-----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, Eib0mZDtPALke5GbF1z4ip5sTB0LPI4H2lswDlgOy3pUnrcee5LWDmv6ZwhLvBHJ OqUFulLMJGzfhaolfVrahQ== 0000071297-96-000028.txt : 19960403 0000071297-96-000028.hdr.sgml : 19960403 ACCESSION NUMBER: 0000071297-96-000028 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 21 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960402 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-K405/A SEC ACT: SEC FILE NUMBER: 001-03446 FILM NUMBER: 96543737 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-K405/A SEC ACT: SEC FILE NUMBER: 000-05464 FILM NUMBER: 96543738 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-K405/A SEC ACT: SEC FILE NUMBER: 001-07471 FILM NUMBER: 96543739 BUSINESS ADDRESS: STREET 1: 280 MELROSE ST CITY: PROVIDENCE STATE: RI ZIP: 02901 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-K405/A SEC ACT: SEC FILE NUMBER: 001-06564 FILM NUMBER: 96543740 BUSINESS ADDRESS: STREET 1: 25 RESEARCH DR CITY: WESTBOROUGH STATE: MA ZIP: 01582 BUSINESS PHONE: 6173669011 10-K405/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ____________________________ FORM 10-K AMENDMENT NO. 1 (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For fiscal year ended December 31, 1995 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No fee Required] Registrant; State of Incorporation or Commission Organization; Address; I.R.S. Employer File Number and Telephone Number Identification No - ------------ ---------------------- ------------------ 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. (X) The purpose of this Amendment is to file electronically with the Commission those exhibits to the Form 10-K for the year ended December 31, 1995, which were not previously filed due to an error in electronic filing formatting. New exhibit indexes are supplied for each filing company. 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 Amendment No. 1 to Form 10-K to be signed on its behalf, by the undersigned thereunto duly authorized. NEW ENGLAND ELECTRIC SYSTEM s/John G. Cochrane ____________________________ John G. Cochrane Attorney-in-fact Date: April 2, 1996 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 Amendment No. 1 to Form 10-K 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/John G. Cochrane ____________________________ John G. Cochrane Attorney-in-fact Date: April 2, 1996 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 Amendment No. 1 to Form 10-K 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/John G. Cochrane ____________________________ John G. Cochrane Attorney-in-fact Date: April 2, 1996 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 Amendment No. 1 to Form 10-K 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/John G. Cochrane ____________________________ John G. Cochrane Attorney-in-fact Date: April 2, 1996 EX-99 2 NEES EXHIBIT INDEX --------------- Exhibit No. Description Page - ----------- ----------- ---- (3) Agreement and Declaration of Previously Trust dated January 2, 1926, Filed as amended through April 28, 1992 (4)(a) Massachusetts Electric Company Previously First Mortgage Indenture and Filed Deed of Trust, dated as of July 1, 1949, and twenty supplements thereto Twenty-first Supplemental Previously Indenture, dated as of April 1, Filed 1995 (4)(b) The Narragansett Electric Previously Company First Mortgage Indenture Filed and Deed of Trust, dated as of September 1, 1944, and twenty-one supplements thereto Twenty-second Supplemental Previously Indenture, dated as of June 1, Filed 1995 (4)(c) The Narragansett Electric Previously Company Preference Provisions, Filed as amended, dated March 23, 1993 (4)(d) New England Power Company General Previously and Refunding Mortgage Indenture Filed and Deed of Trust dated as of January 1, 1977 and nineteen supplements thereto Twentieth Supplemental Indenture, Previously dated as of July 1, 1994 Filed (10)(a) Boston Edison Company et al. and Previously New England Power Company: Filed Amended REMVEC Agreement dated August 12, 1977 (10)(b) The Connecticut Light and Power Previously Company et al. and New England Filed 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 Previously Company et al. and New England Filed Power Company: Stockholders Agreement dated July 1, 1964; Power Purchase Contract dated July 1, 1964; 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; Guarantee Agreement dated as of November 13, 1981; Guarantee Agreement dated as of August 1, 1985 Amendment revising Transmission Previously Agreement dated as of January 19, Filed 1994 (10)(d) Maine Yankee Atomic Power Company Previously et al. and New England Power Filed 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; Guarantee Agreement dated as of September 23, 1985 (10)(e)(i) New England Energy Incorporated Previously Capital Funds Agreement with Filed NEES dated November 1, 1974 and Amendments thereto (10)(e)(ii) New England Energy Incorporated Previously Loan Agreement with NEES dated Filed July 19, 1978 and effective November 1, 1974, and Amendments thereto (10)(e)(iii) New England Energy Incorporated Previously Fuel Purchase Contract with Filed New England Power Company dated July 26, 1979, and Amendments thereto (10)(e)(iv) New England Energy Incorporated Previously Partnership Agreement with Filed Samedan Oil Corporation as Amended and Restated on February 5, 1985 and Amendment thereto (10)(e)(v) New England Energy Incorporated Previously Credit Agreement dated as of Filed April 13, 1995 (10)(e)(vi) New England Energy Incorporated Previously Capital Maintenance Agreement Filed dated November 15, 1985, and Assignment and Security Agreement dated November 15, 1985 and Amendment thereto (10)(f) New England Power Company and Previously New England Electric Transmission Filed 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 Previously Corporation and PruCapital Filed 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 Previously Company, Inc. et al. and New Filed 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 Previously Agreement and Amendments thereto Filed Amendments dated as of June 1, Previously 1993, July 1, 1995, and Filed September 1, 1995 (10)(j) Public Service Company of New Previously Hampshire et al. and New England Filed 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 Previously Corporation et al. and New Filed 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 Previously et al. and New England Power Filed Company: Amended and Restated Power Contract dated April 1, 1985 and Amendments thereto (10)(m) New England Electric Companies' Previously Deferred Compensation Plan as Filed amended dated January 1, 1995 (10)(n) New England Electric System Previously Companies Retirement Supplement Filed Plan as amended dated December 1, 1995 (10)(o) New England Electric Companies' Previously Executive Supplemental Retirement Filed Plan as amended dated January 1, 1995 (10)(p) New England Electric Companies' Previously Incentive Compensation Plan as Filed amended dated January 1, 1995 (10)(q) New England Electric Companies' Previously Senior Incentive Compensation Filed Plan as amended dated January 1, 1995 (10)(r) New England Electric Companies' Previously Incentive Compensation Plan II Filed as amended dated January 1, 1995 (10)(s) New England Electric System Previously Directors Deferred Compensation Filed Plan as amended dated November 24, 1992 (10)(t) Forms of Life Insurance Program Previously and Form of Life Insurance Filed (Collateral Assignment) (10)(u) New England Electric Companies' Previously Incentive Share Plan as amended Filed dated January 1, 1994 (10)(v) New England Power Company and Previously New England Hydro-Transmission Filed Electric Company, Inc. et al: Phase II Massachusetts Transmission Facilities Support Agreement dated as of June 1, 1985 and Amendments thereto (10)(w) New England Power Company and Previously New England Hydro-Transmission Filed Corporation et al: Phase II New Hampshire Transmission Facilities Support Agreement dated as of June 1, 1985 and Amendments thereto (10)(x) New England Power Company et Previously al: Phase II New England Power Filed AC Facilities Support Agreement dated as of June 1, 1985 and Amendments thereto (10)(y) New England Hydro-Transmission Previously Electric Company, Inc. and New Filed England Electric System et al: Equity Funding Agreement dated as of June 1, 1985 and Amendments thereto (10)(z) New England Hydro-Transmission Previously Corporation and New England Filed Electric System et al: Equity Funding Agreement dated as of June 1, 1985 and Amendments thereto (10)(aa) Ocean State Power, et al., and Previously Narragansett Energy Resources Filed Company: Equity Contribution Agreement dated as of December 29, 1988; Amendment dated as of September 29, 1989 Ocean State Power, et al., and Previously New England Electric System: Filed Equity Contribution Support Agreement dated as of December 29, 1988; Amendment dated as of September 29, 1989; Ocean State Power II, et al., Previously and Narragansett Energy Resources Filed 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)(bb) New England Power Service Previously Company and Joan T. Bok: Filed Service Credit Letter dated October 21, 1982 (10)(cc) New England Electric System Previously and John W. Rowe: Service Filed Credit Letter dated December 5, 1988 (10)(dd) New England Power Service Previously Company and the Company: Filed Form of Supplemental Pension Service Credit Agreement (10)(ee) New England Electric System Previously and Frederic E. Greenman: Filed Service Credit Letter dated February 23, 1994 (10)(ff) New England Electric System Previously and John W. Newsham: Pension Filed Service Credit Agreement dated February 23, 1994 (13) 1995 Annual Report to Previously Shareholders Filed (21) Subsidiary list Previously Filed (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 Previously amended through June 27, 1987 Filed (3)(b) By-laws of the Company as Filed herewith amended May 10, 1995 (4) General and Refunding Mortgage Previously Indenture and Deed of Trust Filed dated as of January 1, 1977 and twenty supplements thereto (10)(a) Boston Edison Company et al. Previously and the Company: Amended Filed REMVEC Agreement dated August 12, 1977 (10)(b) The Connecticut Light and Power Previously Company et al. and the Company: Filed 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 Previously Company et al. and the Company: Filed Stockholders Agreement dated July 1, 1964; Power Purchase Contract dated July 1, 1964; 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; 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 Previously Company et al. and the Company: Filed 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; Guarantee Agreement dated as of September 23, 1985 (10)(e) Mass. Electric and the Company: Previously Primary Service for Resale dated Filed February 15, 1974; and Amendments thereto; Memorandum of Understanding effective May 22, 1994 (10)(f) The Narragansett Electric Previously Company and the Company: Filed Primary Service for Resale dated February 15, 1974 and Amendments thereto; Memorandum of Understanding effective May 22, 1994 Amendment of Service Agrement Filed herewith effective January 1, 1995 (10)(g) Time Charter between Filed herewith International Shipholding, Corp. and New England Power Company dated as of October 27, 1994; Amendments dated as of September 22, 1995 (10)(h) Consent and Agreement among New Filed herewith England Power Company, Central Gulf Lines, Inc., Enterprise Ship Company, Inc., and The Bank of New York, dated as of September 28, 1995 (10)(i) New England Electric Previously Transmission Corporation et al. Filed 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)(j) Vermont Electric Transmission Previously Company, Inc. et al. and the Filed Company: Phase I Vermont Transmission Line Support Agreement dated as of December 1, 1981 and Amendments thereto (10)(k) New England Energy Incorporated Previously and the Company: Fuel Purchase Filed Contract dated July 26, 1979, and Amendments thereto (10)(l) New England Power Pool Previously Agreement and Amendments Filed thereto (10)(m) New England Power Service Previously Company and the Company: Filed Specimen of Service Contract (10)(n) Public Service Company of New Previously Hampshire et al. and the Filed 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 Previously of July 19, 1990 between Filed Northeast Utilities Service Company and the Company Seabrook Project Managing Previously Agent Operating Agreement Filed dated as of June 29, 1992; and Amendment thereto (10)(o) Vermont Yankee Nuclear Power Previously Corporation et al. and the Filed 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 Previously et al. and the Company: Filed Amended and Restated Power Contract dated April 1, 1985 and Amendments thereto (10)(q) New England Electric Companies' Previously Deferred Compensation Plan as Filed amended dated January 1, 1995 (10)(r) New England Electric System Previously Companies Retirement Supplement Filed Plan as amended dated December 1, 1995 (10)(s) New England Electric Companies' Previously Executive Supplemental Retirement Filed Plan as amended dated January 1, 1995 (10)(t) New England Electric Companies' Previously Incentive Compensation Plan as Filed amended dated January 1, 1995; New England Electric Companies' Senior Incentive Compensation Plan as amended dated January 1, 1995 (10)(u) Forms of Life Insurance Program Previously and Form of Life Insurance Filed (Collateral Assignment) (10)(v) New England Electric Companies' Previously Incentive Compensation Plan II Filed as amended dated January 1, 1995 (10)(w) New England Electric Companies' Previously Incentive Share Plan as amended Filed dated January 1, 1994 (10)(x) New England Hydro-Transmission Previously Electric Company, Inc. et al. Filed and the Company: Phase II Massachusetts Transmission Facilities Support Agreement dated as of June 1, 1985 and Amendments thereto (10)(y) New England Hydro-Transmission Previously Corporation et al. and the Filed Company: Phase II New Hampshire Transmission Facilities Support Agreement dated as of June 1, 1985 and Amendments thereto (10)(z) Vermont Electric Power Company Previously et al. and the Company: Phase Filed II New England Power AC Facilities Support Agreement dated as of June 1, 1985 and Amendments thereto (10)(aa) TransCanada Pipelines Limited Previously and the Company: Firm Service Filed Contract for Firm Transportation Service for natural gas dated as of January 6, 1992 and Amendments thereto Temporary Assignment effective Filed herewith as of October 26, 1995 (10)(bb) Renaissance Energy Ltd. and Previously the Company: Temporary Trans- Filed portation Contract Assignment (capacity swap) for Firm Transportation Service for natural gas dated as of October 27, 1993; Amendment dated as of October 25, 1994 (10)(cc) Algonquin Gas Transmission Previously Company and the Company: X-38 Filed Service Agreement for Firm Transportation of natural gas dated July 3, 1992; Amendment dated July 31, 1992; Amendment dated as of April 15, 1994 (10)(dd) ANR Pipeline Company and the Previously Company: Gas Transportation Filed Agreement dated July 18, 1990 (10)(ee) Columbia Gas Transmission Previously Corporation and the Company: Filed Service Agreement for Service under FTS Rate Schedule dated June 13, 1991 (10)(ff) Iroquois Gas Transmission Previously System, L.P. and the Company: Filed Gas Transportation Contract for Firm Reserved Service dated as of June 5, 1991 (10)(gg) Tennessee Gas Pipeline Company Previously and the Company: Firm Natural Filed Gas Transportation Agreement dated July 9, 1992 (13) 1995 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 Previously Company as amended through Filed November 15, 1993 (3)(b) By-Laws of the Company as Previously amended through September 15, Filed 1993 (4) First Mortgage Indenture and Previously Deed of Trust, dated as of Filed July 1, 1949, and twenty-one supplements thereto (10)(a) Boston Edison Company et al. Previously and Company: Amended REMVEC Filed Agreement dated August 12, 1977 (10)(b) New England Power Company Previously and the Company: Primary Filed Service for Resale dated February 15, 1974; Amendment of Service Agreement dated July 22, 1983; Amendment of Service Agreement effective November 1, 1993; Memorandum of Understanding effective May 22, 1994 (10)(c) New England Power Pool Previously Agreement and Amendments Filed thereto (10)(d) New England Power Service Previously Company and the Company: Filed Specimen of Service Contract (10)(e) New England Telephone and Previously Telegraph Company and the Filed Company: Specimen of Joint Ownership Agreement for Wood Poles (10)(f) New England Electric Companies' Previously Deferred Compensation Plan as Filed amended dated January 1, 1995 (10)(g) New England Electric System Previously Companies Retirement Supplement Filed Plan as amended dated December 1, 1995 (10)(h) New England Electric Companies' Previously Executive Supplemental Retirement Filed Plan as amended dated January 1, 1995 (10)(i) New England Electric Companies' Previously Incentive Compensation Plan as Filed amended dated January 1, 1995 (10)(j) New England Electric Companies' Previously Form of Deferred Compensation Filed Agreement for Directors (10)(k) New England Electric Companies' Previously Senior Incentive Compensation Filed Plan as amended dated January 1, 1995 (10)(l) Forms of Life Insurance Program Previously and Form of Life Insurance Filed (Collateral Assignment) (10)(m) New England Electric Companies' Previously Incentive Compensation Plan II Filed as amended dated January 1, 1995 (10)(n) New England Electric Companies' Previously Incentive Share Plan as amended Filed dated January 1, 1994 (10)(o) New England Power Service Previously Company and the Company: Filed Form of Supplemental Pension Service Credit Agreement (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. 33-59145 (13) 1995 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 Previously amended June 9, 1988 Filed (3)(b) By-Laws of the Company Previously Filed (4)(a) First Mortgage Indenture and Previously Deed of Trust, dated as of Filed September 1, 1944, and twenty-two supplements thereto (4)(b) The Narragansett Electric Previously Company Preference Provisions, Filed as amended, dated March 23, 1993 (10)(a) Boston Edison Company et al. Previously and the Company: Amended REMVEC Filed Agreement dated August 12, 1977 (10)(b) New England Power Company and Previously the Company: Primary Service for Filed Resale dated February 15, 1974; Amendments of Service Agreement; Memorandum of Understanding effective May 22, 1994 (10)(c) New England Power Pool Agreement Previously and Amendments thereto Filed (10)(d) New England Power Service Previously Company and the Company: Filed Specimen of Service Contract (10)(e) New England Telephone and Previously Telegraph Company and the Filed Company: Specimen of Joint Ownership Agreement for Wood Poles (10)(f) New England Electric Companies' Previously Deferred Compensation Plan for Filed Officers, as amended January 1, 1995 (10)(g) New England Electric System Previously Companies Retirement Supplement Filed Plan, as amended December 1, 1995 (10)(h) New England Electric Companies' Previously Executive Supplemental Retirement Filed Plan, as amended dated January 1, 1995 (10)(i) New England Companies' Incentive Previously Compensation Plan, as amended Filed dated January 1, 1995 (10)(j) New England Electric Companies' Previously Form of Deferred Compensation Filed Agreement for Directors (10)(k) New England Electric Companies' Previously Senior Incentive Compensation Filed Plan as amended dated January 1, 1995 (10)(l) Forms of Life Insurance Program Previously and Form of Life Insurance Filed (Collateral Assignment) (10)(m) New England Electric Companies' Previously Incentive Compensation Plan II Filed as amended dated January 1, 1995 (10)(n) New England Electric Companies' Previously Incentive Share Plan as amended Filed dated January 1, 1994 (10)(o) New England Power Service Previously Company and the Company: Filed Form of Supplemental Pension Service Credit Agreement (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) 1995 Annual Report to Filed herewith Stockholders (24) Power of Attorney Filed herewith (27) Financial Data Schedule Filed herewith EX-24 3 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, Maureen L. Fountain, 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, 1995, 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 27th day of February, 1996. s/Joan T. Bok s/John W. Rowe _________________________ _________________________ Joan T. Bok John W. Rowe s/Paul L. Joskow s/George M. Sage _________________________ _________________________ Paul L. Joskow George M. Sage s/John M. Kucharski s/Charles E. Soule _________________________ _________________________ John M. Kucharski Charles E. Soule s/Edward H. Ladd s/Anne Wexler _________________________ _________________________ Edward H. Ladd Anne Wexler s/Joshua A. McClure s/James Q. Wilson _________________________ _________________________ Joshua A. McClure James Q. Wilson s/James R. Winoker _________________________ James R. Winoker EX-27 4 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-31-1995 DEC-31-1994 DEC-31-1995 DEC-31-1994 12-MOS 12-MOS PER-BOOK PER-BOOK 3,855,902 3,716,721 408,820 423,713 508,794 525,723 417,360 418,684 0 0 5,190,876 5,084,841 64,970 64,970 736,823 736,823 831,529 779,045 1,631,779 1,580,838 0 0 147,016 147,016 1,675,170 1,520,488 0 0 0 0 203,250 233,970 23,960 65,920 0 0 0 0 0 0 1,509,701 1,536,609 5,190,876 5,084,841 2,271,712 2,243,029 128,340 128,257 1,819,944 1,818,276 1,948,284 1,946,533 323,428 296,496 12,098 16,071 335,526 312,567 114,175 97,005 204,757 199,426 8,690 8,697 204,757 199,426 152,273 148,456 108,365 93,500 469,853 417,966 $3.15 $3.07 $3.15 $3.07 Total deferred charges includes other assets and accrued Yankee Atomic costs. Preferred stock reflects preferred stock of subsidiaries. Preferred stock dividends reflect preferred stock dividends of subsidiaries. Total common stockholders equity is reflected net of treasury stock at cost. EX-3 5 NEP EXHIBIT (3)(B) EXHIBIT (3)(b) As Amended May 10, 1995 BY-LAWS OF NEW ENGLAND POWER COMPANY ARTICLE I. 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 $25 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 I 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 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. 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 shares 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. 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 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 laid 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 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 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 cor- poration 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 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 case of all shares of each particular series, the dividends on shares of such series shall be cumulative: (l) 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 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 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 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 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 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 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 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 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 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 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(l), 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. (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(l), 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-third 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, provided that if such quorum shall not have been 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(l) 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(l), 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 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 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. 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 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) 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 on 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 each 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 (iii): (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. (4) Issue any unsecured notes, debentures or other securities representing unsecured indebtedness, or assume any such unsecured securities, for purposes other than the redemption or other retirement of outstanding shares of all series of the Dividend Series Preferred Stock and the Preferred Stock - Cumulative, if immediately after such issue or assumption the total principal amount of all unsecured notes, debentures or other securities representing unsecured indebtedness issued or assumed by the corporation and then outstanding (including unsecured securities then to be issued or assumed but excluding unsecured securities theretofore so voted for by holders of Dividend Series Preferred Stock and Preferred Stock - Cumulative) (the "Unsecured Indebtedness") would exceed twenty per cent (20%) of the aggregate of (i) the total principal amount of all bonds and other securities representing secured indebtedness issued or assumed by the corporation and then outstanding and (ii) the capital, premium and retained earnings of the corporation as then stated on the books of account of the corporation; provided, however, that after July 1, 1976, short-term unsecured indebtedness shall not exceed ten per cent (10%) of such aggregate of (i) and (ii) above; and provided, further, that after July 1, 1976, in the event unsecured securities representing short-term unsecured indebtedness (excluding unsecured securities theretofore so voted for by the holders of Dividend Series Preferred Stock and Preferred Stock - Cumulative) exceed ten per cent (10%) of such aggregate of (i) and (ii) above, no unsecured securities representing unsecured indebtedness shall be issued or assumed (except for the purpose of redemption or other retirement of outstanding shares of all series of the Dividend Series Preferred Stock and the Preferred Stock - Cumulative) unless such ratio of short-term unsecured indebtedness immediately after such issue or assumption is to be not over ten per cent (10%) of such aggregate of (i) and (ii) above. "Short-term unsecured indebtedness" as used herein means unsecured indebtedness of an original maturity of less than ten years and "long-term unsecured indebtedness" means unsecured indebtedness of an original maturity of ten years or more. For the purposes hereof, when any long-term unsecured indebtedness becomes due within ten years, or when any long-term unsecured indebtedness is to be retired within ten years through a sinking fund or otherwise, such long-term unsecured indebtedness, in each case, shall be considered short-term unsecured indebtedness; provided, however, that any long-term unsecured indebtedness of a single maturity (except as provided above in respect of a sinking fund therefor), or the last maturity of any long-term unsecured indebtedness of serial maturities, shall not be considered short-term unsecured indebtedness until due within five years. "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 shares. 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 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 Preferred Stock - Cumulative bearing $25 par value shall be counted as one-quarter. 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. 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 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. 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 of 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 aggregate 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 shares 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 there 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 at 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 these 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 power 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 ground 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 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 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 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 flatfaced 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 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 VIII. 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 6 NEP EXHIBIT (10(F) EXHIBIT (10)(f) NEW ENGLAND POWER COMPANY Primary Service for Resale -------------------------- AMENDMENT OF SERVICE AGREEMENT ------------------------------- Dated: November 16, 1994 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-second Revised Page No. 4", copy of which is attached to this agreement, supersedes and is substituted for "Thirty-first Revised Page No. 4". Tariff Number 1 Schedule IV Thirty-Third Revised Page No. 4 Superseding Thirty-First Revised Page No. 4 (Narragansett) APPENDIX A 10. Integrated Generating, Transmission One-twelfth of the annual and Facilities Credits Payable by fixed charges for the Company: Generating facilities $1,682,017 (Schedule III-B - Paragraph B.4.b) One-twelfth of the annual fixed charges for the Transmission facilities $1,987,399 11. Primary Service for Resale: Delivery Metering Pressure Pressure Delivery KV Metering KV Metering Delivery Points (Nominal) Points (Nominal) Adjustments Adjustment - -------- --------- -------- --------- ----------- ---------- See detail on Original Page No. 4A, Schedule IV 12. Minimum Demand KW: None 13. Minimum Term: None 14. Transmission Service for Partial Requirements Customers: Transmission KV Subtransmission KV Delivery Points (Nominal) Delivery Point(s) (Nominal) --------------- --------- ----------------- --------- Not Applicable -------------- 15. Service for Resale to Interruptible Customers - Schedule III-C Contract - as provided under Appendix B 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 s\ Robert L. McCabe By ______________________________ President Dated: November 16, 1994 EX-10 7 NEP EXHIBIT (10)(G) EXHIBIT (10(g) TIME CHARTER OF S/S ENERGY INDEPENDENCE BETWEEN INTERNATIONAL SHIPHOLDING CORP., OR NOMINEE AS OWNER, AND NEW ENGLAND POWER COMPANY, OR NOMINEE AS CHARTERER DATED AS OF INDEX TO TIME CHARTER Page 1. PERIOD. . . . . . . . . . . . . . . . . . . . . . . . 1 2. DELIVERY/REDELIVERY EVENTS. . . . . . . . . . . . . . 2 3. CLASSIFICATION OF VESSEL. . . . . . . . . . . . . . . 2 4. BUNKER COAL AND FUEL OIL. . . . . . . . . . . . . . . 3 5. DESCRIPTION OF VESSEL . . . . . . . . . . . . . . . . 5 6. CONDITION OF VESSEL . . . . . . . . . . . . . . . . . 8 7. SUEZ/PANAMA CANALS. . . . . . . . . . . . . . . . . . 9 8. CARGOES . . . . . . . . . . . . . . . . . . . . . . . 9 9. TRADING LIMITS. . . . . . . . . . . . . . . . . . . . 10 10. RATE OF HIRE. . . . . . . . . . . . . . . . . . . . . 10 11. PAYMENT OF HIRE . . . . . . . . . . . . . . . . . . . 12 12. LOSS OF VESSEL. . . . . . . . . . . . . . . . . . . . 12 13. FINAL VOYAGE. . . . . . . . . . . . . . . . . . . . . 12 14. LIENS . . . . . . . . . . . . . . . . . . . . . . . . 13 15. SPACE AVAILABLE TO CHARTERER. . . . . . . . . . . . . 13 16. ANNUAL DAYS OF USE BY CHARTERER . . . . . . . . . . . 13 17. OWNER TO PROVIDE. . . . . . . . . . . . . . . . . . . 14 18. CHARTERER TO PROVIDE. . . . . . . . . . . . . . . . . 14 19. BUNKER COAL AND FUEL OIL AT DELIVERY AND REDELIVERY EVENTS. . . . . . . . . . . . . . . . . . . . . . . . 14 20. DUTIES OF MASTER. . . . . . . . . . . . . . . . . . . 15 21. INSTRUCTIONS AND LOGS/CHARTER ADMINISTRATION. . . . . 15 22. CONDUCT OF VESSEL'S PERSONNEL . . . . . . . . . . . . 16 23. BILLS OF LADING . . . . . . . . . . . . . . . . . . . 16 24. SCHEDULED OVERHAUL. . . . . . . . . . . . . . . . . . 17 25. NEGLIGENCE OF PILOTS, ETC.. . . . . . . . . . . . . . 17 26. TUGBOATS. . . . . . . . . . . . . . . . . . . . . . . 18 27. EQUIPMENT . . . . . . . . . . . . . . . . . . . . . . 18 28. SALVAGE . . . . . . . . . . . . . . . . . . . . . . . 19 29. POLLUTION FINANCIAL RESPONSIBILITY. . . . . . . . . . 19 30. EXCEPTIONS. . . . . . . . . . . . . . . . . . . . . . 20 31. WAR CLAUSE. . . . . . . . . . . . . . . . . . . . . . 20 32. ADDITIONAL COST OF HOSTILITIES. . . . . . . . . . . . 21 33. REQUISITION . . . . . . . . . . . . . . . . . . . . . 21 34. DEMISE. . . . . . . . . . . . . . . . . . . . . . . . 21 35. WAR RISKS . . . . . . . . . . . . . . . . . . . . . . 22 36. BOTH-TO-BLAME . . . . . . . . . . . . . . . . . . . . 23 37. NEW JASON CLAUSE. . . . . . . . . . . . . . . . . . . 23 38. CLAUSE PARAMOUNT. . . . . . . . . . . . . . . . . . . 24 39. LAWS. . . . . . . . . . . . . . . . . . . . . . . . . 24 40. BENEFIT OF LIMITATIONS. . . . . . . . . . . . . . . . 24 41. ARBITRATION . . . . . . . . . . . . . . . . . . . . . 25 42. BROKER'S COMMISSIONS. . . . . . . . . . . . . . . . . 25 43. INSPECTION AND SUPERCARGOES . . . . . . . . . . . . . 25 44. SUBCHARTER. . . . . . . . . . . . . . . . . . . . . . 26 45. RESTRICTIONS ON USE OF VESSEL . . . . . . . . . . . . 26 46. OPERATIONAL AND COMMERCIAL OFF-HIRE . . . . . . . . . 26 47. ATTACHMENT, ARREST, ETC.. . . . . . . . . . . . . . . 28 48. ASSIGNMENTS . . . . . . . . . . . . . . . . . . . . . 29 49. WAR RISK INSURANCE. . . . . . . . . . . . . . . . . . 29 50. ICE SECTION . . . . . . . . . . . . . . . . . . . . . 29 51. BILL OF LADING SECTIONS . . . . . . . . . . . . . . . 30 52. TERMINATION . . . . . . . . . . . . . . . . . . . . . 30 53. OPTION TO SHORTEN CHARTER PERIOD. . . . . . . . . . . 30 54. INSURANCE . . . . . . . . . . . . . . . . . . . . . . 31 55. INTERIM VOYAGES BY OWNER. . . . . . . . . . . . . . . 31 56. STEVEDORE DAMAGE. . . . . . . . . . . . . . . . . . . 32 57. LIGHTERING. . . . . . . . . . . . . . . . . . . . . . 32 58. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . 33 59. NOTICES . . . . . . . . . . . . . . . . . . . . . . . 33 Appendix 1 -- Vessel Description and Performance Appendix 2A -- Speed Warranty Calculations Appendix 2B -- Fuel Warranty Calculations Appendix 3 -- Unloader Test Procedures and Warranty Calculations Appendix 4 -- Charterer's Purchase of Owner's Rights in the Vessel TIME CHARTER This agreement is entered into this _____ day of ________, 1994 between International Shipholding Corporation, on its own behalf and on behalf of its Guaranteed Nominee, to be named, as Owner (hereinafter called "Owner") of the S/S ENERGY INDEPENDENCE (hereinafter called "Vessel") and New England Power Company (hereinafter called "Charterer"). WHEREAS, Charterer has agreed to purchase the Vessel from Intercoastal Bulk Carriers, Inc. ("IBC") pursuant to Charterer's options contained in a Time Charter dated 27 December 1989, and Owner and Charterer have entered into a simultaneous Memorandum of Agreement ("MOA") wherein Charterer agrees to sell to and Owner agrees to acquire the Vessel from Charterer; and WHEREAS, Owner and Charterer desire that the Vessel continue to be chartered by Charterer for coal deliveries to its two Massachusetts power plants; NOW THEREFORE, Owner and Charterer hereby mutually agree that the Owner will let and the Charterer will hire the use and services of the Vessel for the carriage of coal and such other lawful merchandise as may be suitable for a Vessel of its description, for the period and on the terms and conditions set forth below. Hereinafter, this document, including any extensions, shall be referred to as the "Charter". 1. PERIOD A. Owner agrees to let and Charterer agrees to hire the Vessel for a period of days specified herein in each of 15 successive years (a "Charter Year"), commencing from the time and date of delivery of the Vessel. Owner and Charterer acknowledge that pending fulfillment of the MOA and delivery of the Vessel hereunder, this Charter is an executory contract which shall become null and void if the MOA is not fulfilled or the Vessel is not delivered under this Charter. B. The number of days of hire for each Charter Year shall be as follows: For Charter Years One and Two: 300 total days each year; For Charter Years Three through and including Eight: 240 total days each year; For Charter Years Nine through and including Fifteen: 210 total days each year. C. Charterer shall have the option to increase, but may not under any circumstances decrease without the concurrence of Owner, the number of total days in any Charter Year specified above, and shall exercise such option in accordance with the provisions set forth in Clause 16. 2. DELIVERY/REDELIVERY EVENTS At the commencement of this Charter, the Vessel will be delivered to the Charterer upon Owner giving Notice to Charterer that the Vessel has completed her contemplated dry docking and is in all respects ready to perform her first voyage hereunder. Upon termination of the Charter including extensions, if any, the Vessel will be redelivered to the Owner at any port on the United States East Coast at Charterer's option, free of cargo. Charterer is to give the Owner 30 days prior notice of the place of redelivery. It is recognized by the parties that there will be re-occurring delivery and redelivery events during the period of this Charter. All such events other than delivery and redelivery at the commencement and termination, respectively, of this Charter, shall be guided by Clause 46 herein. 3. CLASSIFICATION OF VESSEL A. The Owner warrants that the Vessel at the time of its delivery to the Charterer and during the period of this Charter, is properly documented under the laws of the United States so as to qualify the Vessel for the United States coastwise trade. It is the essence of this Charter that the Vessel, during the term of service under this Charter, will remain qualified to engage in United States coastwise trade. The Vessel will be qualified to engage in international trade as well. The Owner agrees to pay any annual fees and expenses in maintaining its obligations under this paragraph. If the Vessel, by reason of any action of the Owner or its agent, contractor or employee during the term of the Charter, were not to qualify for United States coastwise trade, the Charterer shall have the right, but not the obligation, to terminate this Charter upon written notice to the Owner (except with respect to obligations and liabilities hereunder, actual or contingent, which have arisen on or prior to such date of termination), without being required to purchase the Vessel. B. The Owner warrants that, as of the date hereof and during the entire term of the Charter, it and any financial institution having a direct or indirect interest in the Vessel will be citizen(s) of the United States as defined in Section 2, Shipping Act, 1916 as amended (46 U.S.C. App. 802). If the Owner, or such other parties having a direct or indirect interest in the Vessel, for any reason beyond their control during the term of the Charter, were not to qualify as a citizen of the United States as defined in this paragraph but the Vessel were still qualified for United States coastwise trade, Charterer shall have the right, but not the obligation, to terminate the Charter (except with respect to obligations and liabilities hereunder, actual or contingent, which have arisen on or prior to such date of termination) and to purchase the Vessel, all in accordance with Clause 52 and Appendix 4, except that the Charterer need not give 180-days' notice, and the sale is to be consummated as quickly as reasonably possible. If such disqualification as a U.S. citizen were due to any reason within the control of Owner or such other parties having a direct or indirect interest in the Vessel, then Charterer has the option to terminate the Charter without being required to purchase the Vessel. Owner will be allowed a period of up to 10 days to cure the disqualification before Charterer can exercise the aforementioned option. C. The Vessel shall be classed A1, BULK CARRIER, AMS, ACC, for ocean service, American Bureau of Shipping. On delivery the Vessel shall have in effect all certificates of inspection and other approvals and permits required for lawful operation. Owner shall maintain the Vessel in class through the period of the Charter. 4. BUNKER COAL AND FUEL OIL A. Owner warrants that the Vessel is capable of burning, and will be able during the term of the Charter, to burn either coal or fuel oil, as described below, in the main boilers; (i) Bunker Coal: Bunker Supply Contract Min/Max Reject Specifications Limits -------------- ------- Ash (As Received (A/R) Basis) 7.0% Max 8.0% Max Moisture (A/R Basis) 7.0% Max 8.0% Max Sulfur (A/R Basis) 1.2% Max 1.5% Max Volatile (Dry Basis) 28.0% Min 26.0% Min BTU/lb (A/R Basis) 13,000 Min 12,850 Min Ash Fusion Temperature (H=W) 2,600 Min 2,450 Min Size 1-1/4" x 0 1-1/2" x 0 Size (% less than 1/4") 10.0% 15.0% (ii) Fuel Oil: Bunker Supply Contract Min/Max Specifications --------------- Density at 15 Deg. gms/ml 0.991 - 0.995 Viscosity Kinematic at 50 o C 380 - 500 CCR Max 22 Flash Point PMCC (o F) Min 140 o Water Content (Vol) Max 1.0% Ash Content (Vol) Max 0.2% Sulphur Content (Wt) Max 3.5% Pour Point (o C) Max 30 o Vanadium Content (PPM) Max 600 Aluminum Content (PPM) Max 30 BTU/bbl 6.05 mmbtus B. By mutual agreement, the Owner may purchase and supply fuel oil to the Vessel. Subject to the qualifications described below, the Charterer agrees to reimburse the Owner for the cost of that fuel oil and the reasonable expenses incurred in transporting and delivering the fuel oil to the Vessel. Any fuel oil which is to be purchased by the Owner (and for which the Charterer has agreed to reimburse the Owner): (i) will be at prices no higher than the prevailing market prices at the ports in which it is furnished; (ii) will be of a quality that is no higher than that specified in paragraph (A) above; and (iii) will not in any event result in a delivered cost to Charterer which is more than the cost of bunker coal. The cost of bunker coal ("Coal Cost") shall be determined annually as the average cost based on records from the preceding twelve months of (a) actual costs of coal deliveries to the Vessel and (b) for each case where the Vessel is bunkered with fuel oil instead of coal, the best price quoted for contemporaneous and/or comparable deliveries of coal to the Vessel. Estimated consumption of coal will be based on Clause 4 A (i) above and Clause 5 A below. Allowance for fuel oil consumed at discharge, will be deducted from total fuel oil used for purposes of calculating comparative cost of fuel used vis-a-vis "Coal Cost". The above notwithstanding, if the Owner is able to purchase bunker fuel at a lower contract price than the prevailing market price at the port of bunkering, the price charged to Charterer shall be at the lower contract price. (B) Charterer will purchase and will supply coal that is to be burned as fuel ("bunker coal") for the Vessel at no cost to Owner. In addition, upon request of Owner, Charterer will arrange for the sampling and analysis of the bunker coal and the delivery of those analyses to Owner or its agent. (C) Prior to loading the bunker coal on board the Vessel, Owner has the right to review analyses of "cartop" or otherwise representative samples of the bunker coal to determine whether the bunker coal meets the reject specifications set forth in paragraph (A)(i) above. If the "cartop" or otherwise representative samples were not to meet those reject specifications, Owner may reject the bunker coal. In the event of such a rejection: (i) Charterer may elect to supply replacement bunker coal, or in the event Charterer fails to supply bunker coal in a timely manner and elects to have the Vessel wait for bunker coal, the Vessel will remain on-hire while bunker coal that meets the specifications is supplied by Charterer; or (ii) Charterer may decline to supply replacement coal in which event the Vessel may burn oil to the extent it lacks sufficient coal bunkers and not be penalized therefore. If, however Owner does not reject the bunker coal, Owner will be responsible for the bunker coal as if it purchased the bunker coal for its own account and supplied the bunker coal to the Vessel. (D) At the conclusion of each month, Owner will provide a statement to the Charterer which sets forth: (i) the amounts expended by Owner for fuel oil for the Vessel; (ii) third-party expenses reasonably incurred in supplying that fuel oil to the Vessel; and (iii) the adjustment, if any, to reduce the amount chargeable to Charterer to applicable Coal Cost. Copies of invoices supporting those amounts and expenses will be annexed to the statement. Charterer will pay the amount of each statement within 30 days of its receipt. 