-----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, AfzdJHmoZSiifU5cpmD/8vqPa5Qx5+GabKEYyFydNY+votei/oVF9EaIXsFyyac0 2dEecAwnnOQe5HKOFG+heA== 0000072741-02-000051.txt : 20020415 0000072741-02-000051.hdr.sgml : 20020415 ACCESSION NUMBER: 0000072741-02-000051 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 36 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHEAST UTILITIES SYSTEM CENTRAL INDEX KEY: 0000072741 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 042147929 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05324 FILM NUMBER: 02582925 BUSINESS ADDRESS: STREET 1: 174 BRUSH HILL AVE CITY: WEST SPRINGFIELD STATE: MA ZIP: 01090-0010 BUSINESS PHONE: 4137855871 MAIL ADDRESS: STREET 1: 107 SELDON ST CITY: BERLIN STATE: CT ZIP: 06037-1616 10-K 1 form10k2001.txt FORM 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 2001 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ________ to ________ Commission Registrant; State of Incorporation; I.R.S. Employer File Number Address; and Telephone Number Identification No. - ----------- ----------------------------------- ------------------ 1-5324 NORTHEAST UTILITIES 04-2147929 ------------------- (a Massachusetts voluntary association) 174 Brush Hill Avenue West Springfield, Massachusetts 01090-2010 Telephone: (413) 785-5871 0-11419 THE CONNECTICUT LIGHT AND POWER COMPANY 06-0303850 --------------------------------------- (a Connecticut corporation) 107 Selden Street Berlin, Connecticut 06037-1616 Telephone: (860) 665-5000 1-6392 PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE 02-0181050 --------------------------------------- (a New Hampshire corporation) 1000 Elm Street Manchester, New Hampshire 03105-0330 Telephone: (603) 669-4000 0-7624 WESTERN MASSACHUSETTS ELECTRIC COMPANY 04-1961130 -------------------------------------- (a Massachusetts corporation) 174 Brush Hill Avenue West Springfield, Massachusetts 01090-2010 Telephone: (413) 785-5871 333-74636 NORTHEAST GENERATION COMPANY 06-1533879 ---------------------------- (a Connecticut corporation) 107 Selden Street Berlin, Connecticut 06037-1616 Telephone: (860) 655-5154 Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange Registrant Title of Each Class on Which Registered ---------- ------------------- ---------------------- Northeast Utilities Common Shares, $5.00 par value New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Registrant Title of Each Class ---------- ------------------- The Connecticut Light and Preferred Stock, par value $50.00 per share, issuable in Power Company series, of which the following series are outstanding: $1.90 Series of 1947 4.96% Series of 1958 $2.00 Series of 1947 4.50% Series of 1963 $2.04 Series of 1949 5.28% Series of 1967 $2.20 Series of 1949 $3.24 Series G of 1968 3.90% Series of 1949 6.56% Series of 1968 $2.06 Series E of 1954 $2.09 Series F of 1955 4.50% Series of 1956
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of Northeast Utilities' Common Shares, $5.00 Par Value, held by nonaffiliates, was $2,458,357,404 based on a closing sales price of $18.38 per share for the 133,751,763 common shares outstanding on February 28, 2002. Northeast Utilities holds all of the 7,584,884 shares, 388 shares, 509,696 shares, and 6 shares of the outstanding common stock of The Connecticut Light and Power Company, Public Service Company of New Hampshire, Western Massachusetts Electric Company, and Northeast Generation Company, respectively. Documents Incorporated by Reference: Part of Form 10-K into Which Document Description is Incorporated ----------- -------------------- Portions of Annual Reports of the following companies for the year ended December 31, 2001: Northeast Utilities Part II The Connecticut Light and Power Company Part II Public Service Company of New Hampshire Part II Western Massachusetts Electric Company Part II Northeast Generation Company Part II Portions of the Northeast Utilities Proxy Statement dated March 25, 2002 Part III GLOSSARY OF TERMS The following is a glossary of frequently used abbreviations or acronyms that are found in this report: COMPANIES Boulos.......................... E.S. Boulos Company CL&P............................ The Connecticut Light and Power Company CL&P LP......................... CL&P Capital LP Con Edison...................... Consolidated Edison, Inc. CRC............................. CL&P Receivables Corporation CYAPC........................... Connecticut Yankee Atomic Power Company DNCI............................ Dominion Nuclear Connecticut, Inc. HWP............................. Holyoke Water Power Company Mode 1.......................... Mode 1 Communications, Inc. MYAPC........................... Maine Yankee Atomic Power Company NAEC............................ North Atlantic Energy Corporation NAESCO.......................... North Atlantic Energy Service Corporation NEON............................ NEON Communications, Inc. NGC............................. Northeast Generation Company NGS............................. Northeast Generation Services Company NMEM............................ Niagara Mohawk Energy Marketing, Inc. NNECO........................... Northeast Nuclear Energy Company NU or the company............... Northeast Utilities NU system....................... Northeast Utilities System NUEI............................ NU Enterprises, Inc. NUSCO........................... Northeast Utilities Service Company PSNH............................ Public Service Company of New Hampshire RRR............................. The Rocky River Realty Company Select Energy................... Select Energy, Inc. SENY............................ Select Energy New York, Inc. SEPPI........................... Select Energy Portland Pipeline, Inc. SES or SESI..................... Select Energy Services, Inc. VYNPC........................... Vermont Yankee Nuclear Power Corporation WMECO........................... Western Massachusetts Electric Company YAEC............................ Yankee Atomic Electric Company Yankee.......................... Yankee Energy System, Inc. Yankee Companies................ CYAPC, MYAPC, VYNPC, and YAEC Yankee Gas...................... Yankee Gas Services Company GENERATING UNITS Millstone 1..................... Millstone Unit No. 1, a 660 megawatt nuclear unit completed in 1970; Millstone 1 is currently in decommissioning status and was sold to DNCI in March 2001. Millstone 2..................... Millstone Unit No. 2, an 870 megawatt nuclear electric generating unit completed in 1975; Millstone 2 was sold to DNCI in March 2001. Millstone 3..................... Millstone Unit No. 3, a 1,154 megawatt nuclear electric generating unit completed in 1986; Millstone 3 was sold to DNCI in March 2001. Seabrook........................ Seabrook Unit No. 1, a 1,148 MW nuclear electric generating unit completed in 1986. Seabrook 1 went into service in 1990. REGULATORS CDEP............................ Connecticut Department of Environmental Protection DOE............................. United States Department of Energy DPUC............................ Connecticut Department of Public Utility Control DTE............................. Massachusetts Department of Telecommunications and Energy EPA............................. United States Environmental Protection Agency FERC............................ Federal Energy Regulatory Commission NHPUC........................... New Hampshire Public Utilities Commission NRC............................. Nuclear Regulatory Commission SEC............................. Securities and Exchange Commission OTHER 1935 Act........................ Public Utility Holding Company Act of 1935 BFA............................. Business Finance Authority CAAA............................ Clean Air Act Amendments of 1990 District Court.................. United States District Court for the Southern District of New York EITF............................ Emerging Issues Task Force Energy Act...................... Energy Policy Act of 1992 EPS............................. Earnings Per Share ESOP............................ Employee Stock Ownership Plan ESPP............................ Employee Stock Purchase Plan Exchange........................ New York Mercantile Exchange FASB............................ Financial Accounting Standards Board FPPAC........................... Fuel and Purchased-Power Adjustment Clause Incentive Plan.................. Northeast Utilities Incentive Plan ISO............................. Independent System Operator ITC............................. Independent Transmission Company kWh............................. Kilowatt-hour Merger Agreement................ Agreement and Plan of Merger, as amended and restated as of January 11, 2000, between NU and Con Edison MIPs............................ Monthly Income Preferred Securities MW.............................. Megawatts NDFC............................ Nuclear Decommissioning Financing Committee NEPOOL.......................... New England Power Pool NUG&T........................... Northeast Utilities Generation and Transmission Agreement O&M............................. Operation and Maintenance PCRBs........................... Pollution Control Revenue Bonds Pool............................ Northeast Utilities System Money Pool RTO............................. Regional Transmission Organization SERP............................ Supplemental Executive Retirement Plan Settlement Agreement............ "Agreement to Settle PSNH Restructuring" SFAS............................ Statement of Financial Accounting Standards VSP............................. Voluntary Separation Program NORTHEAST UTILITIES THE CONNECTICUT LIGHT AND POWER COMPANY PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE WESTERN MASSACHUSETTS ELECTRIC COMPANY NORTHEAST GENERATION COMPANY 2001 Form 10-K Annual Report Table of Contents PART I Page Item 1. Business............................................. 1 The Northeast Utilities System............................ 1 Safe Harbor Statement..................................... 2 Mergers and Acquisitions.................................. 3 Consolidated Edison, Inc. Merger..................... 3 Competitive Business Acquisitions.................... 3 Rates and Electric Industry Restructuring................. 4 General.............................................. 4 Connecticut Rates and Restructuring.................. 5 Massachusetts Rates and Restructuring................ 7 New Hampshire Rates and Restructuring................ 8 Competitive System Businesses............................. 9 Energy-Related Products and Services and Gas Investments.................................... 10 Electric Generation and Services..................... 13 Energy Management Services........................... 14 Gas Investments...................................... 15 Telecommunications................................... 15 Financing Program......................................... 16 2001 Financings...................................... 16 2002 Financing Requirements.......................... 18 2002 Financing Plans................................. 19 Financing Limitations................................ 19 Construction and Capital Improvement Program.............. 24 Regulated Electric Operations............................. 25 Distribution and Sales............................... 25 Regional and System Coordination..................... 26 Transmission Access and FERC Regulatory Changes...... 27 Regulated Gas Operations.................................. 28 Nuclear Generation........................................ 29 General.............................................. 29 Nuclear Plant Performance............................ 31 Nuclear Insurance.................................... 31 Nuclear Fuel......................................... 32 Decommissioning...................................... 33 Other Regulatory and Environmental Matters................ 37 Environmental Regulation............................. 37 Electric and Magnetic Fields......................... 39 FERC Hydroelectric Project Licensing................. 40 Employees................................................. 41 Item 2. Properties........................................... 42 Item 3. Legal Proceedings.................................... 47 Item 4. Submission of Matters to a Vote of Security Holders.. 52 PART II Item 5. Market for Registrants' Common Equity and Related Shareholder Matters.................................. 53 Item 6. Selected Financial Data.............................. 54 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 54 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................................... 54 Item 8. Financial Statements and Supplementary Data.......... 55 Item 9. Changes in Disagreements with Accountants on Accounting and Financial Disclosure.................. 56 PART III Item 10. Directors and Executive Officers of the Registrants.. 58 Item 11. Executive Compensation............................... 64 Item 12. Security Ownership of Certain Beneficial Owners and Management........................................... 74 Item 13. Certain Relationships and Related Transactions....... 76 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................. 76 NORTHEAST UTILITIES THE CONNECTICUT LIGHT AND POWER COMPANY PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE WESTERN MASSACHUSETTS ELECTRIC COMPANY NORTHEAST GENERATION COMPANY PART I ITEM 1. BUSINESS THE NORTHEAST UTILITIES SYSTEM Northeast Utilities (NU) is the parent company of the Northeast Utilities system (the NU system). The NU system furnishes franchised retail electric service in Connecticut, New Hampshire and western Massachusetts through three of NU's wholly- owned subsidiaries (The Connecticut Light and Power Company [CL&P], Public Service Company of New Hampshire [PSNH] and Western Massachusetts Electric Company [WMECO]). The NU system also furnishes retail natural gas service in most of Connecticut through Yankee Gas Services Company (Yankee Gas), a subsidiary of Yankee Energy System, Inc. (Yankee), the largest natural gas distribution company in Connecticut. Yankee Gas serves approximately 191,000 residential, commercial and industrial customers in 69 cities and towns in Connecticut. NU, through its wholly owned subsidiary, NU Enterprises, Inc. (NUEI), owns a number of competitive energy and telecommunications related businesses, including Northeast Generation Company (NGC), Northeast Generation Services Company (NGS), Select Energy, Inc. (Select Energy), Select Energy Services, Inc. (SESI; formerly HEC Inc.) and Mode 1 Communications, Inc. (Mode 1). For information regarding the activities of these subsidiaries, see "Competitive System Businesses." North Atlantic Energy Corporation (NAEC) is a wholly owned special- purpose operating subsidiary of NU that owns a 35.98 percent interest in the Seabrook station nuclear unit (Seabrook) in Seabrook, New Hampshire, and sells its share of the capacity and output from Seabrook to PSNH under two life-of-unit, full-cost recovery contracts (Seabrook Power Contracts). Several wholly owned subsidiaries of NU provide support services for the NU system companies and, in some cases, for other New England utilities. Northeast Utilities Service Company (NUSCO) provides centralized accounting, administrative, information technology, engineering, financial, legal, operational, planning, purchasing, and other services to the NU system companies. North Atlantic Energy Service Corporation (NAESCO) has operational responsibility for Seabrook. Three other subsidiaries construct, acquire or lease some of the property and facilities used by the NU system companies. The NU system is regulated in virtually all aspects of its business by various federal and state agencies, including the Securities and Exchange Commission (SEC), the Federal Energy Regulatory Commission (FERC), the Nuclear Regulatory Commission (NRC) and various state and/or local regulatory authorities with jurisdiction over the industry and the service areas in which each company operates, including the Connecticut Department of Public Utility Control (DPUC), the New Hampshire Public Utilities Commission (NHPUC) and the Massachusetts Department of Telecommunications and Energy (DTE). In recent years, there has been significant legislative and regulatory activity changing the nature of regulation of the industry. For more information regarding these restructuring initiatives, see "Rates and Electric Industry Restructuring" and "Regulated Electric Operations." SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (Reform Act), NU and its reporting subsidiaries are hereby filing cautionary statements identifying important factors that could cause NU or its subsidiaries' actual results to differ materially from those projected in forward looking statements (as such term is defined in the Reform Act) made by or on behalf of NU or its subsidiaries in this combined Form 10-K, in any subsequent filings with the SEC, in presentations, in response to questions, or otherwise. Any statements that express or involve discussions as to expectations, beliefs, plans, objectives, assumptions or future events, or performance (often, but not always, through the use of words or phrases such as will likely result, are expected to, will continue, is anticipated, estimated, projection, outlook) are not statements of historical facts and may be forward looking. Forward looking statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in the forward looking statements. Accordingly, any such statements are qualified in their entirety by reference to, and are accompanied by, the following important factors that could cause NU or its subsidiaries' actual results to differ materially from those contained in forward looking statements of NU or its subsidiaries made by or on behalf of NU or its subsidiaries. Any forward looking statement speaks only as of the date on which such statement is made, and NU and its subsidiaries undertake no obligation to update any forward looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward looking statements. Some important factors that could cause actual results or outcomes to differ materially from those discussed in the forward looking statements include prevailing governmental policies and regulatory actions, including those of the SEC, the NRC, the FERC, and state regulatory agencies, with respect to allowed rates of return, industry and rate structure, operation of nuclear power facilities, acquisition and disposal of assets and facilities, operation and construction of plant facilities, recovery of purchased-power costs, stranded costs, decommissioning costs, and present or prospective wholesale and retail competition (including but not limited to retail wheeling and transmission costs). The business and profitability of NU and its subsidiaries are also influenced by economic and geographic factors including political and economic risks, changes in environmental and safety laws and policies, weather conditions (including natural disasters), population growth rates and demographic patterns, competition for retail and wholesale customers, pricing and transportation of commodities, market demand for energy from plants or facilities, changes in tax rates or policies or in rates of inflation, changes in project costs, unanticipated changes in certain expenses and capital expenditures, capital market conditions, competition for new energy development opportunities, and legal and administrative proceedings (whether civil or criminal) and settlements. All such factors are difficult to predict, contain uncertainties which may materially affect actual results and are beyond the control of NU or its subsidiaries. MERGERS AND ACQUISITIONS CONSOLIDATED EDISON, INC. MERGER Pursuant to an October 13, 1999 Agreement and Plan of Merger, as restated and amended on January 11, 2000 (the "Merger Agreement"), Consolidated Edison, Inc. ("Con Edison") and NU agreed to a merger pursuant to which Con Edison and NU would become wholly owned subsidiaries of a new entity ("New Con Edison") and NU shareholders would receive cash and New Con Edison common stock in exchange for their NU shares. On March 5, 2001, Con Edison advised NU that it was unwilling to close the merger on the terms set forth in the Merger Agreement, and NU advised Con Edison that it would treat Con Edison's refusal to proceed with the transaction as a repudiation and breach of the Merger Agreement. Subsequently, NU and Con Edison each filed a lawsuit in the United States District Court for the Southern District of New York, alleging, among other things, breach of the Merger Agreement by the other. The companies' claims against each other are pending, and NU regards the proposed merger as effectively terminated. For further information on the litigation relating to the proposed merger, see "Item 3. Legal Proceedings." COMPETITIVE BUSINESS ACQUISITIONS As of December 31, 2000, NGS acquired substantially all of the assets of E.S. Boulos Company, and its affiliates E.S. Boulos Electrical Co., Inc. and E.S.B., Inc. (collectively "Boulos"), construction and maintenance companies located in Westbrook, Maine, for approximately $10 million, subject to adjustment. Boulos, the largest electrical contractor in Maine, specializes in high voltage electrical construction and maintenance in Massachusetts, New Hampshire and Maine. On November 30, 2001, Select Energy completed the acquisition of Select Energy New York, Inc. (formerly Niagara Mohawk Energy Marketing, Inc., or SENY), the competitive energy marketing and services subsidiary of Niagara Mohawk Holdings, Inc., for approximately $31.7 million. SENY, based in Syracuse, New York, is engaged in the wholesale and retail sales of natural gas and electricity in the Northeastern U.S. and Canada and is now a wholly- owned subsidiary of Select Energy. RATES AND ELECTRIC INDUSTRY RESTRUCTURING GENERAL NU's electric utility subsidiaries, CL&P, WMECO and PSNH, have undergone fundamental changes in their business operations as a result of the restructuring of the electric industry in their respective jurisdictions. Most notably, CL&P and WMECO have divested their generation assets and will act solely as transmission and distribution companies in the future, while divestiture of PSNH's generation has been postponed until 2004. All customers are now able to choose their energy suppliers, with the electric utility companies furnishing "standard offer" or "transition" service to those customers who do not choose a competitive supplier. Critical to this restructuring is the companies' ability to recover their stranded costs. Stranded costs are expenditures incurred, or commitments for future expenditures made, on behalf of customers with the expectation such expenditures would continue to be recoverable in the future through rates. As discussed more fully below, CL&P and WMECO have recovered substantially all of their prudently incurred stranded costs. Under an April 2000 settlement agreement among NU, PSNH and the State of New Hampshire (Settlement Agreement), PSNH expects to recover all of its remaining stranded costs. Electric utility restructuring in Connecticut, New Hampshire and Massachusetts provides for a transition period of several years following the opening of each state's electric market to customer choice. During that interim period, the energy delivery companies, including CL&P, WMECO and PSNH, are responsible for arranging for the supply of power to customers who do not select alternative energy suppliers. Management recognizes that in other states electric companies have been negatively affected by the inability to recover supply costs on a timely basis. However, the Company believes that current statutes and regulatory policy in the three states in which NU subsidiaries operate electric delivery businesses will permit timely recovery. CL&P has signed fixed-price contracts with three suppliers who together will serve all of CL&P's standard offer requirements through 2003. One of these suppliers is the Company's competitive marketing affiliate, Select Energy, and the other two suppliers are unaffiliated with CL&P. CL&P is fully recovering all of the payments it is making to those suppliers and has financial guarantees from each supplier to shield CL&P from risk in the event any of the suppliers encounters financial difficulties. See "Connecticut Rates and Restructuring." WMECO signed supply agreements with unaffiliated suppliers for standard offer service in October 2001 for the 2002 calendar year. The DTE approved the contracts and approved new rates which allow WMECO to recover fully its standard offer supply costs. In addition, in Massachusetts there is a second type of WMECO-supplied service called default service. WMECO has signed supply agreements with unaffiliated suppliers for default service through June 2002. The DTE approved the contracts and the rules which allow WMECO to recover fully its default service supply costs. Retail competition for all PSNH customers began on May 1, 2001. PSNH provides transition service energy to its retail customers from its owned generating plant and from purchase power obligations. See "New Hampshire Rates and Restructuring." CONNECTICUT RATES AND RESTRUCTURING Since retail competition began in Connecticut in 2000, an extremely small number of CL&P customers have opted to choose their retail supplier. As of December 31, 2001, only 2,400-virtually all of them residential-of more than 1.2 million CL&P customers were not procuring their electricity through CL&P's standard offer. Through December 2003, 50 percent of CL&P's standard offer supply requirements will be purchased from Select Energy, 45 percent from NRG Energy, and 5 percent from Duke Power Marketing. On November 18, 2001, at the request of NRG Energy, CL&P filed a request with the DPUC to raise the standard offer rate from an average of $0.0495 per kilowatt-hour to $0.0595 per kilowatt-hour, which would help promote competition in advance of the January 1, 2004 termination of the standard offer period. On December 5, 2001, the DPUC rejected CL&P's request, but subsequently opened two new dockets to examine the provision of default service beginning on January 1, 2004 and the viability of the standard offer supply contracts. In the first docket, on December 8, 2001 the DPUC conducted a joint hearing with the Connecticut Office of Consumer Counsel (OCC) to consider issues related to default service commencing on January 1, 2004. A decision in that docket was issued on February 15, 2002 that discussed four options for providing default service, the lack of retail competition and means of spurring competition. In the second docket, the DPUC commenced hearings on February 19, 2002 to consider issues related to the viability of the standard offer supply contracts. A decision in that docket is pending. In November 2000, the DPUC authorized CL&P to securitize approved eligible stranded costs through the issuance of up to $1.55 billion of rate reduction certificates (RRCs). In December 2000, the OCC appealed the DPUC's decision to the Connecticut Superior Court. On March 2, 2001, CL&P and the OCC entered into a settlement agreement that resolved all issues raised in the OCC's appeal. The DPUC approved the settlement on March 12, 2001 and the OCC withdrew its appeal. Approximately $1.44 billion of the RRCs were issued at the end of the first quarter of 2001. Included in the securitized amounts were $1.026 billion in buy down and buy out payments for contracts with 15 independent power producers (IPPs) and one wholesale contract. See "Financing Program - 2001 Financings." On March 31, 2001, CL&P, WMECO, PSNH and other selling joint owners closed on the sale of Millstone 1, Millstone 2 and 94 percent of Millstone 3 to Dominion Nuclear Connecticut, Inc. (DNCI), an affiliate of Dominion Resources, Inc. (Dominion), for $1.3 billion. See "Nuclear Generation." On September 27, 2001, CL&P filed its application with the DPUC for approval of the disposition of the proceeds from the sale of the Millstone units to DNCI. This application described and requested DPUC approval for CL&P's treatment of its share of the proceeds from the sale, including CL&P's retention of approximately $75 million of capital additions at Millstone during the approximately four years prior to sale. A decision from the DPUC is expected in the first half of 2002. On December 3, 2001, JP Morgan, on behalf of the DPUC and the NHPUC, announced the commencement of an auction that will lead to the sale of the Seabrook nuclear plant. Under Connecticut and New Hampshire restructuring laws, each utility commission is charged with the responsibility for conducting the auctions. Eighty-eight percent of the plant is being offered for sale in the auction, including 100 percent of CL&P's and NAEC's shares in Unit 1 and Unit 2. It is expected that a winning bidder will be selected in the first half of 2002. Management expects that the sale of CL&P's and NAEC's interests in Seabrook will occur by the end of 2002. The Vermont Yankee nuclear unit is also being sold; see "Nuclear Generation - General" for information on that sale. CL&P was unable to negotiate buy down or buy out arrangements with 15 IPPs that produce approximately 345 MW. CL&P is selling the output from the projects into the market and will, pursuant to DPUC authority, continue to collect the difference between the contract prices and the market revenues as stranded costs. These stranded costs cannot be securitized. On December 1, 2000, the Attorney General of the State of Connecticut (AG) and the OCC each filed a petition requesting that the DPUC initiate a proceeding to consider whether an interim decrease in the rates charged by CL&P is required. The applicable statute requires the DPUC to commence a special public hearing on the need for an interim rate decrease when, among other reasons, a public service company has for six consecutive months earned a return on equity (ROE) that exceeds the return authorized by the DPUC by at least one percentage point. The AG and the OCC petitions were filed after CL&P reported ROEs of 13.12 percent for the second quarter of 2000 and 14.17 percent for the third quarter of 2001. In June 2001, the DPUC concluded its investigation on potential overearnings by CL&P and ordered a $21.1 million reduction in CL&P's electric transmission and distribution rates and an equal increase in CL&P's generation services charge. The DPUC also implemented an earnings sharing mechanism under which earnings in excess of a 10.3 percent ROE will be shared equally by shareholders and ratepayers. On September 28, 2001, the DPUC ordered a $21.3 million annual reduction in CL&P's System Benefits Charge as a result of a sharp reduction in decommissioning collections and an equal increase in the competitive transition assessment, effective March 1, 2002. Also, on July 26, 2001, the DPUC authorized CL&P to assess a charge of approximately $0.002 per kilowatt-hour through December 2003 to collect approximately $98.5 million of deferred fuel costs. The net result of the decisions noted above will be to reduce CL&P's pretax earnings by $21.1 million beginning June 20, 2001, accelerate CL&P's recovery of stranded costs in 2002 and 2003. On December 18, 2001, the AG filed a new petition seeking an investigation into CL&P's potential overearnings. On February 6, 2002, the DPUC rejected the petition. On July 24, 2001, Yankee Gas filed an application to increase customers' rates by approximately $29.2 million, or an average of 7.64 percent. Yankee Gas requested the increase to fund system reliability projects and a proposed expansion of its distribution system. On January 30, 2002, the DPUC issued a final decision in the case, ordering a $4.0 million reduction in Yankee Gas rates, effective March 1, 2002. The DPUC authorized an 11 percent return on equity for Yankee Gas and a sharing formula for earnings above that level from 2002 through 2005. The DPUC also approved an infrastructure recovery mechanism which will allow Yankee Gas the opportunity to recover the carrying costs of its planned distribution system expansion on an annual basis. The OCC and the AG have requested a reconsideration of the DPUC decision. On March 5, 2002, the DPUC issued a draft decision reopening the docket to review the bill credit calculation that is required to implement the rate reduction and to clarify the rate treatment for system expansion projects that fail to meet the profitability standards established by the DPUC. It is now expected that the rate decrease will become effective on April 1, 2002. On March 14, 2002, the OCC appealed the January 30, 2002 decision. MASSACHUSETTS RATES AND RESTRUCTURING Massachusetts enacted comprehensive electric utility industry restructuring in November 1997. That legislation required each electric company to submit a restructuring plan and to reduce its rates by 15 percent adjusted for inflation by September 1999. The 15 percent rate reduction is a rate cap for standard offer service customers that extends until February 2005, the end of the restructuring transition period. WMECO filed, and in 1999 the DTE approved, WMECO's restructuring plan. The plan allows WMECO's customers to choose their energy suppliers and allows WMECO to recover generation-related stranded costs. Two parties have appealed the DTE's decision on WMECO's restructuring plan to the Massachusetts Supreme Judicial Court. One appeal has been dismissed without prejudice by the Supreme Judicial Court because the appellant has failed to prosecute the appeal. There has been no significant action in the other appeal since it was filed in December 1999. In addition, the DTE-approved plan requires WMECO to procure competitively priced standard offer service and default service. These services provide power to customers that decline to purchase energy from a competitive supplier. For 2001, standard offer service was procured at a composite rate of 7.383 cents per kilowatt-hour (kWh), including congestion costs. Default service was procured for 2001 at a somewhat higher rate. WMECO signed a new one-year standard offer supply agreement with unaffiliated suppliers in October 2001 for the 2002 calendar year at a rate of $0.04829 cents per kilowatt-hour. The DTE approved the contracts and approved new rates which allow WMECO to fully recover its standard offer supply costs. On December 29, 2001, the DTE approved a 14 percent reduction in WMECO's overall bills, primarily reflecting a reduction in WMECO's standard offer supply costs from 2001 to 2002 to $0.04829 per kilowatt-hour. Additionally, supply costs for the approximately 30 percent of WMECO customers taking default service declined to an average rate of $0.0757 per kilowatt-hour in the first half of 2002 from $0.0853 in the second half of 2001. The significant reduction in supply costs in 2002 will result in a material reduction in WMECO revenue and purchased power costs in 2002, but should not have a meaningful impact on financial performance since electric supply costs are passed through to customers. On February 7, 2001, the DTE approved the securitization of $155 million of stranded costs and issued the required financing order. In March 2001, WMECO received the approvals of two Massachusetts state agencies directed by statute to oversee the bond issuance. The stranded costs to be securitized include the unrecovered plant balances of Millstone 2 and 3 and the buydown and buyout payments of two IPP contracts. On May 17, 2001, WMECO Funding LLC (WMECO Funding), a subsidiary of WMECO, sold $155 million of notes to Massachusetts RRB Special Purpose Trust WMECO-1, a special purpose trust. The trust in turn sold, through underwriters, $155 million of rate reduction certificates to the public. The notes were issued in a single class. WMECO Funding applied the proceeds from the sale of the notes to the purchase of certain transition property from WMECO. The certificates were issued in a single class with a maturity and other terms identical to the notes. See "Financing Program - 2001 Financings." WMECO is in the process of finalizing its 2001 annual transition cost reconciliation which is expected to be filed with the DTE on or about March 29, 2002. This filing reconciles the recovery of stranded generation costs for calendar year 2001. Also included in this filing will be the sales proceeds from WMECO's portion of Millstone, the impact of securitization and an approximate $13 million benefit to ratepayers from WMECO's nuclear performance-based ratemaking process. The inclusion of these items as part of the reconciliation filing allows WMECO to accelerate the recovery of total stranded generation assets. Management anticipates a formal hearing in 2002 regarding this filing after a period of discovery by the DTE and other intervenors. NEW HAMPSHIRE RATES AND RESTRUCTURING On May 1, 2001, PSNH became the last of NU's three electric operating subsidiaries to implement industry restructuring. On that date, the Settlement Agreement was implemented and all of PSNH's approximately 440,000 retail electric customers were allowed to begin choosing their electric suppliers. They also received an overall reduction of more than 10 percent in their bills, in addition to the five percent reduction they received on October 1, 2000. The implementation of restructuring followed a ruling by the New Hampshire Supreme Court in January 2001 upholding the NHPUC's final restructuring order and the sale of $525 million of PSNH rate reduction bonds on April 25, 2001. In June 2001, the U.S. Supreme Court refused to hear an appeal of the New Hampshire Supreme Court's decision. The stranded cost recovery charge (SCRC) varies by customer class. Under the terms of the Settlement Agreement, the SCRC cannot exceed an average rate of 3.4 cents per kilowatt-hour. This charge recovers principal and interest on rate reduction bonds, nuclear decommissioning costs, mandated payments to small power producers and so-called Part 3 stranded costs. PSNH had approximately $432.5 million of Part 3 stranded costs as of December 31, 2001, down from $464.8 million when competition began on May 1, 2001. Part 3 stranded costs consist primarily of costs deferred under PSNH's fuel and purchased power adjustment clause (FPPAC), deferred independent power producer (IPP) costs, acquisition premium, future contract obligations to the four regional Yankee nuclear companies, and a portion of the over-market value of Millstone 3. On May 22, 2001, the state's 1996 and 2000 electric industry restructuring laws were modified to forbid PSNH from selling its fossil and hydro plants until at least 33 months after restructuring takes effect, or February 1, 2004. The revisions also fixed the charges retail customers will pay PSNH for electric energy supply, or transition service. If PSNH's costs to serve its load are not fully collected through rates, costs will be deferred and recovered, subject to NHPUC prudence review, as Part 3 stranded costs. PSNH and NAEC have entered into two contracts under which PSNH is obligated to purchase NAEC's 35.98 percent ownership of the capacity and output of Seabrook (Seabrook Power Contracts). The 2001 amended restructuring bill requires the NHPUC to complete the sale of NAEC's share of Seabrook in an expeditious manner. The sale is expected to be consummated in late 2002. NAEC's proceeds will be used to repay all $90 million of NAEC's outstanding debt and return all of NAEC's equity, which totaled $35 million as of December 31, 2001, to NU. The sale of NAEC's share of Seabrook will terminate the Seabrook Power Contracts, and any net proceeds from the sale will be used to reduce PSNH's stranded costs. See "Connecticut Rates and Restructuring" for information on the sale of Seabrook. On April 19, 2000, when the NHPUC approved the Settlement Agreement, it found the FPPAC treatment proposed in the settlement to be reasonable with recovery of the outstanding FPPAC deferral to be allowed through Part 3 stranded costs. On July 27, 2001, PSNH filed testimony and exhibits substantiating its claim to recover all of its FPPAC costs (approximately $209 million) from August 2, 1999 through April 30, 2001 when the FPPAC was terminated pursuant to the Settlement Agreement. The extension of the Seabrook refueling outage and the repairs being made to Newington Station contributed to an increase in the FPPAC underrecovery. Hearings at the NHPUC have not been scheduled but are expected to be held during the spring of 2002. PSNH believes it will fully recover these costs. On May 31, 2000, the New Hampshire Legislature passed Senate Bill 472 which permits the issuance of up to $130 million in rate reduction bonds to finance the buy down or buy out of certain rate orders with six wood-fired small power producers and one waste-to-energy plant. Renegotiation of these NHPUC rate orders would permit PSNH to retain up to 20 percent of the savings generated. House Bill 489, signed into law on May 22, 2001, provides that PSNH will be entitled to retain a fixed 20 percent of any savings obtained from renegotiated power purchase obligations. The bill became effective upon the Governor's signature on May 22, 2001. On April 19, 2001, PSNH made filings with the NHPUC concerning agreements that would reduce the costs of purchases from three of the six wood-fired plants. The NHPUC approved two of the proffered agreements and PSNH subsequently closed those transactions. One of the transactions was financed through the issuance of $50 million in additional rate reduction bonds on January 30, 2002. The third restructured arrangement will not go forward as currently structured and PSNH has requested that the related NHPUC docket be closed. COMPETITIVE SYSTEM BUSINESSES NU is engaged in a variety of competitive businesses. They are grouped essentially into two separate and distinct business activities: the competitive energy business and the telecommunications business. Select Energy is the lead competitive energy business within NU. Select Energy is an integrated energy business that buys, sells, markets and trades electricity, gas and oil and energy-related products and services. Under the umbrella of the Select Energy brand, Select Energy, collectively with its affiliated competitive energy businesses, provides a wide range of energy products and energy services. These affiliated competitive energy companies include SESI, NGC, HWP, NGS, SENY and Select Energy Portland Pipeline, Inc. (SEPPI) and their subsidiaries. With the exception of SESI, the competitive businesses operate primarily in the Northeast region of the United States. Collectively, the competitive businesses generated over $3 billion in revenue during 2001. NGC is the competitive generating subsidiary of NU and a major provider of pumped storage and conventional hydroelectric power in the northeastern United States. NGC owns and operates a portfolio of approximately 1,289 megawatts of generating assets in New England. The generation facilities owned by NGC were acquired at auction from CL&P and WMECO. NGC's portfolio consists of seven hydro facilities along the Housatonic River System (123 MW), the three facilities comprising the Eastern Connecticut System, including one gas turbine (27 MW), all located in Connecticut, and the Northfield Mountain pumped storage station (1,080 MW) and the Cabot and Turners Fall No. 1 hydroelectric stations (59 MW) located in Massachusetts. NGC sells all its generation output to Select Energy, which in turn markets it to customers. Select Energy's payments to NGC are guaranteed by NU. NU's vision is to continue to strengthen its position as one of the major energy providers in the northeastern United States. The deregulated energy business is a core focus of NU. NGC performs functions that are critical to NU's strategy on both the wholesale and retail levels by providing access to electric generation within the NU system and thus limiting the exposure of Select Energy to the risk of energy price fluctuations. ENERGY-RELATED PRODUCTS AND SERVICES AND GAS INVESTMENTS Select Energy sells multiple energy products including electricity, natural gas and oil to wholesale and retail customers in the northeastern United States. Select Energy procures and delivers energy and capacity required to serve its electric, gas and oil customers. Select Energy is the largest wholesale and retail electric energy marketer in New England as measured by MW load. In order to support and complement its growing wholesale and retail business, Select Energy contracted in December of 1999 with NGC to purchase and market all of NGC's 1,289 MWs for a 6-year period. In addition, during 2001 Select Energy purchased approximately 190 MW of coal and hydroelectric generating output from its affiliate, Holyoke Water Power Company (HWP), and more than 3,500 MW of electrical supply from various New England generating facilities on a long-term basis. Select Energy also utilizes generation failure insurance, options and energy futures to hedge its supply requirements. Moreover, Select Energy markets natural gas and develops and markets energy-related products and services. It offers energy management consulting and construction services through its affiliate, SESI, discussed more fully below. Select Energy and its integrated competitive energy business affiliates had aggregate revenues of approximately $3 billion in 2001 as compared to approximately $1.9 billion in 2000 and contributed $5 million to consolidated earnings before extraordinary items in 2001, as compared to earnings of approximately $13.6 million in 2000. Select Energy is licensed to provide retail electric supply in Connecticut, Delaware, Maryland, New Jersey, Maine, Pennsylvania, Virginia, New York, Massachusetts, Rhode Island, and New Hampshire. Within these states, Select Energy is currently registered with approximately 36 electric distribution companies and 55 gas distribution companies to provide retail services. Select Energy's goal is to be the regional leader in providing electric service to those Northeast markets opened to retail competition. In 2001, Select Energy supplied more than 5,000 MWs of standard offer and default service load, making it the largest provider of standard offer service in the Northeast. Revenues from these services comprise in the aggregate approximately 93 percent of Select Energy's 2001 revenues. Select Energy's retail business has contracted with approximately 14,000 electric, gas and energy-related products and service customers within the Northeastern region, most of which are medium and large industrial, commercial and governmental customers. On January 1, 2000, Select Energy began serving one half of CL&P's standard offer load for a four-year period at fixed prices. This equates to approximately 2,000 MW annually for each of the four contract years. Approximately 22 percent of Select Energy's 2001 competitive energy revenues came from CL&P's supply contract. Select Energy has entered into purchase contracts with other energy providers to supply or hedge essentially all of the standard offer requirement, including its contracts with NGC, the purchase of 850 MW of output from the Millstone and Seabrook nuclear units through 2001 and other resources in the energy marketplace. The nuclear contracts that expired in 2001 have been replaced with other energy supply contracts that place Select Energy in a stronger position since they are not tied to specific generation units. Select Energy's profits from its wholesale electric sales in 2001 were reduced due to CL&P's supply contract. During 2000 and 2001, the energy markets were very volatile. This period was marked by extremely high energy prices beginning by the end of the first quarter of 2001 and continuing into the latter part of the year. To reduce risk, Select Energy has already procured almost 100 percent of the projected on-peak and the vast majority of the off-peak electricity requirements to serve the CL&P standard offer service load. In addition, management continues to work with state regulators to increase CL&P's standard offer service price to make it more competitive with alternative energy suppliers. If such relief is not granted, this contract may adversely affect Select Energy's earnings in 2002 and 2003. See "Rates and Electric Industry Restructuring - Connecticut Rates and Restructuring." Select Energy has also entered into contracts with various retail customers to provide energy services at fixed rates. Under these retail contracts, Select Energy has the option to have the host utility provide energy services and is obligated to compensate the customer as defined in the contracts for differences (CFD Payments) to the extent the host utility's rates exceed the contracted rates. For the 12 months ended December 31, 2001, the CFD Payment obligations for 2001 totaled approximately $30 million. As the energy market prices decreased from the end of the first quarter of 2001 through the end of 2001, Select Energy re-established and re-enrolled many of the CFD customers, as provided for under the contracts, and secured the associated supply at reasonable prices, thereby mitigating the effects of many of the future CFD Payments. Policies and procedures have been established to manage these exposures, including the use of risk management instruments. In addition, beginning in January 2000, Select Energy assumed responsibility for serving approximately 500 MW of fixed price market-based wholesale contracts throughout New England with electric energy supply that was previously provided by CL&P and WMECO. In addition to the CFD contracts, as of December 31, 2001, Select Energy had contracts with high volume retail electric customers in states throughout the Northeast with primarily one-year terms. These contracts represent approximately 325 MW of load at about 9,000 service locations and include predominantly commercial, institutional, industrial and governmental accounts. This retail load establishes Select Energy among the largest competitive retail suppliers in New England as measured by MW load. No single retail customer accounts for more than ten percent of Select Energy's expected retail revenues. The energy marketing business is intensely competitive. There are many large energy companies bidding for business in the increasingly restructured New England market. In 2000 and early 2001, the sharp increases in the cost of power supply caused by the extreme increases in oil and gas fuel costs, among other things, during the early part of the year provided significant challenges for Select Energy. However, as energy prices began to decrease at the end of the first quarter of 2001, Select Energy was presented with some offsetting opportunities. In 2001, Select Energy increased its revenue by about 55 percent over the 2000 revenue level, reporting $2.8 billion in 2001 as compared with $1.8 billion in 2000 due to the renewal of existing contracts and the addition of new customers. Disputes with respect to interpretation and implementation of the New England Power Pool (NEPOOL) market rules have arisen with respect to various competitive product markets. In certain cases, Select Energy and the NU operating companies stand to gain if such disputes can be favorably resolved. In other cases, Select Energy and the NU operating companies could incur additional costs as a result of resolution of the disputes. These disputes are in various stages of resolution through regulatory and judicial review. It is too early to ascertain the level of potential gain or loss that may result upon resolution of these issues. For further information on these disputes, see "Item 3. Legal Proceedings." During 2001, Select Energy's competitive natural gas business (wholesale and retail) produced revenues of approximately $200 million, a decrease from 2000 revenues of approximately $221 million. This decrease was due to changes in gas prices and decreased volume. As of December 31, 2001, Select Energy had contracts with approximately 5,300 retail gas customers, primarily located in Connecticut, Massachusetts and Pennsylvania. These contracts generally have one-year terms and include primarily commercial, institutional, industrial and governmental accounts. No single retail gas customer accounts for more than five percent of Select Energy's expected retail gas revenues. In 2001, Select Energy's retail gas revenues were approximately $152 million representing approximately a 124 percent increase compared to 2000. During 2001, Select Energy increased its energy commodity trading abilities. In order to better serve and supply the Northeast energy markets, Select Energy expanded its business lines to include wholesale, retail, energy products and services and trading. Additional experienced energy traders were added and a reorganization of reporting, policy and procedure development and oversight was implemented. While trading of energy commodities entails significant risk, it is an essential and integral part of being a major energy provider. The trading segment of the business can buy, sell, hold or trade any energy futures, options, third party or counter-party positions for energy commodities. The energy trading business also includes entering into associated risk management products, including derivatives, as part of managing the exposure and risk of energy commodity trading. NU provides credit assurance in the form of guarantees and letters of credit for the financial performance obligations of certain of its competitive energy subsidiaries, including Select Energy. NU currently has authorization from the SEC to provide up to $500 million of guarantees, and has applied for authority to increase this amount to $750 million. As of December 31, 2001, NU had provided approximately $268.2 million of such guarantees and $45 million of letters of credit. In addition, NU's "aggregate investment" in Select Energy and its other energy service companies (but not including NGC, HWP or SESI) (which is inclusive of most such credit assurances) is limited by SEC rule to 15 percent of NU's most recent quarterly consolidated capitalization. In light of the increasing size of the energy marketing and trading businesses, NU has applied for authority to exempt Select Energy and SENY from this limitation. ELECTRIC GENERATION AND SERVICES NGC, NU's competitive business affiliate formed in 1999 to acquire generation facilities, currently sells all of its energy and capacity to its affiliate, Select Energy. Select Energy's performance under its contract with NGC is guaranteed by NU. In March 2000, NGC acquired 1,289 MW of hydroelectric and pumped storage generating assets in Connecticut and Massachusetts from CL&P and WMECO. NGC's contract with Select Energy extends through December 2005. About 85 percent of NGC's revenues from this contract (including all of the revenues from Northfield Mountain) are in the form of predetermined, fixed monthly payments based on the capacity of specified facilities. The remaining 15 percent of the revenues are in the form of monthly payments at predetermined rates per unit of actual energy output. NGC currently derives approximately 80 percent to 85 percent of its revenues from Northfield Mountain. NGC plans to renew the agreement with Select Energy after 2005. If NGC's agreement with Select Energy were to terminate, however, NGC's plan would be to aggressively market its power at times of peak usage and maximize revenues from the quick-start and reserve capabilities of its pumped storage facilities. NGC plans to pursue growth opportunities in the northeastern United States through acquisition of existing power plants and the development of new plants; however, its ability to do so is limited by capital and regulatory constraints. HWP is another part of the competitive energy businesses. Select Energy buys and manages the entire generation output from HWP. This generation consisted of about 190 MW until December 13, 2001, when HWP sold 43.6 MW of its hydroelectric generation and its retail electric distribution business to the City of Holyoke's Gas and Electric Department for approximately $17.5 million. HWP is selling all of its capacity and output to Select Energy through December 2002, with annual or longer contract renewals available thereafter. NGS was formed in 1999 to provide a full range of integrated energy- related services to owners of generation facilities and the industrial market in the Northeast. NGS designs, builds, manages, operates, maintains and supports electric power generating equipment, facilities and associated transmission and distribution equipment and provides turnkey management and operation services to owners of electric generation facilities. NGC and HWP have contracted with NGS to operate and maintain all of their generating plants. Through its wholly-owned subsidiary, Boulos, NGS provides electrical construction and contracting services. These services focus on high and medium voltage installations and upgrades and substation and switchyard construction. NGS's industrial services include maintenance, permitting, environmental and specialized electrical testing services. NGS also provides consulting services to these customers, including engineering and design, construction management, asset development, due diligence reviews and environmental regulatory compliance and permitting services. During 2001, NGS's revenues were approximately $112 million and are forecast to grow by approximately 10 percent in 2002. This anticipated growth is expected to be driven by NGS's increased geographical scope, an acquisition and additional contracts with both new and repeat customers. ENERGY MANAGEMENT SERVICES As part of the Select Energy portfolio of products and services, SESI markets energy efficiency and design solutions to customers. In general, SESI contracts to reduce its customers' energy costs, improve the efficiency and reliability of their energy-consuming equipment, and conserve energy and other resources. SESI's engineering, construction management and financing assistance services have been directed primarily to governmental and institutional markets and utilities in the eastern United States. SESI's subsidiary, Select Energy Contracting, Inc. (SECI), provides service contracts and mechanical and electrical contracting, primarily directed to energy systems in commercial markets. In competitive procurements by the U.S. Departments of Defense and Energy and the General Services Administration, SESI has been selected as an "Energy Saving Performance Contractor" (ESPC) for all fifty states and overseas facilities. During 2000 and 2001, SESI became one of the major providers of design, construction, financing and long-term operation and maintenance of energy-efficient and environmentally clean systems to replace older infrastructure. SESI has recently installed the largest fuel cell- based energy plant in the United States (at a state school in Connecticut) and is building the new stand-alone energy plant at Bradley International Airport in Connecticut. These plants provide electricity, heat and cooling. SESI is under contract to operate and maintain the plants for at least 20 years. In 2001, federal ESPC work constituted ten percent of SESI's revenues, which were approximately $102 million (an increase of 22 percent over 2000). GAS INVESTMENTS SEPPI was formed in March 1999 to hold a five percent partnership interest in the Portland Natural Gas Transmission System (PNGTS). Effective June 28, 2001, SEPPI sold its five percent interest to three of the current partners of PNGTS for aggregate consideration of $3.27 million. TELECOMMUNICATIONS Mode 1 was established in 1996 to participate in a wide range of telecommunications activities both within and outside New England. Mode 1 is a licensed competitive local exchange carrier authorized to provide local phone service within the state of Connecticut. Mode 1 provides telecommunication network services at the retail and wholesale levels, primarily dark fiber. It has built high speed fiberoptic connectivity to secondary and tertiary markets within cities such as Hartford and serves the City of Hartford's schools and libraries with an optical network. NU has invested approximately $21 million in Mode 1 since it was established, which investment was principally used to fund Mode 1's investment in NEON Communications, Inc., a wholesale telecommunication infrastructure provider of dark and light fiber-optic services along the Atlantic seaboard (NEON). Mode 1 is the largest equity investor in NEON and currently owns approximately 19.3 percent of the common shares of NEON. On June 15, 2001, NEON and Mode 1 entered into a purchase agreement pursuant to which Mode 1 purchased from NEON an 18 percent subordinated convertible note due 2008 in the principal amount of $15 million (Note). Mode 1 may convert the Note at any time into common stock of NEON at a conversion price of $6 per share, or 2.5 million shares, subject to certain anti-dilution provisions. The interest payments under the Note may be paid in cash, shares of common stock or additional 18 percent subordinated convertible notes, at the option of NEON. To date, NEON has failed to make any scheduled interest payments on the Note. NEON has announced that as a result of its evaluation of strategic alternatives, discussions concerning a restructuring of its outstanding debt are underway. NEON is constructing a fiber optic communications network through New England, New York, Philadelphia and Washington, D.C., utilizing a portion of the NU system companies' transmission and distribution facilities. An officer and trustee of NU and an officer of NUSCO are members of the Board of Directors of NEON. In addition, NU is a party to an agreement with Central Maine Power Company (CMP), an owner of approximately 19.2 percent of NEON's common shares, fully diluted, wherein NU and CMP each agree that, as long as NU owns at least 10 percent of the outstanding common stock of NEON, fully diluted, and the cumulative holdings of NU and CMP are at least 33 1/3 percent, fully diluted, neither NU nor CMP will take action without the other which will allow NEON to merge, consolidate, liquidate or sell, lease or transfer substantially all of its assets or commence or acquiesce to any action or proceeding under any bankruptcy laws. In September 2000, Consolidated Edison Communications, Inc. (CECI), a subsidiary of Con Edison, and another, unaffiliated company, Exelon Ventures (Exelon), acquired 10.75 and 9.25 percent, respectively, of NEON's common shares in exchange for contributions to NEON by each company of telecommunications assets in kind and cash. Mode 1 is party to two reciprocal agreements which commit it to vote for CMP's, CECI's and Exelon's nominees for director of NEON and such companies agree to support Mode 1's nominees. Under these arrangements, Mode 1 can presently designate two directors and CMP, CECI and Exelon can designate two, one and one director(s), respectively. FINANCING PROGRAM 2001 FINANCINGS On February 28, 2001, NU issued $263 million of floating rate senior notes, which replaced a $263 million term-loan credit facility which was used to finance the Yankee acquisition. The senior notes bear an effective interest cost of 3.48 percent at December 31, 2001 and mature in February 2003. On March 30, 2001, CL&P completed the sale of $1.44 billion of RRCs under a November 2000 DPUC ruling approving the securitization of up to $1.55 billion of CL&P's stranded costs (including costs associated with generation assets, purchase power agreement buy outs/buy downs and nuclear generation assets). The average cost of the RRCs, which were issued in several series that vary in maturity from approximately two to ten years, is 5.95 percent. Proceeds from this issue were used to buy out and buy down purchase power agreements, retire debt and cover transaction costs. On April 25, 2001, PSNH completed the sale of $525 million of rate reduction bonds (RRBs), subsequent to a NHPUC ruling approving the securitization of up to $670 million of PSNH's stranded costs. The average cost of the bonds, which were issued in several series that vary in maturity from approximately two to twelve years, is 5.9 percent. Proceeds from this issue were used to buy down the Seabrook Power Contracts, retire preferred stock, return capital to NU and cover fees and interest and other reserves. On May 17, 2001, WMECO completed the sale of $155 million of RRCs, subsequent to a DTE ruling approving the securitization of up to $155 million of WMECO's stranded costs. The cost of the RRCs, which are expected to mature in twelve years, is 6.53 percent. The proceeds from this issue were primarily used to reduce WMECO's capitalization and to buy down and buy out two purchase power contracts. All RRBs and RRCs are payable solely from collections from customers of PSNH, CL&P and WMECO, respectively, and are non-recourse to the companies. On July 11, 2001, CL&P renewed its accounts receivable securitization credit line and extended its termination date to July 10, 2002. In addition, the credit line capacity was reduced from $200 million to $100 million to better reflect CL&P's short-term borrowing requirements. On October 10, 2001, CL&P entered into a replacement standby bond purchase agreement supporting the Series 1996A pollution control bonds. The $62.9 million, 364-day agreement replaces a similar agreement and expires on October 22, 2002. The original transaction was approved by the DPUC in 1997. On October 18, 2001, NGC sold $440 million of senior secured bonds and used the proceeds primarily to repay $346.5 million of bank debt and to return $75 million of equity to NU. The bonds were issued in two series: $120 million of Series A amortizing bonds with an average life of 2.4 years, a coupon of 4.998 percent and a final maturity of October 15, 2005; and $320 million of Series B amortizing bonds with an average life of 18.9 years, a coupon of 8.812 percent and a final maturity of October 15, 2026. On November 9, 2001, NAEC entered into an unsecured $90 million, 364-day credit facility. The new facility provided for a one-time draw at closing of $90 million, which replaced a $200 million unsecured 364-day facility that expired on November 9, 2001 (the original facility had an outstanding balance of $90 million). The new facility has a provision that will require the company to pay down 100 percent of the remaining balance within two days of the sale of the Seabrook nuclear power plant. The expiration date for this facility is November 8, 2002. On November 16, 2001, CL&P, WMECO, PSNH and Yankee Gas entered into a new unsecured 364-day revolving credit facility for $350 million, replacing a $250 million facility for CL&P and WMECO and a $60 million facility for Yankee Gas. CL&P may draw up to $150 million, and WMECO, PSNH and Yankee Gas may draw up to $100 million each, subject to the $350 million maximum for the entire facility. Unless extended, the credit facility will expire on November 15, 2002. Also on November 16, 2001, NU entered into a new unsecured 364-day revolving credit facility for $300 million, replacing a similar $400 million facility that expired on November 16, 2001. The facility supports the working capital needs of NU and its unregulated subsidiaries. The new facility provides a total commitment of $300 million which is available subject to two over-lapping sub-limits. First, subject to the notional amount of any letters of credit outstanding, amounts up to $300 million are available for advances. Second, subject to the advances outstanding, letters of credit may be issued in notional amounts up to $200 million. The agreement provides for letters of credit to be issued in the name of NU or any of its subsidiaries. Unless extended, the credit facility will expire on November 15, 2002. On December 19, 2001, PSNH issued $287.5 million of tax-exempt bonds. The new issuance consists of three series: the 2001 Tax-Exempt Series A and 2001 Tax-Exempt Series B Auction Rate Pollution Control Revenue Bonds (PCRBs) and the 2001 Tax-Exempt Series C 5.45 percent Fixed Rate PCRBs. The proceeds of this issuance were used to retire the 1991 Tax Exempt Series A, Series B and Series C PCRBs, which were used to finance PSNH's share of costs relating to the construction of certain pollution control, sewage and solid waste disposal facilities. The variable interest rate for both the Series A and B bonds was 1.55 percent as of December 31, 2001. In 2001, NU retired $1.3 billion of debt and preferred stock with the RRB and RRC issuance proceeds and the proceeds from the sale of the Millstone power plant. NU paid common dividends totaling $60.9 million in 2001, compared to $57.4 million paid in 2000. The increase was a result of NU paying a $0.45 per share quarterly common dividend for 2001, as compared to payment of a $0.40 per share dividend in 2000. Total NU system debt, including short-term and capitalized lease obligations, was $2.7 billion as of December 31, 2001, compared with $3.8 billion as of December 31, 2000. The decrease was primarily due to the retirement of debt with proceeds from the issuances of RRBs and RRCs as well as from the sale of the Millstone power plant. For more information regarding NU system financing, see "Notes to Consolidated Statements of Capitalization" in NU's financial statements, other footnotes related to long- term debt, short-term debt and the sale of accounts receivables, as applicable, in the notes to NU's, CL&P's, PSNH's, WMECO's, and NGC's financial statements and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." 