes charged (credited) to "Other income" (478) (856) (667) ------- ------- ------- Total federal income taxes $13,769 $11,095 $10,221 ======= ======= =======
Investment tax credits have been deferred and are being amortized over the estimated lives of the property giving rise to the credits. Consistent with rate-making policies of the RIPUC, the Company has adopted comprehensive interperiod tax allocation (normalization) for most temporary book/tax differences. Total federal income taxes differ from the amounts computed by applying the federal statutory tax rates to income before taxes. The reasons for the differences are as follows:
Year Ended December 31, (In thousands) 1997 1996 1995 - ---------------------------------------------------------------- Computed tax at statutory rate $14,595 $11,917 $11,946 Increases (reductions) in tax resulting from: Book versus tax depreciation not normalized 741 778 529 Costs associated with utility plant retirements deducted for tax purposes (1,046) (1,341) (1,768) Allowance for equity funds used during construction - - (37) Amortization of investment tax credits (494) (498) (503) All other differences (27) 239 54 ------- ------- ------- Total federal income taxes $13,769 $11,095 $10,221 ======= ======= =======
The following table identifies the major components of total deferred income taxes:
At December 31, (In millions) 1997 1996 ---- ---- Deferred tax asset: Plant related $ 2 $ 2 Investment tax credits 3 3 All other 13 13 ----- ----- 18 18 ----- ----- Deferred tax liability: Plant related (72) (67) All other (29) (33) ----- ----- (101) (100) ----- ----- Net deferred tax liability $ (83) $ (82) ===== =====
Note G - Short-term Borrowings and Other Accrued Expenses At December 31, 1997, the Company had $16 million of short-term debt outstanding including $12 million in commercial paper borrowings and $4 million of borrowings from affiliates. NEES and certain subsidiaries, including the Company, with regulatory approval, operate a money pool to more effectively utilize cash resources and to reduce outside short-term borrowings. Short-term borrowing needs are met first by available funds of the money pool participants. Borrowing companies pay interest at a rate designed to approximate the cost of outside short-term borrowings. Companies which invest in the pool share the interest earned on a basis proportionate to their average monthly investment in the money pool. Funds may be withdrawn from or repaid to the pool at any time without prior notice. At December 31, 1997, the Company had lines of credit with banks totaling $31 million. There were no borrowings under these lines of credit at December 31, 1997. Fees are paid in lieu of compensating balances on most lines of credit. The weighted average rate on outstanding short-term borrowings was 5.7 percent at December 31, 1997. The fair value of the Company's short-term debt equals carrying value. The components of other accrued expenses are as follows:
At December 31, (In thousands) 1997 1996 - ---------------------------------------------------------------- Rate adjustment mechanisms $12,970 $ 4,632 Accrued wages and benefits 8,050 7,259 Other 499 58 ------- ------- $21,519 $11,949 ======= =======
Note H - Cumulative Preferred Stock A summary of cumulative preferred stock at December 31, 1997 and 1996 is as follows (in thousands of dollars except for share data):
Shares Authorized Dividends Call and Outstanding Amount Declared Price - ------------------------------------------------------------------------------ 1997 1996 1997 1996 1997 1996 - ------------------------------------------------------------------------------ $50 Par value 4.50% Series 49,730 180,000 $ 2,487 $ 9,000 $ 365 $ 405 $55.000 4.64% Series 61,217 150,000 3,061 7,500 320 348 $52.125 6.95% Series 145,050 400,000 7,252 20,000 1,270 1,390 (a) - ------------------------------------------------------------------------------ Total 255,997 730,000 $12,800 $36,500 $1,955 $2,143 - ------------------------------------------------------------------------------ (a) Callable on or after August 1, 2003 at $51.74.