5. DESCRIPTION OF VESSEL EXCEPT AS SPECIFICALLY PROVIDED IN THIS CHARTER, IT IS AGREED THAT AS OF THE DATE HEREOF, OWNER MAKES NO WARRANTY OR REPRESENTATION, EITHER EXPRESS OR IMPLIED, AS TO TITLE TO, AS TO THE DESIGN, CONDITION, MERCHANTABILITY OR SEAWORTHINESS OF, AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP IN, OR AS TO THE CONSUMABLE STORES ABOARD, THE VESSEL, OR AS TO THE FITNESS OF THE VESSEL FOR ANY PARTICULAR PURPOSE OR AS TO THE ELIGIBILITY OF THE VESSEL FOR ANY TRADE OR ANY OTHER WARRANTY OR REPRESENTATION WHATSOEVER. A. Owner agrees that at the date of delivery under this Charter, the Vessel will be of the description and performance set out in Appendix 1, and will maintain the Vessel during the period of service under this Charter. Should the Vessel during the period of service under this Charter fail to comply in any respect with the said description and performance, Owner shall indemnify Charterer for such failure. Owner warrants that the Vessel is capable of maintaining an average speed between sea buoys of not less than 14.47 knots in Moderate Weather (defined as periods when wind speed is up to and including Beaufort Scale Number 5) calculated by averaging voyage legs in laden and unladen condition with a maximum average consumption for all purposes as follows: (1) at sea: 119 mmbtus per hour (2) at load port: 38 mmbtus per hour (3) at disport 42 mmbtus per hour B. On each anniversary date of initial delivery of the Vessel during the period of service under this Charter (and upon the termination of the Charter), the average speed and bunker consumption under this Charter for each Charter Year shall be calculated. Subject to the provisions of the speed warranty calculation in Appendix 2A, the speed calculations will be based on the distance made and time taken by the Vessel to complete all non-slow steaming sea passages in Moderate Weather from sea buoy to sea buoy but excluding time while the Vessel is off-hire. The fuel consumption will be based: (i) at sea, from the time the Vessel departs from its load port sea buoy until the time that it arrives at its discharge port sea buoy, and from the time that it departs from its discharge port sea buoy until it arrives at its load port sea buoy; (ii) at the load port, from the time the Vessel arrives at its loading berth (finished with engines) until the time that it departs from its loading berth (standby engines); and (iii) at the discharge port, from the time the Vessel arrives at its discharge berth (finished with engines) until the time that it departs from its discharge berth (standby engines). C. If any of the calculations made under paragraph (B) of this Clause show that, during any Charter Year: (a) the average speed of the Vessel on non-slow steaming sea passages in Moderate Weather has fallen short of the average speed in service set out in paragraph (A) of this Clause, and/or (b) the average daily bunker consumption in mmbtus on non-slow steaming sea passages in Moderate Weather has exceeded the maximum consumption per day set out in paragraph (A) of this Clause, and/or (c) the average daily in-port bunker consumption has exceeded the maximum consumption per day set out in paragraph (A) of this Clause, then Charterer shall be compensated by Owner by no later than the time for payment of the first payment of hire due after completion of the claim procedure set out below. The time lost due to Owner's failure to meet the speed warranty will be valued at the Vessel's daily hire rate as of the time the warranty was not met. The fuel consumed due to the Owner's failure to meet the fuel warranty will be valued at their Cost to the Charterer. "Cost to Charterer" shall mean the weighted average of the cost of fuel oil or bunker coal, as the case may be, plus the reasonable expenses incurred in supplying the fuel oil or bunker coal to the Vessel, during the course of the year in question. Although the calculation to determine whether the speed and certain fuel oil and bunker coal consumption warranties have been met is to be based on the sea passage portions of the non-slow steaming voyages in Moderate Weather, the calculation to determine the amount to be deducted under this paragraph (C) and paragraph (D) below shall be based on the sea passages from sea buoy to sea buoy of all voyages completed during the period in question. Any amounts payable by Owner to Charterer shall be calculated in accordance with Appendix 2. No later than 30 days after the end of each Charter Year, Owner will present to Charterer all information necessary to determine whether a breach of warranty has occurred for the prior Charter Year. Within 90 days of receiving such information from Owners, if the Charterer were to have a claim for breach of the speed or fuel warranties above, it will submit its claim, with supports, to the Owner. If the Owner were to dispute Charterer's claim, the Owner will present the reasons for its disagreement to the Charterer within 60 days of the receipt of Charterer's claim, failing which the Owner will be deemed to have accepted Charterer's claim and will be barred thereafter from contesting Charterer's claim. D. Payments due under this Clause for the period between the last complete Charter Year and the termination of this Charter or any extension thereof shall in the first instance be settled in accordance with Charterer's estimate made two months before the end of the Charter period as so specified. Any necessary adjustment after the end of the Charter shall be made by payment by Owner to Charterer or by Charterer to Owner as the case may require. E. Owner warrants that, during the period of the Vessel's service, the Vessel will be capable of discharging its entire cargo of coal at the average rate of no less than 3,100 short tons per hour. (1) Charterer has the right twice during the calendar year (the times of which are to be selected by Charterer in its sole discretion) to cause a full load discharge test to be made to determine whether the Vessel is meeting its discharge warranty. Charterer shall give Owner seven calendar days' notice of such test. The test shall take place at Charterer's Brayton Point or Salem Harbor generating stations, or at any other mutually agreeable location. Charterer may withdraw its request at any time up to 24 hours prior to the commencement of the test. Tonnage discharged during the test shall be based on the bill of lading, adjusted by coal retained on board. The test shall be conducted in accordance with Appendix 3. (2) If the results of such a test indicate that the Vessel cannot meet its discharge capability warranty, Owner agrees, at its sole risk and expense, to take such steps as are necessary to cause the Vessel to meet its discharge capability warranty by the time the Vessel next discharges a cargo. Compliance with this paragraph E(2) will be determined by a test the same as that described in paragraph E(1) (such test or tests to be in addition to the two tests allowed to Charterer pursuant to paragraph E(1) above). (3) Charterer's sole remedy for Owner's breach of its discharge rate warranty is damages if Owner fails to comply with its obligation set forth in subparagraph E(2) above. Damages will be based on time lost at the daily rate of hire, and shall be calculated in accordance with Appendix 3. F. Notwithstanding anything herein contained to the contrary, if the Vessel's characteristics and/or performance are modified or affected by reason of compliance with the laws, regulations or requirements of any governmental or state agency, as provided in Clause 29 herein, the Vessel's description and performance or capability warranties shall be adjusted accordingly 36 months after such modifications and/or additions have been made to the Vessel in compliance with such requirements. 6. CONDITION OF VESSEL Owner shall throughout the period of service of this Charter, exercise due diligence (i) to make the Vessel tight, staunch, strong, seaworthy and in good order and condition, and in every way fit for the service for which it is intended, including but not limited to the carriage and self-unloading of coal, with its machinery, boilers, liners and equipment in good working order, and (ii) to cause the Vessel to have a full and efficient complement of Master, Officers and crew. Owner agrees throughout the period of the Charter to use due diligence to cause the Vessel and its machinery, boilers and appurtenances to be maintained in a condition to permit the Vessel to prosecute all voyages at speed specified in Clause 5 and to meet its other warranties under the Charter. Owner agrees to furnish to Charterer by January 1 and July 1 of each year a written report of any operational or equipment problems experienced by the Vessel, or any problems which Owner expects to experience with the equipment of the Vessel, during the coming semi-annual period. Owner shall supply to Charterer all American Bureau of Shipping and U.S. Coast Guard reports concerning the Vessel and afford Charterer access to all American Bureau of Shipping and U.S. Coast Guard files concerning the Vessel. This provision constitutes Owner's irrevocable permission and instruction to ABS and the U.S. Coast Guard to comply with Charterer's requests pursuant to this Clause. 7. SUEZ/PANAMA CANALS Owner undertakes that throughout the period of service under this Charter it will at its expense comply with the regulations in force from time to time so as to enable the Vessel to pass through the Suez and Panama Canals by day and night without delay. 8. CARGOES Owner and Charterer have the right to ship coal, and any other cargoes which are not injurious to the Vessel and its unloading equipment, and as may be suitable for a Vessel of its description including the unloading equipment. Carriage of any cargo is subject to meeting all Trim and Stability restrictions and requirements, and the approval of the National Cargo Bureau, American Bureau of Shipping and United States Coast Guard. In particular and without limiting the generality of the foregoing, it is the intention of the Charterer to trade the Vessel with coal. If, however, the Charterer were to change from coal to another cargo or thereafter from another cargo to coal, any expenses incurred to prepare the Vessel to carry another cargo or thereafter to carry coal, including the expenses incurred for cleaning the Vessel's holds, but excluding any wages or overtime of the Master, Officers or crew (except as provided in Clause 32 or as otherwise agreed by Charterer and Owner), shall be for the Charterer's account and the Vessel shall not be off-hire provided that the Vessel has not otherwise incurred an event of off-hire as described in Clause 46. Upon Charterer's request, Owner will promptly provide Charterer with its best estimate of such costs for any such cargo. 9. TRADING LIMITS It is intended that the Vessel shall be used to trade coastwise on the East Coast of the United States and to Venezuela and Colombia. Under this Charter, the Vessel may be employed in trading in any part of the world between safe ports in such lawful trades as Charterer may direct, subject to American Institute Trade Warranties Limits. Charterer shall be allowed to breach institute warranties only in the event that risks resulting from such breach are insurable, and upon payment by Charterer of any additional insurance premiums and assumption by Charterer of any increased deductibles, if required by underwriters. Charterer shall exercise due diligence to ensure that the Vessel is only employed between and at safe ports, docks, places, berths and anchorages where it can always lie safely afloat. Notwithstanding anything contained in this or any other Clause of this Charter, Charterer shall not be deemed to warrant the safety of any port, place, berth, dock or anchorage and shall be under no liability in respect thereof, except for loss or damage caused by its failure to exercise due diligence as aforesaid. Subject as above, the Vessel shall be loaded and discharged in any dock, or at any wharf or place or anchorage, or alongside lighters or other vessels as Charterer may direct where the Vessel can always safely lie afloat. 10. RATE OF HIRE A. The amount Charterer shall pay as hire to Owner monthly in advance for use and services of the Vessel during the period of this Charter set forth in Clause 1(B) shall be $46,015 per day on-hire or pro rata, commencing with the date and time of the commencement of the Charter and continuing (always assuming the Vessel to be on-hire at the time) until the date and hour of the termination or end (for any reason) of the Charter. Any hire paid in advance but not earned shall be returned to Charterer promptly upon written request. Charterer has the option declarable within twelve (12) months after the commencement of the Charter to pay charter hire for days on-hire pursuant to Clause 1(B) during each of fifteen (15) consecutive years as follows: Years 1 thru 5* $50,000 per diem Years 6 thru 8 $45,500 per diem Years 9 thru 15 $41,000 per diem (* or so much of Year 1 as shall remain after exercise of the option), provided that should the Charter terminate or end (for any reason), Owner will return any additional hire paid by reason of this option over and above that which would otherwise but for such acceleration have been paid, valued on the date of such termination. The above rates of charter hire shall be adjusted for Amortization of Expenses, as defined in Clause 11 of the MOA, such expenses to be calculated at or promptly after commencement of this Charter. B. The amount Charterer shall pay as hire to Owner monthly in advance for use and services of the Vessel during the period of this Charter set forth in Clause 1(C) shall be $29,983 per day on-hire or pro rata. C. Any hire paid in advance but not earned shall be returned to Charterer promptly upon written request. D. The total charter hire described above includes an operating cost component that shall be subject to an annual adjustment as of each anniversary of the commencement of the Charter and continuing through the term of the Charter in accordance with the following: $31,788 times the quantity A divided by B where: "A" is comprised 50% of the Consumer Price Index for Urban Wage Earners and Clerical Workers, unadjusted for seasonal variations, all items, U.S. city average, as published in the Bureau of Labor Statistics' CPI Detailed Report (the "CPI Index") plus 50% of the Producer Price Index for Intermediate Goods, unadjusted for seasonal variations, as published by U.S. Department of Labor Bureau of Labor Statistics in its monthly Producer Price Indexes, (the "PPI Index"), in each case referring to the CPI/PPI Index for the last preceding month for which such index is published before the annual adjustment date; and "B" is comprised 50% of CPI Index plus 50% of the PPI Index, in each case referring to the CPI/PPI Index for the last preceding month for which such index is published before commencement of the Charter. If publication of the CPI and/or PPI Index described above were to be discontinued, the parties will agree to a similar index to replace the discontinued index. If the base period of the CPI/PPI Index is changed, the parties will make appropriate adjustments to the above calculation. If the parties were not to agree, the disagreement will be submitted to arbitration pursuant to Clause 41 and the arbitrators will select the replacement index or indices or make the appropriate adjustments, as the case may be. It is agreed that while the Vessel is on-hire Charterer shall pay the cost of the following: 1) expenses and cost of extra victualling incurred by the Master on Charterer's account, and 2) cost of all telephone calls, wireless telegraph messages and telegrams sent for Charterer's account. 11. PAYMENT OF HIRE Payment of charter hire shall be made monthly in advance at the rates required under Clause 10. For each Charter Year, the monthly payment shall be one-twelfth the amount of hire to be paid based on the number of days of hire specified in Clause 1(B), plus any additional hire for optional days pursuant to Clauses 1(C) and 16, subject to annual adjustment for the number of days the Vessel was actually on-hire in such Charter Year. Charterer shall pay hire by bank telegraphic/electronic transfer to a bank as may, from time to time, be designated in writing by the Owner, monthly in advance in United States dollars. Charterer acknowledges and agrees that, except as otherwise expressly provided in this Charter, its obligations to pay charter hire for the number of days per year each year in which the Vessel is on-hire, and all other sums required to be paid by Charterer under this Charter, all in accordance with the terms and provisions of this Charter, are absolute and unconditional and not subject to any abatement, reduction, setoff, defense, counterclaim or recoupment for any reason whatsoever. Nothing contained herein shall be construed to be a waiver, modification, alteration or release of any claim which Charterer may have at any time for damages or equitable relief against Owner. 12. LOSS OF VESSEL If the Vessel should be missing or lost, or become a constructive total loss, Owner shall promptly notify Charterer in writing. Hire shall cease at noon on the day of the Vessel's loss or on the actual date of the casualty giving rise to the constructive total loss and, if missing, at noon on the date when last heard from. Any hire paid in advance and not earned shall be returned promptly to Charterer. If the Vessel is missing at the time when hire becomes payable, payment for said hire shall be suspended until safety is ascertained. If the missing Vessel's safety is ascertained within 10 days of receipt of notice, this Charter shall continue as if no such notice had been given, and hire shall be adjusted accordingly. If the missing Vessel's safety is not ascertained within 10 days of receipt of notice, this Charter shall terminate effective at noon on the date when last heard from, except with respect to obligations and liabilities hereunder, actual or contingent, which have arisen on or prior to such date of termination. 13. FINAL VOYAGE Should the Vessel be on a voyage towards the port of redelivery at the time a payment of hire is due, payment of hire shall be made for such length of time as Owner and Charterer may agree upon as being the estimated time necessary to complete the voyage, less any disbursements made or expected to be made or expenses incurred or expected to be incurred by Charterer for Owner's account and less the cost of fuel estimated remaining at the termination of the voyage, and when the Vessel is redelivered any overpayment shall be refunded by Owner or under-payment paid by Charterer. Should the Vessel be performing a voyage at the expiry of the period of this Charter, Charterer may have the use of the Vessel at the same rate and conditions, for such extended time as may be necessary to complete loading and/or discharge of the cargo as required by Charterer, and if necessary until the Vessel's return to a port of redelivery as provided by this Charter. 14. LIENS Owner shall have a lien upon all cargoes, and all freights and subfreights for any amounts due under this Charter, and Charterer shall have a lien on the Vessel for all monies paid in advance but not earned, and for the cost of bunker coal and oil, and for all claims for damages arising from any breach of this Charter by Owner. 15. SPACE AVAILABLE TO CHARTERER The whole reach, burden and decks of the Vessel shall be at Charterer's disposal, reserving only proper and sufficient space for the Vessel's Master, Officers, crew, tackle, apparel, furniture, provisions and stores, provided that the weight of stores on board excluding spare parts shall not, unless specifically agreed, exceed 150 tons at any one time during the period of the Charter. The Vessel shall load and discharge cargo as rapidly as possible by night as well as by day. 16. ANNUAL DAYS OF USE BY CHARTERER Charterer shall have the option to increase, but not to decrease, the number of total days of any one year of the period of this Charter specified in Clause 1(B). Such option shall be exercised as follows: (i) 30 days prior to the commencement of each calendar quarter of each year, Charterer shall declare the total number of days in that quarter and in the next successive three calendar quarters, in which it intends to use the Vessel. Such number of days shall be agreed by Owner within ten days of making such declaration, following which such days so declared may be changed for Charterer's operational purposes only but not otherwise except with the consent of the Owner in its sole discretion, such consent not to be unreasonably withheld. (ii) Under no condition may Charterer exercise an option to reduce the number of days set forth in Clause 1(B) without the written consent of the Owner in its sole discretion, such consent not to be unreasonably withheld. Charterer may assist Owner to find alternative employment for days in which Charterer does not hire the Vessel. Any declaration of number of days made by Charterer at any time shall include an anticipated redelivery date and place to Owner, and an estimated date and time for the next delivery event. Such notice shall be updated to Owner 30/15/5 and one days prior to redelivery. Similarly, Owner shall provide notice to Charterer 30/15/5 and one days prior to each delivery event, such notice to specify date and place of redelivery. 17. OWNER TO PROVIDE Owner shall exercise due diligence to man, victual, navigate, operate, obtain fuel oil, water, supply, maintain, and arrange for tugs and pilotage for the Vessel, and properly and carefully carry, keep and care for the cargo, all in accordance with good operating practice. Owner shall provide and pay for all provisions, deck and engine room stores, and galley and cabin stores; maintenance and repair; insurance on the Vessel; wages and overtime of the Master, Officers, and crew; consular and agency fees pertaining to the Vessel, Master, Officers and crew; all deratization exemption certificates; all fresh water used by the Vessel. Fumigation expenses required because of cargoes loaded and ports visited at Charterer's direction will be for Charterer's account; and for any other reason, will be for Owner's account. 18. CHARTERER TO PROVIDE Except during periods when the Vessel is off-hire, Charterer shall pay for fuel as provided in Clause 4, all port charges, light dues, and Panama and other canal dues, pilotage, consular and agency fees (except those agency fees which pertain to: (i) voyages on the East Coast of the United States or (ii) the Vessel, Master, Officers and Crew), tugs necessary for assisting the Vessel into, within and/or out of port for the purpose of carrying out this Charter, agencies pertaining to the cargo, commissions, and expenses of loading and unloading cargoes. In making any expenditures to Charterer's account, Owner shall use its best efforts to procure all items and services at the best terms available in the local market. 19. BUNKER COAL AND FUEL OIL AT DELIVERY AND REDELIVERY EVENTS Except for the delivery at the commencement of this Charter, because fuel on board is the property of Charterer, Charterer will accept and pay for all fuel oil and bunker coal on board at the time of each delivery event, and Owner will accept and pay for all fuel oil and bunker coal remaining on board at each redelivery event. At all times, the then most recent invoiced prices for such items shall serve as the basis for payment. Any and all surveys for bunkers at each delivery and redelivery event shall be conducted by an independent third party, the expenses for which shall be borne equally by the Owner and the Charterer. The Vessel shall remain on-hire in the event such survey is conducted when the Vessel is redelivering to Owner, and shall remain off-hire in the event such survey is conducted when the Vessel is delivering to Charterer for further trading under this Charter. 20. DUTIES OF MASTER The Master shall prosecute voyages with the utmost dispatch and shall render all reasonable assistance with the Vessel's Officers and crew and equipment. The cargo shall be loaded, stowed, trimmed, and discharged under the supervision of the Master, without being an agent, servant or employee of Charterer. The Master, in good faith and to the fullest extent reasonably possible, shall cooperate with Charterer, Charterer's agents and the personnel at the loading and discharging facilities so as to effect prompt and complete loading and discharging. 21. INSTRUCTIONS AND LOGS/CHARTER ADMINISTRATION A. Charterer shall, from time to time, furnish the Master with all requisite instructions and sailing directions. Both the Master and the engineers shall keep full and correct logs of the voyages, which are to be open to, and may be copied by, Charterer and its Agents, and abstracts of which are to be sent to Charterer at the same time they are sent to Owner on a voyage by voyage basis. Charterer and Owner agree that these log abstracts shall constitute the basis of calculations for warranty or other Charter purposes, unless Owner or Charterer, by written notice to the other, challenges any statements contained therein with proper explanation. Twice in each Charter Year, at regular intervals, Owner will send to Charterer copies of any of Owner's reports (both internal reports and those prepared by outside professionals) relating or referring to the maintenance and condition of the Vessel. Notwithstanding the foregoing, Owner shall remain responsible for providing the Master with the required charts and other data necessary for the prompt and safe prosecution of the voyage and compliance with applicable Coast Guard regulations. B. Either Owner or Charterer shall be entitled to call for a meeting of pertinent personnel, from time to time, to discuss any matter whatsoever relating to the parties performance or the efficient administration of this Charter. Any request for such a meeting shall specify: a proposed date, time, and location for the meeting; a statement as to the perceived urgency of the requested meeting; a proposed agenda; a prospective list of attenders from the party calling for such meeting; a suggested list of third party attenders (if applicable); any specific proposals that the initiating party may seek to discuss at the meeting. The party receiving the request shall use all best efforts to accommodate the request for a meeting, in a timely manner, and with commitment of personnel and resources that yields a productive meeting on the proposed agenda. The receiving party shall be entitled to submit agenda items for the proposed meeting, consistent with the guidelines mentioned herein. 22. CONDUCT OF VESSEL'S PERSONNEL If Charterer shall complain of the conduct of the Master or any of the Officers, Owner and Charterer jointly shall immediately investigate the complaint. This right to complain shall not in any way render the Master or Officers to be the agents, servants or employees of the Charterer. If the complaint proves to be well founded, Owner shall, without delay, make a change in the appointments; provided, however, that the Owner shall have the right to abide by grievance procedures in union bargaining contracts to the extent applicable. When requested by Charterer, Owner shall furnish to Charterer copies of the union contracts referred to, including all amendments thereto. 23. BILLS OF LADING Without being an agent, servant or employee of Charterer, the Master (although appointed by Owner) shall, when Vessel is on-hire to Charterer under this Charter, follow all orders and direction of Charterer as regards employment of the Vessel, agency or other arrangements. Bills of Lading are to be signed at any rate of freight Charterer or its Agents may direct, without prejudice to this Charter, the Master attending as necessary at the offices of Charterer or its Agents to do so. Charterer hereby indemnifies Owner against all consequences or liabilities that may arise from the Master, Charterer or its Agents signing Bills of Lading or other documents, or from the Master otherwise complying with Charterer or its Agents' orders, as well as from any irregularities in papers supplied by Charterer or its Agents. The said indemnity shall not extend to any consequences or liabilities or apply to any loss or damage arising from orders to proceed to, enter, remain in or at, depart from or shift berth in or at any port, place, berth, dock, anchorage or submarine line, other than consequences or liabilities or loss or damage resulting from or caused by failure to exercise due diligence as required by Clause 9 hereof. 24. SCHEDULED OVERHAUL Owner intends to schedule overhaul periods of the Vessel between twenty-four (24) months to sixty (60) months. Owner shall provide Charterer a minimum of 3 months prior notice of any anticipated overhaul period. This Clause shall not be construed so as to prevent Owner from taking the Vessel out of service when necessary to make essential repairs. Overhaul periods will take place during commercial off-hire periods as defined in Clause 46. Once the overhaul period has commenced, Owner shall provide Charterer with updates of the Vessel's anticipated return to service at 10/5/3/2 and one days prior to its anticipated return to service. Any delay or waiting time in the scheduling of Charterer's operations due to Owner's failure to provide such notices and with reasonable accuracy, shall be for Owner's account and calculated at the rate of hire prevailing at the time of such delay to or wait by the Vessel. The Vessel shall be off-hire under Clause 46 from the time the Vessel deviates to the dry docking or overhaul port, until the time the Vessel is in a position equivalent to the position it would have been in had deviation for the overhaul period not occurred. Incidental towage, pilotage, fuel, water and all other expenses connected with the overhaul shall be for Owner's account. 25. NEGLIGENCE OF PILOTS, ETC. Neither Charterer, nor any one of its associated or affiliated companies, including but not limited to New England Electric System and all subsidiaries thereof (each of which companies shall hereinafter be referred to as a "Related Company" or, collectively, as "Related Companies"), nor any of the employees, servants, representatives and agents of any of the foregoing, shall be responsible for any losses, damages, delays or liabilities arising from any negligence, incompetence or incapacity of any pilot, stevedore, longshoreman or the personnel of any tug or tugs (whether or not owned by the Charterer or a Related Company) or arising from the terms of the contract of employment thereof and of any tug or tugs, launches or other crafts (whether or not owned by the Charterer or a Related Company), which terms Owner hereby agrees to accept and be bound by, or arising from any unseaworthiness or any insufficiency of any tug or tugs, launches or any other craft the service for which are arranged or owned by Charterer or a Related Company. Owner agrees to indemnify and hold Charterer harmless against any and all such losses, damages, delays or liabilities but such indemnity shall not exceed the amount to which Owner would have been entitled to limit its liability if Owner had itself arranged for such pilots, stevedores, longshoremen, tug personnel, tug or tugs, launches or other craft. When any licensed pilot, captain or other officer (whether or not said person is an employee, servant or representative of Charterer or its agents or of any of its Related Companies or of their agents) of a tug furnished to or engaged in the service of supplying tug power or assistance to the Vessel making use of or having available its own propelling power goes on board the Vessel, or any other licensed pilot goes on board the Vessel, it is understood and agreed that such person or persons are to be considered independent contractors and become the borrowed servant of the Owner and the Vessel for all purposes and in every respect, and shall be subject to the exclusive supervision and control of the Vessel and her personnel. Neither Charterer nor its Related Companies nor those providing the tug or tugs nor Owner, agents, or Charterer shall be under any liability for errors of navigation, management of the Vessel or other losses, damages, delays and liabilities resulting therefrom. This shall include, but not be limited to the giving of orders to any tug or tugs engaged in assisting Vessel in respect to the handling of the Vessel and to the order of the number and horsepower of tugs assisting or standing by the Vessel. In respect to the foregoing, Owner hereby agrees to indemnify and hold harmless Charterer (or any of its Related Companies or its agents or the employees, servants or representatives of the foregoing in the event that said licensed pilot, captain or other officer is employed by such company) from any and all losses, damages, delays and liabilities whatsoever whether to third parties or otherwise, arising from the acts or omissions of such person or persons. 26. TUGBOATS Charterer shall have the option of using its own tugs or those owned by a Related Company in the docking, undocking, or assisting in other ways of the Vessel. In this event the terms and conditions for such services prevailing in the port where such services are rendered, and used by independent tugboat owners, as well as pilotage provisions under Clause 25 above, shall be applicable. Charterer and its Related Companies shall be entitled to all the exemptions from and limitations of liability applicable to said independent tugboat owners and their published terms and conditions and to the aforementioned pilotage provisions under Clause 25 above. 27. EQUIPMENT Charterer, subject to Owner's approval which shall not be unreasonably withheld, shall be at liberty to fit any additional gear for loading, discharging, weighing or sampling cargo it may require beyond what is on board at the commencement of the Charter, and to make all the necessary connections, such work to be done at its expense. Owner shall use its best efforts to assist Charterer in the design, acquisition, installation, certification, operation and maintenance of such equipment. Such gear so fitted shall be considered Charterer's property, and Charterer shall be at liberty to remove it at its expense and time during or at the expiration of this Charter; the Vessel to be left in its original condition to Owner's satisfaction less normal wear and tear. 28. SALVAGE All salvage monies earned by the Vessel shall be divided equally between Owner and Charterer after deduction of Master's, Officers' and Crews' share, legal expenses, hire of Vessel during lost time, value of fuel consumed, repairs of damage, if any, and any other extraordinary loss or expense sustained as a result of the services, which shall always be a first charge on such monies. 29. POLLUTION FINANCIAL RESPONSIBILITY A. During the period of this Charter, Owner warrants that Owner shall comply with all financial capability, responsibility, security or like laws, regulations and/or other requirements of whatsoever kind with respect to oil or other pollution damage applicable to the Vessel entering, leaving, remaining at or passing through any ports or places or waters in the performance of this Charter and shall make all equipment modifications and additions as necessary to so comply, at Charterer's risk and expense. Any such modification or addition shall be deemed to be, and shall be treated as, "equipment" under Clause 27 herein. Immediately upon receipt of a notice from any governmental or state agency which would (or could) require a modification of existing equipment or an installation of additional equipment under this paragraph, the Owner shall notify the Charterer and keep Charterer fully informed. If there were to be more than one strategy for compliance, the Owner shall choose the compliance strategy which a prudent owner bearing all costs thereof would choose based upon a comparison of the life-cycle costs of each alternative. Owner shall provide Charterer with all data and assumptions used in such comparisons. Owner at its sole risk and expense shall make all arrangements by bond, insurance or otherwise and obtain all such certificates or other documentary evidence and take all such other action, as may be necessary, to satisfy such laws, regulations and/or other requirements. Copies of all documents shall be supplied to Charterer. Owner shall indemnify Charterer against all consequences (including lost time to the Vessel) resulting from any failure, inability or omission of Owner and/or the Vessel to do the foregoing. B. If any governmental or state agency shall require the installation of additional equipment, including pollution control devices, such equipment will be installed on the Vessel by Owner at Charterer's risk and expense. Owner will use its best efforts to properly maintain and operate such equipment effectively and assumes responsibility for its effectiveness. 30. EXCEPTIONS Neither the Vessel nor the Master or Owner shall be held liable for any loss of or damage or delay to the cargo or for any failure in performing hereunder arising or resulting from: any act, neglect, default or barratry of the Masters, pilots, mariners or other servants of Owner in the navigation or management of the Vessel; fire, unless caused by the personal design or neglect of Owner; collision, stranding or peril, danger or accident of the sea or other navigable waters; saving or attempting to save life or property; wastage in weight or bulk, or any other loss or damage to the cargo arising from inherent defect, quality, or vice of the cargo; any act or omission of Charterer or the Owner, shipper or consignee of the cargo, their agents or representatives; insufficiency of packing; insufficiency or inadequacy of marks; explosion, bursting of boilers, breakage of shafts, any latent defect in hull equipment or machinery, or unseaworthiness of the Vessel, unless caused by want of due diligence on the part of Owner to make the Vessel seaworthy or to have it properly manned, equipped and supplied; or from any other cause of whatsoever kind arising without the actual fault or privity of Owner. And neither the Vessel, its Master or Owner, nor Charterer, shall, unless this Charter expressly provides otherwise, be responsible for any loss of or damage or delay to or failure to discharge or deliver the cargo or for any failure in performing hereunder arising or resulting from: act of God, act of war, perils of the seas, act of public enemies, pirates or assailing thieves, arrest or restraint or restraint of princes, rulers or people, or seizure under legal process provided bond is promptly furnished to release the Vessel or cargo, laws or governments regulation, strike or lockout or stoppage or restraint of labor from whatever cause whether partial or general or riot or civil commotion or any other cause of whatsoever kind arising without the actual fault or privity of the party affected. The Vessel shall have liberty to sail with or without pilots, to tow or to be towed, to go to the assistance of vessels in distress, and to deviate for the purpose of saving life or property or of landing any ill or injured person on board. This Clause is not to be construed as in any way affecting the provisions for cessation of hire as provided in this Charter. 31. WAR CLAUSE No contraband of war shall be shipped. Coal or other cargo shall not be deemed contraband of war for the purpose of this Clause unless shipped or intended to be shipped to or intended for a country involved in war. The Vessel shall not be required to enter any port that is in a state of blockage, or where hostilities are in progress, or any war zone, or zone deemed a danger zone in consequence of existence of war, or actual hostilities, without the consent of Owner. If such consent be given, then Charterer will pay the increased cost of insuring the Vessel against war risks in an amount mutually agreed to by Owner and Charterer. Said valuation shall be Owner's insured value for hull and machinery plus increased value, but shall not include any coverage for any other reasons such as loss of hire, anticipated profits or insurance on charter hire, etc. 32. ADDITIONAL COST OF HOSTILITIES In the event of the existence of war, or actual hostilities and the continuance of this Charter, the Charterer shall assume the proved additional cost of wages and insurance properly incurred in connection with the Master, Officers and crew as a consequence of such war or actual hostilities. 33. REQUISITION If the Vessel should be requisitioned for title or for use by any government or governmental authority during the period of this Charter, an event of commercial off-hire shall be deemed to have occurred, and all terms and conditions of commercial off-hire in this Charter shall apply, in addition to the following: A. If the Vessel should be requisitioned for title by any government or governmental authority during the period of this Charter, Owner shall promptly notify Charterer in writing. Hire shall cease at noon on the day of such requisition for title. Any hire paid in advance and not earned shall be promptly returned to Charterer. B. If the Vessel should be requisitioned for use by any government or governmental authority during the period of this Charter, Owner shall promptly notify Charterer in writing. Charterer shall have the right to complete the voyage then in progress, and shall remain liable to pay Charter hire and all other sums due and payable under this Charter until the then current voyage is completed and the Vessel redelivers to Owner for a commercial off-hire period. C. Any provision of this Charter to the contrary notwithstanding, the time the Vessel is on any such requisition shall count as part of the period provided in Clause 1 of this Charter and as commercial off-hire even if it reduces the number of days on-hire in one or more Charter Years below the minimum specified in Clause 1. 34. DEMISE Nothing herein contained shall be construed as creating a demise of the Vessel to Charterer. The Owner shall remain responsible for the navigation of the Vessel, insurance, crew and all other matters same as trading for its own account. 35. WAR RISKS A. If any port of loading or of discharge named in this Charter or to which the Vessel may properly be ordered pursuant to the terms of the Bills of Lading be blockaded, or B. if owing to any war, hostilities, warlike operations, civil war, civil commotions, revolutions or the operation of international law, the Master or Owner in his or its discretion considers (1) entry to any such port of loading or of discharge, or the loading or discharging of cargo at any such port dangerous or prohibited or (2) it is dangerous or impossible for the Vessel to reach any such port of loading or discharge then Charterer shall have the right to order the cargo, or such part of it as may be affected, to be loaded or discharged at any other safe port of loading or of discharge within the range of loading or discharging ports respectively established under the provisions of this Charter (provided such other port is not blockaded or that entry thereto or loading or discharge of cargo thereat is not, in the Master's or Owner's discretion, dangerous or prohibited). If in respect of a port of discharge no orders be received from Charterer within 48 hours after it or its agents have received from Owner a request for the nomination of a substitute port, Owner shall then be at liberty to discharge the cargo at any safe port which it or the Master may in its or his discretion decide on (whether within the range of discharging ports established under the provisions of this Charter Party or not) and such discharge shall be deemed to be due fulfillment of the contract or contracts of affreightment so far as cargo so discharged is concerned. In the event of the cargo being loaded or discharged at any such other port within the respective range of loading or discharging ports established under the provisions of this Charter, this Charter shall be read in respect of freight and all other conditions whatsoever as if the voyage performed were that originally designated. In the event, however, that the Vessel discharges the cargo at a port outside the range of discharging ports established under the provisions of this Charter, freight shall be paid as for the voyage originally designated and all extra expenses involved in reaching the actual port of discharge and/or discharging the cargo thereat shall be paid by the Charterer or cargo owner. In this latter event Owner shall have a lien on the cargo for all such extra expenses. C. The Vessel shall have liberty to comply with any directions or recommendations as to departure, arrival, routes, ports of call, stoppages, designations, zones, waters, delivery or in any otherwise whatsoever given by the government of the nation under whose flag the Vessel sails or any other government or local authority including any de facto government or local authority or by any person or body acting or purporting to act as or with the authority of any such government or authority or by any committee or person having under the terms of the war risks insurance on the Vessel the right to give any such direction or recommendation. If by reason of or in compliance with any such direction or recommendation anything is done or is not done such shall not be deemed a deviation. If by reason of or in compliance with any such direction or recommendation the Vessel does not proceed to the port or ports of discharge originally designated or to which it may have been ordered pursuant to the terms of the Bills of Lading, the Vessel may proceed to any safe port of discharge which the Master or Owner in his or its discretion may decide on and there discharge the cargo. Such discharge shall be deemed to be due fulfillment of the contract or contracts of affreightment and Owner shall be entitled to freight as if discharge had been affected at the port or ports originally designated or to which the Vessel may have been ordered pursuant to the terms of the Bills of Lading. All extra expenses involved in reaching and discharging the cargo at any such port of discharge shall be paid by Charterer and/or cargo owner and Owner shall have a lien on the cargo for freight and all such expenses. 