2002 FINANCING REQUIREMENTS The NU system's aggregate capital requirements for 2002 are approximately as follows: CL&P PSNH WMECO NAEC Yankee Other NU Gas System (Millions) Construction $244 $110 $25 $ 5 $103 $106 $593 Nuclear Fuel 0 0 0 8 0 0 8 Maturities 0 0 0 0 0 0 0 Cash Sinking Funds* 0 0 0 0 1 50 51 ---- ---- --- --- ---- ---- ---- Total $244 $110 $25 $13 $104 $156 $652 ==== ==== === === ==== ==== ==== *CL&P, WMECO and PSNH have sinking funds associated with RRCs and RRBs that are not included in the capital requirements subtotal. All interest and principal payments for these bonds are collected through a non-bypassable charge assessed to customers and do not represent additional capital requirements. For further information on the NU system's 2002 financing requirements, see "Notes to Consolidated Statements of Capitalization" in NU's financial statements, "Long-Term Debt" in the notes to CL&P's, PSNH's, WMECO's and NGC's financial statements and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." 2002 FINANCING PLANS On January 30, 2002, PSNH sold $50 million of RRBs, the proceeds of which were used to pay the costs associated with the buy out of high-cost power contracts with wood-fired generating plants. The bonds are scheduled to mature in 2008. In April 2002, NU expects to issue $263 million in long-term debt to replace its $263 million senior two-year note, which matures in 2003. NU has also filed an application with the SEC seeking authorization to issue up to $600 million of long-term debt through the period ending June 30, 2005, including the $263 million proposed issuance of notes. Yankee Gas is considering a number of capital projects including construction of a liquefied natural gas storage terminal in Waterbury, Connecticut that could cost in excess of $50 million. Yankee Gas may issue up to $100 million of long-term debt in 2002 to finance its capital needs and may require additional debt issuances in later years, depending on the extent of its capital program. See "Financing Program - Construction and Capital Improvement Program." CL&P has announced plans for the construction of various transmission facilities. The projects require numerous federal and state regulatory approvals. If approved, construction of these facilities would require external financing. See "Financing Program - Construction and Capital Improvement Program." FINANCING LIMITATIONS Many of the NU system companies' charters and borrowing facilities contain financial limitations that must be satisfied before borrowings can be made and for outstanding borrowings to remain outstanding. Under their current revolving credit facility agreement, CL&P, WMECO, PSNH, and Yankee Gas are allowed to maintain a ratio of debt to total capitalization (leverage ratio) of no more than 65 percent. At December 31, 2001, CL&P's, WMECO's, PSNH's, and Yankee Gas's leverage ratios were 49 percent, 43 percent, 59 percent and 29 percent, respectively. This agreement also requires the companies to maintain 12-month earnings before interest and taxes to interest expense ratio (interest coverage ratio) of at least 2.25 to 1.0. At December 31, 2001, CL&P's, WMECO's, PSNH's and Yankee Gas' interest coverage ratios were 4.22 to 1, 3.38 to 1, 4.98 to 1 and 3.88 to 1, respectively. The ratios do not include rate reduction bonds. NU is allowed, under its revolving short-term credit agreement facility, to maintain a debt to total capitalization (leverage ratio) of no more than 66 percent. At December 31, 2001, NU's leverage ratio was 58 percent. In addition, NU is required to maintain a 12-month consolidated interest coverage ratio of at least 2.25 to 1.0. At December 31, 2001, NU's consolidated interest coverage ratio was 3.08 to 1.0. The ratios do not include RRBs and RRCs. NAEC is party to a 364-day term credit agreement which provides that outstanding advances on the credit thereunder can be terminated or accelerated if NAEC does not maintain specified minimum ratios of common equity to capitalization (as defined in the agreement). For NAEC, the minimum common equity ratio under its term loan credit agreement is 25 percent; at December 31, 2001, NAEC's common equity ratio was 27.9 percent. The agreement also requires a 12-month adjusted net income to interest expense ratio (interest coverage ratio) of not less than 1.50 to 1.00. At December 31, 2001, the ratio for NAEC was 3.20 to 1.00. The credit agreement also provides for mandatory prepayment of 100 percent of the aggregate principal amount of advances outstanding within two days of the sale of the Seabrook nuclear facility. The 364-day term credit agreement also limits NAEC's other unsecured debt to $60 million. NAEC had no such debt outstanding at December 31, 2001. The amount of short-term debt that may be incurred by NU, CL&P, PSNH, WMECO, NAEC, Northeast Nuclear Energy Company (NNECO), Yankee and Yankee Gas is also subject to periodic approval by the SEC under the 1935 Act. PSNH's and NAEC's short-term debt in excess of 10 percent of net fixed plant is also regulated by the NHPUC. The following table shows the amount of short-term borrowings authorized by the SEC or the NHPUC for each company, as the case may be, as of December 31, 2001, and the amounts of outstanding short-term debt of those companies at the end of 2001 and as of March 1, 2002: Maximum Authorized Outstanding Short-Term Debt Short-Term Debt (1) December 31, 2001 March 1, 2002 (Millions) NU $400 $ 40.0 $ 60.0 CL&P 375 0 0 PSNH (2) 225 83.5 11.2 WMECO 250 59.2 62.7 HWP (3) N/A 9.6 9.6 NAEC (4) 260 90.0 90.0 NNECO 75 0 0 Yankee 50 0 0 Yankee Gas 100 52.5 41.1 Select N/A 155.5 157.5 Energy (3) NGS (3) N/A 12.5 11.7 SESI (3) N/A 14.5 11.7 RRR (3) N/A 25.3 28.5 Other N/A 9.8 8.0 ------ ------ Total $552.4 $492.0 ====== ====== (1) These columns include borrowings of various NU system companies from NU and other NU system companies. Total NU system short-term indebtedness to unaffiliated lenders was $290.5 million at December 31, 2001 and $200 million at March 1, 2002. (2) Under applicable NHPUC provisions, PSNH can incur short-term debt up to $100 million. (3) The SEC limits, as indicated, the following companies' borrowings from the NU system money pool (but not borrowings from either parent companies or non-affiliates): HWP ($5 million); Select Energy ($200 million); NGS ($20 million); SESI ($20 million) and the Rocky River Realty Company (RRR) ($30 million). NU, NGC and Mode 1 are not authorized to participate in the money pool. (4) Under applicable NHPUC regulations, NAEC can incur short term debt up to 10 percent of net fixed plant or such other amount as approved by the NHPUC. NAEC currently has authorization from the NHPUC to issue up to $260 million of short-term debt. The supplemental indentures under which NU issued $175 million in principal amount of 8.58 percent amortizing notes in December 1991 and $75 million in principal amount of 8.38 percent amortizing notes in March 1992 contain restrictions on dispositions of certain NU system companies' stock, limitations of liens on NU assets and restrictions on distributions on and acquisitions of NU stock. Under these provisions, NU, CL&P, PSNH and WMECO may not dispose of voting stock of CL&P, PSNH or WMECO other than to NU or another NU system company, except that CL&P may sell voting stock for cash to third persons if so ordered by a regulatory agency so long as the amount sold is not more than 19 percent of CL&P's voting stock after the sale. The restrictions also generally prohibit NU from pledging voting stock of CL&P, PSNH or WMECO or granting liens on its other assets in amounts greater than five percent of the total common equity of NU. Many of the NU system companies' credit agreements have similar restrictions. As of December 31, 2001, no NU debt was secured by liens on NU assets. Furthermore, NU may not declare or make distributions on its capital stock, acquire its capital stock (or rights thereto), or permit an NU system company to do the same, at times when there is an event of default existing under the supplemental indentures under which the amortizing notes were issued. CL&P's charter contains preferred stock provisions restricting the amount of additional unsecured debt it may incur. As of December 31, 2001, the amount of additional unsecured debt it could incur was $535 million. The indentures securing the outstanding first mortgage bonds of CL&P provide that additional bonds may not be issued, except for certain refunding purposes, unless earnings are at least twice the pro forma annual interest charges on outstanding bonds, and certain prior lien obligations and bonds to be issued. The preferred stock provisions of CL&P's charter also prohibit the issuance of additional preferred stock (except for refinancing purposes) unless income before interest charges (as defined and after income taxes and depreciation) is at least 1.5 times the pro forma annual interest charges on indebtedness and the annual dividend requirements on preferred stock that will be outstanding after the additional stock is issued. CL&P's earnings currently permit it to meet those earnings tests. Certain consolidated subsidiaries have dividend restrictions imposed by their long-term debt agreements. These restrictions also limit the amount of retained earnings available for NU common dividends. At December 31, 2001, retained earnings available for the payment of dividends totaled $267.5 million. The Federal Power Act limits the payment of dividends by PSNH, NAEC, CL&P, and WMECO to retained earnings. At December 31, 2001, retained earnings for these companies were $ 176.4 million, -$1 million, $286.9 million, and $55.4 million, respectively. New Hampshire statutes also limit the payment of dividends by PSNH and NAEC to retained earnings. CL&P's first-mortgage bond indenture limits dividend payments to an amount equal to (i) retained earnings accumulated after December 31, 1966; plus (ii) retained earnings accumulated prior to January 1, 1967, not exceeding $13.5 million; plus (iii) any additional amounts authorized by the SEC. Applicable merger accounting rules required that upon acquisition by NU, Yankee's and its subsidiaries' retained earnings were reclassified as capital surplus. Also, the merger premium NU paid to acquire Yankee was allocated among Yankee and its subsidiaries and "pushed down" to their balance sheets. Under accounting conventions in existence at the time of the merger, the majority of the merger premium would be amortized over 40 years. In June 2001, the Financial Accounting Standards Board issued a statement that, effective January 1, 2002, no longer requires companies to amortize goodwill as an expense to the income statement. Instead goodwill is required to be evaluated for impairment and any impairments to goodwill would be charged to expense. A study of the impairment of goodwill is underway. It is expected that the effect of the new accounting standard, assuming no write-down for impairment is required, will be an approximately $9 million annual reduction in goodwill amortization expense. Under the 1935 Act, subsidiaries of registered holding companies are only allowed to pay dividends out of retained earnings unless the SEC allows otherwise. The effect of this rule would be to prevent Yankee from paying dividends to NU from any source other than post-merger earnings, as reduced by the merger premium amortization. NU has received permission from the SEC, through June 2002, for Yankee and Yankee Gas to pay dividends (i) out of additional paid-in capital up to the amount of their respective retained earnings just prior to the merger with NU and (ii) out of earnings before the amortization of the merger goodwill (gross earnings) in the case of Yankee Gas and out of distributed earnings in the case of Yankee. To assure that Yankee Gas has sufficient cash to fund operations, Yankee Gas will not pay dividends in excess of 80 percent of gross earnings on a rolling five-year average basis. In no case would dividends be paid by Yankee or Yankee Gas if their common equity to total capitalization ratios were below 35 percent. NU has also received permission from the SEC, through June 2002, for Yankee and Yankee Gas to repurchase their common stock such that their common equity to total capitalization ratios do not fall below 35 percent. NGC bond covenants prevent NGC from making dividend payments unless (i) no default or event of default will occur from doing so, (ii) the debt service reserve account has been sufficiently funded with six months of principal and interest on the outstanding bonds, and (iii) the debt service coverage ratio for the previous four fiscal quarters (or, if shorter, since the bond issuance closing date) and projected debt service coverage ratio for the next eight fiscal quarters is (a) greater than or equal to 1.35 if contracted generating capacity is greater than 75 percent or (b) greater than or equal to 1.70 if contracted generating capacity is less than 75 percent. At December 31, 2001, NGC's contracted generating capacity was greater than 75 percent. NGC expects to meet its debt service coverage ratio requirements under this covenant and to pay dividends in 2002. NU is required under the 1935 Act to maintain its consolidated common equity at a level equal to at least 30 percent of its consolidated capitalization. Following the issuance of RRBs and RRCs by its subsidiaries, NU was temporarily unable to meet this standard because such bonds and certificates, although nonrecourse to the NU system company issuers, are considered to be indebtedness of the companies under generally accepted accounting principles. The SEC had authorized the consolidated common equity ratio of NU to fall below 30 percent through December 31, 2001. NU's consolidated common equity ratio was greater than 30 percent as of December 31, 2001 and is expected to remain above this level in the future. The 30 percent test also applies to NU's electric operating subsidiaries. The SEC had consented to the common equity ratios of CL&P, WMECO and PSNH falling below 30 percent through December 31, 2004. NU provides credit assurance in the form of guarantees and letters of credit for the financial performance obligations of certain of its unregulated subsidiaries. NU currently has authorization from the SEC to provide up to $500 million of such guarantees and has applied for authority to increase this amount to $750 million. As of December 31, 2001, NU had provided approximately $268.2 million and $45 million, respectively, of such guarantees and letters of credit. As of February 20, 2002, NU had provided approximately $320 million and $150 million, respectively, of such guarantees and letters of credit. Certain NU system credit financing agreements have trigger events tied to the credit ratings of certain NU system companies, as discussed below. RRR is a real estate subsidiary that owns NU's Connecticut headquarters site. It has approximately $8 million of debt outstanding that could be affected by a ratings change. If NU, CL&P, PSNH or WMECO ratings fall below a B1 Moody's rating or a B+ Standard & Poor's rating, bondholders would have the right to demand mandatory prepayments. NGC has a debt reserve account related to the $440 million bond issue that can be funded with cash, an NU guarantee or a letter of credit from an acceptable counterparty. The account is currently funded with cash and may be funded with a guarantee from NU only if NU has an investment grade rating by Standard & Poor's and Moody's. NU and its subsidiaries have $650 million of revolving credit agreements with a number of banks. There are no ratings triggers that would result in a default, but lower ratings would increase fees on future borrowings from the credit lines. CONSTRUCTION AND CAPITAL IMPROVEMENT PROGRAM The NU system's construction program expenditures, including allowance for funds used during construction, is estimated to total as much as $593 million in 2002. Of such total amount, approximately $244 million is expected to be expended by CL&P, $110 million by PSNH, $103 million by Yankee Gas, $25 million by WMECO, $5 million by NAEC, $1 million by NGS and up to $105 million by other system entities. This construction program data includes all anticipated costs necessary for committed projects and for those reasonably expected to become committed projects in 2002, regardless of whether the need for the project arises from environmental compliance, reliability requirements, nuclear safety or other causes. The construction program's main focus is maintaining, upgrading and expanding the existing transmission and distribution system and natural gas distribution system. The system expects to evaluate its needs beyond 2002 in light of future developments, such as restructuring, industry consolidation, performance and other events. The $105 million in construction expenditures planned for other system entities in 2002 includes NU's proposed construction of a new direct current transmission line from Norwalk, Connecticut to western Long Island. NU has sought FERC approval to conduct an open season auction and negotiate final contracts for the scheduling rights on the line. The project's final size and cost will be determined after an auction process, which NU plans to complete in 2002. As a result, management cannot determine if all of the construction expenditures planned for 2002 will actually be expended. CL&P has announced plans to invest approximately $520 million by the end of 2006 to construct two new 345,000 volt transmission lines from inland Connecticut to Norwalk, Connecticut and another $40 million to help rebuild an existing 138,000 volt transmission line beneath Long Island Sound. The investment in transmission lines and continued upgrading of the electric distribution system are expected to increase CL&P's net investment in electric plant to between $244 million and $353 million in each of the years 2002 through 2005. All of these projects are in the developmental or governmental approval stage and management cannot yet determine whether the projects will be built as proposed. If current plans are implemented on schedule, NU would likely require additional external financing to construct these projects. If all of the transmission projects are built as proposed, the NU system's net investment in electric transmission would increase to nearly $1.4 billion by the end of 2006. In January 2002, Yankee Gas received approval for a significant expansion of its natural gas distribution system in Connecticut. See "Connecticut Rates and Restructuring" for information on Yankee Gas' DPUC filing and the related decision. In addition to the projects noted above, NU is considering purchasing additional electric generating capacity in the Northeast United States to enhance its competitive energy marketing activities. Management has not committed to purchase any specific generation and at this time cannot estimate the capital requirements of such a purchase should an agreement be reached. REGULATED ELECTRIC OPERATIONS DISTRIBUTION AND SALES CL&P, PSNH and WMECO furnish retail franchise service in 149, 198 and 59 cities and towns in Connecticut, New Hampshire and Massachusetts, respectively. In December 2001, CL&P furnished retail franchise service to approximately 1.2 million customers in Connecticut, PSNH provided retail service to approximately 440,000 customers in New Hampshire and WMECO served approximately 201,000 retail franchise customers in Massachusetts. HWP served 32 retail customers in Holyoke, Massachusetts prior to the sale of certain of its assets in December 2001. The following table shows the sources of 2001 electric franchise retail revenues based on categories of customers (exclusive of HWP): Total NU CL&P PSNH WMECO System ---- ---- ----- -------- Residential 46% 40% 42% 44% Commercial 39% 37% 37% 39% Industrial 13% 22% 20% 16% Other 2% 1% 1% 1% --- --- --- --- Total 100% 100% 100% 100% === === === === The actual changes in retail kWh sales for the last two years and the forecasted retail sales growth estimates for the ten-year period 2001 through 2011 for CL&P, PSNH and WMECO are set forth below: Forecast 2001- 2011 Compound 2000 over 2001 over Rate of 1999 2000 Growth --------- --------- ------------- NU system 0.9% 2.3% 1.3% CL&P 0.4% 2.4% 1.3% PSNH 2.6% 3.9% 1.8% WMECO -0.1% -0.9% 0.7% Consolidated NU retail sales rose by 2.3 percent in 2001, compared with 2000, primarily due to higher heating and cooling requirements. Approximately 0.6 percent of growth in NU total retail sales was due to the ending of the New Hampshire pilot program in November 2000. During the program, sales to the pilot participants were excluded from the retail class totals. When the pilot program ended, sales to these customers were again included in retail totals. Residential electric sales were up 3.0 percent. Commercial sales were up by 5.6 percent for the year and industrial sales decreased by 4.8 percent. Retail sales for CL&P, WMECO and PSNH were up 2.4 percent, down 0.9 percent and up 3.9 percent, respectively. REGIONAL AND SYSTEM COORDINATION The NU system companies and most other New England utilities are parties to an agreement (NEPOOL Agreement), which provides for coordinated planning and operation of the region's generation and transmission facilities. The NEPOOL Agreement was restated and revised as of March 1997 to provide for (i) a pool-wide open access transmission tariff; (ii) the creation of an Independent System Operator (ISO); and (iii) a broader governance structure for NEPOOL and a more open, competitive market structure. Under these new arrangements the ISO, a nonprofit corporation whose board of directors and staff are not controlled by or affiliated with market participants, ensures the reliability of the NEPOOL transmission system, administers the NEPOOL tariff and oversees the efficient and competitive functioning of the regional power market. The NEPOOL tariff provides for nondiscriminatory open access to the regional transmission network at a single rate regardless of transmitting distance for all transactions. The rate is a formula rate, structured to ensure that each transmission provider under the NEPOOL tariff recovers its revenue requirements. In 1999, the NEPOOL Executive Committee filed a comprehensive settlement of all issues set for hearing concerning the NEPOOL transmission tariff. The settlement resolves disputes concerning the calculation of revenue requirements for transmission over NEPOOL facilities and resolves disputes over alleged "double charges" under grandfathered transmission contracts retained by individual transmission providers, including the NU system. The settlement also includes an ROE component which sets the ROE for each individual transmission provider owning NEPOOL transmission facilities with respect to those facilities from March 1, 1997 through at least June 1, 2000, provided no changes to individual network transmission tariff rates are made after December 31, 1999. NU's ROE has been set at 11.75 percent. NU has made no changes to its transmission tariff rates since the settlement was reached; accordingly, its ROE has remained unchanged. As part of the settlement, ISO is required to independently audit the charges in effect for the period June 1997 through May 2000 or direct that such an audit be conducted under its supervision. In June 2000, ISO engaged an independent auditing firm to conduct such an audit. The audit remains ongoing and the results of the audit will be filed at FERC as an informational filing. In December 2000, NU was notified by FERC that it, along with several other companies, would be the subject of a separate FERC industry-wide audit of the accounting related to formula rate transmission tariffs. FERC commenced its audit of NU in February 2001 and an exit conference was held on February 12, 2002. Two agreements determine the manner in which costs and savings are allocated among the NU system electric operating companies. Under an agreement (NUG&T) among CL&P, WMECO and HWP, these companies pool their electric production costs and the costs of their principal transmission facilities. The NUG&T was revised in 1999 to eliminate the generation aspects of the agreement. Final agreement from FERC on this revision was granted in October 2000. Pursuant to the merger agreement between NU and PSNH, these companies and PSNH entered into a 10-year sharing agreement (Sharing Agreement), expiring in June 2002, that provides, among other things, for the allocation of the capability responsibility savings and energy expense savings resulting from a single-system dispatch through NEPOOL. Under the Settlement Agreement between PSNH and the State of New Hampshire, NU filed for and received FERC approval to terminate the Sharing Agreement effective December 31, 2000. Only minor revenue changes are expected in the future as no energy or capacity transactions have taken place under the Sharing Agreement since CL&P and WMECO relinquished their responsibilities to meet customer loads on January 1, 2000. Transmission revenues will be allocated going forward based upon the respective companies' cost of service where these revenues had been split equally between PSNH and the signatories of the NUG&T (CL&P, HWP and WMECO) under the Sharing Agreement. TRANSMISSION ACCESS AND FERC REGULATORY CHANGES Pursuant to FERC Order 888 (issued in April 1996), NU system companies operate their transmission system under an open access, nondiscriminatory transmission tariff. In December 1999, the FERC issued an order calling on all transmission owners to voluntarily join regional transmission organizations (RTOs) in order to boost competition in electric markets (Order 2000). In general, each such organization would be an independent operator over all transmission facilities, and would perform, among other functions, tariff administration, construction planning and reliability management for the particular regional transmission system. On January 16, 2001, NU along with the ISO and five other New England transmission owning utilities (National Grid, USA, The United Illuminating Company, Bangor Hydro-Electric Company, Central Maine Power and Vermont Electric Company) filed a proposal to establish a New England Regional Transmission Organization (NERTO) in compliance with FERC's order. As proposed, NERTO would consist of the ISO and a newly formed for-profit independent transmission company (Northeast ITC). Pursuant to an RTO agreement, both entities would share the minimum required functions of an RTO set forth in the FERC order. ISO would be primarily responsible for short- term reliability functions and Northeast ITC would operate the transmission assets of the participating transmission owners, develop and administer a transmission tariff and engage in transmission planning and expansion activities. FERC ruled in July 2001 that the three existing Northeast pools should merge to form a single RTO. NU has been working with utilities in the three regions to extend the New England Binary RTO model into the Northeast. In January 2002, the New England and New York ISOs proposed to FERC that the two pools combine to form an RTO. The ISOs supported a binary model similar to the New England model proposed in January 2001 to FERC. The ISOs intend to file with FERC the structure of such an RTO by the end of June 2002. NU continues to work with transmission owners in New York and New England to create an independent transmission company within the RTO. Since NEPOOL established competitive wholesale markets in 1999, congestion costs (the cost of higher energy prices within the New England market due to transmission constraints) have grown steadily surpassing $276 million in total by year end 2001. ISO New England made a filing at FERC in March 2000 to implement a congestion management system (CMS) similar to those in use in the New York ISO and Pennsylvania - New Jersey - Maryland Interconnection (PJM). CMS uses locational based pricing to assign costs to regional loads, or zones, within New England. Individual load zones will experience higher or lower congestion costs as the CMS replaces the current practice of distributing and averaging congestion costs across all New England loads. In March 2001, ISO New England and the PJM Interconnection announced their intention to create a standard marked design (SMD) for use in both markets. The SMD will incorporate a congestion management system and will be heavily based on the existing PJM rules. It is expected that the system will be operational in 2003. REGULATED GAS OPERATIONS In March 2000, NU acquired Yankee and Yankee became a wholly owned subsidiary of NU. Yankee is the parent of Yankee Gas, the largest natural gas distribution company in Connecticut. Yankee continues to act as the holding company of Yankee Gas and its two active nonutility subsidiaries, NorConn Properties, Inc. (NorConn), which holds the property and facilities of Yankee and its subsidiaries, and Yankee Energy Financial Services Company, which provides customers with financing for energy equipment installations. Yankee Gas operates the largest natural gas distribution system in Connecticut as measured by number of customers and size of service territory. Total throughput (sales and transportation) for 2001 was 47.5 billion cubic feet. In 2001, total gas operating revenues of $378 million were comprised of the following: 50.3 percent residential; 28.6 percent commercial; 19 percent industrial; and the remaining 2.1 percent other. Yankee Gas provides firm gas sales service to customers who require a continuous gas supply throughout the year, such as residential customers who rely on gas for their heating, hot water and cooking needs. Yankee Gas also provides interruptible gas sales service to certain commercial and industrial customers that have the capability to switch from natural gas to an alternative fuel on short notice. Yankee Gas can interrupt service to these customers during peak demand periods. Yankee Gas offers firm and interruptible transportation services to customers who purchase gas from sources other than Yankee Gas. In addition, Yankee Gas performs gas sales, gas exchanges and capacity releases to marketers to reduce its overall gas expense. Effective November 1, 2001, Yankee Gas brought back in-house the management of its gas supply function. This change will allow Yankee Gas to have more control over its supply/storage portfolio and is expected to create opportunities to reduce gas costs through off-system sales and capacity release transactions. Although Yankee Gas is not subject to FERC jurisdiction, the FERC does regulate the interstate pipelines serving Yankee Gas' service territory. Yankee Gas, therefore, is directly and substantially affected by the FERC's policies and actions. Accordingly, Yankee Gas closely follows and, when appropriate, participates in proceedings before the FERC. Yankee Gas is subject to regulation by the DPUC, which, among other things, has jurisdiction over rates, accounting procedures, certain dispositions of property and plant, mergers and consolidations, issuances of securities, standards of service, management efficiency and construction and operation of distribution, production and storage facilities. For information relating to Yankee Gas DPUC proceedings, see "Rates and Electric Industry Restructuring - Connecticut Rates and Restructuring." For information on the proposed expansion of Yankee Gas' natural gas delivery system in Connecticut, see "Construction and Capital Improvement Program." NUCLEAR GENERATION GENERAL During 2001, certain NU system companies had ownership interests in four nuclear units, Millstone 1, 2 and 3 and Seabrook, and equity interests in four regional nuclear companies (the Yankee Companies) that separately own the Connecticut Yankee nuclear unit (CY), the Maine Yankee nuclear unit (MY), the Vermont Yankee nuclear unit (VY) and the Yankee Rowe nuclear unit (Yankee Rowe). One NU system company operates Seabrook. A different NU system company operated Millstone 2 and 3 until the sale of the units in on March 2001. Yankee Rowe, CY, MY and Millstone 1 have been permanently removed from service and are being decontaminated and decommissioned. On March 31, 2001, CL&P and WMECO consummated the sale of Millstone 1 and 2 to a subsidiary of Dominion, DNCI. CL&P, PSNH, WMECO and certain other of the joint owners collectively sold 93.47 percent of Millstone 3 to DNCI. This sale included all of the respective joint ownership interests of CL&P, PSNH and WMECO in Millstone 3. The NU system received approximately $1.2 billion of cash proceeds from the sale and has or will apply the proceeds to payment of taxes and reductions of debt and equity of CL&P, PSNH and WMECO. As part of the sale, DNCI assumed responsibility for decommissioning Millstone 1 and for the eventual decommissioning of Millstone 2 and 3 when those units cease operations. Before Millstone 1 and 2 were sold to DNCI, CL&P and WMECO owned 100 percent of Millstone 1 and 2 as tenants in common. Their respective ownership interests in each unit were 81 percent and 19 percent. CL&P, PSNH and WMECO had agreements with other New England utilities covering their joint ownership as tenants in common of Millstone 3. CL&P's, PSNH's and WMECO's ownership interests in the unit prior to the sale to Dominion were 52.93, 2.85 and 12.24 percent, respectively. In 1996, one of the joint owners of Millstone 3, the Vermont Electric Generation and Transmission Cooperative, Inc. (VEG&T), filed for bankruptcy. The subsequent liquidation resulted in the offering of VEG&T's 0.35 percent share of Millstone 3 for sale to the joint owners of Millstone 3. None of the non-NU joint owners accepted the offer and CL&P took over responsibility for the costs of that interest. The VEG&T ownership interest in Millstone 3 was included in the sale of the unit to DNCI as part of CL&P's share. The NU companies own 40.04 percent of Seabrook: NAEC has a 35.98 percent ownership interest and CL&P a 4.06 percent ownership interest. For information on the sale of Seabrook, see "Connecticut Rates and Restructuring." CL&P, PSNH, WMECO and other New England electric utilities are the stockholders of the Yankee Companies. Each Yankee Company owns a single nuclear generating unit. The stockholder-sponsors of each Yankee Company are responsible for proportional shares of the operating and decommissioning costs of the respective Yankee Company. They are also entitled to proportional shares of the electrical output of VY, which is the only operating unit of the four Yankee Companies. The relative rights and obligations with respect to the Yankee Companies are approximately proportional to the stockholders' percentage stock holdings, but vary slightly to reflect arrangements under which nonstockholder electric utilities have contractual rights to some of the output of particular units. CL&P's, PSNH's and WMECO's stock ownership percentages in the Yankee Companies are set forth below: CL&P PSNH WMECO NU system ---- ---- ----- --------- Connecticut Yankee Atomic Power Company (CYAPC) ...... 34.5% 5.0% 9.5% 49.0% Maine Yankee Atomic Power Company (MYAPC) ............ 12.0% 5.0% 3.0% 20.0% Vermont Yankee Nuclear Power Corporation (VYNPC)... 10.1% 4.3% 2.6% 17.0% Yankee Atomic Electric Company (YAEC).............. 24.5% 7.0% 7.0% 38.5% The ownership interests of CL&P, PSNH and WMECO in VYNPC increased slightly in early 2002 when VYNPC redeemed the stock owned by certain Vermont municipal electric systems which had previously owned about five percent of VYNPC's stock. In March 2001, the board of VYNPC voted to proceed to auction the plant. J.P. Morgan was selected to conduct the auction. In August 2001, the owners of VYNPC announced they would sell the VY unit to a subsidiary of Entergy Corporation for approximately $180 million (approximately $145 million for the plant, materials and supplies and $35 million for the nuclear fuel). NU subsidiaries own 17 percent of the VY unit and, under the terms of the sale, will continue to buy 17 percent of the plant's output through March 2012 at fixed prices. The sale requires several regulatory approvals and is scheduled to close during the first half of 2002. The operators of Seabrook and VY hold full term operating licenses from the NRC and are subject to the jurisdiction of the NRC. The NRC has broad jurisdiction over the design, construction and operation of nuclear generating stations, including matters of public health and safety, financial qualifications, antitrust considerations and environmental impact. The NRC issues 40 year initial operating licenses to nuclear units and NRC regulations permit renewal of licenses for an additional 20 year period. The NRC also has jurisdiction over the decommissioning activities at Yankee Rowe, CY and MY. The NRC also regularly conducts generic reviews of technical and other issues, a number of which may affect the nuclear plants in which NU system companies have interests. The cost of complying with any new requirements that may result from these reviews cannot be estimated at this time, but such costs could be substantial. NUCLEAR PLANT PERFORMANCE MILLSTONE 3 Millstone 3 has a license expiration date of November 25, 2025. In 2001, Millstone 3 operated at a capacity factor of 30.5 percent through the date of sale of the unit to DNCI (March 31, 2001). Upon the sale to DNCI, Millstone 3 had a lifetime capacity factor of 62.8 percent. MILLSTONE 2 Millstone 2 has a license expiration date of July 31, 2015. For the period from January 1 to April 1, 2001, Millstone 2 operated at a capacity factor of 99.6 percent. Upon the sale to DNCI, Millstone 2 had a lifetime capacity factor of 56.2 percent. SEABROOK Seabrook has a license expiration date of October 17, 2026. In 2001, Seabrook operated at a capacity factor of 85.9 percent. After returning from a scheduled refueling outage on January 28, 2001, Seabrook operated at a capacity factor of 93.4 percent through the end of the year. Seabrook is scheduled to undergo a refueling outage in spring 2002 before the expected sale of 88 percent of the unit. For information on the upcoming auction of Seabrook, see "Connecticut Rates and Restructuring." VERMONT YANKEE VY has a license expiration date of March 21, 2012. In 2001, VY operated at a capacity factor of 93.4 percent. VY began its 22nd refueling outage on April 27, 2001 and returned to service on May 20, 2001, the shortest outage in its history. For information on the sale of VY, see "Nuclear Generation - General." NUCLEAR INSURANCE For information regarding nuclear insurance, see "Commitments and Contingencies - Nuclear Insurance Contingencies" in the notes to NU's, CL&P's, PSNH's and WMECO's financial statements. NUCLEAR FUEL GENERAL The supply of nuclear fuel for the NU system's existing unit requires the procurement of uranium concentrates, followed by the conversion, enrichment and fabrication of the uranium into fuel assemblies suitable for use in the NU system's unit. Fuel may also be purchased at a point after any of the above processes are completed. The NU system expects that uranium concentrates and related services for the units operated by the NU system and for the other units in which the NU system companies are participating that are not covered by existing contracts will be available for the foreseeable future on reasonable terms and prices. In 1998, an action was initiated by the owners of Millstone in the U.S. Court of Federal Claims against the United States Department of Energy (DOE) regarding the special annual assessment that the DOE imposes on purchasers of enriched uranium to meet the future costs of decontaminating and decommissioning (D&D) government owned uranium enrichment facilities. Similar actions for Seabrook and CY were also filed. The lawsuits challenge the imposition of the D&D assessment on federal constitutional grounds and are similar to actions filed by a number of other utilities against DOE. Proceedings in the Millstone, Seabrook and CY cases are stayed pending the final resolution of a similar claim brought against the DOE by MYAPC. In July 1999, the claims court dismissed MYAPC's complaint. In November 2001, the Federal circuit court affirmed the dismissal of MYAPC's claims. On February 6, 2002, MYAPC filed a petition for certiorari, asking the United States Supreme Court to review the decision of the Federal circuit court. Nuclear fuel costs associated with nuclear plant operations include amounts for disposal of spent nuclear fuel. The NU system companies include in their nuclear fuel expense spent fuel disposal costs accepted by the DPUC, NHPUC and DTE in rate case or fuel adjustment decisions. Spent fuel disposal costs also are reflected in the FERC-approved wholesale charges. HIGH-LEVEL RADIOACTIVE WASTE The Nuclear Waste Policy Act of 1982 (NWPA) provides that the federal government is responsible for the permanent disposal of spent nuclear reactor fuel (SNF) and high-level waste. As required by the NWPA, electric utilities generating SNF and high-level waste are obligated to pay fees into a fund which would be used to cover the cost of siting, constructing, developing and operating a permanent disposal facility for this waste. The NU system companies have been paying for such services for fuel burned on or after April 7, 1983, on a quarterly basis since July 1983. The DPUC, NHPUC and DTE permit the fee to be recovered through rates. For nuclear fuel used to generate electricity prior to April 7, 1983 (prior-period fuel), payment must be made prior to the first delivery of spent fuel to the DOE. The DOE's current estimate for an available site is 2010. In return for payment of the fees prescribed by the NWPA, the federal government is to take title to and dispose of the utilities' high-level wastes and SNF. There have been numerous litigation proceedings involving the DOE's statutory and contractual obligation to accept high-level waste and SNF. While the courts have declined to order the DOE to begin accepting spent fuel for disposal on January 31, 1998, the courts left open the utilities' ability to bring damage claims against the DOE. In 1998, YAEC, CYAPC and MYAPC filed separate complaints against the DOE in the U.S. Court of Federal Claims seeking monetary damages resulting from DOE's failure to accept spent nuclear fuel for disposal. In decisions later that year, the court found liability on the part of DOE to the companies for breach of the standard contract, based upon the DOE's failure to begin disposal of spent nuclear fuel. The damages owed to YAEC, CYAPC and MYAPC as a result of DOE's failure to begin disposing of spent nuclear fuel is in litigation. Until the federal government begins accepting nuclear waste for disposal, nuclear generating plants will need to retain high-level waste and spent fuel onsite or make some other provisions for their storage. Seabrook is expected to have spent fuel storage capacity until at least 2008. The VY spent fuel pool is expected to be able to accommodate full-core removal through 2004. In 2003, VYNPC expects to install additional storage which would provide for full core off-load capability through 2008. Construction of dry spent fuel storage facilities, to hold the spent nuclear fuel generated at those facilities until the DOE accepts the fuel, is in progress at CY, MY and Yankee Rowe. LOW-LEVEL RADIOACTIVE WASTE The NU system currently has contracts to dispose of its low-level radioactive waste (LLRW) at two privately operated facilities in Clive, Utah and Barnwell, South Carolina. In July 2000, the Northeast Interstate Low Level Radioactive Waste Management Compact, consisting of Connecticut and New Jersey, accepted South Carolina as a new member and is now known as the Atlantic Compact. This arrangement entitles CY access to Barnwell through its dismantlement. This arrangement may eventually exclude other nuclear plants from accessing Barnwell. As a contingency, the NU system has plans that will allow for onsite storage of LLRW for at least 5 years. DECOMMISSIONING Based upon the NU system's most recent site-specific update of the decommissioning costs for Seabrook, the recommended decommissioning method continues to be immediate and complete dismantlement as soon as practical after its retirement. The table below sets forth the estimated Seabrook decommissioning costs for the NU system companies. The estimates are based on the latest site studies, stated in December 31, 2001 dollars. CL&P NAEC WMECO NU System (Millions) $22.6 $199.9 $0 $222.5 New Hampshire enacted a law in 1981 requiring the creation of a state- managed fund to finance decommissioning of any nuclear units in that state. NAEC's costs for decommissioning Seabrook are billed by it to PSNH. PSNH recovered these costs from customers under the terms of its rate agreement through April 30, 2001. Effective May 1, 2001 (competition day), PSNH began to recover decommissioning costs as a stranded cost through the stranded cost recovery charge. CL&P is recovering its share of decommissioning costs through its systems benefit charge. During November 2001, the Nuclear Decommissioning Finance Committee (NDFC) issued an order in Docket NDFC 2001-1 that decreased decommissioning funding requirements from those previously approved. The decrease in funding requirements resulted from revisions in the decommissioning standard required by state statutes and an increase in the NDFC's estimate of the energy producing life of Seabrook. The NDFC order also updated the projected cost of decommissioning Seabrook to $556 million (in 2001 dollars). NAEC's and CL&P's shares of this cost are $199.9 million and $22.6 million, respectively. This is a significant reduction from the projected cost of decommissioning of $612.3 million if the decommissioning standards applied in an earlier docket were used. The revised decommissioning standard used by the NFDC to estimate the cost of decommissioning Seabrook was a commercial/industrial standard that recognized that the plant site will have nonnuclear commercial, industrial or other similar value after the cessation of nuclear operations. In addition, the decommissioning estimate took into account an increase in the operating life of Seabrook. In Dockets NDFC 98-1 and 2000-1, the operating life of Seabrook was estimated to be twenty-five years. In Docket NDFC 2001-1, the NDFC concluded that based on the "significantly improved" economic outlook for the nuclear generation and the fact that Seabrook has a "good operating record," Seabrook's operating life could be extended to thirty-six years, until October 2026, which is the current expiration date of its operating license. In addition, the funding requirements took into account recent changes to New Hampshire statutes related to decommissioning funding requirements when nuclear generation is sold to a nonutility. The schedules assume that up to 88 percent of Seabrook will be sold to a nonutility by December 31, 2002. Pursuant to the PSNH Settlement Agreement, upon a successful sale of NAEC's share of Seabrook, the existing Seabrook Power Contracts between PSNH and NAEC will be terminated. However, subsequent to such sale, PSNH may continue to be responsible for funding NAEC's former ownership share of its decommissioning liability, calculated on the basis of meeting the minimum funding required by the NRC by December 31, 2015, as determined by the NDFC. PSNH may enter into a new contract to provide for the payment of Seabrook nuclear decommissioning costs, with full recovery of the costs of that contract to be recoverable from PSNH's customers. Under no circumstances will PSNH's customers have any responsibility for increases in decommissioning funding above the amount calculated based upon the payment schedule as of the sale date. Pursuant to the Purchase and Sale Agreement (PSA) with Dominion for the sale of the Millstone units, upon the closing of the sale, the sellers were obligated to deliver to Dominion decommissioning funds in the amounts of $268.3 million for Unit 1, $253 million for Unit 2 and $244 million for Unit 3. With respect to Unit 3, the NU system companies delivered $178 million of the total amount turned over to Dominion. In addition, a "top off" payment of $52.6 million was made. Upon the closing, Dominion assumed full responsibility for decommissioning the three Millstone units, and NU shareholders, the NU system companies and their ratepayers have no further obligation related to decommissioning. Finally, the PSA required that Unit 1 be turned over to Dominion in "cold and dark" condition. Dominion and NU agreed that a number of projects required to achieve the "cold and dark" status had not been fully completed as of the date of the closing. Dominion and NU further agreed that the cost of the work to be completed was $10.4 million ($8.4 million for CL&P and $2.0 million for WMECO). As of December 31, 2001, the NU system recorded balances (at market) in the Seabrook external decommissioning trust funds as follows: CL&P NAEC WMECO NU System (Millions) $6.2 $55.5 $0 $61.7 CYAPC, VYNPC and MYAPC are all collecting revenues for decommissioning from their power purchasers. The table below sets forth the NU system companies' estimated share of remaining decommissioning costs (and closure costs where applicable) of the Yankee Companies' units as of December 31, 2001. The estimates are based on the latest site studies. For information on the equity ownership of the NU system companies in each of the Yankee Companies' units and the proposed sale of VY, see "Electric Operations - Nuclear Generation - General." CL&P PSNH WMECO NU system (Millions) VY $ 44.8 $18.8 $11.8 $ 75.4 CY* 78.3 11.3 21.5 111.1 MY* 63.3 26.4 15.8 105.5 ------ ----- ----- ------ Total $186.4 $56.5 $49.1 $292.0 ====== ===== ===== ====== * The costs shown include all of the expected future billings associated with the funding of decommissioning, recovery of remaining assets and other closure costs associated with the early retirement of Yankee Rowe, CY and MY as of December 31, 2001, which have been recorded as an obligation on the books of the NU system companies. As of December 31, 2001, the NU system's share of the external decommissioning trust fund balances (at market), which have been recorded on the books of the Yankee Companies, is as follows: CL&P PSNH WMECO NU system (Millions) VY $ 28.2 $11.9 $ 7.4 $ 47.5 CY* 95.4 13.8 26.3 135.4 Rowe* 30.4 8.7 8.7 47.8 MY* 18.9 7.9 4.7 31.4 ------ ----- ----- ------ Total $172.9 $42.3 $47.1 $262.1 ====== ===== ===== ====== In July 2000, the FERC issued a letter approving an April 2000 settlement between CYAPC, the DPUC and the OCC on CY decommissioning. Significant terms of the settlement include (1) decommissioning collections of $16.7 million per year, fully funding decommissioning and spent fuel storage costs through 2023; (2) consolidation of the pre-1983 spent fuel trust into the decommissioning trust and lowering total decommissioning collections by $56 million over the next seven years; (3) ROE rate of six percent with no refunds of prior decommissioning or return on equity collections; and (4) an incentive/penalty mechanism for decommissioning. The effect of this settlement on CYAPC earnings is approximately $9.0 million, of which NU's share would be approximately $4.4 million. Effective in January 1996, YAEC began billing its sponsors, including CL&P, WMECO and PSNH, amounts based on a revised decommissioning cost estimate approved by the FERC. The YAEC filing assumes NRC license termination and completion of decommissioning activities by 2004. Billings to YAEC sponsor companies were completed in June 2000. In January 2001, NNECO filed a written notification with the NRC reporting that during a reconciliation and verification of Millstone spent nuclear fuel records, personnel concluded that the location of two full- length irradiated fuel pins could not be determined and were not properly tracked in the records. NNECO reported that the two fuel rods are from the same fuel assembly, which was disassembled in 1972 for inspection, and were displaced from the fuel assembly in 1974. NNECO further reported that records indicate that in 1979 and 1980 the displaced rods were physically verified to be stored in a canister in the Millstone 1 spent fuel pool, and that the rods and canister are no longer in the spent fuel pool location documented in 1979 and 1980. NNECO's report indicated that records retrieved to date do not document the relocation or disposition of the two fuel rods. On October 5, 2001, NU issued a report, following an extensive search, concerning two missing fuel pins at the retired Millstone 1 nuclear unit which was sold to DNCI. As of December 31, 2001, costs related to this search totaled $7.1 million. The report concluded that the pins are currently located in one of four facilities licensed to store low or high- level nuclear waste and that they are not a threat to public health and safety. A follow-up review by the NRC concluded that NU's investigation was thorough and complete and its conclusions were reasonable and supportable. The NRC is in agreement with NU that the fuel rods are stored in a licensed storage facility. It is possible that this proceeding could result in the issuance of a notice of violation and the imposition of civil penalties. Management cannot predict the likelihood of any such occurrence at this time. OTHER REGULATORY AND ENVIRONMENTAL MATTERS ENVIRONMENTAL REGULATION GENERAL The NU system and its subsidiaries are subject to federal, state and local regulations with respect to water quality, air quality, toxic substances, hazardous waste and other environmental matters. Additionally, the NU system's major generation and transmission facilities may not be constructed or significantly modified without a review by the applicable state agency of the environmental impact of the proposed construction or modification. Compliance with environmental laws and regulations, particularly air and water pollution control requirements, may limit operations or require substantial investments in new equipment at existing facilities. SURFACE WATER QUALITY REQUIREMENTS The federal Clean Water Act requires every "point source" discharger of pollutants into navigable waters to obtain a National Pollutant Discharge Elimination System (NPDES) permit from the United States Environmental Protection Agency (EPA) or state environmental agency specifying the allowable quantity and characteristics of its effluent. NU system facilities are in the process of obtaining or renewing all required NPDES permits in effect. Compliance with NPDES and state water discharge permits has necessitated substantial expenditures, which are difficult to estimate, and may require further expenditures because of additional requirements that could be imposed in the future. For information regarding civil lawsuits related to alleged violations of certain facilities' NPDES permits, see "Item 3. Legal Proceedings." The Federal Oil Pollution Act of 1990 (OPA 90) sets out the requirements for facility response plans and periodic inspections of spill response equipment at facilities that can cause substantial harm to the environment by discharging oil or hazardous substances into the navigable waters of the United States and onto adjoining shorelines. The NU system companies are currently in compliance with the requirements of OPA 90. OPA 90 includes limits on the liability that may be imposed on persons deemed responsible for release of oil. The limits do not apply to oil spills caused by negligence or violation of laws or regulations. OPA 90 also does not preempt state laws regarding liability for oil spills. In general, the laws of the states in which the NU system owns facilities and through which the NU system transports oil could be interpreted to impose strict liability for the cost of remediating releases of oil and for damages caused by releases. The NU system currently carries general liability insurance in the total amount of $160 million annual coverage, which includes liability coverage for oil spills. AIR QUALITY REQUIREMENTS The Clean Air Act Amendments of 1990 (CAAA), as well as state laws in Connecticut, Massachusetts and New Hampshire, impose stringent requirements on emissions of sulfur dioxide (SO2) and nitrogen oxide (NOX) for the purpose of controlling acid rain and ground level ozone. In addition, the CAAA address the control of toxic air pollutants. Installation of continuous emissions monitors and expanded permitting provisions also are included. Compliance with CAAA requirements has cumulatively cost the NU system approximately $66 million as of December 31, 2001: $11 million for CL&P, $50 million for PSNH, $1 million for WMECO, and $4 million for HWP. In addition, PSNH expects to spend approximately $2.5 million a year for SO2 allowances and approximately $2.5 million for annual operational costs for NOX controls. Massachusetts and New Hampshire are both imposing significant emission reduction requirements on power plants, in addition to the Federal requirements. The cost for Mount Tom Station to meet its Massachusetts limit is estimated to be approximately $4 million. The situation in New Hampshire is complicated by the preliminary nature of the requirements and uncertainty regarding divestiture of the generating units. The recently estimated compliance costs to PSNH are approximately $4 million. HAZARDOUS WASTE REGULATIONS As many other industrial companies have done in the past, the NU system companies disposed of residues from operations by depositing or burying such materials on-site or disposing of them at off-site landfills or facilities. Typical materials disposed of include coal gasification waste, fuel oils, gasoline and other hazardous materials that might contain polychlorinated biphenyls (PCBs). It has since been determined that deposited or buried wastes, under certain circumstances, could cause groundwater contamination or create other environmental risks. The NU system has recorded a liability for what it believes is, based upon currently available information, its estimated environmental remediation costs for waste disposal sites for which the NU system companies expect to bear legal liability, and continues to evaluate the environmental impact of its former disposal practices. Under federal and state law, government agencies and private parties can attempt to impose liability on NU system companies for such past disposal. At December 31, 2001, the liability recorded by the NU system for its estimated environmental remediation costs for known sites needing remediation, including those sites described below, exclusive of recoveries from insurance or from third parties, was approximately $46.2 million, representing 47 sites. This total includes liabilities recorded by Yankee Gas of $22.9 million. All cost estimates were made in accordance with generally accepted accounting principles where remediation costs are probable and reasonably estimable. These costs could be significantly higher if alternative remedies become necessary. Under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, commonly known as Superfund, the EPA has the authority to clean up or order the clean up of hazardous waste sites and to impose the clean up costs on parties deemed responsible for the hazardous waste activities on the sites. Responsible parties include the current owner of a site, past owners of a site at the time of waste disposal, waste transporters, and waste generators. The NU system currently is involved in four Superfund sites: one in New Jersey, one in New York, one in New Hampshire, and one in Kentucky, which could have a material impact on the NU system. The NU system has committed in the aggregate approximately $875,000 to its share of the clean up of these sites. The greatest liabilities currently relate to former manufactured gas plant (MGP) facilities which represent the largest share of future clean up costs. These facilities were owned and operated by predecessor companies to the NU system from the mid-1800's to mid-1900. Byproducts from the manufacture of gas using coal resulted in fuel oils, hydrocarbons, coal tar, metals and other waste products that may pose risks to human health and the environment. The NU system currently has partial or full ownership responsibilities at 28 former MGP sites. Of the total NU system liabilities, $41.8 million has been established to address future remediation costs at MGP sites. Other sites undergoing comprehensive investigations or remedial actions under state programs located in Connecticut, Massachusetts, New Hampshire or New Jersey include four former fuel oil releases, three landfills, three asbestos hazard abatement projects and five miscellaneous projects. To date, approximately $3.64 million