The annual dividend requirement for total cumulative preferred stock was $758,000 for 1997 and $2,143,000 for 1996. In 1997, the Company retired preferred stock with an aggregate par value of $24 million. Total premiums of $1.7 million in connection with the preferred stock retirement were charged to retained earnings. Note I - Long-term Debt A summary of long-term debt is as follows:
At December 31, (In thousands) Series Rate % Maturity 1997 1996 - ---------------------------------------------------------------- First Mortgage Bonds: U(92-1) 7.230 June 3, 1997 $10,000 U(92-2) 7.210 June 3, 1997 5,000 U(92-3) 7.000 June 16, 1997 10,000 U(92-7) 5.700 September 16, 1997 7,500 V(95-1) 7.810 February 16, 1998 $ 5,000 5,000 V(94-2) 6.960 May 3, 1999 2,000 2,000 V(94-3) 6.910 May 4, 1999 1,000 1,000 U(92-6) 6.630 August 12, 1999 5,000 5,000 U(92-5) 6.980 July 17, 2000 5,000 5,000 U(92-8) 6.340 September 18, 2000 10,000 10,000 U(92-4) 7.830 June 17, 2002 15,000 15,000 U(93-1) 7.080 January 13, 2003 7,500 7,500 U(93-2) 6.560 April 15, 2003 5,000 5,000 U(93-4) 6.350 July 1, 2003 5,000 5,000 V(94-4) 7.420 June 15, 2004 5,000 5,000 V(94-6) 8.330 November 8, 2004 10,000 10,000 U(93-3) 6.650 June 30, 2008 5,000 5,000 S 9.125 May 1, 2021 22,200 22,200 T 8.875 August 1, 2021 22,000 22,000 U(93-5) 7.050 September 1, 2023 5,000 5,000 U(94-1) 7.050 February 2, 2024 5,000 5,000 V(94-1) 8.080 May 2, 2024 5,000 5,000 V(94-5) 8.160 August 9, 2024 5,000 5,000 V(95-2) 7.750 June 2, 2025 10,000 10,000 V(95-3) 7.500 October 10, 2025 7,000 7,000 W(95-1) 7.300 November 13, 2025 16,000 16,000 W(96-1) 7.240 January 19, 2026 2,000 2,000 W(97-1) 7.390 September 30, 2027 3,000 W(97-2) 7.390 October 1, 2027 7,000 Unamortized discounts and premiums (1,155) (1,183) -------- -------- Total long-term debt $188,545 $211,017 ======== ======== Long-term debt due in one year 5,000 32,500 -------- -------- $183,545 $178,517 ======== ========
Substantially all of the properties and franchises of the Company are subject to the lien of mortgage indentures under which the first mortgage bonds have been issued. The Company will make cash payments of $5,000,000 in 1998, $8,000,000 in 1999, $15,000,000 in 2000, and $15,000,000 in 2002 to retire maturing mortgage bonds. There are no cash payments required in 2001. At December 31, 1997, the Company's long-term debt had a carrying value of approximately $190,000,000 and had a fair value of approximately $201,000,000. The fair market value of the Company's long-term debt was estimated based on the quoted prices for similar issues or on the current rates offered to the Company for debt of the same remaining maturity. Note J - Restrictions on Retained Earnings Available for Dividends on Common Stock As long as any preferred stock is outstanding, certain restrictions on payment of dividends on common stock would come into effect if the "junior stock equity" was, or by reason of payment of such dividends became, less than 25 percent of "Total capitalization." However, the junior stock equity at December 31, 1997 was 59 percent of total capitalization and, accordingly, none of the Company's retained earnings at December 31, 1997 were restricted as to dividends on common stock under the foregoing provisions. Note K - Regulatory Matters A 1986 Rhode Island Supreme Court decision held that the RIPUC's rate-making powers include the authority to order refunds of amounts earned in excess of an allowed return. As a result, the RIPUC monitors the Company's earnings on a regular basis. Note L - Supplementary Income Statement Information Advertising expenses, expenditures for research and development, and rents were not material and there were no royalties paid in 1997, 1996, or 1995. Taxes, other than federal income taxes, charged to operating expenses are set forth by class as follows
Year Ended December 31, (In thousands) 1997 1996 1995 ---- ---- ---- Municipal property taxes $18,061 $16,546 $15,172 State gross earnings tax 18,676 18,764 18,617 Federal and state payroll and other taxes 2,629 3,220 2,838 ------- ------- ------- $39,366 $38,530 $36,627 ======= ======= =======