36. BOTH-TO-BLAME If the Vessel comes into collision with another ship as a result of the negligence of the other ship and any act, neglect or default of the Master, mariner, pilot or the servants of the Owner in the navigation or in the management of the Vessel, the owners of the cargo carried hereunder shall indemnify the Owner against all loss or liability to the other or non-carrying ship or its owners insofar as such loss or liability represents loss, or damage to, or any claim whatsoever of the owners of said cargo, paid or payable by the other or recovered by the other or non-carrying ship or her owners as part of their claim against the carrying ship or Owner. The foregoing provisions shall also apply where the owners, operators or those in charge of any ships or objects other than, or in addition to, the colliding ships or object are at fault in respect of a collision or contact. 37. NEW JASON CLAUSE In the event of accident, danger, damage or disaster before or after the commencement of any voyage, resulting from any cause whatsoever, whether or not due to negligence for which, or the consequences of which, the Owner is not responsible by statute, contract or otherwise, the goods, shippers, consignees or owners of the goods shall contribute with the Owner in general average to the payment of any sacrifices, losses or expenses of a general average nature that may be made or incurred and shall pay salvage and special charges incurred in respect of the goods. If salving ship is owned or operated by the Owner salvage shall be paid for as fully as if the said salving ship or ships belonged to strangers. Such deposits as the Owner or his agents may deem sufficient to cover the estimated contribution of the goods and any salvage and special charges thereon shall, if required, be made by the goods, shippers, consignees or owners of the goods to carrier before delivery. In lieu of said deposit, Charterer has the option to give, and Owner will accept, written guarantee of Charterer to cover any contribution of the goods and any salvage and special charges thereon as may be required to be made by the goods, shippers, consignees or owners of the goods. 38. CLAUSE PARAMOUNT This Charter and Bills of Lading issued hereunder shall have effect subject to the provisions of the Carriage of Goods by Sea Act of the United States, approved April 16, 1936. The applicable act, ordinance or legislation (hereinafter called the "Act") shall be deemed to be incorporated in the Bills of Lading issued hereunder. Nothing therein contained shall be deemed a surrender by the Owner or carrier of any of their rights or immunities or an increase of any of their responsibilities or liabilities under the Act. If any term of this Charter or the Bills of Lading issued hereunder should be repugnant to the Act to any extent, such term shall be void to that extent but no further. 39. LAWS This Charter shall be governed by the general maritime law of the United States (and to the extent maritime law is not applicable, the laws of the State of New York) except in cases of general average, which shall be adjusted, stated and settled according to York/Antwerp Rules 1974 and, as to matters not provided for by these rules, according to the laws and usages at the port of New York. If a General Average statement is required, it shall be prepared at such port or place in the United States as directed by Owner, unless otherwise mutually agreed by an Adjuster appointed by Owner and approved by Charterer, who shall attend to the settlement and collection of the General Average, subject to customary charges. General Average Agreements and/or security shall be furnished by Owner and/or Charterer, and/or Owner and/or consignee of cargo, if requested. Any cash deposit being made as security to pay General Average and/or salvage shall be remitted to the Average Adjuster and shall be held by him at his risk in a special account in a duly authorized and licensed bank at the place where the General Average statement is prepared. Should the Vessel put into a port of distress or be under average, it is to be consigned to the Owner's agents, paying them the usual charges and commissions. 40. BENEFIT OF LIMITATIONS Any provision of this Charter to the contrary notwithstanding, Owner shall have the benefit of all limitations of, and exemptions from, liability accorded to the Owner or chartered owner of vessels by any applicable statute of rule of law for the time being in force. 41. ARBITRATION Any and all differences and disputes of whatsoever nature arising out of this Charter which cannot be resolved by the parties shall be put to arbitration in the City of New York pursuant to the laws relating to arbitration there in force, before a board of three persons, consisting of one arbitrator to be appointed by the Owner, one by Charterer and one by the two so chosen. The decision of any two of the three on any point or points shall be final. Either party hereto may call for such arbitration by service upon any officer of the other, wherever he may be found, of a written notice specifying the name and address of the arbitrator chosen by the first moving party and a brief description of the disputes or differences which such party desires to put to arbitration. If the other party shall not, by notice served upon an officer of the first moving party within two weeks of the service of such first notice, appoint its arbitrator to arbitrate the disputes or differences specified then the first moving party shall have the right without further notice to appoint a second arbitrator, who shall be a disinterested person, with precisely the same force and effect as if said second arbitrator had been appointed by the other party. In the event that the two arbitrators fail to appoint a third arbitrator within twenty days of the appointment of the second arbitrator, the appointment of a third arbitrator shall be made by the acting president of the Society of Maritime Arbitrators, Inc. (New York) and the appointment of such arbitrator shall have precisely the same force and effect as if such arbitrator had been appointed by the two arbitrators. Until such time as the arbitrators finally close the hearings, either party shall have the right by written notice served on the arbitrators and on an officer of the other party to specify further disputes or differences under this Charter for hearing and determination. Awards made in pursuance of this Clause may include costs, including a reasonable allowance for attorney's fees, but may not include punitive or multiple damages. Judgment may be entered upon any award made hereunder in any court having jurisdiction in the premises. Should either party desire it, arbitration proceedings hereunder will be consolidated with any arbitration under the MOA. 42. BROKER'S COMMISSIONS Owner warrants that there are no brokerage commissions payable with respect to this Charter and will indemnify, hold harmless and defend Charterer against any claim for brokerage commission. 43. INSPECTION AND SUPERCARGOES Charterer or its agents or designees shall have the right at any time, and from time to time, during the term of this Charter to, at its own expense, (a) inspect, survey and/or audiogauge and/or photograph or videotape the entire reach of the Vessel, including its underwater parts, cargo and machinery spaces, to the fullest possible extent, and (b) place a technical consultant and/or supercargo on the Vessel. 44. SUBCHARTER Charterer shall not subcharter the Vessel to any party whatsoever unless written consent shall first be obtained from Owner, which consent shall not be unreasonably withheld. In the event of any subcharter, Charterer shall reimburse Owner for any expenses incurred by Owner for the operation of the Vessel in connection with any subcharter which exceed the expenses which Owner would have otherwise not have incurred in the employment of the Vessel in the U.S. East coast carriage of coal to Charterer's Massachusetts generating stations; provided, however, that Charterer shall not be required to reimburse Owner for any extra wages or overtime of the Master, Officers or crew (except as provided in Clause 32 or as otherwise agreed by Charterer and Owner, or except where such excess expenses result from overtime incurred at the specific request of Charterer which is in excess of the overtime incurred in the Vessel's regular employment). Upon Charterer's request Owner will promptly provide Charterer with its best estimate of such costs for any proposed subcharter specified by Charterer. 45. RESTRICTIONS ON USE OF VESSEL Notwithstanding any other provisions of this Charter, the Vessel shall not without the prior approval of the United States Maritime Administration, trade to or from any country listed by the United States Maritime Administration in its General Order No. 59 (46 CFR 221.7), as the same may be amended from time to time. Charterer agrees to take no action that would cause the Vessel to cease to qualify as "Section 38 property" as defined in Section 48 of the Internal Revenue Code. 46. OPERATIONAL AND COMMERCIAL OFF-HIRE Under this Charter there shall be two categories of off-hire: Operational and Commercial. They are defined as follows: A. Operational off-hire shall be deemed to have occurred in the event of loss of time continuing for more than four hours through: (1) deficiency of personnel; (2) deficiency of stores; (3) breakdown (whether partial or otherwise) of propulsion and/or cargo unloading machinery or boilers; (4) accident or damage to the Vessel including collision or stranding; (5) a strike of Officers or crew of the Vessel (but not a strike of the longshoremen, miners or other facilities notwithin the control of the Owner); or (6) any other cause preventing the efficient working of the Vessel. B. Commercial off-hire shall be deemed to have occurred in the event the Charterer provides adequate written notice to Owner, and which has been accepted and agreed by Owner in accordance with Clause 16. C. In the event of an operational off-hire period that appears to Charterer will extend longer than 35 consecutive days, Owner shall be obligated to provide suitable coal transport capacity in the form of other colliers or barges, at a cost per short ton equivalent no greater than the equivalent cost of coal transport for the voyage then underway, at the time charter rate then payable. The first delivery of such coal shall be made within 45 days from the date the Vessel first entered an operational off-hire period, unless otherwise directed by Charterer. Charterer will discuss with Owner the possible use of non U.S. flag substitute tonnage, to the extent suitable and provided Charterer does not use its own sources for non U.S. flag tonnage. In any event, Charterer will be under no obligation to accept non U.S. tonnage from Owner. D. The commencement of an operational off-hire period shall be four hours after the Vessel experiences an operational off-hire event defined in this Clause 46A, as reported by the Vessel, at which time hire shall cease to be payable. Operational off-hire shall terminate upon the Vessel reaching an equivalent position with respect to vessel's operations underway at the time the operational off-hire period commenced. Any provision of this Charter to the contrary notwithstanding, the Charterer shall not pay hire for any period of operational off-hire even if the period(s) of operational off-hire in any one Charter Year reduce(s) the number of days on-hire below the minimum specified in Clause 1. E. The commencement of a commercial off-hire period shall be when the Vessel passes sea buoy at the entrance to Chesapeake Bay in ballast condition or comparable point of deviation, at which time hire shall cease to be payable. Commercial off-hire shall terminate, and hire shall be payable upon, the Vessel reaching the following points: (i) if Charterer orders the Vessel to a South America coal load port as the first voyage after delivery of the Vessel after termination of a commercial off-hire period, then delivery shall take place 24 hours after dropping last outbound sea pilot at the last port where Vessel called for the Charterer or where the Vessel called during the commercial off-hire period, or whichever is less; (ii) if Charterer orders the Vessel to a US East Coast coal load port as the first voyage after delivery of the Vessel after termination of a commercial off-hire period, then delivery shall take place on passing the sea buoy at the entrance to Chesapeake Bay or comparable position prior to arrival at that next load port; (iii) if Charterer orders the Vessel to any other port not specified in (i) or (ii) above, after delivery of the Vessel after termination of a commercial off-hire period, then delivery shall take place at such time as the Vessel would have reached an equivalent position on a round trip voyage basis had the commercial off-hire period not taken place. F. Upon redelivery of the Vessel to Owner at the commencement of pre-agreed commercial off-hire periods, or upon delivery of the Vessel to Charterer at the end of such periods, or as soon thereafter as practicable, surveys of bunker coal and/or fuel oils shall be conducted. Expenses for fuel surveys shall be borne equally by Owner and Charterer. Time required for such surveys shall be for Owner's account when delivering to the Charterer, and shall be for the Charterer's account when redelivering to Owner. Surveyed quantities shall be adjusted up or down to account for the advance periods of delivery and redelivery specified above, in accordance with vessel records of fuel actually consumed during these periods. With regard to fuels actually consumed during these periods, Owner agrees to make available to Charterer adequate records of same. 47. ATTACHMENT, ARREST, ETC. A. If the Vessel shall be detained (otherwise than in the normal course of her business or operations) attached, arrested or if the Vessel shall be otherwise levied upon or taken into custody by virtue of proceedings in any court or tribunal in the United States or any foreign country or by any governmental or other authority, Owner shall cause (i) the Vessel to be released as promptly as practicable and in any event within five days after any such attachment, arrest, levy or taking occurring in the United States, and (ii) any lien to be discharged to the extent that such lien is not being contested in good faith by or on behalf of the Owner through appropriate proceedings without risk of a sale, forfeiture or loss of the Vessel. In the event the Vessel is detained (otherwise than in the normal course of her business or operations), arrested, attached or levied upon or taken into custody by any authority whatsoever, and it appears that such will interfere with the next anticipated redelivery event, Owner will immediately notify the Charterer. B. Subject to Section 46, in the event of loss of time of the Vessel by virtue of a detention, attachment, arrest, levy or other taking into custody of the Vessel (but excluding loss of time due to action or inaction of Charterer or its agents or due to liens or claims which predate Owner's title in the Vessel), the Vessel will be on operational off-hire for all time so lost. However, in all cases of such detention, attachment, arrest, levy or other taking into custody, Owner will ensure that its P&I Club will post the appropriate bond, letter of undertaking or other security to promptly release the Vessel. 48. ASSIGNMENTS A. This Charter shall not be assigned by either party without the prior written consent of the other party. In any such event and notwithstanding any such assignment and consent, assignor shall continue to perform its duties and obligations under this Charter Party and shall remain responsible as primary obligor therefor, unless it provides acceptable assurances to the other party covering any liabilities of the assignee. B. Owner's rights and obligations under this Charter are not transferable by sale without Charterer's consent. In the event of the Vessel being sold without its consent Charterer may (including a requisition for title pursuant to Clause 33A), at its absolute discretion, terminate the Charter upon written notice to the Owner (except with respect to obligations and liabilities hereunder, actual or contingent, which have arisen on or prior to such date of termination), without being required to purchase the Vessel, without prejudice to any of Charterer's other rights or remedies. 49. WAR RISK INSURANCE Any increase in War Risk Insurance costs because of increased rate over those in effect on date of this Charter, and prompted by voyages to war risk zones by the Charterer shall be for Charterer's account. The Vessel's valuation in such insurance shall be mutually agreed to by Owner and Charterer. 50. ICE SECTION The Vessel shall not be ordered to or bound to enter any icebound port or place or any place where lights, lightships, marks or buoys on Vessel's arrival are or are likely to be withdrawn by reason of ice, or where there is a risk that ordinarily Vessel will not be able on account of ice to enter, reach or leave the place. Vessel shall not be obliged to force ice nor to follow icebreakers. If on account of ice the Master considers it dangerous to enter or remain at any loading or discharging place for fear of the Vessel being frozen in and/or damaged, he shall have the liberty to sail to another place or port which is free from ice and there await Charterer's further instructions. This Clause shall be deemed incorporated in Bills of Lading under applicable circumstances. 51. BILL OF LADING SECTIONS All Bills of Lading issued under this Charter shall contain the Clause Paramount, War Risks, Both-to-Blame, New Jason and Ice Section in form and substance as set forth herein. 52. TERMINATION This Charter may be terminated by Charterer at any time after seven years from initial delivery hereunder for any reason upon not less than 180 days prior written notice from Charterer to Owner and provided that it include or be accompanied by a Notice of Intention to Exercise Purchase Option for the Vessel, in accordance with Appendix 4 of this Charter. Such notice shall specify a provisional Termination Date. If, however, a Notice of Intention to Exercise Purchase Option is made by Charterer pursuant to this Clause, and the purchase is not consummated on the provisional Termination Date, or within 30 days thereof, such Notice of Intention to Exercise Purchase Option shall be deemed to have been withdrawn. This Charter shall thereupon continue as though no such Notice had been given, except that Charterer agrees to reimburse Owner for costs, if any, directly related to the planned purchase of the Vessel, subject to a cap of $50,000. 53. OPTION TO SHORTEN CHARTER PERIOD a. Charterer will have the option declarable the latest by the end of the 12th Charter Year to change the charter period to thirteen (13) consecutive years, in which case Charterer will pay Owner in addition to the aforementioned charter hire (plus escalation as applicable) for the days on-hire during the 13 consecutive years, a lump sum charter hire of Thirteen Million Three Hundred Thousand Dollars ($13,300,000) on the last day of the Charter. b. Charterer will also have the option declarable the latest by the end of the 13th Charter Year to change the charter period to fourteen (14) consecutive years, in which case Charterer will pay Owner in addition to the aforementioned charter hire (plus escalation as applicable) for the days on-hire during the 14 consecutive years, a lump sum charter hire of Six Million Six Hundred Fifty Thousand Dollars ($6,650,000) on the last day of the Charter. c. Upon exercising either option Charterer shall have the right to prepay the said lump sum charter hire (with adjustment for accelerated payment) in installments over the remaining term of the Charter, at the time of each monthly payment of hire is made, with effect from the first day of the month in which the declaration is made. The adjustment for accelerated payment shall be calculated by discounting for the relevant period of acceleration the applicable lump sum, using the interpolated United States Treasury rate corresponding to the period of time from the date of the exercise of the option until the anticipated end of the Charter. 54. INSURANCE At all times during the term of this Charter, the Owner shall cause the Vessel to be insured, through responsible and experienced marine underwriters, for all customary risks including but not limited to hull, increased value, protection and indemnity, including pollution coverage, war risk, and second seaman's war risk in amounts no less than commercially reasonable and appropriate amounts. Owner shall also carry excess liability insurance in such amount as Owner and Charterer shall agree. All policies shall be with companies and under policy forms approved by Owner and Charterer, such approvals not to be unreasonably withheld. All policies shall name as assureds, as interests may appear, Owner and Charterer with a waiver of subrogation as against the Charterer. Owner shall provide and/or afford Charterer access to all documentation and records relating to insurance for or relating to the Vessel. 55. INTERIM VOYAGES BY OWNER It is recognized by the parties that there will be reoccurring periods of commercial off-hire. Redelivery and delivery events will therefore occur when the Charterer places the Vessel in commercially off-hire mode in accordance with Clause 46, and when the Charterer desires the return of the Vessel to its customary trades, respectively. During these periods of commercial off-hire, the Owner may trade the Vessel in any lawful cargo and between any ports which it chooses. Upon completion of any commercial off-hire period, Owner shall deliver the Vessel to Charterer with holds clean and dry, free of cargo, and ready in all respects to load steam coal. Any provision of this Charter to the contrary notwithstanding, Charterers shall have no responsibility or liability whatsoever for or relating to the Vessel or her operation during periods of commercial off-hire or any consequences thereof. 56. STEVEDORE DAMAGE Stevedores will be appointed by and paid for by Charterer. Should any damage be caused to the Vessel or her fittings by the stevedores, the Master has to try to let stevedores repair such damage and try to settle the matter directly with them. The Master also shall endeavor to obtain written acknowledgment of the damage and liability from the concerned stevedores immediately at the occurrence. Charterer shall not be responsible for any damage caused by stevedores to the Vessel unless the Master immediately notifies Charterer or its agents of such damage within 24 hours from the occurrence. Such notice will specify the damage in detail and invite Charterer to appoint a surveyor to participate in assessing the extent of such damage. If Charterer is responsible hereunder: A. In the case of any damage(s) affecting the Vessel's seaworthiness and/or the safety of the crew and/or affecting the trading capabilities of the Vessel, the Charterer will immediately arrange for repairs of such damage(s) at its expense and the Vessel is to remain on-hire until such repairs are completed and, if required, passed by the Vessel's classification society. B. Any damage(s) not described under A above will be repaired, at Charterer's option, before or after redelivery concurrently with Owner's work. In such case no hire and/or expenses will be paid to Owner except when the time and/or the expenses required for the repairs for which Charterer is responsible exceed the time and/or expenses necessary to carry out Owner's work. 57. LIGHTERING Vessel may lie safely alongside another vessel/coasters/lighters at a safe dock, wharf or place (including anchorages) for transshipment and/or discharge of cargo and/or bunkering if such operation is customarily carried out at such places. Such operation will be carried out always subject to good weather, smooth and calm sea, slight wind and current when Master thinks fit and safe under the supervision of and at the discretion of the Master. The Master may at any time order the vessel/coasters/lighters away from his Vessel, or remove his own Vessel, at Charterer's time and expense. If the Master considers the double banking by ship's own propelling unsafe, the Master may include tug services at Charterer's time and expense. Charterer will supply extra fenders and/or securing materials, if necessary, and indemnify Owner/Vessel against all cargo claims as a result of such operation. Charterer also will indemnify Owner from any additional insurance premium to cover additional risks for Vessel, loss of hire and/or shipowner liabilities, and Charterer will give Owner due advance notice of their intention to perform such operation advising approximate type and quantity of cargo involved, the other vessel concerned destination of cargo and location of operation. Charterer will always indemnify Owner for any damages to Vessel, claims from the other alongside vessel and/or loss of hire resultantly incurred from the unsafety of the operations and/or any omission occasioned by crew members of both vessels. 58. MISCELLANEOUS This Charter, including all Appendices referenced herein, constitutes the entire understanding of the parties with respect to the subjects referenced herein and there are no representations, understandings, agreements, oral or written, which are not included herein. The terms and provisions hereof shall extend to and be binding upon the successors and assigns of the parties hereto. Any amendment hereto shall be evidenced by a writing signed by a duly authorized representative of each party. 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. The failure of either party to insist in any one instance or more upon strict performance of any of the terms and conditions hereof, or to exercise any right or privilege herein conferred, shall not be construed as waiver of such terms, conditions, rights or privileges, but the same shall continue and remain in full force and effect. The article headings in this Charter are for descriptive purposes only. 59. NOTICES Except as otherwise provided in this Charter, all notices, demands, designations, certificates, requests, offers, consents, approvals and other instruments given pursuant to this Charter shall be in writing and shall be validly given when sent by overnight courier delivery or by telefax (a) if to Owner, addressed to International Shipholding Corporation, One Whitehall Street, New York, New York 10004, Attention: Niels M. Johnsen, Vice President, and (b) if to Charterer, addressed to New England Power Company at 25 Research Drive, Westborough, Massachusetts 01582, Attention: Sheridan A. Glen, Director, Coal and Oil. Owner and Charterer each may from time to time specify any address in the United States as its address for purposes of this Charter by giving 15 day's written notice to the other party. IN WITNESS WHEREOF, the parties by each of its duly authorized representative signs in the spaces set forth below this 1st day of November, 1994. WITNESS International Shipholding Corp. on its own behalf and on behalf of its Nominee WITNESS New England Power Company APPENDIX 2A S.S. ENERGY INDEPENDENCE CHARTER PARTY DATED OCTOBER 27, 1994 Speed Warranty Calculation 1. The sea passage portion of both the laden and ballast legs of all voyages (load port to load port) shall be used, excluding in their entirety both legs of any voyage during which: (a) the Vessel reduced its speed at Charterer's request or due to fog or due to other adverse weather conditions or as provided in paragraph 4 below; or (b) the Vessel encountered winds in excess of Beaufort 5 for a sustained period of 2 hours or greater. All voyages not so excluded are referred to as the "Qualifying Speed Voyages". Owner will ensure at least three (3) Qualifying Speed Voyages per year. 2. The log records shall be used to determine the time and distance of the sea passages on all Qualifying Speed Voyages. The sea passage shall begin at the load port sea buoy (or the discharge port sea buoy, as the case may be) and end at the discharge port sea buoy (or the load port sea buoy, as the case may be). For ballast voyages from Salem Harbor utilizing the Cape Cod Canal, the discharge port sea buoy shall be the Buzzard's Bay pilot station. 3. The average speed on the Qualifying Speed Voyages shall be calculated by dividing (a) the total nautical miles travelled on the sea passages of all of the Qualifying Speed Voyages by (b) the total time in hours utilized on such sea passages. If such average speed is less than 14.47 knots, the speed guarantee payment to be paid by Owner to Charterer pursuant to Clauses 5B, C and D of the Charter shall be calculated in accordance with the following example: Assumption: Qualifying Speed Voyages - Total Elapsed Time Sea Buoy to Sea Buoy Legs: 1,200 hrs. Average Speed: 14.4 knots Total Nautical Miles: 17,280 Warranty Speed: 14.47 knots Total Time in Calendar Year (excluding time under Paragraph 4 below) Sea Buoy to Sea Buoy: 4,000 hrs. Daily Hire for Charter Year: $45,000 Calculation: Time Allowed on Qualifying Speed Voyages at Warranty Speed: 17,280 mi = 1,194.19 hrs. --------- 14.47 kts Excess Time on Qualifying Speed Voyages = 1,200.00 hrs. - 1,194.19 hrs. ------------- 5.81 hrs. Excess Time Percentage: 5.81 = 0.484% ----- 1200 Penalty Hours: 0.484% x 4,000 hrs. = 19.36 Penalty Days: 19.36 = 0.8067 ----- 24 Total Penalty: 45,000 x 0.8067 = $36,301.50 4. In the event the Vessel's maximum speed is reduced during any sea passages from sea buoy to sea buoy by 10% or more as a result of a breakdown of the Vessel, the entire period during which the Vessel is required to operate at such reduced speed ("Breakdown Speed Period") shall be eliminated from the speed performance calculations of the calendar year in question under paragraphs 1 through 3 above. Owner shall notify Charterer of any Breakdown Speed Period within five (5) days of the occurrence of the breakdown. Charterer's claim for speed deficiency for all sea passages from sea buoy to sea buoy during any Breakdown Speed Period shall be made separately as against the same warranted speed and in the same manner as provided in paragraphs 1 through 3 above based upon voyages which would otherwise be Qualifying Speed Voyages but for the breakdown. 5. Amounts payable under this Appendix 2A shall not be netted against any amounts payable under Appendices 2B or 3. APPENDIX 2B S.S. ENERGY INDEPENDENCE CHARTER PARTY DATED OCTOBER 27, 1994 Fuel Warranty Calculation Sea Passage Warranty 1. The sea passage portion of both the laden and ballast legs of all voyages (load port to load port) shall be used, excluding in their entirety both legs of any voyage during which: (a) the Vessel reduced its speed at Charterer's request or due to fog or due to other adverse weather conditions or breakdown of the Vessel; or (b) the Vessel encountered winds in excess of Beaufort 5 for a sustained period of 2 hours or greater. All voyages not so excluded are referred to as the "Qualifying Fuel Voyages". 2. The log records shall be used to determine the time and distance of the sea passages on all Qualifying Fuel Voyages. The sea passage shall begin at the load port sea buoy (or the discharge port sea buoy, as the case may be) and end at the discharge port sea buoy (or the load port sea buoy, as the case may be). For ballast voyages from Salem Harbor utilizing the Cape Cod Canal, the discharge port sea buoy shall be the Buzzard's Bay pilot station. 3. Fuel consumption on any sea passage shall be determined as recorded in the ship's logs. 4. The average fuel consumption on sea passages on the Qualifying Fuel Voyages shall be equal to (a) the total fuel consumed on the sea passages of the Qualifying Fuel Voyages, divided by (b) the time taken on such sea passages (in hours). Load Port/Discharge Port Warranty 1. The portion of all voyages during which the Vessel is at berth in the load/discharge port shall be used. Such voyages are referred to as the "Qualifying Ports". 2. The log records shall be used to determine the time and fuel consumption at the load/discharge ports on all Qualifying Ports. The time spent at berth in the load/discharge port shall begin at FWE and end at STBY Engines. 3. The fuel consumption per day at the load/discharge berth on the Qualifying Ports shall be equal to (a) the total fuel consumed at the load/discharge berth on the Qualifying Ports, divided by (b) the total time in hours spent at load/discharge berth on such voyages. Warranty Charge Calculation Formula: The fuel warranty charge (if any) payable by Owner to Charterer pursuant to Clauses 5B, C and D of the Charter shall be calculated in accordance with the following: A. Load Port: (Warranty: 38 mmbtus per hr.) Total time in LP = sum of (FWE - STBY) for all Qualifying Ports Allowed consumption in LP = (Total Time (hrs) x 38) = a1 mmbtus Actual consumption in LP = b1 (from log books) mmbtus Adjustment = b1 - a1 mmbtus $ Adjustment only if b1 - a1 is positive: (b1-a1) x Avg. Fuel Cost/Year in $ per mmbtus = A1$ B. Discharge Port: (Warranty: 42 mmbtus per hr.) Total time in DP = sum of (FWE - STBY) for all Qualifying Ports Allowed consumption in DP = (Total Time (hrs) x 42) = a2 mmbtus Actual consumption in DP = b2 (from log books) mmbtus Adjustment b2 - a2 = mmbtus $ Adjustment only if b2 - a2 is positive: (b2 - a2) x Avg. Fuel Cost/Year in $ per mmbtus = A2 $ C. Sea Passage/Navigation: (Warranty: 119 mmbtus per hr.) Total fuel consumed in Charter Year = X Fuel consumption in all LP/DP = (b1 + b2) Actual Sea/Navigation consumption = [X - (b1 + b2)] = X1 Total time at sea = Hours from sea buoy to sea buoy (from logbooks) Allowed consumption at sea = (Total Time x 119) = c1 Actual consumption at sea = d1 (from log books) mmbtus Engine Efficiency: (only if d1 > c1) = d1 = y1 c1 $ Adjustment Allowed only if y1 is > 1.0: [x1 - x1] x Avg. Fuel y1 Cost/Year in $ per mmbtus = A3 $ Payment of a fuel warranty charge is due only if A1, A2 and/or A3 are positive numbers, with no netting of one against the other or against any payment due under Appendices 2A or 3. Example: The following example illustrates application of this formula: Assumptions: Performance on Qualifying Fuel Voyages, Loadings and Discharges: at sea - 130 mmbtus/hour at load port - 40 mmbtus/hour at discharge port - 44 mmbtus/hour Warranted Performance: at sea - 119 mmbtus/hour at load port - 38 mmbtus/hour at discharge port - 42 mmbtus/hour Average cost of fuel delivered to the Vessel during calendar year: $1.85/mmbtus Actual usage during the calendar year: Total: 795,000 mmbtus (from ship's log) at load port 68,000 mmbtus (from ship's log) at discharge port 77,000 mmbtus (from ship's log) at sea (sea buoy 520,000 mmbtus (from ship's log) to sea buoy) balance is: navigation passage: 130,000 mmbtus sum of: sea and navigation: 650,000 mmbtus Calculations: A. Load Port: Total time in LP = 72 x 24 = 1,728 hours Allowed consumption in LP = 1,728 x 38 = 65,664 mmbtus Actual consumption in LP = 68,000 mmbtus Adjustment 68,000 - 65,664 = 2,336 mmbtus $ Adjustment 2,336 x 1.85 = (A1) = $ 14,321.60 B. Discharge Port: Total time in DP = 74 x 24 = 1,776 hours Allowed consumption in DP = 1,726 x 42 = 72,492 mmbtus Actual consumption in DP = 77,000 mmbtus Adjustment 77,000 - 72,492 = 4,508 mmbtus $ Adjustment 4,508 x 1.85 = (A2) = $ 8,339.80 C. Sea Passage/Navigation Actual sea/navigation consumption: Total - LP/DP = 650,000 mmbtus Total time at sea = 4,000 hours Allowed consumption at sea = 4,000 X 119 = C1 = 476,000 mmbtus Actual consumption at sea = d1 = 520,000 mmbtus Engine efficiency = d1/c1 = Y1 = 1.0924 Dollar adjustment: (650,000 - 650,000) x $1.85 = A3 1.0924 = 54,980 x 1.85 = $101,713 Payment adjustment: from Owner to Charterer: A1 = $ 4,321.60 A2 = $ 8,339.80 A3 = $101,713.00 Total due: from Owner to Charterer: $ A1 + A2 + A3 = $114,374.40 APPENDIX 3 S.S. ENERGY INDEPENDENCE CHARTER PARTY DATED OCTOBER 27, 1994 Unloader Test Procedure And Warranty Calculation 1. The time utilized for unloading the Vessel during any test shall be measured from the time the Vessel commences operation of her unloading equipment until she ceases such operation upon completion of discharge without deductions for any reason other than reduction or cessation of unloading at the request of Charterer. 2. The tonnage unloaded shall equal (a) the coal on board prior to loading, as reported in the Vessel's logs, plus (b) the coal loaded as stated in the bill of lading, less (c) the coal remaining on board after discharging, as reported in the Vessel's logs, provided the Vessel shall not be deemed to have effected a complete unloading until the amount of cargo coal remaining on board is less than 200 short tons. 3. The test unloading rate shall be the tonnage unloaded, as determined in paragraph 2 above, divided by the time utilized for unloading the Vessel, as determined in paragraph 1 above. If a test requested by Charterer is completed and results in an average unloading rate of less than 3,100 short tons per hour, the Vessel shall be considered out of compliance with the discharge warranty provided in Clause 5E of the Charter, until such time as the Vessel completes a full load discharge test pursuant to Clause 5E and this Appendix 3 at an average discharge rate of 3,100 short tons per hour or more. In the event that the Owner fails to make necessary repairs to the Vessel so that it passes such unloading test at the next discharge port, damages payable by Owner to Charterer shall be calculated in accordance with the following example: Assumptions: Performance in the discharge test requested by Charterer: 2,900 short tons/hour Number of short tons unloaded between failing the initial unloading test and passing a compliance test in accordance with the above procedure (but not including the tonnage unloaded in either test): 240,000 Hours unloading @ 3,100 ST/HR = 240,000 = 77.42 hours 3,100 Hours unloading @ 2,900 ST/HR = 240,000 = 82.76 hours 2,900 Time deemed lost due to non-compliance: 82.76 - 77.42 hrs. = 5.34 hrs. = 0.2225 days Daily rate at $45,000 per day Damages payable by Owner: 0.2225 days x $45,000 = $10,012.50 4. Amounts payable under this Appendix 3 shall not be netted against any amounts payable under Appendices 2A or 2B. APPENDIX 4 Charterer's Purchase of Owner's Rights in the Vessel 1. Acknowledgment. Owner acknowledges that Clause 52 of this Charter, as worded, entitles Charterer for any reason whatsoever in its absolute and unfettered discretion to terminate this Charter effective any time after seven charter years have elapsed from the commencement of the Charter, provided such termination is pursuant to a Notice of Intention to Exercise Purchase Option given not less than 180 days in advance of such termination. 2. Termination Date. As used in this Charter, the Termination Date is the date on which Charterer consummates its purchase of Owner's Rights in the Vessel, under Clause 3B or Clause 52 of this Charter. Unless otherwise terminated, the Charter shall remain in full force and effect until the Termination Date. 3. Owner's Rights in the Vessel. As used in this Charter, the term "Owner's Rights in the Vessel" shall mean and include all of Owner's right, title and interest in and to the Vessel, and all rights, claims, causes of action, benefits and other legal or equitable interests deriving from, or accruing to Owner as a result of constructing, owning, leasing, financing, operating, chartering or using the Vessel including, without limitation, all of Owner's right, title and interest in and to the following: (a) the Vessel, together with her engines, boilers, machinery, masts, boats, anchors, cables, chains, tackle, apparel, furniture, capstans, pumps, hatches, unloading systems and all other appurtenances thereto, and also any and all additions, improvements and replacements made in or to the Vessel or said appurtenances and all spare parts ashore and on board; (b) contracts, now in existence or hereafter entered into, relating to the construction, reconstruction and repair of the Vessel; (c) all agreements and commitments relating to the financing of the Vessel, including, as the case may be, the construction, reconstruction, repair and/or purchase of the Vessel, to the extent such rights and benefits are transferable, and providing Charterer opts to purchase the Vessel subject to any mortgage lien on the Vessel; (d) any charters and/or sub-charters with respect to the Vessel and hire due thereunder on and after the Termination Date; (e) all proceeds payable under insurance policies or insuring agreements with respect to the Vessel, to the extent such proceeds are not in reimbursement of any amounts theretofore paid by or for the account of Owner; (f) the proceeds of salvage and general average, to the extent that such proceeds relate to physical damage to or loss of the Vessel arising out of salvage or general average, and to the extent said damage or loss has not been repaired or replaced by Owner; and (g) the compensation, award or proceeds arising out of or relating to such period of requisition of use of the Vessel, if any, which extends after the Termination Date, providing such requisition has not previously resulted in termination of this Charter. 