has been established to address future remediation costs at these sites. In the past, the NU system has received other claims from government agencies and third parties for the cost of remediating sites not currently owned by the NU system but affected by past NU system disposal activities and may receive more such claims in the future. The NU system expects that the costs of resolving claims for remediating sites about which it has been notified will not be material, but cannot estimate the costs with respect to sites about which it has not been notified. ELECTRIC AND MAGNETIC FIELDS Published reports have discussed the possibility of adverse health effects from electric and magnetic fields (EMF) associated with electric transmission and distribution facilities and appliances and wiring in buildings and homes. Most researchers, as well as numerous scientific review panels considering all significant EMF epidemiological and laboratory studies to date, agree that current information remains inconclusive, inconsistent and insufficient for characterizing EMF as a health risk. Based on this information, management does not believe that a causal relationship between EMF exposure and adverse health effects has been established or that significant capital expenditures are appropriate to minimize unsubstantiated risks. The NU system companies have closely monitored research and government policy developments for many years and will continue to do so. If further investigation were to demonstrate that the present electricity delivery system is contributing to increased risk of cancer or other health problems, the industry could be faced with the difficult problem of delivering reliable electric service in a cost-effective manner while managing EMF exposures. To date, no courts have concluded that individuals have been harmed by EMF from electric utility facilities, but if utilities were to be found liable for damages, the potential monetary exposure for all utilities, including the NU system companies, could be enormous. Without definitive scientific evidence of a causal relationship between EMF and health effects, and without reliable information about the kinds of changes in utilities' transmission and distribution systems that might be needed to address the problem, if one is found, no estimates of the cost impacts of remedial actions and liability awards are available. FERC HYDROELECTRIC PROJECT LICENSING Federal Power Act licenses may be issued for hydroelectric projects for terms of 30 to 50 years as determined by the FERC. Upon the expiration of a license, any hydroelectric project so licensed is subject to reissuance by the FERC to the existing licensee or to others upon payment to the licensee of the lesser of fair value or the net investment in the project plus severance damages less certain amounts earned by the licensee in excess of a reasonable rate of return. FERC has also taken the position that under appropriate circumstances it may order decommissioning of hydroelectric projects. The NU system companies currently hold FERC licenses for 11 hydroelectric projects totaling 16 plants. In addition, the NU system companies own and operate five unlicensed hydroelectric projects that are currently deemed non-jurisdictional by FERC. These licensed and unlicensed hydroelectric projects are located in Connecticut, Massachusetts and New Hampshire and aggregate approximately 1,367 MW of capacity. CL&P's and WMECO's five licensed projects and four unlicensed projects with approximately 1,302 MW of capacity were transferred to NGC in March 2000. As part of the Settlement Agreement, PSNH has proposed to auction its seven hydroelectric projects (totaling nine plants) with approximately 65 MW of capacity upon approval of the agreement. Subsequently, the New Hampshire legislature deferred the sale of any PSNH fossil or hydroelectric facilities until at least February 2004. HWP sold its interests in the Holyoke hydroelectric project and transferred its FERC operating license to the City of Holyoke's Gas & Electric Department effective December 14, 2001. NGC's FERC licenses for operation of the Falls Village and Housatonic hydroelectric projects expired in August 2001. Annual operating licenses allow NGC to continue plant operations until new licenses are granted. A license application, which proposed to combine both projects under one license, was submitted to the FERC in August 1999. The Connecticut Department of Environmental Protection (CDEP) has issued its Section 401 water quality certification for the Housatonic River Project. The FERC has reviewed the application and issued a request for additional information. A partial response to FERC's additional information request was filed on February 7, 2002, and additional responses will be filed shortly. FERC is expected to issue notice that the projects as proposed are ready for environmental analysis within the next several months, with a draft environmental impact statement expected in the fall of 2002 and a final environmental impact statement in the fall of 2003. PSNH's FERC license for the Merrimack River Hydroelectric Project that consists of the Amoskeag, Hooksett and Garvins Falls hydroelectric generating stations expires on December 31, 2005. On December 29, 2000, PSNH filed a notice of intent with the FERC stating its plan to file an application for a new license by December 31, 2003. PSNH has begun formal consultations with federal and state resource agencies, as well as non-governmental organizations and the public. PSNH held two public meetings on January 16 and 17, 2002 to solicit comments from these parties on the significant resource issues they believe PSNH should address in its FERC license application. Limited comments were made at the public meetings and the parties have until March 18, 2002 to submit their written comments to PSNH. PSNH plans to file its final license application with the FERC no later than December 31, 2003. The FERC's review of license applications normally takes several years. If a new license is not issued by the expiration of the current license (December 31, 2005), it is expected that FERC will issue annual licenses under the same terms and conditions as the current license until a new license is issued. EMPLOYEES As of December 31, 2001, the NU system companies had 7,520 employees on their payrolls, of which 2,170 were employed by CL&P, 1,254 by PSNH, 410 by WMECO, 451 by Yankee Gas, 318 by NGS, 1,511 by NUSCO, 816 by NAESCO, 161 by Select and 429 by SESI. NU, NGC, NAEC, Mode 1, NUEI and SEPPI have no employees. On December 15, 2000, 498 employees of CL&P, PSNH, WMECO, HWP, NUSCO and Yankee Gas were offered a voluntary separation program (VSP). There were 346 employees who accepted the VSP. As of December 31, 2001, 298 employees have retired under the program and the remaining 48 are expected to retire between January 1, 2002 and March 1, 2002. Costs relating to the VSP for 2001 were approximately $93.3 million. In November 2001, CL&P announced a reorganization to reflect the separation of regulated from competitive services and to refocus the organization on distribution responsibilities. The reorganization began with the selection of new officers in December 2001, with further selection processes at subsequent management levels planned for the first quarter of 2002. The majority of the costs associated with the reorganization is attributable to restructuring in Connecticut and is not expected to impact earnings. Approximately 2,487 employees of CL&P, PSNH, WMECO, NAESCO, HWP, NUSCO and Yankee Gas are covered by 18 union agreements, which expire between May 31, 2002 and December 1, 2005. ITEM 2. PROPERTIES The physical properties of the NU system are owned or leased by subsidiaries of NU. CL&P's properties are located either on land which is owned in fee or on land, as to which CL&P owns perpetual occupancy rights adequate to exclude all parties except possibly state and federal governments, which has been reclaimed and filled pursuant to permits issued by the United States Army Corps of Engineers. The principal properties of PSNH are held by it in fee. In addition, PSNH leases space in an office building under a 30-year lease expiring in 2002. In March of 2002, PSNH is expected to move its office space to a refurbished former PSNH generating station site. A major portion of WMECO's properties are owned in fee. NAEC owns a 35.98 percent interest in Seabrook and approximately 560 acres of exclusion area land located around the unit. In addition, CL&P, PSNH and WMECO have certain data processing equipment, vehicles, and office space that are leased. Also CL&P and WMECO have certain substation equipment that they lease. With few exceptions, the NU system companies' lines are located on or under streets or highways, or on properties either owned or leased, or in which the Company has appropriate rights, easements or permits from the owners. Yankee Gas' property consists primarily of its gas distribution facilities including distribution lines (mains and services), meter, valves, pressure regulators and flow controllers. Yankee Gas owns various propane facilities with a combined storage capacity equivalent to approximately 245,000 Mcf. Yankee Gas also owns service buildings in Meriden, Waterbury, Norwalk, and Danielson, Connecticut. NorConn Properties, Inc. owns and leases to Yankee Gas a service building in East Windsor, Connecticut, while the Ansonia, Danbury and Waterford, Connecticut buildings are rented. Yankee Gas' customer information center is located in Wethersfield, Connecticut and its corporate headquarters are located in Berlin, Connecticut. CL&P, NGC and Yankee Gas's properties are subject to the lien of each company's respective first mortgage indentures. In addition, CL&P's interest in transmission assets is subject to second mortgage liens for the benefit of PCRBs. Various properties are also subject to minor encumbrances which do not substantially impair the usefulness of the properties to the owning company. The NU system companies' properties are well maintained and are in good operating condition. TRANSMISSION AND DISTRIBUTION SYSTEM At December 31, 2001, the NU system companies owned 104 transmission and 356 distribution substations that had an aggregate transformer capacity of 17,106,556 kilovoltamperes (kVa) and 9,087,294 kVa, respectively; 3,075 circuit miles of overhead transmission lines ranging from 69 kilovolt (kV) to 345 kV, and 196 cable miles of underground transmission lines ranging from 69 kV to 138 kV; 33,342 pole miles of overhead and 2,254 conduit bank miles of underground distribution lines; and 428,564 line transformers in service with an aggregate capacity of 18,640,000 kVa. ELECTRIC GENERATING PLANTS As of December 31, 2001, the electric generating plants of the NU system companies and the NU system companies' entitlement in the generating plant of the VYNPC were as follows (See "Item 1. Business - Nuclear Generation" for information on ownership and operating results for the year): Claimed Year Capability* Owner Plant Name (Location) Type Installed (kilowatts) - ----- -------------------- ---- --------- ----------- CL&P Seabrook (Seabrook, NH) Nuclear 1990 47,135 VT Yankee (Vernon, VT) Nuclear 1972 45,189 --------- Total Nuclear-Steam Plants ( 2 units) 92,324 --------- Total CL&P Generating Plants ( 2 units) 92,324 ========= PSNH VT Yankee (Vernon, VT) Nuclear 1972 18,999 --------- Total Nuclear-Steam Plants ( 1 unit) 18,999 Total Fossil-Steam Plants ( 6 units) 1952-74 1,020,280 Total Hydro-Conventional (20 units) 1917-83 67,930 Total Internal Combustion ( 5 units) 1968-70 103,594 --------- Total PSNH Generating Plants (32 units) 1,210,803 ========= WMECO VT Yankee (Vernon, VT) Nuclear 1972 11,904 --------- Total Nuclear-Steam Plants ( 1 unit) 11,904 Total Hydro-Conventional ( 3 units) 1930 33,960** --------- Total WMECO Generating Plants ( 4 units) 45,864 ========= NAEC Seabrook (Seabrook, NH) Nuclear 1990 417,751 ========= HWP Mt. Tom (Holyoke, MA) Fossil-Steam 1960 147,000 ========= NGC Total Hydro-Conventional (36 units) 1903-55 157,930 Total Hydro-Pumped Storage ( 7 units) 1928-73 1,109,000 Tunnel (Preston, CT) ( 1 unit) 1969 20,800 --------- Total NGC Generating Plants (44 units) 1,287,730 ========= NU system Seabrook (Seabrook, NH) Nuclear 1990 464,886 VT Yankee (Vernon, VT) Nuclear 1972 76,092 --------- Total Nuclear-Steam Plants ( 2 units) 540,978 Total Fossil-Steam Plants ( 7 units) 1952-74 1,167,280 Total Hydro-Conventional (59 units) 1903-83 259,820 Total Hydro-Pumped Storage ( 7 units) 1928-73 1,109,000 Total Internal Combustion ( 6 units) 1968-70 124,394 --------- Total NU system Generating Plants Including Vermont Yankee (81 units) 3,201,472 ========= Excluding Vermont Yankee (80 units) 3,125,380 ========= * Claimed capability represents winter ratings as of December 31, 2001. ** Total Hydro-Conventional capability includes the Cobble Mtn. plant's 33,960 kilowatts which is leased from the City of Springfield, MA. FRANCHISES CL&P. Subject to the power of alteration, amendment or repeal by the General Assembly of Connecticut and subject to certain approvals, permits and consents of public authority and others prescribed by statute, CL&P has, subject to certain exceptions not deemed material, valid franchises free from burdensome restrictions to provide electric transmission and distribution services in the respective areas in which it is now supplying such service. In addition to the right to provide electric transmission and distribution services as set forth above, the franchises of CL&P include, among others, limited rights and powers, as set forth in Title 16 of the Connecticut General Statutes and the special acts of the General Assembly constituting its charter, to manufacture, generate, purchase and sell electricity at retail, including to provide standard offer, backup, and default service, to sell electricity at wholesale to other utility companies and municipalities and to erect and maintain certain facilities on public highways and grounds, all subject to such consents and approvals of public authority and others as may be required by law. The franchises of CL&P include the power of eminent domain. PSNH. The NHPUC, pursuant to statutory requirement, has issued orders granting PSNH exclusive franchises free from burdensome restrictions to distribute electricity in the respective areas in which it is now supplying such service. In addition to the right to distribute electricity as set forth above, the franchises of PSNH include, among others, rights and powers to manufacture, generate, purchase, and transmit electricity, to sell electricity at wholesale to other utility companies and municipalities and to erect and maintain certain facilities on certain public highways and grounds, all subject to such consents and approvals of public authority and others as may be required by law. The franchises of PSNH include the power of eminent domain. NNECO. Subject to the power of alteration, amendment or repeal by the General Assembly of Connecticut and subject to certain approvals, permits and consents of public authority and others prescribed by statute, NNECO has a valid franchise free from burdensome restrictions to sell electricity to utility companies doing an electric business in Connecticut and other states. In addition to the right to sell electricity as set forth above, the franchise of NNECO includes, among others, rights and powers to manufacture, generate and transmit electricity, and to erect and maintain facilities on certain public highways and grounds, all subject to such consents and approvals of public authority and others as may be required by law. WMECO. WMECO is authorized by its charter to conduct its electric business in the territories served by it, and has locations in the public highways for transmission and distribution lines. Such locations are granted pursuant to the laws of Massachusetts by the Department of Public Works of Massachusetts or local municipal authorities and are of unlimited duration, but the rights thereby granted are not vested. Such locations are for specific lines only, and, for extensions of lines in public highways, further similar locations must be obtained from the Department of Public Works of Massachusetts or the local municipal authorities. In addition, WMECO has been granted easements for its lines in the Massachusetts Turnpike by the Massachusetts Turnpike Authority. Pursuant to the Massachusetts restructuring legislation, the DTE is required to define service territories for each distribution company, including WMECO, based on the service territories actually served on July 1, 1997, and following municipal boundaries to the extent possible. The DTE has not yet defined service territories. After these service territories are established by the DTE, until they are terminated by effect of law or otherwise, the distribution company shall have the exclusive obligation to provide distribution service to all retail customers within its service territory, and no other person shall provide distribution service within such service territory without the written consent of such distribution company. HWP and Holyoke Power and Electric Company (HP&E). HWP, and its wholly owned subsidiary HP&E, are authorized by their charters to conduct their businesses in the territories served by them. HWP's electric business is subject to the restriction that sales be made by written contract in amounts of not less than 100 horsepower to purchasers who use the electricity in their own business in the counties of Hampden or Hampshire, Massachusetts and cities and towns in these counties, and customers who occupy property in which HWP has a financial interest, by ownership or purchase money mortgage. HWP also has certain dam and canal and related rights, all subject to such consents and approvals of public authorities and others as may be required by law. The two companies have locations in the public highways for their transmission and distribution lines. Such locations are granted pursuant to the laws of Massachusetts by the Department of Public Works of Massachusetts or local municipal authorities and are of unlimited duration, but the rights thereby granted are not vested. Such locations are for specific lines only and, for extensions of lines in public highways, further similar locations must be obtained from the Department of Public Works of Massachusetts or the local municipal authorities. HP&E has no retail service territory area and sells electric power exclusively at wholesale. In connection with the sale of certain of HWP's and HP&E's assets to the city of Holyoke Gas and Electric Department (HGEE) effective December 2001, HWP agreed to cause the charters of HWP HP&E to be amended to eliminate their rights to distribute electricity at retail in Holyoke and surrounding towns unless other sellers can legally compete with HG&E, and not to exercise such rights prior to such amendment. NGC. NGC is an exempt wholesale generator and, as it currently operates its business, is not regulated by the DPUC or the DTE. FERC's authorization for exempt wholesale generators to sell electric power at wholesale market- based rates typically contains an exemption from much of the traditional public utility company rate regulation. As a wholesaler of power, NGC is a "public utility" subject to the Federal Power Act. The market-based authorization that NGC has received from FERC exempts NGC from some, but not all, of the Federal Power Act regulations, including traditional cost-based rate regulation. However, because NGC is a wholesale marketer that owns its own generation facilities, NGC is required to file information concerning long-term transactions and quarterly transaction summaries with FERC. ITEM 3. LEGAL PROCEEDINGS 1. Connecticut Superior Court - Connecticut Attorney General Civil Lawsuit and Appeal In 1997, the Attorney General for the State of Connecticut (AG) initiated a civil lawsuit, on behalf of the CDEP, in Connecticut Superior Court against NNECO and NUSCO for violations of the Millstone water discharge permit and Connecticut water discharge regulations. In 1998, the Superior Court approved a settlement between NNECO and the AG. The settlement required NNECO to pay a $700,000 civil penalty and expend $500,000 to fund three supplemental environmental projects. Additionally, the settlement requires NNECO to perform two environmental audits of its water compliance program, have a third-party review of the first NNECO audit and inform the CDEP of major changes to its environmental management system. The first audit and the third party review have been completed. The second required water compliance audit by NNECO has been completed and the audit report was submitted to the CDEP for review on January 5, 2001. On June 13, 2001, the CDEP certified that NNECO and NUSCO had fully complied with all settlement requirements. 2. Con Edison/NU - Merger Appeals and Related Litigation On March 5, 2001, Consolidated Edison, Inc. (Con Edison) advised NU that it was unwilling to close its merger with NU on the terms set forth in the parties' October 13, 1999 Agreement and Plan of Merger, as amended and restated as of January 11, 2000 (Merger Agreement). That same day, NU notified Con Edison that it would treat Con Edison's refusal to proceed with the merger as a repudiation and breach of the Merger Agreement, and would file suit to obtain the benefits of the transaction for NU shareholders. On March 6, 2001, Con Edison filed suit in the United States District Court for the Southern District of New York (District Court) seeking a declaratory judgment that it has been relieved of its obligation to proceed with the merger due to, among other things, NU's alleged breach of the Merger Agreement and the alleged occurrence of a "Material Adverse Change" with respect to NU as that term is defined in the Merger Agreement. Con Edison also contends that it is entitled to recover damages from NU equal to the benefits it would have received if the merger had been consummated (which it calculates as 82 percent of the approximately $1.57 billion in total synergy savings that the parties had expected to achieve in the merger) together with the costs incurred in preparing for and seeking approval of the merger. NU believes that Con Edison's claim for damages is without merit and, in any event, that Con Edison's proposed measure of damages is inappropriate. On March 12, 2001, NU filed suit against Con Edison in the District Court seeking damages in excess of $1 billion arising from Con Edison's breach of the Merger Agreement. On May 11, 2001, in accordance with a stipulation of the parties and order of the District Court, Con Edison filed an amended complaint in which it added claims seeking damages for breach of contract, fraudulent inducement and negligent misrepresentation. On June 1, 2001, NU answered Con Edison's amended complaint, denying all of its material allegations and asserting affirmative defenses, and asserted a counterclaim seeking damages in excess of $1 billion against Con Edison for breach of the Merger Agreement. NU subsequently dismissed its March 12 complaint as duplicative of the June 1 counterclaim. On June 8, 2001, Con Edison answered NU's counterclaim, denying its material allegations and asserting affirmative defenses. The parties substantially completed fact discovery in the litigation on December 21, 2001, and are currently conducting expert discovery. The case schedule currently calls for the parties to be prepared for trial on or after June 21, 2002; however, no trial date has yet been set by the Court. In addition, separate petitions were filed with the DPUC asking that its merger approval be rescinded or reversed. The DPUC reopened its docket approving the merger and asked parties to comment on the question of whether a date certain should be imposed for consummation of the merger and whether that date should be January 31, 2002. On January 30, 2002, the DPUC issued a decision establishing January 31, 2002 as the deadline for merger consummation. At this early stage of the litigation, management can predict neither the outcome of this matter nor its ultimate effect on NU. For related information, see Part I, Item 1. "Business - Mergers and Acquisitions." 3. Millstone Station - Damage to Fish Population Lawsuits On April 20, 2000, two fishermen, Aldred Madeira, Jr. and Timothy F. Madieros, brought a lawsuit against NNECO and NUSCO in New London Superior Court alleging two counts: common law nuisance and tortious interference with a business expectancy. Dominion Nuclear Connecticut, Inc. (DNC) has since been added as an additional defendant. The lawsuit alleges that Millstone has engaged in various actions, including entrainment of winter flounder, that has caused the two fishermen to suffer damages. The suit seeks compensatory and punitive damages as well as temporary and permanent injunctions to suspend Millstone operations during the winter flounder spawning season, conversion of Millstone to a closed-cooling system, or in the alternative, permanent shutdown. On March 11, 2002, all claims for injunctive relief by the plaintiffs were dismissed. This matter remains pending before the Complex Litigation Docket in Connecticut Superior Court with discovery of information between the parties underway. On August 23, 2001, two additional fishermen, James Engelmann and Michael Stepski, brought a similar lawsuit to the Madeira and Madieros action against NNECO, NUSCO and DNC in Superior Court alleging two counts: common law nuisance and tortious interference with a business expectancy. Like the earlier suit, this action seeks compensatory and punitive damages as well as temporary and permanent injunctions to suspend Millstone operations during the winter flounder spawning season and conversion of the Millstone facility to a closed cooling system. This matter is also pending before the Complex Litigation Docket in Connecticut Superior Court and is in the early stages of litigation. As in the Madeira matter above, all claims for injunctive relief by the plaintiffs were dismissed on March 11, 2002. On April 26, 2000, another lawsuit was filed in Connecticut Superior Court against NUSCO, NNECO and the Commissioner of the CDEP challenging the validity of previously issued CDEP emergency and temporary authorizations allowing Millstone to discharge wastewater not expressly authorized by the facility's NPDES permit. The suit sought a temporary and permanent injunction against operations at Millstone 1, 2 and 3. On August 30, 2000, NNECO filed a motion to dismiss, and on October 16, 2000, NNECO's motion was granted. Plaintiffs have since filed an appeal, which remains pending, with the Connecticut Appellate Court. On April 13, 2001, the Connecticut Coalition Against Millstone (CCAM), the STAR Foundation and Joseph Besade notified NNECO and DNC by letter of their intent to bring a citizen suit action under the provisions of the Clean Water Act. Sixty days notice is required before any action can be brought. The notification letter alleges Clean Water Act violations at Millstone Station and challenges the validity of Millstone Station's NPDES permit and related emergency water discharge authorizations and DEP's authority to transfer both the NPDES permit and emergency authorizations to DNC. As of this date, no action has been brought by CCAM. 4. Sale of Millstone to Dominion Nuclear Connecticut, Inc. On February 20, 2001, the CCAM filed in Connecticut Superior Court an appeal of the DPUC's decision approving the sale of Millstone to DNC. CCAM alleges that the final decision violates the Connecticut general statutes on multiple grounds and requests that the decision be reversed and vacated. On March 2, 2001, CCAM filed a motion to stay, which was heard by the court on March 12, 2001. On March 26, 2001, CCAM's appeal was dismissed. On April 16, 2001, plaintiffs filed an appeal with the Connecticut Appellate Court. On February 21, 2002, the court dismissed CCAM's appeal. On March 8, 2001, CCAM and other parties also filed a lawsuit in Connecticut Superior Court against the CDEP, NNECO and DNC challenging (1) the validity of Millstone's NPDES permit (Permit) and a previously issued CDEP emergency authorization allowing Millstone to discharge wastewater not expressly authorized by the facility's Permit, and (2) CDEP's authority to transfer both Millstone's permit and emergency authorization to DNC. On March 29, 2001, CCAM's request for a temporary restraining order (TRO) enjoining CDEP from transferring both the Permit and emergency authorization to DNC prior to a full hearing was denied. Subsequently, on July 19, 2001, the entire matter was dismissed. CCAM has since filed an appeal, which remains pending, with the Connecticut Appellate Court. On March 12, 2001, the Millstone Station Employees Association (MSEA) filed in Connecticut Superior Court a request for a stay of the DPUC's approval of the sale of Millstone pending resolution of certain employee pension issues. The DPUC and CL&P have moved to dismiss the stay request on various grounds. No hearing date has been established. For further information on the sale of the Millstone units, see Item I, "Business - Rates and Electric Industry Restructuring" and "- Nuclear Generation." 5. Federal Energy Regulatory Commission (FERC) - Installed Capability (ICAP) Deficiency Charge Pursuant to a series of FERC decisions, the price for ICAP in New England has fluctuated since 1998, prior to which the price was $8.75 per kilowatt-month. In March 2001, FERC reinstituted the $8.75 charge effective April 1, 2001 and placed a $0.17 charge into effect from August 1, 2001 to April 2, 2001. In March 2001 opponents of the $8.75 charge filed an appeal in the First Circuit Court of Appeals (First Circuit). The court issued a stay, thus keeping the $0.17 charge in effect. In June 2001, the First Circuit issued its decision supporting the $8.75 charge and lifting its stay. In strong language, the court generally called the $0.17 charge non-complying and stated that FERC's original rejection of the $0.17 was well justified. The court permitted FERC to reinstate the $8.75 charge "at once" or at a "future date." In the interim, Independent System Operator - New England (ISO-NE) filed a proposed ICAP charge of $4.87, which FERC accepted as "cost based" and made effective September 1, 2001. FERC also directed ISO-NE to file by December 3, 2001 a report on alternatives to the ICAP requirement, particularly the feasibility of a forward reserves market and using demand side management to meet reserve capacity needs. In July 2001, NU filed an appeal of the FERC orders imposing the $0.17 rate from August 1, 2000 to April 1, 2001. In December 2001, FERC denied rehearing its order allowing the $0.17 rate during the court stay period, April through August 2001. NU recently appealed this decision to the First Circuit and expects consolidation with the prior pending case. In its December 3, 2001 report on alternatives to the ICAP requirement, ISO- NE proposed an interim advance ICAP purchase requirement but indicated that other ICAP improvements would be implemented with the Standard Market Design (scheduled for late 2002 or early 2003) and that it intended to develop a forward reserves market thereafter. The ISO's interim advance purchase requirement proposal was filed with FERC in late December 2001. Subsequently, ISO-NE published the results of its study on the cost of new peaking units in New England which suggests that the level of a cost based ICAP deficiency charge would be $6.15 rather than $4.87. 6. Retirement Plan Litigation This matter involves four separate but related federal court lawsuits by nineteen former employees of NUSCO, WMECO and CL&P who retired between 1991 and 1994. The complaints generally allege that the Company breached its fiduciary duties to the plaintiffs by making affirmative misrepresentations that caused them to retire prematurely, since as a result of these alleged misrepresentations they came to believe incorrectly that no particular future enhancement of employee benefits was being seriously considered at the time by the Company. The cases will be tried together in a summary bench trial in the United States District Court in Hartford, Connecticut. The trial is scheduled to begin on April 29, 2002 and is expected to conclude in mid-May 2002. 7. Holyoke Power and Electric Company In July of 1998, Holyoke Power and Electric Company (HP&E) entered into a contract with Bridgeport Energy, LLC (Bridgeport), a subsidiary of Duke Energy, to purchase installed capability at a rate of $3.125 per kilowatt per month through April 30, 2004. This contract was subsequently assigned to Select Energy, Inc. (Select Energy). The contract contains a clause that allowed either party to terminate the contract upon 30 days prior notice if FERC, NEPOOL or ISO-NE (1) eliminates ICAP or (2) makes material changes to ICAP that materially adversely affect the parties and such changes can't be resolved through negotiation. When ISO-NE filed with FERC in May 2000 to eliminate the ICAP product, Select Energy sought to terminate the contract. Pending the resolution of the ICAP issues at FERC and in court, the parties entered into a series of agreements to preserve their rights to argue whether the contract should be terminated, during which time Bridgeport continued to supply, and Select Energy continued to pay for, the ICAP. In June 2001, Select discontinued purchasing the ICAP from Bridgeport. In July 2001, Select Energy filed a complaint in Connecticut Superior Court, requesting the court to declare that the contract was terminated as of June 2000, asking for an order that the contract was effectively terminated in June 2000 and requesting damages for the above-market portion of its payment. Bridgeport filed a complaint in Connecticut Superior Court shortly thereafter, alleging that Select Energy is in default under the contract and owes damages from June of 2000 through the remainder of the term of the contract. The complaint states that Bridgeport's actual damages for the period from June 2001 through September 2001 were in excess of $5 million. The complaints have been transferred to the complex litigation docket of the court, and the trial judge has set a scheduling order contemplating a trial in October 2003. Given the uncertainty concerning a decision by the First Circuit Court of Appeals on the ICAP issues, it is difficult to predict the outcome of this litigation. 8. NRG Power Marketing, Inc. - Congestion Charges Litigation On November 28, 2001, CL&P filed a complaint against NRG Power Marketing, Inc. (NRG) in Connecticut Superior Court alleging breach of contract arising from the failure of NRG to pay congestion charges due under the Standard Offer Wholesale Sales Agreement (Agreement) between the parties. CL&P seeks recovery of $13,882,750, the outstanding congestion charges due through September 30, 2001, together with all such charges which continue to accrue under the Agreement. On December 20, 2001, NRG filed a petition for removal to U.S. District Court for the District of Connecticut. NRG filed its answer and counterclaim on February 1, 2002. For its counterclaim, NRG seeks recovery of $1,181,774, which claims to have paid CL&P in error for congestion charges incurred during January and February, 2000. Discovery is pending and is currently scheduled to be completed on or before September 30, 2002. 9. Other Legal Proceedings The following sections of Item 1. "Business" discuss additional legal proceedings: See "Rates and Electric Industry Restructuring" for information about various state restructuring proceedings and civil lawsuits related thereto; "Regulated Electric Operations" and "Regulated Gas Operations" for information about proceedings relating to power, transmission and pricing issues; "Regulated Electric Operations - Nuclear Generation" and "Regulated Electric Operations - Nuclear Plant Performance" for information related to nuclear plant performance, nuclear fuel enrichment pricing, high-level and low-level radioactive waste disposal, decommissioning matters, and NRC regulation; "Other Regulatory and Environmental Matters" for information about proceedings involving surface water and air quality, toxic substances and hazardous waste, electric and magnetic fields, licensing of hydroelectric projects, and other matters. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No event that would be described in response to this item occurred with respect to NU, CL&P, PSNH, WMECO, or NGC. PART II ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED SHAREHOLDER MATTERS NU. The common shares of NU are listed on the New York Stock Exchange. The ticker symbol is "NU," although it is frequently presented as "Noeast Util" and/or "NE Util" in various financial publications. The high and low sales prices for the past two years, by quarters, are shown below. Year Quarter High Low 2001 First $23.5600 $16.8000 Second 20.7500 17.3500 Third 20.7900 18.3000 Fourth 19.2500 16.9500 2000 First $21.5000 $18.0000 Second 23.1250 20.8125 Third 23.9600 21.5000 Fourth 24.5600 18.2500 As of January 31, 2002, there were 76,028 common shareholders of record of NU. As of the same date, there were a total of 133,983,973 common shares issued, including 4,389,180 unallocated ESOP shares held in the ESOP trust. On January 9, 2001, the NU Board of Trustees approved the payment of a 10 cent per share dividend, payable on March 31, 2001, to shareholders of record as of March 1, 2001. On April 9, 2001, the NU Board of Trustees approved the payment of a 10 cent per share dividend, payable on June 29, 2001, to shareholders of record as of June 1, 2001. On June 28, 2001, the NU Board of Trustees approved the payment of a 12.5 cent per share dividend, payable on September 28, 2001, to shareholders of record as of September 1, 2001. On October 9, 2001, the NU Board of Trustees approved the payment of a 12.5 cent per share dividend, payable on December 31, 2001, to shareholders of record as of December 1, 2001. On January 11, 2000, the NU Board of Trustees approved the payment of a 10 cent per share dividend, payable on March 31, 2000, to shareholders of record as of March 1, 2000. The record date for this dividend was changed on January 31, 2000 to March 6, 2000, to provide Yankee shareholders who received NU common shares the opportunity to receive the dividend following the Yankee merger. On April 11, 2000, the NU Board of Trustees approved the payment of a 10 cent per share dividend, payable on June 30, 2000, to shareholders of record as of June 1, 2000. On July 11, 2000, the NU Board of Trustees approved the payment of a 10 cent per share dividend, payable on September 29, 2000, to shareholders of record as of September 1, 2000. On October 10, 2000, the NU Board of Trustees approved the payment of a 10 cent per share dividend, payable on December 29, 2000, to shareholders of record as of December 1, 2000. Information with respect to dividend restrictions for NU and its subsidiaries is contained in Item 1. Business under the caption "Financing Program - Financing Limitations" and in Note (b) to the "Consolidated Statements of Shareholders' Equity" on page 30 of NU's 2001 Annual Report to Shareholders, which information is incorporated herein by reference. CL&P, PSNH, WMECO, and NGC. The information required by this item is not applicable because the common stock of CL&P, PSNH, WMECO, and NGC is held solely by NU. ITEM 6. SELECTED FINANCIAL DATA NU. Reference is made to information under the heading "Selected Consolidated Financial Data" contained on page 51 of NU's 2001 Annual Report to Shareholders, which information is incorporated herein by reference. CL&P. Reference is made to information under the heading "Selected Consolidated Financial Data" contained on page 43 of CL&P's 2001 Annual Report, which information is incorporated herein by reference. PSNH. Reference is made to information under the heading "Selected Consolidated Financial Data" contained on page 38 of PSNH's 2001 Annual Report, which information is incorporated herein by reference. WMECO. Reference is made to information under the heading "Selected Consolidated Financial Data" contained on page 38 of WMECO's 2001 Annual Report, which information is incorporated herein by reference. NGC. Reference is made to information under the heading "Selected Financial Data" contained on page 23 of NGC's 2001 Annual Report, which information is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS; AND ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK NU. Reference is made to information under the heading "Management's Discussion and Analysis and Results of Operations" contained on pages 15 through 25 of NU's 2001 Annual Report to Shareholders, which information is incorporated herein by reference. CL&P. Reference is made to information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained on pages 1 through 12 of CL&P's 2001 Annual Report, which information is incorporated herein by reference. PSNH. Reference is made to information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained on pages 1 through 10 of PSNH's 2001 Annual Report, which information is incorporated herein by reference. WMECO. Reference is made to information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained on pages 1 through 10 of WMECO's 2001 Annual Report, which information is incorporated herein by reference. NGC. Reference is made to information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained on pages 1 through 5 of NGC's 2001 Annual Report, which information is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NU. Reference is made to information under the headings "Company Report," "Report of Independent Public Accountants," "Consolidated Statements of Income," "Consolidated Statements of Comprehensive Income," "Consolidated Balance Sheets," "Consolidated Statements of Shareholders' Equity," "Consolidated Statements of Cash Flows," "Consolidated Statements of Capitalization," "Consolidated Statements of Income Taxes," "Notes to Consolidated Financial Statements," and "Consolidated Statements of Quarterly Financial Data" contained on pages 26 through 50 of NU's 2001 Annual Report to Shareholders, which information is incorporated herein by reference. CL&P. Reference is made to information under the headings "Report of Independent Public Accountants," "Consolidated Statements of Income," "Consolidated Statements of Comprehensive Income," "Consolidated Balance Sheets," "Consolidated Statements of Common Stockholder's Equity," "Consolidated Statements of Cash Flows," "Notes to Consolidated Financial Statements," and "Consolidated Quarterly Financial Data" contained on pages 13 through 43 of CL&P's 2001 Annual Report, which information is incorporated herein by reference. PSNH. Reference is made to information under the headings "Report of Independent Public Accountants," "Consolidated Statements of Income," "Consolidated Statements of Comprehensive Income," "Consolidated Balance Sheets," "Consolidated Statements of Common Stockholder's Equity," "Consolidated Statements of Cash Flows," "Notes to Consolidated Financial Statements," and "Consolidated Quarterly Financial Data" contained on pages 11 through 38 of PSNH's 2001 Annual Report, which information is incorporated herein by reference. WMECO. Reference is made to information under the headings "Report of Independent Public Accountants," "Consolidated Statements of Income," "Consolidated Statements of Comprehensive Income," "Consolidated Balance Sheets," "Consolidated Statements of Common Stockholder's Equity," "Consolidated Statements of Cash Flows," "Notes to Consolidated Financial Statements," and "Consolidated Quarterly Financial Data" contained on pages 11 through 38 of WMECO's 2001 Annual Report, which information is incorporated herein by reference. NGC. Reference is made to information under the headings "Report of Independent Public Accountants," "Statements of Income," "Statements of Comprehensive Income," "Balance Sheets," "Statements of Common Stockholder's Equity," "Statements of Cash Flows," "Notes to Financial Statements," and "Quarterly Financial Data" contained on pages 6 through 23 of NGC's 2001 Annual Report, which information is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On March 15, 2002, the Company's Board of Trustees, acting on the recommendation of its Audit Committee decided to no longer engage Arthur Andersen LLP (Arthur Andersen or AA) as the Company's independent public accountants. This determination followed the Company's decision to seek proposals from other independent accountants to audit the Company's consolidated financial statements for the year ending December 31, 2002. Arthur Andersen's reports on the Company's consolidated financial statements for each of the years ended 2001, 2000 and 1999 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the years ended December 31, 2001, 2000 and 1999 and through the date hereof, there were no disagreements with Arthur Andersen on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure which, if not resolved to AA's satisfaction, would have caused them to make reference to the subject matter in connection with their report on the Company's consolidated financial statements for such years; and there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. The Company provided Arthur Andersen with a copy of the foregoing disclosures. Attached as Exhibit 16 is a copy of AA's letter, dated March 22, 2002, stating its agreement with such statements. Effective March 15, 2002, the Board of Trustees, based on upon a recommendation of its Audit Committee, retained Deloitte & Touche as its independent auditors to audit the Company's consolidated financial statements for the year ending December 31, 2002. The decision to retain Deloitte & Touche will be submitted to shareholders for nonbinding ratification at the Company's 2002 Annual Meeting of Stockholders to be held on May 14, 2002. During the years ended December 31, 2001 and 2000 and through the date hereof, the Company did not consult Deloitte & Touche with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's consolidated financial statements, or any other matters or reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K. The Declaration of Trust of the Company does not require that its shareholders ratify the selection of our independent auditors. If the appointment of Deloitte & Touche is ratified, the Board of Trustees and its Audit Committee may, in their discretion, change the appointment at any time during the year if they determine that such change would be in the best interests of the Company and its shareholders. If the shareholders do not ratify the appointment, the Board of Trustees and its Audit Committee will reconsider whether or not to retain Deloitte & Touche but may retain Deloitte & Touche if they deem it to be in the best interests of the Company and its shareholders. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS NU. In addition to the information provided below concerning the executive officers of NU, incorporated herein by reference is the information contained in the sections "Proxy Statement," "Election of Trustees," "Board Committees and Responsibilities," and "Section 16(a) Beneficial Ownership Reporting Compliance," of the definitive proxy statement for solicitation of proxies by NU's Board of Trustees, dated March 25, 2002, which will be filed with the Commission pursuant to Rule 14a-6 under the Securities Exchange Act of 1934. Positions Name Held - ---------------------- --------- Gregory B. Butler (*) VP, SEC, GC John H. Forsgren (*) EVP, CFO, VC, T Cheryl W. Grise (*) P Bruce D. Kenyon (*) P Michael G. Morris (*) CHB, P, CEO, T Gary D. Simon (*) OTH Lisa J. Thibdaue (*) OTH CL&P. Positions Name Held - ---------------------- --------- David H. Boguslawski VP, D Gregory B. Butler (*) OTH John H. Forsgren (*) OTH Cheryl W. Grise (*) OTH, D Michael G. Morris (*) OTH Leon J. Olivier (*) P, COO, D Lisa J. Thibdaue (*) OTH PSNH. Positions Name Held - ---------------------- --------- David H. Boguslawski VP, D Gregory B. Butler (*) OTH John C. Collins D John H. Forsgren (*) OTH, D Cheryl W. Grise (*) OTH, D Gerald Letendre D Gary A. Long (*) P, COO, D Michael G. Morris (*) CH, CEO, D Jane E. Newman D Lisa J. Thibdaue (*) OTH WMECO. Positions Name Held - ---------------------- --------- David H. Boguslawski VP, D Gregory B. Butler (*) OTH James E. Byrne D John H. Forsgren (*) OTH, D Cheryl W. Grise (*) OTH, D Kerry J. Kuhlman (*) P, COO, D Paul J. McDonald D Michael G. Morris (*) CH, CEO, D Melinda M. Phelps D Lisa J. Thibdaue (*) OTH NGC. Positions Name Held - ---------------------- --------- Gregory B. Butler (*) OTH John H. Forsgren (*) OTH Bruce D. Kenyon (*) P, D Michael G. Morris (*) OTH William J. Nadeau VP, D Frank P. Sabatino VP, D William W. Schivley D Gary D. Simon (*) OTH * Executive Officer Key: CEO - Chief Executive Officer OTH - Executive Officer of CFO - Chief Financial Officer Registrant because of policy- CH - Chairman making function for NU System CHB - Chairman of the Board P - President COO - Chief Operating Officer SEC - Secretary D - Director SVP - Senior Vice President EVP - Executive Vice President T - Trustee GC - General Counsel VP - Vice President VC - Vice Chairman Name Age Business Experience During Past 5 Years - ---------------------- --- --------------------------------------- David H. Boguslawski 47 Vice President - Transmission Business of CL&P, PSNH and WMECO since May 1, 2001 and a Director of CL&P, PSNH and WMECO since June 30, 1999; previously Vice President - Energy Delivery of CL&P, PSNH and WMECO, from September 1996 to May 2001. Gregory B. Butler 44 Vice President, Secretary and General Counsel of NU since May 1, 2001; previously Vice President-Governmental Affairs of NUSCO from January 1997 to May 2001; Vice President of Federal Affairs at New England Electric System from January 1995 to December 1996; and senior counsel for Niagara Mohawk Power Corporation from December 1992 to January 1995. James E. Byrne 47 Partner, Finneran, Byrne & Dreshsler, L.L.P., since 1982. Director of WMECO since September 17, 1999. John C. Collins (1) 56 Chief Executive Officer, Dartmouth- Hitchcock Clinic, Dartmouth-Hitchcock Medical Center since 1977. Director of PSNH since October 19, 1992. John H. Forsgren (2) 55 Vice Chairman of NU since May 1, 2001; Executive Vice President and Chief Financial Officer of NU since February 1, 1996; Director of WMECO since June 10, 1996 and of PSNH since August 5, 1996; Executive Vice President and Chief Financial Officer of CL&P, PSNH, and WMECO from February 1996 to June 1999 and of NGC from January 1999 to June 1999. Director of CL&P from June 1996 to June 1999 and of NGC from December 1998 to June 1999. Cheryl W. Grise 49 President - Utility Group of NU since May 2001; President of CL&P from May 2001 to September 2001 and a Director of CL&P since May 1, 2001, PSNH since May 14, 2001 and WMECO since June 2001; previously Senior Vice President, Secretary and General Counsel of NU from July 1998 to May 2001, Senior Vice President, Secretary and General Counsel of CL&P, and PSNH and Senior Vice President, Secretary, Assistant Clerk and General Counsel of WMECO from July 1998 to June 1999 and Senior Vice President, Secretary and General Counsel of NGC from January 1999 to June 1999; previously Director of CL&P and WMECO (January 1994 through November 1997) and PSNH (February 1995 through November 1997); Senior Vice President and Chief Administrative Officer of CL&P and PSNH, and Senior Vice President of WMECO from 1995 to 1998. Bruce D. Kenyon (3) 59 President-Generation Group of NU since March 1, 1999, President of NGC since January 4, 1999 and a Director of NGC since December 29, 1998; President-Generation Group of CL&P, PSNH and WMECO from March 1999 to June 1999; previously President-Nuclear Group of NU, CL&P, PSNH and WMECO from September 1996 to March 1999, a Director of CL&P and WMECO from September 1996 to June 1999, and a Director of PSNH from November 1997 to June 1999. Kerry J. Kuhlman 51 President and Chief Operating Officer of WMECO since April 1999; previously Vice President-Customer Operations of WMECO from October 1998 to April 1999; Vice President- Central Region of CL&P from August 1997 to October 1998; and Vice President-Eastern Region of CL&P from July 1994 to August 1997. Gerald Letendre (4) 60 President, Diamond Casting & Machine Co., Inc. since 1972. Director of PSNH since October 19, 1992. Gary A. Long 50 President and Chief Operating Officer and a Director of PSNH since July 1, 2000 and a Director of PSNH; previously Senior Vice President-PSNH of PSNH from February 2000 through June 2000 and Vice President-Customer Service and Economic Development of PSNH from January 1994 to February 2000. Paul J. McDonald (5) 58 Advisor to the Board of Directors, Friendly Ice Cream Corporation since January 2000; Director of WMECO since September 17, 1999. Previously Senior Executive Vice President and Chief Financial Officer, Friendly Ice Cream Corporation, from 1986 to 1999. Michael G. Morris (6) 55 Chairman of the Board, President and Chief Executive Officer and a Trustee of NU and a Director of PSNH and WMECO since August 19, 1997, Chairman and Chief Executive Officer of PSNH from August 1997 through March 2000 and since May 14, 2001 and Chairman of PSNH from March 1, 2000 to July 2000, Chairman of WMECO from August 1997 and Chairman and Chief Executive Officer of WMECO from June 30, 1999; Chairman and a Director of CL&P from August 1997 to June 1999; Chairman and Chief Executive Officer of NGC from January 1999 to June 1999 and a Director of NGC from December 1998 to June 1999; previously President and Chief Executive Officer of Consumers Power Company from 1994 to 1997. William J. Nadeau (7) 51 Vice President - Northeast Generation Services Company since January 4, 1999; Vice President and a Director of NGC since June 1, 2000; Vice President-Fossil/Hydro Engineering and Operations of CL&P, PSNH and WMECO from July 1998 to March 2001; previously Director- Fossil and Hydro, Massachusetts region (WMECO, HWP) from September 1995 to June 1998. Jane E. Newman (8) 56 Executive Dean, Harvard University's John F. Kennedy School of Government since July 2000; Director of PSNH since October 19, 1992. Previously Managing Director, The CommerceGroup, LLC, a strategic communications company, from January 1999 to July 2000; and Dean, Whittemore School of Business and Economics of the University of New Hampshire from January 1998 to January 1999; Executive Vice President and Director of Exeter Trust Company from 1995 to 1997. Leon J. Olivier 53 President and Chief Operating Officer and a Director of CL&P since September 2001; previously Senior Vice President of Entergy Nuclear Corp. from April 2001 to September 2001; Senior Vice President and Chief Nuclear Officer of Northeast Nuclear Energy Company from October 1998 to May 2001; Senior Vice President, Nuclear of Boston Edison Company from 1997 to October 1998. Melinda M. Phelps 45 Partner, Bulkley, Richardson & Gelinas, LLP since January 1, 2001; Director of WMECO since September 17, 1999. Previously of counsel to Bulkley, Richardson & Gelinas, LLP, from May 2000 through December 2000 and partner, Keyes and Donnellan, P.C., from 1992 to 2000. Frank P. Sabatino 53 Senior Vice President-Power Marketing of Select Energy, Inc. since April 4, 1999 and Vice President and a Director of NGC since June 1, 2000; Senior Vice President-Power Marketing of NUSCO from April 1999 to June 1999; previously Vice President-Wholesale Marketing of CL&P and WMECO from June 1994 to December 1998. William W. Schivley (9) 55 President of Select Energy, Inc. since August 1999 and a Director of NGC since March 1, 2000; previously Executive Vice President and Chief Operating Officer for CMS Marketing Services and Trading Company from January 1997 to August 1999 and President of CMS Gas and Electric Marketing from January 1992 to January 1997. Gary D. Simon (10) 53 Senior Vice President-Enterprise Development and Analysis of NUSCO since May 6, 2000; Senior Vice President-Strategy and Development of NUSCO from April 1998 to May 2000. Previously Senior Director, Electric Power for Cambridge Energy Research Associates from 1989 to 1998. Lisa J. Thibdaue (11) 48 Vice President-Rates, Regulatory Affairs and Compliance of NUSCO since January 1998; Vice President-Rates, Regulatory Affairs and Compliance of CL&P, PSNH and WMECO from January 1998 to June 1999; previously Executive Director, Rates and Regulatory Affairs, Consumers Power Company from 1996 to 1998. (1) Mr. Collins is a Director of Blue Cross and Blue Shield of Vermont, The Vermont Health Plan, and Hamden Assurance Company Limited. (2) Mr. Forsgren is a Director of NEON Communications, Inc. and The Circle Trust Company and a member of the Board of Regents of Georgetown University. (3) Mr. Kenyon is a Trustee of Columbia College and Director of Connecticut Yankee Atomic Power Company. (4) Mr. Letendre is a Director of the National Association of Manufacturers (Washington, DC). (5) Mr. McDonald is a Director of CIGNA Investments Inc. and Polytainer's, LLC (Toronto, Canada). (6) Mr. Morris is a Director of the Institute of Nuclear Power Operations, the Nuclear Energy Institute, the Edison Electric Institute, the Association of Edison Illuminating Companies, Nuclear Electric Insurance Limited, Connecticut Business & Industry Association, the Webster Financial Corporation, and the Spinnaker Exploration Co. Mr. Morris is also a Regent of Eastern Michigan University. (7) Mr. Nadeau is a Director of Connecticut Yankee Atomic Power Company. (8) Ms. Newman is a Director of Citizens Advisors. (9) Mr. Schivley is a Director of Monitor Sugar Company. (10) Mr. Simon is a Director of NEON Communications, Inc. (11) Ms. Thibdaue is a Director of Connecticut Water Service Company. There are no family relationships between any director or executive officer and any other director or executive officer of NU, CL&P, PSNH, WMECO or NGC. ITEM 11. EXECUTIVE COMPENSATION NU. Incorporated herein by reference is the information contained in the sections "Executive Compensation", "Pension Benefits", "Trustee Compensation", "Employment Contracts and Termination of Employment Arrangements", "Compensation Committee Report on Executive Compensation" and "Share Performance Chart" of the definitive proxy statement for solicitation of proxies by NU's Board of Trustees, dated March 25, 2002, which will be filed with the Commission pursuant to Rule 14a-6 under the Securities Exchange Act of 1934. SUMMARY COMPENSATION TABLE CL&P, PSNH, WMECO, NGC The following tables present the cash and non-cash compensation received by the Chief Executive Officer and the next four highest paid executive officers of CL&P, PSNH, WMECO and NGC accordance with Rules of the Securities and Exchange Commission (SEC):
- --------------------------------------------------------------------------------------------------------------- Annual Compensation Long-Term Compensation ------------------- ----------------------------------------------- Awards Payouts ------------------------- --------------------- Restricted Securities Long-Term All Stock Underlying Incentive Other Other Annual Award(s) Options/Stock Program Compen- Name and Salary Compensation ($) Appreciation Payouts sation ($) Principal Position Year ($) Bonus ($) ($) Note 1) (Note 2) Rights (#) ($) (Note 3) - --------------------------------------------------------------------------------------------------------------- Michael G. Morris 2001 900,000 869,805 - - 220,000 - 27,000 Chairman of the Board, President 2000 830,770 1,200,000 - - 140,000 - 27,236 and Chief Executive Officer of NU and 1999 783,173 1,253,300 92,243 348,611 118,352 - 23,210 Chairman and Chief Executive Officer of PSNH and WMECO John H. Forsgren 2001 524,423 200,000 - - 98,000 - 5,100 Vice Chairman, Executive Vice 2000 444,615 450,000 - - 36,000 - 5,100 Chief Financial President and 1999 429,904 400,000 - 122,682 32,852 87,003 12,888 Officer of NU Bruce D. Kenyon 2001 515,000 150,000 - - 34,000 - 15,450 President - Generation Group 2000 504,616 475,000 - - 20,000 - 16,274 of NU and President of NGC (in NGC table 1999 500,000 - - 77,690 20,804 462,500 15,000 only) Cheryl W. Grise 2001 338,654 180,000 - - 76,000 - 10,119 President - Utility Group of NU 2000 279,616 290,000 - - 23,000 - 8,795 (in CL&P, PSNH and WMECO tables only) 1999 244,712 250,000 - 73,612 19,712 - 82,247 Gary D. Simon 2001 236,539 70,000 - - 14,000 - 7,096 Senior Vice President - 2000 231,539 200,000 - - 18,000 - 6,946 Enterprise Development and 1999 226,635 200,000 - 61,333 16,424 - 4,982 Analysis of NUSCO (in NGC table only) Gregory B. Butler 2001 189,269 70,000 - - 7,600 - 5,100 Vice President, Secretary and 2000 174,462 105,000 - - 9,000 72,995 5,100 General Counsel of NU and NUSCO 1999 168,635 94,000 - 31,892 8,540 - 4,800 Lisa J. Thibdaue 2001 193,539 60,000 - - 8,500 - 5,100 Vice President - Rates, Regulatory 2000 187,154 115,000 - - 9,500 - 5,100 Affairs and Compliance of NUSCO 1999 181,635 112,000 - 30,667 8,212 - 4,800 (in CL&P, PSNH and WMECO tables only)
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- ----------------------------------------------------------------------------------------------------------- Individual Grants Grand Date Value ----------------- ---------------- Number of % of Total Securities Options/SARs Underlying Granted to Exercise or Grant Date Options/SARs Employees Base Price Expiration Present Name Granted (#) in Fiscal Year ($/sh) Date Value ($) - ----------------------------------------------------------------------------------------------------------- Michael G. Morris 120,000 14.47 21.03 2/27/2011 1,006,800 (Note 4) 100,000 12.06 20.06 6/28/2011 803,000 (Note 5) John H. Forsgren 33,000 3.98 21.03 2/27/2011 276,870 (Note 4) 65,000 7.84 20.06 6/28/2011 521,950 (Note 5) Bruce D. Kenyon 34,000 4.10 21.03 2/27/2011 228,745 (Note 4) Cheryl W. Grise 26,000 3.14 21.03 2/27/2011 218,140 (Note 4) 50,000 6.03 20.06 6/28/2011 401,500 (Note 5) Gary D. Simon 14,000 1.69 21.03 2/27/2011 117,460 (Note 4) Gregory B. Butler 7,600 0.92 21.03 2/27/2011 63,764 (Note 4) Lisa J. Thibdaue 8,500 1.03 21.03 2/27/2011 71,315 (Note 4)
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
- ------------------------------------------------------------------------------------------------------- Shares With Respect to Number of Securities Value of Unexercised Which Underlying Unexercised In-the-Money SARs Were Value Options/SARs Options/SARs Exercised Realized at Fiscal Year End (#) at Fiscal Year End ($) Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable - ------------------------------------------------------------------------------------------------------- Michael G. Morris - - 698,475 344,451 4,256,831 83,783 John H. Forsgren 50,471 326,800 107,085 132,950 155,390 29,483 Bruce D. Kenyon 38,253 260,312 41,772 54,268 65,323 18,670 Cheryl W. Grise 24,490 166,654 33,724 97,904 52,402 17,690 Gary D. Simon - - 73,198 50,226 170,384 61,713 Gregory B. Butler - - 15,868 16,448 24,783 7,666 Lisa J. Thibdaue - - 16,172 17,572 24,665 7,369 Notes to Summary Compensation and Option/SAR Grants Tables: 1. Other annual compensation for Mr. Morris consists of 1999 relocation expense reimbursements. 2. At December 31, 2001, the aggregate restricted stock holdings by the five individuals named in the table for CL&P, WMECO and PSNH were 13,556 shares with a value of $238,992 and for NGC were 14,332 shares with a value of $252,673. Awards shown for 1999 vested one-third on February 23, 2000, one-third on February 23, 2001, and one-third on February 23, 2002. No restricted stock was awarded in 2001. Dividends paid on restricted stock are either paid out or reinvested into additional shares. 3. "All Other Compensation" for 2001 consists of employer matching contributions under the Northeast Utilities Service Company 401k Plan, generally available to all eligible employees ($5,100 for each named officer), and matching contributions under the Deferred Compensation Plan for Executives (Mr. Morris - $21,900, Mrs. Grise - $5,019, Mr. Kenyon - $10,350, Mr. Simon - $1,996). 4. These options were granted on February 27, 2001 under the Incentive Plan. All options granted vest one-third on February 27, 2002, one-third on February 27, 2003 and one-third on February 27, 2004. Valued using the Black-Scholes option pricing model, discounted by 5.71% to reflect the risk of forfeiture, with the following assumptions: Volatility: 25.96 percent (36 months of monthly data); Risk-free rate: 5.23 percent; Dividend yield: 0.94 percent; Exercise date: February 27, 2011. 5. These options were granted on June 28, 2001 under the Incentive Plan. All options granted vest one-third on June 28, 2002, one-third on June 28, 2003 and one-third on June 28, 2004. Valued using the Black-Scholes option pricing model, discounted by 5.71% to reflect the risk of forfeiture, with the following assumptions: Volatility: 26.38 percent (36 months of monthly data); Risk-free rate: 5.63 percent; Dividend yield: 1.12 percent; Exercise date: June 28, 2011.