New England Power Service Company, an affiliated service company operating pursuant to the provisions of Section 13 of the Public Utility Holding Company Act of 1935, furnished services to the Company at the cost of such services. These costs amounted to $23,341,012, $27,336,438, and $29,094,719, including capitalized construction costs of $1,946,000, $6,426,000, and $6,268,000 for each of the years 1997, 1996, and 1995, respectively. The Narragansett Electric Company Selected Financial Information
Year Ended December 31, (In millions) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------ Operating revenue: Electric sales (excluding fuel cost recovery) $369 $361 $361 $356 $351 Fuel cost recovery 142 134 131 120 127 Other 9 9 7 6 5 - ------------------------------------------------------------------------------ Total operating revenue $520 $504 $499 $482 $483 Net income $ 28 $ 23 $ 24 $ 15 $ 14 Total assets $713 $707 $700 $647 $556 Capitalization: Common equity $292 $257 $245 $208 $183 Cumulative preferred stock 13 36 36 37 37 Long-term debt 183 179 211 189 156 - ------------------------------------------------------------------------------ Total capitalization $488 $472 $492 $434 $376 Preferred dividends declared $ 2 $ 2 $ 2 $ 2 $ 2 Common dividends declared $ 15 $ 9 $ 5 $ 3 $ 5
Selected Quarterly Financial Information (Unaudited)
First Second Third Fourth (In thousands) Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------- 1997 Operating revenue $131,466 $119,894 $141,980 $126,698 Operating income $ 13,403 $ 9,819 $ 14,238 $ 9,756 Net income $ 7,693 $ 5,085 $ 9,862 $ 5,292 1996 Operating revenue $127,285 $116,470 $140,481 $119,349 Operating income $ 12,286 $ 8,245 $ 13,419 $ 9,561 Net income $ 6,290 $ 3,117 $ 8,169 $ 5,378
Per share data is not relevant because the Company's common stock is wholly owned by New England Electric System. A copy of The Narragansett Electric Company's Annual Report on Form 10-K to the Securities and Exchange Commission for the year ended December 31, 1997 will be available on or about April 1, 1998, without charge, upon written request to The Narragansett Electric Company, Shareholder Services Department, 280 Melrose Street, Providence, Rhode Island 02901. EX-24 33 NARRA POWER OF ATTORNEY EXHIBIT (24) POWER OF ATTORNEY ----------------- Each of the undersigned directors of The Narragansett Electric Company (the "Company"), individually as a director of the Company, hereby constitutes and appoints John G. Cochrane, Robert K. Wulff, and Geraldine M. Zipser, individually, as attorney-in-fact to execute on behalf of the undersigned the Company's annual report on Form 10-K for the year ended December 31, 1997, to be filed with the Securities and Exchange Commission, and to execute any appropriate amendment or amendments thereto as may be required by law. Dated this 18th day of March, 1998. s/Michael F. Ryan _________________________ _________________________ Richard W. Frost Michael F. Ryan s/Cheryl A. LaFleur s/Richard P. Sergel _________________________ _________________________ Cheryl A. LaFleur Richard P. Sergel s/Robert L. McCabe s/Ronald L. Thomas _________________________ _________________________ Robert L. McCabe Ronald L. Thomas s/Lawrence J. Reilly _________________________ Lawrence J. Reilly EX-27 34 NARRA FDS WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND RELATED STATEMENTS OF INCOME, RETAINED EARNINGS AND CASH FLOWS OF THE NARRAGANSETT ELECTRIC COMPANY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THE NARRAGANSETT ELECTRIC COMPANY 3 0000069659 1,000 DEC-31-1997 DEC-31-1997 12-MOS PER-BOOK 568,111 0 89,459 55,285 0 712,855 56,624 105,536 129,567 291,839 0 12,800 183,545 4,425 0 11,925 5,000 0 0 0 203,321 712,855 520,038 14,247 458,575 472,822 47,216 (750) 46,466 18,534 27,932 1,955 25,977 14,722 16,179 73,720 0 0 Total deferred charges includes other assets. Per share data is not relevant because the Company's common stock is wholly-owned by New England Electric System. Total common stockholders equity includes the unrealized gain on securities. -----END PRIVACY-ENHANCED MESSAGE-----