4. (a) Purchase Free of Mortgage Lien. In connection with a Notice of Intention to Exercise Purchase Option, Charterer may elect to purchase Owner's Rights in the Vessel free and clear of any mortgage lien on the Vessel, in consideration for which Charterer shall pay to Owner or its designee a purchase price in U.S. dollars (the "Purchase Value") equal to the applicable number set forth in Column 2 of Table 1 below opposite the period in which the date of purchase occurs (period 1 commencing with the delivery of the Vessel under the Charter and ending on and including _________, 1995 and each succeeding period being each of the following semi-annual periods of this Charter occurring thereafter). If Charterer shall purchase Owner's Rights in the Vessel pursuant to this subparagraph (a), Owner shall on the Termination Date convey good title to the Charterer or its designee in and to Owner's Rights in the Vessel free of (i) all charges, liens, security interests and encumbrances arising from acts of Owner taken without the consent of the Charterer, other than those arising out of current operations of the Vessel in accordance with this Charter, and (ii) any mortgage lien on the Vessel. Charterer or its designee will accept such interest or title in Owner's Rights in the Vessel. Table 1 Beginning of Eighth Year Purchase Option Effective at in Semi-Annual Periods Beginning of Each Semi-Annual Period - ------------------------ ------------------------------------ 15 55175730 16 52259363 17 49300160 18 46780743 19 44223519 20 41631385 21 39007526 22 36355449 23 33679008 24 30982444 25 28270423 26 25548076 27 22821047 28 20095548 29 17378406 30 146771343 (b) Purchase Subject to Mortgage and Debt. In the alternative, subject to the approval of lenders, Charterer may elect to purchase Owner's Rights in the Vessel subject to any mortgage lien on the Vessel, in consideration for which Charterer shall (i) assume the obligations with respect to any such mortgage lien on the Vessel, including the debt, and cause any person liable with respect thereto to be released from all liability thereunder, and (ii) pay to Owner an amount equal to the purchase price which would otherwise be payable pursuant to subparagraph (a) of this Clause 4, less the outstanding principal amount of the Debt and accrued and unpaid interest thereon from the last date through which Charter hire was paid under this Charter to the date of purchase. If Charterer shall purchase Owner's Rights in the Vessel pursuant to this subparagraph (b), Owner shall, on the Termination Date, convey good title to Charterer or its designee in and to Owner's Rights in the Vessel free of all charges, liens, security interests and encumbrances arising from acts of Owner taken without the consent of the Charterer, other than the assumed mortgage lien and those arising out of current operations of the Vessel in accordance with the provisions of this Charter. Charterer or its designee will accept such interest or title in and to Owner's Rights in the Vessel. 5. Payment. On the Termination Date (a) Charterer shall pay and deliver to Owner the consideration specified by Charterer pursuant to Clause 4(a) or Clause 4(b) of this Appendix 4 for Charterer's purchase of Owner's Rights in the Vessel, together with all Charter hire, if any, and other sums then due and payable hereunder to but not including such Termination Date, and (b) Owner shall deliver to Charterer or its designee a Bill of Sale in recordable form together with all other instruments necessary to convey and assign all of Owner's Rights in the Vessel with the quality of interest or title thereto specified in connection with such purchase in Clause 3 of this Appendix 4, and originals or copies of all applicable construction documents, repair records, applicable Certificates of the United States Coast Guard and classification societies, log books and such other records as may be reasonably requested by Charterer in connection with the purchase and operation of the Vessel. 6. Reservation Relating to Charter. Upon purchase of the Vessel, Charterer has agreed to accept Owner's Rights in the Vessel in accordance with the provisions of this Charter; provided, however, that such acceptance does not relieve Owner of any of its obligations pursuant to this Charter and does not constitute a waiver by Charterer with respect to any breach thereof, nor does it foreclose the exercise by Charterer of any of Charterer's rights, powers or remedies with respect thereto. 7. Termination. Unless terminated earlier in accordance with the provisions of this Charter or by operation of law, this Charter shall terminate upon the completion of Charterer's purchase, except with respect to obligations and liabilities of the parties, actual or contingent, which have arisen under this Charter on or prior to such date of purchase. 8. Owner's Further Assurances and Assistance. Owner shall, at Charterer's expense, take such steps as Charterer may reasonably require to furnish further assurances of the transfer to Charterer of Owner's Rights in the Vessel and for the purpose of enforcing Charterer's rights as transferee and assignee of Owner's Rights in the Vessel. 9. Transition Clause. (a) After delivery by Charterer of a Notice of Intention to Exercise Purchase Option and until delivery (the "Interim Operations Period"), the Vessel shall continue to be operated in accordance with the Charter. (b) During the Interim Operations Period, as permitted under the terms of the Charter, Charterer may on its own behalf and/or on behalf of its designee purchaser cause a qualified consultant to accompany the Vessel on her voyages in order to ensure that the Vessel is maintained in good condition and in American Bureau of Shipping ("ABS") Class as required under the Charter and to keep Charterers informed of the Vessel's condition. Charterer shall pay the expense of any such consultant. (c) Charterer may on its own behalf and/or on behalf of its designee purchaser place its representative at any drydock or overhaul events occurring within the Interim Operations Period. Upon request, Owner will promptly give to Charterer a copy of the requisition of work to be performed during the drydocking period. Upon request, Owner will provide Charterer with a copy of said requisition. Upon request, Owner will permit Charterer's representative to make a complete survey of the Vessel at the shipyard and in drydock. If Charterer makes such a survey, Charterer will promptly thereafter advise Owner of any additional work which needs to be performed in order to maintain class with ABS so that the Vessel will leave the drydock period with a clean American Bureau of Shipping certificate, confirming that the Vessel is in class, free of outstanding recommendations, and with confirmation that the Vessel is in compliance with this Charter, in particular Clauses 3 and 6 thereof. The cost of the aforementioned shipyard work to comply with class requirements will be paid for by Owner. (d) In the event Charterer requests any requisition for work items to be added for drydock or overhaul periods which are not necessary to maintain the Vessel's classification status, or to free the Vessel from outstanding recommendations, or return the Vessel to seaworthy condition, Owner agrees to use its best efforts to accommodate Charterer's request for such work to be completed at drydock. Any such work and resulting extra time, if any, for drydocking charges, shall be for Charterer's account. 10. Place and Time of Delivery. The Vessel shall be delivered hereunder on the Termination Date, safely afloat, at a safe berth in a safe port, as directed by Charterer. Owner shall give 30/15 days approximate notice of the delivery date, followed by 10/5 days definite notice of Vessel's expected readiness, and shall keep Charterer advised of Vessel's itinerary. If Charterer requires delivery to a designee, whether or not related to Charterer, Owner's delivery obligation shall be performed and satisfied by duly conveying Owner's Rights in the Vessel to Charterer's designee. 11. Drydocking. (a) Prior to delivery of the Vessel, the Charterer (or its designee) may cause the Vessel to be placed in drydock at the port of delivery for inspection by ABS representatives of the bottom and other underwater parts below the Summer Load Line. If the ABS representatives find the rudder, propeller, bottom or other underwater parts below the Summer Load Line to be broken or defective so as to affect the Vessel's clean certificate of class, such defects shall be made good at Owner's expense to ABS satisfaction without qualification. (b) While the Vessel is in drydock, and if requested by the Charterer (or its designee) or the ABS representative, the tail-end shaft shall be drawn. Should same be condemned or found defective so as to affect the Vessel's clean certificate of class, it shall be renewed or made good at Owner's expense to ABS satisfaction without qualification. (c) The expenses of drawing and replacing the tail-end shaft shall be borne by Owner. In all other cases the Charterer (or its designee) shall pay the aforesaid expenses, dues and fees. (d) The expenses in connection with putting the Vessel in and taking her out of drydock, including drydocking dues and the ABS surveyor's fee, shall be paid by Owner if the rudder, propeller, bottom, other underwater parts below the Summer Load Line or the tail-end shaft be found broken, damaged or defective so as to affect the Vessel's clean certificate of class. In all other cases the Charterer (or its designee) shall pay the aforesaid expenses, dues and fees. (e) During the above-mentioned inspections by ABS, representatives of Charterer and/or its designee shall have the right to be present in the drydock, but without interfering with the ABS surveyors' decisions. (f) Promptly after delivery of the Vessel, the Charterer (or its designee) may have the manufacturer of the inclined lift conveyor system inspect the same and issue its report to Charterer, as designee and Owner stating whether the system is in operating condition adequate to meet the discharge rate warranty in the Charter, or, if not, what repairs are required to bring the system up to such operating condition. Any repairs and/or refurbishment, including repairs to the teflon panels in the cargo holds/hoppers, which are necessary to place the system in such operating condition, will be performed at Owner's expense. Owner's representative shall have the right to be present while such inspection is being made, but without interfering with the manufacturer's decisions. 12. Condition On Delivery. Any other provision of this Charter to the contrary notwithstanding, if at the time scheduled for delivery, work remains to be done to maintain or bring the Vessel within ABS Class free of outstanding recommendations ("Remaining Work"), Charterer (or its designee) at its own option may (a) accept delivery of the Vessel as is, where is, under terms of this Appendix 4 and the Remaining Work will thereafter be done at Owner's expense or (b) reschedule the Termination Date and the delivery of the Vessel to take place after completion of the Remaining Work. 13. Encumbrances. Providing Owner is able to deliver and pass title to the Vessel to Charterer, should any claims and/or liens which have been incurred prior to the time of delivery (but not before original delivery to Owner under MOA dated October 27, 1994) be asserted against the Vessel or interfere with the Vessel's operation, Charterer shall take delivery and title, provided, however, that Owner shall hold Charterer harmless from and indemnify Charterer against Charterers' payment of any such claims and/or liens against the Vessel, but in no event shall Owner be liable for Charterer's incidental or consequential damages or losses, howsoever arising, whether claimable in law, equity or otherwise, including, without limitation, any loss of profits. 14. Revocable Notice. Charterer at any time for any reason shall have the unfettered right to withdraw its Notice of Intention to Exercise Purchase, provided, however, that Charterer shall give Owner as much notice of its intention to withdraw said Notice as is feasible and shall pay Owner the direct operational costs, if any, theretofore caused by or resulting from said Notice, subject to a cap of $50,000. NEW YORK, NEW YORK SEPTEMBER 22, 1995 ADDENDUM NUMBER ONE TO TIME CHARTER OF S/S ENERGY INDEPENDENCE BETWEEN INTERNATIONAL SHIPHOLDING CORPORATION OR ITS GUARANTEED NOMINEE, AS OWNER, AND NEW ENGLAND POWER COMPANY OR ITS NOMINEE, AS CHARTERER, DATED OCTOBER 27, 1994 It is this day mutually agreed that this Charter is amended, as follows:- CLAUSE 2. "DELIVERY/REDELIVERY EVENTS" Is DELETED and substituted for by the following Clause:- ------- "2. "DELIVERY/REDELIVERY EVENTS" Under the terms and conditions of the MEMORANDUM OF AGREEMENT (MOA) dated October 27, 1994 between New England Power Company (NEP), as Seller, and International Shipholding Corporation (ISC) and a Guaranteed Nominee of ISC to be named, as Buyers, Clause 6 thereof stipulates, in part, that "Buyers shall accept delivery of the Vessel as is, where is, free of registered encumbrances". Delivery under this Charter will take place simultaneously with delivery under the aforementioned MOA at the same time and same place. Thereupon the terms and condition of this Charter are in full force and effect. After the simultaneous delivery under the MOA and this Charter, the terms and conditions of both the aforementioned MOA and this Charter are applicable to the period and to the events that occur after said simultaneous delivery of the Vessel. Any time used after the initial delivery under this Charter for purposes of performing drydocking and shipyard work will be off-hire (but NEP remains responsible for reimbursement payments as per Clause 11 and hire payments, if any, as per Clause 9 (f) - "Dry Docking" of the MOA). If the drydocking and shipyard work occupy more than 65 days, Charter Year One must be extended so that at the initial commencement of on-hire it includes a minimum of 300 days as contemplated in Clause 1 of this Time Charter. Upon termination of the Charter including extensions, if any, the Vessel will be redelivered to the Owner at any port on the United States East Coast at Charterer's option, free of cargo. Charterer is to give the Owner 30 days prior notice of the place of redelivery. "It is recognized by the parties that there will be re-occurring delivery and redelivery events during the period of this Charter. All such events other than delivery and redelivery at the commencement and termination, respectively, of this Charter, shall be guided by Clause 46 herein." APPENDIX 4 - Paragraph 4 (a) - DELETE "(period 1 commencing on May 1, 1995 and ending six months later, on November 1, 1995, and each succeeding period being each of the following semi-annual periods occurring thereafter)" and SUBSTITUTE "(period 1 commencing on the date on which the purchase actually occurs and ending six months later, and each succeeding period being each of the following semi-annual periods occurring thereafter)". All other terms and conditions of this Charter remain unaltered and in full force and effect. INTERNATIONAL SHIPHOLDING CORPORATION ON ITS OWN BEHALF AND ON BEHALF OF ITS GUARANTEED NOMINEE NEW ENGLAND POWER COMPANY s/ Niels W. Johnsen s/ Jeffrey D. Tranen BY: _______________________ By: __________________________ Name: Niels W. Johnsen Name: Jeffrey D. Tranen Title: Chairman Title: President NEW YORK, NEW YORK SEPTEMBER 22, 1995 ADDENDUM NUMBER TWO TO TIME CHARTER OF S/S ENERGY INDEPENDENCE BETWEEN INTERNATIONAL SHIPHOLDING CORPORATION OR ITS GUARANTEED NOMINEE, AS OWNER, AND NEW ENGLAND POWER COMPANY OR ITS NOMINEE, AS CHARTERER, DATED OCTOBER 27, 1994 It is this day mutually agreed that from and as of the date hereof International Shipholding Corporation (ISC) and New England Power Company (NEP) amend the Charter to provide that all of the rights and obligations of the "Owner" under the Charter have been assigned, set over and delegated to, and assumed and accepted by Central Gulf Lines, Inc. (CGL) (a wholly-owned subsidiary of ISC) in its own right as disponent owner of the Vessel under the Bareboat Charter between Enterprise Ship Company, Inc. (Enterprise), as Owner, and CGL, as Bareboat Charterer, dated September 28, 1995 and not as ISC's Nominee. All references in the Charter to "Owner" shall be deemed to be references to CGL as disponent owner. All other terms and conditions of this Charter remain unaltered and in full force and effect. INTERNATIONAL SHIPHOLDING NEW ENGLAND POWER COMPANY CORPORATION s/ Niels W. Johnsen s/ Jeffrey D. Tranen By: __________________________ By: _____________________ Name: Niels W. Johnsen Name: Jeffrey D. Tranen Title: Chairman Title: President CENTRAL GULF LINES, INC. s/ Niels W. Johnsen By: __________________________ Name: Niels W. Johnsen Title: Chairman EX-10 8 NEP EXHIBIT (10)(H) EXHIBIT (10)(h) CONSENT AND AGREEMENT This Consent and Agreement dated as of September 28, 1995 is by and among New England Power Company, a Massachusetts corporation ("Time Charterer"), Central Gulf Lines, Inc., a Delaware corporation ("CGL"), Enterprise Ship Company, Inc., a Delaware corporation ("Enterprise"), and The Bank of New York as Collateral Trustee ("Collateral Trustee"). RECITAL ------- WHEREAS, International Shipholding Corporation ("ISC") has entered into a Memorandum of Agreement, dated October 27, 1994, with Time Charterer and has, pursuant to such Memorandum of Agreement, nominated Enterprise to act as purchaser of that certain American Flag Vessel called "ENERGY INDEPENDENCE", Official No. 657540 of 24,900.7 tons gross and 16,131 tons net register (hereinafter called the "Vessel") an Addendum Number One, an Addendum Number Two and a Modification to such Memorandum of Agreement, dated September 22, 1995, September 22, 1995 and September 20, 1995, respectively, with Time Charterer (as amended, the "MOA") pursuant to which vessel shall be delivered to Enterprise; WHEREAS, by virtue of such purchase Enterprise is the owner of the Vessel and Enterprise is willing to bareboat charter the Vessel to CGL, and CGL is willing to charter the Vessel for a period of fifteen (15) successive years commencing from the time and date of delivery of the Vessel, on the terms and conditions set forth in Bareboat Charter dated as of September 28, 1995 (the "Bareboat Charter"); WHEREAS, in accepting ISC's nomination of Enterprise as purchaser under the MOA, Time Charterer has agreed that Enterprise will bareboat charter the Vessel to CGL pursuant to the Bareboat Charter in connection herewith has agreed to accept CGL as disponent owner under that certain Time Charter of the Vessel dated October 27, 1994, between ISC and Time Charterer, as amended by Addendum Number One dated September 22, 1995 and Addendum Number Two dated September 22, 1995 (as amended, the "Time Charter"); WHEREAS, Enterprise, ISC, as Guarantor, Citibank, N.A., Credit Lyonnais Cayman Island Branch and First National Bank of Commerce, as Lenders, Citibank, N.A., as Agent and Citicorp Securities Inc., as Arranger have entered into a Credit Agreement, dated as of August 15, 1995 (as amended from time to time in accordance with its terms, the "Credit Agreement") providing for a loan to Enterprise in an aggregate principal amount not to exceed $50,000,000. Pursuant to the Credit Agreement, Enterprise has concurrently entered into a Collateral Trust Agreement with The Bank of New York as Collateral Trustee (the "Collateral Trustee") pursuant to which the Collateral Trustee will hold certain security for the benefit of the Lenders; WHEREAS, CGL is executing an Assignment of Time Charter (the "Assignment") pursuant to which it is assigning and transferring to Enterprise all its right, title and interest in and to the Time Charter with respect to the Vessel; WHEREAS, Enterprise is executing a Re-Assignment of Time Charter (the "Reassignment") pursuant to which it is assigning and transferring to the Collateral Trustee all its right, title and interest in and to the Time Charter with respect to the Vessel; WHEREAS, Enterprise is also executing an Assignment of Bareboat Charter (the "Assignment of Bareboat Charter") pursuant to which it is assigning and transferring to the Collateral Trustee all its right, title and interest in and to the Bareboat Charter with respect to the Vessel; WHEREAS, the Time Charterer has been asked to consent to such assignment and reassignment of the Time Charter and assignment of the Bareboat Charter and to certain modifications of the provisions of the Time Charter; NOW, THEREFORE, in consideration of the mutual undertakings of the parties hereto, as herein set forth, it is hereby agreed as follows: I. Time Charterer hereby acknowledges notice of and, on and subject to the terms hereof, consents and agrees to the Assignment of Time Charter (the "CGL Assignment") by CGL and to the Reassignment of Time Charter by Enterprise (the "Reassignment") and to the Bareboat Charter Assignment by Enterprise referred to in the Reassignment, in each case as collateral security for the obligations of Enterprise under the Credit Agreement, the Loan Documents, the Notes and the Collateral Trust Agreement and to all of the respective terms thereof and hereby confirms and agrees: (A) that the Time Charter is in full force and effect, the Vessel has been accepted by the Time Charterer under the Time Charter, and the First "Charter Year" has commenced as of the date of this Consent and Agreement; (B) that so long as the CGL Assignment and the Reassignment are in effect, Time Charterer will make payment of all moneys due and to become due from it under the Time Charter to the Retention Account maintained by the Collateral Trustee at its office at 101 Barclay Street, New York, New York (or any account designated in writing by the Collateral Trustee as a successor or replacement bank account), until receipt of written notice from the Collateral Trustee that all obligations of Enterprise secured by the Reassignment have been paid in full; (C) pursuant to and subject to the provisions of Section 11 of the Time Charter, payment of charter hire and other sums required to be paid by Time Charterer is absolute and unconditional and shall not be subject to any abatement, reduction, right of set-off or defense by reason of counterclaim or recoupment for any reason whatsoever which the Time Charterer may have against CGL as the "Owner" under the Time Charterer; moreover, none of the undersigned will seek to recover from the collateral trustee for any reason whatsoever any moneys paid by any of the undersigned to the Collateral Trustee by virtue of the Assignment or Reassignment and this Consent and Agreement and any such payment shall be final as to the Collateral Trustee; (D) so long as the Reassignment is in effect, and subject to the Time Charterer's rights to terminate the Time Charter in accordance with its terms and as modified by this Consent and Agreement, the undersigned will not amend or supplement the Time Charter, or agree to any decrease in the total number of days in any Charter Year, without first obtaining the written consent of the Collateral Trustee (which consent will not be unreasonably withheld); and (E) that, subject to the rights of the Time Charterer under the Time Charter and this Consent and Agreement, the Time Charterer will fully cooperate with the collateral Trustee in its exercise of the rights available to the Collateral Trustee under the Reassignment, including, without limitation, the right to act as "Owner" under the terms of the Time Charter or, subject to Time Charterer's rights under Section 48A of the Time Charter, provided the Time Charterer's consent will not be unreasonably withheld, to nominate a third party to act as "Owner" under the Time Charter. II. The Time Charterer hereby agrees to deliver to the Collateral Trustee a copy of any "Notice of Intention to Exercise Purchase Option" given under the Time Charter and to give written notice to the Collateral Trustee whether or not the Time Charterer will purchase the Vessel subject to the Mortgage. In the event the Time Charterer elects to purchase the Vessel free and clear of the Mortgage, upon payment of the Purchase Value (as defined in the Time Charter or in Article VII of this Consent and Agreement as the case may be) the Collateral Trustee shall execute (or cause to be executed) such instruments or documents, at Enterprise's expense, so as to cause the lien of the Mortgage and the Reassignment of the Time Charter to be released so that the Vessel can be sold and transferred to the Time Charterer free and clear of such liens and encumbrances. III. Enterprise and the Collateral Trustee agree that the rights of the Time Charterer to purchase the Vessel under the express terms of the Time Charter, as modified by this Consent and Agreement, shall continue in full force and effect regardless of the exercise of any rights of the Collateral Trustee under the Mortgage or the Reassignment of Time Charter or Assignment of Bareboat Charter (including without limitation any termination of the Bareboat Charter) and shall only be terminated in the event of judicial sale in admiralty of the Vessel; provided, however, that if any such judicial sale is not confirmed, the rights of the Time Charterer shall continue in full force and effect as if the sale of the Vessel had not occurred and provided further that nothing herein shall be deemed a waiver by the Collateral Trustee of the preferred status of the Mortgage in respect of third parties. IV. Notwithstanding the provisions of Section 48.A of the Time Charter to the contrary, the Time Charterer agrees that is shall not assign, transfer or otherwise dispose of any of its right, title or interest in, to or under the Time Charter without the prior written consent of the Collateral Trustee, and that any assignment, transfer or other disposition thereof without such consent shall be void, provided, however, that the Time Charterer may assign the Time Charter to a Related Company (as defined in Section 25, of the Time Charter) so long as the Time Charterer shall continue to perform its duties and obligations under the Time Charter and shall remain responsible as the primary obligor therefor, unless the Collateral Trustee otherwise consents. V.(A) In connection with exercise of the Collateral Trustee's remedies under the Collateral Trust Agreement, the Credit Agreement or the Loan Documents, CGL, Enterprise, the Time Charterer and the Collateral Trustee agree that any reassignment, transfer or other disposition by the Collateral Trustee of all of CGL's, Enterprise's, or any successor party's right, title and interest in, to and under the Bareboat Charter and/or the Time Charter as Owner to any person and any further reassignment, transfer or disposition thereof and to the sale, whether public or private or pursuant to judicial foreclosure, of the Vessel to any person in connection with the exercise of remedies by the Collateral Trustee or the Lenders pursuant to the Collateral Trust Agreement, the Credit Agreement and the Loan Documents, shall be subject to the Time Charterer's consent as provided in Section 48.A of the Time Charter, as modified by this Consent and Agreement, which consents shall not be unreasonably withheld, provided that in all events any such reassignment, transfer or disposition shall not cause the Vessel to cease to qualify for operation in the United States' coastwise trade. (B)(1) In the event that the Collateral Trustee proposes to make a disposition of all of Enterprise's or CGL's right, title and interest in, to and under the Time Charter as Owner whether or not in connection with the sale of the Vessel in a private or judicially-ordered sale, pursuant to the exercise of remedies under the Collateral Trust Agreement, the Credit Agreement and the Loan Documents, it shall notify the Time Charterer in writing of such intention and offer the Time Charterer the opportunity to exercise its right to purchase the Vessel in accordance with APPENDIX 4 of the Time Charter, as modified by the Consent and Agreement. (2) Subject to the Time Charterer's purchase option, in the exercise of remedies under the Collateral Trust Agreement, the Credit Agreement and the Loan Documents, the Collateral Trustee may assign the Time Charter Either to a Qualified Operator pre-approved by the Time Charterer pursuant to Article V(B)(3) or to a Qualified Operator approved the Time Charterer pursuant to Article V(B)(4), and in either case, no other approval or consent of the Time Charterer shall be required. To be qualified an operator (i) must have a minimum Net Worth of $10 million and minimum Total Assets of $25 million and (ii) be qualified to operate vessels in the U.S. coastwise trade (a "Qualified Operator). (3) Within 20 days of the date hereof the Time Charterer shall furnish, and Enterprise shall cause the Time Charterer to furnish, to Enterprise and the Collateral Trustee a written list of four Qualified Operators to whom the Owner's role under the Time Charter may be assigned pursuant to this Article V(B). On the basis of such list Time Charterer, Enterprise and the Collateral Trustee shall, within 30 days of the date hereof arrive at and Approved List (the "Approved List") of Qualified Operators; profiled that if the Time Charterer fails to deliver such a list, or the parties fail to arrive at an Approved List, then the Collateral Trustee shall provide to the Time Charterer the names of four Qualified Operators and the Time Charterer shall select on of the operators in accordance with the last two sentences of Article V(B)(4). The Time Charterer agrees that annually it will either confirm that such Qualified Operators are still acceptable, or it will designate a replacement Qualified Operator for any operator acceptable to Time Charterer and the Approved List, as so modified, shall be effective for the forthcoming year. The Time Charterer's failure to confirm such Qualified Operators or to designate a replacement as aforesaid shall be deemed to be the Time Charterer's continued acceptance of the Approved List of Qualified Operators as then constituted. (4) The Collateral Trustee may elect not to exercise its rights under Article V(B)(2) above in which case it shall so advise the Time Charterer, and the Time Charterer shall select an operator from the Approved List, which operator must be able to operate the Vessel for a sum which equal to or less than the Maximum Operating Expense Amount as defined by the Credit Agreement (the "Expense Requirement"). The only grounds for the Time Charterer not selecting one of the operators from the Approved List shall be the inability of any of the listed operators to meet the Expense Requirement. If for such reason no operator can be selected from the Approved List, the Time Charterer shall so inform the Collateral Trustee. The Collateral Trustee then may either (i) approve selection of one of the operators by waiving the Expense Requirement or (ii) within ten (10) days provide to the Time Charterer the names of four Qualified Operators. Subject to the Times Charterer's right of consent under Section 48A of the Time Charter (which will not be unreasonably withheld), the Time Charterer shall select one of the operators so designated by the Collateral Trustee, subject to the same Expense Requirement. Once an operator is selected pursuant to this Article V(B)(4), such operator shall continue to serve until a successor is appointed in accordance with the same procedure. (5) If a suitable successor operator is not selected in accordance with the procedures provided in Article V(B)(4), the parties shall enter into good faith negotiations to revise their economic assumptions in order to arrive at a basis on which to accept any of the candidates which previously had been dismissed for failure to meet the Expense Requirement test. If agreement on such terms cannot be negotiated, the Time Charterer shall have 15 days within which to exercise its purchase option, after which time the Collateral Trustee may either (i) notify the Time Charterer that it will forego (but without any waiver thereof) for the time being exercise of its remedies and have CGL continue to operate the Vessel or (ii) propose a purchaser who will take the Vessel over subject to the Time Charter or (iii) advise the Time Charterer that it intends to proceed with its remedies under the Credit Agreement and the Loan Documents, including its right to foreclose on the Vessel. The Time Charterer shall be free to terminate the Time Charter in the event that it does not agree with the Purchaser proposed by the Collateral Trustee. (C) CGL, Enterprise and the Collateral Trustee agree that in connection with any assignment, transfer or other disposition of the Bareboat Charter and/or the Time Charter or any such sale of the Vessel, the Time Charterer shall have the right to terminate the Time Charter under Section 48.B of the Time Charter (1) if the Time Charter shall have been assigned to a substitute operator either not currently pre-approved pursuant to Article V(B)(3) or who shall not have been approved pursuant to Article V(B)(4) or (2) if the Time Charterer elects to purchase the Vessel (whether before or after the seventh anniversary of the date of delivery of the Vessel) under the terms of the Time Charter, as modified by this Consent and Agreement. (D) CGL, Enterprise and the Collateral Trustee agree that any permitted reassignment, transfer or other disposition of the Time Charter by the Collateral Trustee pursuant to Article V(B) or otherwise with the consent of the Time Charterer shall provide that the assignee or transferee shall have assumed all of the obligations of the Owner under the Time Charter arising after the date of such assumption, and CGL, Enterprise and ISC as the guarantor of their performance shall remain liable to the Time Charterer for any and all obligations of the Owner under the Time Charter arising prior to or which relate to the period prior to the date of such assumption, and after the date of such assignment and assumption. VI. Enterprise and the Collateral Trustee agree that so long as the obligations to the Lenders shall be outstanding, in addition to the rights to terminate the Time Charter according to its terms operator shall have been appointed with Time Charterer's consent pursuant to Article V(B), the Time Charter may be terminated by the Time Charterer at any time (whether before or after the seventh anniversary of the date of delivery of the Vessel under the terms of the Time Charter) in the event that the Collateral Trustee proposes to sell the Vessel in a private or judicially-ordered sale pursuant to the exercise of remedies under the Collateral Trust Agreement, the Credit Agreement or the Loan Documents or upon the occurrence of any reorganization, arrangement, insolvency, readjustment, bankruptcy, dissolution, liquidation or similar proceeding involving Enterprise or ISC. In the event that the Collateral Trustee proposes to sell the Vessel in a private or judicially-ordered sale pursuant to the exercise of remedies under the Credit Agreement, it shall notify the Time Charterer in writing of such intention, specifying the anticipated date of sale which shall not be less than 20 days nor more than 60 days from the time of such notification. The Time Charterer shall have 15 days from the date of such notice from the Collateral Trustee to purchase the Vessel by giving its irrevocable Notice of Intention to Exercise Purchase Option to the Owner and the Collateral Trustee. Such purchase shall be in accordance with the procedures and provisions set forth in Appendix 4 to the Time Charter, except that (i) the 180 day notice of purchase shall not be required, (ii) if such purchase occurs before the seventh anniversary of the Time Charter, Schedule A attached hereto, (iii) if such purchase occurs on a date other than a semi- annual anniversary as set forth in the appropriate schedule the exact purchase price shall be determined by (x) multiplying (A) a number equal to the difference between the next applicable semi-annual purchase price and the last applicable semi-annual purchase price by (B) a fraction, the numerator of which is the number of days since the last semi-annual anniversary and the denominator of which is 180 and (y) subtracting the product of such calculation from the purchase figure applicable to the amount designated for the last applicable semi-annual period. VII. CGL and Enterprise each warrant that it is now and for the period of the Time Charter shall remain a citizen of the United States as defined by Section 2 of the Shipping Act of 1916, as amended. Enterprise and Collateral Trustee acknowledge and agree that the term "Owner" as used in the Time Charter, including without limit in Clause 3.A. thereof , shall include Enterprise, in addition to CGL, and that upon any event of default under the Bareboat Charter pursuant to which either Enterprise or the Collateral Trust elect to pursue any remedy available under the terms of the Bareboat Charter, the Credit Agreement, the Collateral Trust Agreement or the Loan Documents, then in such event Enterprise shall assume and perform the obligations of Owner under the Time Charter unless and until a substitute operator is appointed pursuant to Article V(B). In all events, CGL, Enterprise and the Collateral Trustee agree with Time Charterer that the Time Charter shall survive any termination of the Bareboat Charter unless Time Charterer shall elect to terminate the Time Charter. CGL, Enterprise and the Collateral Trustee also agree with Time Charterer that transfer of beneficial ownership, or a controlling interest, in the equity of either CGL or Enterprise shall be deemed a transfer of the Time Charter requiring the Time Charterer's consent. VIII. Notwithstanding the provisions of Section 3.B. of the Time Charter to the contrary, or Article VI of this Consent and Agreement, the Time Charterer consents to a direct or indirect interest in the Vessel by a financial institution so long as such financial institution either is a citizen of the United States for purposes of operating a vessel in the United States coastwise trade as defined in Section 2 of the Shipping Act, 1916, as amended, or holds such interest in the Vessel through an "approved" trustee within the meaning of Section 31328 of Title 46, United States Code and is otherwise legally qualified to hold a mortgage on a coastwise qualified vessel under the then applicable law and regulations. So long as such financial institution satisfies the requirements of this Article IX, the Time Charterer shall not have the right to terminate the Time Charter pursuant to Section 3.B. of the Time Charter on account of such financial institution not being a citizen of the United States. IX. Terms not defined in this Consent and Agreement or the Credit Agreement shall be defined in the Time Charter. X. This Consent and Agreement and the consents referred to herein or provided pursuant hereto may be relied on by Enterprise, CGL and the Collateral Trustee and shall be deemed to satisfy any requirement for the Time Charterer's consent under the Time Charter with respect to the transactions contemplated hereby. In the event of any inconsistency or contradiction between the provisions of the Bareboat Charter and Time Charter as regards to the rights of the parties hereto, the provisions of the Time Charter shall prevail. IN WITNESS WHEREOF, the parties, intending to be legally bound, has caused this Consent and Agreement to be duly executed by their duly authorized officers on the day and year first above written. NEW ENGLAND POWER COMPANY By: __________________________ Name: John G. Cochrane Title: Assistant Treasurer Accepted and agreed to: THE BANK OF NEW YORK, as Collateral Trustee By: __________________________ Name: Title: ENTERPRISE SHIP COMPANY, INC. By: __________________________ Name: Niels W. Johnsen Title: Chairman CENTRAL GULF LINES, INC. By: __________________________ Name: Niels M. Johnsen Title: Vice President SCHEDULE A Purchase Value Beginning of Effective at Semiannual Beginning of Each Period* Semi-annual Period _____________ __________________ 1 $59,707,395 2 59,373,814 3 59,040,234 4 58,706,653 5 58,373,073 6 58,039,492 7 57,705,912 8 57,372,331 9 57,038,751 10 56,705,170 11 56,371,590 12 56,038,009 13 55,704,428 14 55,370,848 __________________ * Periods 1 through 14 as defined in Time Charter. EX-10 9 NEP EXHIBIT (10)(AA) EXHIBIT (10)(aa) TEMPORARY TRANSPORTATION CONTRACT ASSIGNMENT THIS TEMPORARY ASSIGNMENT made effective as of the 26th day of October, 1995 BETWEEN: NEW ENGLAND POWER COMPANY ("Assignor") OF THE FIRST PART and ALTRESCO PITTSFIELD, L.P. ("Assignee") OF THE SECOND PART WITNESSES THAT: WHEREAS TransCanada Pipelines Limited ("TransCanada") and Assignor are parties to a contract for transportation service made as of the 6th day of January, 1992, as amended; and WHEREAS Assignee has requested that Assignor assign part of Assignor's rights and obligations as Shipper under the Contract and Assignor has agreed to do so subject to the terms and conditions of this Assignment. NOW THEREFORE, THIS AGREEMENT WITNESSES THAT in consideration of the covenants and agreements herein set forth, the parties hereto covenant and agree as follows: 1. Subject to paragraph 6 herein, during the operative term of this Assignment, Assignor does hereby grant, transfer, assign and set over unto Assignee, and Assignee accepts from Assignor, that portion of Assignor's service entitlement as shipper under the Contract equal to 283.310 3 m 3 per day (the "Assigned Volume"), together with the corresponding rights and obligations of Assignor as shipper under the Contract. 2. Subject to paragraphs 6 and 8 herein, during operative term of this Assignment, Assignee hereby covenants and agrees that it shall perform and observe the covenants and obligations of Assignor as shipper contained in the Contract insofar as they pertain to the Assigned Volume, to the same extent as Assignee would be obligated so to do were Assignee a party to the Contract, as shipper, with a service entitlement thereunder equal to the Assigned Volume. 3. This Assignment shall be in full force and effect as of and from 08:00 hours on November 1, 1995 (the "Date of First Delivery") (provided that, for the purposes of Assignee nominating service for the Date of First Delivery, the Assignment shall become effective as at 08:00 hours on the date immediately preceding the Date of First Delivery) and, subject to paragraph 4 hereof, shall be operative for a term ending at 08:00 hours on October 31, 1998. Notwithstanding the foregoing, the operative term of this Assignment shall not extend beyond the term of the Contract. 4. In the event that Assignee fails to comply with paragraph 2 hereof, Assignor shall have the right to terminate this Assignment by following the termination procedure set forth in Section XVII of the General Terms and Conditions contained in TransCanada's Transportation Tariff as if Assignor were TransCanada, Assignee were Shipper and this Assignment was the Contract for this purpose. 5. Assignor will request TransCanada to acknowledge the assignment contained herein and to treat Assignee as shipper with a service entitlement under the Contract equal to the Assigned Volume during the operative term of this Assignment. Assignee hereby consents to such request and to such treatment, and for this purpose Assignee declares that all notices, nominations, requests, invoices, and other written communications may be given by TransCanada to Assignee as follows: (i) Mailing address: One Bowdoin Square Boston, Massachusetts U.S.A. 02114 (ii) Delivery address: Same as above (iii) Nominations: Manager, Fuel Services Accounting Telecopier: (617) 227-2690 (iv) Legal and Other: Senior Vice President, Fuel Services Telecopier: (617) 227-2690 6. Assignee acknowledges that Assignor will not seek TransCanada's consent to this Assignment and that Assignor accordingly is and will remain obligated to TransCanada to perform and observe the covenants and obligations of shipper that are contained in the Contract in regard to the Assigned Volume insofar as TransCanada is concerned. Without limiting the generality of the foregoing, the Assignor and the Assignee acknowledge that the Assignor shall remain responsible for all gas imbalances (as such term is defined in Section XXII of the General Terms and Conditions in TransCanada's Transportation Tariff) and Energy-in-Transit Balances associated with the Assigned Volume and/or the Contract. Consequently, Assignee shall indemnify Assignor for and hold Assignor harmless from all charges that TransCanada may be entitled to collect from the Assignor under the Contract in regard to the Assigned Volume in the event that Assignee fails to pay them. 7. Assignee shall be entitled to sub-assign all or part of the Assigned Volume, together with the corresponding rights and obligations under the Contract, to a third party by assigning all or part of its rights and obligations under this Assignment; provided that no such assignment shall relieve Assignee of its obligations to Assignor hereunder without Assignor's prior written consent, which consent shall not be unreasonably withheld. Notwithstanding any such sub-assignment or sub-assignments, Assignor is and will remain obligated to TransCanada to perform and observe the covenants and obligations of shipper that are contained in the Contract in regard to the Assigned Volume insofar as TransCanada is concerned. 8. Notwithstanding anything to the contrary herein set forth or implied, Assignor reserves and retains for itself exclusively any option or right to renew or otherwise extend the operative term of the Contract which may be contained in or granted by the Contract. 9. Assignee acknowledges that it has (or may obtain directly from TransCanada) a copy of the Transportation Tariff. 