PENSION BENEFITS The tables on the following pages show the estimated annual retirement benefits payable to an executive officer of Northeast Utilities upon retirement, assuming that retirement occurs at age 65 and that the officer is at that time not only eligible for a pension benefit under the Northeast Utilities Service Company Retirement Plan (the Retirement Plan) but also eligible for either the make-whole benefit or the make-whole benefit plus the target benefit under the Supplemental Executive Retirement Plan for Officers of Northeast Utilities System Companies (the Supplemental Plan). The Supplemental Plan is a non-qualified pension plan providing supplemental retirement income to system officers. The make-whole benefit under the Supplemental Plan, available to all officers, makes up for benefits lost through application of certain tax code limitations on the benefits that may be provided under the Retirement Plan, and includes as "compensation" awards under the executive incentive plans and deferred compensation (as earned). The target benefit further supplements these benefits and is available to officers at the Senior Vice President level and higher who are selected by the Board of Trustees to participate in the target benefit and who remain in the employ of Northeast Utilities companies until at least age 60 (unless the Board of Trustees sets an earlier age). Mr. Forsgren and Mrs. Grise are currently eligible for a make-whole plus a target benefit. Messrs. Kenyon, Simon, and Butler and Ms. Thibdaue are eligible for the make-whole benefit but not the target benefit. Mr. Kenyon's Employment Agreement provides specially calculated retirement benefits, based on his previous arrangement with South Carolina Electric and Gas, which supplement his make-whole benefit under the Supplemental Plan. If Mr. Kenyon retires with at least three years of service with the Company, he will be deemed to have two extra years of service for purpose of his special retirement benefit. If after achieving three years of service he voluntarily terminates employment following a "substantial change in responsibilities resulting from a material change in the business of Northeast Utilities," he will be deemed to have an additional year of service for purpose of his special retirement benefit, and if he retires with at least three years of service with the Company, he will receive a lump sum payment of $500,000. Mr. Kenyon has met these service-related milestones. Mr. Morris's Employment Agreement provides that upon retirement after reaching the fifth anniversary of his employment date (or upon disability or termination without cause or following a change of control, as defined) he will be entitled to receive a special retirement benefit calculated by applying the benefit formula of the CMS Energy/Consumers Energy Company (CMS) Supplemental Executive Retirement Plan to all compensation earned from the Northeast Utilities system (the Company) and to all service rendered to the Company and CMS. If Mr. Morris retires after age 60, his special retirement benefit will be no less than that which he would have received had he been eligible for a make-whole benefit plus a target benefit under the Supplemental Plan. Mr. Forsgren's Employment Agreement provides for supplemental pension benefits based on crediting up to ten years additional service and providing payments equal to 25 percent of salary for up to 15 years following retirement, reduced by four percentage points for each year that his age is less than 65 years at retirement. In addition, if Mr. Forsgren retires after age 58, he will be eligible for a make-whole plus a target benefit under the Supplemental Plan based on crediting three extra years of service, unreduced for early commencement. ANNUAL BENEFIT FOR OFFICERS ELIGIBLE FOR MAKE-WHOLE BENEFIT Final Years of Credited Service Average Compensation 15 20 25 30 35 $ 200,000 $ 43,605 $ 58,139 $ 72,674 $ 87,209 $101,744 250,000 54,855 73,139 91,424 109,709 127,994 300,000 66,105 88,139 110,174 132,209 154,244 350,000 77,355 103,139 128,924 154,709 180,494 400,000 88,605 118,139 147,674 177,209 206,744 450,000 99,855 133,139 166,424 199,709 232,994 500,000 111,105 148,139 185,174 222,209 259,244 600,000 133,605 178,139 222,674 267,209 311,744 700,000 156,105 208,139 260,174 312,209 364,244 800,000 178,605 238,139 297,674 357,209 416,744 900,000 201,105 268,139 335,174 402,209 469,244 1,000,000 223,605 298,139 372,674 447,209 521,744 1,100,000 246,105 328,139 410,174 492,209 574,244 1,200,000 268,605 358,139 447,674 537,209 626,744 ANNUAL BENEFIT FOR OFFICERS ELIGIBLE FOR MAKE-WHOLE PLUS TARGET BENEFIT Final Years of Credited Service Average Compensation 15 20 25 30 35 $ 200,000 $ 72,000 $ 96,000 $120,000 $120,000 $120,000 250,000 90,000 120,000 150,000 150,000 150,000 300,000 108,000 144,000 180,000 180,000 180,000 350,000 126,000 168,000 210,000 210,000 210,000 400,000 144,000 192,000 240,000 240,000 240,000 450,000 162,000 216,000 270,000 270,000 270,000 500,000 180,000 240,000 300,000 300,000 300,000 600,000 216,000 288,000 360,000 360,000 360,000 700,000 252,000 336,000 420,000 420,000 420,000 800,000 288,000 384,000 480,000 480,000 480,000 900,000 324,000 432,000 540,000 540,000 540,000 1,000,000 360,000 480,000 600,000 600,000 600,000 1,100,000 396,000 528,000 660,000 660,000 660,000 1,200,000 432,000 576,000 720,000 720,000 720,000 The benefits presented in the tables above are based on a straight life annuity beginning at age 65 and do not take into account any reduction for joint and survivorship annuity payments. Final average compensation for purposes of calculating the target benefit is the highest average annual compensation of the participant during any 36 consecutive months compensation was earned. Final average compensation for purposes of calculating the make- whole benefit is the highest average annual compensation of the participant during any 60 consecutive months compensation was earned. Compensation for these benefits takes into account the annual compensation shown in the Summary Compensation Table and long term incentive compensation but does not include employer matching contributions under the 401k Plan. In the event that an officer's employment terminates because of disability, the retirement benefits shown above would be offset by the amount of any disability benefits payable to the recipient that are attributable to contributions made by Northeast Utilities and its subsidiaries under long term disability plans and policies. As of December 31, 2001, the executive officers named in the Summary Compensation Table had the following years of credited service for purposes of the Supplemental Plan: Mr. Kenyon - 7, Mr. Forsgren - 5, Mrs. Grise - 21, Mr. Simon - 3, Mr. Butler - 5, and Ms. Thibdaue - 4. Mr. Morris had 23 years of service for purposes of his special retirement benefit. In addition, Mr. Forsgren had 10 years of service for purposes of his supplemental pension benefit and would have 25 years of service for such purpose if he were to retire at age 65. COMPENSATION OF DIRECTORS During 2001 each non-employee Director of PSNH and WMECO was compensated at an annual rate of $10,000 cash, and received $500 for each meeting attended of the Board of Directors or, in the case of PSNH, its committees. A non-employee Director who participates in a meeting of the Board of Directors or any of its committees by conference telephone receives $300 per meeting. Also, committee chairs were compensated at an additional annual rate of $1,500. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS Northeast Utilities has entered into an employment agreement with Mr. Morris and Northeast Utilities Service Company (NUSCO) has entered into employment agreements with each of the other named executive officers except Messrs. Simon and Butler and Ms. Thibdaue, who participate in the Special Severance Program for Officers of Northeast Utilities Companies. The agreements and the Special Severance Program are also binding on Northeast Utilities and on each majority-owned subsidiary of Northeast Utilities. Each agreement obligates the officer to perform such duties as may be directed by the NUSCO Board of Directors or the Northeast Utilities Board of Trustees, protect the Company's confidential information, and refrain, while employed by the Company and for a period of time thereafter, from competing with the Company in a specified geographic area. Each agreement provides that the officer's base salary will not be reduced below certain levels without the consent of the officer, and that the officer will participate in specified benefits under the Supplemental Executive Retirement Plan or other supplemental retirement programs (see Pension Benefits, above) and/or in certain executive incentive programs at specified incentive opportunity levels. Each agreement provides for a specified employment term and for automatic one-year extensions of the employment term unless at least six months' notice of non-renewal is given by either party. The employment term may also be ended by the Company for "cause", as defined, at any time (in which case no supplemental retirement benefit, if any, shall be due), or by the officer on thirty days' prior written notice for any reason. Absent "cause", the Company may remove the officer from his or her position on sixty days' prior written notice, but in the event the officer is so removed and signs a release of all claims against the Company, the officer will receive one or two years' base salary and annual incentive payments, specified employee welfare and pension benefits, and vesting of stock appreciation rights, options and restricted stock. Under the terms of the agreements and the Special Severance Program, upon any termination of employment following a change of control, as defined, between (a) the earlier of the date shareholders approve a change of control transaction or a change of control transaction occurs and (b) the earlier of the date, if any, on which the Board of Trustees abandons the transaction or the date two years following the change of control, if the officer signs a release of all claims against the Company, the officer will be entitled to certain payments including a multiple (not to exceed three) of annual base salary, annual incentive payments, specified employee welfare and pension benefits, and vesting of stock appreciation rights, options and restricted stock. Certain of the change of control provisions may be modified by the Board of Trustees prior to a change of control, on at least two years' notice to the affected officer(s). Besides the terms described above, the agreements of Messrs. Morris, Kenyon and Forsgren provide for a specified salary, cash, restricted stock and/or stock options upon employment, special incentive programs and/or special retirement benefits. See Pension Benefits, above, for further description of these provisions. The agreements of Mr. Forsgren and Mrs. Grise were supplemented during 2001 to provide for special deferred compensation of $520,000 and $500,000, respectively, vesting in even installments (adjusted to reflect investment performance) on June 28, 2002, 2003 and 2004, so long as such officer remains in the employ of Northeast Utilities Service Company, and vesting sooner in the event of a change of control of the Company or involuntary termination without cause. Letter agreements reflecting the terms of employment of Messrs. Simon and Butler and Ms. Thibdaue provide for specified salary, cash, restricted stock or stock options upon employment. The descriptions of the various agreements set forth above are for purpose of disclosure in accordance with the proxy and other disclosure rules of the SEC and shall not be controlling on any party; the actual terms of the agreements themselves determine the rights and obligations of the parties. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT NU. Incorporated herein by reference is the information contained in the sections "Common Stock Ownership of Certain Beneficial Owners" and "Common Stock Ownership of Management" of the definitive proxy statement for solicitation of proxies by NU's Board of Trustees, dated March 25, 2002, which will be filed with the Commission pursuant to Rule 14a-6 under the Securities Exchange Act of 1934. CL&P, PSNH, WMECO and NGC. NU owns 100% of the outstanding common stock of registrants CL&P, PSNH, and WMECO. NU owns 100% of the outstanding common stock of NU Enterprises, Inc., which in turn owns 100% of the outstanding common stock of NGC. As of February 27, 2002, the Directors and Executive Officers of CL&P, PSNH, WMECO and NGC beneficially owned the number of shares of each class of equity securities of NU listed below. No equity securities of CL&P, PSNH, WMECO or NGC are owned by the Directors and Executive Officers of CL&P, PSNH, WMECO and NGC. Unless otherwise noted, each Director and Executive Officer of CL&P, PSNH, WMECO and NGC has sole voting and investment power with respect to the listed shares. Title of Amount and Nature of Percent of Class Name Beneficial Ownership Class NU Common David H. Boguslawski (1) 30,349 (2) NU Common Gregory B. Butler (3) 33,969 (2) NU Common James E. Byrne None (2) NU Common John C. Collins None (2) NU Common John H. Forsgren (4) 149,132 (2) NU Common Cheryl W. Grise (5) 78,813 (2) NU Common Bruce D. Kenyon (6) 133,710 (2) NU Common Kerry J. Kuhlman (7) 20,565 (2) NU Common Gerald Letendre None (2) NU Common Gary A. Long (8) 18,784 (2) NU Common Paul J. McDonald 500 (2) NU Common Michael G. Morris (9) 890,925 (2) NU Common William J. Nadeau (10) 17,709 (2) NU Common Jane E. Newman None (2) NU Common Leon J. Olivier None (2) NU Common Melinda M. Phelps None (2) NU Common Frank P. Sabatino (11) 56,734 (2) NU Common William W. Schivley (12) 44,357 (2) NU Common Gary D. Simon (13) 114,081 (2) NU Common Lisa J. Thibdaue (14) 30,713 (2) Amount beneficially owned by Directors and Executive Officers as a group: Amount and Nature of Percent of Company Number of Persons Beneficial Ownership Outstanding CL&P 7 1,213,910 (2) PSNH 10 1,232,685 (2) WMECO 10 1,234,966 (2) NGC 8 1,440,617 1.08% (1) Includes 24,016 shares that could be acquired by Mr. Boguslawski pursuant to currently exercisable options and 462 shares held under the Northeast Utilities Employee Share Purchase Plan II as to which Mr. Boguslawski has sole voting but no dispositive power. (2) As of February 27, 2002, there were 133,748,279 common shares of NU outstanding. The percentage of such shares beneficially owned by any Director or Executive Officer of CL&P, PSNH, WMECO or NGC and by all of the Directors and Executive Officers of each of CL&P, PSNH and WMECO does not exceed one percent. (3) Includes 24,249 shares that could be acquired by Mr. Butler pursuant to currently exercisable options and 796 shares held in an ESOP as to which Mr. Butler has sole voting power but no dispositive power. (4) Includes 141,035 shares that could be acquired by Mr. Forsgren pursuant to currently exercisable options and 5,382 restricted shares as to which Mr. Forsgren has sole voting and no dispositive power. (5) Includes 56,626 shares that could be acquired by Mrs. Grise pursuant to currently exercisable options, 4,844 restricted shares as to which Mrs. Grise has sole voting and no dispositive power, and 265 shares held by Mrs. Grise's husband as custodian for her children, with whom she shares voting and dispositive power. (6) Includes 66,705 shares that could be acquired by Mr. Kenyon pursuant to currently exercisable options, 501 shares held under the Northeast Utilities Employee Share Purchase Plan II as to which Mr. Kenyon has sole voting but no dispositive power, and 1,212 shares held in an ESOP as to which Mr. Kenyon has sole voting power but no dispositive power. (7) Includes 14,331 shares that could be acquired by Ms. Kuhlman pursuant to currently exercisable options. (8) Includes 13,183 shares that could be acquired by Mr. Long pursuant to currently exercisable options. (9) Includes 816,258 shares that could be acquired by Mr. Morris pursuant to currently exercisable options, 1,262 shares held under the Northeast Utilities Employee Share Purchase Plan II as to which Mr. Morris has sole voting but no dispositive power, 23,407 restricted shares as to which Mr. Morris has sole voting and no dispositive power, and 922 shares held in an ESOP as to which Mr. Morris has sole voting power but no dispositive power. (10) Includes 13,183 shares that could be acquired by Mr. Nadeau pursuant to currently exercisable options. (11) Includes 34,280 shares that could be acquired by Mr. Sabatino pursuant to currently exercisable options and 670 shares held under the Northeast Utilities Employee Share Purchase Plan II as to which Mr. Sabatino has sole voting but no dispositive power. (12) Includes 30,916 shares that could be acquired by Mr. Schivley pursuant to currently exercisable options, 383 shares held in an ESOP as to which Mr. Schivley has sole voting power but no dispositive power. (13) Includes 108,090 shares that could be acquired by Mr. Simon pursuant to currently exercisable options, and 564 shares held in an ESOP as to which Mr. Simon has sole voting power but no dispositive power. (14) Includes 24,909 shares that could be acquired by Ms. Thibdaue pursuant to currently exercisable options and 575 shares held in an ESOP as to which Mr. Thibdaue has sole voting power but no dispositive power. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements: The Report of Independent Public Accountants and financial statements of CL&P, PSNH, WMECO, and NGC are hereby incorporated by reference and made a part of this report (see "Item 8. Financial Statements and Supplementary Data"). Report of Independent Public Accountants on Schedules S-1 Consent of Independent Public Accountants S-2 2. Schedules: Financial Statement Schedules for NU (Parent), NU and Subsidiaries, CL&P and Subsidiaries, PSNH and Subsidiaries, and WMECO and Subsidiary are listed in the Index to Financial Statements Schedules S-3 3. Exhibits Index E-1 (b) Reports on Form 8-K: NU filed a current report on Form 8-K dated January 23, 2001, disclosing: o NU's earnings press release for the fourth quarter and full year 2000. NU filed a current report on Form 8-K dated February 28, 2001 disclosing: o NU's news release formally seeking Con Edison's assurance of intent to close merger. NU filed a current report on Form 8-K dated March 5, 2001, disclosing: o NU declares Con Edison in breach of merger agreement. NU to sue Con Edison to recover value of merger for NU shareholders. NU filed a current report on Form 8-K dated March 12, 2001, disclosing: o NU filed suit in the U.S. District Court for the Southern District seeking for itself and its shareholders in excess of $1 billion in damages arising from Con Edison's breach of the merger agreement. NU filed a current report on Form 8-K dated March 22, 2001, disclosing: o NU's news release announcing revised 2000 earnings and confirming 2001 projected earnings. NU and CL&P filed current reports on Form 8-K dated March 30, 2001, disclosing: o The closing on the sale of $1.44 billion of rate reduction certificates through CL&P's subsidiary, CL&P Funding LLC. o The closing on the sale of substantially all of the Millstone units to DNCI. WMECO filed a current report on Form 8-K dated March 30, 2001, disclosing: o The closing on the sale of substantially all of the Millstone units to DNCI. CL&P Funding LLC filed a current report on Form 8-K dated March 30, 2001, disclosing: o The closing on the sale of $1.44 billion of rate reduction certificates. NU, CL&P and WMECO filed current reports on Form 8-K dated April 11, 2001, disclosing: o NU's news release announcing the retirement of $830 million of public debt and preferred securities. NU filed a current report on Form 8-K dated April 24, 2001, disclosing: o NU's earnings press release for the first quarter of 2001. NU, PSNH and PSNH Funding LLC filed current reports on Form 8-K dated April 25, 2001, disclosing: o The closing on the sale of $525.4 million of rate reduction bonds through PSNH's subsidiary, PSNH Funding LLC. NU, WMECO and WMECO Funding LLC filed current reports on Form 8-K dated May 17, 2001, disclosing: o The closing on the sale of $155 million of rate reduction certificates through WMECO's subsidiary, WMECO Funding LLC. NU filed a current report on Form 8-K dated June 28, 2001, disclosing: o The declaration of a dividend of $0.125 per share payable on September 28, 2001, to shareholders of record as of September 1, 2001, and the announcement of three proposed strategic transmission projects. NU filed a current report on Form 8-K dated July 10, 2001, disclosing: o The authorization by the NU Board of Trustees of the repurchase of up to 15 million NU common shares by July 1, 2003, and the election of two new trustees. NU filed a current report on Form 8-K dated July 24, 2001, disclosing: o NU's earnings press release for the second quarter and six months ended June 30, 2001. NU filed current reports on Form 8-K dated October 11, 2001, disclosing: o Earnings guidance for 2001 and 2002 and related presentation information. CL&P, PSNH and WMECO filed current reports on Form 8-K dated October 11, 2001, disclosing: o Presentation information related to earnings guidance for 2001 and 2002. NU filed a current report on Form 8-K dated October 23, 2001, disclosing: o NU's earnings press release for the third quarter and nine months ended September 30, 2001. NU filed a current report on Form 8-K dated October 29, 2001, disclosing: o Earnings information for the twelve months ended September 30, 2001 for certain major businesses. NU and CL&P filed current reports on Form 8-K dated November 20, 2001, disclosing: o NU's news release announcing the CL&P's seeking of an increase in generation rates to protect supply contracts and customers. NU filed a current report on Form 8-K dated January 22, 2002, disclosing: o NU's earnings press release for the fourth quarter and full year 2001. NU, PSNH and PSNH Funding LLC 2 filed current reports on Form 8-K dated January 30, 2002, disclosing: o The closing on the sale of $50 million of rate reduction bonds through PSNH's subsidiary, PSNH Funding LLC 2. NU filed a current report on Form 8-K dated March 15, 2002, disclosing: o NU's change in its certifying accountant. NORTHEAST UTILITIES SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NORTHEAST UTILITIES ------------------- (Registrant) Date: March 22, 2002 By /s/ Michael G. Morris -------------- --------------------------- Michael G. Morris Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date Title Signature - ---- ----- --------- March 22, 2002 Chairman of the Board, /s/ Michael G. Morris - -------------- President and -------------------------------- Chief Executive Officer Michael G. Morris and a Trustee March 22, 2002 Vice Chairman, /s/ John H. Forsgren - -------------- Executive Vice --------------------------------- President and Chief John H. Forsgren Financial Officer and a Trustee March 22, 2002 Vice President - /s/ John P. Stack - -------------- Accounting and --------------------------------- Controller John P. Stack March 22, 2002 Trustee /s/ Richard H. Booth - -------------- -------------------------------- Richard H. Booth March 22, 2002 Trustee /s/ Cotton M. Cleveland - -------------- --------------------------------- Cotton M. Cleveland March 22, 2002 Trustee /s/ Sanford Cloud, Jr. - -------------- --------------------------------- Sanford Cloud, Jr. March 22, 2002 Trustee /s/ James F. Cordes - -------------- --------------------------------- James F. Cordes March 22, 2002 Trustee /s/ E. Gail de Planque - -------------- --------------------------------- E. Gail de Planque March 22, 2002 Trustee /s/ Raymond L. Golden - -------------- --------------------------------- Raymond L. Golden March 22, 2002 Trustee /s/ Elizabeth T. Kennan - -------------- --------------------------------- Elizabeth T. Kennan March 22, 2002 Trustee /s/ Robert E. Patricelli - -------------- --------------------------------- Robert E. Patricelli March 22, 2002 Trustee /s/ John F. Swope - -------------- --------------------------------- John F. Swope THE CONNECTICUT LIGHT AND POWER COMPANY SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE CONNECTICUT LIGHT AND POWER COMPANY --------------------------------------- (Registrant) Date: March 22, 2002 By /s/ Leon J. Olivier -------------- ------------------------ Leon J. Olivier President and Chief Operating Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date Title Signature - ---- ----- --------- March 22, 2002 President and /s/ Leon J. Olivier - -------------- Chief Operating ------------------------------------- Officer and Leon J. Olivier a Director March 22, 2002 Treasurer /s/ Randy A. Shoop - -------------- ------------------------------------- Randy A. Shoop March 22, 2002 Vice President - /s/ John P. Stack - -------------- Accounting and ------------------------------------- Controller John P. Stack March 22, 2002 Director /s/ David H. Boguslawski - -------------- ------------------------------------- David H. Boguslawski March 22, 2002 Director /s/ Cheryl W. Grise - -------------- ------------------------------------- Cheryl W. Grise PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE --------------------------------------- (Registrant) Date: March 22, 2002 By /s/ Michael G. Morris -------------- ----------------------- Michael G. Morris Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date Title Signature - ---- ----- --------- March 22, 2002 Chairman and Chief /s/ Michael G. Morris - -------------- Executive Officer -------------------------------------- and a Director Michael G. Morris March 22, 2002 President and /s/ Gary A. Long - -------------- Chief Operating -------------------------------------- Officer and Gary A. Long a Director March 22, 2002 Vice President /s/ David R. McHale - -------------- and Treasurer -------------------------------------- David R. McHale March 22, 2002 Vice President - /s/ John P. Stack - -------------- Accounting and -------------------------------------- Controller John P. Stack March 22, 2002 Director /s/ David H. Boguslawski - -------------- -------------------------------------- David H. Boguslawski March 22, 2002 Director /s/ John C. Collins - -------------- -------------------------------------- John C. Collins March 22, 2002 Director /s/ John H. Forsgren - -------------- -------------------------------------- John H. Forsgren March 22, 2002 Director /s/ Cheryl W. Grise - -------------- -------------------------------------- Cheryl W. Grise March 22, 2002 Director /s/ Gerald Letendre - -------------- -------------------------------------- Gerald Letendre March 22, 2002 Director /s/ Jane E. Newman - -------------- -------------------------------------- Jane E. Newman WESTERN MASSACHUSETTS ELECTRIC COMPANY SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WESTERN MASSACHUSETTS ELECTRIC COMPANY -------------------------------------- (Registrant) Date: March 22, 2002 By /s/ Michael G. Morris -------------- -------------------------- Michael G. Morris Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date Title Signature - ---- ----- --------- March 22, 2002 Chairman and Chief /s/ Michael G. Morris - -------------- Executive Officer ------------------------------------- and a Director Michael G. Morris March 22, 2002 President and /s/ Kerry J. Kuhlman - -------------- Chief Operating ------------------------------------- Officer and Kerry J. Kuhlman a Director March 22, 2002 Vice President /s/ David R. McHale - -------------- and Treasurer ------------------------------------- David R. McHale March 22, 2002 Vice President - /s/ John P. Stack - -------------- Accounting and ------------------------------------- Controller John P. Stack March 22, 2002 Director /s/ David H. Boguslawski - -------------- ------------------------------------- David H. Boguslawski March 22, 2002 Director /s/ James E. Byrne - -------------- ------------------------------------- James E. Byrne March 22, 2002 Director /s/ John H. Forsgren - -------------- ------------------------------------- John H. Forsgren March 22, 2002 Director /s/ Cheryl W. Grise - -------------- ------------------------------------- Cheryl W. Grise March 22, 2002 Director /s/ Paul J. McDonald - -------------- ------------------------------------- Paul J. McDonald March 22, 2002 Director /s/ Melinda M. Phelps - -------------- ------------------------------------- Melinda M. Phelps NORTHEAST GENERATION COMPANY SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NORTHEAST GENERATION COMPANY ---------------------------- (Registrant) Date: March 22, 2002 By /s/ Bruce D. Kenyon -------------- ------------------- Bruce D. Kenyon President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date Title Signature - ---- ----- --------- March 22, 2002 President /s/ Bruce D. Kenyon - -------------- and a Director -------------------------------- Bruce D. Kenyon March 22, 2002 Vice President /s/ David R. McHale - -------------- and Treasurer -------------------------------- of Northeast Utilities David R. McHale Service Company as Agent for Northeast Generation Company March 22, 2002 Vice President - /s/ John P. Stack - -------------- Accounting and -------------------------------- Controller John P. Stack of Northeast Utilities Service Company as Agent for Northeast Generation Company March 22, 2002 Director /s/ William J. Nadeau - -------------- -------------------------------- William J. Nadeau March 22, 2002 Director /s/ Frank P. Sabatino - -------------- -------------------------------- Frank P. Sabatino March 22, 2002 Director /s/ William W. Schivley - -------------- -------------------------------- William W. Schivley REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES ----------------------------------------------------- We have audited in accordance with auditing standards generally accepted in the United States, the financial statements included in Northeast Utilities' annual report to shareholders and The Connecticut Light and Power Company's, Public Service Company of New Hampshire's, Western Massachusetts Electric Company's and Northeast Generation Company's annual reports, incorporated by reference in this Form 10-K, and have issued our reports thereon dated January 22, 2002 for Northeast Utilities, The Connecticut Light and Power Company, Public Service Company of New Hampshire and Western Massachusetts Electric Company, and February 5, 2002 for Northeast Generation Company. Our report on the financial statements of Northeast Utilities includes an explanatory paragraph with respect to the adoption of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended and as discussed in Note 1C to the consolidated financial statements. Our audits were made for the purpose of forming an opinion on the financial statements referred to above taken as a whole. The schedules listed in the accompanying Index to Financial Statements Schedules are the responsibility of the companies' management, are presented for purposes of complying with the Securities and Exchange Commission's rules and are not a part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements referred to above and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements referred to above taken as a whole. /s/ Arthur Andersen LLP Arthur Andersen LLP Hartford, Connecticut January 22, 2002 (February 5, 2002 for Northeast Generation Company) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of our reports dated January 22, 2002 for Northeast Utilities, The Connecticut Light and Power Company, Public Service Company of New Hampshire and Western Massachusetts Electric Company, and February 5, 2002 for Northeast Generation Company, included in Registration Statement File No. 33-34622, No. 33-44814, No. 33-63023, No. 33-40156, No. 333-52413, No. 333-52415, No. 333-85613, and No. 333-55142 of Northeast Utilities. We also consent to the incorporation by reference of our report dated January 22, 2002 for The Connecticut Light and Power Company included in Registration Statement No. 33-55279 of The Connecticut Light and Power Company and No. 33-56537 of CL&P Capital, LP. It should be noted that we have not audited any financial statements of the companies referred to above subsequent to December 31, 2001 or performed any audit procedures subsequent to the date of our report. /s/ Arthur Andersen LLP Arthur Andersen LLP Hartford, Connecticut March 20, 2002 INDEX TO FINANCIAL STATEMENTS SCHEDULES Schedule I. Financial Information of Registrant: Northeast Utilities (Parent) Balance Sheets at December 31, 2001 and 2000 S-4 Northeast Utilities (Parent) Statements of Income for the Years Ended December 31, 2001, 2000, and 1999 S-5 Northeast Utilities (Parent) Statements of Cash Flows for the Years Ended December 31, 2001, 2000, and 1999 S-6 II. Valuation and Qualifying Accounts and Reserves for 2001, 2000, and 1999: Northeast Utilities and Subsidiaries S-7 - S-9 The Connecticut Light and Power Company and Subsidiaries S-10 - S-12 Public Service Company of New Hampshire S-13 - S-15 Western Massachusetts Electric Company and Subsidiary S-16 - S-18 All other schedules of the companies' for which provision is made in the applicable regulations of the SEC are not required under the related instructions or are not applicable, and therefore have been omitted.
SCHEDULE I NORTHEAST UTILITIES (PARENT) FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS AT DECEMBER 31, 2001 AND 2000 (Thousands of Dollars) 2001 2000 ---------- ---------- ASSETS - ------ Current Assets: Cash................................................ $ 13,183 $ 1,058 Notes receivable from affiliated companies.......... 124,800 94,400 Notes and accounts receivable....................... 555 868 Receivables from affiliated companies............... 21,713 3,908 Prepayments......................................... 1,093 3,744 ---------- ---------- 161,344 103,978 ---------- ---------- Deferred Debits and Other Assets: Investments in subsidiary companies, at equity...... 2,392,884 2,687,804 Investments in transmission companies, at equity.... 13,596 15,011 Other............................................... 4,260 348 ---------- ---------- 2,410,740 2,703,163 ---------- ---------- Total Assets.......................................... $2,572,084 $2,807,141 ========== ========== LIABILITIES AND CAPITALIZATION - ------------------------------ Current Liabilities: Notes payable to banks.............................. $ 40,000 $ 436,000 Long-term debt - current portion.................... 23,000 21,000 Accounts payable.................................... 146 966 Accounts payable to affiliated companies............ 26,626 18 Accrued taxes....................................... 249 1,135 Accrued interest.................................... 2,492 6,961 Other............................................... 19 20 ---------- ---------- 92,532 466,100 ---------- ---------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes................... 4,742 5,026 Other............................................... 170 432 ---------- ---------- 4,912 5,458 ---------- ---------- Capitalization: Long-Term Debt...................................... 357,000 117,000 ---------- ---------- Common Shareholders' Equity: Common shares, $5 par value - authorized 225,000,000 shares; 148,890,640 shares issued and 130,132,136 shares outstanding in 2001 and 148,781,861 shares issued and 143,820,405 outstanding in 2000................... 744,453 693,345 Capital surplus, paid in............................ 1,107,609 942,144 Temporary equity from stock forward................. - 215,000 Deferred contribution plan - employee stock stock ownership plan.............................. (101,809) (114,463) Retained earnings................................... 678,460 495,873 Accumulated other comprehensive (loss)/income....... (32,470) 1,769 Treasury stock...................................... (278,603) (15,085) ---------- ---------- Common Shareholders' Equity......................... 2,117,640 2,218,583 ---------- ---------- Total Capitalization.................................. 2,474,640 2,335,583 ---------- ---------- Total Liabilities and Capitalization.................. $2,572,084 $2,807,141 ========== ==========
SCHEDULE I NORTHEAST UTILITIES (PARENT) FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Thousands of Dollars, Except Share Information)
2001 2000 1999 ---- ---- ---- Operating Revenues................................. $ - $ - $ - ----------- ----------- ----------- Operating Expenses: Other............................................ 11,917 15,335 19,126 ----------- ----------- ----------- Operating Loss..................................... (11,917) (15,335) (19,126) ----------- ----------- ----------- Other Income/(Loss): Equity in earnings of subsidiaries............... 188,783 23,553 56,812 Gain related to Millstone sale................... 147,935 - - Loss on share repurchase contracts............... (35,394) - - Other, net....................................... 10,863 11,687 5,236 ----------- ----------- ----------- Other Income, Net.................................. 312,187 35,240 62,048 ----------- ----------- ----------- Income Before Interest and Income Tax Expense...... 300,270 19,905 42,922 Interest Expense................................... 32,696 47,819 15,612 ----------- ----------- ----------- Income/(Loss) Before Income Tax Expense/(Benefit).. 267,574 (27,914) 27,310 Income Tax Expense/(Benefit)....................... 24,064 672 (6,906) ----------- ----------- ----------- Earnings/(Loss) for Common Shares.................. $ 243,510 $ (28,586) $ 34,216 =========== =========== =========== Basic Earnings/(Loss) Per Common Share................................. $ 1.80 $ (0.20) $ 0.26 =========== =========== =========== Fully Diluted Earnings/(Loss) Per Common Share................................. $ 1.79 $ (0.20) $ 0.26 =========== =========== =========== Basic Common Shares Outstanding (average)............................. 135,632,126 141,549,860 131,415,126 =========== =========== =========== Fully Diluted Common Shares Outstanding (average)............................. 135,917,423 141,967,216 132,031,573 =========== =========== ===========
SCHEDULE I NORTHEAST UTILITIES (PARENT) FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Thousands of Dollars)
2001 2000 1999 ---- ---- ---- Operating Activities: Net earnings/(loss) for common shares.......................... $ 243,510 $ (28,586) $ 34,216 Adjustments to reconcile to net cash flows provided by operating activities: Equity in earnings of subsidiary companies................... (188,783) (23,553) (56,812) Cash dividends received from subsidiary companies............ 120,072 183,016 66,000 Deferred income taxes........................................ (233) (276) 74 Net other sources of cash.................................... 2,283 3,276 16,655 Changes in working capital: Receivables and unbilled revenues, net....................... (24,295) 4,200 (7,220) Accounts payable............................................. 25,788 (7,475) 5,863 Other working capital (excludes cash)........................ (2,705) (1,866) 12,191 --------- --------- --------- Net cash flows provided by operating activities.................. 175,637 128,736 70,967 --------- --------- --------- Investing Activities: Investment in NU system Money Pool............................. (30,400) (49,100) (10,900) Investment in subsidiaries..................................... 396,257 (117,631) (99,462) Other investment activities, net............................... 1,415 1,489 1,245 Payment for the purchase of SENY, net of cash acquired ........ (25,823) - - Payment for the purchase of Yankee, net of cash acquired....... - (260,347) - --------- --------- --------- Net cash flows provided by/(used in) investing activities........ 341,449 (425,589) (109,117) --------- --------- --------- Financing Activities: Issuance of common shares...................................... 1,751 4,269 5,318 Repurchase of common shares.................................... (291,789) - - Issuance of long-term debt..................................... 263,000 - - Net (decrease)/increase in short-term debt..................... (396,000) 371,000 65,000 Reacquisitions and retirements of long-term debt............... (21,000) (20,000) (19,000) Cash dividends on common shares................................ (60,923) (57,358) (13,168) --------- --------- --------- Net cash flows (used in)/provided by financing activities........ (504,961) 297,911 38,150 --------- --------- --------- Net increase in cash............................................. 12,125 1,058 - Cash - beginning of year......................................... 1,058 - - --------- --------- --------- Cash - end of year............................................... $ 13,183 $ 1,058 $ - ========= ========= ========= Supplemental Cash Flow Information: Cash paid during the year for: Interest, net of amounts capitalized........................... $ 35,453 $ 39,099 $ 15,724 ========= ========= ========= Income taxes................................................... $ 32,126 $ 1,430 $ 28,982 ========= ========= =========
NORTHEAST UTILITIES AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEAR ENDED DECEMBER 31, 2001 (Thousands of Dollars) - ------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Additions ---------------------- (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts- Deductions- at end Description of period expenses describe describe of period - ------------------------------------------------------------------------------------------------- RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Reserves for uncollectible accounts $12,500 $15,947 $ - $12,094 (a) $16,353 ======= ======= ======= ======= ======= RESERVES NOT APPLIED AGAINST ASSETS: Operating reserves $79,281 $25,936 $ - $36,132 (b) $69,085 ======= ======= ======= ======= ======= (a) Amounts written off, net of recoveries. (b) Principally payments for environmental remediation, various injuries and damages, employee medical expenses, and expenses in connection therewith.
NORTHEAST UTILITIES AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEAR ENDED DECEMBER 31, 2000 (Thousands of Dollars) - ------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Additions ---------------------- (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts- Deductions- at end Description of period expenses describe describe of period - ------------------------------------------------------------------------------------------------- RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Reserves for uncollectible accounts $ 4,895 $26,740 $ 130(c) $19,265 (a) $12,500 ======= ======= ======= ======= ======= RESERVES NOT APPLIED AGAINST ASSETS: Operating reserves $44,995 $22,573 $37,680(c) $25,967 (b) $79,281 ======= ======= ======= ======= ======= (a) Amounts written off, net of recoveries. (b) Principally payments for environmental remediation, various injuries and damages, employee medical expenses, and expenses in connection therewith. (c) Amounts represent activity related to the acquisition of Yankee on March 1, 2000.
NORTHEAST UTILITIES AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEAR ENDED DECEMBER 31, 1999 (Thousands of Dollars) - ------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Additions ---------------------- (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts- Deductions- at end Description of period expenses describe describe of period - ------------------------------------------------------------------------------------------------- RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Reserves for uncollectible accounts $ 2,417 $ 8,026 $ - $ 5,548 (a) $ 4,895 ======= ======= ======= ======= ======= RESERVES NOT APPLIED AGAINST ASSETS: Operating reserves $40,438 $18,597 $ - $14,040 (b) $44,995 ======= ======= ======= ======= ======= (a) Amounts written off, net of recoveries. (b) Principally payments for environmental remediation, various injuries and damages, employee medical expenses, and expenses in connection therewith.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEAR ENDED DECEMBER 31, 2001 (Thousands of Dollars) - ------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Additions ---------------------- (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts- Deductions- at end Description of period expenses describe describe of period - ------------------------------------------------------------------------------------------------- RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Reserves for uncollectible accounts $ 300 $ 551 $ - $ 326 (a) $ 525 ======= ======= ======= ======= ======= RESERVES NOT APPLIED AGAINST ASSETS: Operating reserves $13,660 $ 5,735 $ - $ 8,008 (b) $11,387 ======= ======= ======= ======= ======= (a) Amounts written off, net of recoveries. (b) Principally payments for environmental remediation, various injuries and damages, employee medical expenses, and expenses in connection therewith.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEAR ENDED DECEMBER 31, 2000 (Thousands of Dollars) - ------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Additions ---------------------- (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts- Deductions- at end Description of period expenses describe describe of period - ------------------------------------------------------------------------------------------------- RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Reserves for uncollectible accounts $ 300 $ 9,270 $ - $ 9,270 (a) $ 300 ======= ======= ======= ======= ======= RESERVES NOT APPLIED AGAINST ASSETS: Operating reserves $16,069 $ 7,488 $ - $ 9,897 (b) $13,660 ======= ======= ======= ======= ======= (a) Amounts written off, net of recoveries. (b) Principally payments for environmental remediation, various injuries and damages, employee medical expenses, and expenses in connection therewith.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEAR ENDED DECEMBER 31, 1999 (Thousands of Dollars) - ------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Additions ---------------------- (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts- Deductions- at end Description of period expenses describe describe of period - ------------------------------------------------------------------------------------------------- RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Reserves for uncollectible accounts $ 300 $ 290 $ - $ 290 (a) $ 300 ======= ======= ======= ======= ======= RESERVES NOT APPLIED AGAINST ASSETS: Operating reserves $16,656 $ 5,422 $ - $ 6,009 (b) $16,069 ======= ======= ======= ======= ======= (a) Amounts written off, net of recoveries. (b) Principally payments for environmental remediation, various injuries and damages, employee medical expenses, and expenses in connection therewith.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEAR ENDED DECEMBER 31, 2001 (Thousands of Dollars) - ------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Additions ---------------------- (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts- Deductions- at end Description of period expenses describe describe of period - ------------------------------------------------------------------------------------------------- RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Reserves for uncollectible accounts $ 1,869 $ 1,787 $ - $ 1,920 (a) $ 1,736 ======= ======= ======= ======= ======= RESERVES NOT APPLIED AGAINST ASSETS: Operating reserves $11,650 $ 7,393 $ - $ 5,201 (b) $13,842 ======= ======= ======= ======= ======= (a) Amounts written off, net of recoveries. (b) Principally payments for environmental remediation, various injuries and damages, employee medical expenses, and expenses in connection therewith.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEAR ENDED DECEMBER 31, 2000 (Thousands of Dollars) - ------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Additions ---------------------- (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts- Deductions- at end Description of period expenses describe describe of period - ------------------------------------------------------------------------------------------------- RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Reserves for uncollectible accounts $ 1,359 $ 2,220 $ - $ 1,710 (a) $ 1,869 ======= ======= ======= ======= ======= RESERVES NOT APPLIED AGAINST ASSETS: Operating reserves $11,405 $ 9,855 $ - $ 9,610 (b) $11,650 ======= ======= ======= ======= ======= (a) Amounts written off, net of recoveries. (b) Principally payments for environmental remediation, various injuries and damages, employee medical expenses, and expenses in connection therewith.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEAR ENDED DECEMBER 31, 1999 (Thousands of Dollars) - ------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Additions ---------------------- (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts- Deductions- at end Description of period expenses describe describe of period - ------------------------------------------------------------------------------------------------- RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Reserves for uncollectible accounts $ 2,041 $ 1,590 $ - $ 2,272 (a) $ 1,359 ======= ======= ======= ======= ======= RESERVES NOT APPLIED AGAINST ASSETS: Operating reserves $ 9,906 $ 7,268 $ - $ 5,769 (b) $11,405 ======= ======= ======= ======= ======= (a) Amounts written off, net of recoveries. (b) Principally payments for environmental remediation, various injuries and damages, employee medical expenses, and expenses in connection therewith.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEAR ENDED DECEMBER 31, 2001 (Thousands of Dollars) - ------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Additions ---------------------- (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts- Deductions- at end Description of period expenses describe describe of period - ------------------------------------------------------------------------------------------------- RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Reserves for uncollectible accounts $ 1,886 $ 2,887 $ - $ 2,745 (a) $ 2,028 ======= ======= ======= ======= ======= RESERVES NOT APPLIED AGAINST ASSETS: Operating reserves $ 6,760 $ 3,767 $ - $ 3,021 (b) $ 7,506 ======= ======= ======= ======= ======= (a) Amounts written off, net of recoveries. (b) Principally payments for environmental remediation, various injuries and damages, employee medical expenses, and expenses in connection therewith.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEAR ENDED DECEMBER 31, 2000 (Thousands of Dollars) - ------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Additions ---------------------- (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts- Deductions- at end Description of period expenses describe describe of period - ------------------------------------------------------------------------------------------------- RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Reserves for uncollectible accounts $ 1,640 $ 2,416 $ - $ 2,170 (a) $ 1,886 ======= ======= ======= ======= ======= RESERVES NOT APPLIED AGAINST ASSETS: Operating reserves $ 7,188 $ 1,130 $ - $ 1,558 (b) $ 6,760 ======= ======= ======= ======= ======= (a) Amounts written off, net of recoveries. (b) Principally payments for environmental remediation, various injuries and damages, employee medical expenses, and expenses in connection therewith.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEAR ENDED DECEMBER 31, 1999 (Thousands of Dollars) - ------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Additions ---------------------- (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts- Deductions- at end Description of period expenses describe describe of period - ------------------------------------------------------------------------------------------------- RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Reserves for uncollectible accounts $ 50 $ 4,564 $ - $ 2,974 (a) $ 1,640 ======= ======= ======= ======= ======= RESERVES NOT APPLIED AGAINST ASSETS: Operating reserves $ 5,960 $ 3,085 $ - $ 1,857 (b) $ 7,188 ======= ======= ======= ======= ======= (a) Amounts written off, net of recoveries. (b) Principally payments for environmental remediation, various injuries and damages, employee medical expenses, and expenses in connection therewith.
EXHIBIT INDEX Each document described below is incorporated by reference to the files of the Securities and Exchange Commission, unless the reference to the document is marked as follows: * - Filed with the 2001 Annual Report on Form 10-K, File No. 1-5324, for NU and herein incorporated by reference into the 2001 Annual Reports on Form 10-K for CL&P, PSNH, WMECO and NGC. # - Filed with the 2001 Annual Report on Form 10-K, File No. 1-5324, for NU and herein incorporated by reference into the 2001 Annual Report on Form 10-K for CL&P. @ - Filed with the 2001 Annual Report on Form 10-K, File No. 1-5324, for NU and herein incorporated by reference into the 2001 Annual Report on Form 10-K for PSNH. ** - Filed with the 2001 Annual Report on Form 10-K, File No. 1-5324, for NU and herein incorporated by reference into the 2001 Annual Report on Form 10-K for WMECO. ## - Filed with the 2001 Annual Report on Form 10-K, File No. 1-5324, for NU and herein incorporated by reference into the 2001 Annual Report on Form 10-K for NGC. Exhibit Number Description 2 Plan of acquisition, reorganization, arrangement, liquidation or succession 2.1 Amended and Restated Agreement and Plan of Merger (Exhibit 1 to NU's Current Report on Form 8-K dated October 13, 1999, File No. 1-5324). 3 Articles of Incorporation and By-Laws 3.1 Northeast Utilities 3.1.1 Declaration of Trust of NU, as amended through May 24, 1988. (Exhibit 3.1.1, 1988 NU Form 10-K, File No. 1-5324) 3.2 The Connecticut Light and Power Company 3.2.1 Certificate of Incorporation of CL&P, restated to March 22, 1994. (Exhibit 3.2.1, 1993 NU Form 10-K, File No. 1-5324) 3.2.2 Certificate of Amendment to Certificate of Incorporation of CL&P, dated December 26, 1996. (Exhibit 3.2.2, 1996 NU Form 10-K, File No. 1-5324) 3.2.3 Certificate of Amendment to Certificate of Incorporation of CL&P, dated April 27, 1998. (Exhibit 3.2.3, 1998 NU Form 10-K, File No. 1-5324) 3.2.4 By-laws of CL&P, as amended to January 1, 1997. (Exhibit 3.2.3, 1996 NU Form 10-K, File No. 1-5324) 3.3 Public Service Company of New Hampshire 3.3.1 Articles of Incorporation, as amended to May 16, 1991. (Exhibit 3.3.1, 1993 NU Form 10-K, File No. 1-5324) 3.3.2 By-laws of PSNH, as amended to November 1, 1993. (Exhibit 3.3.2, 1993 NU Form 10-K, File No. 1-5324) 3.4 Western Massachusetts Electric Company 3.4.1 Articles of Organization of WMECO, restated to February 23, 1995. (Exhibit 3.4.1, 1994 NU Form 10-K, File No. 1-5324) 3.4.2 By-laws of WMECO, as amended to April 1, 1999. (Exhibit 3.1, 1999 NU Form 10-Q for the Quarter Ended June 30, 1999, File No. 1-5324) 3.4.3 By-laws of WMECO, as further amended to May 1, 2000. (Exhibit 3.1, 2000 NU Form 10-Q for the Quarter Ended June 30, 2000, File No. 1-5324) 3.5 Northeast Generation Company 3.5.1 Certificate of Incorporation of NGC, dated December 28, 1998, (Exhibit B.34.1, 1999 NU Form U5S, File No. 30-246) 3.5.2 By-Laws of NGC, dated January 4, 1999. (Exhibit B.34.2, 1999 NU Form U5S, File No. 30-246) 3.5.3 By-Laws of NGC, as amended to June 1, 2000. (Exhibit B.34.3, 2000 NU Form U5S, File No. 30-246) 4. Instruments defining the rights of security holders, including indentures 4.1 Northeast Utilities 4.1.1 Indenture dated as of December 1, 1991 between Northeast Utilities and IBJ Schroder Bank & Trust Company, with respect to the issuance of Debt Securities. (Exhibit 4.1.1, 1991 NU Form 10-K, File No. 1-5324) 4.1.1.1 First Supplemental Indenture dated as of December 1, 1991 between Northeast Utilities and IBJ Schroder Bank & Trust Company, with respect to the issuance of Series A Notes. (Exhibit 4.1.2, 1991 NU Form 10-K, File No. 1-5324) 4.1.1.2 Second Supplemental Indenture dated as of March 1, 1992 between Northeast Utilities and IBJ Schroder Bank & Trust Company with respect to the issuance of 8.38% Amortizing Notes. (Exhibit 4.1.3, 1992 NU Form 10-K, File No. 1-5324) 4.1.2 Indenture between NU and the Bank of New York, as Trustee, dated as of February 28, 2001, relating to Senior Notes (Exhibit A-1 to 35-CERT filed March 9, 2001, File No. 70-9535) 4.1.2.1 First Supplemental Indenture to the Indenture, dated as of February 28, 2001, between NY and The Bank of New York, as Trustee, relating to Floating Rate Notes Due 2003 (Exhibit A-2 to 35-CERT filed March 9, 2001, File No. 70-9535) 4.1.3 Revolving Credit Agreement among NU and the Banks named therein, dated November 16, 2001(Exhibit to 35 CERT filed November 28, 2001, File No. 70-9755) 4.2 The Connecticut Light and Power Company 4.2.1 Indenture of Mortgage and Deed of Trust between CL&P and Bankers Trust Company, Trustee, dated as of May 1, 1921. (Composite including all twenty-four amendments to May 1, 1967.) (Exhibit 4.1.1, 1989 NU Form 10-K, File No. 1-5324) Supplemental Indentures to the Composite May 1, 1921 Indenture of Mortgage and Deed of Trust between CL&P and Bankers Trust Company, dated as of: 4.2.1.1 June 1, 1994. (Exhibit 4.2.15, 1994 NU Form 10-K, File No. 1-5324) 4.2.1.2 October 1, 1994. (Exhibit 4.2.16, 1994 NU Form 10-K, File No. 1-5324) 4.2.2 Financing Agreement between Industrial Development Authority of the State of New Hampshire and CL&P (Pollution Control Bonds, 1986 Series) dated as of December 1, 1986. (Exhibit C.1.47, 1986 NU Form U5S, File No. 30-246) 4.2.3 Financing Agreement between Industrial Development Authority of the State of New Hampshire and CL&P (Pollution Control Bonds, 1988 Series) dated as of October 1, 1988. (Exhibit C.1.55, 1988 NU Form U5S, File No. 30-246) 4.2.4 Loan and Trust Agreement among Business Finance Authority of the State of New Hampshire, CL&P and the Trustee (Pollution Control Bonds, 1992 Series A) dated as of December 1, 1992.(Exhibit C.2.33, 1992 NU Form U5S, File No. 30-246) 4.2.5 Loan Agreement between Connecticut Development Authority and CL&P (Pollution Control Bonds - Series A, Tax Exempt Refunding) dated as of September 1, 1993. (Exhibit 4.2.21, 1993 NU Form 10-K, File No. 1-5324) 4.2.6 Loan Agreement between Connecticut Development Authority and CL&P (Pollution Control Bonds - Series B, Tax Exempt Refunding) dated as of September 1, 1993. (Exhibit 4.2.22, 1993 NU Form 10-K, File No. 1-5324) 4.2.7 Amended and Restated Loan Agreement between Connecticut Development Authority and CL&P (Pollution Control Revenue Bond - 1996A Series) dated as of May 1, 1996 and Amended and Restated as of January 1, 1997. (Exhibit 4.2.24, 1996 NU Form 10-K, File No. 1-5324) 4.2.7.1 Amended and Restated Indenture of Trust between Connecticut Development Authority and the Trustee (CL&P Pollution Control Revenue Bond- 1996A Series), dated as of May 1, 1996 and Amended and Restated as of January 1, 1997. (Exhibit 4.2.24.1, 1996 NU Form 10-K, File No. 1-5324) 4.2.7.2 Standby Bond Purchase Agreement among CL&P, Bank of New York as Purchasing Agent and the Banks Named therein, dated October 24, 2000 (Exhibit 4.2.24.2 of 2000 NU Form 10-K, File No. 1-5324) 4.2.7.3 AMBAC Municipal Bond Insurance Policy issued by the Connecticut Development Authority (CL&P Pollution Control Revenue Bond-1996A Series), effective January 23, 1997. (Exhibit 4.2.24.3, 1996 NU Form 10-K, File No. 1-5324) 4.2.8 Revolving Credit Agreement among WMECO, CL&P PSNH and Yankee and the Banks named therein, dated November 16, 2001 (Exhibit to 35 CERT filed November 28, 2001, File No. 70-9755) 4.2.9 Amended and Restated Receivables Purchase and Sale Agreement dated as of March 30, 2001 (CL&P and CL&P Receivables Corporation (CRC)) (Exhibit 10.1, 2001 NU 10-Q for the Quarter Ended September 30, 2001 (File No. 1-5324) 4.2.9.1 Amendment No. 1 to the Purchase and Contribution Agreement between CL&P and CRC dated as of March 30, 2001 (Exhibit 10.1.1 2001 NU 10-Q for the Quarter Ended September 30, 2001 (File No. 1-5324) 4.3 Public Service Company of New Hampshire 4.3.1 First Mortgage Indenture dated as of August 15, 1978 between PSNH and First Fidelity Bank, National Association, New Jersey, now First Union National Bank, Trustee, (Composite including all amendments to May 16, 1991). (Exhibit 4.4.1, 1992 NU Form 10-K, File No. 1-5324) 4.3.1.1 Tenth Supplemental Indenture dated as of May 1, 1991 between PSNH and First Fidelity Bank, National Association, now First Union National Bank. (Exhibit 4.1, PSNH Current Report on Form 8-K dated February 10, 1992, File No. 1-6392) @4.3.1.2 Twelfth Supplemental Indenture dated as of December 1, 2001 between PSNH and First Union National Bank 4.3.2 Series D (Tax Exempt Refunding) Amended and Restated PCRB Loan and Trust Agreement dated as of April 1, 1999. (Exhibit 4.3.6, 1999 NU Form 10-K, File No. 1-5324) 4.3.3 Series E (Tax Exempt Refunding) Amended & Restated PCRB Loan and Trust Agreement dated as of April 14, 1999. (Exhibit 4.3.7, 1999 NU Form 10-K, File No. 1-5324) @4.3.4 Series A Loan and Trust Agreement among Business Finance Authority of the State of New Hampshire and PSNH and State Street Bank and Trust Company, as Trustee (Tax Exempt Pollution Control Bonds) dated as of October 1, 2001. @4.3.5 Series B Loan and Trust Agreement among Business Finance Authority of the State of New Hampshire and PSNH and State Street Bank and Trust Company, as Trustee (Tax Exempt Pollution Control Bonds) dated as of October 1, 2001. @4.3.6 Series C Loan and Trust Agreement among Business Finance Authority of the State of New Hampshire and PSNH and State Street Bank and Trust Company, as Trustee (Tax Exempt Pollution Control Bonds) dated as of October 1, 2001. 4.3.7 Revolving Credit Agreement among WMECO, CL&P PSNH and Yankee and the Banks named therein, dated November 16, 2001 (Exhibit to 35 CERT filed November 28, 2001, File No. 70-9755) 4.4 Western Massachusetts Electric Company 4.4.1 Loan Agreement between Connecticut Development Authority and WMECO, (Pollution Control Bonds - Series A, Tax Exempt Refunding) dated as of September 1, 1993. (Exhibit 4.4.13, 1993 NU Form 10-K, File No. 1-5324) 4.4.2 Revolving Credit Agreement among WMECO, CL&P PSNH and Yankee and the Banks named therein, dated November 16, 2001 (Exhibit to 35 CERT filed November 28, 2001, File No. 70-9755) 4.5 Northeast Generation Company 4.5.1 Indenture Mortgage, dated as of October 18, 2001 between NGC and The Bank of New York, as trustee (Exhibit 4.1 to NGC Registration Statement S-4 dated December 6, 2001, File No. 333-74636) 4.5.1.1 First Supplemental Indenture Mortgage, dated as of October 18, 2001 between NGC and The Bank of New York, as trustee (Exhibit 4.2 to NGC Registration Statement S-4 dated December 6, 2001, File No. 333-74636) 10. Material Contracts 10.1 Stockholder Agreement dated as of July 1, 1964 among the stockholders of Connecticut Yankee Atomic Power Company (CYAPC). (Exhibit 10.1, 1994 NU Form 10-K, File No. 1-5324) 10.2 Form of Power Contract dated as of July 1, 1964 between CYAPC and each of CL&P, HELCO, PSNH and WMECO. (Exhibit 10.2, 1994 NU Form 10-K, File No. 1-5324) 10.2.1 Form of Additional Power Contract dated as of April 30, 1984, between CYAPC and each of CL&P, PSNH and WMECO. (Exhibit 10.2.1, 1994 NU Form 10-K, File No. 1-5324) 10.2.2 Form of 1987 Supplementary Power Contract dated as of April 1, 1987, between CYAPC and each of CL&P, PSNH and WMECO. (Exhibit 10.2.6, 1987 NU Form 10-K, File No. 1-5324) 10.3 Capital Funds Agreement dated as of September 1, 1964 between CYAPC and CL&P, HELCO, PSNH and WMECO. (Exhibit 10.3, 1994 NU Form 10-K, File No. 1-5324) 10.4 Stockholder Agreement dated December 10, 1958 between Yankee Atomic Electric Company (YAEC) and CL&P, HELCO, PSNH and WMECO. (Exhibit 10.4, 1993 NU Form 10-K, File No. 1-5324) 10.5 Form of Amendment No. 3, dated as of April 1, 1985, to Power Contract between YAEC and each of CL&P, PSNH and WMECO, including a composite restatement of original Power Contract dated June 30, 1959 and Amendment No. 1 dated April 1, 1975 and Amendment No. 2 dated October 1, 1980. (Exhibit 10.5, 1988 NU Form 10-K, File No. 1-5324.) 10.5.1 Form of Amendment No. 4 to Power Contract, dated May 6, 1988, between YAEC and each of CL&P, PSNH and WMECO. (Exhibit 10.5.1, 1989 NU Form 10-K, File No. 1-5324) 10.5.2 Form of Amendment No. 5 to Power Contract, dated June 26, 1989, between YAEC and each of CL&P, PSNH and WMECO. (Exhibit 10.5.2, 1989 NU Form 10-K, File No. 1-5324) 10.5.3 Form of Amendment No. 6 to Power Contract, dated July 1, 1989, between YAEC and each of CL&P, PSNH and WMECO. (Exhibit 10.5.3, 1989 NU Form 10-K, File No. 1-5324) 10.5.4 Form of Amendment No. 7 to Power Contract, dated February 1, 1992, between YAEC and each of CL&P, PSNH and WMECO. (Exhibit 10.5.4, 1993 NU Form 10-K, File No. 1-5324) 10.6 Stockholder Agreement dated as of May 20, 1968 among stockholders of MYAPC. (Exhibit 10.6, 1997 NU Form 10-K, File No. 1-5324) 10.7 Form of Power Contract dated as of May 20, 1968 between MYAPC and each of CL&P, HELCO, PSNH and WMECO. (Exhibit 10.7, 1997 Form 10-K, File No. 1-5324) 10.7.1 Form of Amendment No. 1 to Power Contract dated as of March 1, 1983 between MYAPC and each of CL&P, PSNH and WMECO. (Exhibit 10.7.1, 1993 NU Form 10-K, File No. 1-5324) 10.7.2 Form of Amendment No. 2 to Power Contract dated as of January 1, 1984 between MYAPC and each of CL&P, PSNH and WMECO. (Exhibit 10.7.2, 1993 NU Form 10-K, File No. 1-5324) 10.7.3 Form of Amendment No. 3 to Power Contract dated as of October 1, 1984 between MYAPC and each of CL&P, PSNH and WMECO. (Exhibit No. 10.7.3, 1994 NU Form 10-K, File No. 1-5324) 10.7.4 Form of Additional Power Contract dated as of February 1, 1984 between MYAPC and each of CL&P, PSNH and WMECO. (Exhibit 10.7.4, 1993 NU Form 10-K, File No. 1-5324) 10.8 Capital Funds Agreement dated as of May 20, 1968 between MYAPC and CL&P, PSNH, HELCO and WMECO. (Exhibit 10.8, 1997 NU Form 10-K, File No. 1-5324) 10.8.1 Amendment No. 1 to Capital Funds Agreement, dated as of August 1, 1985, between MYAPC, CL&P, PSNH and WMECO. (Exhibit No. 10.8.1, 1994 NU Form 10-K, File No. 1-5324) 10.9 Sponsor Agreement dated as of August 1, 1968 among the sponsors of Vermont Yankee Nuclear Power Corporation (VYNPC). (Exhibit 10.9, 1997 NU Form 10-K, File No. 1-5324) 10.10 Form of Power Contract dated as of February 1, 1968 between VYNPC and each of CL&P, HELCO, PSNH and WMECO. (Exhibit 10.10, 1997 NU Form 10-K, File No. 1-5324) 10.10.1 Form of Amendment to Power Contract dated as of June 1, 1972 between VYNPC and each of CL&P, HELCO, PSNH and WMECO. (Exhibit 5.22, File No. 2-47038) 10.10.2 Form of Second Amendment to Power Contract dated as of April 15, 1983 between VYNPC and each of CL&P, PSNH and WMECO. (Exhibit 10.10.2, 1993 NU Form 10-K, File No. 1-5324) 10.10.3 Form of Third Amendment to Power Contract dated as of April 24, 1985 between VYNPC and each of CL&P, PSNH and WMECO. (Exhibit No. 10.10.3, 1994 NU Form 10-K, File No. 1-5324) 10.10.4 Form of Fourth Amendment to Power Contract dated as of June 1, 1985 between VYNPC and each of CL&P, PSNH and WMECO. (Exhibit No. 10.10.4, 1996 NU Form 10-K, File No. 1-5324) 10.10.5 Form of Fifth Amendment to Power Contract dated as of May 6, 1988 between VYNPC and each of CL&P, PSNH and WMECO. (Exhibit 10.10.5, 1990 NU Form 10-K, File No. 1-5324) 10.10.6 Form of Sixth Amendment to Power Contract dated as of May 6, 1988 between VYNPC and each of CL&P, PSNH and WMECO. (Exhibit 10.10.6, 1990 NU Form 10-K, File No. 1-5324) 10.10.7 Form of Seventh Amendment to Power Contract dated as of June 15, 1989 between VYNPC and each of CL&P, PSNH and WMECO. (Exhibit 10.10.7, 1990 NU Form 10-K, File No. 1-5324) 10.10.8 Form of Eighth Amendment to Power Contract dated as of December 1, 1989 between VYNPC and each of CL&P, PSNH and WMECO. (Exhibit 10.10.8, 1990 NU Form 10-K, File No. 1-5324) 10.10.9 Form of Additional Power Contract dated as of February 1, 1984 between VYNPC and each of CL&P, PSNH and WMECO. (Exhibit 10.10.9, 1993 NU Form 10-K, File No. 1-5324) 10.11 Capital Funds Agreement dated as of February 1, 1968 between VYNPC and CL&P, HELCO, PSNH and WMECO. (Exhibit 10.11, 1997 NU Form 10-K, File No. 1-5324) 10.11.1 Form of First Amendment to Capital Funds Agreement dated as of March 12, 1968 between VYNPC and CL&P, HELCO, PSNH and WMECO. (Exhibit 10.11.1, 1997 NU Form 10-K, File No. 1-5324) 10.11.2 Form of Second Amendment to Capital Funds Agreement dated as of September 1, 1993 between VYNPC and CL&P, HELCO, PSNH and WMECO. (Exhibit 10.11.2, 1993 NU Form 10-K, File No. 1-5324) 10.12 Agreement dated July 19, 1990, among NAESCO and Seabrook Joint owners with respect to operation of Seabrook. (Exhibit 10.53, 1990 NU Form 10-K, File No. 1-5324) 10.13 Sharing Agreement between CL&P, WMECO, HP&E, HWP and PSNH dated as of June 1, 1992. (Exhibit 10.17, 1992 NU Form 10-K, File No. 1-5324) 10.14 Rate Agreement by and between NUSCO, on behalf of NU, and the Governor of the State of New Hampshire and the New Hampshire Attorney General dated as of November 22, 1989. (Exhibit 10.44, 1989 NU Form 10-K, File No. 1-5324) 10.14.1 First Amendment to Rate Agreement dated as of December 5, 1989. (Exhibit 10.16.1, 1995 NU Form 10-K, File No. 1-5324) 10.14.2 Second Amendment to Rate Agreement dated as of December 12, 1989. (Exhibit 10.16.2, 1995 NU Form 10-K, File No. 1-5324) 10.14.3 Third Amendment to Rate Agreement dated as of December 3, 1993. (Exhibit 10.16.3, 1995 NU Form 10-K, File No. 1-5324) 10.14.4 Fourth Amendment to Rate Agreement dated as of September 21, 1994. (Exhibit 10.16.4, 1995 NU Form 10-K, File No. 1-5324) 10.14.5 Fifth Amendment to Rate Agreement dated as of September 9, 1994. (Exhibit 10.16.5, 1995 NU Form 10-K, File No. 1-5324) 10.15 Agreement to Settle PSNH Restructuring (Exhibit 10.2, 1999 NU Form 10-Q for the Quarter Ended June 30, 1999, File No. 1-5324) @10.15.1 Revised and Conformed Agreement to Settle PSNH Restructuring, dated August 2, 1999, conformed June 23 and executed on September 22, 2000. 10.16 Merger Settlement Agreement between NU, Con Edison and NHPUC dated as of December 6, 2000 (Exhibit O.1, to NU's U-1 Application, File No. 70-9711) 10.17 Form of Seabrook Power Contract between PSNH and NAEC, as amended and restated. (Exhibit 10.45, 1992 NU Form 10-K, File No. 1-5324) 10.18 Agreement (composite) for joint ownership, construction and operation of New Hampshire nuclear unit, as amended through the November 1, 1990 twenty-third amendment. (Exhibit No. 10.17, 1994 NU Form 10-K, File No. 1-5324) 10.18.1 Memorandum of Understanding dated November 7, 1988 between PSNH and Massachusetts Municipal Wholesale Electric Company (Exhibit 10.17, PSNH 1989 Form 10-K, File No. 1-6392) 10.18.2 Agreement of Settlement among Joint Owners dated as of January 13, 1989. (Exhibit 10.13.21, 1988 NU Form 10-K, File No. 1-5324) 10.18.2.1 Supplement to Settlement Agreement, dated as of February 7, 1989, between PSNH and Central Maine Power Company. (Exhibit 10.18.1, PSNH 1989 Form 10-K, File No. 1-6392) 10.19 Amended and Restated Agreement for Seabrook Project Disbursing Agent dated as of November 1, 1990. (Exhibit 10.4.7, File No. 33-35312) 10.19.1 Form of First Amendment to Exhibit 10.22. (Exhibit 10.4.8, File No. 33-35312) 10.19.2 Form (Composite) of Second Amendment to Exhibit 10.22. (Exhibit 10.18.2, 1993 NU Form 10-K, File No. 1-5324) 10.20 Agreement dated November 1, 1974 for Joint Ownership, Construction and Operation of William F. Wyman Unit No. 4 among PSNH, Central Maine Power Company and other utilities. (Exhibit 5.16 , File No. 2-52900) 10.20.1 Amendment to Exhibit 10.23 dated June 30, 1975. (Exhibit 5.48, File No. 2-55458) 10.20.2 Amendment to Exhibit 10.23 dated as of August 16, 1976. (Exhibit 5.19, File No. 2-58251) 10.20.3 Amendment to Exhibit 10.23 dated as of December 31, 1978. (Exhibit 5.10.3, File No. 2-64294) 10.21 Form of Service Contract dated as of July 1, 1966 between each of NU, CL&P and WMECO and Northeast Utilities Service Company (NUSCO)(Exhibit 10.20, 1993 NU Form 10-K, File No. 1-5324) 10.21.1 Service Contract dated as of June 5, 1992 between PSNH and NUSCO. (Exhibit 10.12.4, 1992 NU Form 10-K, File No. 1-5324) 10.21.2 Service Contract dated as of January 4, 1999 between NUSCO and NGC (Exhibit 10.7 to NGC Registration Statement S-4 dated December 6, 2001, File No. 333-74636) 10.21.2.1 Form of Service Agreement Renewals, dated December 31, 1999 and December 31, 2000, of Service Contract, dated as of January 4, 1999, between NUSCO and NGC (Exhibit 10.7.1 to NGC Registration Statement S-4 dated December 6, 2001, File No. 333-74636) 10.21.2.2 Management and Operating Agreement, dated February 1, 2000, between NGC and NGS (Exhibit 10.6 to NGC Registration Statement S-4 dated December 6, 2001, File No. 333-74636) 10.21.2.3 Amendment No. 1, dated March 1, 2000, to Management and Operating Agreement, dated February 1, 2000, between NGC and NGS (Exhibit 10.6.1 to NGC Registration Statement S-4 dated December 6, 2001, File No. 333-74636) 10.21.3 Form of Service Agreement dated as of June 29, 1992 between PSNH and North Atlantic Energy Service Corporation, and the First Amendment thereto. (Exhibits B.7 and B.7.1, File No. 70-7787) 10.21.4 Form of Annual Renewal of Service Contract. (Exhibit 10.20.3, 1993 NU Form 10-K, File No. 1-5324) 10.22 Memorandum of Understanding between CL&P, HELCO, HP&E, HWP and WMECO dated as of June 1, 1970 with respect to pooling of generation and transmission. (Exhibit 13.32, File No. 2-38177) 10.22.1 Amendment to Memorandum of Understanding between CL&P, HELCO, HP&E, HWP and WMECO dated as of February 2, 1982 with respect to pooling of generation and transmission. (Exhibit 10.21.1, 1993 NU Form 10-K, File No. 1-5324) 10.22.2 Amendment to Memorandum of Understanding between CL&P, HELCO, HP&E, HWP and WMECO dated as of January 1, 1984 with respect to pooling of generation and transmission. (Exhibit 10.21.2, 1994 NU Form 10-K, File No. 1-5324) 10.22.3 Second Amendment to Memorandum of Understanding between CL&P, HELCO, HP&E, HWP and WMECO dated as of June 8, 1999 with respect to pooling of generation and transmission. (Exhibit 10.23.3, 1999 NU Form 10-K, File No. 1-5324) 10.23 Restated NEPOOL Power Pool Agreement (restated by the sixty-ninth Agreement dated as of December 31, 2000, and includes the Restated NEPOOL Open Access Transmission Tariff 10.23.1 Form of Interim Independent System Operator (ISO) Agreement (Attachment to Thirty-third Amendment to Exhibit 10.26 dated as of December 31, 1996). (Exhibit 10.23.6, 1996 NU Form 10-K, File No. 1-5324) *10.23.2 Seventieth Agreement Amending NEPOOL Agreement (ISO Capital Funding Tariff) (FERC Docket ER-01-1460-000) dated as of February 2, 2001. *10.23.3 Seventy-First Agreement Amending NEPOOL Agreement (Late Payment Fees) (FERC Docket ER-01-1460-000) dated as of February 2, 2001. *10.23.4 Seventy-Second Agreement Amending NEPOOL Agreement (Net Commitment Period Compensation "NCPC") (FERC Docket ER-01-1891-000) dated as of April 6, 2001. *10.23.5 Seventy-Third Agreement Amending NEPOOL Agreement (Schedule 2 Changes) (FERC Docket ER-01-2161-000) dated as of May 9, 2001. *10.23.6 Seventy-Fourth Agreement Amending NEPOOL Agreement (Review Bond Amendment) (FERC Docket ER-01-2140-000) dated as of May 9, 2001. *10.23.7 Seventy-Sixth Agreement Amending NEPOOL Agreement (Compliance with June 13, 2001 Orders) (FERC Dockets EL00-62-004, et al. and ER-98-3853-005) dated as of June 29, 2001. *10.23.8 Seventy-Eighth Agreement Amending NEPOOL Agreement (Revised Sections 18.4 and 18.5) (FERC Docket EL00-62- 036) dated as of September 24, 2001. *10.23.9 Seventy-Ninth Agreement Amending NEPOOL Agreement (ICA Compliance Amendment) (FERC Docket EL00-62-036) dated as of September 24, 2001. *10.23.10 Eightieth Agreement Amending NEPOOL Agreement (Generation Information System "GIS" Agreement) dated as of October 12, 2001. *10.23.11 Eighty-First Agreement Amending NEPOOL Agreement (Restatement of Financial Assurance Policies) dated as of December 7, 2001. 10.24 Agreements among New England Utilities with respect to the Hydro- Quebec interconnection projects. (See Exhibits 10(u) and 10(v); 10(w), 10(x), and 10(y), 1990 and 1988, respectively, Form 10-K of New England Electric System, File No. 1-3446.) 10.25 Lease dated as of April 14, 1992 between The Rocky River Realty Company (RRR) and Northeast Utilities Service Company (NUSCO) with respect to the Berlin, Connecticut headquarters (office lease). (Exhibit 10.29, 1992 NU Form 10-K, File No. 1-5324) 10.25.1 Lease dated as of April 14, 1992 between RRR and NUSCO with respect to the Berlin, Connecticut headquarters (project lease). (Exhibit 10.29.1, 1992 NU Form 10-K, File No. 1-5324) 10.26 Lease and Agreement, dated as of December 15, 1988, by and between WMECO and Bank of New England, N.A., with BNE Realty Leasing Corporation of North Carolina. (Exhibit 10.63, 1988 NU Form 10-K, File No. 1-5324.) 10.27 Note Agreement dated April 14, 1992, by and between The Rocky River Realty Company (RRR) and Purchasers named therein (Connecticut General Life Insurance Company, Life Insurance Company of North America, INA Life Insurance Company of New York, Life Insurance Company of Georgia), with respect to RRR's sale of $15 million of guaranteed senior secured notes due 2007 and $28 million of guaranteed senior secured notes due 2017. (Exhibit 10.52, 1992 NU Form 10-K, File No. 1-5324) 10.27.1 Amendment to Note Agreement, dated September 26, 1997. (Exhibit 10.31.1, 1997 NU Form 10-K, File No. 1-5324) 10.27.2 Note Guaranty dated April 14, 1992 by Northeast Utilities pursuant to Note Agreement dated April 14, 1992 between RRR and Note Purchasers, for the benefit of The Connecticut National Bank as Trustee, the Purchasers and the owners of the notes. (Exhibit 10.52.1, 1992 NU Form 10-K, File No. 1-5324) 10.27.2.1 Extension of Note Guaranty, dated September 26, 1997. (Exhibit 10.31.2.1, 1997 NU Form 10-K, File No. 1-5324) 10.27.3 Assignment of Leases, Rents and Profits, Security Agreement and Negative Pledge, dated as of April 14, 1992 among RRR, NUSCO and The Connecticut National Bank as Trustee, securing notes sold by RRR pursuant to April 14, 1992 Note Agreement. (Exhibit 10.52.2, 1997 NU Form 10-K, File No. 1-5324) 10.27.3.1 Modification of and Confirmation of Assignment of Leases, Rents and Profits, Security Agreement and Negative Pledge, dated as of September 26, 1997. (Exhibit 10.31.3.1, 1997 NU Form 10-K, File No. 1-5324) 10.32.4 Purchase and Sale Agreement, dated July 28, 1997 by and between RRR and the Sellers and Purchasers named therein. (Exhibit 10.31.4, 1997 NU Form 10-K, File No. 1-5324) 10.32.5 Purchase and Sale Agreement, dated September 26, 1997 by and between RRR and the Purchaser named therein. (Exhibit 10.31.5, 1992 NU Form 10-K, File No. 1-5324) 10.33 Rights Agreement dated as of February 23, 1999, between Northeast Utilities and Northeast Utilities Service Company, as Rights Agent (Exhibit 1 to NU's Registration Statement on Form 8-A, filed on April 12, 1999, File No. 001-05324). 10.33.1 Amendment to Rights Agreement (Exhibit 3 to NU's Current Report on Form 8-K dated October 13, 1999, File No. 1-5324). 10.33.2 Second Amendment to Rights Agreement (Exhibit 3 to NU Form 8-A-12B-A dated February 1, 2002, File No. 001-05324 and Exhibit B-3 to NU Rule 35 Cert., dated February 1, 2002, File No. 070-09463). 10.34 NU Executive Incentive Plan, effective as of January 1, 1991. (Exhibit 10.44, NU 1991 Form 10-K, File No. 1-5324) 10.34.1 NU Incentive Plan, effective as of January 1, 1998. (Exhibit 10.35.1, 1998 NU Form 10-K, File No. 1-5324) 10.34.1.1 Amendment to Exhibit 10.34.1, effective as of February 23, 1999. (Exhibit 10.35.1.1, 1998 NU Form 10-K, File No. 1-5324) 10.35 Supplemental Executive Retirement Plan for Officers of NU System Companies, Amended and Restated effective as of January 1, 1992. (Exhibit 10.45.1, NU Form 10-Q for the Quarter Ended June 30, 1992, File No. 1-5324) 10.35.1 Amendment 1 to Exhibit 10.35, effective as of August 1, 1993. (Exhibit 10.35.1, 1993 NU Form 10-K, File No. 1-5324) 10.35.2 Amendment 2 to Exhibit 10.35, effective as of January 1, 1994. (Exhibit 10.35.2, 1993 NU Form 10-K, File No. 1-5324) 10.35.3 Amendment 3 to Exhibit 10.35, effective as of January 1, 1996. (Exhibit 10.36.3, 1995 NU Form 10-K, File No. 1-5324) *10.35.4 Amendment 4 to Exhibit 10.35, effective as of February 26, 2002 *10.35.5 Amendment 5 Exhibit 10.35, effective as of November 1, 2001 10.36 Special Severance Program for Officers of NU System Companies, as adopted on July 15, 1998. (Exhibit 10.37, 1998 NU Form 10-K, File No. 1-5324) 10.36.1 Amendment to Exhibit 10.36, effective as of February 23, 1999. (Exhibit 10.37.1, 1998 Form 10-K, File No. 1-5324) 10.36.2 Amendment to Exhibit 10.36, effective as of September 14, 1999. (Exhibit 10.3, 1999 NU Form 10-Q for the Quarter Ended September 30, 1999, File No. 1-5324) 10.37 Loan Agreement dated as of December 2, 1991, by and between NU and Mellon Bank, N.A., as Trustee, with respect to NU's loan of $175 million to an ESOP Trust. (Exhibit 10.46, 1991 NU Form 10-K, File No. 1-5324) 10.37.1 First Amendment to Exhibit 10.37 dated February 7, 1992. (Exhibit 10.36.1, 1993 NU Form 10-K, File No. 1-5324) 10.37.2 Loan Agreement dated as of March 19, 1992 by and between NU and Mellon Bank, N.A., as Trustee, with respect to NU's loan of $75 million to the ESOP Trust. (Exhibit 10.49.1, 1992 NU Form 10-K, File No. 1-5324) 10.37.3 Second Amendment to Exhibit 10.37 dated April 9, 1992. (Exhibit 10.36.3, 1993 NU Form 10-K, File No. 1-5324) 10.38 Employment Agreement with Michael G. Morris. (Exhibit 10.39, 1997 NU Form 10-K, File No. 1-5324) 10.38.1 Amendment to Exhibit 10.38, dated as of February 23, 1999. (Exhibit 10.39.1, 1998 NU Form 10-K, File No. 1-5324) 10.38.2 Amendment to Exhibit 10.38, dated as of June 28, 2001 (Exhibit 10.41.2 to 2001 NU Form 10-Q for the Quarter Ending September 30, 2001, File No. 1-5324) 10.38.3 Amendment to Exhibit 10.38, dated as of September 11, 2001 (Exhibit 10.41.3 to 2001 NU Form 10-Q for the Quarter Ending September 30, 2001, File No. 1-5324). 10.39 Transition and Retirement Agreement with Bernard M. Fox. (Exhibit 10.39, 1996 NU Form 10-K, File No. 1-5324) 10.40 Employment Agreement with Bruce M. Kenyon. (Exhibit 10.40, 1996 NU Form 10-K, File No. 1-5324) 10.40.1 Amendment to Exhibit 10.40, dated as of January 13, 1998. (Exhibit 10.41.1, 1998 NU Form 10-K, File No. 1-5324) 10.40.2 Amendment to Exhibit 10.40, dated as of February 23, 1999. (Exhibit 10.41.2, 1998 NU Form 10-K, File No. 1-5324) 10.40.3 Amendment to Exhibit 10.40, dated as of May 14, 1999. (Exhibit 10.1, 1999 NU Form 10-Q for the Quarter Ended March 31,1999, File No. 1-5324) 10.40.4 Amendment to Exhibit 10.40, dated as of March 21, 2000. (Exhibit 10.1, 2000 NU Form 10-Q for the Quarter Ended March 31, 2000, File No. 1-5324) 10.41 Employment Agreement with John H. Forsgren. (Exhibit 10.41, 1996 NU Form 10-K, File No. 1-5324) 10.41.1 Amendment to Exhibit 10. 41, dated as of January 13, 1998. (Exhibit 10.42.1, 1998 NU Form 10-K, File No. 1-5324) 10.41.2 Amendment to Exhibit 10.41, dated as of February 23, 1999. (Exhibit 10.42.2, 1998 NU Form 10-K, File No. 1-5324) 10.41.3 Amendment to Exhibit 10.41, dated as of May 10, 1999. (Exhibit 10.1, 1999 NU Form 10-Q for the Quarter Ended March 31, 1999, File No. 1-5324) 10.41.4 Amendment to Exhibit 10.41, dated as of September 14, 1999. (Exhibit 10.4, 1999 NU Form 10-Q for the Quarter Ended September 30, 1999, File No. 1-5324) 10.41.5 Amendment to Exhibit 10.41, dated as of September 19, 2001 (Exhibit 10.44.7 to 2001 NU Form 10-Q for the Quarter Ending September 30, 2001, File No. 1-5324). 10.42 Supplemental Retirement Benefit with John H. Forsgren, dated as of August 8, 2001, (Exhibit 10.44.5, 2001 Form 10-Q for Quarter Ended September 30, 2001, File No. 1-5324) 10.43 Supplemental Compensation Arrangement with John J. Forsgren, dated as of September 5, 2001, (Exhibit 10.44.6, 2001 Form 10-Q for Quarter Ended September 30, 2001, File No. 1-5324). 10.44 Employment Agreement with Cheryl W. Grise. (Exhibit 10.44, 1998 NU Form 10-K, File No. 1-5324) 10.44.1 Amendment to Exhibit 10.42, dated as of January 13, 1998, (Exhibit 10.44.1, 1998 NU Form 10-K, File No. 1-5324) 10.44.2 Amendment to Exhibit 10.42, dated as of February 23, 1999, (Exhibit 10.44.2, 1998 NU Form 10-K, File No. 1-5324) 10.44.3 Amendment to Exhibit 10.42, dated as of September 14, 1999, (Exhibit 10.5, 1999 NU Form 10-Q for the Quarter Ended September 30, 1999, File No. 1-5324) 10.44.4 Amendment to Exhibit 10.42 dated as of September 19, 2001, (Exhibit 10.46.5 to 2001 NU Form 10-Q for the Quarter Ending September 30, 2001, File No. 1-5324) 10.44.5 Supplemental Compensation Arrangement with Cheryl W. Grise, dated as of September 17, 2001, (Exhibit 10.46.4, 2001 NU Form 10-Q for Quarter Ended September 30, 2001, File No. 1-5324) *10.45 Agreement with Gary D. Simon dated March 16, 1998 10.46 Northeast Utilities Deferred Compensation Plan for Trustees, Amended and Restated December 13, 1994. (Exhibit 10.39, 1995 NU Form 10-K, File No. 1-5324) *10.46.1 Amendment to Exhibit 10.46, effective November 5, 2001. 10.47 Deferred Compensation Plan for Officers of Northeast Utilities System Companies adopted September 23, 1986. (Exhibit 10.40, 1995 NU Form 10-K, File No. 1-5324) 10.48 Northeast Utilities Deferred Compensation Plan for Executives, adopted January 13, 1998. (Exhibit A.5, File No. 70-09185) 10.49 Reciprocal Support Agreement Among NNECO, NAESCO, CYAPC, YAEC and NUSCO dated January 1, 1996. (Exhibit 10.41, 1995 NU Form 10K, File No. 1-5324) 10.50 Receivables Purchase and Sale Agreement (CL&P and CL&P Receivables Corporation), dated as of September 30, 1997. (Exhibit 10.49, 1997 NU Form 10-K, File No. 1-5324) 10.50.1 Amendment to Exhibit 10.50 dated September 29, 1998. (Exhibit 10.49.1, 1998 NU Form 10-K, File No. 1-5324) 10.50.2 Amendment to Exhibit 10.50 dated September 28, 1999. (Exhibit C.10.3, 1999 NU Form U5S, File No. 30-246) 10.50.3 Amendment to Exhibit 10.50 dated September 27, 2000. (Exhibit 10.51.3 2000 NU Form 10-K, File No. 1-5324) 10.50.4 Purchase and Contribution Agreement (CL&P and CL&P Receivables Corporation), dated as of September 30, 1997. (Exhibit 10.49.1, 1997 NU Form 10-K, File No. 1-5324) 10.51 Credit Agreement dated as of March 9, 2000, among NGC as Borrower and the Initial Lenders Named Therein as Initial Lenders and Citibank, N.A. as Administrative and Collateral Agent and Depository Bank (Exhibit 10.54, 2000 NU form 8-K, File No. 1-5324). 10.51.1 Amendment No. 1 to Exhibit 10.51, dated as of July 27, 2000 (Exhibit 10.54.1, 2000 NU Form 8-K, File No. 1-5324). 10.51.2 Amendment No. 2 to Exhibit 10.51, dated as of November 22, 2000 (Exhibit 10.54.2, 2000 NU Form 8-K, File No. 1-5324). 10.52 Tranche B Mortgage dated as of March 9, 2000, among NGC and Citibank, N.A. (Exhibit 10.55, 2000 NU Form 8-K, File No. 1-5324). 10.53 Indenture of Mortgage and Deed of Trust dated July 1, 1989 between Yankee Gas and the Connecticut National Bank, as Trustee (Exhibit 4.7, 1990 YES Form 10-K, File No. 0-10721) 10.54 Power Purchase and Sales Agreement, dated December 27, 1999 between NGC and Select Energy, Inc. Mortgage, (Exhibit 10.1 to NGC Registration Statement S-4 dated December 6, 2001) 10.54.1 Consent and Agreement, dated as of October 18, 2001, among NU, Select Energy, Inc., The Bank of New York, as trustee and NGC, dated as of October 18, 2001 between NGC (Exhibit 10.3 to NGC Registration Statement S-4 dated December 6, 2001) 10.54.2 Security Agreement, dated as of October 18, 2001, between NGC and The Bank of New York, as trustee (Exhibit 10.4 to NGC Registration Statement S-4 dated December 6, 2001) 10.54.3 Form of Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of October 18, 2001, by NGC in favor of The Bank of New York, as Trustee (Exhibit 10.5 to NGC Registration Statement S-4 dated December 6, 2001) #10.55 CL&P Transition Property Purchase and Sale Agreement dated as of March 30, 2001. #10.56 CL&P Transition Property Servicing Agreement dated as of March 30, 2001. @10.57 PSNH Purchase and Sale Agreement with PSNH Funding LLC dated as of April 25, 2001. @10.58 PSNH Servicing Agreement with PSNH Funding LLC dated as of April 25, 2001. @10.59 PSNH Purchase and Sale Agreement with PSNH Funding LLC2 dated as of January 30, 2002. @10.60 PSNH Servicing Agreement with PSNH Funding LLC2 dated as of January 30, 2002. **10.61 WMECO Transition Property Purchase and Sale Agreement dated as of May 17, 2001. **10.62 WMECO Transition Property Servicing Agreement dated as of May 17, 2001. 12. Ratio of Earnings to Fixed Charges 13. Annual Report to Security Holders (Each of the Annual Reports is filed only with the Form 10-K of that respective registrant.) *13.1 Portions of the Annual Report to Shareholders of NU (pages 15 to 52) that have been incorporated by reference into this Form 10-K. 13.2 Annual Report of CL&P. 13.3 Annual Report of WMECO. 13.4 Annual Report of PSNH. 13.5 Annual Report of NGC. 16. Arthur Andersen LLP letter to Securities and Exchange Commission, dated March 22, 2002, (Exhibit 16 to NU Form 8-K, dated March 22, 2002, File No. 1-5324) *21. Subsidiaries of the Registrant. *99. Letter from Northeast Utilities to Securities and Exchange Commission, dated March 22, 2002, concerning change in auditors. EX-12 4 exhibit12.txt EXHIBIT 12 Exhibit 12 NORTHEAST UTILITIES Ratio of Earnings to Fixed Charges (Thousands of Dollars)
Year Year Year Year Year 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- Earnings, as defined: Net income (loss) before extraordinary item and cumulative effect.................... $(129,962) $(146,753) $ 34,216 $205,295 $220,124 Income taxes................................ 1,948 5,939 98,611 161,725 171,483 Equity in earnings of regional nuclear generating and transmission companies................................. (4,653) (1,456) (2,905) 13,667 3,090 Minority interest........................... 9,300 9,300 9,300 9,300 3,100 Fixed charges, as below..................... 291,348 292,622 279,851 311,175 295,141 --------- --------- -------- -------- -------- Total earnings, as defined: $ 167,981 $ 159,652 $419,073 $701,162 $692,938 ========= ========= ======== ======== ======== Fixed Charges, as defined: Interest on long-term debt...................... $ 282,095 $ 273,824 $258,093 $200,696 $147,049 Interest on rate reduction bonds................ - - - - 87,616 Other interest.................................. (10,114) (4,735) 5,558 98,605 44,993 Rental interest factor - capital................ 13,600 18,300 13,700 8,657 13,144 Rental interest factor - 1/3 operating.......... 5,767 5,233 2,500 3,217 2,339 --------- --------- -------- -------- -------- Total fixed charges, as defined................. $ 291,348 $ 292,622 $279,851 $311,175 $295,141 ========= ========= ======== ======== ======== Ratio of earnings to fixed charges................ 0.58 0.55 1.50 2.25 2.35 ========= ========= ======== ======== ========
EX-99 5 exhibit99.txt EXHIBIT 99 Exhibit 99 Northeast Utilities 174 Brush Hill Avenue West Springfield, Massachusetts 01090-2010 LETTER TO COMMISSION PURSUANT TO TEMPORARY NOTE 3T March 22, 2002 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549-0408 Ladies and Gentlemen: Pursuant to Temporary Note 3T to Article 3 of Regulation S-X, Northeast Utilities has obtained a letter of representation from Arthur Andersen LLP ("Andersen") stating that they audited the financial statements of Northeast Utilities, The Connecticut Light and Power Company, Public Service Company of New Hampshire, Western Massachusetts Electric Company, and Northeast Generation Company as of December 31, 2001 and for the year then ended and have issued their reports thereon dated January 22, 2002 for Northeast Utilities, The Connecticut Light and Power Company, Public Service Company of New Hampshire, and Western Massachusetts Electric Company, and February 5, 2002 for Northeast Generation Company. In addition, the representation letter states that the audits referred to above were subject to their quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards, that there was appropriate continuity of Arthur Andersen personnel working on the audit and availability of national office consultation. Availability of personnel at foreign affiliates of Arthur Andersen is not relevant to these audits. Very truly yours, Northeast Utilities /s/ John P. Stack ---------------------------------------------- John P. Stack Vice President - Accounting and Controller EX-4.3.1.2 6 y58564a.txt Exhibit 4.3.1.2 PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND FIRST UNION NATIONAL BANK Formerly Known as FIRST FIDELITY BANK, NATIONAL ASSOCIATION, NEW JERSEY Successor to BANK OF NEW ENGLAND, NATIONAL ASSOCIATION (Formerly Known as NEW ENGLAND MERCHANTS NATIONAL BANK) and to NEW BANK OF NEW ENGLAND, NATIONAL ASSOCIATION, TRUSTEE TWELFTH SUPPLEMENTAL INDENTURE Dated as of December 1, 2001 TO ISSUE SERIES I, J and K FIRST MORTGAGE BONDS $89,250,000 First Mortgage Bonds (Series I due 2021) $89,250,000 First Mortgage Bonds (Series J due 2021) $108,985,000 5.45% First Mortgage Bonds (Series K due 2021) THE SERIES I AND J FIRST MORTGAGE BONDS CREATED BY THIS SUPPLEMENTAL INDENTURE CONTAIN PROVISIONS FOR CHANGES IN THE INTEREST RATE THEREON Page 1 THIS TWELFTH SUPPLEMENTAL INDENTURE dated as of December 1, 2001, between PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE (hereinafter with its successors and assigns generally called the Company), a corporation duly organized and existing under the laws of the State of New Hampshire, having its principal place of business at 1000 Elm Street in Manchester, New Hampshire 03101, and FIRST UNION NATIONAL BANK, formerly known as First Fidelity Bank, National Association, New Jersey, successor in trust to Bank of New England, National Association (formerly known as New England Merchants National Bank) and to New Bank of New England, National Association (hereinafter with its successors in trust generally called the Trustee), a national banking association duly organized and existing under the laws of the United States of America, having its corporate trust office at 21 South Street, 3rd Floor, Morristown, New Jersey 07960, and duly authorized to execute the trusts hereof. WHEREAS, the Company heretofore duly executed and delivered to Bank of New England, National Association (formerly known as New England Merchants National Bank), as predecessor trustee, its General and Refunding Mortgage Indenture (hereinafter, as amended by the Tenth Supplemental Indenture dated as of May 1, 1991, generally referred to as the "Original Indenture" and sometimes referred to, with each and every prior indenture supplemental thereto and each and every other instrument, including this Twelfth Supplemental Indenture, which the Company, pursuant to the provisions thereof, may execute with the Trustee and which is therein stated to be supplemental to the Original Indenture, as the "Indenture"), dated as of August 15, 1978, but actually executed on September 20, 1978, and recorded, among other places, in Hillsborough County, New Hampshire, Registry of Deeds, Book 2640, Page 334, in York County, Maine, Registry of Deeds, Book 2417, Page 01, in Concord, Vermont, Land Records, Book 44, Page 129A, and in the Office of the Secretary of the State of Connecticut in Volume 56, Page G of Railroad Mortgages (together with certificates with respect thereto recorded in the Town Clerk's offices of Waterford and Berlin, Connecticut), to which this instrument is supplemental, and in modification and confirmation thereof has executed and delivered (i) to Bank of New England, National Association (formerly known as New England Merchants National Bank) as predecessor trustee nine duly recorded indentures supplemental thereto, (ii) to First Fidelity Bank, National Association, New Jersey, as trustee, a Tenth Supplemental Indenture dated as of May 1, 1991 (hereinafter generally referred to as the Tenth Supplemental Indenture) and (iii) to First Union National Bank, as trustee, an Eleventh Supplemental Indenture dated as of April 1, 1998 (hereinafter generally referred to as the Eleventh Supplemental Indenture) thereto duly recorded, whereby substantially all the properties of the Company used by it in its business, whether then owned or thereafter acquired, with certain reservations, exceptions and exclusions fully set forth in the Original Indenture were given, granted, bargained, sold, transferred, assigned, pledged, mortgaged and conveyed to the Trustee, its successors and assigns, in trust upon the terms and conditions set forth therein to secure its General and Refunding Mortgage Bonds issued and to be issued thereunder, and for other purposes more particularly specified therein; and WHEREAS, on January 6, 1991, Bank of New England, National Association was declared insolvent, and New Bank of New England, National Association, pursuant to a purchase and assumption agreement dated as of January 6, 1991 between it and the Federal Deposit Insurance Corporation as receiver of Bank of New England, National Association, acquired and succeeded to all of the right, title, interest, authority and appointment of Bank of New England, National Association, as Trustee under the Indenture, which succession and appointment were ratified and confirmed by the Board of Directors of the Company on February 21, 1991, all as more particularly recited in the Agreement as to Resignation of Trustee and Appointment of Successor Trustee (the "Resignation and Appointment Agreement"), by and among the Company, New Bank Page 2 of New England, National Association, and First Fidelity Bank, National Association, New Jersey, recorded with the Tenth Supplemental Indenture; and WHEREAS, pursuant to the Resignation and Appointment Agreement, New Bank of New England, National Association resigned as successor trustee and First Fidelity Bank, National Association, New Jersey succeeded to the trusts created by the Indenture; and WHEREAS, First Fidelity Bank, National Association, New Jersey changed its name to First Union National Bank and remains as Trustee under the Indenture; and WHEREAS, pursuant to The Third Amended Joint Plan of Reorganization (the "Plan"), dated December 28, 1989 (Case No. 88- 00043), as confirmed by order of the United States Bankruptcy Court for the District of New Hampshire dated April 20, 1990, all bonds outstanding under the First Mortgage Indenture dated as of January 1, 1943, as from time to time amended and supplemented, between the Company and Old Colony Trust Company, as trustee (to which each of The First National Bank of Boston and Maryland National Bank has been successor trustee) have been paid in full and said First Mortgage Indenture has been released and is of no further force or effect, all bonds outstanding under the Third Mortgage Indenture dated as of February 15, 1986, as from time to time amended and supplemented, between the Company and First Fidelity Bank, National Association, New Jersey, as trustee, have been paid in full and said Third Mortgage Indenture has been released and is of no further force or effect, and all bonds issued prior to the date of execution of the Tenth Supplemental Indenture and outstanding under the Indenture have been paid in full; and WHEREAS, the actions contemplated by the Resignation and Appointment Agreement and the Tenth Supplemental Indenture have been authorized and directed by Order of the United States Bankruptcy Court for the District of New Hampshire dated January 18, 1991 in Case No. 88-00043, which Order authorized certain transactions and procedures necessary to consummate the Plan and approved certain modifications of the Plan related thereto; and WHEREAS, all applicable requirements of the Plan and said Order have been complied with; and WHEREAS, pursuant to the Tenth Supplemental Indenture the Company effected the amendments to the Indenture specified in the Tenth Supplemental Indenture, including amendments to reflect the release and discharge of the Company's First Mortgage Indenture dated as of January 1, 1943, as supplemented and amended, and to reflect that, as a result, the Indenture is now a First Mortgage Indenture, the bonds issued and to be issued under the Indenture will be First Mortgage Bonds of the Company, and the Original Indenture as it may heretofore and hereafter be supplemented and amended shall henceforth be known and referred to as the Page 3 Company's First Mortgage Indenture dated as of August 15, 1978; and WHEREAS, the Company by appropriate and sufficient corporate action in conformity with the terms of the Indenture duly caused to be issued seven new series of bonds under the Indenture designated First Mortgage Bonds, Series A through G, said Series A through Series G Bonds being in an aggregate principal amount of $858,985,000 and consisting of fully registered bonds containing the terms and provisions duly fixed and determined by the Board of Directors of the Company and expressed in Schedule B to the Tenth Supplemental Indenture; and WHEREAS, on May 15, 1996, $172,500,000 aggregate principal amount of the Company's 8 7/8% First Mortgage Bonds, Series A, matured and were paid and canceled; and WHEREAS, as of April 1, 1998 the Company by appropriate and sufficient corporate action in conformity with the terms of the Indenture duly caused to be issued a new series of bonds under the Indenture designated First Mortgage Bonds, Series H, said Series H Bonds being in an aggregate principal amount of $75,000,000 and containing the terms and provisions duly fixed and determined by the Board of Directors of the Company and expressed in Schedule A to the Eleventh Supplemental Indenture; and WHEREAS, on May 15, 1998, $170,000,000 aggregate principal amount of the Company's 9.17% First Mortgage Bonds, Series B, matured and were paid and canceled; and WHEREAS, on April 22, 1999, the Revolving Credit Agreement dated as of April 23, 1998 (the "Credit Agreement") terminated, the Credit Borrowings thereunder were indefeasibly paid in full in accordance with the terms thereof and the obligations of the several Lenders to make Advances to the Company under the Credit Agreement were terminated; the bonds of Series H were deemed paid and all obligations of the Company to pay the principal of, premium, if any, and interest on the bonds of Series H was satisfied and discharged; and the $75,000,000 aggregate principal amount of the Company's First Mortgage Bonds, Series H, were canceled; and WHEREAS, as of March 30, 2001 the Company sold its interest in the Millstone II Nuclear Generating Station, located in Waterford, Connecticut, and with the sale of said property, no longer owns any property located in Connecticut which is subject to the lien of the Indenture, and is no longer subject to the jurisdiction of the Connecticut Department of Public Utility Control; and WHEREAS, the Company has purchased, constructed or otherwise acquired certain additional property not heretofore specifically described in the Indenture but which is and is intended to be Page 4 subject to the lien thereof, and proposes specifically to subject such additional property to the lien of the Indenture at this time; and WHEREAS, pursuant to a Series A Loan and Trust Agreement dated as of October 1, 2001 (herein called the "Series A PCRB Agreement"), by and among the Business Finance Authority of the State of New Hampshire (herein called the "Authority"), the Company and State Street Bank and Trust Company, as trustee (herein called the "Series A PCRB Trustee"), the Authority is, concurrently herewith, issuing $89,250,000 in principal amount of its Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - 2001 Tax-Exempt Series A) (herein called the "Series A PCR Bonds") and loaning the proceeds from the sale of the Series A PCR Bonds to the Company. Proceeds of the loan will be used to refund (i) the Authority's $66,000,000 aggregate principal amount 7.65% Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - 1991 Tax-Exempt Series A) (the "1991 Series A Bonds"), and (ii) a portion of the Authority's $112,500,000 aggregate principal amount 7.65% Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - 1991 Tax-Exempt Series C) (the "1991 Series C Bonds"). The proceeds of the 1991 Series A Bonds and the 1991 Series C Bonds were used to finance and refinance a portion of the Company's share of expenditures, including financing costs, relating to the construction of certain pollution control, sewage and/or solid waste disposal facilities required for the operation of the Seabrook nuclear-fueled, steam electric generating plant, Unit 1, located in Seabrook, New Hampshire, in which the Company owned an undivided 35.6% interest; and WHEREAS, the Series A PCR Bonds are special obligations of the Authority, payable solely out of the revenues and other receipts, funds and moneys derived by the Authority under the Series A PCRB Agreement and from any amounts otherwise available under the Series A PCRB Agreement for the payment of the Series A PCR Bonds, and such revenues and other receipts, funds, moneys and amounts are, pursuant to the Series A PCRB Agreement, assigned and pledged by the Authority to the Series A PCRB Trustee as security for the Series A PCR Bonds and include loan payments required to be made by the Company to the Series A PCRB Trustee for the account of the Authority pursuant to the Series A PCRB Agreement in amounts equal to the amounts payable with respect to the Series A PCR Bonds; and WHEREAS, in consideration of the loan being provided by the Authority under, and pursuant to the provisions of, the Series A PCRB Agreement, the Company has agreed to issue $89,250,000 principal amount of its First Mortgage Bonds, Series I (hereinafter generally referred to as the "Series I Bonds" or the "bonds of Series I") to evidence and secure the Company's obligation under the Series A PCRB Agreement to make loan payments as aforesaid and to provide security for the Series A PCR Bonds; and Page 5 WHEREAS, pursuant to a Series B Loan and Trust Agreement dated as of October 1, 2001 (herein called the "Series B PCRB Agreement"), by and among the Authority, the Company and State Street Bank and Trust Company, as trustee (herein called the "Series B PCRB Trustee"), the Authority is, concurrently herewith, issuing $89,250,000 in principal amount of its Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - 2001 Tax-Exempt Series B) (herein called the "Series B PCR Bonds") and loaning the proceeds from the sale of the Series B PCR Bonds to the Company. Proceeds of the loan will be used to refund a portion of the 1991 Series C Bonds. The proceeds of the 1991 Series C Bonds were used to finance and refinance a portion of the Company's share of expenditures, including financing costs, relating to the construction of certain pollution control, sewage and/or solid waste disposal facilities required for the operation of the Seabrook nuclear-fueled, steam electric generating plant, located in Seabrook, New Hampshire, in which the Company owned an undivided 35.6% interest; and WHEREAS, the Series B PCR Bonds are special obligations of the Authority, payable solely out of the revenues and other receipts, funds and moneys derived by the Authority under the Series B PCRB Agreement and from any amounts otherwise available under the Series B PCRB Agreement for the payment of the Series B PCR Bonds, and such revenues and other receipts, funds, moneys and amounts are, pursuant to the Series B PCRB Agreement, assigned and pledged by the Authority to the Series B PCRB Trustee as security for the Series B PCR Bonds and include loan payments required to be made by the Company to the Series B PCRB Trustee for the account of the Authority pursuant to the Series B PCRB Agreement in amounts equal to the amounts payable with respect to the Series B PCR Bonds; and WHEREAS, in consideration of the loan being provided by the Authority under, and pursuant to the provisions of, the Series B PCRB Agreement, the Company has agreed to issue $89,250,000 principal amount of its First Mortgage Bonds, Series J (hereinafter generally referred to as the "Series J Bonds" or the "bonds of Series J") to evidence and secure the Company's obligation under the Series B PCRB Agreement to make loan payments as aforesaid and to provide security for the Series B PCR Bonds; and WHEREAS, pursuant to a Series C Loan and Trust Agreement dated as of October 1, 2001 (herein called the "Series C PCRB Agreement"), by and among the Authority, the Company and State Street Bank and Trust Company, as trustee (herein called the "Series C PCRB Trustee"), the Authority is, concurrently herewith, issuing $108,985,000 in principal amount of its Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - 2001 Tax-Exempt Series C) (herein called the "Series C PCR Bonds") and loaning the proceeds from the sale of the Series C PCR Bonds to the Company. Proceeds of the loan will be used to refund the Page 6 Authority's $108,985,000 aggregate principal amount 7.50% Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - 1991 Tax-Exempt Series B) (the "1991 Series B Bonds"). The proceeds of the 1991 Series B Bonds were used to finance and refinance a portion of the Company's share of expenditures, including financing costs, relating to the construction of certain pollution control, sewage and/or solid waste disposal facilities required for operation of the Seabrook nuclear-fueled, steam electric generating plant, located in Seabrook, New Hampshire, in which the Company owned an undivided 35.6% interest; and WHEREAS, the Series C PCR Bonds are special obligations of the Authority, payable solely out of the revenues and other receipts, funds and moneys derived by the Authority under the Series C PCRB Agreement and from any amounts otherwise available under the Series C PCRB Agreement for the payment of the Series C PCR Bonds, and such revenues and other receipts, funds, moneys and amounts are, pursuant to the Series C PCRB Agreement, assigned and pledged by the Authority to the Series C PCRB Trustee as security for the Series C PCR Bonds and include loan payments required to be made by the Company to the Series C PCRB Trustee for the account of the Authority pursuant to the Series C PCRB Agreement in amounts equal to the amounts payable with respect to the Series C PCR Bonds; and WHEREAS, in consideration of the loan being provided by the Authority under, and pursuant to the provisions of, the Series C PCRB Agreement, the Company has agreed to issue $108,985,000 principal amount of its First Mortgage Bonds, Series K (hereinafter generally referred to as the "Series K Bonds" or the "bonds of Series K") to evidence and secure the Company's obligation under the Series C PCRB Agreement to make loan payments as aforesaid and to provide security for the Series C PCR Bonds; and WHEREAS, the execution and delivery of this Twelfth Supplemental Indenture and the issue of not exceeding Eighty Nine Million Two Hundred Fifty Thousand Dollars ($89,250,000) in aggregate principal amount of bonds of Series I, Eighty Nine Million Two Hundred Fifty Thousand Dollars ($89,250,000) in aggregate principal amount of bonds of Series J and One Hundred Eight Million Nine Hundred Eighty Five Thousand Dollars ($108,985,000) in aggregate principal amount of bonds of Series K, and other necessary actions have been duly authorized by the Executive Committee of the Board of Directors of the Company; WHEREAS, the Company proposes to execute and deliver this Twelfth Supplemental Indenture to provide for the issue of the bonds of Series I, J and K and to confirm the lien of the Indenture on the property referred to below, all as permitted by Section 15.1 of the Original Indenture; and WHEREAS, all acts and things necessary to make the initial issue Page 7 of the Series I, J and K Bonds, when executed by the Company and authenticated by the Trustee and delivered as in the Original Indenture provided, the legal, valid and binding obligations of the Company according to their terms and to make this Twelfth Supplemental Indenture a legal, valid and binding instrument for the security of the bonds, in accordance with its and their terms, have been done and performed, and the execution and delivery of this Twelfth Supplemental Indenture has in all respects been duly authorized; NOW, THEREFORE, in consideration of the premises, and of the acceptance of said Series I, J and K First Mortgage Bonds by the holder thereof, and of the sum of $1.00 duly paid by the Trustee to the Company, and of other good and valuable considerations, the receipt whereof is hereby acknowledged, and in confirmation of and supplementing the Original Indenture as previously supplemented by said eleven preceding supplemental indentures, and in performance of and compliance with the provisions thereof, said Public Service Company of New Hampshire, by these presents, does give, grant, bargain, sell, transfer, assign, pledge, mortgage and convey unto First