10. This Assignment and the rights and obligations of the parties hereunder are subject to all valid and applicable present and future laws, rules, regulations, and orders of any governmental or regulatory authority having jurisdiction or control over the parties hereto to either of them, or over the Contract. 11. This Assignment shall be construed in accordance with and governed by the laws of the Province of Alberta and the laws of Canada applicable therein. 12. This Assignment shall ensure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. IN WITNESS WHEREOF of the parties hereto have duly executed and delivered this Assignment as of the day, month and year first above written. NEW ENGLAND POWER COMPANY ALTRESCO PITTSFIELD, L.P. by its General Partner, Altresco, Inc. s/ Jeffrey W. VanSant s/ Douglas F. Egan By: __________________________ By: _____________________ Jeffrey W. Vansant Douglas E. Egan Name: ________________________ Name: ___________________ (please print) (please print) Vice President Vice President Title: _______________________ Title: __________________ s/ John F. Malley By: __________________________ John F. Malley Name: ________________________ (please print) Vice President Title: _______________________ cc. TansCanada Pipelines Limited Fax: (403) 267-8620 (Ms. Sally Greenwood) EX-13 10 NEP ANNUAL REPORT Annual Report 1995 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 December 31, 1995) Joan T. Bok Chairman of the Board of New England Electric System Frederic E. Greenman* Vice President, General Counsel, and Assistant Clerk of the Company and Senior Vice President, General Counsel, and Secretary of New England Electric System Alfred D. Houston Executive Vice President and Chief Financial Officer of New England Electric System Cheryl A. LaFleur** Vice President and General Counsel of the Company and Vice President, General Counsel, and Secretary of New England Electric System John W. Newsham* Executive Vice President of the Company and Vice President of New England Electric System John W. Rowe Chairman of the Company and President and Chief Executive Officer of New England Electric System Jeffrey D. Tranen President of the Company and Vice President of New England Electric System Officers (As of December 31, 1995) John W. Rowe Chairman of the Company and President and Chief Executive Officer of New England Electric System Jeffrey D. Tranen President of the Company and Vice President of New England Electric System John W. Newsham* Executive Vice President of the Company and Vice President of New England Electric System Frederic E. Greenman* Vice President, General Counsel, and Assistant Clerk of the Company and Senior Vice President, General Counsel, and Secretary of New England Electric System Cheryl A. LaFleur** Vice President and General Counsel of the Company and Vice President, General Counsel, and Secretary of New England Electric System Andrew H. Aitken Vice President Lawrence E. Bailey Vice President Jeffrey A. Donahue Vice President John F. Malley Vice President Arnold H. Turner Vice President Jeffrey W. VanSant Vice President Michael E. Jesanis Treasurer of the Company and of New England Electric System Robert King Wulff Clerk of the Company and of certain affiliates John G. Cochrane Assistant Treasurer of the Company and of certain affiliates and Vice President of an affiliate Kirk L. Ramsauer Assistant Clerk of the Company and of an affiliate Howard W. McDowell Controller of the Company and of certain affiliates * retired December 31, 1995 ** elected effective December 31, 1995 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, a wholly-owned subsidiary of New England Electric System, 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 and the Federal Energy Regulatory Commission. The Company's business is principally that of generating, purchasing, transmitting, and selling electric energy in wholesale quantities to other electric utilities, principally its affiliates Granite State Electric Company, Massachusetts Electric Company, and The Narragansett Electric Company. In 1995, 95 percent of the Company's revenue from the sale of electricity was derived from sales to affiliated companies and 5 percent from sales to municipal and other utilities. There are a number of proposals that would increase competition in the electric utility industry and result in customers having a choice of power suppliers (see "Financial Review"). The Company, through its own generating units, entitlements and purchase power contracts, has a total capability of 5,704 megawatts. In 1995, the Company's energy mix was 38 percent coal, 22 percent gas, 14 percent nuclear, 10 percent hydro, 10 percent oil, and 6 percent renewable non-utility generation. The Company is a member of the New England Power Pool, which coordinates the planning and operation of the generation and transmission facilities in New England, and the region-wide central dispatch of generation. 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, 1995 and 1994 and the related statements of income, retained earnings, and cash flows for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Boston, Massachusetts COOPERS & LYBRAND L.L.P. March 1, 1996 New England Power Company Financial Review Overview Net income increased by $2 million in 1995 compared with 1994. This increase reflects higher sales, lower depreciation and amortization expense and lower maintenance expense. Partially offsetting these increases to 1995 earnings were increased purchased power costs excluding fuel, increased costs related to postretirement benefits other than pensions (PBOPs), increased reimbursements to affiliates for service extension discounts (SEDs) to customers and generation and transmission costs incurred for the benefit of the Company. In addition, interest costs also increased in 1995. Net income increased by $8 million in 1994 reflecting decreased purchased power charges excluding fuel, lower interest expense and increased allowance for funds used during construction. In addition, earnings in 1993 were reduced by a one-time after-tax charge of $6 million ($10 million before-tax) associated with an early retirement program. Partially offsetting these increases to 1994 earnings were increased operation and maintenance expenses and the reimbursement of certain power plant dismantlement costs through revenue credits to The Narragansett Electric Company (Narragansett), an affiliate. Competitive Conditions The electric utility business is being subjected to rapidly increasing competitive pressures, stemming from a combination of trends, including the presence of surplus generating capacity, a disparity in electric rates among regions of the country, improvements in generation efficiency, increasing demand for customer choice, and new regulations and legislation intended to foster competition. To date, this competition has been most prominent in the bulk power market, in which non-utility generators have significantly increased their market share. Electric utilities have had exclusive franchises for the retail sale of electricity in specified service territories. As a result, competition in the retail market has been limited to (i) competition with alternative fuel suppliers, primarily for heating and cooling, (ii) competition with customer-owned generation, and (iii) direct competition among electric utilities to attract major new facilities to their service territories. These competitive pressures have led the New England Electric System (NEES) companies and other utilities to offer, from time to time, special discounts or service packages to certain large customers. In states across the country, including Massachusetts, Rhode Island, and New Hampshire, there have been an increasing number of proposals to allow retail customers to choose their electricity supplier, with incumbent utilities required to deliver that electricity over their transmission and distribution systems (also known as "retail wheeling"). If electric customers were allowed to choose their electricity supplier, utilities across the country would face the risk that market prices may not be sufficient to recover the costs of the commitments incurred to supply customers under a regulated industry structure. The amount by which costs exceed market prices is commonly referred to as "stranded costs." The Company derives approximately 72 percent, 20 percent, and 3 percent of its electric sales revenues from sales to Massachusetts Electric Company (Massachusetts Electric), Narragansett, and Granite State Electric Company, respectively. These affiliated companies purchase electricity under wholesale all-requirements contracts with the Company and resell it to their customers. Legislative or utility initiatives, such as Choice: New England, could ultimately result in changes in the relationship between the Company and its all-requirements customers. Choice: New England In October 1995, the NEES companies announced a plan to allow all customers of electric utilities in Massachusetts, Rhode Island, and New Hampshire to choose their power supplier beginning in 1998. The plan, Choice: New England, was developed in response to 1995 decisions by the Massachusetts Department of Public Utilities (MDPU) and the Rhode Island Public Utilities Commission (RIPUC) that approved a set of principles for industry restructuring. These principles include allowing utilities the opportunity to recover stranded costs. Choice: New England was formally filed by Massachusetts Electric with the MDPU in February 1996. Narragansett plans to file a similar version of Choice: New England with the RIPUC in April 1996 to comply with a RIPUC order to file restructuring plans. Under Choice: New England, the pricing of generation would be deregulated. However, customers would have the right to receive service under a "standard offer" from the incumbent utility or its affiliate, the pricing of which would be approved in advance by legislators or regulators. Customers electing the standard offer would be eligible to choose an alternative power supplier at any time, but would not be allowed to return to the standard offer. Under Choice: New England, transmission and distribution rates would remain regulated. As described in the "Rate Activity" section, the Company has recently filed a proposed tariff rate with the Federal Energy Regulatory Commission (FERC) whereby its transmission facilities would be operated by another NEES subsidiary pursuant to a support agreement. Under Choice: New England, the Company's wholesale contract with its affiliates would be terminated. In return, Choice: New England proposes that the cost of the Company's past generation commitments be recovered through a wires access or transition charge. Those commitments, which are currently estimated at approximately $4 billion on a present value basis, primarily consist of (i) generating plant commitments, (ii) regulatory assets, (iii) purchased power contracts, and (iv) the operating cost of nuclear plants which cannot be mitigated by shutting down the plants (otherwise referred to as "nuclear costs independent of operation"). Sunk costs associated with utility generating plants, such as past capital investments, and regulatory assets would be recovered over ten years. The return on equity related to the unrecovered capital investments and regulatory assets would be reduced to one percentage point over the rate on long-term "BBB" rated utility bonds. Purchased power contract costs and nuclear costs independent of operation would be recovered as incurred over the life of those obligations, a period expected to extend beyond ten years. The access charge would be set at three cents per kilowatt-hour (kWh) for the first three years. Thereafter, the access charge would vary, but is expected to decline. The provisions of Choice: New England, including the proposed access charge, are subject to state approval and FERC approval. In March 1996, Massachusetts Electric filed a request with the MDPU to allow the implementation of two pilot programs to test the plan. The first would allow certain high technology customers in Massachusetts representing 1 percent of the NEES companies' retail sales to have direct access to alternative power suppliers beginning in July 1996. The second would allow residential and small business customers in Massachusetts representing 0.5 percent of the NEES companies' retail sales to have direct access beginning September 1, 1996. Three other utilities and the Massachusetts Division of Energy Resources (DOER) also filed plans with the MDPU in February 1996. The DOER's plan also calls for direct access for all customers beginning in 1998 with a pilot program beginning in 1997. The DOER plan, however, proposes that, in exchange for stranded cost recovery, utilities divest their generating assets, either through sale or spinoff. The NEES companies do not support the DOER mandatory divestiture proposal. The MDPU is expected to issue regulations on industry restructuring in September 1996 and to issue orders on the individual utility plans in 1997. Rhode Island Legislation In February 1996, the Speaker and Majority Leader of the House of Representatives of the Rhode Island Legislature announced the filing of legislation which would allow electric consumers in Rhode Island to choose their power supplier. Under the proposed legislation, large manufacturing customers and new large non-manufacturing customers would gain access to alternative power suppliers over a two-year period beginning in 1998. These customers represent approximately 14 percent of Narragansett's retail kWh sales. The balance of Rhode Island customers would gain access over a two-year period beginning in the year 2000, or earlier if consumers of 50 percent of the electricity in New England gain similar rights to choose their power supplier. The NEES companies have announced their support for the proposed legislation. A key provision of the legislation authorizes utilities to recover the cost of past generation commitments through a transition access charge on utility distribution wires. The legislation divides those past commitments in the same manner as Choice: New England. The legislation proposes a 12-year recovery period for utility generation commitments and regulatory assets. Consideration by the Rhode Island Legislature of the proposed legislation is expected to be completed by the summer of 1996. Previously, in 1995, the Rhode Island Legislature passed legislation that would have allowed certain industrial customers to buy power from alternative suppliers, rather than through the local electric utility. Narragansett urged the Governor of Rhode Island to veto the legislation because Narragansett believed it would result in piecemeal deregulation that would not be fair to customers or shareholders. The Governor vetoed the proposed legislation, in part because of commitments by Narragansett to provide a two-year rate discount to manufacturing customers and to submit a specific and detailed proposal to the RIPUC addressing the issues associated with providing large customers with access to Narragansett's distribution system for the purpose of choosing an alternative power supplier. Other Legislative and Regulatory Initiatives In February 1996, the New Hampshire House of Representatives passed a bill requiring utilities in that state to file plans by June 1996 with the New Hampshire Public Utilities Commission (NHPUC) to provide customers with access to alternative suppliers. The bill allows the NHPUC significant discretion in determining the appropriate level of stranded cost recovery. The bill would authorize the NHPUC to impose a plan on utilities if none is filed and approved by July 1997. The bill is pending in the state Senate. In January 1996, Granite State reached an agreement with the NHPUC staff to conduct a retail access pilot for 3 percent of Granite State's customers. If approved by the NHPUC and the FERC, participating customers in the pilot will pay access charges that are on average over 90 percent of the charges proposed under Choice: New England. The agreement was reached in response to 1995 legislation which directed the NHPUC to establish a pilot program for the state's utilities. The agreement includes more favorable terms regarding stranded cost recovery than preliminary pilot guidelines issued by the NHPUC. In February 1996, the NHPUC indicated that further review of certain assumptions made in the agreement was necessary. The Commission also expanded the pilot to include new large commercial and industrial customers. Separately, in June 1995, the NHPUC issued a decision stating that franchise territories in New Hampshire are not exclusive as a matter of law. That decision is under appeal. In February 1996, the MDPU denied the recovery of stranded power generation costs in the context of the town of Stow, Massachusetts attempting to purchase the distribution assets in that town owned by the neighboring Hudson Municipal Light Department. Although the MDPU reaffirmed its general position that utilities should have a reasonable opportunity to recover net, non-mitigable, stranded costs, it refused to allow recovery in this case stating that Hudson had not sufficiently demonstrated that stranded costs would be incurred and made no effort to mitigate any such costs. Both parties have appealed the MDPU decision and the MDPU has stayed its decision pending appeal. In August 1995, the MDPU issued an order requiring a customer of another utility who installed cogenerating equipment to pay 75 percent of that utility's stranded costs attributable to serving the customer's load. The MDPU indicated the decision did not set a precedent for stranded cost recovery as part of industry restructuring. In March 1996, the FERC ruled that it would not review the MDPU's decision. The customer is expected to appeal the decision to the courts. In March 1995, the FERC issued a Notice of Proposed Rulemaking (NOPR) in which it stated that it is appropriate that legitimate and verifiable stranded costs be recovered from departing customers as a result of wholesale competition. The FERC also indicated that costs stranded as a result of retail competition would be subject to state commission review if the necessary statutory authority exists and subject to FERC review if the state commission does not have such authority. A final decision is expected during 1996. The NOPR also addressed open access transmission and indicated that those utilities owning transmission facilities would be required to file a tariff to make available comparable transmission service. (See "Rate Activity" section for further discussion.) Risk Factors The major risk factors affecting recovery of at-risk assets are: (i) regulatory and legal decisions, (ii) the market price of power, and (iii) the amount of market share retained by the Company. First, there can be no assurance that a final restructuring plan ordered by regulatory bodies, or the courts, or through legislation will include an access charge that would fully recover stranded costs. If laws are enacted or regulatory decisions are made that do not offer an opportunity to recover stranded costs, the Company believes it has strong legal arguments to challenge such laws or decisions. Such a challenge would be based, in part, on the assertion that subjecting utility generating assets to competition without compensation for stranded costs while requiring utilities to open access to their wires at historic cost-based rates, would constitute an unconstitutional taking of property without just compensation. Second, the access charge proposed under Choice: New England recovers only sunk costs, such as plant expenditures and contractual commitments. Because of a regional surplus of electric generation capacity, current wholesale power prices in the short-term market are based on the short-run fuel costs of generating units. Such wholesale prices are not currently providing a significant contribution toward other marginal costs, such as operation and maintenance expenses. The Company expects this situation to continue in a retail market. Third, revenues will also be affected by the Company's ability to retain existing customers and attract new customers in a competitive environment. As a result of the pressure on market prices and market share, it is likely that, even if Choice: New England is implemented, the Company would experience losses in revenue for an indeterminate period and increased revenue volatility. 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. 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 liabilities, and thereby defer the income statement impact of certain costs that are expected to be recovered in future rates. The effects of regulatory, legislative, or utility initiatives, such as the proposed Rhode Island legislation or Choice: New England, could, in the near future, cause all or a portion of the Company's operations to cease meeting the criteria of FAS 71. In that event, the application of FAS 71 to such operations would be discontinued and a non-cash write-off of previously established regulatory assets and liabilities related to such operations would be required. At December 31, 1995, the Company had pre-tax regulatory assets (net of regulatory liabilities) of approximately $300 million. In addition, the Company's affiliate, New England Energy Incorporated (NEEI), has a regulatory asset of approximately $200 million, which is recoverable in its entirety from the Company. If competitive or regulatory change should cause a substantial revenue loss or lead to the permanent shutdown of any generating facilities, a write-down of plant assets could be required pursuant to Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (FAS 121). In addition, FAS 121 requires that all regulatory assets, which must have a high probability of recovery to be initially established, must continue to meet that high probability standard to avoid being written off. FAS 121, which is effective for the Company in January 1996, is not expected to have a material adverse impact on the financial condition or results of operations upon adoption, based on the current regulatory environment in which the Company operates. However, the impact in the future may change as competitive factors and potential restructuring influence the electric utility industry. For further discussion, see Note B. Rate Activity In February 1995, the FERC approved a rate agreement filed by the Company. Under the agreement, which became effective January 1995, the Company's base rates are frozen through 1996. Before this rate agreement, the Company's rate structure contained two surcharges that were recovering the costs of a coal conversion project and a portion of the Company's investment in the Seabrook 1 nuclear unit (Seabrook 1). These two surcharges fully recovered their related costs by mid-1995. However, under the rate agreement, the revenues continue to be collected as part of base rates. The agreement also provides for (i) full recovery of costs associated with the Manchester Street Station repowering project, which began commercial operation in the second half of 1995, (ii) the recovery of approximately $50 million of deferred costs associated with terminated purchased power contracts and PBOPs over seven years, (iii) full recovery of currently incurred PBOP costs, (iv) the recovery over three years of $27 million of costs related to the dismantling of a retired generating station in Rhode Island and the replacement of a turbine rotor at one of the Company's generating units, and (v) increased recovery of depreciation expense by approximately $8 million annually to recognize costs that will be incurred upon the eventual dismantling of its Brayton Point and Salem Harbor generating plants. Under the agreement, approximately $15 million of the $38 million in Seabrook 1 costs scheduled for recovery in 1995 pursuant to a 1988 settlement agreement were deferred for recovery in 1996. Finally, the agreement provided that the Company would reimburse its wholesale customers for discounts provided by those wholesale customers to their retail customers under SED programs. Under these programs, retail customers are entitled to such discounts only if they have signed an agreement not to purchase power from another supplier or generate any additional power themselves for a three to five year period. Reimbursements in 1995 totaled $12 million. The FERC's approval of this rate agreement applies to all of the Company's customers except the Milford Power Limited Partnership (MPLP). MPLP, owner of a gas-fired power plant in Milford, Massachusetts, has protested the rate agreement based on issues related to the Manchester Street Station repowering project. (See "Purchased Power Contract Dispute" section.) In response to the FERC NOPR discussed above, the Company and NEES Transmission Services, Inc. (NEES Trans), a proposed new subsidiary of NEES, filed transmission tariffs in March 1996 at the FERC that will become applicable for all wholesale transmission transactions, including those of the NEES retail distribution affiliates. Under the proposed tariffs and accompanying support agreements, NEES Trans will provide all wholesale transmission services involving the NEES companies' facilities under comparable, nondiscriminatory transmission rates. The existing NEES companies, including the Company, would turn operational control of their transmission facilities over to NEES Trans in exchange for support payments from NEES Trans for these facilities. The Company may, at a later date, transfer its transmission assets to NEES Trans. The net book value of the Company's transmission system is approximately $340 million. The Company is requesting that its filing become effective by June 1, 1996 or upon approval by the Securities and Exchange Commission, for the establishment of this new company. If approved as filed, the implementation of the tariffs would not have a significant impact on the Company's revenues. Operating Revenue The following table summarizes the changes in operating revenue: Increase (Decrease) in Operating Revenue (In Millions) 1995 1994 ---- ---- Fuel recovery $27 $(6) Accrued NEEI fuel revenues 4 (7) Narragansett integrated facilities credit (10) (6) SED reimbursements (12) Sales growth 15 10 Other 6 1 ---- ---- $30 $(8) Accrued NEEI fuel revenues and accrued NEEI fuel costs (see "Operating Expenses" section) reflect losses incurred by NEEI, an affiliate of the Company, on its rate-regulated oil and gas operations. These revenues are accrued in the year of the loss but are billed to the Company's customers through its fuel adjustment clause in the following year. Changes in accrued NEEI fuel revenues and fuel costs are principally due to fluctuations in NEEI production (see "Fuel Supply" section). The entire output of Narragansett's generating capacity is made available to the Company. Narragansett receives a credit on its purchased power bill from the Company for its fuel costs and other generation and transmission-related costs. The increased credits in 1995 reflect costs associated with a new transmission line that went into service in September 1994 and with Narragansett's portion of the repowered Manchester Street generating station that went into service in the second half of 1995. In addition, the credits increased in both 1995 and 1994 due to increased costs associated with the dismantlement of the previously retired South Street generating facility. However, a portion of the 1995 credits had been deferred for recovery from ratepayers in 1996 and 1997. See the "Rate Activity" section for a discussion of SED reimbursements. Operating Expenses The following table summarizes the changes in operating expenses: Increase (Decrease) in Operating Expenses (In Millions) 1995 1994 ---- ---- Fuel costs $27 $(7) Accrued NEEI fuel costs 4 (7) Purchased energy excluding fuel 22 (11) Other operation and maintenance (2) 18 Depreciation and amortization (35) 6 Taxes (1) 5 ---- ---- $15 $4 Total fuel costs represent fuel for generation and the portion of purchased electric energy permitted to be recovered through the Company's fuel adjustment clause. The increase in fuel costs in 1995 reflects decreased nuclear generation due to overhauls and decreased hydro production resulting from low water levels. Purchased energy excluding fuel represents purchased electric energy costs not recovered through the fuel clause. The increase in these costs in 1995 and the decrease in 1994 reflects costs associated with scheduled plant overhauls and refueling shutdowns at partially-owned nuclear power facilities. The 1995 increase includes the amortization of previously deferred purchased power contract termination costs and costs to repair the steam generator tubes at Maine Yankee, in which the Company has a 20 percent interest. Maine Yankee returned to service at 90 percent capacity in January 1996. The decrease in other operation and maintenance expenses in 1995 reflects lower overhaul costs at wholly-owned generating units, primarily in the fourth quarter of 1995, partially offset by the recognition of currently incurred and previously incurred deferred PBOP costs in accordance with the Company's 1995 rate agreement, increased transmission system related costs and general and administrative costs. The increase in other operation and maintenance expenses in 1994 reflects increases in generating plant maintenance costs associated with overhauls of wholly-owned generating units in part to achieve compliance with the Clean Air Act. The increase also reflects cost increases in computer system development, increased demand-side management program expenses, and general increases in other areas. These increases were partially offset by a one-time charge in 1993 of $10 million associated with an early retirement program. Depreciation and amortization expense decreased in 1995 due to reduced amortization of Seabrook 1 and the completion, in the second quarter of 1995, of the amortization of certain coal conversion facilities, partially offset by the effects of increased depreciation rates approved in the Company's 1995 rate agreement and depreciation of new plant expenditures, including the Manchester Street Station, which began commercial operation in the second half of 1995. The increase in depreciation and amortization expense in 1994 primarily reflects increased amortization of Seabrook 1 as part of a 1988 rate settlement and increased depreciation on new plant expenditures. The increase in taxes in 1994 primarily reflects increased income taxes and municipal property taxes. Under the existing terms of certain purchased power contracts with other utilities, the Company will reduce its power purchases by $19 million in 1996. The Company is a 15 percent stockholder in Connecticut Yankee Atomic Power Company (Connecticut Yankee) which owns a 580 megawatt (MW) nuclear generating unit. The Company also has an approximately 12 percent ownership interest in Millstone 3, a 1,150 MW nuclear unit. In March 1996, the Nuclear Regulatory Commission (NRC) issued a letter requiring Millstone 3 and Connecticut Yankee to demonstrate to the NRC within 30 days a plan and schedule to ensure that the future operation of those units will be conducted in accordance with their operating licenses and safety provisions or face license suspension. Millstone 3 was also added to the NRC's problem plant list in January 1996. It is unknown what effect the increased NRC scrutiny will have on the operations and cost of Millstone 3 and Connecticut Yankee. Other non-affiliated facilities which have been on the problem plant list have incurred substantial additional capital and operating expenditures before the NRC designation was changed. Interest Expense The increase in interest expense in 1995 was primarily due to an increase in combined long-term and short-term debt balances and higher interest rates earlier in 1995. The decrease in interest expense in 1994 is primarily due to significant refinancings of corporate debt at lower interest rates during 1993. In addition, the decrease in 1994 also reflects reduced interest on rate refunds and taxes primarily in the fourth quarter, partially offset by increased interest on short-term debt. Allowance for Funds Used During Construction (AFDC) AFDC increased in 1995 and 1994 due to increased construction work in progress associated with the repowering of the Manchester Street Station. The accrual of AFDC ended for this project when the units began commercial operation in the second half of 1995. (See "Utility Plant Expenditures and Financing" section.) 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 a range of potentially hazardous products and by-products in its operations. NEES subsidiaries currently have an environmental audit program in place 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 U.S. 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. 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. Electric and Magnetic Fields (EMF) Concerns have been raised about whether EMF, which occur near transmission and distribution lines as well as near household wiring and appliances, cause or contribute to adverse health effects. Numerous studies on the effects of these fields, some of them sponsored by electric utilities (including NEES companies), have been conducted and are continuing. Some of the studies have suggested associations between certain EMF and health effects, including various types of cancer, while other studies have not substantiated such associations. It is impossible to predict the ultimate impact on the Company and the electric utility industry if further investigations were to demonstrate that the present electricity delivery system is contributing to increased risk of cancer or other health problems. Many utilities, including the NEES companies, have been contacted by customers regarding a potential relationship between EMF and adverse health effects. To date, no court in the United States has ruled that EMF from electrical facilities cause adverse health effects and no utility has been found liable for personal injuries alleged to have been caused by EMF. In any event, the Company believes that it currently has adequate insurance coverage for personal injury claims. Several state courts have recognized a cause of action for damage to property values in transmission line condemnation cases based on the fear that power lines cause cancer. It is difficult to predict what the impact on the Company would be if this cause of action is recognized in the states in which the Company operates and in contexts other than condemnation cases. Purchased Power Contract Dispute In October 1994, the Company was sued by MPLP, a venture of Enron Corporation and Jones Capital that owns a 149 MW gas-fired power plant in Milford, Massachusetts. The Company purchases 56 percent of the power output of the facility under a long-term contract with MPLP. The suit alleges that the Company has engaged in a scheme to cause MPLP and its power plant to fail and has prevented MPLP from finding a long-term buyer for the remainder of the facility's output. The complaint includes allegations that the Company has violated the Federal Racketeer Influenced and Corrupt Organizations Act, engaged in unfair or deceptive acts in trade or commerce, and breached contracts. MPLP also asserts that the Company deliberately misled regulatory bodies concerning the Manchester Street Station repowering project. MPLP seeks compensatory damages in an unspecified amount, as well as treble damages. The Company believes that the allegations of wrongdoing are without merit. The Company has filed counterclaims and crossclaims against MPLP, Enron Corporation, and Jones Capital, seeking monetary damages and termination of the purchased power contract. MPLP also intervened in the Company's current rate filing before the FERC, making similar allegations to those asserted in MPLP's lawsuit. Hearings on this claim concluded in October 1995. An Administrative Law Judge initial decision is expected by mid-1996. Utility Plant Expenditures and Financing Cash expenditures for utility plant totaled $163 million for 1995, including $85 million related to the Manchester Street Station repowering project discussed below. The funds necessary for utility plant expenditures during the period were provided by net cash from operating activities, after the payment of dividends, and proceeds of long-term debt issues. Cash expenditures for utility plant for 1996 are estimated to be $85 million. Internally generated funds are estimated to fully cover the Company's 1996 capital expenditure requirements for utility plant. In 1995, the Company issued $50 million of mortgage bonds at rates ranging from 6.69 percent to 7.94 percent. In addition, the Company refinanced $10 million of variable rate mortgage bonds in 1995. The Company has issued $40 million of variable rate mortgage bonds to date in 1996 to refinance a like amount of outstanding debt. In the second half of 1995, the Company and Narragansett completed the 489 MW repowering of the Manchester Street Station. The Company owns a 90 percent interest and Narragansett owns a 10 percent interest in the Manchester Street Station. The total cost for the generating station will be approximately $450 million, including AFDC. In addition, related transmission improvements, which were principally the responsibility of Narragansett, were placed in service in September 1994 at a cost of approximately $60 million. At December 31, 1995, the Company had $125 million of short-term debt outstanding including $124 million of commercial paper borrowings and $1 million of borrowings from affiliates. At December 31, 1995, the Company had lines of credit and bond purchase facilities with banks totaling $510 million which are available to provide liquidity support for commercial paper borrowings and for $342 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, 1995. March 25, 1996 New England Power Company Statements of Income
Year Ended December 31, (In Thousands) 1995 1994 1993 ---- ---- ---- Operating revenue, principally from affiliates $1,570,539 $1,540,757 $1,549,014 ---------- ---------- ---------- Operating expenses: Fuel for generation 279,849 260,540 273,347 Purchased electric energy 547,926 513,583 525,985 Other operation 211,872 196,610 186,087 Maintenance 92,954 110,528 103,261 Depreciation and amortization 102,758 137,979 131,932 Taxes, other than income taxes 58,716 54,400 51,931 Income taxes 91,051 96,596 93,997 ---------- ---------- ---------- Total operating expenses 1,385,126 1,370,236 1,366,540 ---------- ---------- ---------- Operating income 185,413 170,521 182,474 Other income: Allowance for equity funds used during construction 7,746 9,142 3,252 Equity in income of nuclear power companies 5,721 4,816 5,646 Other income (expense), net (1,610) (293) (566) ---------- ---------- ---------- Operating and other income 197,270 184,186 190,806 ---------- ---------- ---------- Interest: Interest on long-term debt 46,797 38,711 45,837 Other interest 10,525 1,956 5,427 Allowance for borrowed funds used during construction credit (11,479) (5,854) (1,926) ---------- ---------- ---------- Total interest 45,843 34,813 49,338 ---------- ---------- ---------- Net income $151,427 $149,373 $141,468 ========== ========== ========== Statements of Retained Earnings Year Ended December 31, (In Thousands) 1995 1994 1993 ---- ---- ---- Retained earnings at beginning of year $372,763 $346,153 $321,699 Net income 151,427 149,373 141,468 Dividends declared on cumulative preferred stock (3,433) (3,440) (4,883) Dividends declared on common stock, $21.00, $18.50, and $17.25 per share, respectively (135,448) (119,323) (111,261) Premium on redemption of preferred stock (870) -------- -------- -------- Retained earnings at end of year $385,309 $372,763 $346,153 ======== ======== ======== The accompanying notes are an integral part of these financial statements.
New England Power Company Balance Sheets At December 31, (In Thousands) 1995 1994 Assets ---- ---- Utility plant, at original cost $2,941,469 $2,524,544 Less accumulated provisions for depreciation and amortization 1,047,982 1,001,393 ---------- ---------- 1,893,487 1,523,151 Net investment in Seabrook 1 under rate settlement (Note D-2) 15,210 38,283 Construction work in progress 41,566 314,777 ---------- ---------- Net utility plant 1,950,263 1,876,211 ---------- ---------- Investments: Nuclear power companies, at equity (Note D-1) 47,055 46,349 Non-utility property and other investments 26,627 22,980 ---------- ---------- Total investments 73,682 69,329 ---------- ---------- Current assets: Cash 2,607 377 Accounts receivable: Affiliated companies 204,314 197,655 Accrued NEEI revenues (Note E-1) 43,731 39,794 Others 17,821 29,738 Fuel, materials, and supplies, at average cost 54,664 73,361 Prepaid and other current assets 27,986 33,729 ---------- ---------- Total current assets 351,123 374,654 ---------- ---------- Deferred charges and other assets (Note B) 273,275 292,644 ---------- ---------- $2,648,343 $2,612,838 ========== ========== Capitalization and Liabilities Capitalization: Common stock, par value $20 per share, authorized and outstanding 6,449,896 shares $128,998 $128,998 Premiums on capital stocks 86,829 86,829 Other paid-in capital 288,000 288,000 Retained earnings 385,309 372,763 ---------- ---------- Total common equity 889,136 876,590 Cumulative preferred stock, par value $100 per share (Note H) 60,516 60,516 Long-term debt 735,440 695,466 ---------- ---------- Total capitalization 1,685,092 1,632,572 ---------- ---------- Current liabilities: Long-term debt due in one year 10,000 Short-term debt (including $1,025 and $16,575 to affiliates) 125,150 145,575 Accounts payable (including $50,760 and $69,089 to affiliates) 163,791 179,761 Accrued liabilities: Taxes 3,447 6,133 Interest 10,482 9,914 Other accrued expenses (Note G) 10,834 10,866 Dividends payable 32,249 ---------- ---------- Total current liabilities 355,953 352,249 ---------- ---------- Deferred federal and state income taxes 390,197 364,073 Unamortized investment tax credits 57,509 59,014 Other reserves and deferred credits 159,592 204,930 Commitments and contingencies (Note E) ---------- ---------- $2,648,343 $2,612,838 ========== ========== 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) 1995 1994 1993 Operating activities: ---- ---- ---- Net income $151,427 $149,373 $141,468 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 108,384 142,764 135,746 Deferred income taxes and investment tax credits, net 25,683 23,051 20,665 Allowance for funds used during construction (19,225) (14,996) (5,178) Early retirement program 2,967 Decrease (increase) in accounts receivable 1,321 (6,932) 31,323 Decrease (increase) in fuel, materials, and supplies 18,697 (17,406) 16,902 Decrease (increase) in prepaid and other current assets 5,743 (7,275) (4,908) Increase (decrease) in accounts payable (15,970) 35,661 (35,913) Increase (decrease) in other current liabilities (2,150) (30,823) 25,205 Other, net (28,244) (26,845) (46,559) --------- --------- --------- Net cash provided by operating activities $245,666 $246,572 $281,718 --------- --------- --------- Investing activities: Plant expenditures, excluding allowance for funds used during construction $(162,766) $(229,015) $(156,614) Other investing activities (3,614) (3,053) (2,402) --------- --------- --------- Net cash used in investing activities $(166,380) $(232,068) $(159,016) --------- --------- --------- Financing activities: Dividends paid on common stock $(103,198) $(133,835) $(120,936) Dividends paid on preferred stock (3,433) (3,440) (4,883) Changes in short-term debt (20,425) 95,050 32,200 Long-term debt issues 60,000 28,000 224,000 Long-term debt retirements (10,000) (224,000) Preferred stock retirements (512) (25,000) Premium on reacquisition of long-term debt (3,255) Premium on redemption of preferred stock (870) --------- --------- --------- Net cash used in financing activities $(77,056) $(14,737) $(122,744) --------- --------- --------- Net increase (decrease) in cash and cash equivalents $2,230 $(233) $(42) Cash and cash equivalents at beginning of year 377 610 652 --------- --------- --------- Cash and cash equivalents at end of year $2,607 $377 $610 ========= ========= ========= Supplementary Information: Interest paid less amounts capitalized $41,557 $32,510 $42,390 --------- --------- --------- Federal and state income taxes paid $57,948 $83,455 $78,300 --------- --------- --------- Dividends received from investments at equity $5,014 $4,809 $5,103 --------- --------- --------- The accompanying notes are an integral part of these financial statements.