Union National Bank, as Trustee, as provided in the Original Indenture, as previously supplemented and amended and as supplemented by this Twelfth Supplemental Indenture, and its successor or successors in the trust thereby and hereby created, and its and their assigns, (a) all and singular the property, and rights and interests in property, described in the Original Indenture and the eleven preceding supplemental indentures (said first nine supplemental indentures, as amended by the Tenth Supplemental Indenture, together with the Tenth Supplemental Indenture and the Eleventh Supplemental Indenture, hereinafter referred to as the Preceding Supplemental Indentures), and thereby conveyed, pledged, assigned, transferred and mortgaged, or intended so to be (said descriptions in said Original Indenture and the Preceding Supplemental Indentures being hereby made a part hereof to the same extent as if set forth herein at length), whether then or now owned or thereafter or hereafter acquired, except such of said properties or interests therein as may have been released or sold or disposed of in whole or in part as permitted by the provisions of the Original Indenture, and (b) also, but without in any way limiting the generality of the foregoing, all the right, title and interest of the Company, now owned or hereafter acquired, in and to the rights, titles, interests and properties described or referred to in Schedule D hereto attached and hereby made a part hereof as fully as if set forth herein at length, in all cases not specifically reserved, excepted and excluded; the foregoing property, and rights and interests in property, being located in the following listed municipalities in New Hampshire and unincorporated areas in Coos County, New Hampshire, as well as in various municipalities in the States of Maine, Vermont and elsewhere: BELKNAP COUNTY - Alton, Barnstead, Belmont, Center Harbor, Gilford, Gilmanton, Laconia, Meredith, New Hampton, Sanbornton, Page 8 Tilton; CARROLL COUNTY - Albany, Brookfield, Chatham, Conway, Eaton, Effingham, Freedom, Madison, Moultonboro, Ossipee, Sandwich, Tamworth, Tuftonboro, Wakefield, Wolfeboro; CHESHIRE COUNTY - Alstead, Chesterfield, Dublin, Fitzwilliam, Gilsum, Harrisville, Hinsdale, Jaffrey, Keene, Marlborough, Marlow, Nelson, Richmond, Rindge, Roxbury, Stoddard, Sullivan, Surry, Swanzey, Troy, Westmoreland, Winchester; COOS COUNTY - Bean's Grant, Berlin, Cambridge, Carroll, Chandler's Purchase, Clarksville, Colebrook, Columbia, Crawford's Purchase, Dalton, Dummer, Errol, Gorham, Green's Grant, Jefferson, Lancaster, Martin's Location, Milan, Millsfield, Northumberland, Pinkham's Grant, Pittsburg, Randolph, Shelburne, Stark, Stewartstown, Stratford, Success, Thompson & Meserve's Purchase, Wentworth's Location, Whitefield; GRAFTON COUNTY - Alexandria, Ashland, Bath, Bethlehem, Bridgewater, Bristol, Campton, Easton, Enfield, Franconia, Grafton, Hebron, Holderness, Landaff, Lincoln, Lisbon, Littleton, Lyman, Orange, Plymouth, Rumney, Sugar Hill, Thornton, Woodstock; HILLSBOROUGH COUNTY - Amherst, Antrim, Bedford, Bennington, Brookline, Deering, Francestown, Goffstown, Greenfield, Greenville, Hancock, Hillsborough, Hollis, Hudson, Litchfield, Lyndeborough, Manchester, Mason, Merrimack, Milford, Mont Vernon, Nashua, New Boston, New Ipswich, Pelham, Peterborough, Sharon, Temple, Weare, Wilton, Windsor; MERRIMACK COUNTY - Allenstown, Andover, Boscawen, Bow, Bradford, Canterbury, Chichester, Concord, Danbury, Dunbarton, Epsom, Franklin, Henniker, Hill, Hooksett, Hopkinton, Loudon, Newbury, New London, Northfield, Pembroke, Pittsfield, Salisbury, Sutton, Warner, Webster, Wilmot; ROCKINGHAM COUNTY - Auburn, Atkinson, Brentwood, Candia, Chester, Danville, Deerfield, Derry, East Kingston, Epping, Exeter, Fremont, Greenland, Hampstead, Hampton, Hampton Falls, Kensington, Kingston, Londonderry, New Castle, Newfields, Newington, Newmarket, Newton, North Hampton, Northwood, Nottingham, Portsmouth, Raymond, Rye, Sandown, Seabrook, South Hampton, Stratham, Windham; STRAFFORD COUNTY - Barrington, Dover, Durham, Farmington, Lee, Madbury, Middleton, Milton, New Durham, Rochester, Rollinsford, Somersworth, Strafford; SULLIVAN COUNTY - Claremont, Croydon, Goshen, Grantham, Lempster, Newport, Springfield, Sunapee, Unity, Washington; SUBJECT, HOWEVER, as to all of the foregoing, to the specific rights, privileges, liens, encumbrances, restrictions, Page 9 conditions, limitations, covenants, interests, reservations, exceptions and otherwise as provided in the Original Indenture and the Preceding Supplemental Indentures, and in the descriptions in the schedules thereto and hereto and in the deeds or grants in said schedules referred to; BUT SPECIFICALLY RESERVING, EXCEPTING AND EXCLUDING (as the same are reserved, excepted and excluded from the lien of the Original Indenture and the Preceding Supplemental Indentures) from this instrument and the grant, conveyance, mortgage, transfer and assignment herein contained, all right, title and interest of the Company, now owned or hereafter acquired, in and to the properties and rights specified in subclauses (a) to (m), both inclusive, of the paragraph beginning "BUT SPECIFICALLY RESERVING, EXCEPTING AND EXCLUDING..." which paragraph is part of the granting clauses of the Original Indenture; TO HAVE AND TO HOLD all said plant, premises, property, franchises and rights hereby conveyed, assigned, pledged or mortgaged, or intended so to be, unto the Trustee, its successor or successors in trust, and to its and their assigns forever; BUT IN TRUST, NEVERTHELESS, with power of sale, for the equal pro rata benefit, security and protection of the owners of the bonds without any preference, priority or distinction whatever of any one bond over any other bond by reason of priority in the issue, sale or negotiation thereof, or otherwise; PROVIDED, HOWEVER, and these presents are upon the condition, that if the Company shall pay or cause to be paid or make appropriate provision for the payment unto the holders of the bonds of the principal, premium, if any, and interest to become due thereon at the times and in the manner stipulated therein, and shall keep, perform and observe all and singular the covenants, agreements and provisions in the Indenture expressed to be kept, performed and observed by or on the part of the Company, then the Indenture and the estate and rights thereby and hereby granted shall, pursuant and subject to the provisions of Article 16 of the Original Indenture, cease, determine and be void, but otherwise shall be and remain in full force and effect. AND IT IS HEREBY COVENANTED, DECLARED AND AGREED, upon the trusts and for the purposes aforesaid, as set forth in the following covenants, agreements, conditions and provisions, viz.: ARTICLE 1 SERIES I BONDS SECTION 1.01. Designation; Amount. The bonds of Series I shall be designated "First Mortgage Bonds, Series I" and shall not exceed Eighty Nine Million Two Hundred Fifty Thousand Dollars ($89,250,000) in aggregate principal amount at any one time outstanding. The Trustee shall authenticate and deliver up to Page 10 $89,250,000 aggregate principal amount of Series I Bonds at any time upon application by the Company and compliance with the applicable provisions of the Original Indenture. SECTION 1.02. Form of Bonds of 2001 Series I. The bonds of Series I shall be issued only in fully registered form without coupons in denominations of $25,000 and multiples thereof. The Bonds of Series I and the certificate of the Trustee upon said bonds shall be substantially in the forms thereof respectively set forth in Schedule A appended hereto. SECTION 1.03. Provisions of Bonds of 2001 Series I; Interest Accrual; Effect of Payment on Series A PCR Bonds. The bonds of Series I shall mature on May 1, 2021, and shall bear interest, payable on the interest payment dates applicable from time to time to the Series A PCR Bonds (each such interest payment date so applicable to the Series A PCR Bonds being an interest payment date applicable to the bonds of Series I), until the Company's obligation in respect of the principal thereof shall be discharged, in amounts equal to the interest payments due on the Series A PCR Bonds on the interest payment dates applicable to the bonds of Series I, and shall be payable both as to principal and interest at the corporate trust office of the Trustee at 21 South Street, 3rd Floor, Morristown, New Jersey, or the corporate trust office of its successors, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts. The interest on the Series I Bonds, whether in temporary or definitive form, shall be payable without presentation of such bonds, and only to or upon the written order of the registered holders thereof of record at the applicable record date. If pursuant to the Series A PCRB Agreement, all or any portion of the principal of the Series A PCR Bonds shall become or be declared immediately due and payable, a like principal amount of the Series I Bonds, together with all accrued interest thereon, shall, without notice or demand of any kind, become immediately due and payable. In addition, the Series I Bonds shall be callable for redemption in whole or in part according to the terms and provisions provided herein in Section 1.05. Anything in the Indenture or any Series I Bond to the contrary notwithstanding, the Series I Bonds shall be deemed paid, and all obligations of the Company to pay at the times provided herein the principal of and premium, if any, and interest on the Series I Bonds, or to deposit with the Trustee at the times provided in the Indenture an amount of money sufficient therefor, shall be satisfied and discharged, when and to the extent that the principal of and premium, if any, and interest on the Series A PCR Bonds shall have been paid or deemed paid as provided in the Series A PCRB Agreement. The Series A PCRB Trustee shall promptly notify the Trustee by telephone, confirmed in Page 11 writing, of any default in the payment of principal of and premium, if any, and interest on the Series A PCR Bonds, and shall promptly notify the Trustee by telephone, confirmed in writing, of any payment of principal of and premium, if any, and interest (other than payment of regularly scheduled interest) on the Series A PCR Bonds, or if the Series A PCR Bonds have been paid or deemed paid, defeased, redeemed, retired, surrendered or canceled. The Trustee shall be entitled to rely on any such notification received from the Series A PCRB Trustee. Each Series I Bond shall be dated the date of authentication thereof by the Trustee, and shall bear interest on the principal amount thereof from the interest payment date next preceding the date thereof to which interest has been paid on the Bonds of said series, or if the date thereof is prior to the record date (as hereinafter defined) with respect to the first interest payment date then from the date of original issue of the Series I Bonds, or if the date thereof be an interest payment date to which interest is being paid or a date between the record date for any such interest payment date and such interest payment date, then from such interest payment date. The person in whose name any bond of Series I is registered at the close of business on any record date (as hereinafter defined) with respect to any interest payment date shall be entitled to receive the interest payable on such interest payment date notwithstanding the cancellation of such bond upon any registration of transfer or exchange thereof subsequent to the record date and prior to such interest payment date, except that if and to the extent the Company shall default in the payment of the interest due on such interest payment date, then such defaulted interest shall be paid to the person in whose name such bond is registered on a subsequent record date for the payment of defaulted interest if one shall have been established as hereinafter provided and otherwise on the date of payment of such defaulted interest. A subsequent record date may be established by the Company by notice mailed to the owners of the bonds of Series I not less than ten (10) days preceding such record date, which record date shall not be more than thirty (30) days prior to the subsequent interest payment date. The term "record date" as used in this Section with respect to any regular interest payment date shall mean the day next preceding such interest payment date, or, if such day shall be a legal holiday or a day on which banking institutions in Morristown, New Jersey are authorized by law to close, the next preceding day which shall not be a legal holiday or a day on which such institutions are so authorized to close. SECTION 1.04. Transfer and Exchange of Bonds of Series I; Series A PCRB Trustee as Registered Holder; Restriction on Transfer of Bonds of Series I. The bonds of Series I may be surrendered for registration or transfer as provided in Section 2.8 of the Original Indenture, but subject to the restriction set forth in the immediately succeeding paragraph, at the corporate trust office of the Trustee at 21 South Street, 3rd Floor, Morristown, NJ or the corporate trust office of its successors, and may be surrendered at said office for exchange for a like Page 12 aggregate principal amount of bonds of Series I of other authorized denominations and upon surrender for exchange of one or more bonds of Series I, the Company shall execute and the Trustee shall authenticate and there shall be delivered in exchange therefor a like aggregate principal amount of bonds of Series I of other authorized denominations. Notwithstanding the provisions of Section 2.7 of the Original Indenture, no charge, except for taxes or other governmental charges, shall be made by the Company for any registration or transfer of bonds of Series I or for the exchange of any bonds of Series I for such bonds of other authorized denominations. The bonds of Series I shall be issued to and registered in the name of the Series A PCRB Trustee and, anything in this Twelfth Supplemental Indenture or any Series I Bond to the contrary notwithstanding, the bonds of Series I shall not be sold, assigned, pledged or transferred, except to effect the transfer to any successor trustee under the Series A PCRB Agreement. SECTION 1.05. Redemption of the Series I Bonds. If the Series A PCR Bonds are to be redeemed as a whole or in part on any date as provided in the Series A PCRB Agreement, a like principal amount of the Series I Bonds shall be redeemed on such date, at a redemption price equal to the redemption price at which the Series A PCR Bonds are to be so redeemed, as set forth in the Series A PCRB Agreement, stated as a percentage of principal amount of the Series I Bonds to be so redeemed, together in every case with accrued and unpaid interest thereon to the date fixed for redemption. The Series I Bonds shall be redeemed as aforesaid in accordance with the provisions hereof and upon not more than forty-five (45) nor less than thirty (30) days' prior notice given by mail as provided in Article 6 of the Original Indenture; provided that the Company shall be deemed to have satisfied such notice requirement if it shall have delivered to the Series A PCRB Trustee, or received from the Series A PCRB Trustee, as appropriate, at the time and in the manner specified in the Series A PCRB Agreement, the notice required pursuant to the Series A PCRB Agreement to be delivered in connection with the redemption of the Series A PCR Bonds. The Company shall deliver a copy of such notice to the Trustee at the time of such delivery to or receipt from the Series A PCRB Trustee. Redemption of Series I Bonds pursuant to the foregoing provisions of this Section 1.05 may be made with moneys deposited with or received by the Trustee pursuant to Section 6.4 of the Original Indenture, or otherwise pursuant to the Indenture. Except as provided in this Section 1.05, the Series I Bonds are not subject to redemption under any provisions of the Indenture. SECTION 1.06. Payment Date Not a Business Day. If any redemption or maturity date for principal, premium or interest Page 13 with respect to the Series I Bonds shall be (i) a Sunday or a legal holiday, or (ii) a day on which banking institutions are authorized pursuant to law to close and on which the corporate trust office of the Trustee in Morristown, New Jersey or the Series A PCRB Trustee is not open for business, then the payment thereof may be made on the next succeeding day not a day specified in (i) or (ii) with the same force and effect as if made on the specified payment date and no interest shall accrue for the period after the specified payment date. ARTICLE 2 SERIES J BONDS SECTION 2.01. Designation; Amount. The bonds of Series J shall be designated "First Mortgage Bonds, Series J" and shall not exceed Eighty Nine Million Two Hundred Fifty Thousand Dollars ($89,250,000) in aggregate principal amount at any one time outstanding. The Trustee shall authenticate and deliver up to $89,250,000 aggregate principal amount of Series J Bonds at any time upon application by the Company and compliance with the applicable provisions of the Original Indenture. SECTION 2.02. Form of Bonds of 2001 Series J. The bonds of Series J shall be issued only in fully registered form without coupons in denominations of $25,000 and multiples thereof. The bonds of Series J and the certificate of the Trustee upon said bonds shall be substantially in the forms thereof respectively set forth in Schedule B appended hereto. SECTION 2.03. Provisions of Bonds of 2001 Series J; Interest Accrual; Effect of Payment on Series B PCR Bonds. The bonds of Series J shall mature on May 1, 2021, and shall bear interest, payable on the interest payment dates applicable from time to time to the Series B PCR Bonds (each such interest payment date so applicable to the Series B PCR Bonds being an interest payment date applicable to the bonds of Series J), until the Company's obligation in respect of the principal thereof shall be discharged, in amounts equal to the interest payments due on the Series B PCR Bonds on the interest payment dates applicable to the bonds of Series J, and shall be payable both as to principal and interest at the corporate trust office of the Trustee at 21 South Street, 3rd Floor, Morristown, New Jersey, or the corporate trust office of its successors, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts. The interest on the Series J Bonds, whether in temporary or definitive form, shall be payable without presentation of such bonds, and only to or upon the written order of the registered holders thereof of record at the applicable record date. If pursuant to the Series B PCRB Agreement, all or any portion of the principal of the Series B PCR Bonds shall become or be declared immediately due and payable, a like principal amount of the Series J Bonds, together with all accrued interest thereon, Page 14 shall, without notice or demand of any kind, become immediately due and payable. In addition, the Series J Bonds shall be callable for redemption in whole or in part according to the terms and provisions provided herein in Section 2.05. Anything in the Indenture or any Series J Bond to the contrary notwithstanding, the Series J Bonds shall be deemed paid, and all obligations of the Company to pay at the times provided herein the principal of and premium, if any, and interest on the Series J Bonds, or to deposit with the Trustee at the times provided in the Indenture an amount of money sufficient therefor, shall be satisfied and discharged, when and to the extent that the principal of and premium, if any, and interest on the Series B PCR Bonds shall have been paid or deemed paid as provided in the Series B PCRB Agreement. The Series B PCRB Trustee shall promptly notify the Trustee by telephone, confirmed in writing, of any default in the payment of principal of and premium, if any, and interest on the Series B PCR Bonds, and shall promptly notify the Trustee by telephone, confirmed in writing, of any payment of principal of and premium, if any, and interest (other than payment of regularly scheduled interest) on the Series B PCR Bonds, or if the Series B PCR Bonds have been paid or deemed paid, defeased, redeemed, retired, surrendered or canceled. The Trustee shall be entitled to rely on any such notification received from the Series B PCRB Trustee. Each Series J Bond shall be dated the date of authentication thereof by the Trustee, and shall bear interest on the principal amount thereof from the interest payment date next preceding the date thereof to which interest has been paid on the Bonds of said series, or if the date thereof is prior to the record date (as hereinafter defined) with respect to the first interest payment date then from the date of original issue of the Series J Bonds, or if the date thereof be an interest payment date to which interest is being paid or a date between the record date for any such interest payment date and such interest payment date, then from such interest payment date. The person in whose name any bond of Series J is registered at the close of business on any record date (as hereinafter defined) with respect to any interest payment date shall be entitled to receive the interest payable on such interest payment date notwithstanding the cancellation of such bond upon any registration of transfer or exchange thereof subsequent to the record date and prior to such interest payment date, except that if and to the extent the Company shall default in the payment of the interest due on such interest payment date, then such defaulted interest shall be paid to the person in whose name such bond is registered on a subsequent record date for the payment of defaulted interest if one shall have been established as hereinafter provided and otherwise on the date of payment of such defaulted interest. A subsequent record date may be established by the Company by notice mailed to the owners of the bonds of Series J not less than ten (10) days preceding such record date, Page 15 which record date shall not be more than thirty (30) days prior to the subsequent interest payment date. The term "record date" as used in this Section with respect to any regular interest payment date shall mean the day next preceding such interest payment date, or, if such day shall be a legal holiday or a day on which banking institutions in Morristown, New Jersey are authorized by law to close, the next preceding day which shall not be a legal holiday or a day on which such institutions are so authorized to close. SECTION 2.04. Transfer and Exchange of Bonds of Series J; Series B PCRB Trustee as Registered Holder; Restriction on Transfer of Bonds of Series J. The bonds of Series J may be surrendered for registration or transfer as provided in Section 2.8 of the Original Indenture, but subject to the restriction set forth in the immediately succeeding paragraph, at the corporate trust office of the Trustee at 21 South Street, 3rd Floor, Morristown, New Jersey, or the corporate trust office of its successors, and may be surrendered at said office for exchange for a like aggregate principal amount of bonds of Series J of other authorized denominations and upon surrender for exchange of one or more bonds of Series J, the Company shall execute and the Trustee shall authenticate and there shall be delivered in exchange therefor a like aggregate principal amount of bonds of Series J of other authorized denominations. Notwithstanding the provisions of Section 2.7 of the Original Indenture, no charge, except for taxes or other governmental charges, shall be made by the Company for any registration or transfer of bonds of Series J or for the exchange of any bonds of Series J for such bonds of other authorized denominations. The bonds of Series J shall be issued to and registered in the name of the Series B PCRB Trustee and, anything in this Twelfth Supplemental Indenture or any Series J Bond to the contrary notwithstanding, the bonds of Series J shall not be sold, assigned, pledged or transferred, except to effect the transfer to any successor trustee under the Series B PCRB Agreement. SECTION 2.05. Redemption of the Series J Bonds. If the Series B PCR Bonds are to be redeemed as a whole or in part on any date as provided in the Series B PCRB Agreement, a like principal amount of the Series J Bonds shall be redeemed on such date, at a redemption price equal to the redemption price at which the Series B PCR Bonds are to be so redeemed, as set forth in the Series B PCRB Agreement, stated as a percentage of principal amount of the Series B Bonds to be so redeemed, together in every case with accrued and unpaid interest thereon to the date fixed for redemption. The Series J Bonds shall be redeemed as aforesaid in accordance with the provisions hereof and upon not more than forty-five (45) nor less than thirty (30) days' prior notice given by mail as provided in Article 6 of the Original Indenture; provided that the Company shall be deemed to have satisfied such notice requirement if it shall have delivered Page 16 to the Series B PCRB Trustee, or received from the Series B PCRB Trustee, as appropriate, at the time and in the manner specified in the Series B PCRB Agreement, the notice required pursuant to the Series B PCRB Agreement to be delivered in connection with the redemption of the Series B PCR Bonds. The Company shall deliver a copy of such notice to the Trustee at the time of such delivery to or receipt from the Series B PCRB Trustee. Redemption of Series J Bonds pursuant to the foregoing provisions of this Section 2.05 may be made with moneys deposited with or received by the Trustee pursuant to Section 6.4 of the Original Indenture, or otherwise pursuant to the Indenture. Except as provided in this Section 2.05, the Series J Bonds are not subject to redemption under any provisions of the Indenture. SECTION 2.06. Payment Date Not a Business Day. If any redemption or maturity date for principal, premium or interest with respect to the Series J Bonds shall be (i) a Sunday or a legal holiday, or (ii) a day on which banking institutions are authorized pursuant to law to close and on which the corporate trust office of the Trustee in Morristown, New Jersey or the Series B PCRB Trustee is not open for business, then the payment thereof may be made on the next succeeding day not a day specified in (i) or (ii) with the same force and effect as if made on the specified payment date and no interest shall accrue for the period after the specified payment date. ARTICLE 3 SERIES K BONDS SECTION 3.01. Designation; Amount. The Series K Bonds shall be designated "5.45% First Mortgage Bonds, Series K" and shall not exceed One Hundred Eight Million Nine Hundred Eighty Five Thousand Dollars ($108,985,000) aggregate principal amount at any one time outstanding. The Trustee shall authenticate and deliver up to $108,985,000 aggregate principal amount of Series K Bonds at any time upon application of the Company. SECTION 3.02. Form of Bonds of 2001 Series K. The bonds of Series K shall be issued in denominations of $5,000 and multiples thereof. The Series K Bonds and the certificate of the Trustee upon said bonds shall be substantially in the forms thereof respectively set forth in Schedule C appended hereto. SECTION 3.03. Provisions of Bonds of 2001 Series K; Interest Accrual; Effect of Payment on Series C PCR Bonds. The Series K Bonds shall mature on May 1, 2021, and shall bear interest (computed on the basis of a 360-day year consisting of twelve 30-day months), payable semiannually on the first day of May and November of each year, at the rate specified in their title, until the Company's obligation in respect of the principal Page 17 thereof shall be discharged and shall be payable as to principal, premium, if any, and interest at the corporate trust office of the Trustee at 21 South Street, 3rd Floor, Morristown, New Jersey or the corporate trust office of its successors, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts. The interest on the Series K Bonds, whether in temporary or definitive form, shall be payable without presentation of such Bonds, and only to or upon the written order of the registered holders thereof of record at the applicable record date. If, pursuant to the Series C PCRB Agreement, the principal of the Series C PCR Bonds shall become or be declared immediately due and payable, the principal of the Series K Bonds, together with all accrued interest thereon, shall, without notice or demand of any kind, become immediately due and payable. In addition, the Series K Bonds shall be callable for redemption in whole or in part according to the terms and provisions provided herein in Section 3.05. Anything in the Indenture or any Series K Bond to the contrary notwithstanding, the Series K Bonds shall be deemed paid, and all obligations of the Company to pay at the times provided herein the principal of and premium, if any, and interest on the Series K Bonds, or to deposit with the Trustee at the times provided in the Indenture an amount of money sufficient therefor, shall be satisfied and discharged, when and to the extent that the principal of and premium, if any, and interest on the Series C PCR Bonds shall have been paid or deemed paid as provided in the Series C PCRB Agreement. The Series C PCRB Trustee shall promptly notify the Trustee by telephone, confirmed in writing, of any default in the payment of principal of and premium, if any, and interest on the Series C PCR Bonds, and shall promptly notify the Trustee by telephone, confirmed in writing, of any payment of principal of and premium, if any, and interest (other than payment of regularly scheduled interest) on the Series C PCR Bonds, or if the Series C PCR Bonds have been paid or deemed paid, defeased, redeemed, retired, surrendered or canceled. The Trustee shall be entitled to rely on any such notification received from the Series C PCRB Trustee. Each Series K Bond shall be dated as of the date of authentication thereof by the Trustee and shall bear interest on the principal amount thereof from the interest payment date next preceding the date of authentication thereof by the Trustee to which interest has been paid on the Bonds of said series, or if the date of authentication thereof is prior to the record date (as hereinafter defined) with respect to the first interest payment date then from December 1, 2001, or if the date of authentication thereof be an interest payment date to which interest is being paid or a date between the record date for any such interest payment date and such interest payment date, then from such interest payment date. The person in whose name any bond of Series K is registered Page 18 at the close of business on any record date (as hereinafter defined) with respect to any interest payment date shall be entitled to receive the interest payable on such interest payment date notwithstanding the cancellation of such bond upon any transfer or exchange thereof subsequent to the record date and prior to such interest payment date, except that if and to the extent the Company shall default in the payment of the interest due on such interest payment date, then such defaulted interest shall be paid to the person in whose name such bond is registered on a subsequent record date for the payment of defaulted interest if one shall have been established as hereinafter provided and otherwise on the date of payment of such defaulted interest. A subsequent record date may be established by the Company by notice mailed to the owners of the bonds of Series K not less than ten (10) days preceding such record date, which record date shall be not more than thirty (30) days prior to the subsequent interest payment date. The term "record date" as used in this section 3.03 with respect to any regular interest payment date (i.e. May 1 or November 1) shall mean the day next preceding such interest payment date, or, if such day shall be a legal holiday or a day on which banking institutions in Morristown, New Jersey are authorized by law to close, the next preceding day which shall not be a legal holiday or a day on which such institutions are so authorized to close. SECTION 3.04. Transfer and Exchange of Bonds of Series K; Series C PCRB Trustee as Registered Holder; Restriction on Transfer of Bonds of Series K. The bonds of Series K may be surrendered for registration or transfer as provided in Section 2.8 of the Original Indenture, but subject to the restriction set forth in the immediately succeeding paragraph, at the corporate trust office of the Trustee at 21 South Street, 3rd Floor, Morristown, New Jersey, or the corporate trust office of its successors, and may be surrendered at said office for exchange for a like aggregate principal amount of bonds of Series K of other authorized denominations and, upon surrender for exchange of one or more bonds of Series K, the Company shall execute and the Trustee shall authenticate and there shall be delivered in exchange therefor a like aggregate principal amount of bonds of Series K of other authorized denominations. Notwithstanding the provisions of Section 2.7 of the Original Indenture, no charge, except for taxes or other governmental charges, shall be made by the Company for any registration or transfer of bonds of Series K or for the exchange of any bonds of Series K for such bonds of other authorized denominations. The bonds of Series K shall be issued to and registered in the name of the Series C PCRB Trustee and, anything in the Indenture or any bond of Series K to the contrary notwithstanding, the bonds of Series K shall not be sold, assigned, pledged or transferred, except to effect the transfer to any successor trustee under the Series C PCRB Agreement. SECTION 3.05. Redemption of the Series K Bonds. If the Page 19 Series C PCR Bonds are to be redeemed as a whole or in part on any date as provided in the Series C PCRB Agreement, a like principal amount of the Series K Bonds shall be redeemed on such date, at a redemption price equal to the redemption price at which the Series C PCR Bonds are to be so redeemed, as set forth in the Series C PCRB Agreement, stated as a percentage of the principal amount of the Series K Bonds to be so redeemed, together in every case with accrued and unpaid interest thereon to the date fixed for redemption. The Series K Bonds shall be redeemed as aforesaid in accordance with the provisions hereof and upon not more than forty-five (45) nor less than thirty (30) days' prior notice given by mail as provided in Article 6 of the Original Indenture; provided that the Company shall be deemed to have satisfied such notice requirement if it shall have delivered to the Series C PCRB Trustee, or received from the Series C PCRB Trustee, as appropriate, at the time and in the manner specified in the Series C PCRB Agreement, the notice required pursuant to the Series C PCRB Agreement to be delivered in connection with the redemption of the Series C PCR Bonds. The Company shall deliver a copy of such notice to the Trustee at the time of such delivery to or receipt from the Series C PCRB Trustee. Redemption of Series K Bonds pursuant to the foregoing provisions of this Section 3.05 may be made with moneys deposited with or received by the Trustee pursuant to Section 6.4 of the Original Indenture, or otherwise pursuant to the Indenture. Except as provided in this Section 3.05, the Series K Bonds are not subject to redemption under any provisions of the Indenture. SECTION 3.06. Payment Date Not a Business Day. If any redemption or maturity date for principal, premium or interest with respect to the Series K Bonds shall be (i) a Sunday or a legal holiday, or (ii) a day on which banking institutions are authorized pursuant to law to close and on which the corporate trust office of the Trustee in Morristown, New Jersey or the Series C PCRB Trustee is not open for business, then the payment thereof may be made on the next succeeding day not a day specified in (i) or (ii) with the same force and effect as if made on the specified payment date and no interest shall accrue for the period after the specified payment date. ARTICLE 4 MISCELLANEOUS PROVISIONS SECTION 4.01. Recitals. The recitals in this Twelfth Supplemental Indenture shall be taken as recitals by the Company alone, and shall not be considered as made by or as imposing any obligation or liability upon the Trustee, nor shall the Trustee be held responsible for the legality or validity of this Twelfth Supplemental Indenture, and the Trustee makes no covenants or representations, and shall not be responsible, as to or for the effect, authorization, execution, delivery or recording of this Page 20 Twelfth Supplemental Indenture, except as expressly set forth in the Original Indenture. The Trustee shall not be taken impliedly to waive by this Twelfth Supplemental Indenture any right it would otherwise have. SECTION 4.02. Benefits of Supplemental Indenture. Nothing in this Twelfth Supplemental Indenture, expressed or implied, is intended or shall be construed to confer upon, or give to, any person, firm or corporation, other than the parties hereto and the holders of the bonds, any right, remedy or claim under or by reason of the Indenture or any covenant, condition or stipulation thereof; and the covenants, stipulations and agreements in the Indenture contained are and shall be for the sole and exclusive benefit of the parties hereto, their successors and assigns, and holders of the bonds. SECTION 4.03. Effect of Supplemental Indenture. This Twelfth Supplemental Indenture is executed, shall be construed as and is expressly stated to be an indenture supplemental to the Original Indenture and shall form a part of the Indenture; and the Original Indenture, as supplemented and amended by this Twelfth Supplemental Indenture, is hereby confirmed and adopted by the Company as its obligation. All terms used in this Twelfth Supplemental Indenture shall be taken to have the meaning specified in the Original Indenture, except in cases where the context clearly indicates otherwise. SECTION 4.04. Termination. This Twelfth Supplemental Indenture shall become void when the Indenture shall be void. SECTION 4.05. Trust Indenture Act. If and to the extent that any provision of this Twelfth Supplemental Indenture limits, qualifies or conflicts with any of the applicable provisions of Sections 310 to 317, inclusive, of the Trust Indenture Act of 1939, as amended, such required provision shall control. SECTION 4.06. Counterparts. This Twelfth Supplemental Indenture may be simultaneously executed in any number of counterparts, each of which shall be deemed an original; and all said counterparts executed and delivered, each as an original, shall constitute but one and the same instrument, which shall for all purposes be sufficiently evidenced by any such original counterpart. SECTION 4.07. Notices. Any notice to the Trustee under any provision of this Twelfth Supplemental Indenture shall be sufficiently given if served personally upon a responsible officer of the Trustee or mailed by registered or certified mail, postage prepaid, addressed to the Trustee at its corporate trust office, which is 21 South Street, 3rd Floor, Morristown, New Jersey 07960 as of the date hereof. The Trustee shall notify the Company from time to time of any change in the address of its corporate trust office. Page 21 IN WITNESS WHEREOF, PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE has caused this instrument to be executed and its corporate seal to be hereto affixed, by its officers, thereunto duly authorized, and FIRST UNION NATIONAL BANK has caused this instrument to be executed and its corporate seal to be hereto affixed by its officers thereunto duly authorized, all as of the day and year first above written but actually executed on December ____, 2001. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE [CORPORATE SEAL] By /s/ David R. McHale Name: David R. McHale Title: Vice President and Treasurer Attest: /s/ O. Kay Comendul Name: O. Kay Comendul Title: Secretary Signed, sealed and delivered by Public Service Company of New Hampshire in the presence of us: Witnesses FIRST UNION NATIONAL BANK as Trustee as aforesaid By /s/ Stephanie Roche Name: Stephanie Roche Title: Vice President [CORPORATE SEAL] Attest: Name: _______________ Title: _______________ Signed, sealed and delivered by First Union National Bank in the presence of us: ________________ ________________ Witnesses Page 22 SCHEDULE A (FORM OF BONDS OF SERIES I) THIS BOND IS TRANSFERABLE ONLY AS PROVIDED HEREIN No. $89,250,000 PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE Incorporated under the Laws of the State of New Hampshire FIRST MORTGAGE BOND, SERIES I PRINCIPAL DUE MAY 1, 2021 FOR VALUE RECEIVED, PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE, a corporation organized and existing under the laws of the State of New Hampshire (hereinafter called the Company), hereby promises to pay to State Street Bank and Trust Company, as Trustee under the Series A PCRB Agreement (as defined on the reverse hereof), or registered assigns, subject to the conditions set forth in this Bond, the principal sum of Eighty Nine Million Two Hundred Fifty Thousand Dollars ($89,250,000), on the first day of May, 2021, and to pay interest on said sum, on the interest payment dates applicable from time to time to the Series A PCR Bonds (as defined on the reverse hereof) (each such interest payment date so applicable to such Series A PCR Bonds being an interest payment date applicable to this Bond), until the Company's obligation with respect to said principal sum shall be discharged, in amounts equal to the interest payments due on such Series A PCR Bonds on such interest payment dates applicable to this Bond. This Bond shall bear interest as aforesaid from the interest payment date next preceding the date hereof to which such interest has been paid on the Bonds of this series, or if the date hereof is prior to the record date with respect to the first interest payment date then from the date of original issue of the Bonds of this series, or if the date hereof is an interest Page 23 payment date to which interest is being paid or date between the record date for any such interest payment date and such interest payment date, then from such interest payment date. Principal, premium, if any, and interest shall be payable at the corporate trust office of First Union National Bank (herein, with its successors, generally called the "Trustee") at 21 South Street, 3rd Floor, Morristown, New Jersey, or the corporate trust office of its successor, in such coin or currency of the United State of America as at the time of payment is legal tender for the payment of public and private debts. Each installment of interest hereon (other than overdue interest) due on any interest payment date shall be payable to the person who shall be the registered owner of this bond at the close of business on the record date, which shall be the day next preceding such interest payment date, or, if such day shall be a legal holiday or a day on which banking institutions in Morristown, New Jersey are authorized by law to close, the next preceding day which shall not be a legal holiday or a day on which such institutions are so authorized to close. Reference is hereby made to the further provisions of this Bond set forth on the reverse hereof, including without limitation provisions in regard to the call and redemption and the registration of transfer and exchangeability of this bond, and such further provisions shall for all purposes have the same effect as though fully set forth in this place. This bond shall not become or be valid or obligatory until the certificate of authentication hereon shall have been signed by the Trustee. IN WITNESS WHEREOF, Public Service Company of New Hampshire has caused this bond to be executed in its corporate name and on its behalf by its Vice President and Treasurer by his signature or a facsimile thereof, and its corporate seal to be affixed or imprinted hereon and attested by the manual or facsimile signature of its Secretary. Dated as of December 19, 2001. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE By /s/ David R. McHale Name: David R. McHale Title: Vice President and Treasurer Attest: by /s/ O. Kay Comendul Name: O. Kay Comendul Title: Secretary [FORM OF TRUSTEE'S CERTIFICATE] First Union National Bank hereby certifies that this bond is one of the bonds described in the within mentioned Indenture. FIRST UNION NATIONAL BANK, TRUSTEE By _______________________________ Name: Title: Authorized Officer Page 24 [FORM OF BOND] [REVERSE] PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE First Mortgage Bond, Series I This Bond is one of a series of Bonds in fully registered form known as the "First Mortgage Bonds, Series I" of the Company, limited to Eighty Nine Million Two Hundred Fifty Thousand Dollars ($89,250,000) in aggregate principal amount, and issued under and pursuant to a First Mortgage Indenture between the Company and New England Merchants National Bank (later known as Bank of New England, National Association), as Trustee, dated as of August 15, 1978, as amended, and pursuant to which First Union National Bank is now Successor Trustee (said First Mortgage Indenture (i) as amended by the Tenth Supplemental Indenture thereto, being hereinafter generally called the "Original Indenture," and (ii) together with the Eleventh and Twelfth Supplemental Indentures, and all other indentures expressly stated to be supplemental thereto, being hereinafter generally called the "Indenture"), and together with all bonds of all series now outstanding or hereafter issued under the Indenture being equally and ratably secured (except as any sinking or other analogous fund, established in accordance with the provisions of the Indenture, may afford additional security for the bonds of any particular series) by the Indenture, to which Indenture (executed counterparts of which are on file at the corporate trust office of the Trustee in Morristown, New Jersey) reference is hereby made for a description of the nature and extent of the security, the rights thereunder of the holders of bonds issued and to be issued thereunder, the rights, duties and immunities thereunder of the Trustee, the rights and obligations thereunder Page 25 of the Company, and the terms and conditions upon which Bonds of this series, and bonds of other series, are issued and are to be issued; but neither the foregoing reference to the Indenture nor any provision of this Bond or of the Indenture shall affect or impair the obligation of the Company, which is absolute, unconditional and unalterable, to pay at the maturities herein provided the principal of and interest on this Bond as herein provided. This bond, together with all other bonds of this series, if any, is issued to evidence and secure the Company's obligation under a Series A Loan and Trust Agreement dated as of October 1, 2001 (herein called the "Series A PCRB Agreement"), by and among the Business Finance Authority of the State of New Hampshire (herein called the "Authority"), the Company and State Street Bank and Trust Company, as trustee (herein called the "Series A PCRB Trustee"), to make loan payments as described below and to provide security for the Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - 2001 Tax-Exempt Series A) (herein called the "Series A PCR Bonds") issued by the Authority in a principal amount of $89,250,000 pursuant to the Series A PCRB Agreement. Pursuant to the Series A PCRB Agreement, the Authority, on the date of original issue, loaned the proceeds from the sale of the Series A PCR Bonds to the Company to finance and refinance a portion of the Company's share of expenditures, including financing costs, relating to the construction of certain pollution control, sewage and/or solid waste disposal facilities required for the operation of the Seabrook nuclear-fueled, steam electric generating plant, Unit 1, located in Seabrook, New Hampshire, in which the Company owned an undivided 35.6% interest. The Series A PCR Bonds are special obligations of the Authority, payable solely out of the revenues and other receipts, funds and moneys derived by the Authority under the Series A PCRB Agreement and from any amounts otherwise available under the Series A PCRB Agreement for the payment of the Series A PCR Bonds. Such revenues and other receipts, funds, moneys and amounts have been, pursuant to the Series A PCRB Agreement, assigned and pledged by the Authority to the Series A PCRB Trustee as security for the Series A PCR Bonds and include loan payments required to be made by the Company to the Series A PCRB Trustee for the account of the Authority pursuant to the Series A PCRB Agreement in amounts equal to the amounts payable with respect to the Series A PCR Bonds. This Bond, together with all other Bonds of this series, if any, has been issued to and registered in the name of the Series A PCRB Trustee and, anything in the Indenture or any Bond of this series to the contrary notwithstanding, the Bonds of this series shall not be sold, assigned, pledged or transferred, except to effect the transfer to any successor trustee under the Series A PCRB Agreement. Anything in the Indenture or any Bond of this series to the contrary notwithstanding, the Bonds of this series shall be deemed paid, and all obligations of the Company to pay at the times provided herein the principal of and premium, if any, and Page 26 interest on the Bonds of this series, or to deposit with the Trustee at the times provided in the Indenture an amount of money sufficient therefor, shall be satisfied and discharged, when and to the extent that the principal of and premium, if any, and interest on the Series A PCR Bonds shall have been paid or deemed paid as provided in the Series A PCRB Agreement. The bonds of this Series I in permanent form are issuable in denominations of twenty five thousand dollars ($25,000) and multiples thereof. Subject to the restriction on transfer set forth above, this Bond is transferable by the registered owner hereof upon surrender hereof at the corporate trust office of the Trustee, together with a written instrument of transfer in approved form, signed by the owner or his duly authorized attorney, and a new Bond or Bonds of this series for a like principal amount will be issued in exchange, all as provided in the Indenture. Prior to due presentment for registration of transfer of this Bond, the Company and the Trustee may deem and treat the registered owner hereof as the absolute owner hereof, whether or not this Bond be overdue, for the purpose of receiving payment and for all other purposes, and neither the Company nor the Trustee shall be affected by any notice to the contrary. This bond is exchangeable at the option of the registered holder hereof upon surrender hereof, at the corporate trust office of the Trustee at 21 South Street, 3rd Floor, Morristown, New Jersey, or the corporate trust office of its successors, for an equal principal amount of bonds of this series of other authorized denominations, in the manner and on the terms provided in the Indenture. If, pursuant to the Series A PCRB Agreement, all or a portion of the principal of the Series A PCR Bonds shall become or be declared immediately due and payable, a like principal amount of the Bonds of this series, together with all accrued interest thereon, shall without notice or demand of any kind, become immediately due and payable. The Series A PCR Bonds are subject to such acceleration upon the occurrence and continuance of any of the "Events of Default" specified in the Series A PCRB Agreement. If the Series A PCR Bonds are to be redeemed as a whole or in part on any date as provided in the Series A PCRB Agreement, a like principal amount of the Series I Bonds shall be redeemed on such date, at a redemption price equal to the redemption price at which the Series A PCR Bonds are to be so redeemed, as set forth in the Series A PCRB Agreement, stated as a percentage of principal amount of the Series I Bonds to be so redeemed, together in every case with accrued and unpaid interest thereon to the date fixed for redemption. The Series I Bonds shall be redeemed as aforesaid in accordance with the provisions of the Indenture and upon not more than forty-five (45) nor less than Page 27 thirty (30) days' prior notice given by mail as provided in Indenture; provided that the Company shall be deemed to have satisfied such notice requirement if it shall have delivered to the Series A PCRB Trustee, or received from the Series A PCRB Trustee, as appropriate, at the time and in the manner specified in the Series A PCRB Agreement, the notice required pursuant to the Series A PCRB Agreement to be delivered in connection with the redemption of the Series A PCR Bonds. The Company shall deliver a copy of such notice to the Trustee at the time of such delivery to or receipt from the Series A PCRB Trustee. Except as provided in the immediately preceding paragraph, the Bonds of this series are not subject to redemption under any provisions of the Indenture. If this Bond is called in whole or in part, and if moneys have been duly deposited or otherwise made available to the Trustee for redemption hereof, or of the part hereof so called, as required in the Indenture, this Bond, or such called part hereof, shall be due and payable on the date fixed for redemption and thereafter this Bond, or such called part hereof, shall cease to bear interest on the date fixed for redemption and shall cease to be entitled to the lien of the Indenture, and, as respects the Company's liability hereon, this Bond, or such called part hereof, shall be deemed to have been paid; but, if less than the whole principal amount hereof shall be so called, the registered owner hereof shall be entitled, in addition to the sums payable on account of the part called, to receive, without expense to such owner, upon surrender hereof, one or more Bonds of this series for an aggregate principal amount equal to that part of the principal amount hereof not then called and paid. The Indenture contains provisions permitting the Company and the Trustee to effect, by supplemental indenture, certain modifications of the Indenture without any consent of the holders of the bonds, and to effect certain other modifications of the Indenture, and of the rights of the holders of the bonds, with the consent of the holders of not less than a majority in aggregate principal amount of all bonds issued under the Indenture at the time outstanding, or in case one or more, but less than all, of the series of said bonds then outstanding are affected, with the consent of the holders of not less than a majority in aggregate principal amount of said outstanding bonds of each series affected. No recourse shall be had for the payment of the principal of or premium, if any, or interest on this Bond, or for any claim based hereon, or otherwise in respect hereof or of the Indenture, to or against any incorporator or against any stockholder, director or officer, past, present or future, as such, of the Company or any affiliate of the Company, or of any predecessor or successor company, either directly or through the Company, or such predecessor or successor company or any trustee, receiver or assignee or otherwise, under any constitution, or statute or rule of law, or by the enforcement of any assessment or penalty, or otherwise, all such liability of incorporators, stockholders, directors or officers, as such, being waived and released by the holder and owner hereof by the acceptance of this Bond and as part of the consideration for the issuance hereof and being likewise waived and released by the terms of the Indenture. Page 28 SCHEDULE B (FORM OF BONDS OF SERIES J) THIS BOND IS TRANSFERABLE ONLY AS PROVIDED HEREIN No. $89,250,000 PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE Incorporated under the Laws of the State of New Hampshire FIRST MORTGAGE BOND, SERIES J PRINCIPAL DUE MAY 1, 2021 FOR VALUE RECEIVED, PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE, a corporation organized and existing under the laws of the State of New Hampshire (hereinafter called the Company), hereby promises to pay to State Street Bank and Trust Company, as Trustee under the Series B PCRB Agreement (as defined on the reverse hereof), or registered assigns, subject to the conditions set forth in this Bond, the principal sum of Eighty Nine Million Two Hundred Fifty Thousand Dollars ($89,250,000), on the first day of May, 2021, and to pay interest on said sum, on the interest payment dates applicable from time to time to the Series B PCR Bonds (as defined on the reverse hereof) (each such interest payment date so applicable to such Series B PCR Bonds being an interest payment date applicable to this Bond), until the Company's obligation with respect to said principal sum shall be discharged, in amounts equal to the interest payments due on such Series B PCR Bonds on such interest payment dates applicable to this Bond. This Bond shall bear interest as aforesaid from the interest payment date next preceding the date hereof to which such interest has been paid on the Bonds of this series, or if the date hereof is prior to the record date with respect to the first interest payment date then from the date of original issue of the Bonds of this series, or if the date hereof is an interest payment date to which interest is being paid or date between the record date for any such interest payment date and such interest payment date, then from such interest payment date. Principal, premium, if any, and interest shall be payable at the corporate trust office of First Union National Bank (herein, with its successors, generally called the "Trustee") at 21 South Street, Page 29 3rd Floor, Morristown, New Jersey, or the corporate trust office of its successor, in such coin or currency of the United State of America as at the time of payment is legal tender for the payment of public and private debts. Each installment of interest hereon (other than overdue interest) due on any interest payment date shall be payable to the person who shall be the registered owner of this bond at the close of business on the record date, which shall be the day next preceding such interest payment date, or, if such day shall be a legal holiday or a day on which banking institutions in Morristown, New Jersey are authorized by law to close, the next preceding day which shall not be a legal holiday or a day on which such institutions are so authorized to close. Reference is hereby made to the further provisions of this Bond set forth on the reverse hereof, including without limitation provisions in regard to the call and redemption and the registration of transfer and exchangeability of this bond, and such further provisions shall for all purposes have the same effect as though fully set forth in this place. This bond shall not become or be valid or obligatory until the certificate of authentication hereon shall have been signed by the Trustee. IN WITNESS WHEREOF, Public Service Company of New Hampshire has caused this bond to be executed in its corporate name and on its behalf by its Vice President and Treasurer by his signature or a facsimile thereof, and its corporate seal to be affixed or imprinted hereon and attested by the manual or facsimile signature of its Secretary. Dated as of December 19, 2001. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE By /s/ David R. McHale Name: David R. McHale Title: Vice President and Treasurer Attest: By /s/ O. Kay Comendul Name: O. Kay Comendul Title: Secretary [FORM OF TRUSTEE'S CERTIFICATE] First Union National Bank hereby certifies that this bond is one of the bonds described in the within mentioned Indenture. FIRST UNION NATIONAL BANK, TRUSTEE By _______________________________ Name: Title: Authorized Officer Page 30 [FORM OF BOND] [REVERSE] PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE First Mortgage Bond, Series J This Bond is one of a series of Bonds in fully registered form known as the "First Mortgage Bonds, Series J" of the Company, limited to Eighty Nine Million Two Hundred Fifty Thousand Dollars ($89,250,000) in aggregate principal amount, and issued under and pursuant to a First Mortgage Indenture between the Company and New England Merchants National Bank (later known as Bank of New England, National Association), as Trustee, dated as of August 15, 1978, as amended, and pursuant to which First Union National Bank is now Successor Trustee (said First Mortgage Indenture (i) as amended by the Tenth Supplemental Indenture thereto, being hereinafter generally called the "Original Indenture," and (ii) together with the Eleventh and Twelfth Supplemental Indentures and all other indentures expressly stated to be supplemental thereto, being hereinafter generally called the "Indenture"), and together with all bonds of all series now outstanding or hereafter issued under the Indenture being equally and ratably secured (except as any sinking or other analogous fund, established in accordance with the provisions of the Indenture, may afford additional security for the bonds of any particular series) by the Indenture, to which Indenture (executed counterparts of which are on file at the corporate trust office of the Trustee in Morristown, New Jersey) reference is hereby made for a description of the nature and extent of the security, the rights thereunder of the holders of bonds issued and to be issued thereunder, the rights, duties and immunities thereunder of the Trustee, the rights and obligations thereunder of the Company, and the terms and conditions upon which Bonds of this series, and bonds of other series, are issued and are to be issued; but neither the foregoing reference to the Indenture nor any provision of this Bond or of the Indenture shall affect or impair the obligation of the Company, which is absolute, unconditional and unalterable, to pay at the maturities herein provided the principal of and interest on this Bond as herein provided. This bond, together with all other bonds of this series, if any, is issued to evidence and secure the Company's obligation under a Series B Loan and Trust Agreement dated as of October 1, 2001 (herein called the "Series B PCRB Agreement"), by and among the Business Finance Authority of the State of New Hampshire (herein called the "Authority"), the Company and State Street Page 31 Bank and Trust Company, as trustee (herein called the "Series B PCRB Trustee"), to make loan payments as described below and to provide security for the Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - - 2001 Tax-Exempt Series B) (herein called the "Series B PCR Bonds") issued by the Authority in a principal amount of $89,250,000 pursuant to the Series B PCRB Agreement. Pursuant to the Series B PCRB Agreement, the Authority, on the date of original issue, loaned the proceeds from the sale of the Series B PCR Bonds to the Company to finance and refinance a portion of the Company's share of expenditures, including financing costs, relating to the construction of certain pollution control, sewage and/or solid waste disposal facilities required for the operation of the Seabrook nuclear-fueled, steam electric generating plant, Unit 1, located in Seabrook, New Hampshire, in which the Company owned an undivided 35.6% interest. The Series B PCR Bonds are special obligations of the Authority, payable solely out of the revenues and other receipts, funds and moneys derived by the Authority under the Series B PCRB Agreement and from any amounts otherwise available under the Series B PCRB Agreement for the payment of the Series B PCR Bonds. Such revenues and other receipts, funds, moneys and amounts have been, pursuant to the Series B PCRB Agreement, assigned and pledged by the Authority to the Series B PCRB Trustee as security for the Series B PCR Bonds and include loan payments required to be made by the Company to the Series B PCRB Trustee for the account of the Authority pursuant to the Series B PCRB Agreement in amounts equal to the amounts payable with respect to the Series B PCR Bonds. This Bond, together with all other Bonds of this series, if any, has been issued to and registered in the name of the Series B PCRB Trustee and, anything in the Indenture or any Bond of this series to the contrary notwithstanding, the Bonds of this series shall not be sold, assigned, pledged or transferred, except to effect the transfer to any successor trustee under the Series B PCRB Agreement. Anything in the Indenture or any Bond of this series to the contrary notwithstanding, the Bonds of this series shall be deemed paid, and all obligations of the Company to pay at the times provided herein the principal of and premium, if any, and interest on the Bonds of this series, or to deposit with the Trustee at the times provided in the Indenture an amount of money sufficient therefor, shall be satisfied and discharged, when and to the extent that the principal of and premium, if any, and interest on the Series B PCR Bonds shall have been paid or deemed paid as provided in the Series B PCRB Agreement. The bonds of this Series J in permanent form are issuable in denominations of twenty five thousand dollars ($25,000) and multiples thereof. Subject to the restriction on transfer set forth above, this Bond is transferable by the registered owner hereof upon surrender hereof at the corporate trust office of the Trustee, together with a written instrument of transfer in approved form, Page 32 signed by the owner or his duly authorized attorney, and a new Bond or Bonds of this series for a like principal amount will be issued in exchange, all as provided in the Indenture. Prior to due presentment for registration of transfer of this Bond, the Company and the Trustee may deem and treat the registered owner hereof as the absolute owner hereof, whether or not this Bond be overdue, for the purpose of receiving payment and for all other purposes, and neither the Company nor the Trustee shall be affected by any notice to the contrary. This bond is exchangeable at the option of the registered holder hereof upon surrender hereof, at the corporate trust office of the Trustee at 21 South Street, 3rd Floor, Morristown, New Jersey, or the corporate trust office of its successors, for an equal principal amount of bonds of this series of other authorized denominations, in the manner and on the terms provided in the Indenture. If, pursuant to the Series B PCRB Agreement, all or a portion of the principal of the Series B PCR Bonds shall become or be declared immediately due and payable, a like principal amount of the Bonds of this series, together with all accrued interest thereon, shall without notice or demand of any kind, become immediately due and payable. The Series B PCR Bonds are subject to such acceleration upon the occurrence and continuance of any of the "Events of Default" specified in the Series B PCRB Agreement. If the Series B PCR Bonds are to be redeemed as a whole or in part on any date as provided in the Series B PCRB Agreement, a like principal amount of the Series J Bonds shall be redeemed on such date, at a redemption price equal to the redemption price at which the Series B PCR Bonds are to be so redeemed, as set forth in the Series B PCRB Agreement, stated as a percentage of principal amount of the Series J Bonds to be so redeemed, together in every case with accrued and unpaid interest thereon to the date fixed for redemption. The Series J Bonds shall be redeemed as aforesaid in accordance with the provisions of the Indenture and upon not more than forty-five (45) nor less than thirty (30) days' prior notice given by mail as provided in Indenture; provided that the Company shall be deemed to have satisfied such notice requirement if it shall have delivered to the Series B PCRB Trustee, or received from the Series B PCRB Trustee, as appropriate, at the time and in the manner specified in the Series B PCRB Agreement, the notice required pursuant to the Series B PCRB Agreement to be delivered in connection with the redemption of the Series B PCR Bonds. The Company shall deliver a copy of such notice to the Trustee at the time of such delivery to or receipt from the Series B PCRB Trustee. Except as provided in the immediately preceding paragraph, the Bonds of this series are not subject to redemption under any provisions of the Indenture. Page 33 If this Bond is called in whole or in part, and if moneys have been duly deposited or otherwise made available to the Trustee for redemption hereof, or of the part hereof so called, as required in the Indenture, this Bond, or such called part hereof, shall be due and payable on the date fixed for redemption and thereafter this Bond, or such called part hereof, shall cease to bear interest on the date fixed for redemption and shall cease to be entitled to the lien of the Indenture, and, as respects the Company's liability hereon, this Bond, or such called part hereof, shall be deemed to have been paid; but, if less than the whole principal amount hereof shall be so called, the registered owner hereof shall be entitled, in addition to the sums payable on account of the part called, to receive, without expense to such owner, upon surrender hereof, one or more Bonds of this series for an aggregate principal amount equal to that part of the principal amount hereof not then called and paid. The Indenture contains provisions permitting the Company and the Trustee to effect, by supplemental indenture, certain modifications of the Indenture without any consent of the holders of the bonds, and to effect certain other modifications of the Indenture, and of the rights of the holders of the bonds, with the consent of the holders of not less than a majority in aggregate principal amount of all bonds issued under the Indenture at the time outstanding, or in case one or more, but less than all, of the series of said bonds then outstanding are affected, with the consent of the holders of not less than a majority in aggregate principal amount of said outstanding bonds of each series affected. No recourse shall be had for the payment of the principal of or premium, if any, or interest on this Bond, or for any claim based hereon, or otherwise in respect hereof or of the Indenture, to or against any incorporator or against any stockholder, director or officer, past, present or future, as such, of the Company or any affiliate of the Company, or of any predecessor or successor company, either directly or through the Company, or such predecessor or successor company or any trustee, receiver or assignee or otherwise, under any constitution, or statute or rule of law, or by the enforcement of any assessment or penalty, or otherwise, all such liability of incorporators, stockholders, directors or officers, as such, being waived and released by the holder and owner hereof by the acceptance of this Bond and as part of the consideration for the issuance hereof and being likewise waived and released by the terms of the Indenture. Page 34 SCHEDULE C (FORM OF BONDS OF SERIES K) THIS BOND IS TRANSFERABLE ONLY AS PROVIDED HEREIN No. $108,985,000 PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE Incorporated under the Laws of the State of New Hampshire 5.45% FIRST MORTGAGE BOND, SERIES K PRINCIPAL DUE MAY 1, 2021 FOR VALUE RECEIVED, PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE, a corporation organized and existing under the laws of the State of New Hampshire (hereinafter called the Company), hereby promises to pay to State Street Bank and Trust Company, as Trustee under the Series C PCRB Agreement (as defined on the reverse hereof), or registered assigns, subject to the conditions set forth in this Bond, the principal sum of One Hundred Eight Million Nine Hundred Eight Five Thousand Dollars ($108,985,000), on the first day of May, 2021, and to pay interest on said sum (computed on the basis of a 360-day year consisting of twelve 30 day months), semiannually on the first day of May and November, until the Company's obligation with respect to said principal sum shall be discharged, at the rate per annum specified in the title of this Bond from the interest payment date next preceding the date of authentication hereof to which interest has been paid on the Bonds of this series, or if the date of authentication hereof is prior to the record date with respect to the first interest payment with respect to the first interest payment date, then from December 1, 2001, or if the date of authentication hereof is an interest payment date to which interest is being paid or a date between the record date for such interest payment and such interest payment date, then from such interest payment date. Principal, premium, if any, and interest shall be payable at the corporate trust office of First Union National Bank (herein, with its successors, generally called the "Trustee") at 21 South Street, 3rd Floor, Morristown, New Jersey, or the corporate trust office of its successor, in such coin or currency of the United State of America as at the time of payment is legal tender for the payment of public and private debts. Each installment of interest hereon (other than overdue interest) due on any interest payment date shall be payable to the person who shall be the registered owner of this bond at the close of business on the record date, which shall be the day next preceding such interest payment date, or, if such day shall be a legal holiday or a day on which banking institutions in Morristown, New Jersey are authorized by law to close, the next preceding day which shall not be a legal holiday or a day on which such institutions are so authorized to close. Reference is hereby made to the further provisions of this Bond set forth on the reverse hereof, including without limitation provisions in regard to the call and redemption and Page 35 the registration of transfer and exchangeability of this bond, and such further provisions shall for all purposes have the same effect as though fully set forth in this place. This bond shall not become or be valid or obligatory until the certificate of authentication hereon shall have been signed by the Trustee. IN WITNESS WHEREOF, Public Service Company of New Hampshire has caused this bond to be executed in its corporate name and on its behalf by its Vice President and Treasurer by his signature or a facsimile thereof, and its corporate seal to be affixed or imprinted hereon and attested by the manual or facsimile signature of its Secretary. Dated as of December 1, 2001. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE By /s/ David R. McHale Name: David R. McHale Title: Vice President and Treasurer Attest: By: O. Kay Comendul Name: O. Kay Comendul Title: Secretary [FORM OF TRUSTEE'S CERTIFICATE] First Union National Bank hereby certifies that this bond is one of the bonds described in the within mentioned Indenture. FIRST UNION NATIONAL BANK, TRUSTEE By _______________________________ Name: Title: Authorized Officer Page 36 [FORM OF BOND] [REVERSE] PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE 5.45% First Mortgage Bond, Series K This Bond is one of a series of Bonds in fully registered form known as the "5.45% First Mortgage Bonds, Series K" of the Company, limited to One Hundred Eight Nine Hundred Eighty Five Thousand Dollars ($108,985,000) in aggregate principal amount, and issued under and pursuant to a First Mortgage Indenture between the Company and New England Merchants National Bank (later known as Bank of New England, National Association), as Trustee, dated as of August 15, 1978, as amended, and pursuant to which First Union National Bank is now Successor Trustee (said First Mortgage Indenture (i) as amended by the Tenth Supplemental Indenture thereto, being hereinafter generally called the "Original Indenture," and (ii) together with the Eleventh and Twelfth Supplemental Indentures and all other indentures expressly stated to be supplemental thereto, being hereinafter generally called the "Indenture"), and together with all bonds of all series now outstanding or hereafter issued under the Indenture being equally and ratably secured (except as any sinking or other analogous fund, established in accordance with the provisions of the Indenture, may afford additional security for the bonds of any particular series) by the Indenture, to which Indenture (executed counterparts of which are on file at the corporate trust office of the Trustee in Morristown, New Jersey) reference is hereby made for a description of the nature and extent of the security, the rights thereunder of the holders of bonds issued and to be issued thereunder, the rights, duties and immunities thereunder of the Trustee, the rights and obligations thereunder of the Company, and the terms and conditions upon which Bonds of this series, and bonds of other series, are issued and are to be issued; but neither the foregoing reference to the Indenture nor any provision of this Bond or of the Indenture shall affect or impair the obligation of the Company, which is absolute, unconditional and unalterable, to pay at the maturities herein provided the principal of and interest on this Bond as herein provided. This bond, together with all other bonds of this series, if any, is issued to evidence and secure the Company's obligation under a Series C Loan and Trust Agreement dated as of October 1, 2001 (herein called the "Series C PCRB Agreement"), by and among the Business Finance Authority of the State of New Hampshire (herein called the "Authority"), the Company and State Street Bank and Trust Company, as trustee (herein called the "Series C PCRB Trustee"), to make loan payments as described below and to provide security for the Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - 2001 Tax-Exempt Series C) (herein called the "Series C PCR Bonds") issued by the Authority in a principal amount of $108,985,000 pursuant to the Series C PCRB Agreement. Pursuant to the Series C PCRB Agreement, the Authority, on the date of original issue, loaned the proceeds from the sale of the Series C PCR Bonds to the Company to finance and refinance a portion of the Company's share of expenditures, including financing costs, relating to the construction of certain pollution control, sewage and/or solid waste disposal facilities required for the operation of the Seabrook nuclear-fueled, steam electric generating plant, Unit 1, located in Seabrook, New Hampshire, in which the Company owned an undivided 35.6% interest. The Series C PCR Bonds are special obligations of the Authority, payable solely out of the revenues and other receipts, funds and moneys derived by the Authority under the Series C PCRB Agreement and from any amounts otherwise Page 37 available under the Series C PCRB Agreement for the payment of the Series C PCR Bonds. Such revenues and other receipts, funds, moneys and amounts have been, pursuant to the Series C PCRB Agreement, assigned and pledged by the Authority to the Series C PCRB Trustee as security for the Series C PCR Bonds and include loan payments required to be made by the Company to the Series C PCRB Trustee for the account of the Authority pursuant to the Series C PCRB Agreement in amounts equal to the amounts payable with respect to the Series C PCR Bonds. This Bond, together with all other Bonds of this series, if any, has been issued to and registered in the name of the Series C PCRB Trustee and, anything in the Indenture or any Bond of this series to the contrary notwithstanding, the Bonds of this series shall not be sold, assigned, pledged or transferred, except to effect the transfer to any successor trustee under the Series C PCRB Agreement. Anything in the Indenture or any Bond of this series to the contrary notwithstanding, the Bonds of this series shall be deemed paid, and all obligations of the Company to pay at the times provided herein the principal of and premium, if any, and interest on the Bonds of this series, or to deposit with the Trustee at the times provided in the Indenture an amount of money sufficient therefor, shall be satisfied and discharged, when and to the extent that the principal of and premium, if any, and interest on the Series C PCR Bonds shall have been paid or deemed paid as provided in the Series C PCRB Agreement. The bonds of this Series K in permanent form are issuable in denominations of five thousand dollars ($5,000) and multiples thereof. Subject to the restriction on transfer set forth above, this Bond is transferable by the registered owner hereof upon surrender hereof at the corporate trust office of the Trustee, together with a written instrument of transfer in approved form, signed by the owner or his duly authorized attorney, and a new Bond or Bonds of this series for a like principal amount will be issued in exchange, all as provided in the Indenture. Prior to due presentment for registration of transfer of this Bond, the Company and the Trustee may deem and treat the registered owner hereof as the absolute owner hereof, whether or not this Bond be overdue, for the purpose of receiving payment and for all other purposes, and neither the Company nor the Trustee shall be affected by any notice to the contrary. This bond is exchangeable at the option of the registered holder hereof upon surrender hereof, at the corporate trust office of the Trustee at 21 South Street, 3rd Floor, Morristown, New Jersey, or the corporate trust office of its successors, for an equal principal amount of bonds of this series of other authorized denominations, in the manner and on the terms provided in the Indenture. If, pursuant to the Series C PCRB Agreement, all or a Page 38 portion of the principal of the Series C PCR Bonds shall become or be declared immediately due and payable, a like principal amount of the Bonds of this series, together with all accrued interest thereon, shall without notice or demand of any kind, become immediately due and payable. The Series C PCR Bonds are subject to such acceleration upon the occurrence and continuance of any of the "Events of Default" specified in the Series C PCRB Agreement. If the Series C PCR Bonds are to be redeemed as a whole or in part on any date as provided in the Series C PCRB Agreement, a like principal amount of the Series K Bonds shall be redeemed on such date, at a redemption price equal to the redemption price at which the Series C PCR Bonds are to be so redeemed, as set forth in the Series C PCRB Agreement, stated as a percentage of principal amount of the Series K Bonds to be so redeemed, together in every case with accrued and unpaid interest thereon to the date fixed for redemption. The Series K Bonds shall be redeemed as aforesaid in accordance with the provisions of the Indenture and upon not more than forty-five (45) nor less than thirty (30) days' prior notice given by mail as provided in Indenture; provided that the Company shall be deemed to have satisfied such notice requirement if it shall have delivered to the Series C PCRB Trustee, or received from the Series C PCRB Trustee, as appropriate, at the time and in the manner specified in the Series C PCRB Agreement, the notice required pursuant to the Series C PCRB Agreement to be delivered in connection with the redemption of the Series C PCR Bonds. The Company shall deliver a copy of such notice to the Trustee at the time of such delivery to or receipt from the Series C PCRB Trustee. Except as provided in the immediately preceding paragraph, the Bonds of this series are not subject to redemption under any provisions of the Indenture. If this Bond is called in whole or in part, and if moneys have been duly deposited or otherwise made available to the Trustee for redemption hereof, or of the part hereof so called, as required in the Indenture, this Bond, or such called part hereof, shall be due and payable on the date fixed for redemption and thereafter this Bond, or such called part hereof, shall cease to bear interest on the date fixed for redemption and shall cease to be entitled to the lien of the Indenture, and, as respects the Company's liability hereon, this Bond, or such called part hereof, shall be deemed to have been paid; but, if less than the whole principal amount hereof shall be so called, the registered owner hereof shall be entitled, in addition to the sums payable on account of the part called, to receive, without expense to such owner, upon surrender hereof, one or more Bonds of this series for an aggregate principal amount equal to that part of the principal amount hereof not then called and paid. The Indenture contains provisions permitting the Company and the Trustee to effect, by supplemental indenture, certain Page 39 modifications of the Indenture without any consent of the holders of the bonds, and to effect certain other modifications of the Indenture, and of the rights of the holders of the bonds, with the consent of the holders of not less than a majority in aggregate principal amount of all bonds issued under the Indenture at the time outstanding, or in case one or more, but less than all, of the series of said bonds then outstanding are affected, with the consent of the holders of not less than a majority in aggregate principal amount of said outstanding bonds of each series affected. No recourse shall be had for the payment of the principal of or premium, if any, or interest on this Bond, or for any claim based hereon, or otherwise in respect hereof or of the Indenture, to or against any incorporator or against any stockholder, director or officer, past, present or future, as such, of the Company or any affiliate of the Company, or of any predecessor or successor company, either directly or through the Company, or such predecessor or successor company or any trustee, receiver or assignee or otherwise, under any constitution, or statute or rule of law, or by the enforcement of any assessment or penalty, or otherwise, all such liability of incorporators, stockholders, directors or officers, as such, being waived and released by the holder and owner hereof by the acceptance of this Bond and as part of the consideration for the issuance hereof and being likewise waived and released by the terms of the Indenture. Page 40 SCHEDULE D Description of Certain Properties Acquired Since April 1, 1998 The following deeds and conveyances, recorded in the Registries of Deeds in the Counties in New Hampshire indicated, contain descriptions of certain properties acquired in fee simple by the Company since April 1, 1998.
Grantor Date Book/Page County/Town Wayne W. Wheeler 2/08/2000 2193/1302 Merrimack/Bow & Katherine B. Wheeler Bellemore Business 03/09/2000 6216/1230 Hillsborough/Bedford Park, LLC
Page 41 THE STATE OF CONNECTICUT ) COUNTY OF HARTFORD ) ss. Berlin Then personally appeared before me David R. McHale, Vice President and Treasurer, and O. Kay Comendul, Secretary, of Public Service Company of New Hampshire, a New Hampshire corporation, and severally acknowledged the foregoing instrument to be their free act and deed in their said capacities and the free act and deed of said corporation. Witness my hand and notarial seal this ___th day of December, 2001, at Berlin, Connecticut. Name: Notary Public in and for the State of Connecticut My Commission Expires: (Notarial Seal) THE STATE OF NEW JERSEY ) COUNTY OF MORRIS ) ss. Morristown Then personally appeared before me Stephanie Roche, Vice President, and ____________, ______________, of First Union National Bank, a national banking association, and acknowledged the foregoing instrument to be their free act and deed in their said capacities and the free act and deed of said corporation. Witness my hand and notarial seal this __th day of December, 2001, at Morristown, New Jersey. Name: Notary Public in and for the State of New Jersey My Commission Expires: (Notarial Seal) Page 42 ENDORSEMENT First Union National Bank, Trustee, being the mortgagee in the foregoing Supplemental Indenture, hereby consents to the cutting of any timber standing upon any of the lands covered by said Supplemental Indenture and to the sale of any such timber so cut and of any personal property covered by said Supplemental Indenture to the extent, but only to the extent, that such sale is permitted under the provisions of the Original Indenture as referred to in, and as amended by, the Tenth Supplemental Indenture thereto dated as of May 1, 1991, the Eleventh Supplemental Indenture thereto dated as of April 1, 1998, and the Twelfth Supplemental Indenture, dated as of December 1, 2001. FIRST UNION NATIONAL BANK, as Trustee as aforesaid By /s/ Stephanie Roche Name: Stephanie Roche Title: Vice President Signed, sealed and acknowledged on behalf of First Union National Bank in the presence of us: _________________ _________________ Witnesses CORPORATE SEAL Page 43 EX-4.3.5 7 y58564b.txt EXHIBIT 4.3.5 EXECUTION COPY SERIES A LOAN AND TRUST AGREEMENT among BUSINESS FINANCE AUTHORITY OF THE STATE OF NEW HAMPSHIRE and PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE and STATE STREET BANK AND TRUST COMPANY, as Trustee Dated as of October 1, 2001 Providing for the Issue of: $89,250,000 Business Finance Authority of the State of New Hampshire Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - 2001 Tax-Exempt Series A) Auction Rate Securities Dated the Date of Delivery TABLE OF CONTENTS ARTICLE I. INTRODUCTION AND DEFINITIONS 1 Section 101. Description of the Agreement and the Parties 1 Section 102. Definitions 2 (a) Words 2 (b) Number and Gender 6 (c) Use of Examples 6 ARTICLE II. LOAN OF BOND PROCEEDS; THE ASSIGNMENT AND PLEDGE 6 Section 201. Loan of Bond Proceeds; Issue of First Mortgage Bonds 6 Section 202. Assignment and Pledge of the Authority 7 Section 203. Further Assurance 7 Section 204. Defeasance 7 ARTICLE III. THE BORROWING 8 Section 301. The Bonds 8 (a) Details of the Bonds 8 (b) Form of Bonds 9 (c) Replacement of Bonds 18 (d) Registration of Bonds in the Book-Entry Only System 18 (e) Interest on Overdue Principal 20 (f) Cancellation and Destruction of Bonds 20 Section 302. Application of Bond Proceeds 21 Section 303. Bond Fund 21 Section 304. Application of Moneys 22
-i- Section 305. Payments by the Company 22 (a) Debt Service 22 (b) Additional Payments 22 (c) Unclaimed Moneys 22 (d) Rebate 23 (e) Purchase Price 23 Section 306. Unconditional Obligation 23 Section 307. Redemption of the Bonds 24 (a) Optional Redemption 24 (b) Reserved 24 (c) Mandatory Taxability Redemption 24 (d) Notice to the Trustee 25 (e) Payment of Redemption Price and Accrued Interest 25 (f) Notice of Redemption 25 Section 308. Investments 25 Section 309. Tax Status of Bonds 27 Section 310. Paying Agent 28 Section 311. Payment Procedure Pursuant to Bond Insurance Policy 30 Section 312. The Bond Insurer 32 ARTICLE IV. SPECIAL PROVISIONS RELATING TO AUCTION RATE SECURITIES 32 Section 401. Definitions 32 Section 402. Orders by Existing Owners and Potential Owners 38
-ii- Section 403. Submission of Orders by Broker-Dealers to Auction Agent 40 Section 404. Determination of Auction Rate 42 Section 405. Allocation of Bonds 43 Section 406. Notice of Auction Rate 45 Section 407. Auction Index 46 Section 408. Miscellaneous Provisions Regarding Auctions 47 Section 409. Changes in Auction Period or Auction Date. 48 Section 410. Auction Agent 49 Section 411. Qualifications of Auction Agent; Resignation; Removal 49 Section 412. Conversion 49 Section 413. Credit Ratings 51 Section 414. Mandatory Tender 51 (a) Agreement to Tender 51 (b) Purchase of Tendered Bonds 51 ARTICLE V. SPECIAL PROVISIONS RELATING TO VARIABLE RATE AND FIXED RATE MODES 52 Section 501. Definitions 52 Section 502. Medium, Method and Place of Payment and Dating of Bonds 59 Section 503. Payment of Principal and Interest of Bonds; Acceptance of Terms and Conditions 59 Section 504. Calculation and Payment of Interest; Change in Mode; Maximum Rate 60 Section 505. Determination of Flexible Rates and Interest Periods During Flexible Mode 61 Section 506. Determination of Interest Rates During the Daily Mode and the Weekly Mode 61 Section 507. Determination of Term Rates and Fixed Rates 61
-iii- (a) Term Rates 62 (b) Fixed Rates 62 Section 508. Alternate Rates 62 Section 509. Changes in Mode 63 (a) Changes to Modes Other Than Fixed Rate Mode 63 (b) Change to Fixed Rate Mode 65 (c) Failure to Satisfy Conditions Precedent to a Mode Change 66 (d) Recission of Election 66 Section 510. Optional Redemption of Flexible Rate Bonds 67 Section 511. Optional Redemption of Bonds in the Daily Mode or the Weekly Mode 67 Section 512. Optional Redemption of Bonds in the Term Rate or the Fixed Rate Mode 67 Section 513. Optional Tenders of Bonds in the Daily Mode or the Weekly Mode 68 Section 514. Mandatory Purchase on Mandatory Purchase Date 69 Section 515. Remarketing of Bonds; Notices 69 (a) Remarketing of Bonds 69 (b) Notice of Remarketing; Registration Instructions; New Bonds 69 (c) Draw on Liquidity Facility 70 Section 516. Source of Funds for Purchase of Bonds 70 Section 517. Delivery of Bonds 70 Section 518. Book-Entry Tenders 70 Section 519. No Book-Entry System 71 Section 520. No Purchases or Sales After Credit Provider or Liquidity Provider Failure 72
-iv- Section 521. Credit Enhancement and Liquidity Facility 73 Section 522. Purchase Fund 73 (a) Remarketing Proceeds Account 74 (b) Liquidity Facility Purchase Account 74 (c) Company Purchase Account 74 (d) Investment 74 Section 523. Inadequate Funds for Tenders 74 Section 524. Appointment of Remarketing Agent 74 ARTICLE VI. THE PROJECT 75 Section 601. Company not to Impair Tax Status; Use of Project Facilities 75 Section 602. Qualification of Project Facilities 75 Section 603. Reserved 75 Section 604. Reserved 75 Section 605. Disposition and Use of Project Facilities 76 ARTICLE VII. ADDITIONAL COVENANTS OF THE COMPANY 76 Section 701. Existence and Good Standing; Merger; Consolidation 76 Section 702. Indemnification by the Company 76 Section 703. Continuing Disclosure 77 ARTICLE VIII. DEFAULT AND REMEDIES 77 Section 801. Default 77 Section 802. Remedies for Events of Default 78 (a) Acceleration 78
-v- (b) Rights as a Secured Party 78 Section 803. Court Proceedings 79 Section 804. Revenues after Default 79 Section 805. Rights of Bondowners 79 Section 806. Performance of Company's Obligations 80 Section 807. Remedies Cumulative; No Waiver 80 Section 808. Rights of Bond Insurer 80 ARTICLE IX. THE TRUSTEE 80 Section 901. Corporate Organization, Authorization and Capacity 80 Section 902. Rights and Duties of the Trustee 80 (a) Moneys to be Held in Trust 80 (b) Accounts 81 (c) Performance of the Authority's Obligations 81 (d) Responsibility 81 (e) Limitations on Actions 81 (f) Financial Obligations 82 (g) Registration Books 82 (h) Ownership of Bonds 82 (i) No Surety Bond 82 (j) Requests by the Company 82 (k) Trustee as Holder of Series I First Mortgage Bonds 83 Section 903. Fees and Expenses of the Trustee 83
-vi- Section 904. Resignation or Removal of Trustee 83 Section 905. Successor Trustee 83 ARTICLE X. THE AUTHORITY 84 Section 1001. Limited Obligation 84 Section 1002. Rights and Duties of the Authority 84 (a) Remedies of the Authority 84 (b) Limitations on Actions 85 (c) Responsibility 85 Section 1003. Expenses of the Authority 86 Section 1004. Matters to be Considered by Authority 86 Section 1005. Actions by Authority 86 ARTICLE XI. THE BONDOWNERS 86 Section 1101. Action by Bondowners 86 ARTICLE XII. AMENDMENTS AND MISCELLANEOUS 88 Section 1201. Amendments 88 (a) Without Bondowners' Consent 88 (b) With Bondowners' Consent 88 Section 1202. Notices 89 Section 1203. Agreement Not for the Benefit of Other Parties 90 Section 1204. Severability 90 Section 1205. Counterparts 90 Section 1206. Captions 90
-vii- Section 1207. Governing Law 90 Section 1208. Payment Date Not a Business Day 90 EXHIBIT A THE PROJECT FACILITIES A-1 EXHIBIT B SERIES A SEABROOK POLLUTION CONTROL FACILITIES AGREEMENT B-1
-viii- ARTICLE I. INTRODUCTION AND DEFINITIONS Section 101. Description of the Agreement and the Parties. This SERIES A LOAN AND TRUST AGREEMENT (the "Agreement") is entered into as of October 1, 2001 by the Business Finance Authority of the State of New Hampshire (with its successors, the "Authority" and formerly The Industrial Development Authority of the State of New Hampshire), a body corporate and politic created under New Hampshire RSA 162-A:3; Public Service Company of New Hampshire (with its successors, the "Company"), a New Hampshire corporation; and State Street Bank and Trust Company, a Massachusetts trust company, as Trustee (with its successors, the "Trustee"). This Agreement is a financing document combined with a security document as one instrument in accordance with New Hampshire RSA Chapter 162-I (the "Act") and relates to industrial facilities as defined in Paragraphs 2, VII(d) and (e) of the Act and located in the Town of Seabrook, Rockingham County, New Hampshire. This Agreement provides for the following transactions: (a) the Authority's issue of the Bonds; (b) the Authority's loan of the proceeds of the Bonds to the Company to refund the outstanding balance of the Authority's $66,000,000 7.65% Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - 1991 Tax-Exempt Series A) (the "1991 Series A Bonds") and a portion of the outstanding balance of the Authority's $112,500,000 7.65% Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - 1991 Tax-Exempt Series C) (the "1991 Series C Bonds") which 1991 Series A Bonds and 1991 Series C Bonds were originally issued for the purpose of financing the acquisition, construction and installation of the Project Facilities; (c) the Company's repayment of the loan of Bond proceeds from the Authority through payment to the Trustee of all amounts necessary to pay the Bonds issued by the Authority; (d) the Company's agreement to evidence and secure its repayment obligations hereunder by the issuance of the Series I First Mortgage Bonds; and (e) the Authority's assignment to the Trustee in trust for the benefit and security of the Bondowners and the Bond Insurer of the Authority's rights in respect of the loan to the Company hereunder, including repayment of the loan to be received from the Company. In consideration of the mutual promises contained in this Agreement, the rights conferred and the obligations assumed hereby, and other good and valuable consideration, the receipt of which is hereby acknowledged, each of the Company, the Authority and the Trustee agree, assign, covenant, grant, pledge, promise, represent and warrant as set forth herein for their own benefit and for the benefit of the Bondowners and the Bond Insurer. 1 Section 102. Definitions. (a) Words. In addition to terms defined elsewhere herein, the following terms have the following meanings in this Agreement, unless the context otherwise requires: (i) "Act" has the meaning set forth in Section 101. (ii) "Auction Rate Mode" means the mode during which the Bonds bear interest at an Auction Rate. (iii) "Authority's Service Charge" means payment to the Authority for its own use of .375% of the principal amount of the Bonds payable on the date of the issue of the Bonds and an additional .375% of the then Outstanding principal balance of the Bonds payable on the date which is three years from the date of the issue of the Bonds. (iv) "Bond Counsel" means Palmer & Dodge LLP or such other nationally recognized bond counsel selected by the Company and reasonably satisfactory to the Trustee and the Bond Insurer. (v) "Bond Fund" means the fund established under Section 303. (vi) "Bond Insurance Agreement" means the Reimbursement and Indemnity Agreement dated as of December 19, 2001, between the Company and the Bond Insurer. (vii) "Bond Insurance Policy" means the financial guaranty insurance policy issued by the Bond Insurer insuring the payment when due of the principal of and interest on the Bonds as provided therein. (viii) "Bond Insurer" means MBIA Insurance Corporation, a New York stock insurance company. (ix) "Bond Insurer Default" has the meaning defined in Section 808(b). (x) "Bond Insurer Event of Insolvency" means the institution of a proceeding in a court having jurisdiction in the premises seeking an order for relief, rehabilitation, reorganization, conservation, liquidation or dissolution in respect of the Bond Insurer and the continuance of such proceeding for a period of sixty (60) consecutive days or such court enters an order granting the relief sought in such proceeding and such order is not reversed or action thereunder stayed within sixty (60) days of such entry. (xi) "Bondowners", "owners" or words of similar import means the registered owners of the Bonds from time to time as shown in the books kept by the Trustee as bond registrar, except that wherever appropriate the term "owners" shall mean the owners of the Bonds for federal income tax purposes. 2 (xii) "Bonds" means the $89,250,000 principal amount of the Business Finance Authority of the State of New Hampshire Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - 2001 Tax-Exempt Series A) dated the date of delivery and substantially in the form set forth in Subsection 301(a) and any bond or bonds duly issued in exchange or replacement therefor. (xiii) "Book-Entry Only System" means the system of registration of the Bonds described in Subsection 301(d). (xiv) "Business Day" means a day other than a Saturday or Sunday and on which banks in each of the cities in which the principal offices of the Trustee, the First Mortgage Bond Trustee, the Remarketing Agent, if any, and the Paying Agent and the office of the Liquidity Provider at which draws on a Liquidity Facility, if any, are made are located are not required or authorized to remain closed and on which the New York Stock Exchange or the payment system of the Federal Reserve System is not closed. (xv) "Company Bonds" shall have the meaning set forth in Section 305(e). (xvi) "Company Representative" means the person or persons at the time designated to act on behalf of the Company in a written certificate (or any alternate or alternates at the time so designated) furnished to the Trustee, containing the specimen signature of such person or persons and signed on behalf of the Company by its Chairman, Vice Chairman, President, Chief Financial Officer, Treasurer, any Assistant Treasurer, or any Vice President. (xvii) "Continuing Disclosure Agreement" means the Continuing Disclosure Agreement between the Company and the Trustee dated the date of issuance and delivery of the Bonds as originally executed and as it may be amended from time to time in accordance with its terms. (xviii) "Debt Service" means all money payable to the Bondowners in accordance with the terms hereof and of the Bonds including (i) principal, (ii) interest and (iii) any premium. (xix) "Default" has the meaning given such term in Section 801. (xx) "Event of Default" has the meaning given such term in Section 801. (xxi) "Facilities Agreement" has the meaning given to it in Section 605. (xxii) "Federal Tax Statement" means the Statement as to Tax Exempt Status of Bonds executed by the Company in connection with the original issuance of the Bonds and delivered to the Trustee. (xxiii) "First Mortgage Bond Indenture" means the First Mortgage Indenture 3 dated as of August 15, 1978, as amended, and the Twelfth Supplemental Indenture thereto dated as of December 1, 2001 between the Company and First Union National Bank, successor to First Fidelity Bank, National Association, New Jersey, as Trustee, as amended and supplemented from time to time. (xxiv) "First Mortgage Bond Trustee" means the trustee under the First Mortgage Bond Indenture. (xxv) "IRC" means the Internal Revenue Code of 1986, as it may be amended from time to time. (xxvi) "Loan" has the meaning given such term in Section 201. (xxvii) "Maximum Rate" means the lesser of fourteen percent (14%) per annum (or such separate rates for Bonds and Liquidity Provider Bonds as may be provided for by amendment to this Agreement) and the maximum rate of interest permitted by applicable law. (xxviii) "MBIA" means MBIA Insurance Corporation, the principal operating subsidiary of MBIA Inc., a New York Stock Exchange listed company, as Bond Insurer. (xxix) "Moody's" means Moody's Investors Service, a corporation duly organized and existing under and by virtue of the laws of the State of Delaware, and its successors and assigns, except that if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, then the term "Moody's" shall be deemed to refer to any other nationally recognized securities rating agency selected by the Company after consultation with the Remarketing Agent. (xxx) "NAEC" means North Atlantic Energy Corporation, a New Hampshire corporation and an affiliate of the Company. (xxxi) "1954 Code" means the Internal Revenue Code of 1954, as amended, as applicable to the Bonds and the Project Facilities. (xxxii) "Outstanding", when used to modify Bonds, refers to Bonds issued, authenticated, and delivered under this Agreement, excluding: (i) Bonds which have been exchanged or replaced; (ii) Bonds which have been paid; (iii) Bonds which have become due and for the payment of which moneys have been duly provided; and (iv) Bonds with respect to which this Agreement has been defeased pursuant to Section 204. (xxxiii) "Paying Agent" means State Street Bank and Trust Company, as Paying Agent under this Agreement and its successors in such capacity. 4 (xxxiv) "Permitted Investments" has the meaning given such term in Section 308. (xxxv) The word "person" means any individual or entity so recognized by law. (xxxvi) "Project Costs" means the Company's cost of acquisition or construction and installation of the Project Facilities which are "project costs" within the meaning of Paragraph 2, IX of the Act, including, but not limited to, the cost of issuing the Bonds, obtaining professional and advisory services, and certain interest on the Bonds, which may be paid from Bond proceeds pursuant to the Act. (xxxvii) "Project Facilities" means the Company's former ownership share of the sewage or solid waste disposal and air or water pollution control facilities at the Station as of the date of issuance of the Bonds described generally in the attached Exhibit A. (xxxviii) "Refunding Trust Agreements" means the Refunding Trust Agreements, each among the Authority, the Company and State Street Bank and Trust Company, as trustee for the 1991 Series A Bonds and the 1991 Series C Bonds, respectively, each dated as of October 1, 2001. (xxxix) "S&P" means Standard & Poor's Ratings Services, a division of McGraw-Hill, duly organized and existing under and by virtue of the laws of the State of New York, and its successors and assigns, except that if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, then the term "S&P" shall be deemed to refer to any other nationally recognized securities rating agency selected by the Company after consultation with the Remarketing Agent. (xl) "Seabrook Transfer" means each of the transfer by the Company of its interest in the Station (including the Project Facilities) to NAEC, as of June 5, 1992, the proposed transfer by NAEC of such interest to an unaffilated party pursuant to an order of the New Hampshire Public Utilities Commission and any subsequent transfer of such interest. (xli) "Seabrook Transferee" means each of NAEC, any subsequent owner or owners of the Project Facilities pursuant to a Seabrook Transfer, and its or their successors. (xlii) "Securities Depository" means The Depository Trust Company and its successors and assigns or any other securities depository selected by the Company which agrees to follow the procedures required to be followed by such securities depository in connection with the Bonds. (xliii) "Series I First Mortgage Bonds" means the $89,250,000 in aggregate principal amount First Mortgage Bonds, Series I issued by the Company and delivered to 5 the Trustee pursuant to Section 201 of this Agreement and the First Mortgage Bond Indenture to evidence and secure the Company's obligation to repay the Loan. (xliv) "Station" means Unit No. 1 of the nuclear electric generating plant located in Seabrook, New Hampshire, of which the Company is a joint owner. (xlv) "Trustee" means the State Street Bank and Trust Company, as trustee under this Agreement and its successors in such capacity. (xlvi) "UCC" means the New Hampshire Uniform Commercial Code (New Hampshire Revised Statutes Annotated Chapter 382-A). (xlvii) "Variable Rate Mode" means the Daily Mode, Weekly Mode, Flexible Mode or Term Rate Mode (all as defined in Section 501). Except in the Bonds, "here" in such words as "hereby," "herein," "hereof" or "hereunder" means this Agreement as a whole rather than the particular section, subsection, paragraph, subparagraph, clause or subclause in which the word appears; and in the Bonds it refers thereto. (b) Number and Gender. Wherever appropriate (1) the singular and plural forms of words and (2) words of different gender shall, within those respective classifications, be deemed interchangeable. (c) Use of Examples. When a condition, class, category, circumstance or other concept is described in general terms herein and a list of possible examples or components of what has been described generally is associated with that description, and regardless of whether the words "include" or "including" or the like are also used, the listing shall be deemed illustrative only and shall not be construed as excluding other possible examples or components or as otherwise limiting the generality of the description in any way. 6 ARTICLE II. LOAN OF BOND PROCEEDS; THE ASSIGNMENT AND PLEDGE Section 201. Loan of Bond Proceeds; Issue of First Mortgage Bonds. The Authority shall issue the Bonds pursuant to the Act in the amount, in the form, and with the terms provided herein, and shall loan to the Company such amount (the "Loan") to refinance Project Costs as hereinafter provided. The Company agrees to repay the Loan of the aggregate principal amount of the Bonds in the amounts and at the times necessary to pay principal of, premium, if any, and interest on the Bonds by making the payments required under Section 305, and to evidence and secure the Company's obligation to do so, the Company shall issue and deliver to the Trustee a like aggregate principal amount of its Series I First Mortgage Bonds in the form set forth in the First Mortgage Bond Indenture. Upon payment of the principal of and premium, if any, on any of the Bonds and payment of all accrued interest in connection therewith, whether at maturity or prior to maturity by redemption or otherwise, or upon provision for the payment thereof having been made in accordance with Section 204, Series I First Mortgage Bonds in an aggregate principal amount equal to the aggregate principal amount of the Bonds so paid, or for the payment of which such provision has been made, shall be deemed fully paid and the obligations of the Company thereunder terminated as provided in the First Mortgage Indenture and shall be surrendered by the Trustee to the First Mortgage Bond Trustee for cancellation. The Trustee shall promptly notify the First Mortgage Bond Trustee by telephone, confirmed in writing, of any default in the payment of principal of, and premium, if any, and interest on the Bonds, and shall promptly notify the First Mortgage Bond Trustee by telephone, confirmed in writing of any payment of principal of and premium, if any, and interest (other than payment of regularly scheduled interest) on the Bonds, or if the Bonds have been paid or deemed paid, defeased, redeemed, retired, surrendered or canceled. In accordance with the terms thereof, the Series I First Mortgage Bonds shall be issued to and registered in the name of the Trustee and shall not be sold, assigned, pledged or transferred, except to effect transfer to any successor Trustee hereunder. The Series I First Mortgage Bonds shall have a principal amount, an interest rate, a maturity date and redemption provisions corresponding to the Bonds. Payments of principal of and premium, if any, and interest on the Series I First Mortgage Bonds shall upon receipt by the Trustee be deemed to constitute payments of corresponding amounts by the Company in respect of the Bonds pursuant to Subsection 305(a). Section 202. Assignment and Pledge of the Authority. The Authority, for consideration paid as hereinabove acknowledged, hereby irrevocably assigns and pledges to the Trustee in trust for the security of the Bondowners upon the terms hereof all of the Authority's right, title and interest in (i) respect of the Loan and all payments thereon, (ii) all moneys and securities held by the Trustee for deposit in, or deposited in, the Bond Fund and investment earnings thereon, (iii) the Series I First Mortgage Bonds, all bonds issued in replacement thereof or in exchange or substitution therefor and all payments on, and proceeds of, the foregoing, and (iv) any collateral security for, and all proceeds of, any of the foregoing. The Trustee shall hold (a) all the rights, title and interest received under this section and (b) all payments (exclusive of funds to which the Trustee is entitled in its own right as fees, reimbursement, indemnity or otherwise) received from the Company or derived from the exercise of the Authority's powers hereunder (which shall include all payments under Subsection 305(a)) and in respect of the Series I First Mortgage 7 Bonds in trust for the security of the Bondowners in accordance with the provisions hereof. Section 203. Further Assurance. The Company and the Authority shall from time to time execute, deliver and record and file such instruments as may be necessary to perfect or to maintain or continue the perfection of, or as the Trustee may reasonably require to confirm, perfect or maintain the security created hereby and the assignment and pledge of rights hereunder. Section 204. Defeasance. When there are in the Bond Fund sufficient funds, or non-callable and non-prepayable obligations issued by, or the full and timely payment of which are guaranteed by, the United States of America, in such principal amount, bearing interest at such rates and with such maturities as will provide, without reinvestment, sufficient amounts to pay principal or Purchase Price of, premium, if any, and interest on the Bonds as and when such amounts become due and, prior to the Fixed Rate Conversion Date or change to the Fixed Rate, as applicable, to pay the Purchase Price thereof whenever the same may be payable, as determined through a verification report or computation, which may be prepared by the Company, and when all the rights hereunder of the Authority and the Trustee have been provided for (1) the Bondowners will cease to be entitled to any right, benefit or security under this Agreement except the right to receive payment of the funds deposited and held for payment and other rights set forth below or which by their nature cannot be satisfied prior to or simultaneously with termination of the lien hereof, (2) the security interests created by this Agreement (except in such funds and investments) shall terminate, and (3) the Authority and the Trustee shall execute and deliver such instruments as may be necessary to discharge the lien and security interests created hereunder; provided, however, that, if within ninety (90) days of such deposit, the Bonds are not to be redeemed in full prior to maturity or paid in full at maturity, the Trustee and the Bond Insurer shall have received on the date of the deposit an opinion of Bond Counsel to the effect that such deposit and the investment thereof will not affect the exclusion of interest on the Bonds from gross income of the owners thereof for federal income tax purposes; and provided further that if any Bonds are to be redeemed prior to the maturity thereof, such Bonds shall have been duly called for redemption or irrevocable instructions for such a call shall have been given to the Trustee. Upon such defeasance, the funds and investments required to pay or redeem the Bonds in full shall be irrevocably set aside for such purpose. The Trustee shall cause to be mailed to all Bondowners within fifteen (15) days of the conditions of this section being met in the manner herein specified for redemption of Bonds a notice stating that such conditions have been met and that the lien of this Agreement has been discharged, and, if the Bonds are to be redeemed prior to maturity, specifying the date of redemption and the redemption price. Any funds or property held by the Trustee for payment of the Bonds under this section and not required for such payment shall (unless there is an Event of Default hereunder, in which case they shall be applied as provided in Section 604), after satisfaction of all the rights of the Authority and the Trustee, and payment of the rebate, if any, due to the United States of America under IRC ss.148(f), and upon such indemnification, if any, as the Authority or the Trustee may reasonably require, be distributed to the Company. If Bonds are not presented for final payment when due and moneys are available in the hands of the Trustee therefor, the Trustee shall, without liability for interest thereon, continue to hold the moneys held for that purpose subject to 8 Subsection 305(c), and interest shall cease to accrue on the principal amount represented thereby. When there are in the Bond Fund funds or securities as described in the preceding paragraph as are sufficient to pay principal or Purchase Price of, premium, if any, and interest on, some but not all of the Bonds in full as and when such amounts become due and all of the other conditions in the preceding paragraph have been met with respect to such Bonds, the particular Bonds (or portions thereof) for which such provision for payment shall have been considered made shall be selected by lot by the Trustee (or, if the Bonds are then registered to CEDE & CO. and the Book-Entry Only System is then in effect, by The Depository Trust Company) and thereupon the Trustee and the Authority shall take similar action to release the security interests created by this Agreement in respect of such Bonds (except in such funds or securities and investments thereon), subject however to compliance with the applicable conditions set forth in the provisos above. Notwithstanding the foregoing, those provisions relating to the maturity of Bonds, interest payments and dates thereof and the Trustee's remedies with respect thereto, and provisions relating to exchange, transfer and registration of Bonds, replacement and cancellation of Bonds, the holding of moneys in trust and the duties of the Trustee in connection with all of the foregoing and the fees, expenses and indemnities of the Trustee and the Authority, shall remain in full force and effect and shall be binding upon the Trustee, the Authority, the Company and the Bondowners notwithstanding the release and discharge of this Agreement and the lien on the Series I First Mortgage Bonds until the Bonds have been actually paid in full. Notwithstanding anything herein to the contrary, if moneys or governmental obligations have been deposited or set aside with the Trustee pursuant to the provisions of this Section 204 and the principal of, premium, if any, and interest on the Bonds shall not, in fact, have been actually paid in full, no amendment to the provisions of this Section 204 will be made without the consent of the owner of each of the Bonds affected thereby. Subject to Section 808(b), any defeasance of the Bonds shall require the prior written consent, which consent shall not be unreasonably withheld, of the Bond Insurer. Notwithstanding anything herein to the contrary, in the event that the principal and/or interest due on the Bonds shall be paid by the Bond Insurer pursuant to the Bond Insurance Policy, the Bonds shall remain Outstanding for all purposes, not be defeased or otherwise satisfied and not be considered paid by the Company, and the assignment and pledge hereunder and all covenants, agreements and other obligations of the Company to the registered owners of the Bonds shall continue to exist and shall run to the benefit of the Bond Insurer, and the Bond Insurer shall be subrogated to the rights of such Bondowners. 