New England Power Company 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 and the Federal Energy Regulatory Commission. The Company's business is principally that of generating, purchasing, transmitting, and selling electric energy in wholesale quantities to other electric utilities, principally its affiliates Granite State Electric Company, Massachusetts Electric Company (Massachusetts Electric), and The Narragansett Electric Company (Narragansett). 2. System of Accounts: The accounts of the Company are maintained in accordance with the Uniform System or 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 eligible for inclusion in rate base. In 1995, an average of $21 million of construction work in progress was included in rate base, all of which was attributable to the Manchester Street Station repowering project. AFDC is capitalized in "Utility plant" with offsetting non-cash 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 7.5 percent, 7.8 percent, and 8.1 percent, in 1995, 1994, and 1993, 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) 1995 1994 1993 ---- ---- ---- Depreciation $66,309 $52,834 $53,128 Nuclear decommissioning costs (Note E-5) 2,629 1,951 1,951 Amortization: Investment in Seabrook 1 under rate settlement (Note D-2) 23,074 65,061 58,437 Oil Conservation Adjustment 4,467 11,854 12,137 Property losses 6,279 6,279 6,279 ------- ------- ------- Total depreciation and amortization expense $102,758 $137,979 $131,932 ======= ======= =======
Depreciation is provided annually on a straight-line basis. The provision for depreciation as a percentage of weighted average depreciable property was 2.7 percent in 1995, 2.4 percent in 1994, and 2.5 percent in 1993. The Oil Conservation Adjustment was designed to recover expenditures for coal conversion facilities at the Company's Salem Harbor Station. These costs were fully amortized at December 31, 1995. 5. Cash: The Company classifies short-term investments with a maturity of 90 days or less at time of purchase as cash. Note B - Competitive Conditions The electric utility business is being subjected to rapidly increasing competitive pressures and increasing demands for customer choice. Accordingly, in February 1996, Massachusetts Electric, an affiliate, filed a plan, Choice: New England, with Massachusetts regulators, which would allow all customers of electric utilities in Massachusetts to choose their power supplier beginning in 1998. Another affiliate, Narragansett, will file a similar version of Choice: New England with the Rhode Island Public Utilities Commission in April 1996. Under Choice: New England, pricing of generation would be deregulated while transmission and distribution rates would remain regulated, although subject to greater rewards and penalties based on performance. Choice: New England proposes that the cost of past commitments to serve customers be recovered through a wires access or transition charge. Those past commitments of the Company include generating plant commitments, regulatory assets, purchased power contracts, and nuclear costs independent of operation. 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. 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 liabilities, and thereby defer the income statement impact of certain costs that are expected to be recovered in future rates. The effects of regulatory, legislative, or utility initiatives, such as proposed legislation in Rhode Island or Choice: New England, could, in the near future, cause all or a portion of the Company's operations to cease meeting the criteria of FAS 71. In that event, the application of FAS 71 to such operations would be discontinued and a non-cash write-off of previously established regulatory assets and liabilities related to such operations would be required. In March 1995, the Financial Accounting Standards Board issued 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). This standard clarifies when and how to recognize an impairment of long-lived assets. If competitive or regulatory change should cause a substantial revenue loss or lead to the permanent shutdown of any generating facilities, a write-down of plant assets could be required pursuant to FAS 121. At December 31, 1995, the Company had net plant investments totaling approximately $2 billion, of which approximately $1.6 billion is generation related. In addition, FAS 121 requires that all regulatory assets, which must have a high probability of recovery to be initially established, must continue to meet that high probability standard to avoid being written off. However, if written off, a regulatory asset can be restored if it again has a high probability of recovery. FAS 121, which is effective for the Company in January 1996, is not expected to have a material adverse impact on the financial condition or results of operations upon adoption, based on the current regulatory environment in which the Company operates. However, the impact in the future may change as competitive factors and potential restructuring influence the electric utility industry. The components of regulatory assets are as follows: At December 31, (In Thousands) 1995 1994 ---- ---- Regulatory assets included in current assets and liabilities: Accrued NEEI losses (see Note E-1) $43,731 $39,794 Regulatory assets included in deferred charges: Accrued Yankee Atomic costs (see Note D-1) 67,566 122,452 Unamortized losses on reacquired debt 32,571 34,862 Deferred SFAS No. 106 costs (see Note F-2) 16,416 19,149 Deferred SFAS No. 109 costs (see Note C) 30,059 34,482 Purchased power contract termination costs 23,494 29,012 Deferred gas pipeline charges (see Note E-4) 62,873 37,562 Unamortized property losses 12,044 7,373 Other 22,049 2,542 -------- -------- 267,072 287,434 -------- -------- $310,803 $327,228 ======== ======= In addition to the regulatory assets recorded on its books, the Company is obligated to reimburse an affiliate, New England Energy Incorporated (NEEI), for losses which NEEI has been incurring in connection with its fuel exploration, development and production program (see Note E-1). The Company's ability to pass such losses on to customers was favorably resolved in the Company's 1988 rate settlement. NEEI has a regulatory asset of approximately $200 million, which is recoverable in its entirety from the Company. Approximately $300 to $350 million of total regulatory assets, including NEEI's regulatory asset, are expected to be recovered within the next five years. Amounts included in "Deferred charges and other assets" on the balance sheets that do not represent regulatory assets totaled $6,203,000 and $5,210,000 at December 31, 1995 and 1994, respectively. Note C - 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 (IRS) through 1991. The returns for 1992 and 1993 are currently under examination by the IRS. Total income taxes in the statements of income are as follows:
Year Ended December 31, (In Thousands) 1995 1994 1993 ---- ---- ---- Income taxes charged to operations $91,051 $96,596 $93,997 Income taxes charged (credited) to "Other income" 353 (994) 838 ------- ------- ------- Total income taxes $91,404 $95,602 $94,835 ======= ======= ======= Total income taxes, as shown above, consist of the following components: Year Ended December 31, (In Thousands) 1995 1994 1993 ---- ---- ---- Current income taxes $65,721 $72,551 $74,171 Deferred income taxes 27,188 26,628 23,270 Investment tax credits, net (1,505) (3,577) (2,606) ------- ------- ------- Total income taxes $91,404 $95,602 $94,835 ======= ======= =======
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) 1995 1994 1993 ---- ---- ---- Federal income taxes $74,590 $78,274 $77,593 State income taxes 16,814 17,328 17,242 ------- ------- ------- Total income taxes $91,404 $95,602 $94,835 ======= ======= ======= With regulatory approval from the Federal Energy Regulatory Commission (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) 1995 1994 1993 ---- ---- ---- Computed tax at statutory rate $84,991 $85,741 $82,706 Increases (reductions) in tax resulting from: Amortization of investment tax credits (2,227) (3,045) (2,511) State income taxes, net of federal income tax benefit 10,929 11,263 10,770 All other differences (2,289) 1,643 3,870 ------- ------- ------- Total income taxes $91,404 $95,602 $94,835 ======= ======= =======
The following table identifies the major components of total deferred income taxes: At December 31, (In Millions) 1995 1994 ---- ---- Deferred tax asset: Plant related $92 $96 Investment tax credits 24 25 All other 43 29 ---- ---- 159 150 ---- ---- Deferred tax liability: Plant related (397) (384) Equity AFDC (47) (47) All other (105) (83) ---- ---- (549) (514) ---- ---- Net deferred tax liability $(390) $(364) ===== ===== There were no valuation allowances for deferred tax assets deemed necessary. Note D - Nuclear Power Investments 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) 1995 1994 1993 ---- ---- ---- Operating revenue $695,781 $631,940 $700,148 ========== ========= ========= Net income $31,657 $30,345 $30,061 ========== ========= ========= Company's equity in net income $5,721 $4,816 $5,646 ========== ========= ========= Net plant 443,967 537,103 591,650 Other assets 1,418,681 1,458,186 1,286,923 Liabilities and debt (1,612,843) (1,748,960) (1,633,139) ---------- ---------- ---------- Net assets $249,805 $246,329 $245,434 ========== ========= ========= Company's equity in net assets $47,055 $46,349 $46,342 ========== ========= ========= Company's purchased electric energy $115,647 $106,404 $118,362 ========== ========= --------=
At December 31, 1995, $13 million of undistributed earnings of the Yankees were included in the Company's retained earnings. The Company has a 30 percent ownership interest in Yankee Atomic Electric Company (Yankee Atomic), which owns a 185 megawatt (MW) nuclear generating station in Rowe, Massachusetts. In 1992, the Yankee Atomic board of directors decided to permanently cease power operation of the facility and to proceed with decommissioning. The Company has recorded an estimate of its total future payment obligations for post operating costs to Yankee Atomic as a liability and an offsetting regulatory asset of $68 million each at December 31, 1995, reflecting its expected future rate recovery of such costs (see Note B). 2. Jointly-Owned Nuclear Generating Units: The Company is also a 12 percent and 10 percent joint owner, respectively, of the Millstone 3 and Seabrook 1 nuclear generating units, each 1,150 MW. The Company's net investment in Millstone 3, included in "Net utility plant" is approximately $392 million. The Company's unamortized pre-1988 investment in Seabrook 1, is approximately $15 million and is shown separately on the Company's balance sheet. It will be fully amortized in 1996, pursuant to a settlement agreement. The Company's net investment in Seabrook 1 since January 1, 1988, which is approximately $54 million, is included in "Net utility plant" on the Company's balance sheet and is being depreciated over the term of Seabrook 1's operating license. The Company's share of expenses for these units is included in "Operating expenses." Note E - Commitments and Contingencies 1. Oil and Gas Operations: NEEI, a subsidiary of NEES, is engaged in domestic oil and gas exploration, development, and production. NEEI operates under an intercompany pricing policy (Pricing Policy) with the Company which has been approved by the Securities and Exchange Commission (SEC). The Pricing Policy requires the Company to purchase all fuel meeting its specifications offered to it by NEEI. Under the Pricing Policy, NEEI's oil and gas exploration program is composed of prospects entered into through December 31, 1983 under a rate-regulated program. NEEI has incurred operating losses since 1986, due to low oil and gas prices, and expects to incur substantial additional losses in the future. These losses are passed on to the Company in the year after they are incurred by NEEI and, in turn, are being recovered from customers through the Company's fuel clause. The Company's ability to pass these losses on to its customers was favorably resolved in the Company's 1988 FERC rate settlement. This settlement covered all costs incurred by or resulting from commitments made by NEEI through March 1, 1988. Other subsequent costs incurred by NEEI are subject to normal regulatory review. In 1995, 1994, and 1993, the Company recorded accrued fuel expenses and accrued revenues of $44 million, $40 million, and $46 million, respectively, representing losses incurred by NEEI in each year. In the absence of the Pricing Policy, the SEC's cost center "ceiling test" rule requires non-rate-regulated companies to write down capitalized costs to a level which approximates the present value of their proved oil and gas reserves. Based on NEEI's 1995 average oil and gas selling prices, application of the ceiling test would have resulted in a write-down of approximately $112 million after tax ($178 million before tax) at December 31, 1995. 2. Plant Expenditures: The Company's utility plant expenditures are estimated to be $85 million in 1996. At December 31, 1995, substantial commitments had been made relative to future planned expenditures. 3. Hydro-Quebec Interconnection: 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 $73 million in utility plant at December 31, 1995. Under the support agreements, the Company has agreed, in conjunction with any Hydro-Quebec Phase II project debt financing, to guarantee its share of project debt. At December 31, 1995, the Company had guaranteed approximately $30 million of project debt. 4. Natural Gas Pipeline Capacity: In connection with serving the Company's gas-burning 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 approximately $60 million to $65 million per year from 1996 to 2000. Remaining fixed payments from 2001 through 2014 total approximately $625 million. As part of a rate settlement, the Company was recovering 50 percent of the fixed pipeline capacity payments through its current fuel clause and deferring the recovery of the remaining 50 percent until the Manchester Street repowering project was completed. These deferrals ended in November 1995, at which time the Company had deferred payments of approximately $63 million which will be amortized over 25 years in accordance with rate settlements (see Note B). 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 $71 million, $55 million, and $21 million, in 1995, 1994, and 1993, respectively, have been passed to customers through the Company's fuel clause. These proceeds have been included in "Fuel for generation" in the Company's statements of income as an offset to the related fuel expense. Natural gas sales are expected to decrease as a result of the Manchester Street Station entering commercial operation in the second half of 1995. 5. 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 a range of potentially hazardous products and by-products in its operations. NEES subsidiaries currently have an environmental audit program in place 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 U.S. 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. 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. 6. Nuclear Plant Decommissioning and Nuclear Fuel Disposal: The Company is recovering its share of projected decommissioning costs for Millstone 3 and Seabrook 1 through depreciation expense. Projected decommissioning costs include estimated costs to decontaminate the units as required by the Nuclear Regulatory Commission (NRC), as well as costs to dismantle the non-contaminated portion of the units. The Company records decommissioning cost expense on its books consistent with its rate recovery. 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. Each of the operating nuclear units in which the Company has an ownership interest has established decommissioning trust funds or escrow funds into which payments are being made to meet the projected costs of decommissioning each plant. Listed below is information on each operating nuclear plant in which the Company has an ownership interest. The Company's share of (in millions of dollars) --------------------------------- Estimated Decommiss- Ownership ioning Cost Fund License Unit Interest (in 1995 $) Balances** Expiration Connecticut Yankee 15% 58 27 2007 Maine Yankee *** 20% 71 28 2008 Vermont Yankee 20% 71 27 2012 Millstone 3 * 12% 58 14 2025 Seabrook 1 * 10% 43 6 2026 * Fund balances are included in "Non-utility property and other investments" on the balance sheets and approximate market value. ** Certain additional amounts are anticipated to be available through tax deductions. *** 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. There is no assurance that decommissioning costs actually incurred by the Yankees, 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 that do not currently exist. If any of the units were shut down prior to the end of their operating licenses, the funds collected for decommissioning to that point would be insufficient. The Nuclear Waste Policy Act of 1982 establishes that the federal government 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 Millstone 3 and Seabrook 1. The Company is recovering this fee through its fuel clause. Similar costs are incurred by Connecticut Yankee, Maine Yankee, and Vermont Yankee. These costs are billed to the Company and also recovered from customers through the Company's fuel clause. 7. 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. 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 $18 million per year. 8. Long-term Contracts for the Purchase of Electricity: The Company purchases a portion of its electricity requirements pursuant to long-term contracts that expire in various years from 1996 to 2029, with owners of various generating units. 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 $215 million in 1995, $190 million in 1994, and $220 million in 1993. These contracts have minimum fixed payment requirements of $190 million in 1996, $185 million in 1997, $190 million in 1998, $180 million in 1999 and 2000, and approximately $1.8 billion thereafter. Approximately 97 percent of the payments under these contracts are to the Yankees (excluding Yankee Atomic - see Note D-1) and Ocean State Power, entities in which the Company or its affiliates hold ownership interests. The Company's other contracts, principally with non-utility 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 $245 million in 1995, and $210 million in 1994 and 1993, respectively. 9. Purchased Power Contract Dispute: In October 1994, the Company was sued by Milford Power Limited Partnership (MPLP), a venture of Enron Corporation and Jones Capital that owns a 149 MW gas-fired power plant in Milford, Massachusetts. The Company purchases 56 percent of the power output of the facility under a long-term contract with MPLP. The suit alleges that the Company has engaged in a scheme to cause MPLP and its power plant to fail and has prevented MPLP from finding a long-term buyer for the remainder of the facility's output. The complaint includes allegations that the Company has violated the Federal Racketeer Influenced and Corrupt Organizations Act, engaged in unfair or deceptive acts in trade or commerce, and breached contracts. MPLP also asserts that the Company deliberately misled regulatory bodies concerning the Manchester Street Station repowering project. MPLP seeks compensatory damages in an unspecified amount, as well as treble damages. The Company believes that the allegations of wrongdoing are without merit. The Company has filed counterclaims and crossclaims against MPLP, Enron Corporation, and Jones Capital, seeking monetary damages and termination of the purchased power contract. MPLP also intervened in the Company's current rate filing before the FERC, making similar allegations to those asserted in MPLP's lawsuit. Hearings on this claim concluded in October 1995. An Administrative Law Judge initial decision is expected by mid-1996. Note F - 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. Net pension cost for 1995, 1994, and 1993 included the following components:
Year Ended December 31, (In Thousands) 1995 1994 1993 ---- ---- ---- Service cost benefits earned during the period $2,231 $2,202 $1,953 Plus (less): Interest cost on projected benefit obligation 6,406 6,403 6,070 Return on plan assets at expected long-term rate (6,488) (6,554) (5,850) Amortization 131 557 47 ------- ------- ------- Net pension cost $2,280 $2,608 $2,220 ======= ======= ======= Actual return on plan assets $17,108 $608 $8,949 ======= ======= ======= 1996 1995 1994 1993 ---- ---- ---- ---- Assumptions used to determine pension cost: Discount rate 7.25% 8.25% 7.25% 8.25% Average rate of increase in future compensation levels 4.13% 4.63% 4.35% 5.35% Expected long-term rate of return on assets 8.50% 8.75% 8.75% 8.75%
Service cost for 1993 does not reflect $10 million of costs incurred in connection with an early retirement and special severance program offered by the Company in that year. 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) 1995 1994 ---- ---- Union Non-Union Union Non-Union Employee Employee Employee Employee Plans Plans Plans Plans -------- --------- ------- -------- Benefits earned Actuarial present value of accumulated benefit liability: Vested $293 $343 $251 $308 Non-vested 8 10 8 9 ---- ---- ---- ---- Total $301 $353 $259 $317 ==== ==== ==== ==== Reconciliation of funded status Actuarial present value of projected benefit liability $346 $402 $303 $355 Unrecognized prior service costs (7) (4) (8) (4) Unrecognized transition liability (1) (1) Unrecognized net loss (1) (23) (13) (33) ---- ---- ---- ---- 338 374 282 317 ---- ---- ---- ---- Pension fund assets at fair value 349 392 293 323 Unrecognized transition asset (11) (13) ---- ---- ---- ---- 338 392 280 323 ---- ---- ---- ---- Accrued pension/(prepaid) payments recorded on books $ - $(18) $ 2 $ (6)
The plans' funded status at December 31, 1995 and 1994 were calculated using the assumed rates from 1996 and 1995, respectively, and the 1983 Group Annuity Mortality table. Plan assets are composed primarily of corporate equity, guaranteed investment contracts, 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 total cost of PBOPs for 1995, 1994, and 1993 included the following components:
Year Ended December 31, (In Thousands) 1995 1994 1993 ---- ---- ---- Service cost benefits earned during the period $1,344 $1,628 $1,632 Plus (less): Interest cost on accumulated benefit obligation 4,013 3,954 4,275 Return on plan assets at expected long-term rate (1,374) (1,111) (725) Amortization 2,079 2,591 2,558 ------ ------ ------ Net postretirement benefit cost $6,062 $7,062 $7,740 ====== ====== ====== Actual return on plan assets $4,137 $54 $ 746 1996 1995 1994 1993 ---- ---- ---- ---- Assumptions used to determine postretirement benefit cost: Discount rate 7.25% 8.25% 7.25% 8.25% Expected long-term rate of return on assets 8.25% 8.50% 8.50% 8.50% Health care cost rate 1994 and 1993 11.00% 12.00% Health care cost rate 1995 to 1999 8.00% 8.50% 8.50% 9.50% Health care cost rate 2000 to 2004 6.25% 8.50% 8.50% 9.50% Health care cost rate 2005 and beyond 5.25% 6.25% 6.25% 7.25% The following table sets forth benefits earned and the plans' funded status: At December 31, (In Millions) 1995 1994 ---- ---- Accumulated postretirement benefit obligation: Retirees $30 $31 Fully eligible active plan participants 1 3 Other active plan participants 20 17 --- --- Total benefits earned 51 51 Unrecognized transition obligation (43) (46) Unrecognized net gain 12 6 --- --- 20 11 --- --- Plan assets at fair value 23 15 --- --- Prepaid postretirement benefit costs recorded on books $3 $4 === ===
The plans' funded status at December 31, 1995 and 1994 were calculated using the assumed rates in effect for 1996 and 1995, respectively. The health care cost trend rate assumption has 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, 1995 by approximately $6 million and the net periodic cost for the year 1995 by approximately $1 million. The Company funds the annual tax deductible contributions. Plan assets are invested in equity and debt securities and cash equivalents. Note G - Short-term Borrowings and Other Accrued Expenses At December 31, 1995, the Company had $125 million of short-term debt outstanding including $124 million in commercial paper borrowings and $1 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, 1995, the Company had lines of credit and standby bond purchase facilities with banks totaling $510 million which are available to provide liquidity support for commercial paper borrowings and for $342 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, 1995. Fees are paid on the lines and facilities in lieu of compensating balances. The weighted average rate on outstanding short-term borrowings was 5.9 percent at December 31, 1995. 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) 1995 1994 ---- ---- Accrued wages and benefits $6,258 $6,397 Capital lease obligations due within one year 4,323 4,324 Other 253 145 ------ ------ $10,834 $10,866 ====== ====== Note H - Cumulative Preferred Stock
A summary of cumulative preferred stock at December 31, 1995 and 1994 is as follows (in thousands of dollars except for share data): Shares Authorized Dividends Call and Outstanding Amount Declared Price --------------- ------ ------------ ----- 1995 1994 1995 1994 1995 1994 ---- ---- ---- ---- ---- ---- ----- $100 Par value 6.00% Series 75,020 75,020 $7,502 $7,502 $451 $458 (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 100,000 100,000 10,000 10,000 464 464 102.56 6.08% Series 100,000 100,000 10,000 10,000 608 608 102.34 7.24% Series 150,000 150,000 15,000 15,000 1,086 1,086 103.06 ------- ------- ------ ------ ----- ----- Total 605,160 605,160$60,516 $60,516 $3,433 $3,440 (a) Noncallable. The annual dividend requirement for total cumulative preferred stock was $3,433,000 for 1995 and 1994.
Note I - Long-term Debt A summary of long-term debt is as follows: At December 31, (In Thousands) Series Rate % Maturity 1995 1994 - ----------------------------------------------------------------------------- General and Refunding Mortgage Bonds: W(93-3) 5.12 February 2, 1996 $5,000 $5,000 W(93-8) 5.06 February 5, 1996 5,000 5,000 Y(94-3) 8.10 December 22, 1997 3,000 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 Y(95-2) 7.93 February 14, 2000 10,000 Y(95-3) 7.40 March 21, 2000 10,000 Y(95-4) 6.69 June 5, 2000 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 L 7.80 April 1, 2016 29,850 29,850 X variable March 1, 2018 79,250 79,250 R variable November 1, 2020 117,850 107,850 S variable November 1, 2020 20,750 20,750 T variable November 1, 2020 18,000 28,000 U 8.00 August 1, 2022 170,000 170,000 V variable October 1, 2022 106,150 106,150 Y(94-1) 8.53 September 20, 2024 5,000 5,000 Unamortized discounts (2,910) (2,884) -------- -------- Total long-term debt 745,440 695,466 ======== ======== Long-term debt due in one year (10,000) -------- -------- $735,440 $695,466 ======== ======== 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 $10 million in 1996, $3 million in 1997, $50 million in 1998, $10 million in 1999, and $55 million in 2000 to retire maturing mortgage bonds. The terms of $342 million of variable rate pollution control revenue bonds (PCRBs) collateralized by the Company's mortgage bonds require the Company to reacquire the bonds under certain limited circumstances. At December 31, 1995, interest rates on the Company's variable rate bonds ranged from 3.35 percent to 6.00 percent. To date in 1996, the Company has issued $40 million of additional variable rate PCRBs to refinance $10 million of Series T bonds and $30 million of Series L bonds. At December 31, 1995, the Company's long-term debt had a carrying value of $745,000,000 and had a fair value of approximately $785,000,000. 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, 1995 was 52 percent of total capitalization, including long-term debt due in one year, and, accordingly, none of the Company's retained earnings at December 31, 1995 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, 1995 were restricted as to dividends on common stock. However, a portion of the Company's retained earnings (less than $20 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 1995, 1994, or 1993. Taxes, other than income taxes, charged to operating expenses are set forth by classes as follows:
Year Ended December 31, (In Thousands) 1995 1994 1993 ---- ---- ---- Municipal property taxes $49,807 $46,506 $44,124 Federal and state payroll and other taxes 8,909 7,894 7,807 ------- ------- ------- $58,716 $54,400 $51,931 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 $103,529,000, $103,961,000, and $94,366,000, including capitalized construction costs of $24,671,000, $22,396,000, and $20,335,000, for each of the years 1995, 1994, and 1993, respectively.
New England Power Company Operating Statistics (Unaudited)
Year Ended December 31, 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Sources of Energy (Thousands of kWh) Net generation thermal 11,547,85610,971,31911,621,03812,087,77513,569,122 Net generation conventional hydro 1,257,533 1,352,600 1,253,925 1,212,155 1,507,656 Generation pumped storage 519,931 525,653 548,358 530,796 498,895 Net generation nuclear 1,812,468 1,767,959 1,696,677 1,592,340 1,033,332 Nuclear entitlements 1,278,598 2,535,534 2,196,998 2,214,976 2,713,947 Purchased energy from non-affiliates (B) 8,857,842 8,674,191 7,800,975 7,287,856 6,323,144 Energy for pumping (716,279) (723,352) (750,784) (738,364) (685,659) -------------------------------------------------- Total generated and purchased 24,557,94925,103,90424,367,18724,187,53424,960,437 Losses, company use, etc. (690,626) (635,695) (548,228) (632,850) (589,001) -------------------------------------------------- Total sources of energy 23,867,32324,468,20923,818,95923,554,68424,371,436 Sales of Energy (Thousands of kWh) Resale: Affiliated companies 22,338,30122,182,76121,858,49121,497,99321,496,098 Less generation by affiliated Company (A) (64,035) (5,781) (4,506) (83,753) (162,844) -------------------------------------------------- Net sales to affiliated companies 22,274,26622,176,98021,853,98521,414,24021,333,254 Other utilities (B) 947,537 1,731,225 1,528,686 1,705,591 2,613,034 Municipals 633,970 551,866 426,525 415,659 411,171 -------------------------------------------------- Total sales for resale 23,855,77324,460,07123,809,196 23,535,490 24,357,459 Ultimate customers 11,550 8,138 9,763 19,194 13,977 -------------------------------------------------- Total sales of energy 23,867,32324,468,20923,818,95923,554,68424,371,436 Operating Revenue (In Thousands) Revenue from electric sales Resale: Affiliated companies $1,498,848$1,448,503$1,459,619$1,450,831$1,384,222 Less G and T credits (A) (43,532) (32,346) (26,001) (38,697) (50,961) Net sales to affiliated companies 1,455,316 1,416,157 1,433,618 1,412,134 1,333,261 Other utilities (B) 41,193 56,306 52,695 55,156 76,162 Municipals 37,036 32,055 27,574 26,980 25,755 -------------------------------------------------- Total revenue from sales for resale 1,533,545 1,504,518 1,513,887 1,494,270 1,435,178 Ultimate customers 945 606 752 1,399 1,097 ---------------------------------------- --------- Total revenue from electric sales 1,534,490 1,505,1241,514,639 1,495,669 1,436,275 Other operating revenue 36,049 35,633 34,375 35,206 36,016 -------------------------------------------------- Total operating revenue $1,570,539$1,540,757$1,549,014$1,530,875$1,472,291 Annual Maximum Demand (kW one hour peak) 4,381,000 4,385,000 4,081,0003,964,000 4,250,000 (A) The generation and transmission facilities of affiliates are operated as an integrated part of the Company's power supply and the affiliates receive generation and transmission (G and T) credits against their power bills for costs of facilities so integrated. (B)Includes transactions with the New England Power Pool.
New England Power Company Selected Financial Information
Year Ended December 31, (In Millions) 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Operating revenue: Electric sales (excluding fuel cost recovery) $941 $942 $939 $907 $861 Fuel cost recovery 594 563 576 589 575 Other 36 36 34 35 36 ------ ------ ------ ------ ------ Total operating revenue $1,571 $1,541 $1,549 $1,531 $1,472 Net income $151 $149 $141 $134 $135 Total assets $2,648 $2,613 $2,441 $2,387 $2,277 Capitalization: Common equity $889 $877 $850 $825 $797 Cumulative preferred stock 61 61 61 86 86 Long-term debt 735 695 667 666 730 ------ ------ ------ ------ ------ Total capitalization $1,685 $1,633 $1,578 $1,577 $1,613 Preferred dividends declared $3 $3 $5 $6 $6 Common dividends declared $135 $119 $111 $100 $116
Selected Quarterly Financial Information (Unaudited)
First Second Third Fourth (In Thousands) Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1995 Operating revenue $391,118 $378,177 $421,935 $379,309 Operating income $40,089 $33,454 $69,669 $42,201 Net income $30,982 $27,689 $61,684 $31,072 1994 Operating revenue $399,574 $356,488 $419,555 $365,140 Operating income $56,873 $32,192 $55,217 $26,239 Net income $49,189 $26,182 $49,818 $24,184 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, 1995 will be available on or about April 1, 1996, without charge, upon written request to New England Power Company, Shareholder Services Department, 25 Research Drive, Westborough, Massachusetts 01582.
EX-21 11 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 Corporatio Yankee Atomic Electric Company Massachusetts
EX-24 12 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, Maureen L. Fountain, 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, 1995, 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 12th day of March, 1996. s/Joan T. Bok s/Alfred D. Houston _________________________ _________________________ Joan T. Bok Alfred D. Houston s/Cheryl A. LaFleur _________________________ _________________________ Cheryl A. LaFleur John W. Rowe _________________________ Jeffrey D. Tranen EX-27 13 NEP FDS
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. 0000071337 New England Power Company 1,000 DEC-31-1995 DEC-31-1994 DEC-31-1995 DEC-31-1994 12-MOS 12-MOS PER-BOOK PER-BOOK 1,950,263 1,876,211 73,682 69,329 351,123 374,654 273,275 292,644 0 0 2,648,343 2,612,838 128,998 128,998 374,829 374,829 385,309 372,763 889,136 876,590 0 0 60,516 60,516 735,440 695,466 1,025 16,575 0 0 124,125 129,000 10,000 0 0 0 0 0 0 0 828,101 834,691 2,648,343 2,612,838 1,570,539 1,540,757 91,051 96,596 1,294,075 1,273,640 1,385,126 1,370,236 185,413 170,521 11,857 13,665 197,270 184,186 45,843 34,813 151,427 149,373 3,433 3,440 147,994 145,933 135,448 119,323 46,797 38,711 245,666 246,572 0 0 0 0 Total deferred charges includes other assets and accrued Yankee Atomic costs. Per share data is not relevant because the Company's common stock is wholly-owned by New England Electric System. EX-12 14 MECO COMPUTATION OF RATIOS
MASSACHUSETTS ELECTRIC COMPANY Computation of Ratio of Earnings to Fixed Charges (SEC Coverage) (Unaudited)
Years Ended December 31, ------------------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (In Thousands) Net Income $29,101 $34,726 $23,779 $34,905 $25,243 - ---------- Add income taxes and fixed charges - ---------------------------------- Current federal income taxes 9,437 (6,762) 5,606 3,977 8,568 Deferred federal income taxes 6,156 24,932 3,430 13,451 3,889 Investment tax credits - net (1,132) (1,228) (1,228) (1,228) (1,194) Massachusetts franchise tax 3,935 4,681 3,348 3,858 2,920 Interest on long-term debt 25,901 20,967 23,403 21,910 20,157 Interest on short-term debt and other 6,784 6,366 3,638 3,657 3,643 ------- ------- ------- ------- ------- Net earnings available for fixed charges $80,182 $83,682 $61,976 $80,530 $63,226 ------- ------- ------- ------- ------- Fixed charges: Interest on long-term debt $25,901 $20,967 $23,403 $21,910 $20,157 Interest on short-term debt and other 6,784 6,366 3,638 3,657 3,643 ------- ------- ------- ------- ------- Total fixed charges $32,685 $27,333 $27,041 $25,567 $23,800 ======= ======= ======= ======= ======= Ratio of earnings to fixed charges 2.45 3.06 2.29 3.15 2.66 - ----------------------------------
EX-13 15 MECO ANNUAL REPORT Annual Report 1995 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 December 31, 1995) Urville J. Beaumont Treasurer and Director, Beaumont and Campbell, P.A. (Attorneys), Salem, New Hampshire Joan T. Bok Chairman of the Board of New England Electric System Sally L. Collins Director, Workplace Health Services, Greenfield, Massachusetts John H. Dickson President and Chief Executive Officer of the Company Dr. Kalyan K. Ghosh President, Worcester State College Charles B. Housen Chairman and President, Erving Industries, Erving, Massachusetts Patricia McGovern Of Counsel, Goulston and Storrs, P.C., Boston, Massachusetts John F. Reilly President and Chief Executive Officer of Fred C. Church, Inc., Lowell, Massachusetts John W. Rowe President and Chief Executive Officer of New England Electric System Richard P. Sergel Chairman of the Company and Vice President of New England Electric System Richard M. Shribman Treasurer, Norick Realty Corporation, Salem, Massachusetts Roslyn M. Watson President, Watson Ventures, Boston, Massachusetts Officers (As of December 31, 1995) Richard P. Sergel Chairman of the Company and Vice President of New England Electric System John H. Dickson President and Chief Executive Officer John C. Amoroso Vice President Eric P. Cody Vice President Peter H. Gibson Vice President Gregory A. Hale Vice President Cheryl A. LaFleur*** Vice President Charles H. Moser Vice President Lydia M. Pastuszek Vice President of the Company and President of an affiliate Anthony C. Pini Vice President Thomas E. Rogers** Vice President Christopher E. Root Vice President Nancy H. Sala Vice President Dennis E. Snay Vice President Michael E. Jesanis Treasurer of the Company and of New England Electric System Robert King Wulff Clerk of the Company and of certain affiliates Howard W. McDowell Controller and Assistant Treasurer of the Company and Controller of certain affiliates Frederic E. Greenman* Assistant Clerk and General Counsel of the Company and Senior Vice President, General Counsel, and Secretary of New England Electric System Thomas G. Robinson** Assistant Clerk and General Counsel of the Company * retired December 31, 1995 ** elected effective December 31, 1995 *** resigned effective December 31, 1995 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 is a wholly-owned subsidiary of New England Electric System operating in Massachusetts. The Company's business is the distribution and sale of electricity at retail. Electric service is provided to approximately 950,000 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, suburban communities, and many 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. There are a number of proposals that would increase competition in the electric utility industry and result in customers having a choice of power suppliers (see "Financial Review"). The properties of the Company consist principally of substations and distribution lines interconnected with transmission and other facilities of New England Power Company (NEP), an affiliate. The Company buys its electric energy requirements from NEP under a contract which obligates NEP to furnish such requirements at its standard resale rate. The Company participates through NEP in the New England Power Pool, which provides for the coordination of the planning and operation of the generation and transmission facilities in New England, and the region-wide central dispatch of generation. 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, 1995 and 1994 and the related statements of income, retained earnings, and cash flows for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Boston, Massachusetts COOPERS & LYBRAND L.L.P. March 1, 1996 Massachusetts Electric Company Financial Review Overview Net income for 1995 decreased $6 million. Although the Company experienced growth in sales and reduced operation and maintenance costs, such increases in income were more than offset by increased purchased power costs, increased interest expense and a decrease in revenue due to the operation of the Company's purchased power adjustment (PPCA) mechanism. Net income for 1994 increased by $11 million compared with 1993. The increase was primarily due to the inclusion in 1993 of one-time charges associated with an early retirement program and the establishment of additional gas waste reserves. In addition, the increase in 1994 earnings reflects increased kilowatt-hour (kWh) sales. These factors were partially offset by increased operation and maintenance expenses excluding the effect of the one-time charges discussed above. Competitive Conditions The electric utility business is being subjected to rapidly increasing competitive pressures, stemming from a combination of trends, including the presence of surplus generating capacity, a disparity in electric rates among regions of the country, improvements in generation efficiency, increasing demand for customer choice, and new regulations and legislation intended to foster competition. To date, this competition has been most prominent in the bulk power market, in which non-utility generators have significantly increased their market share. Electric utilities have had exclusive franchises for the retail sale of electricity in specified service territories. As a result, competition in the retail market has been limited to (i) competition with alternative fuel suppliers, primarily for heating and cooling, (ii) competition with customer-owned generation, and (iii) direct competition among electric utilities to attract major new facilities to their service territories. These competitive pressures have led the Company and other utilities to offer, from time to time, special discounts or service packages to certain large customers. In states across the country, including Massachusetts, there have been an increasing number of proposals to allow retail customers to choose their electricity supplier, with incumbent utilities required to deliver that electricity over their transmission and distribution systems (also known as "retail wheeling"). If electric customers were allowed to choose their electricity supplier, the Company's role would change and it would provide only distribution services. Power would be provided by power generators and marketers, which could be either affiliated or non-affiliated companies. In these competitive circumstances, utilities across the country that operate generation plants, such as the Company's affiliate, New England Power Company (NEP), would face the risk that market prices may not be sufficient to recover the costs of the commitments incurred to supply customers under a regulated industry structure. The amount by which costs exceed market prices is commonly referred to as "stranded costs." The Company purchases electricity on behalf of its customers under a wholesale all-requirements contract with NEP. NEP derives approximately 72 percent of its electric sales revenues from sales to the Company. Choice: New England In October 1995, the New England Electric System (NEES) companies announced a plan to allow all customers of electric utilities in Massachusetts, Rhode Island, and New Hampshire to choose their power supplier beginning in 1998. The plan, Choice: New England, was developed in response to 1995 decisions by the Massachusetts Department of Public Utilities (MDPU) and the Rhode Island Public Utilities Commission that approved a set of principles for industry restructuring. These principles include allowing utilities the opportunity to recover stranded costs. Choice: New England was formally filed with the MDPU in February 1996. Under Choice: New England, the Company would no longer sell electricity to its customers. Instead, customers would purchase electricity from a supplier of their choice, with the Company remaining responsible for providing distribution services to customers under regulated rates. Transmission services would be provided by a new affiliate of the Company, which would be formed by NEES to provide comparable service across the NEES companies' transmission system. Under Choice: New England, the pricing of generation would be deregulated. However, customers would have the right to receive service under a "standard offer" from the incumbent utility or its affiliate, the pricing of which would be approved in advance by legislators or regulators. Customers electing the standard offer would be eligible to choose an alternative power supplier at any time, but would not be allowed to return to the standard offer. Under Choice: New England, the Company's wholesale contract with NEP would be terminated. In return, Choice: New England proposes that the cost of NEP's past generation commitments be recovered from the Company and its retail affiliates through a contract termination charge. The Company would, in turn, seek to recover the payments to NEP through a wires access or transition charge to retail customers. Those commitments primarily consist of (i) generating plant commitments, (ii) regulatory assets, (iii) purchased power contracts, and (iv) the operating cost of nuclear plants which cannot be mitigated by shutting down the plants (otherwise referred to as "nuclear costs independent of operation"). The portion of these commitments incurred by NEP to serve the Company's customers is currently estimated at approximately $3 billion on a present value basis. Sunk costs associated with utility generating plants, such as past capital investments, and regulatory assets would be recovered over ten years. Purchased power contract costs and nuclear costs independent of operation would be recovered as incurred over the life of those obligations, a period expected to extend beyond ten years. The access charge would be set at three cents per kWh for the first three years. Thereafter, the access charge would vary, but is expected to decline. The provisions of Choice: New England, including the proposed access charge, are subject to state approval and Federal Energy Regulatory Commission (FERC) approval. In March 1996, the Company filed a request with the MDPU to allow the implementation of two pilot programs to test the plan. The first would allow certain high technology customers in Massachusetts representing 1 percent of the NEES companies' retail sales to have direct access to alternative power suppliers beginning in July 1996. The second would allow residential and small business customers in Massachusetts representing 0.5 percent of the NEES companies' retail sales to have direct access beginning September 1, 1996. Three other utilities and the Massachusetts Division of Energy Resources (DOER) also filed plans with the MDPU in February 1996. The DOER's plan also calls for direct access for all customers beginning in 1998 with a pilot program beginning in 1997. The DOER plan, however, proposes that, in exchange for stranded cost recovery, utilities divest their generating assets, either through sale or spinoff. The NEES companies do not support the DOER mandatory divestiture proposal. The MDPU is expected to issue regulations on industry restructuring in September 1996 and to issue orders on the individual utility plans in 1997. Other Legislative and Regulatory Initiatives In February 1996, the MDPU denied the recovery of stranded power generation costs in the context of the town of Stow, Massachusetts attempting to purchase the distribution assets in that town owned by the neighboring Hudson Municipal Light Department. Although the MDPU reaffirmed its general position that utilities should have a reasonable opportunity to recover net, non-mitigable, stranded costs, it refused to allow recovery in this case stating that Hudson had not sufficiently demonstrated that stranded costs would be incurred and made no effort to mitigate any such costs. Both parties have appealed the MDPU decision and the MDPU has stayed its decision pending appeal. In August 1995, the MDPU issued an order requiring a customer of another utility who installed cogenerating equipment to pay 75 percent of that utility's stranded costs attributable to serving the customer's load. The MDPU indicated the decision did not set a precedent for stranded cost recovery as part of industry restructuring. In March 1996, the FERC ruled that it would not review the MDPU's decision. The customer is expected to appeal the decision to the courts. In March 1995, the FERC issued a Notice of Proposed Rulemaking in which it stated that it is appropriate that legitimate and verifiable stranded costs be recovered from departing customers as a result of wholesale competition. The FERC also indicated that costs stranded as a result of retail competition would be subject to state commission review if the necessary statutory authority exists and subject to FERC review if the state commission does not have such authority. A final decision is expected during 1996. Risk Factors The major risk factors affecting the Company relate to the possibility of adverse regulatory decisions or legislation which limit the level of revenues the Company is allowed to charge for its services. The Company's all-requirements purchased power contract with NEP requires either party to give seven years notice prior to terminating the contract. Termination of the contract would create stranded costs at NEP that NEP would seek to recover from the Company pursuant to the contract. In that event, the Company would seek recovery of such stranded costs from its customers. However, there is no assurance that the final restructuring plans ordered by state regulatory bodies or state legislatures will include provisions that allow the Company to fully recover any stranded costs passed on to the Company by NEP. In such an event, the Company could be faced with a significant amount of costs being billed to it by NEP that the Company could not fully recover from retail customers, for which the Company would seek a remedy in the courts. In addition, there is no assurance that any performance incentive system, which regulators might ultimately adopt with respect to the Company's distribution activities, would allow the Company to fully recover prudently incurred costs and earn a reasonable return on investment. 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. 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 liabilities, and thereby defer the income statement impact of certain costs that are expected to be recovered in future rates. The effects of regulatory, legislative, or utility initiatives could, in the near future, cause all or a portion of the Company's operations to cease meeting the criteria of FAS 71. In that event, the application of FAS 71 to such operations would be discontinued and a non-cash write-off of previously established regulatory assets and liabilities related to such operations would be required. At December 31, 1995, the Company had pre-tax regulatory assets (net of regulatory liabilities) of approximately $54 million. If competitive or regulatory change should cause a substantial revenue loss, a write-down of plant assets could be required pursuant to Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (FAS 121). In addition, FAS 121 requires that all regulatory assets, which must have a high probability of recovery to be initially established, must continue to meet that high probability standard to avoid being written off. FAS 121, which is effective for the Company in January 1996, is not expected to have a material adverse impact on the financial condition or results of operations upon adoption, based on the current regulatory environment in which the Company operates. However, the impact in the future may change as competitive factors and potential restructuring influence the electric utility industry. For further discussion, see Note B. Rate Activity The MDPU approved a $31 million increase to base rates for the Company effective October 1, 1995. In 1993, the MDPU approved a rate agreement filed by the Company, the Massachusetts Attorney General, and two groups of large commercial and industrial customers. Under the agreement, effective December 1, 1993, the Company implemented an 11 month general rate decrease of $26 million (annual basis). This rate reduction continued in effect through October 31, 1994, at which time rates increased to the previously approved levels. The agreement also provided for the recognition of electricity delivered but not yet billed (unbilled revenues) for accounting purposes. Unbilled revenues at September 30, 1993 of approximately $35 million were amortized to income over 13 months ending December 1994. The agreement further provided for rate discounts for large commercial and industrial customers who signed agreements to give a five-year notice to the Company before they purchase power from another supplier or generate any additional power themselves. In addition, commencing in 1995, the cost of these discounts is being passed on to NEP as a result of a NEP rate settlement that was approved by the FERC in early 1995. The 1993 agreement also resolved all rate recovery issues associated with environmental remediation costs of Massachusetts manufactured gas waste sites formerly owned by the Company and its affiliates, as well as certain other environmental cleanup costs (see "Hazardous Waste" section). Demand-Side Management (DSM) The Company has received approval from the MDPU to recover DSM program expenditures in rates on a current basis. These expenditures were $53 million, $59 million, and $47 million in 1995, 1994, and 1993, respectively. Since 1990, the Company has been allowed to earn incentives based on the results of its DSM programs. The Company recorded before-tax incentives of $5.1 million, $7.1 million, and $6.7 million in 1995, 1994, and 1993, respectively. Operating Revenue The following table summarizes the changes in operating revenue: Increase (Decrease) in Operating Revenue - ------------------------------------------------------------------------------ (In Millions) 1995 1994 - ------------------------------------------------------------------------------ Sales growth $11 $12 Fuel recovery 38 (16) PPCA mechanism (11) 7 Rate changes/service extension discount (SEDs) 26 (22) Unbilled revenues recognized under rate agreement (32) 21 DSM recovery (8) 12 --- --- $24 $14 In 1995, kWh sales increased by 0.9 percent compared with a 1.8 percent increase in 1994. Peak demand billing levels to commercial and industrial customers increased by 2.0 percent in 1995 while remaining flat between 1994 and 1993. The increase in kWh sales in 1995 reflects a warmer summer and a return to more normal weather conditions in the fourth quarter of 1995, partially offset by mild weather in the first quarter of 1995. The Company's rates contain a fuel clause and a PPCA provision. These mechanisms are 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 PPCA mechanism is also designed to pass on to customers the effects of NEP's seasonal rates. Although the Company experienced an increase in purchased power costs in 1995, NEP's seasonal rates reduced the impact of this increase. The passback to customers of this benefit is reflected as a reduction in revenues under the PPCA mechanism. Rate changes in 1995 reflect the November 1994 expiration of a temporary rate decrease, as well as a general rate increase, that went into effect on October 1, 1995. Unbilled revenues recognized under the Company's rate agreement reflect the Company's completion of the recognition of $35 million of unbilled revenues over a 13 month period that ended in December 1994 in accordance with an October 1993 rate agreement. Operating Expenses The following table summarizes the changes in operating expenses: Increase (Decrease) in Operating Expenses - ------------------------------------------------------------------------------ (In Millions) 1995 1994 - ------------------------------------------------------------------------------ Purchased electric energy: Fuel costs $38 $(16) SED reimbursements (9) Purchases and demand charges from NEP 10 4 NEP refunds 4 Other operation and maintenance: DSM (6) 11 Other (9) (17) Depreciation 2 2 Taxes (1) 13 --- --- $25 $1 The 1995 increase in fuel costs from NEP reflects decreased nuclear generation due to overhauls and decreased hydro production resulting from low water levels. The decrease in the fuel cost component of purchased power in 1994 includes a decrease in the amount of New England Energy Incorporated's (NEEI) costs passed through by NEP. NEEI is an affiliated company involved in oil and gas exploration and development. The reduction in other operation and maintenance expenses in 1995 reflects decreased distribution line-related expenses. This decrease was partially offset by increased postretirement benefit expenses commensurate with additional amounts being recovered from customers. The decrease in other operation and maintenance expenses in 1994 was primarily the result of one-time charges in 1993 of $26 million for the establishment of additional gas waste reserves and $13 million associated with an early retirement program, partially offset by the effects, in 1993, of the Company's rate agreement which allowed recovery of amounts previously charged to expense (see "Rate Activity" section). Other operation and maintenance expenses in 1994 also included increased computer system development costs, increased postretirement benefit expenses, and general increases in other areas. The decrease in taxes in 1995 was primarily due to decreased income, partially offset by increased municipal property taxes. The increase in taxes in 1994 reflects increased income and increased municipal property taxes. 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 a range of potentially hazardous products and by-products in its operations. NEES subsidiaries currently have an environmental audit program in place 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 U.S. Environmental Protection Agency or the Massachusetts Department of Environmental Protection for 18 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. The Company is aware of approximately 35 such locations in Massachusetts (including seven of the 18 locations for which the Company is a PRP). 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. In 1993, the MDPU approved a rate agreement filed by the Company (see "Rate Activity" section) that allows for remediation costs of former manufactured gas sites and certain other hazardous waste sites located in Massachusetts to be met from a non-rate-recoverable, interest-bearing fund of $30 million established on the Company's books in 1993. Rate-recoverable contributions of $3 million, adjusted for inflation, are added to the fund annually in accordance with the agreement. Any shortfalls in the fund would be paid by the Company and be recovered through rates over seven years. 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. 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. At December 31, 1995, the Company had total reserves for environmental response costs of $39 million and a related regulatory asset of $16 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. Electric and Magnetic Fields (EMF) Concerns have been raised about whether EMF, which occur near transmission and distribution lines as well as near household wiring and appliances, cause or contribute to adverse health effects. Numerous studies on the effects of these fields, some of them sponsored by electric utilities (including NEES companies), have been conducted and are continuing. Some of the studies have suggested associations between certain EMF and health effects, including various types of cancer, while other studies have not substantiated such associations. It is impossible to predict the ultimate impact on the Company and the electric utility industry if further investigations were to demonstrate that the present electricity delivery system is contributing to increased risk of cancer or other health problems. Many utilities, including the NEES companies, have been contacted by customers regarding a potential relationship between EMF and adverse health effects. To date, no court in the United States has ruled that EMF from electrical facilities cause adverse health effects and no utility has been found liable for personal injuries alleged to have been caused by EMF. In any event, the Company believes that it currently has adequate insurance coverage for personal injury claims. Several state courts have recognized a cause of action for damage to property values in transmission line condemnation cases based on the fear that power lines cause cancer. It is difficult to predict what the impact on the Company would be if this cause of action is recognized in Massachusetts and in contexts other than condemnation cases. Utility Plant Expenditures and Financing Cash expenditures for utility plant totaled $90 million in 1995. The funds necessary for utility plant expenditures during 1995 were primarily provided by net cash from operating activities, after the payment of dividends, long-term debt issues, and capital contributions from NEES. Cash expenditures for utility plant for 1996 are estimated to be approximately $105 million. Internally generated funds are expected to meet approximately 70 percent of capital expenditure requirements in 1996. In 1995, the Company issued $88 million of first mortgage bonds, bearing interest rates ranging from 6.72 percent to 8.46 percent. The Company plans to issue $20 million of long-term debt in 1996 to fund capital expenditures. At December 31, 1995, the Company had $55 million of short-term debt outstanding including $54 million of commercial paper borrowings and $1 million of borrowings from affiliates. As of December 31, 1995, the Company had lines of credit with banks totaling $90 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 31,1995. March 25, 1996 Massachusetts Electric Company Statements of Income
Year Ended December 31, (In Thousands) 1995 1994 1993 ---- ---- ---- Operating revenue $1,505,676 $1,482,070 $1,468,540 ---------- ---------- ---------- Operating expenses: Purchased electric energy, principally from New England Power Company, an affiliate 1,113,673 1,074,402 1,081,918 Other operation 206,660 215,794 229,438 Maintenance 29,525 35,502 28,168 Depreciation 44,829 42,775 40,848 Taxes, other than income taxes 30,022 28,664 26,527 Income taxes 19,297 22,265 11,055 ---------- ---------- ---------- Total operating expenses 1,444,006 1,419,402 1,417,954 ---------- ---------- ---------- Operating income 61,670 62,668 50,586 Other income (expense), net (541) (995) (64) ---------- ---------- ---------- Operating and other income 61,129 61,673 50,522 ---------- ---------- ---------- Interest: Interest on long-term debt 25,901 20,967 23,403 Other interest 6,784 6,366 3,638 Allowance for borrowed funds used during construction credit (657) (386) (298) ---------- ---------- ---------- Total interest 32,028 26,947 26,743 ---------- ---------- ---------- Net income $29,101 $34,726 $23,779 ========== ========== ========== Statements of Retained Earnings Year Ended December 31, (In Thousands) 1995 1994 1993 ---- ---- ---- Retained earnings at beginning of year $136,911 $135,276 $134,670 Net income 29,101 34,726 23,779 Dividends declared on cumulative preferred stock (3,114) (3,114) (3,772) Dividends declared on common stock, $5.25, $12.50, and $7.75 per share, respectively (12,590) (29,977) (18,585) Premium on redemption of preferred stock (816) -------- -------- -------- Retained earnings at end of year $150,308 $136,911 $135,276 ======== ======== ======== The accompanying notes are an integral part of these financial statements.
Massachusetts Electric Company Balance Sheets At December 31, (In Thousands) 1995 1994 Assets ---------- ---------- Utility plant, at original cost $1,420,069 $1,346,824 Less accumulated provisions for depreciation 399,711 373,501 ---------- ---------- 1,020,358 973,323 Construction work in progress 21,118 22,672 ---------- ---------- Net utility plant 1,041,476 995,995 ---------- ---------- Current assets: Cash 1,840 1,225 Accounts receivable: From sales of electric energy 160,795 137,431 Other (including $1,776 and $6,609 from affiliates) 3,527 36,022 Less reserves for doubtful accounts 12,544 10,394 ---------- ---------- 151,778 163,059 Unbilled revenues (Note A-3) 49,800 42,800 Materials and supplies, at average cost 10,602 11,524 Prepaid and other current assets 22,514 21,583 ---------- ---------- Total current assets 236,534 240,191 ---------- ---------- Deferred charges and other assets (Note B) 65,090 59,536 ---------- ---------- $1,343,100 $1,295,722 ========== ========== Capitalization and Liabilities Capitalization: Common stock, par value $25 per share, authorized and outstanding 2,398,111 shares $59,953 $59,953 Premiums on capital stocks 45,862 45,862 Other paid-in capital 155,310 141,310 Retained earnings 150,308 136,911 ---------- ---------- Total common equity 411,433 384,036 Cumulative preferred stock (Note G) 50,000 50,000 Long-term debt 353,267 265,631 ---------- ---------- Total capitalization 814,700 699,667 ---------- ---------- Current liabilities: Long-term debt due in one year 35,000 Short-term debt (including $1,000 and $8,650 to affiliates) 55,450 81,820 Accounts payable (including $165,515 and $157,076 to affiliates) 181,943 182,102 Accrued liabilities: Taxes 7,371 906 Interest 9,502 7,945 Other accrued expenses (Note F) 17,136 27,132 Customer deposits 4,633 4,985 Dividends payable 1,977 13,968 ---------- ---------- Total current liabilities 278,012 353,858 ---------- ---------- Deferred federal and state income taxes 184,575 176,913 Unamortized investment tax credits 17,684 18,816 Other reserves and deferred credits 48,129 46,468 Commitments and contingencies (Note D) ---------- ---------- $1,343,100 $1,295,722 ========== ========== The accompanying notes are an integral part of these financial statements. Massachusetts Electric Company Statements of Cash Flows
Year Ended December 31, (In Thousands) 1995 1994 1993 Operating activities: ---- ---- ---- Net income $29,101 $ 34,726 $ 23,779 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 44,829 42,775 40,848 Deferred income taxes and investment tax credits, net 6,666 28,909 3,126 Allowance for borrowed funds used during construction (657) (386) (298) Amortization of unbilled revenues (32,300) (2,700) Early retirement program 7,665 Decrease (increase) in accounts receivable, net and unbilled revenues 4,281 (7,580) (46,434) Decrease (increase) in materials and supplies 922 (923) (682) Decrease (increase) in prepaid and other current assets (931) (1,593) 6,229 Increase (decrease) in accounts payable (159) 3,985 (9,112) Increase (decrease) in other current liabilities (2,326) (10,379) 32,507 Other, net (2,340) (12,982) 14,723 ------- ------- ------- Net cash provided by operating activities $79,386 $44,252 $69,651 ------- ------- ------- Investing activities: Plant expenditures, excluding allowance for funds used during construction $(89,735) $(94,105) $(80,473) Other investing activities (1,972) (4,892) ------- ------- ------- Net cash used in investing activities $(91,707) $(98,997) $(80,473) ------- ------- ------- Financing activities: Capital contributions from parent $14,000 $50,572 Dividends paid on common stock (24,580) $(21,584) (19,185) Dividends paid on preferred stock (3,114) (3,114) (3,850) Changes in short-term debt (26,370) 43,895 (7,775) Long-term debt issues 88,000 36,000 116,000 Long-term debt retirements (35,000) (117,000) Preferred stock issues 35,000 Preferred stock retirements (35,000) Premium on reacquisition of long-term debt (7,089) Premium on redemption of preferred stock (816) ------- ------- ------- Net cash provided by financing activities $12,936 $55,197 $10,857 ------- ------- ------- Net increase in cash and cash equivalents $615 $452 $35 Cash and cash equivalents at beginning of year 1,225 773 738 ------- ------- ------- Cash and cash equivalents at end of year $1,840 $1,225 $773 ======= ======= ======= Supplementary information: Interest paid less amounts capitalized $29,130 $24,562 $25,220 ------- ------- ------- Federal and state income taxes paid (refunded) $(8,026) $1,645 $12,090 ------- ------- ------- 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 and sale of electricity at retail. Electric service is provided to approximately 950,000 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), an affiliate. The Company purchases 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 requires either party to give seven years notice prior to terminating the contract. 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, pursuant to a 1993 rate agreement, began accruing revenues for electricity delivered but not yet billed (unbilled revenues). Unbilled revenues at December 31, 1995, 1994, and 1993 were $50 million, $43 million, and $43 million, respectively of which $7 million, $32 million, and $11 million were recognized in income in the respective years. Included in these income amounts are $32 million in 1994 and $3 million in 1993 which represent amortization of the initial effect of recording unbilled revenues in accordance with the 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 an allowance for the cost of funds used to finance construction. AFDC is capitalized in "Utility plant" with offsetting non-cash 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 6.0 percent, 4.8 percent, and 3.5 percent, in 1995, 1994, and 1993, 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 1995, 1994, and 1993. 6. Cash: The Company classifies short-term investments with a maturity of 90 days or less at time of purchase as cash. Note B - Competitive Conditions The electric utility business is being subjected to rapidly increasing competitive pressures and increasing demands for customer choice. Accordingly, in February 1996, the Company filed a plan, Choice: New England, with Massachusetts regulators, which would allow all customers of electric utilities in Massachusetts to choose their power supplier beginning in 1998. Under Choice: New England, pricing of generation would be deregulated while transmission and distribution rates would remain regulated, although subject to greater rewards and penalties based on performance. Choice: New England proposes that the cost of past commitments to serve customers be recovered through a wires access or transition charge. Those past commitments include generating plant commitments, regulatory assets, purchased power contracts, and nuclear costs independent of operation. 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. 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 liabilities, and thereby defer the income statement impact of certain costs that are expected to be recovered in future rates. The effects of regulatory, legislative, or utility initiatives could, in the near future, cause all or a portion of the Company's operations to cease meeting the criteria of FAS 71. In that event, the application of FAS 71 to such operations would be discontinued and a non-cash write-off of previously established regulatory assets and liabilities related to such operations would be required. In March 1995, the Financial Accounting Standards Board issued 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). This standard clarifies when and how to recognize an impairment of long-lived assets. If competitive or regulatory change should cause a substantial revenue loss, a write-down of plant assets could be required pursuant to FAS 121. In addition, FAS 121 requires that all regulatory assets, which must have a high probability of recovery to be initially established, must continue to meet that high probability standard to avoid being written off. However, if written off, a regulatory asset can be restored if it again has a high probability of recovery. FAS 121, which is effective for the Company in January 1996, is not expected to have a material adverse impact on the financial condition or results of operations upon adoption, based on the current regulatory environment in which the Company operates. However, the impact in the future may change as competitive factors and potential restucturing influence the electric utility industry. The components of regulatory assets are as follows: At December 31, (In Thousands) 1995 1994 ---- ---- Regulatory assets (liabilities) included in current assets and liabilities: Rate adjustment mechanisms (See Note F) $(792) $(2,059) ------- ------- Regulatory assets included in deferred charges: Unamortized losses on reacquired debt 8,034 8,848 Deferred SFAS No. 106 costs (See Note E-2) 17,185 16,079 Deferred SFAS No. 109 costs (See Note C) 8,308 8,445 Environmental response costs (See Note D-2) 15,526 9,417 Deferred storm costs 4,433 6,545 Other 1,312 1,764 ------- ------- 54,798 51,098 ------- ------- $54,006 $49,039 ======= ======= Amounts included in "Deferred charges and other assets" on the Company's balance sheets that do not represent regulatory assets totaled $10,292,000 and $8,438,000 at December 31, 1995 and 1994, respectively. Note C - 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 (IRS) through 1991. The returns for 1992 and 1993 are currently under examination by the IRS. Total income taxes in the statements of income are as follows: Year Ended December 31, (In Thousands) 1995 1994 1993 ---- ---- ---- Income taxes charged to operations $19,297 $22,265 $11,055 Income taxes charged (credited) to "Other income" (901) (642) 101 ------- ------- ------- Total income taxes $18,396 $21,623 $11,156 ======= ======= ======= Total income taxes, as shown above, consist of the following components: Year Ended December 31, (In Thousands) 1995 1994 1993 ---- ---- ---- Current income taxes $11,730 $(7,286) $8,030 Deferred income taxes 7,798 30,137 4,354 Investment tax credits, net (1,132) (1,228) (1,228) ------- ------- ------- Total income taxes $18,396 $21,623 $11,156 ======= ======= ======= 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) 1995 1994 1993 ---- ---- ---- Federal income taxes $14,461 $16,942 $7,808 State income taxes 3,935 4,681 3,348 ------- ------- ------- Total income taxes $18,396 $21,623 $11,156 ======= ======= =======
Consistent with rate-making policies of the Massachusetts Department of Public Utilities (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) 1995 1994 1993 ---- ---- ---- Computed tax at statutory rate $16,624 $19,722 $12,227 Increases (reductions) in tax resulting from: Amortization of investment tax credits (1,132) (1,228) (1,228) Adjustment of prior year tax accruals (155) (110) (2,528) State income taxes, net of federal income tax benefit 2,558 3,043 2,459 All other differences 501 196 226 ------- ------- ------- Total income taxes $18,396 $21,623 $11,156 ======= ======= ======= The following table identifies the major components of total deferred income taxes: At December 31, (In Millions) 1995 1994 ---- ---- Deferred tax asset: Plant related $9 $8 Investment tax credits 7 8 All other 42 45 ---- ---- 58 61 ---- ---- Deferred tax liability: Plant related (209) (201) All other (34) (37) ---- ---- (243) (238) ---- ---- Net deferred tax liability $(185) $(177) ==== ==== There were no valuation allowances for deferred tax assets deemed necessary.
Note D - Commitments and Contingencies 1. Plant Expenditures: The Company's utility plant expenditures are estimated to be approximately $105 million in 1996. At December 31, 1995, 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 a range of potentially hazardous products and by-products in its operations. NEES subsidiaries currently have an environmental audit program in place 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 U.S. Environmental Protection Agency or the Massachusetts Department of Environmental Protection for 18 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. The Company is aware of approximately 35 such locations in Massachusetts (including seven of the 18 locations for which the Company is a PRP). 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. In 1993, the MDPU approved a rate agreement filed by the Company that allows for remediation costs of former manufactured gas sites and certain other hazardous waste sites located in Massachusetts to be met from a non-rate-recoverable, interest-bearing fund of $30 million established on the Company's books composed of previously recorded reserves of $21 million plus $9 million of additional reserves recorded in the fourth quarter of 1993. Rate-recoverable contributions of $3 million, adjusted for inflation, are added to the fund annually in accordance with the agreement. Any shortfalls in the fund would be paid by the Company and be recovered through rates over seven years. 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. 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. At December 31, 1995, the Company had total reserves for environmental response costs of $39 million and a related regulatory asset of $16 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. 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. Net pension cost for 1995, 1994, and 1993 included the following components:
Year Ended December 31, (In Thousands) 1995 1994 1993 ---- ---- ---- Service cost benefits earned during the period $3,992 $4,134 $3,348 Plus (less): Interest cost on projected benefit obligation 17,576 16,435 16,905 Return on plan assets at expected long-term rate (18,122) (17,223) (16,683) Amortization 99 1,060 (208) ------ ------ ------ Net pension cost $3,545 $4,406 $3,362 ====== ====== ====== Actual return on plan assets $47,717 $1,541 $25,785 ======= ======= ======= 1996 1995 1994 1993 ---- ---- ---- ---- Assumptions used to determine pension cost: Discount rate 7.25% 8.25% 7.25% 8.25% Average rate of increase in future compensation levels 4.13% 4.63% 4.35% 5.35% Expected long-term rate of return on assets 8.50% 8.75% 8.75% 8.75%
Service cost for 1993 does not reflect $13 million of costs incurred in connection with an early retirement and special severance program offered by the Company in that year. 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) 1995 1994 ---- ---- Union Non-Union Union Non-Union Employee Employee Employee Employee Plans Plans Plans Plans -------- -------- -------- --------- Benefits earned Actuarial present value of accumulated benefit liability: Vested $293 $343 $251 $308 Non-vested 8 10 8 9 ---- ---- ---- ---- Total $301 $353 $259 $317 ==== ==== ==== ==== Reconciliation of funded status Actuarial present value of projected benefit liability $346 $402 $303 $355 Unrecognized prior service costs (7) (4) (8) (4) Unrecognized transition liability - (1) - (1) Unrecognized net loss (1) (23) (13) (33) ---- ---- ---- ---- 338 374 282 317 ---- ---- ---- ---- Pension fund assets at fair value 349 392 293 323 Unrecognized transition asset (11) - (13) - ---- ---- ---- ---- 338 392 280 323 ---- ---- ---- ---- Accrued pension/(prepaid) payments recorded on books $ - $(18) $2 $(6)
The plans' funded status at December 31, 1995 and 1994 were calculated using the assumed rates from 1996 and 1995, respectively, and the 1983 Group Annuity Mortality table. Plan assets are composed primarily of corporate equity, guaranteed investment contracts, 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 total cost of PBOPs for 1995, 1994, and 1993 included the following components:
Year Ended December 31, (In Thousands) 1995 1994 1993 ---- ---- ---- Service cost benefits earned during the period $2,368 $2,840 $2,613 Plus (less): Interest cost on accumulated benefit obligation 11,699 11,050 12,007 Return on plan assets at expected long-term rate (4,165) (3,306) (2,095) Amortization 6,628 7,287 7,302 ------ ------ ------ Net postretirement benefit cost $16,530 $17,871 $19,827 ====== ====== ====== Actual return on plan assets $12,209 $ 265 $ 2,125 ====== ====== ====== 1996 1995 1994 1993 ---- ---- ---- ---- Assumptions used to determine postretirement benefit cost: Discount rate 7.25% 8.25% 7.25% 8.25% Expected long-term rate of return on assets 8.25% 8.50% 8.50% 8.50% Health care cost rate 1994 and 1993 11.00% 12.00% Health care cost rate 1995 to 1999 8.00% 8.50% 8.50% 9.50% Health care cost rate 2000 to 2004 6.25% 8.50% 8.50% 9.50% Health care cost rate 2005 and beyond 5.25% 6.25% 6.25% 7.25% The following table sets forth benefits earned and the plans' funded status: At December 31, (In Millions) 1995 1994 ---- ---- Accumulated postretirement benefit obligation: Retirees $93 $92 Fully eligible active plan participants 12 19 Other active plan participants 44 33 --- --- Total benefits earned 149 144 Unrecognized prior service costs (1) - Unrecognized transition obligation (124) (131) Unrecognized net gain 26 15 --- --- 50 28 Plan assets at fair value 65 44 --- --- Prepaid postretirement benefit costs recorded on books $15 $16 === ===
The plans' funded status at December 31, 1995 and 1994 were calculated using the assumed rates in effect for 1996 and 1995, respectively. The health care cost trend rate assumption has 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, 1995 by approximately $18 million and the net periodic cost for the year 1995 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 - Short-term Borrowings and Other Accrued Expenses At December 31, 1995, the Company had $55 million of short-term debt outstanding including $54 million in commercial paper borrowings and $1 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, 1995, the Company had lines of credit with banks totaling $90 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, 1995. Fees are paid in lieu of compensating balances on most lines of credit. The weighted average rate on outstanding short-term borrowings was 5.9 percent at December 31, 1995. 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) 1995 1994 ---- ---- Rate adjustment mechanisms $3,908 $15,087 Accrued wages and benefits 11,066 9,969 Other 2,162 2,076 ------ ------ $17,136 $27,132 ====== ====== Note G - Cumulative Preferred Stock
A summary of cumulative preferred stock at December 31, 1995 and 1994 is as follows (in thousands of dollars except for share data): A summary of cumulative preferred stock at December 31, 1995 and 1994 is as follows (in thousands of dollars except for share data): Shares Authorized Dividends Call and Outstanding Amount Declared Price --------------- ------ ------------ ----- 1995 1994 1995 1994 1995 1994 ---- ---- ---- ---- ---- ---- ----- $25 Par value 6.84% Series 600,000 600,000$15,000 $15,000 $1,026 $1,026 (a) $100 Par value 4.44% Series 75,000 75,000 7,500 7,500 333 333$104.068 4.76% Series 75,000 75,000 7,500 7,500 357 357 103.730 6.99% Series 200,000 200,000 20,000 20,000 1,398 1,398 (b) ------- -------------- -------------- ------- Total 950,000 950,000$50,000 $50,000 $3,114 $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 $3,114,000 for 1995 and 1994. There are no mandatory redemption provisions on the Company's cumulative preferred stock.
Note H - Long-term Debt A summary of long-term debt is as follows: At December 31, (In Thousands)
Series Rate % Maturity 1995 1994 - ----------------------------------------------------------------------------- First Mortgage Bonds: R(92-2) 5.875 February 6, 1995 $10,000 S(92-1) 5.860 June 26, 1995 15,000 S(92-8) 4.730 September 18, 1995 10,000 R(92-4) 7.230 June 3, 1997 $10,000 10,000 R(92-5) 7.210 June 3, 1997 5,000 5,000 S(92-6) 6.120 August 15, 1997 12,000 12,000 S(92-7) 6.010 August 15, 1997 3,000 3,000 U(95-3) 7.800 February 13, 1998 5,000 U(95-4) 7.790 February 16, 1998 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 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 U(95-2) 8.220 January 24, 2005 10,000 U(95-7) 7.920 March 3, 2005 9,000 V(95-1) 6.720 June 23, 2005 10,000 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 V(95-2) 7.630 June 27, 2025 10,000 V(95-3) 7.600 September 12, 2025 10,000 V(95-4) 7.630 September 12, 2025 10,000 Unamortized discounts (1,733) (1,369) -------- -------- Total long-term debt 353,267 300,631 ======== ======== Long-term debt due in one year (35,000) -------- -------- $353,267 $265,631 ======== ========
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 $30,000,000 in 1997, $20,000,000 in 1998, $15,000,000 in 1999, and $21,000,000 in 2000 to retire maturing mortgage bonds. There are no cash payments required in 1996. At December 31, 1995, the Company's long-term debt had a carrying value of approximately $353,000,000 and had a fair value of approximately $380,000,000. 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 I - 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, 1995 was 50 percent of total capitalization, and accordingly, none of the Company's retained earnings at December 31, 1995 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, 1995 were restricted as to dividends on common stock. Note J - Supplementary Income Statement Information Advertising expenses, expenditures for research and development, and rents were not material and there were no royalties paid in 1995, 1994, or 1993. Taxes, other than income taxes, charged to operating expenses are set forth by classes as follows:
Year Ended December 31, (In Thousands) 1995 1994 1993 ---- ---- ---- Municipal property taxes $23,119 $21,186 $19,620 Federal and state payroll and other taxes 6,903 7,478 6,907 ------- ------- ------- $30,022 $28,664 $26,527
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 $66,195,000, $71,107,000, and $61,515,000, including capitalized construction costs of $7,660,000, $8,977,000, and $9,038,000, for each of the years 1995, 1994, and 1993, respectively. Massachusetts Electric Company Operating Statistics (Unaudited)
Year Ended December 31, 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Sources of Energy (Thousands of kWh) Purchased energy: From New England Power Company, an affiliate 16,594,81216,455,77416,179,20416,005,08715,971,746 From others 2,887 3,364 12,676 13,916 12,865 -------------------------------------------------- Total purchased 16,597,69916,459,13816,191,88016,019,00315,984,611 Losses, company use, etc. (730,608) (733,804) (740,390) (711,157) (730,694) -------------------------------------------------- Total sources of energy 15,867,09115,725,33415,451,49015,307,84615,253,917 ================================================== Sales of Energy (Thousands of kWh) Residential 5,768,635 5,798,806 5,694,539 5,645,350 5,568,452 Commercial 5,999,555 5,936,170 5,743,924 5,645,867 5,585,604 Industrial 3,998,506 3,885,391 3,850,075 3,907,040 3,979,418 Other 89,759 95,382 99,991 105,842 113,444 Total sales to -------------------------------------------------- ultimate customers 15,856,45515,715,74915,388,52915,304,09915,246,918 Sales for resale 10,636 9,585 62,961 3,747 6,999 -------------------------------------------------- Total sales of energy 15,867,09115,725,33415,451,49015,307,84615,253,917 ================================================== Maximum Demand (kW one hour peak) 3,029,000 3,016,000 2,819,000 2,791,000 2,888,000 Average Annual Use per Residential Customer (kWh) 6,844 6,948 6,888 6,886 6,832 Number of Customers at December 31 Residential 847,437 839,443 831,223 824,072 817,270 Commercial 97,211 95,430 93,414 92,281 81,355 Industrial 4,503 4,551 4,637 4,624 4,650 Other 854 880 906 952 986 -------------------------------------------------- Total ultimate customers 950,005 940,304 930,180 921,929 904,261 Other (for resale) 179 178 278 22 21 -------------------------------------------------- Total customers 950,184 940,482 930,458 921,951 904,282 ================================================== Operating Revenue (In Thousands) Residential $610,856 $588,518 $593,336 $549,884 $521,140 Commercial 543,715 523,826 518,965 510,638 490,078 Industrial 312,057 301,502 316,140 319,905 318,502 Other 17,991 17,147 17,416 17,489 18,304 -------------------------------------------------- Total revenue from ultimate customers 1,484,619 1,430,993 1,445,857 1,397,916 1,348,024 Amortization of unbilled revenues 32,300 2,700 Sales for resale 1,013 924 5,399 278 518 -------------------------------------------------- Total revenue from electric sales 1,485,632 1,464,217 1,453,956 1,398,194 1,348,542 Other operating revenue 20,044 17,853 14,584 14,754 15,346 -------------------------------------------------- Total operating revenue $1,505,676$1,482,070$1,468,540$1,412,948$1,363,888 ==================================================
Massachusetts Electric Company Selected Financial Information
Year Ended December 31, (In Millions) 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Operating revenue: Electric sales (excluding fuel cost recovery) $1,072 $1,088 $1,062 $1,012 $984 Fuel cost recovery 414 376 392 386 365 Other 20 18 15 15 15 ------ ------ ------ ------ ------ Total operating revenue $1,506 $1,482 $1,469 $1,413 $1,364 Net income $29 $35 $24 $35 $25 Total assets $1,343 $1,296 $1,232 $1,015 $1,017 Capitalization: Common equity $412 $384 $382 $331 $313 Cumulative preferred stock 50 50 50 50 50 Long-term debt 353 266 265 266 194 ------ ------ ------ ------ ------ Total capitalization $815 $700 $697 $647 $557 Preferred dividends declared $3 $3 $4 $3 $3 Common dividends declared $13 $30 $19 $23 $5
Selected Quarterly Financial Information (Unaudited)
First Second Third Fourth (In Thousands) Quarter Quarter Quarter Quarter* ------- ------- ------- ------- 1995 Operating revenue $373,092 $355,431 $392,575 $384,578 Operating income $13,349 $11,173 $11,799 $25,349 Net income $5,126 $2,567 $3,653 $17,755 1994 Operating revenue $381,712 $339,886 $376,582 $383,890 Operating income $17,124 $15,054 $10,120 $20,370 Net income $9,572 $8,215 $1,431 $15,508 *See "Rate Activity" section of Financial Review 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, 1995 will be available on or about April 1, 1996, without charge, upon written request to Massachusetts Electric Company, Shareholder Services Department, 25 Research Drive, Westborough, Massachusetts 01582.
EX-24 16 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, Maureen L. Fountain, 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, 1995, 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 20th day of March, 1996. s/Urville J. Beaumont s/Patricia McGovern _________________________ _________________________ Urville J. Beaumont Patricia McGovern s/John F. Reilly, Jr. _________________________ _________________________ Joan T. Bok John F. Reilly, Jr. s/Sally L. Collins _________________________ _________________________ Sally L. Collins John W. Rowe s/John H. Dickson _________________________ _________________________ John H. Dickson Richard P. Sergel s/Kalyan K. Ghosh s/Richard M. Shribman _________________________ _________________________ Kalyan K. Ghosh Richard M. Shribman s/Charles B. Housen s/Roslyn M. Watson _________________________ _________________________ Charles B. Housen Roslyn M. Watson EX-27 17 MECO FDS
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. 0000063073 Massachusetts Electric Company 1,000 DEC-31-1995 DEC-31-1994 DEC-31-1995 DEC-31-1994 12-MOS 12-MOS PER-BOOK PER-BOOK 1,041,476 995,995 0 0 236,534 240,191 65,090 59,536 0 0 1,343,100 1,295,722 59,953 59,953 201,172 187,172 150,308 136,911 411,433 384,036 0 0 50,000 50,000 353,267 265,631 1,000 8,650 0 0 54,450 73,170 0 35,000 0 0 0 0 0 0 472,950 479,235 1,343,100 1,295,722 1,505,676 1,482,070 19,297 22,265 1,424,709 1,397,137 1,444,006 1,419,402 61,670 62,668 (541) (995) 61,129 61,673 32,028 26,947 29,101 34,726 3,114 3,114 25,987 31,612 12,590 29,977 25,901 20,967 79,386 44,252 0 0 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. EX-12 18 NARRA COMPUTATION OF RATIOS
THE NARRAGANSETT ELECTRIC COMPANY Computation of Ratio of Earnings to Fixed Charges (SEC Coverage) (Unaudited)
Years Ended December 31, ------------------------------------------------------------ 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (In Thousands) Net Income $23,910 $14,589 $14,274 $21,052 $16,820 - ---------- Add income taxes and fixed charges - ---------------------------------- Current federal income taxes 7,212 1,020 2,183 4,608 1,558 Deferred federal income taxes 3,512 3,930 2,199 4,560 5,528 Investment tax credits - net (503) (508) (508) (507) (500) Interest on long-term debt 16,627 14,334 12,715 13,290 12,581 Interest on short-term debt and other 3,663 2,897 2,074 1,277 2,500 ------- ------- ------- ------- ------- Net earnings available for fixed charges $54,421 $36,262 $32,937 $44,280 $38,487 ------- ------- ------- ------- ------- Fixed charges: Interest on long-term debt $16,627 $14,334 $12,715 $13,290 $12,581 Interest on short-term debt and other 3,663 2,897 2,074 1,277 2,500 ------- ------- ------- ------- ------- Total fixed charges $20,290 $17,231 $14,789 $14,567 $15,081 ======= ======= ======= ======= ======= Ratio of earnings to fixed charges 2.68 2.10 2.23 3.04 2.55 - ----------------------------------
EX-13 19 NARRA ANNUAL REPORT Annual Report 1995 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 December 31, 1995) Joan T. Bok Chairman of the Board of New England Electric System Stephen A. Cardi Treasurer, Cardi Corporation (Construction), Warwick, Rhode Island Frances H. Gammell Senior Vice President, Treasurer, and Secretary, Original Bradford Soap Works, Inc., West Warwick, Rhode Island Joseph J. Kirby President, Washington Trust Bancorp, Inc., Westerly, Rhode Island Robert L. McCabe President and Chief Executive Officer of the Company John W. Rowe President and Chief Executive Officer of New England Electric System Richard P. Sergel Chairman of the Company and Vice President of New England Electric System William E. Trueheart President of Bryant College, Smithfield, Rhode Island John A. Wilson, Jr. Consultant to and former President of Wanskuck Company (Cable reel manufacturer), Providence, Rhode Island and Consultant to Hinkley, Allen, Tobin and Silverstein Officers (As of December 31, 1995) Richard P. Sergel Chairman of the Company and Vice President of New England Electric System Robert L. McCabe President and Chief Executive Officer William Watkins, Jr. Executive Vice President Francis X. Beirne Vice President Richard W. Frost Vice President Alfred D. Houston Vice President and Treasurer of the Company and Executive Vice President and Chief Financial Officer of New England Electric System Richard Nadeau Vice President Marcy L. Reed Vice President Michael F. Ryan Vice President Thomas G. Robinson Secretary of the Company and General Counsel of an affiliate John G. Cochrane Assistant Treasurer of the Company and of certain affiliates and Vice President of an affiliate Craig L. Eaton Assistant Secretary Howard W. McDowell Controller of the Company and of certain affiliates 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 is a wholly-owned subsidiary of New England Electric System (NEES) operating in Rhode Island. The Company's business is the distribution and sale of electricity at retail. Electric service is provided to approximately 328,000 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, jewelry, silverware, and chemical products. In addition, a broad range of professional, banking, medical, and educational institutions is served. There are a number of proposals that would increase competition in the electric utility industry and result in customers having a choice of power suppliers (see "Financial Review"). 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 a recently repowered 489 megawatt steam-electric generating station. The entire output of this plant is made available to New England Power Company (NEP), an affiliate, as part of the integrated NEES system. Under a contract with NEP, the Company purchases its electric energy requirements from NEP. The contract provides for the integration of the Company's generating and transmission facilities with NEP's facilities in order to achieve maximum economy and reliability. The contract also provides for the application of credits against the Company's power bills from NEP for costs associated with the Company's facilities so integrated. The Company and NEP are members of the New England Power Pool, which provides for the coordination of the planning and operation of the generation and transmission facilities in New England, and the region-wide central dispatch of generation. 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, 1995 and 1994 and the related statements of income, retained earnings, and cash flows for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Boston, Massachusetts COOPERS & LYBRAND L.L.P. March 1, 1996 The Narragansett Electric Company Financial Review Overview Net income for 1995 increased $9 million compared with 1994. This increase reflects the 1995 commencement of the recovery of the Company's investment in the Manchester Street Station, which went into service in the second half of 1995, and related transmission facilities that went into service in 1994. The increase in earnings in 1995 also reflects the recognition of unbilled revenues over a 21 month period that ended December 31, 1995. These increases were partially offset by increased depreciation expense and increased interest expense. Net income increased by $300,000 in 1994. The increase was primarily due to the inclusion of a one-time charge in 1993 associated with an early retirement program. The increase also reflects kilowatt-hour (kWh) sales growth in 1994, the commencement of recognition of unbilled revenues and increased allowance for funds used during construction. These increases were largely offset by rate discounts to large commercial and industrial customers, increases in other operation expenses, and increased interest expense. Competitive Conditions The electric utility business is being subjected to rapidly increasing competitive pressures, stemming from a combination of trends, including the presence of surplus generating capacity, a disparity in electric rates among regions of the country, improvements in generation efficiency, increasing demand for customer choice, and new regulations and legislation intended to foster competition. To date, this competition has been most prominent in the bulk power market, in which non-utility generators have significantly increased their market share. Electric utilities have had exclusive franchises for the retail sale of electricity in specified service territories. As a result, competition in the retail market has been limited to (i) competition with alternative fuel suppliers, primarily for heating and cooling, (ii) competition with customer-owned generation, and (iii) direct competition among electric utilities to attract major new facilities to their service territories. These competitive pressures have led the Company and other utilities to offer, from time to time, special discounts or service packages to certain large customers. In states across the country, including Rhode Island, there have been an increasing number of proposals to allow retail customers to choose their electricity supplier, with incumbent utilities required to deliver that electricity over their transmission and distribution systems (also known as "retail wheeling"). If electric customers were allowed to choose their electricity supplier, the Company's role would change and it would provide only distribution services. Power would be provided by power generators and marketers, which could be either affiliated or non-affiliated companies. In these competitive circumstances, utilities across the country that operate generation plants, such as the Company's affiliate, New England Power Company (NEP), would face the risk that market prices may not be sufficient to recover the costs of the commitments incurred to supply customers under a regulated industry structure. The amount by which costs exceed market prices is commonly referred to as "stranded costs." The Company purchases electricity on behalf of its customers under a wholesale all-requirements contract with NEP. NEP derives approximately 20 percent of its electric sales revenues from sales to the Company. Choice: New England In October 1995, the New England Electric System (NEES) companies announced a plan to allow all customers of electric utilities in Massachusetts, Rhode Island, and New Hampshire to choose their power supplier beginning in 1998. The plan, Choice: New England, was developed in response to 1995 decisions by the Rhode Island Public Utilities Commission (RIPUC) and the Massachusetts Department of Public Utilities that approved a set of principles for industry restructuring. These principles include allowing utilities the opportunity to recover stranded costs. In March 1995, the RIPUC ordered all utilities in Rhode Island to file restructuring plans by April 12, 1996. In response to a RIPUC order, the Company plans to file a similar version of Choice: New England with the RIPUC in April 1996. Under Choice: New England, the Company would no longer sell electricity to its customers. Instead, customers would purchase electricity from a supplier of their choice, with the Company remaining responsible for providing distribution services to customers under regulated rates. Transmission services would be provided by a new affiliate of the Company, which would be formed by NEES to provide comparable service across the NEES companies' transmission system. Initially, the new affiliate would have operational control of the Company's transmission facilities, but may, at a later date, acquire those facilities from the Company. The net book value of the Company's transmission system is approximately $80 million. Under Choice: New England, the pricing of generation would be deregulated. However, customers would have the right to receive service under a "standard offer" from the incumbent utility or its affiliate, the pricing of which would be approved in advance by legislators or regulators. Customers electing the standard offer would be eligible to choose an alternative power supplier at any time, but would not be allowed to return to the standard offer. Under Choice: New England, the Company's wholesale contract with NEP would be terminated. In return, Choice: New England proposes that the cost of NEP's past generation commitments be recovered from the Company and its retail affiliates through a contract termination charge. The Company would, in turn, seek to recover the payments to NEP through a wires access or transition charge to retail customers. Those commitments primarily consist of (i) generating plant commitments, (ii) regulatory assets, (iii) purchased power contracts, and (iv) the operating cost of nuclear plants which cannot be mitigated by shutting down the plants (otherwise referred to as "nuclear costs independent of operation"). The portion of these commitments incurred by NEP to serve the Company's customers is currently estimated at approximately $1 billion on a present value basis. Sunk costs associated with utility generating plants, such as past capital investments, and regulatory assets would be recovered over ten years. Purchased power contract costs and nuclear costs independent of operation would be recovered as incurred over the life of those obligations, a period expected to extend beyond ten years. The access charge would be set at three cents per kWh for the first three years. Thereafter, the access charge would vary, but is expected to decline. The provisions of Choice: New England, including the proposed access charge, are subject to state approval and Federal Energy Regulatory Commission (FERC) approval. Rhode Island Legislation In February 1996, the Speaker and Majority Leader of the House of Representatives of the Rhode Island Legislature announced the filing of legislation which would allow electric consumers in Rhode Island to choose their power supplier. Under the proposed legislation, large manufacturing customers and new large non-manufacturing customers would gain access to alternative power suppliers over a two-year period beginning in 1998. These customers represent approximately 14 percent of the Company's retail kWh sales. The balance of Rhode Island customers would gain access over a two-year period beginning in the year 2000, or earlier if consumers of 50 percent of the electricity in New England gain similar rights to choose their power supplier. The NEES companies have announced their support for the proposed legislation. A key provision of the legislation authorizes utilities to recover the cost of past generation commitments through a transition access charge on utility distribution wires. The legislation divides those past commitments in the same manner as Choice: New England. The legislation proposes a 12-year recovery period for utility generation commitments and regulatory assets. The legislation would require the Company to transfer its 10 percent share of the Manchester Street Station and its transmission facilities to separate affiliates at net book value. (See "Repowering of Manchester Street Station" section.) The legislation also establishes performance-based rates for distribution utilities, such as the Company. Under the legislation, the Company would be entitled to increase its distribution rates by approximately $10 million annually, for the period 1997 through 1999, less any increases in wholesale base rates from NEP passed on by the Company to customers. For those three years, the Company's return on equity would be subject to a floor of 6 percent and a ceiling of 11 percent. Earnings over the ceiling would be shared equally between customers and shareholders up to an absolute cap on return on equity of 12.5 percent. To the extent that earnings fall below the floor, the Company would be authorized to surcharge customers for the shortfall. Consideration by the Rhode Island Legislature of the proposed legislation is expected to be completed by the summer of 1996. Previously, in 1995, the Rhode Island Legislature passed legislation that would have allowed certain industrial customers to buy power from alternative suppliers, rather than through the local electric utility. The Company urged the Governor of Rhode Island to veto the legislation because the Company believed it would result in piecemeal deregulation that would not be fair to customers or shareholders. The Governor vetoed the proposed legislation, in part because of commitments by the Company to provide a two-year rate discount to manufacturing customers (see "Rate Activity" section) and to submit a specific and detailed proposal to the RIPUC addressing the issues associated with providing large customers with access to the Company's distribution system for the purpose of choosing an alternative power supplier. Other Regulatory Initiatives In March 1995, the FERC issued a Notice of Proposed Rulemaking in which it stated that it is appropriate that legitimate and verifiable stranded costs be recovered from departing customers as a result of wholesale competition. The FERC also indicated that costs stranded as a result of retail competition would be subject to state commission review if the necessary statutory authority exists and subject to FERC review if the state commission does not have such authority. A final decision is expected during 1996. Risk Factors The major risk factors affecting the Company relate to the possibility of adverse regulatory decisions or legislation which limit the level of revenues the Company is allowed to charge for its services. The Company's all-requirements purchased power contract with NEP requires either party to give seven years notice prior to terminating the contract. Termination of the contract would create stranded costs at NEP that NEP would seek to recover from the Company pursuant to the contract. In that event, the Company would seek recovery of such stranded costs from its customers. However, there is no assurance that the final restructuring plans ordered by state regulatory bodies or state legislatures will include provisions that allow the Company to fully recover any stranded costs passed on to the Company by NEP. In such an event, the Company could be faced with a significant amount of costs being billed to it by NEP that the Company could not fully recover from retail customers, for which the Company would seek a remedy in the courts. 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. 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 liabilities, and thereby defer the income statement impact of certain costs that are expected to be recovered in future rates. The effects of regulatory, legislative, or utility initiatives could, in the near future, cause all or a portion of the Company's operations to cease meeting the criteria of FAS 71. In that event, the application of FAS 71 to such operations would be discontinued and a non-cash write-off of previously established regulatory assets and liabilities related to such operations would be required. At December 31, 1995, the Company had pre-tax regulatory assets (net of regulatory liabilities) of approximately $48 million. If competitive or regulatory change should cause a substantial revenue loss or lead to the permanent shutdown of any generating facilities, a write-down of plant assets could be required pursuant to Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (FAS 121). In addition, FAS 121 requires that all regulatory assets, which must have a high probability of recovery to be initially established, must continue to meet that high probability standard to avoid being written off. FAS 121, which is effective for the Company in January 1996, is not expected to have a material adverse impact on the financial condition or results of operations upon adoption, based on the current regulatory environment in which the Company operates. However, the impact in the future may change as competitive factors and potential restructuring influence the electric utility industry. For a further discussion, see Note B. Rate Activity The RIPUC approved a settlement agreement that provides for a $15 million increase to base rates for the Company effective December 1, 1995. The RIPUC also approved $3 million of new discounts for manufacturing customers, the costs of which are not being recovered from other customers. In February 1995, the FERC approved a rate agreement, effective in January 1995, for NEP. This rate agreement, among other things, increased the credits the Company receives from NEP for the costs of owning and operating its generation and transmission facilities by $14 million on an annual basis. The Company supplies all of the output of its generating facilities to NEP. The increase in the credits reflects the Company's 10 percent investment in the Manchester Street Station, which entered commercial operation in the second half of 1995, and the transmission facilities associated with the station, which were placed in service in September 1994. An additional increase in these credits of approximately $2 million took effect in January 1996. In 1994, the RIPUC approved a rate agreement between the Company and the Rhode Island Division of Public Utilities and Carriers that provided for the Company to recognize, for accounting purposes, $14 million of unbilled revenues over a 21 month period which ended in December 1995. The agreement further provided for rate discounts for large commercial and industrial customers who signed agreements to give a five-year notice to the Company before they purchase power from another supplier or generate any additional power themselves. In addition, commencing in 1995 the cost of these discounts is being passed on to NEP as a result of the NEP rate settlement referred to above. Effective January 1993, the RIPUC approved a $1.5 million increase in rates for the Company, representing the first step of a three-year phase-in of the Company's recovery of costs associated with postretirement benefits other than pensions. The second and third $1.5 million increases took effect in January 1994 and 1995, respectively. 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, the RIPUC monitors the Company's earnings on a regular basis. Demand-Side Management (DSM) The Company has received approval from the RIPUC to recover DSM program expenditures in rates on a current basis. These expenditures were $9 million, $10 million, and $12 million in 1995, 1994, and 1993, respectively. Since 1990, the Company has been allowed to earn incentives based on the results of its DSM programs. The Company recorded before-tax incentives of $0.5 million, $0.6 million, and $0.5 million in 1995, 1994, and 1993, respectively. Operating Revenue The following table summarizes the changes in operating revenue: Increase (Decrease) in Operating Revenue (In Millions) 1995 1994 ---- ---- Sales growth $2 $5 Fuel recovery 11 (7) Rate changes/service extension discounts (SEDs) 1 Unbilled revenues recognized under rate agreements 2 5 Purchased power cost adjustment (PPCA) mechanism 1 (2) DSM recovery (1) (2) Other 1 ---- ---- $17 $(1) ==== ==== In 1995, kWh sales to ultimate customers increased 0.3 percent over 1994. A warmer summer in 1995 and a return to more normal weather in the fourth quarter of 1995 was largely offset by unusually mild weather in the first quarter of 1995. In 1994, kWh sales to ultimate customers increased by 0.6 percent over 1993 reflecting an improved regional economy, partially offset by a loss of sales attributable to the May 1994 plant closing of one of the Company's largest customers. In the third quarter of 1994, the Company began recognizing electricity delivered but not yet billed (unbilled revenues) according to its rate agreement filed in July 1994 with the RIPUC. For a further discussion of unbilled revenues, see "Rate Activity" section. The Company's rates contain a fuel clause and a PPCA provision. These mechanisms are designed to allow the Company to pass on to its customers changes in purchased energy costs from NEP. Operating Expenses The following table summarizes the changes in operating expenses: Increase (Decrease) in Operating Expenses (In Millions) 1995 1994 ---- ---- Purchased electric energy: Fuel costs $11 $(7) Integrated facilities credit from NEP (19) (6) SED reimbursements (2) Purchases and demand charges and other 2 3 Other operation and maintenance (1) (1) Depreciation 7 7 Taxes 7 1 ---- ---- $5 $(3) ==== ==== The 1995 increase in fuel costs from NEP reflects decreased nuclear generation due to overhauls and decreased hydro production resulting from low water levels. The decrease in the fuel cost component of purchased power in 1994 includes a decrease in the amount of New England Energy Incorporated's (NEEI) costs passed through by NEP. NEEI is an affiliated company involved in oil and gas exploration and development. The Company owns a 10 percent share of the Manchester Street Station and also owns the seven mile underground transmission line associated with this facility as well as other transmission facilities in Rhode Island. The Company's share of the electricity generated by this plant is made available to NEP which owns the remaining 90 percent of the station. The Company receives a credit on its purchased power bill from NEP reflecting rate recovery of its investment in the station and the transmission line, and for its fuel costs and other generation and transmission costs. The increase in the integrated facilities credits from NEP is primarily due to the recovery of the Company's investment in the repowered Manchester Street Station that went into service in the second half of 1995 and the related transmission line which was placed in service in September 1994. The increased credits in both 1995 and 1994 also reflect the reimbursement of increased dismantlement costs being incurred on the Company's previously retired South Street generating station. These increased costs for dismantlement are reflected in the increases in depreciation in the above table. The reduction in other operation and maintenance expenses in 1995 reflects decreased distribution related expenses, partially offset by increased postretirement benefit expenses. The increase in operation and maintenance expenses in 1994 reflects increased computer system development costs, postretirement benefit expenses and general increases in other areas, partially offset by a one-time charge of $5 million in 1993 associated with an early retirement program. The increase in taxes in 1995 is primarily due to increased income. Allowance for Funds Used During Construction (AFDC) AFDC decreased in 1995 due to the completion in 1994 of transmission facilities related to the Manchester Street Station repowering project, partially offset by additional spending in 1995 on the generating station itself. AFDC increased in 1994 due to increased construction work in progress associated with the Manchester Street Station and related transmission facilities (see "Repowering of Manchester Street Station" section). 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 a range of potentially hazardous products and by-products in its operations. NEES subsidiaries currently have an environmental audit program in place 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 U.S. 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. 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. Electric and Magnetic Fields (EMF) Concerns have been raised about whether EMF, which occur near transmission and distribution lines as well as near household wiring and appliances, cause or contribute to adverse health effects. Numerous studies on the effects of these fields, some of them sponsored by electric utilities (including NEES companies), have been conducted and are continuing. Some of the studies have suggested associations between certain EMF and health effects, including various types of cancer, while other studies have not substantiated such associations. It is impossible to predict the ultimate impact on the Company and the electric utility industry if further investigations were to demonstrate that the present electricity delivery system is contributing to increased risk of cancer or other health problems. Many utilities, including the NEES companies, have been contacted by customers regarding a potential relationship between EMF and adverse health effects. To date, no court in the United States has ruled that EMF from electrical facilities cause adverse health effects and no utility has been found liable for personal injuries alleged to have been caused by EMF. In any event, the Company believes that it currently has adequate insurance coverage for personal injury claims. Several state courts have recognized a cause of action for damage to property values in transmission line condemnation cases based on the fear that power lines cause cancer. It is difficult to predict what the impact on the Company would be if this cause of action is recognized in Rhode Island and in contexts other than condemnation cases. Utility Plant Expenditures and Financings Cash expenditures for utility plant totaled $73 million in 1995, including $13 million related to the Manchester Street Station repowering project discussed below. The funds necessary for utility plant expenditures during 1995 were primarily provided by net cash from operating activities, after the payment of dividends, long-term debt issues, and capital contributions from NEES. Cash expenditures for utility plant for 1996 are estimated to be approximately $50 million. Internally generated funds are estimated to provide 95 percent of these needs in 1996. Cash expenditures for utility plant are also expected to be funded through the issuance of long-term debt. In 1995, the Company issued $38 million of first mortgage bonds bearing interest rates ranging from 7.30 percent to 7.81 percent. In November 1995, the Company retired $16 million of first mortgage bonds prior to maturity and incurred premiums of $1.9 million. The Company has refinanced $2 million of long-term debt to date in 1996 at an interest rate of 7.24 percent and plans to issue an additional $10 million of long-term debt later in 1996. At December 31, 1995, the Company had $23 million of short-term debt outstanding including $22 million of commercial paper borrowings and $1 million of borrowings from affiliates. As of December 31, 1995, the Company had lines of credit with banks totaling $41 million. There were no borrowings under these lines of credit at December 31, 1995. Repowering of Manchester Street Station In the second half of 1995, NEP and the Company completed the 489 megawatt repowering of the Manchester Street Station. NEP owns a 90 percent interest and the Company owns a 10 percent interest in the Manchester Street Station. The total cost for the generating station will be approximately $450 million including AFDC, of which the Company's share will be approximately $40 million. In addition, related transmission improvements were placed in service in September 1994 at a cost of approximately $60 million, of which the Company's share was $45 million. March 25, 1996 The Narragansett Electric Company Statements of Income
Year Ended December 31, (In Thousands) 1995 1994 1993 ---- ---- ---- Operating revenue $499,113 $481,669 $483,028 -------- -------- -------- Operating expenses: Purchased electric energy, principally from New England Power Company, an affiliate 293,272 300,678 310,895 Other operation 73,194 73,082 73,723 Maintenance 11,174 12,281 12,179 Depreciation 31,533 24,813 17,645 Taxes, other than federal income taxes 36,627 35,818 35,846 Federal income taxes 10,888 4,883 4,175 -------- -------- -------- Total operating expenses 456,688 451,555 454,463 -------- -------- -------- Operating income 42,425 30,114 28,565 -------- -------- -------- Other income: Allowance for equity funds used during construction 106 1,028 543 Other income (expense), net (192) (856) (634) -------- -------- -------- Operating and other income 42,339 30,286 28,474 -------- -------- -------- Interest: Interest on long-term debt 16,627 14,334 12,715 Other interest 3,663 2,897 2,074 Allowance for borrowed funds used during construction credit (1,861) (1,534) (589) -------- -------- -------- Total interest 18,429 15,697 14,200 -------- -------- -------- Net income $23,910 $14,589 $14,274 ======== ======== ======== Statements of Retained Earnings Year Ended December 31, (In Thousands) 1995 1994 1993 ---- ---- ---- Retained earnings at beginning of year $91,556 $81,659 $74,207 Net income 23,910 14,589 14,274 Dividends declared on cumulative preferred stock (2,143) (2,143) (1,931) Dividends declared on common stock, $4.50, $2.25, and $4.00 per share, respectively (5,096) (2,549) (4,530) Premium on redemption of preferred stock (361) -------- -------- -------- Retained earnings at end of year $108,227 $91,556 $81,659 ======== ======== ======== The accompanying notes are an integral part of these financial statements.
The Narragansett Electric Company Balance Sheets
At December 31, (In Thousands) 1995 1994 ---- ---- Assets Utility plant, at original cost $699,906 $617,498 Less accumulated provisions for depreciation 173,391 161,557 -------- -------- 526,515 455,941 Construction work in progress 8,733 35,974 -------- -------- Net utility plant 535,248 491,915 -------- -------- Current assets: Cash 1,999 713 Accounts receivable: From sales of electric energy 59,760 51,278 Other (including $1,464 and $9,306 from affiliates) 9,330 17,953 Less reserves for doubtful accounts 5,516 4,472 -------- -------- 63,574 64,759 Unbilled revenues (Note A-3) 16,500 13,100 Fuel, materials, and supplies, at average cost 6,245 5,170 Prepaid and other current assets 15,887 13,993 -------- -------- Total current assets 104,205 97,735 -------- -------- Deferred charges and other assets (Note B) 60,168 57,727 -------- -------- $699,621 $647,377 ======== ======== Capitalization and Liabilities Capitalization: Common stock, par value $50 per share, authorized and outstanding 1,132,487 shares $56,624 $56,624 Premiums on preferred stocks 170 170 Other paid-in capital 80,000 60,000 Retained earnings 108,227 91,556 -------- -------- Total common equity 245,021 208,350 Cumulative preferred stock, par value $50 per share 36,500 36,500 Long-term debt 210,892 188,862 -------- -------- Total capitalization 492,413 433,712 -------- -------- Current liabilities: Short-term debt (including $1,000 to affiliates in 1995) 22,675 29,800 Accounts payable (including $38,510 and $47,900 to affiliates) 46,247 56,139 Accrued liabilities: Taxes 6,380 143 Interest 5,847 5,615 Other accrued expenses (Note F) 19,558 25,346 Customer deposits 5,691 5,261 Dividends payable 1,102 819 -------- -------- Total current liabilities 107,500 123,123 -------- -------- Deferred federal income taxes 76,017 70,253 Unamortized investment tax credits 8,016 8,518 Other reserves and deferred credits 15,675 11,771 Commitments and contingencies (Note D) -------- -------- $699,621 $647,377 ======== ======== 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) 1995 1994 1993 ---- ---- ---- Operating activities: Net income $23,910 $14,589 $14,274 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 31,533 24,813 17,645 Deferred federal income taxes and investment tax credits, net 3,009 3,422 1,690 Allowance for funds used during construction (1,967) (2,562) (1,132) Amortization of unbilled revenues (8,209) (6,158) Early retirement program 2,705 Decrease (increase) in accounts receivable, net and unbilled revenues (2,215) (14,163) (2,183) Decrease (increase) in fuel, materials, and supplies (1,075) (598) 429 Decrease (increase) in prepaid and other current assets (1,894) (2,478) 2,359 Increase (decrease) in accounts payable (9,892) 5,134 (3,180) Increase (decrease) in other current liabilities 9,320 12,312 2,287 Other, net 5,931 5,877 (2,180) --------- --------- --------- Net cash provided by operating activities $48,451 $40,188 $32,714 --------- --------- --------- Investing activities: Plant expenditures, excluding allowance for funds used during construction $(72,897) $(92,503) $(62,897) Other investing activities (251) (911) --------- --------- --------- Net cash used in investing activities $(73,148) $(93,414) $(62,897) --------- --------- --------- Financing activities: Capital contributions from NEES $20,000 $15,000 Dividends paid on common stock (4,813) (2,831) $(5,663) Dividends paid on preferred stock (2,143) (2,143) (1,783) Changes in short-term debt (7,125) 10,075 16,050 Long-term debt issues 38,000 33,000 27,500 Long-term debt retirements (16,000) (14,900) Preferred stock issues 20,000 Preferred stock retirements (10,000) Premium on reacquisition of long-term debt (1,936) (652) Premium on redemption of preferred stock (361) --------- --------- --------- Net cash provided by financing activities $25,983 $53,101 $30,191 --------- --------- --------- Net increase (decrease) in cash and cash equivalents $1,286 $(125) $8 Cash and cash equivalents at beginning of year 713 838 830 --------- --------- --------- Cash and cash equivalents at end of year $1,999 $713 $838 ========= ========= ========= Supplementary Information: Interest paid less amounts capitalized $17,050 $14,015 $12,623 --------- --------- --------- Federal income taxes paid $1,084 $2,982 $2,352 --------- --------- --------- 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 and sale of electricity at retail. Electric service is provided to approximately 328,000 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 a recently repowered 489 megawatt steam-electric generating station. The entire output of this plant is made available to New England Power Company (NEP), an affiliate, as part of the integrated NEES system. Under a contract with NEP, the Company purchases all of its electric energy requirements from NEP. The contract provides for the integration of the Company's generating and transmission facilities with NEP's facilities in order to achieve maximum economy and reliability. The contract also provides for the application of credits against the Company's power bills from NEP for costs associated with the Company's facilities so integrated. This contract requires either party to give seven years notice prior to terminating the contract. 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, pursuant to its 1994 rate agreement, began accruing revenues for electricity delivered but not yet billed (unbilled revenues). Unbilled revenues at December 31, 1995 and 1994 were $17 million and $13 million, respectively, of which $12 million and $5 million were recognized in income in the respective years. Included in these income amounts are $8 million in 1995 and $6 million in 1994 which represent amortization of the initial effect of recording unbilled revenues in accordance with the rate agreement. Other accrued revenues are 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 eligible for inclusion in rate base. In 1995, an average of $4 million of construction work in progress was included in rate base, all of which was attributable to the Manchester Street Station repowering project. AFDC is capitalized in "Utility plant" with offsetting non-cash 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 6.2 percent, 6.8 percent, and 6.9 percent in 1995, 1994, and 1993, 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 5.0 percent, 4.5 percent, and 3.5 percent in 1995, 1994, and 1993, respectively. The increase in the depreciation rates in 1995 and 1994 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. Note B - Competitive Conditions The electric utility business is being subjected to rapidly increasing competitive pressures and increasing demands for customer choice. Accordingly, the companies within the NEES system have developed a plan, Choice: New England, which would allow all customers of electric utilities in the states the NEES companies serve to choose their power supplier beginning in 1998. The Company plans to file a similar version of Choice: New England with the Rhode Island Public Utilities Commission (RIPUC) in April 1996. Under Choice: New England, pricing of generation would be deregulated while transmission and distribution rates would remain regulated. Choice: New England proposes that the cost of past commitments to serve customers be recovered through a wires access or transition charge. Those past commitments include generating plant commitments, regulatory assets, purchased power contracts, and nuclear costs independent of operation. In addition, legislation has been introduced in the Rhode Island House of Representatives by the House leadership that would allow customers to choose their power supplier on a phased-in basis beginning in 1998. It also provides that past commitments be recovered through a wires access or transition charge. 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. 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 liabilities, and thereby defer the income statement impact of certain costs that are expected to be recovered in future rates. The effects of regulatory, legislative, or utility initiatives could, in the near future, cause all or a portion of the Company's operations to cease meeting the criteria of FAS 71. In that event, the application of FAS 71 to such operations would be discontinued and a non-cash write-off of previously established regulatory assets and liabilities related to such operations would be required. In March 1995, the Financial Accounting Standards Board issued 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). This standard clarifies when and how to recognize an impairment of long-lived assets. If competitive or regulatory change should cause a substantial revenue loss or lead to the permanent shutdown of any generating facilities, a write-down of plant assets could be required pursuant to FAS 121. In addition, FAS 121 requires that all regulatory assets, which must have a high probability of recovery to be initially established, must continue to meet that high probability standard to avoid being written off. However, if written off, a regulatory asset can be restored if it again has a high probability of recovery. FAS 121, which is effective for the Company in January 1996, is not expected to have a material adverse impact on the financial condition or results of operations upon adoption, based on the current regulatory environment in which the Company operates. However, the impact in the future may change as competitive factors and potential restructuring influence the electric utility industry. The components of regulatory assets are as follows:
At December 31, (In Thousands) 1995 1994 ---- ---- Regulatory assets (liabilities) included in current assets and liabilities: Rate adjustment mechanisms $(7,661) $(8,382) Unamortized unbilled revenues (see Note A-3) (8,209) -------- -------- (7,661) (16,591) -------- -------- Regulatory assets included in deferred charges: Deferred SFAS No. 109 costs (see Note C) 29,251 26,999 Unamortized losses on reacquired debt 13,918 12,538 Deferred SFAS No. 106 costs (see Note E 2) 4,894 5,539 Deferred storm costs 3,676 4,277 Other 3,900 3,751 -------- -------- 55,639 53,104 -------- -------- $47,978 $36,513 ======== ======== Amounts included in "Deferred charges and other assets" on the Company's balance sheets that do not represent regulatory assets totaled $4,529,000 and $4,623,000 at December 31, 1995 and 1994, respectively.
Note C - 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 (IRS) through 1991. The returns for 1992 and 1993 are currently under examination by the IRS. Total federal income taxes consist of the following components:
Year Ended December 31, (In Thousands) 1995 1994 1993 ---- ---- ---- Income taxes charged to operations: Current income taxes $7,560 $1,511 $2,537 Deferred income taxes 3,831 3,880 2,146 Investment tax credits, net (503) (508) (508) ------- ------- ------- Total income taxes charged to operations 10,888 4,883 4,175 ------- ------- ------- Income taxes charged (credited) to "Other income": Current income taxes (348) (491) (354) Deferred income taxes (319) 50 53 ------- ------- ------- Total income taxes charged (credited) to "Other income" (667) (441) (301) ------- ------- ------- Total federal income taxes $10,221 $4,442 $3,874 ======= ======= ======= 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) 1995 1994 1993 ---- ---- ---- Computed tax at statutory rate $11,946 $6,661 $6,352 Increases (reductions) in tax resulting from: Book versus tax depreciation not normalized 529 653 496 Costs associated with utility plant retirements deducted for tax purposes (1,768) (1,872) (1,756) Allowance for equity funds used during construction (37) (360) (190) Amortization of investment tax credits (503) (508) (508) Adjustment of prior year tax accruals (47) (150) (473) All other differences 101 18 (47) ------- ------- ------- Total federal income taxes $10,221 $4,442 $3,874 ======= ======= ======= The following table identifies the major components of total deferred income taxes: At December 31, (In Millions) 1995 1994 ---- ---- Deferred tax asset: Plant related $2 $2 Investment tax credits 3 3 All other 13 13 ----- ----- 18 18 ===== ===== Deferred tax liability: Plant related (62) (57) All other (32) (31) ----- ----- (94) (88) ----- ----- Net deferred tax liability $(76) $(70) ===== ===== There were no valuation allowances for deferred tax assets deemed necessary.
Note D - Commitments and Contingencies 1. Plant Expenditures: The Company's utility plant expenditures are estimated to be approximately $50 million in 1996. At December 31, 1995, 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 a range of potentially hazardous products and by-products in its operations. NEES subsidiaries currently have an environmental audit program in place 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 U.S. 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. 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. 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. Net pension cost for 1995, 1994, and 1993 included the following components:
Year Ended December 31, (In Thousands) 1995 1994 1993 ---- ---- ---- Service cost benefits earned during the period $1,963 $1,877 $1,557 Plus (less): Interest cost on projected benefit obligation 9,327 8,629 8,737 Return on plan assets at expected long-term rate (9,567) (9,024) (8,739) Amortization 67 567 (101) ------- ------- ------- Net pension cost $1,790 $2,049 $1,454 ------- ------- ------- Actual return on plan assets $25,192 $809 $13,545 ======= ======= ======= 1996 1995 1994 1993 ---- ---- ---- ---- Assumptions used to determine pension cost: Discount rate 7.25% 8.25% 7.25% 8.25% Average rate of increase in future compensation levels 4.13% 4.63% 4.35% 5.35% Expected long-term rate of return on assets 8.50% 8.75% 8.75% 8.75% Service cost for 1993 does not reflect $5 million of costs incurred in connection with an early retirement and special severance program offered by the Company in that year.
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) 1995 1994 ---- ---- Union Non-Union Union Non-Union Employee Employee Employee Employee Plans Plans Plans Plans ------ ------ ------ ------ Benefits earned Actuarial present value of accumulated benefit liability: Vested $293 $343 $251 $308 Non-vested 8 10 8 9 ---- ---- ---- ---- Total $301 $353 $259 $317 ==== ==== ==== ==== Reconciliation of funded status Actuarial present value of projected benefit liability $346 $402 $303 $355 Unrecognized prior service costs (7) (4) (8) (4) Unrecognized transition liability (1) (1) Unrecognized net loss (1) (23) (13) (33) ---- ---- ---- ---- 338 374 282 317 ---- ---- ---- ---- Pension fund assets at fair value 349 392 293 323 Unrecognized transition asset (11) (13) ---- ---- ---- ---- 338 392 280 323 ---- ---- ---- ---- Accrued pension/(prepaid) payments recorded on books $ - $(18) $ 2 $ (6)
The plans' funded status at December 31, 1995 and 1994 were calculated using the assumed rates from 1996 and 1995, respectively, and the 1983 Group Annuity Mortality table. Plan assets are composed primarily of corporate equity, guaranteed investment contracts, 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 total cost of PBOPs for 1995, 1994, and 1993 included the following components:
Year Ended December 31, (In Thousands) 1995 1994 1993 ---- ---- ---- Service cost - benefits earned during the period $1,072 $1,252 $1,161 Plus (less): Interest cost on accumulated benefit obligation 6,006 5,630 6,330 Return on plan assets at expected long-term rate (2,080) (1,640) (1,031) Amortization 3,539 3,716 3,864 ------- ------- ------- Net postretirement benefit cost $8,537 $8,958 $10,324 ======= ======= ======= Actual return (loss) on plan assets $6,161 $(23) $1,047 ======= ======= ======= 1996 1995 1994 1993 ---- ---- ---- ---- Assumptions used to determine postretirement benefit cost: Discount rate 7.25% 8.25% 7.25% 8.25% Expected long-term rate of return on assets 8.25% 8.50% 8.50% 8.50% Health care cost rate 1994 and 1993 11.00% 12.00% Health care cost rate 1995 to 1999 8.00% 8.50% 8.50% 9.50% Health care cost rate 2000 to 2004 6.25% 8.50% 8.50% 9.50% Health care cost rate 2005 and beyond 5.25% 6.25% 6.25% 7.25% The following table sets forth benefits earned and the plans' funded status: At December 31, (In Millions) 1995 1994 ---- ---- Accumulated postretirement benefit obligation: Retirees $50 $50 Fully eligible active plan participants 6 10 Other active plan participants 20 14 ---- ---- Total benefits earned 76 74 Unrecognized transition obligation (66) (70) Unrecognized net gain 16 10 ---- ---- 26 14 Plan assets at fair value 34 22 ---- ---- Prepaid postretirement benefit costs recorded on books $8 $8 ==== ====
The plans' funded status at December 31, 1995 and 1994 were calculated using the assumed rates in effect for 1996 and 1995, respectively. The health care cost trend rate assumption has 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, 1995 by approximately $10 million and the net periodic cost for the year 1995 by approximately $1 million. The Company funds the annual tax deductible contributions. Plan assets are invested in equity and debt securities and cash equivalents. Note F - Short-term Borrowings and Other Accrued Expenses At December 31, 1995, the Company had $23 million of short-term debt outstanding including $22 million in commercial paper borrowings and $1 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, 1995, the Company had lines of credit with banks totaling $41 million. There were no borrowings under these lines of credit at December 31, 1995. Fees are paid in lieu of compensating balances on most lines of credit. The weighted average rate on outstanding short-term borrowings was 6.0 percent at December 31, 1995. 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) 1995 1994 ---- ---- Rate adjustment mechanisms $14,075 $12,102 Deferred unbilled revenues 8,209 Accrued wages and benefits 5,483 4,999 Other 36 ------- ------- $19,558 $25,346 ======= =======
Note G - Cumulative Preferred Stock
A summary of cumulative preferred stock at December 31, 1995 and 1994 is as follows (in thousands of dollars except for share data): Shares Authorized Dividends Call and Outstanding Amount Declared Price --------------- ------ ------------ ----- 1995 1994 1995 1994 1995 1994 ---- ---- ---- ---- ---- ---- ----- $50 Par value 4.50% Series 180,000 180,000 $9,000 $9,000 $405 $405 4.64% Series 150,000 150,000 7,500 7,500 348 348 6.95% Series 400,000 400,000 20,000 20,000 1,390 1,390 (a) ------- -------------- ------- ------ ------ Total 730,000 730,000$36,500 $36,500 $2,143 $2,143 ======= ============== ======= ====== ====== (a)Callable on or after August 1, 2003 at $51.74. The annual dividend requirement for total cumulative preferred stock was $2,143,000 for 1995 and 1994.
Note H - Long-term Debt
A summary of long-term debt is as follows: At December 31, (In Thousands) Series Rate % Maturity 1995 1994 - ----------------------------------------------------------------------------- First Mortgage Bonds: U(92-1) 7.230 June 3, 1997 $10,000 $10,000 U(92-2) 7.210 June 3, 1997 5,000 5,000 U(92-3) 7.000 June 16, 1997 10,000 10,000 U(92-7) 5.700 September 16, 1997 7,500 7,500 V(95-1) 7.810 February 16, 1998 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 24,000 40,000 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 V(95-3) 7.500 October 10, 2025 7,000 W(95-1) 7.300 November 13, 2025 16,000 Unamortized discounts and premiums (1,308) (1,338) -------- -------- Total long-term debt $210,892 $188,862 ======== ========
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 $32,500,000 in 1997, $5,000,000 in 1998, $8,000,000 in 1999, and $15,000,000 in 2000 to retire maturing mortgage bonds. There are no cash payments required in 1996. To date in 1996, the Company has refinanced $2 million of long-term debt at 7.24 percent. At December 31, 1995, the Company's long-term debt had a carrying value of approximately $211,000,000 and had a fair value of approximately $229,000,000. 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 I - 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, 1995 was 50 percent of total capitalization and, accordingly, none of the Company's retained earnings at December 31, 1995 were restricted as to dividends on common stock under the foregoing provisions. Note J - 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 K - Supplementary Income Statement Information Advertising expenses, expenditures for research and development, and rents were not material and there were no royalties paid in 1995, 1994, or 1993. Taxes, other than federal income taxes, charged to operating expenses are set forth by classes as follows:
Year Ended December 31, (In Thousands) 1995 1994 1993 ---- ---- ---- Municipal property taxes $15,172 $13,944 $13,798 State gross earnings tax 18,617 19,270 19,281 Federal and state payroll and other taxes 2,838 2,604 2,767 ------- ------- ------- $36,627 $35,818 $35,846 ======= ======= =======
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 $28,502,000, $32,445,000, and $30,133,000, including capitalized construction costs of $6,268,000, $7,756,000, and $6,602,000, for each of the years 1995, 1994, and 1993, respectively. The Narragansett Electric Company Operating Statistics (Unaudited)
Year Ended December 31, 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Sources of Energy (Thousands of kWh) Net generation for New England Power Company 64,035 5,781 4,506 83,753 162,844 Purchased energy: From New England Power Company, an affiliate (net of generation) 4,955,575 5,001,843 4,982,254 4,729,733 4,699,509 From others 2,080 2,909 2,343 2,249 2,243 -------------------------------------------------- Total generated and purchased 5,021,690 5,010,533 4,989,103 4,815,735 4,864,596 Losses, company use, etc. (260,960) (263,234) (270,373) (229,106) (277,383) -------------------------------------------------- Total sources of energy 4,760,730 4,747,299 4,718,730 4,586,629 4,587,213 ================================================== Sales of Energy (Thousands of kWh) Residential 1,835,085 1,843,970 1,817,675 1,783,754 1,784,156 Commercial 2,031,541 1,983,508 1,931,377 1,877,738 1,867,225 Industrial 843,635 868,092 917,305 869,062 878,142 Other 49,881 51,138 51,821 55,476 57,106 -------------------------------------------------- Total sales to ultimate customers 4,760,142 4,746,708 4,718,178 4,586,030 4,586,629 Sales for resale 588 591 552 599 584 -------------------------------------------------- Total sales of energy 4,760,730 4,747,299 4,718,730 4,586,629 4,587,213 ================================================== Annual Maximum Demand (kW one hour peak) 1,031,000 1,005,000 939,000 919,000 961,000 Average Annual Use per Residential Customer (kWh) 6,305 6,397 6,337 6,265 6,308 Number of Customers at December 31 Residential 292,659 289,317 287,876 286,228 284,275 Commercial 32,412 32,195 31,948 31,534 31,417 Industrial 1,792 1,825 1,869 1,914 1,944 Other 873 875 878 941 934 -------------------------------------------------- Total ultimate customers 327,736 324,212 322,571 320,617 318,570 Other electric companies (for resale) 2 2 1 3 4 -------------------------------------------------- Total customers 327,738 324,214 322,572 320,620 318,574 ================================================== Operating Revenue (In Thousands) Residential $205,649 $200,778 $202,522 $196,983 $192,688 Commercial 198,429 189,059 190,185 183,702 178,616 Industrial 72,071 72,136 78,088 76,275 76,299 Other 7,236 6,883 6,778 6,587 6,197 -------------------------------------------------- Total revenue from ultimate customers 483,385 468,856 477,573 463,547 453,800 Amortization of unbilled revenues 8,209 6,158 Sales for resale 70 68 64 68 65 -------------------------------------------------- Total revenue from electric sales 491,664 475,082 477,637 463,615 453,865 Other operating revenue 7,449 6,587 5,391 4,637 3,645 -------------------------------------------------- Total operating revenue $499,113 $481,669 $483,028 $468,252 $457,510 ==================================================
The Narragansett Electric Company Selected Financial Information
Year Ended December 31, (In Millions) 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Operating revenue: Electric sales (excluding fuel cost recovery) $361 $356 $351 $342 $340 Fuel cost recovery 131 120 127 121 114 Other 7 6 5 5 4 ------ ------ ------ ------ ------ Total operating revenue $499 $482 $483 $468 $458 Net income $24 $15 $14 $21 $17 Total assets $700 $647 $556 $479 $445 Capitalization: Common equity $245 $208 $183 $176 $151 Cumulative preferred stock 36 37 37 27 27 Long-term debt 211 189 156 143 118 ------ ------ ------ ------ ------ Total capitalization $492 $434 $376 $346 $296 Preferred dividends declared $2 $2 $2 $2 $2 Common dividends declared $5 $3 $5 $5 $5
Selected Quarterly Financial Information (Unaudited)
First Second Third Fourth (In Thousands) Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1995 Operating revenue $125,020 $116,426 $139,217 $118,450 Operating income $12,645 $7,301 $12,699 $9,780 Net income $7,766 $3,058 $7,939 $5,147 1994 Operating revenue $125,461 $103,800 $137,014 $115,394 Operating income $10,407 $2,714 $10,937 $6,056 Net income (loss) $6,314 $(1,013) $7,230 $2,058 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, 1995 will be available on or about April 1, 1996, without charge, upon written request to The Narragansett Electric Company, Shareholder Services Department, 280 Melrose Street, Providence, Rhode Island 02901.
EX-24 20 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, Maureen L. Fountain, 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, 1995, 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 26th day of March, 1996. s/Joan T. Bok s/Robert L. McCabe _________________________ _________________________ Joan T. Bok Robert L. McCabe s/Stephen A. Cardi s/John W. Rowe _________________________ _________________________ Stephen A. Cardi John W. Rowe _________________________ _________________________ Frances H. Gammell Richard P. Sergel s/John J. Kirby s/William E. Trueheart _________________________ _________________________ John J. Kirby William E. Trueheart _________________________ John A. Wilson, Jr. EX-27 21 NARRA FDS
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. 0000069659 The Narragansett Electric Company 1,000 DEC-31-1995 DEC-31-1994 DEC-31-1995 DEC-31-1994 12-MOS 12-MOS PER-BOOK PER-BOOK 535,248 491,915 0 0 104,205 97,735 60,168 57,727 0 0 699,621 647,377 56,624 56,624 80,170 60,170 108,227 91,556 245,021 208,350 0 0 36,500 36,500 210,892 188,862 1,000 0 0 0 21,675 29,800 0 0 0 0 0 0 0 0 184,533 183,865 699,621 647,377 499,113 481,669 10,888 4,883 445,800 446,672 456,688 451,555 42,425 30,114 (86) 172 42,339 30,286 18,429 15,697 23,910 14,589 2,143 2,143 21,767 12,446 5,096 2,549 16,627 14,334 48,451 40,188 0 0 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. -----END PRIVACY-ENHANCED MESSAGE-----