9 ARTICLE III. THE BORROWING Section 301. The Bonds. (a) Details of the Bonds. The Bonds shall be issued in fully registered form and shall be numbered from 1 upwards in the order of their issuance or in any other manner deemed appropriate by the Paying Agent and the Authority. The Bonds shall be initially in the denomination of $25,000 or any integral multiple thereof prior to the Conversion Date and thereafter in Authorized Denominations as defined in Section 501. The Bonds shall be dated the date of original delivery thereof, and interest shall accrue from that date. The interest on Bonds until they come due shall be payable on the interest payment dates applicable to the Mode the Bonds are in from time to time; provided, however, that Liquidity Provider Bonds shall bear interest as described in Section 503. The Bonds shall be initially in the Auction Rate Mode. Bonds shall be signed on behalf of the Authority by the manual or facsimile signature of any two of the Chairman, Vice Chairman, Treasurer, and Executive Director and the corporate seal of the Authority or a facsimile thereof shall be engraved or otherwise reproduced thereon. The Certificate of Authentication of the Trustee shall be manually signed on behalf of the Trustee. No bonds shall be issued under this Agreement other than the Bonds. In case any officer of the Authority whose manual or facsimile signature shall appear on any Bonds shall cease to be such officer before the delivery thereof, such manual or facsimile signature shall nevertheless be valid and sufficient for all purposes as if he or she had remained in office until after such delivery. The Bonds shall mature on May 1, 2021 and shall bear interest as provided in this Agreement for the Mode they are in from time to time. The Bonds are subject to redemption and optional and mandatory tender for purchase all as described in Articles IV and V of this Agreement and the form of Bonds. (b) Form of Bonds. (i) The Bonds initially shall be issued in substantially the following form: Unless this bond is presented by an authorized representative of The Depository Trust Company, a New York Company ("DTC"), to the Authority (as defined below) or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. Registered No. R $___________ 10 UNITED STATES OF AMERICA STATE OF NEW HAMPSHIRE BUSINESS FINANCE AUTHORITY OF THE STATE OF NEW HAMPSHIRE Pollution Control Revenue Bond (Public Service Company of New Hampshire Project - 2001 Tax-Exempt Series A) CUSIP: 64468C AT 1 INITIAL INTEREST RATE: 1.55% INITIAL PERIOD: December 19, 2001 through and including January 15, 2002 MATURITY DATE: May 1, 2021 DATE OF THIS BOND: December 19, 2001 (Date as of which Bonds of this series were initially issued) MODE: Auction Rate (as of Date of Registration) REGISTERED OWNER: CEDE & CO. DATE OF REGISTRATION: PRINCIPAL AMOUNT: DOLLARS THIS BOND DOES NOT CONSTITUTE AN INDEBTEDNESS OF THE STATE OF NEW HAMPSHIRE OR OF THE AUTHORITY EXCEPT TO THE EXTENT PERMITTED BY NEW HAM-PSHIRE RSA CHAPTER 162-I. ALL AMOUNTS OWED HEREUNDER ARE PAYABLE ONLY FROM THE SOURCES PROVIDED IN THE LOAN AND TRUST AGREEMENT DESCRIBED BELOW, AND NO PUBLIC FUNDS MAY BE USED FOR THAT PURPOSE. The Business Finance Authority of the State of New Hampshire (the "Authority"), for value received, promises to pay to the REGISTERED OWNER, or registered assigns, but solely from the moneys to be provided under the Agreement mentioned below, upon presentation and surrender hereof, in lawful money of the United States of America, the PRINCIPAL AMOUNT on the MATURITY DATE, unless paid earlier as provided below, with interest from the most recent Interest Payment Date (as defined in the Agreement) to which interest has been paid or duly provided for or, if no interest has been paid, from the DATE OF THIS BOND, as the rates determined as set forth below, payable on each Interest Payment Date. This bond is one of a series of Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - 2001 Tax-Exempt Series A) (the "Bonds") in the 11 aggregate principal amount of $89,250,000 issued under New Hampshire Chapter RSA 162-I (the "Act"). The proceeds of the Bonds are being loaned to Public Service Company of New Hampshire (the "Company"), a New Hampshire corporation, pursuant to a Series A Loan and Trust Agreement (the "Agreement") dated as of October 1, 2001 among the Company, the Authority and the Trustee to refinance certain costs associated with the Company's prior ownership interest in air or water pollution control and sewage or solid waste disposal facilities installed for use by Unit No. 1 at the nuclear electric generating station (the "Station") in Seabrook, New Hampshire (the "Project Facilities"). Pursuant to the Agreement, the Company has unconditionally agreed to repay such loan in the amounts and at the times necessary to pay the principal of, premium, if any, and interest on the Bonds when due. To evidence and secure such loan the Company has issued and delivered to the Trustee its First Mortgage Bonds, Series I (the "Series I First Mortgage Bonds") issued under the First Mortgage Indenture dated as of August 15, 1978, as amended, and the Twelfth Supplemental Indenture thereto dated as of December 1, 2001 between the Company and First Union National Bank, successor to First Fidelity Bank, National Association, New Jersey, as Trustee (as amended and supplemented from time to time, the "First Mortgage Bond Indenture") in an aggregate principal amount and with an interest rate, maturity date and redemption provisions corresponding to those of the Bonds. As provided in the Agreement, payments of principal of, and premium, if any, and interest on the Series I First Mortgage Bonds shall, upon receipt by the Trustee, be deemed to constitute payments in corresponding amounts by the Company in respect of the Bonds. Reference is hereby made to the Agreement for the provisions thereof with respect to the rights, limitations of rights, duties, obligations and immunities of the Company, the Authority, the Trustee and the Bondowners, including the order of payments in the event of insufficient funds, the disposition of unclaimed moneys held by the Trustee and restrictions on the rights of owners of the Bonds to bring suit. The Agreement may be amended to the extent and in the manner provided therein. Copies of the Agreement are available for inspection at the corporate trust office of the Trustee. Unless otherwise defined herein, capitalized terms shall have the meanings given them in the Agreement. If an Event of Default (as defined in the Agreement) occurs and is continuing, the Trustee may, and upon the written request of Bondowners of at least 25% in principal amount of the Bonds outstanding shall, declare the principal of all Bonds then outstanding and the interest accrued thereon immediately due and payable in accordance with the Agreement. The Bondowners shall have no right to institute any proceeding or pursue any other remedy to enforce the Bonds or the covenants of the Company under the Agreement except as provided therein. The Bonds shall be issued initially in the Auction Rate Mode. This bond is initially issued in a twenty-eight day Auction Period, however, the Auction Period will automatically convert to a thirty-five day Auction Period after the first such twenty-eight day period. At the option of the Company and upon certain terms and conditions provided for in the Agreement, this bond may at any time be converted to a daily, seven-day, 28-day, 35-day, three-month or six-month Auction Period or a Special Auction Period or converted to a Variable Rate Mode or to Fixed Rate Indebtedness, all as provided in the Agreement. Until conversion to the Daily Mode, Weekly Mode, Flexible Mode, Term Rate Mode or Fixed Rate Mode as provided below, this bond shall bear interest at an Auction Rate. The Auction Rate shall be the rate of interest 12 determined by the auction agent designated as provided in the Agreement (herein, with its successors, the "Auction Agent") for each Auction Period or Special Auction Period, as defined below, pursuant to the Auction Procedures. In no event may the Auction Rate exceed the Maximum Auction Rate (as defined in the Agreement, initially the lesser of fourteen percent (14%) per annum or the maximum rate permitted by applicable law). The Bonds shall bear interest during the INITIAL PERIOD at the INITIAL INTEREST RATE. Thereafter, the Auction Agent shall redetermine the Auction Rate for each Auction Period as provided in the Agreement. The amount of interest due on any Interest Payment Date shall be the amount of unpaid interest accrued on this bond through the day preceding such Interest Payment Date or, if such Interest Payment Date is not a Business Day, through the day preceding the first Business Day succeeding such Interest Payment Date. The Auction Rate and the applicable auction procedures shall be as set forth in the Agreement, to which specific reference is made and which provisions are specifically incorporated herein by reference. Upon conversion or reconversion to a Variable Rate Mode or the Fixed Rate Mode, this bond is subject to mandatory tender for purchase as described below. Each conversion of the Bonds from the Auction Mode to another Mode shall be subject to the conditions set forth herein and in the Agreement. In the event that the conditions for a proposed conversion from the Auction Rate Mode to a new Mode are not met (i) such new Mode shall not take effect on the proposed conversion date, notwithstanding any prior notice to the Bondowners of such conversion and (ii) the next Auction Period shall be a seven-day Auction Period and the Auction Rate shall be the Maximum Auction Rate. In no event shall the failure of this bond to be converted to another Mode be deemed to be a default or an Event of Default (as defined in the Agreement). Each determination and redetermination of the Auction Rate shall be conclusive and binding on the Authority, the Trustee, the Paying Agent, the Bond Insurer, the Company and the Bondowners. While this bond is in the Auction Rate Mode in a daily, seven-day, 28-day, 35-day or three-month Auction Period or Special Auction Period of 180 days or less, interest shall be computed on the basis of a 360-day year for the actual number of days elapsed. While this bond is in the Auction Rate Mode in a six-month Auction Period or Special Auction Period of more than 180 days, interest shall be computed on the basis of a 360-day year consisting of twelve 30-day months. From and after the date on which this bond becomes due, any unpaid principal will bear interest at the then effective interest rate until paid or duly provided for. Principal and interest on this bond is payable while this bond is in the Auction Rate Mode, by check mailed to the REGISTERED OWNER hereof, or by wire or bank transfer within the continental United States of America of immediately available funds to any REGISTERED OWNER of $1,000,000 or more in principal amount of the Series Bonds upon written request of such REGISTERED OWNER received by the Trustee not less than five days prior to the record date, determined as of the close of business on the applicable record date, at its address as shown on the registration books maintained by the Paying Agent. The Purchase Price of Bonds tendered 13 for purchase shall be paid as provided below. The record date for payment of interest while this bond is in an Auction Rate Period other than a daily Auction Period is the second Business Day preceding the date on which interest is to be paid, and during a daily Auction Period, the last Business Day of the month preceding the date on which interest is to be paid. AFTER THE FIXED RATE CONVERSION DATE, THE REGISTERED OWNER SHALL HAVE NO RIGHT TO TENDER THIS BOND FOR PURCHASE. This bond is subject to mandatory tender for purchase at a price of par plus accrued interest, if any, to the Purchase Date, on the Conversion Date from the Auction Rate Mode to another Mode. Notice of mandatory tender shall be given or caused to be given by the Trustee in writing to the REGISTERED OWNER at least fifteen (15) days (or, if this bond is then in a six-month Auction Period or a Special Auction Period of more than 180 days, 30 days) prior to the mandatory Purchase Date. The owner of this bond, by acceptance hereof, agrees to sell and surrender this bond at such price to any purchaser determined in accordance with the provisions of the Agreement in the event of such mandatory tender and, on such Purchase Date, to surrender this bond to the Paying Agent for payment of the Purchase Price. From and after the Purchase Date, no further interest on this bond shall be payable to the REGISTERED OWNER, provided that there are sufficient funds available on the Conversion Date to pay the purchase price. All notices of tender of Bonds and deliveries of Bonds subject to mandatory tender shall be made to the Paying Agent at 2 Avenue de Lafayette, Boston, MA 02111, Attention: Corporate Trust Department. The Purchase Price of Bonds in the Auction Rate Mode tendered for purchase is payable by wire or bank transfer within the continental United States of America in immediately available funds from the Paying Agent to the REGISTERED OWNER at its address shown on the registration books maintained by the Paying Agent. If on any date this bond is subject to mandatory tender for purchase, payment of the Purchase Price of this bond to such owner shall be made on the Purchase Date if presentation and surrender of this bond is made prior to 1:00 P.M., New York City time, or on the next Business Day without any additional accrued interest if presentation and surrender of this bond made after 1:00 P.M., New York City time. This bond is also subject to optional redemption at 100% of the principal amount so redeemed plus accrued interest to the redemption date prior to the Fixed Rate Conversion Date at the direction of the Company in whole or in part on any Interest Payment Date immediately following the last day of an Auction Period during an Auction Rate Period; provided that in the event of any partial redemption of the Bonds prior to the Fixed Rate Conversion Date, the aggregate principal amount so redeemed shall be an integral multiple of $25,000 and the aggregate principal amount of the Bonds of this series bearing interest at an Auction Rate that will remain Outstanding shall be at least $10,000,000 unless otherwise consented to by the Broker-Dealer. The Bonds are subject to mandatory redemption at any time at a redemption price of 14 100% of the principal amount of the Bonds so redeemed plus accrued interest to the redemption date in the event (i) the Company delivers to the Trustee an opinion of nationally recognized bond counsel selected by the Company and reasonably satisfactory to the Trustee ("Bond Counsel") stating that interest on the Bonds is or will become includable in gross income of the owners thereof for federal income tax purposes, or (ii) it is finally determined by the Internal Revenue Service or a court of competent jurisdiction, as a result of (A) a proceeding in which the Company has participated or been given notice and an opportunity to participate, and (B) either a failure by the Company or the Seabrook Transferee (as defined in the Agreement) to observe any covenant or agreement undertaken in or pursuant to the Agreement or a Seabrook Transfer (as defined in the Agreement), or the inaccuracy of any representation made by the Company or the Seabrook Transferee in or pursuant to the Agreement or a Seabrook Transfer, that interest payable on the Bonds is includable for federal income tax purposes in the gross income of any owner thereof (other than an owner which is a "substantial user" or a "related person" within the meaning of Section 147(a) of the Internal Revenue Code of 1986). Any determination under clause (ii) above will not be considered final for this purpose until the earliest of the conclusion of any appellate review, the denial of appellate review or the expiration of the period for seeking appellate review. Redemption under this paragraph shall be in whole unless not later than forty-five (45) days prior to the redemption date the Company delivers to the Trustee an opinion of Bond Counsel reasonably satisfactory to the Trustee to the effect that a redemption of less than all of the Bonds will preserve the tax-exempt status of interest on the remaining Bonds outstanding subsequent to such redemption. Any such redemption shall be made on the 60th day after the date on which the opinion described in clause (i) is delivered or the determination described in clause (ii) becomes final or on such earlier date as the Company may designate by notice given to the Trustee at least forty-five (45) days prior to such designated date. If such redemption shall occur in accordance with the terms of the Agreement, then such failure by the Company or the Seabrook Transferee to observe such covenant or agreement, or the inaccuracy of any such representation will not, in and of itself, constitute a default thereunder. If the Trustee receives written notice from any Bondowner stating that (i) such Bondowner has been notified in writing by the Internal Revenue Service that it proposes to include the interest on the Bonds in the gross income of such owner for federal income tax purposes, or any other proceeding has been instituted against such owner which may lead to a like determination, and (ii) such owner will afford the Company the opportunity to participate at its own expense in the proceeding, either directly or in the name of such owner, until the conclusion of any appellate review, and the Trustee has examined such written notice and it appears to be accurate on its face, then the Trustee shall promptly give notice thereof to the Company, the Authority, and each Bondowner whose Bonds may be affected. The Trustee shall thereafter keep itself reasonably informed of the progress of any administrative proceedings or litigation relating to such notice. Under the Agreement the Company is required to give the Trustee written notice of such a final determination within forty-five (45) days of such final determination. If less than all of the outstanding Bonds are to be called for redemption, the Bonds or portions thereof to be redeemed will be selected by the Trustee by lot or in any customary manner as determined by the Trustee in units of $25,000, provided that for so long as CEDE & CO., as 15 nominee of the Depository Trust Company ("DTC"), is the REGISTERED OWNER and the Book-Entry Only System (as defined in the Agreement) is in effect, the particular Bonds or portions thereof to be redeemed shall be selected by DTC, in such manner as DTC may determine. In the event this bond (or any portion thereof) is selected for redemption prior to the Fixed Rate Conversion Date, notice will be mailed by the Trustee no fewer than 15 days (and no fewer than 30 days when this bond is in a six-month Auction Period or a Special Auction Period of 180 days or more) prior to the redemption date to the REGISTERED OWNER. Failure to mail notice to the owner of any other Bond or any defect in the notice to such other owner shall not affect the redemption of this bond. The Trustee shall give or cause to be given notice of any redemption of this bond as provided above to the REGISTERED OWNER at its address shown on the registration books maintained by the Paying Agent. A certificate of the Trustee shall conclusively establish the mailing of any such notice for all purposes. Notice of redemption having been duly mailed, this bond, or the portion called for redemption, will become due and payable on the redemption date at the applicable redemption price and, moneys for the redemption having been deposited with the Paying Agent, from and after the date fixed for redemption, interest on this bond (or such portion) will no longer accrue. IN CERTAIN CIRCUMSTANCES SET OUT HEREIN, THIS BOND (OR PORTION THEREOF) IS SUBJECT TO PURCHASE OR REDEMPTION, IN EACH CASE UPON NOTICE TO OR FROM THE OWNER HEREOF AS OF A DATE PRIOR TO SUCH PURCHASE OR REDEMPTION. IN EACH SUCH EVENT AND UPON DEPOSIT OF THE PURCHASE OR REDEMPTION PRICE WITH THE PAYING AGENT ON THE PURCHASE OR REDEMPTION DATE, AS THE CASE MAY BE, THIS BOND (OR PORTION THEREOF) SHALL CEASE TO BE DEEMED TO BE OUTSTANDING UNDER THE AGREEMENT, INTEREST HEREON SHALL CEASE TO ACCRUE AS OF THE PURCHASE OR REDEMPTION DATE, AND THE REGISTERED OWNER HEREOF SHALL BE ENTITLED ONLY TO RECEIVE THE PURCHASE OR REDEMPTION PRICE SO DEPOSITED WITH THE PAYING AGENT BUT ONLY UPON SURRENDER OF THIS BOND TO THE PAYING AGENT. This bond is transferable by the REGISTERED OWNER, in person or by its attorney duly authorized in writing, at the principal corporate trust office of the Paying Agent, upon surrender of this bond to the Paying Agent for cancellation. Upon the transfer, a new Bond or Bonds in authorized denominations of the same aggregate principal amount will be issued to the transferee at the same office. This bond may also be exchanged at the principal corporate trust office of the Paying Agent for a new Bond or Bonds in authorized denominations of the same aggregate principal amount without transfer to a new registered owner. Exchanges and transfers will be without expense to the owner except for applicable taxes or other governmental charges, if any. The Paying Agent will not be required to make an exchange or transfer of this bond (except in connection with any mandatory tender of this bond) (i) if this bond (or any portion thereof) has been selected for redemption or (ii) during the fifteen (15) days preceding any date fixed for selection for redemption if this bond (or any portion thereof) is eligible to be selected for redemption. 16 The Bonds are issuable only in fully registered form in the denominations of $25,000 or any multiple thereof with respect to Bonds in the Auction Rate Mode. The Authority, the Trustee and the Company may treat the REGISTERED OWNER as the absolute owner of this bond for all purposes, notwithstanding any notice to the contrary. No director, officer, employee or agent of the Authority nor any person executing this bond (by facsimile signature or otherwise) shall be personally liable, either jointly or severally, hereon or be subject to any personal liability or accountability by reason of the issuance hereof. This bond shall not be valid until the Certificate of Authentication has been signed by the Trustee. BUSINESS FINANCE AUTHORITY OF THE STATE OF NEW HAMPSHIRE By: Chairman (Seal) By: Executive Director Certificate Of Authentication This bond is one of the Bonds described in the Agreement. STATE STREET BANK AND TRUST COMPANY, as Trustee By: ____________________________________ Authorized Signer 17 STATEMENT OF INSURANCE MBIA Insurance Corporation (the "Insurer") has issued a policy containing the following provisions, such policy being on file at the principal corporate trust office of the Trustee (which on the date of this Bond is State Street Bank and Trust Company, Boston, Massachusetts). The Insurer, in consideration of the payment of the premium and subject to the terms of this policy, hereby unconditionally and irrevocably guarantees to any owner, as hereinafter defined, of the following described obligations, the full and complete payment required to be made by or on behalf of the Issuer to State Street Bank and Trust Company, or its successor, as Paying Agent for the Bonds (the "Paying Agent") of an amount equal to (i) the principal of (either at the stated maturity or by any advancement of maturity pursuant to a mandatory sinking fund payment) and interest on, the Obligations (as that term is defined below) as such payments shall become due but shall not be so paid (except that in the event of any acceleration of the due date of such principal by reason of mandatory or optional redemption or acceleration resulting from default or otherwise, other than any advancement of maturity pursuant to a mandatory sinking fund payment, the payments guaranteed hereby shall be made in such amounts and at such times as such payments of principal would have been due had there not been any such acceleration); and (ii) the reimbursement of any such payment which is subsequently recovered from any owner pursuant to a final judgment by a court of competent jurisdiction that such payment constitutes an avoidable preference to such owner within the meaning of any applicable bankruptcy law. The amounts referred to in clauses (i) and (ii) of the preceding sentence shall be referred to herein collectively as the "Insured Amounts." "Obligations" shall mean: $89,250,000 Business Finance Authority of the State of New Hampshire Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - 2001 Tax-Exempt Series A) Auction Rate Securities Upon receipt of telephonic notice, such notice subsequently confirmed in writing by registered or certified mail, or upon receipt of written notice by registered or certified mail, by the Insurer from the Paying Agent or any owner of an Obligation the payment of an Insured Amount for which is then due, that such required payment has not been made, the Insurer on the due date of such payment or within one business day after receipt of notice of such nonpayment, whichever is later, will make a deposit of funds, in an account with State Street Bank and Trust Company, N.A., in New York, New York, or its successor, sufficient for the payment of any such Insured Amounts which are then due. Upon presentment and surrender of such Obligations or presentment of such other proof of ownership of the Obligations, together with any appropriate instruments of assignment to evidence the assignment of the Insured Amounts due on the Obligations as are paid by the Insurer, and appropriate instruments to effect the appointment of the Insurer as agent for such owners of the Obligations in any legal proceeding related to payment of Insured Amounts on the Obligations, such instruments being in a form satisfactory to State Street Bank and Trust Company, N.A., State Street Bank and Trust Company, N.A. shall disburse to such owners or the Paying Agent payment of the Insured Amounts due on such 18 Obligations, less any amount held by the Paying Agent for the payment of such Insured Amounts and legally available therefor. This policy does not insure against loss of any prepayment premium which may at any time be payable with respect to any Obligation. As used herein, the term "owner" shall mean the registered owner of any Obligation as indicated in the books maintained by the Paying Agent, the Issuer, or any designee of the Issuer for such purpose. The term owner shall not include the Authority or any party whose agreement with the Authority constitutes the underlying security for the Obligations. Any service of process on the Insurer may be made to the Insurer at its offices located at 113 King Street, Armonk, New York 10504 and such service of process shall be valid and binding. This policy is non-cancelable for any reason. The premium on this policy is not refundable for any reason including the payment prior to maturity of the Obligations. The policy has been endorsed as follows: It is further understood that this policy shall guarantee to the owner or holder, as defined in the policy, the full and complete payments required to be made by or on behalf of the Issuer if there occurs pursuant to the terms of the Obligations an event which results in the loss of the tax exempt status of the interest on the Obligations, including any principal, interest or premium payments payable thereon, if any, as and when thereby required. This endorsement forms a part of the policy to which it is attached, effective on the inception date of the policy. MBIA INSURANCE CORPORATION 19 Assignment For value received the undersigned sells, assigns and transfers this bond to (Name and Address of Assignee) Social Security or Other Identifying Number of Assignee and irrevocably appoints attorney-in-fact to transfer it on the books kept for registration of the bond, with full power of substitution. NOTE: The signature to this assignment must correspond with the name as written on the face of the bond without alteration or enlargement or other change and must be guaranteed by a Participant in a Recognized Signature Guaranty Medallion Program. Dated: Signature Guaranteed: Participant in a Recognized Signature Guaranty Medallion Program By: Authorized Signature (ii) In the event of a conversion of any series of the Bonds from the Auction Rate Mode to any other Mode, the Company shall cause to be prepared and Trustee shall deliver, new Bonds to the owners thereof in substantially the form set forth in Subsection 301(b)(i) with such insertions and deletions as are necessary or desirable, as determined by the Company, to reflect the terms of the Bonds in the Daily Mode, Weekly Mode, Flexible Mode, Term Rate Mode or Fixed Rate Mode, as applicable. (c) Replacement of Bonds. Replacement Bonds shall be issued pursuant to applicable law as a result of the destruction, loss or mutilation of the Bonds. The costs of a replacement shall be paid or reimbursed by the applicant, who shall indemnify the Authority, the Trustee, the Paying Agent and the Company against all liability and expense in connection therewith. (d) Registration of Bonds in the Book-Entry Only System. (i) The provisions of this Subsection 301(d) shall apply with respect to any Bond registered to CEDE & CO. or any other nominee of The Depository Trust Company ("DTC") while the Book-Entry Only System (meaning the system of registration described in paragraph (ii) of this Subsection 301(d)) is in effect. (ii) The Bonds shall be issued in the form of a separate single authenticated 20 fully registered Bond for each Mode of Bonds in substantially the form set forth in Subsection 301(b). Any legend required to be on the Bonds by DTC may be added by the Trustee or Paying Agent. On the date of original delivery thereof, the Bonds shall be registered in the registry books of the Paying Agent in the name of CEDE & CO., as nominee of The Depository Trust Company as agent for the Authority in maintaining the Book-Entry Only System. With respect to Bonds registered in the registry books kept by the Paying Agent in the name of CEDE & CO., as nominee of DTC, the Authority, the Paying Agent, the Remarketing Agent, if any, the Company and the Trustee shall have no responsibility or obligation to any Participant (which means securities brokers and dealers, banks, trust companies, clearing Companys and various other entities, some of whom or their representatives own DTC) or to any Beneficial Owner (which means, when used with reference to the Book-Entry Only System, the person who is considered the beneficial owner of the Bonds pursuant to the arrangements for book entry determination of ownership applicable to DTC) with respect to the following: (A) the accuracy of the records of DTC, CEDE & CO. or any Participant with respect to any ownership interest in the Bonds, (B) the delivery to or from any Participant, any Beneficial Owner or any other person, other than DTC, of any notice with respect to the Bonds, including any notice of redemption or tender (whether mandatory or optional), or (C) the payment to any Participant, any Beneficial Owner or any other person, other than DTC, of any amount with respect to the principal of or premium, if any, or interest on the Bonds. The Paying Agent shall pay all principal of and premium, if any, and interest on the Bonds only to or upon the order of DTC, and all such payments shall be valid and effective fully to satisfy and discharge the Authority's obligations with respect to the principal of and premium, if any, and interest on such Bonds to the extent of the sum or sums so paid. No person other than DTC shall be entitled to receive an authenticated Bond evidencing the obligation of the Authority to make payments of principal of and premium, if any, and interest pursuant to this Agreement. Upon delivery by DTC to the Trustee or the Paying Agent of written notice to the effect that DTC has determined to substitute a new nominee in place of CEDE & CO., the words "CEDE & CO." in this Agreement shall refer to such new nominee of DTC. (iii) Upon receipt by the Authority and the Trustee, the Paying Agent or the Remarketing Agent, if any, of written notice from DTC to the effect that DTC is unable or unwilling to discharge its responsibilities, the Paying Agent shall issue, transfer and exchange Bonds as requested by DTC in appropriate amounts, and whenever DTC requests the Authority, the Paying Agent, the Trustee and the Remarketing Agent, if any, to do so, the Trustee, the Paying Agent, the Remarketing Agent, if any, and the Authority will cooperate with DTC in taking appropriate action after reasonable notice (A) to arrange for a substitute bond depository willing and able upon reasonable and customary terms to maintain custody of the Bonds or (B) to make available Bonds registered in whatever name or names the Bondowners transferring or exchanging such Bonds shall designate. (iv) In the event the Company determines that it is in the best interests of the Beneficial Owners that they be able to obtain Bond certificates, the Authority may so 21 notify DTC, the Paying Agent, the Remarketing Agent, if any, and the Trustee, whereupon DTC will notify the Participants of the availability through DTC of Bond certificates. In such event, the Paying Agent shall issue, transfer and exchange Bond certificates of the initial series as requested by DTC in appropriate amounts and in authorized denominations. Whenever DTC requests the Authority and the Paying Agent to do so, the Paying Agent and the Authority will cooperate with DTC in taking appropriate action after reasonable notice to make available Bonds registered in whatever name or names the Beneficial Owners transferring or exchanging Bonds shall designate. (v) Notwithstanding any other provision of this Agreement to the contrary, so long as any Bond is registered in the name of CEDE & CO., as nominee of DTC, all payments with respect to the Purchase Price and principal of and premium, if any, and interest on such Bond and all notices with respect to such Bond shall be made and given, respectively, to DTC as provided in the Authority's Letter of Representation (the "Representation Letter") for the Bonds dated December 4, 2001. The form of such Representation Letter may be modified in a manner consistent with the provisions of this Agreement upon conversion or reconversion of the Bonds to another Mode or Rate Period in which the Book-Entry Only System is in effect. (vi) Notwithstanding any provision in Section 307 to the contrary, so long as all of the Bonds Outstanding are held in the Book-Entry Only System, (A) if less than all of such Bonds are to be redeemed upon any redemption of Bonds hereunder, the particular Bonds or portions of Bonds of such series to be redeemed shall be selected by DTC in such manner as DTC may determine, and (B) if less than all of such Bonds are to be converted to a different Mode, upon any conversion to such Mode hereunder, the beneficial interests in particular Bonds or portions of Bonds to be converted shall be selected by DTC in such manner as DTC may determine. (vii) So long as the Book-Entry Only System is in effect, a Beneficial Owner who elects to have its Bonds purchased or tendered pursuant to the Agreement shall effect delivery by causing a Participant to transfer the Beneficial Owner's interest in the Bonds pursuant to the Book-Entry Only System. The requirement for physical delivery of Bonds in connection with a demand for purchase or a mandatory tender for purchase will be deemed satisfied when the ownership rights in the Bonds are transferred in accordance with the Book-Entry Only System. (viii) While the Bonds bear interest in a Variable Rate Mode, so long as the Book-Entry Only System is in effect, the Remarketing Agent, if any, shall communicate to DTC information concerning the purchasers of Tendered Bonds as may be necessary or appropriate, and, notwithstanding any provision in the Representations Letter to the contrary, the Remarketing Agent shall continue to remit to the Paying Agent interest rate determination information pursuant to the terms of this Agreement. (ix) While the Bonds bear interest in a Variable Rate Mode, notwithstanding any provision of this Agreement to the contrary, if the Book-Entry Only System is in 22 effect while a Liquidity Facility is in effect, Company Bonds or Liquidity Provider Bonds, if any, shall be registered in the name of the Company or the Liquidity Provider, as the case may be, and a separate Bond certificate shall be issued to and held by the Paying Agent for the Company or the Liquidity Provider, as the case may be, and the registration books maintained by the Paying Agent shall indicate (i) the Company or the Liquidity Provider, as the case may be, as the owner of any Company Bonds or Liquidity Provider Bonds and (ii) that CEDE & CO. is no longer the owner of such Company Bonds or Liquidity Provider Bonds, as the case may be. Upon any Bond ceasing to be a Company Bond or Liquidity Provider Bond, as the case may be, such Bond shall be re-registered in the name of CEDE & CO. (e) Interest on Overdue Principal. Any overdue principal of any Bond shall bear interest after its maturity or acceleration at the then-effective interest rate of the Bonds. (f) Cancellation and Destruction of Bonds. All Bonds paid or redeemed in full, either at or before maturity, shall be delivered to the Trustee when such payment or redemption is made, and such Bonds, and all Bonds surrendered in any exchanges or transfers, shall thereupon be promptly canceled. All Bonds acquired and owned by the Company and delivered to the Trustee for cancellation shall be deemed paid and shall be promptly canceled. Bonds so canceled may at any time be cremated or otherwise destroyed by the Trustee, which shall execute a certificate of cremation or destruction in duplicate by the signature of one of its authorized officers describing the Bonds so cremated or otherwise destroyed, and one executed certificate shall be filed with the Authority and the other executed certificate shall be retained by the Trustee. Section 302. Application of Bond Proceeds. The Authority shall loan the proceeds of the Bonds to the Company by promptly causing (A) the accrued interest, if any, to be deposited in the Bond Fund and (B) $89,250,000 to be deposited with State Street Bank and Trust Company, as trustee under the Refunding Trust Agreements, to refund the 1991 Series A Bonds and a portion of the 1991 Series C Bonds on a current basis. The Company represents and warrants that (i) substantially all of the proceeds (within the meaning of the 1954 Code) of the 1991 Series A Bonds and the Authority's $112,500,000 Adjustable Rate Solid Waste Disposal and Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - 1989 Series) (the "1989 Bonds"), which were refunded by the 1991 Series C Bonds, were spent to pay directly or to reimburse the Company for Project Costs; (ii) such Project Costs were incurred by and were chargeable to the capital account of the Company; (iii) such Project Costs are costs of "sewage or solid waste disposal facilities" or "air or water pollution control facilities" within the meaning of Section 103(b)(4)(E) or (F) of the 1954 Code incurred and paid after January 14, 1976; and (iv) such Project Costs were for an "industrial facility" within the meaning of Paragraphs 2, VII (d) and (e) of the Act. The Company shall pay expenses and costs of issuance of the Bonds from its own funds. Section 303. Bond Fund. A Bond Fund is hereby established with the Trustee for the account of the Company, and moneys shall be deposited therein as provided in this Agreement. The Company hereby grants to the Trustee for the benefit of the Bondowners a lien on and 23 security interest in all deposits in the Bond Fund. The moneys in the Bond Fund and any investments held as part of such Fund shall be held in trust and, except as otherwise provided in Sections 304, 804 and 903, shall be applied by the Trustee solely to the payment of principal of, premium, if any, and interest on the Bonds. If at any time the amount in the Bond Fund exceeds the amount necessary to pay or redeem the Bonds in full, and all amounts owing or to be owing under this Agreement to the Authority and the Trustee have been paid or provided for to the reasonable satisfaction of the Trustee and the Authority, then the excess shall be paid to the Company except as otherwise may be required by applicable law. When moneys in the Bond Fund are to be applied to the payment of the Bonds, such moneys shall be transferred by the Trustee to itself for the account of the Authority and shall then be so applied. The Trustee shall pay out of the Bond Fund on each payment date the amount required for the payment of principal of, premium, if any, and interest on the Bonds payable on such date (whether at maturity, upon redemption, by acceleration or otherwise). Section 304. Application of Moneys. If available moneys in the Bond Fund are not sufficient on any day to pay all principal of, premium, if any, and interest on the Outstanding Bonds then due or overdue, such moneys shall, after payment of all amounts owing to the Trustee and the Authority under this Agreement, be applied first to the payment of interest, including interest on overdue principal, in the order in which the same became due (pro rata with respect to interest which became due at the same time) and second to the pro rata payment of principal and premium, if any, without regard to the order in which the same became due, in each case pro rata among Bondowners. For this purpose interest on overdue principal shall be treated as coming due on the first day of each month. Whenever moneys are applied pursuant to this section, such moneys shall be applied by the Trustee at such times, and from time to time, as the Trustee in its discretion shall determine, having due regard to the amount of such moneys available and the likelihood of additional moneys becoming available for such application in the future. Whenever the Trustee shall exercise such discretion it shall fix the date (which shall be the first day of a month unless the Trustee shall deem another date more suitable) upon which such application is to be made, and upon such date interest on the amounts of principal paid on such date shall cease to accrue. The Trustee shall give such notice as it may deem appropriate of the fixing of any such date. When interest or a portion of the principal is to be paid on an overdue Bond, the Trustee may require presentation of the Bond for endorsement of the payment. 24 Section 305. Payments by the Company. (a) Debt Service. Not later than the opening of business on the second Business Day preceding an Interest Payment Date or the date on which a payment of principal or redemption premium or Purchase Price is due, at maturity, upon redemption, by acceleration or otherwise, the Company shall pay or cause to be paid to the Trustee for deposit in the Bond Fund an amount in immediately available funds on such date equal to the payment then coming due less the amount, if any, then in the Bond Fund and available to pay Debt Service. At any time when any principal of the Bonds is overdue, the Company shall also have a continuing obligation to pay to the Trustee for deposit in the Bond Fund an amount equal to interest on the overdue principal, but the payments required under this section shall not otherwise bear interest. The Company may make payments to the Bond Fund earlier than required by this section, but such payments shall not affect the accrual of interest. If any moneys are invested in accordance with this Agreement and a loss results therefrom so that there are insufficient funds to pay principal of, premium, if any, and interest on the Bonds when due, the Company shall supply the deficiency. (b) Additional Payments. (i) The Company shall pay when due the Authority's Service Charge and other expenses as provided in Section 1003. (ii) Within thirty (30) days after notice from the Trustee, the Company shall pay to the Trustee the reasonable fees and expenses of the Trustee as set forth in Section 903 and other indemnified or reimbursable amounts. (c) Unclaimed Moneys. Except as may otherwise be required by applicable law, in case any moneys deposited with the Trustee for the payment of the principal of, premium, if any, or interest on any Bond remain unclaimed for three years after such principal, premium, if any, or interest has become due and payable, the Trustee may, and upon receipt of a written request of the Company Representative shall, pay over to the Company the amount so deposited and thereupon the Trustee and the Authority shall be released from any further liability with respect to the payment of such principal, premium or interest, and the owner of such Bond shall be entitled (subject to any applicable statute of limitations) to look only to the Company as an unsecured creditor for the payment thereof. (d) Rebate. The Company shall pay to the United States of America when due any rebate with respect to the Bonds pursuant to IRC ss.148(f). (e) Purchase Price. If the amount available from a Liquidity Facility, together with all other amounts received by the Paying Agent for the purchase of Bonds tendered pursuant to Sections 414, 513 or 514, is not sufficient to pay the Purchase Price of such Bonds on the Purchase Date, the Paying Agent shall before 12:00 P.M., New York City time, on such Purchase Date, notify the Company and the Trustee of such deficiency by telephone or telegraph promptly confirmed in writing. The Company shall pay to the Paying Agent in immediately available funds by 12:30 P.M. New York City time, on the Purchase Date for Bonds tendered pursuant to 25 Sections 414, 513 or 514, an amount equal to the Purchase Price of such Bonds less the amount, if any, available to pay the Purchase Price in accordance with Sections 414, 513 or 514 as the case may be, from the proceeds of the remarketing of such Bonds or from drawings on the Liquidity Facility, as reported by the Paying Agent. Bonds so purchased with moneys furnished by the Company ("Company Bonds") shall be registered to the Company, but shall be delivered to and held by the Paying Agent for the account of the Company until transferred pursuant to the following sentence or cancelled. Company Bonds held by the Paying Agent shall, upon written instructions of the Company, be cancelled or transferred to the Remarketing Agent for delivery to or at the direction of any purchaser of such Bonds from the Company which the Company certifies is a person other than the Company or a "related person" as such term is used in Section 144(a)(3) of the IRC, whereupon such Bonds shall no longer be Company Bonds. Any Company Bond shall not be subject to purchase under Sections 513 and 514 and, if so registered for a period of ninety (90) days without being resold, shall be canceled, and the Company shall deliver the Bonds to the Paying Agent. Section 306. Unconditional Obligation. The obligation of the Company to make payments under this Agreement shall be absolute and unconditional, shall be binding and enforceable in all circumstances whatsoever as provided in the Act and shall not be subject to set-off, recoupment or counterclaim, and shall be a general obligation of the Company to which the full faith and credit of the Company are pledged. The Company shall be obligated to make such payments whether or not the Project Facilities have ceased to exist or be functional to any extent from any cause whatsoever. The Company shall be obligated to make such payments regardless of whether it is in possession or entitled to be in possession of the Project Facilities. Section 307. Redemption of the Bonds. The Bonds shall be subject to redemption prior to maturity under the circumstances, in the manner and subject to the conditions provided in this section, in Article IV and V and in the form of Bonds. Whenever Bonds are called for redemption, the accrued interest thereon shall become due on the redemption date. Transfers and payments for the purpose of redeeming Bonds under this Agreement shall be made on behalf of the Authority, and the Authority hereby consents to any redemption of Bonds in accordance herewith. Except as otherwise provided in Subsection 301(d), if less than all of the Bonds are to be redeemed, the Bonds to be redeemed shall be selected by the Trustee by lot or in any customary manner as determined by the Trustee provided that the Trustee shall redeem prior to any other Bonds (i) Bonds that are Liquidity Provider Bonds at the time of selection for redemption and (ii) after the redemption of such Liquidity Provider Bonds, Bonds that are Company Bonds at the time of selection for redemption. (a) Optional Redemption. The Bonds may be redeemed at the times and prices as provided in the form of Bonds and in Article V at the option of the Company upon written notice given by the Company to the Authority, the Remarketing Agent, if any, the Trustee and the Paying Agent at the time specified in the form of Bonds or Article V, as applicable, or, after the Fixed Rate Conversion Date or change to the Fixed Rate, at least sixty (60) days, before the redemption date. 26 (b) Reserved. (c) Mandatory Taxability Redemption. The Outstanding Bonds are subject to mandatory redemption at any time at a redemption price of 100% of the principal amount of the Bonds so redeemed plus accrued interest to the redemption date in the event (i) the Company delivers to the Trustee and the Bond Insurer an opinion of Bond Counsel stating that interest on the Bonds is or will become includable in gross income of the owners thereof for federal income tax purposes, or (ii) it is finally determined by the Internal Revenue Service or a court of competent jurisdiction, as a result of (A) a proceeding in which the Company has participated or been given notice and an opportunity to participate, and (B) either a failure by the Company or the Seabrook Transferee to observe any covenant or agreement undertaken in or pursuant to this Agreement or a Seabrook Transfer, or the inaccuracy of any representation made by the Company or the Seabrook Transferee in or pursuant to this Agreement or a Seabrook Transfer, that interest payable on the Bonds is includable for federal income tax purposes in the gross income of any owner thereof (other than an owner which is a "substantial user" or a "related person" within the meaning of IRC Section 147(a)). Any determination under clause (ii) above will not be considered final for this purpose until the earliest of the conclusion of any appellate review, the denial of appellate review or the expiration of the period for seeking appellate review. Redemption under this Subsection 307(c) shall be in whole unless, not later than forty-five (45) days prior to the redemption date, the Company delivers to the Trustee an opinion of Bond Counsel to the effect that a redemption of less than all of the Bonds will preserve the tax-exempt status of interest on the remaining Bonds outstanding subsequent to such redemption. Any redemption under this Subsection 307(c) shall be made on the 60th day after the date on which the opinion described in clause (i) is delivered or the determination described in clause (ii) becomes final or on such earlier date as the Company may designate by notice given to the Trustee at least forty-five (45) days prior to such designated date. If such redemption shall occur in accordance with the terms of this Agreement, then such failure by the Company or the Seabrook Transferee to observe such covenant or agreement, or the inaccuracy of any such representations will not, in and of itself, constitute a Default hereunder. If the Trustee receives written notice from any Bondowner stating that (I) such Bondowner has been notified in writing by the Internal Revenue Service that it proposes to include the interest on the Bonds in the gross income of such owner for federal income tax purposes, or any other proceeding has been instituted against such owner which may lead to a like determination, and (II) such owner will afford the Company the opportunity to participate at its own expense in the proceeding, either directly or in the name of such owner, until the conclusion of any appellate review, and the Trustee has examined such written notice and it appears to be accurate on its face, then the Trustee shall promptly give notice thereof to the Company, the Authority, and each Bondowner whose Bonds may be affected. The Trustee shall thereafter keep itself reasonably informed of the progress of any administrative proceedings or litigation relating to such notice. (d) Notice to the Trustee. The Company shall exercise its option to have Bonds redeemed under Subsection 307(a) by giving written notice to the Trustee at least forty-five (45) days before the redemption date. The Company shall keep the Trustee informed of the progress 27 of any proceeding referred to in Subclause 307(c)(ii)(A) and shall give written notice to the Trustee within forty-five (45) days after it has actual knowledge of a final determination as described in Clause 307(c)(ii). (e) Payment of Redemption Price and Accrued Interest. Whenever Bonds are called for redemption, the accrued interest thereon shall become due on the redemption date and shall be paid from the Bond Fund to the extent available therein. To the extent not otherwise provided, the Company shall deposit with the Trustee prior to the redemption date a sufficient sum to pay the redemption price and accrued interest. (f) Notice of Redemption. When Bonds are to be redeemed, the Trustee shall give notice to Bondowners in the name of the Authority as provided in the form of Bond and this Subsection 307(f), which notice shall identify the Bonds or portions thereof to be redeemed and state the date fixed for redemption and the place or places of payment of the redemption price. The notice shall further state that on such date there shall become due and payable upon each Bond or portion thereof to be redeemed the redemption price thereof, together with interest accrued to the redemption date, that money available therefor having been deposited with the Trustee, from and after such date, interest thereon shall cease to accrue and that the Bonds or portions thereof called for redemption shall cease to be entitled to any benefit under this Agreement except the right to receive payment of the redemption price. Failure to mail notice to a particular Bondowner, or any defect in the notice to such Bondowner, shall not affect the redemption of any other Bond. Section 308. Investments. (a) Pending their use under this Agreement, moneys in the Bond Fund may be invested or reinvested by the Trustee at the written direction of the Company Representative (upon which the Trustee may conclusively rely) in Permitted Investments, as defined below, with maturities at or before the time when such moneys are required to be available and shall be so invested upon and pursuant to written direction of the Company if no Default known to the Trustee then exists under this Agreement; provided that the Company shall not request, authorize or permit any investment which would cause any of the Bonds to be classified as "arbitrage bonds" as defined in IRC ss.148(a). Any investments and proceeds thereof shall be held by the Trustee as part of the Bond Fund and shall be sold or redeemed at the direction of the Company to the extent necessary to make payments or transfers or anticipated payments or transfers from such Fund. (b) Any interest or dividends realized from an investment and any profit realized upon the sale or disposition thereof shall be credited to the Bond Fund and any loss shall be charged thereto. (c) (1) The term "Permitted Investments" means (A) Direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury, and CATS and TIGRS) or obligations the principal of and interest on which are unconditionally guaranteed by the United States of America; (B) Bonds, 28 debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following federal agencies and provided such obligations are backed by the full faith and credit of the United States of America (stripped securities are only permitted if they have been stripped by the agency itself): (i) U.S. Export-Import Bank (Eximbank) - Direct obligations or fully guaranteed certificates of beneficial ownership; (ii) Farmers Home Administration (FmHA) - Certificates of beneficial ownership; (iii) Federal Financing Bank (iv) Federal Housing Administration Debentures (FHA) (v) General Services Administration - Participation certificates (vi) Government National Mortgage Association (GNMA or "Ginnie Mae") - GNMA - guaranteed mortgage-backed bonds and GNMA - guaranteed pass-through obligations (vii) U.S. Maritime Administration - Guaranteed Title XI financing (viii) U.S. Department of Housing and Urban Development (HUD) - Project Notes, Local Authority Bonds, New Communities Debentures - U.S. government guaranteed debentures, U.S. Public Housing Notes and Bonds - U.S. government guaranteed public housing notes and bonds; (C) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following non-full faith and credit U.S. government agencies (stripped securities are only permitted if they have been stripped by the agency itself): (i) Federal Home Loan Bank System - Senior debt obligations (ix) Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac") - Participation Certificates and Senior debt obligations (x) Federal National Mortgage Association (FNMA or "Fannie Mae") - Mortgage-backed securities and senior debt obligations (xi) Student Loan Marketing Association (SLMA or "Sallie Mae") - Senior debt obligations (xii) Resolution Funding Corp. (REFCORP) obligations, and 29 (xiii) Farm Credit System - Consolidated systemwide bonds and notes; (D) Money market funds registered under the Federal Investment Company Act of 1940, whose shares are registered under the Federal Securities Act of 1933, and having a rating by S&P of AAAm-G; AAAm; or Aam; (E) Certificates of deposit secured at all times by collateral described in (A) and/or (B) above. Such certificates must be issued by commercial banks, savings and loan associations or mutual savings banks. The collateral must be held by a third party and the bondholders must have a perfected first security interest in the collateral; (F) Certificates of deposit, savings accounts, deposit accounts or money market deposits which are fully insured by FDIC, including BIF and SAIF; (G) Investment Agreements, including GIC's, acceptable to the Bond Insurer; (H) Commercial paper rated, at the time of purchase, "Prime - 1" by Moody's and "A-1" or better by S and P ; (I) Bonds or notes issued by any state or municipality which are rated by Moody's and S&P in one of the two highest rating categories assigned by such agencies; (J) Federal funds or bankers acceptances with a maximum term of one year of any bank which has an unsecured, uninsured and unguaranteed obligation rating of "Prime - 1" or "A3" or better by Moody's and "A-1" or "A" or better by S and P; and (K) Repurchase agreements acceptable to the Bond Insurer. (2) Notwithstanding the immediately preceding paragraph Permitted Investments shall not include the following: (i) obligations the principal of and interest on which are unconditionally guaranteed by the United States of America, certificates of deposit and bankers' acceptances, in each case with yields lower than the yield available on comparable obligations of the United States Treasury; or (xiv) any demand deposit or similar account with a bank, trust company or broker, unless the account is used for holding funds for a short period of time until such funds are reinvested or spent. Any of the requirements of this paragraph (2) shall not apply to moneys as to which the Trustee and the Authority shall have received an opinion of nationally recognized bond counsel to the effect that such requirements are not necessary to preserve the exclusion of interest on Bonds from the gross income of the owner thereof for federal income tax purposes. Any such Permitted Investments obtained from or through, or issued by, the Trustee in its commercial banking or other capacity, or any of its affiliates, shall be permitted (provided that such investment otherwise qualifies in accordance with the definition of "Permitted Investments"). Section 309. Tax Status of Bonds. The Company will perform its obligations and agreements contained in the Federal Tax Statement as if they were set forth herein. All representations of the Company in the Federal Tax Statement shall be treated as if they were set forth herein. Any covenants, agreements or representations made by the Company or any transferee of the Project Facilities (or any successor to such a transferee) in connection with such a transfer shall be performed and treated as if set forth herein. The Authority will cooperate with the Bondowners and the Company to the extent deemed necessary or permitted by law in the 30 opinion of bond counsel to the Authority in order to preserve the exclusion of interest on the Bonds from the gross income of the owners thereof for federal income tax purposes. Section 310. Paying Agent. The Paying Agent shall act as such and as Bond registrar and transfer agent. The Paying Agent, which may act by means of agents, shall signify its acceptance of the duties and obligations imposed upon it hereunder by its written instrument of acceptance addressed and delivered to the parties hereto under which the Paying Agent will agree to: (i) hold all sums delivered to it by the Trustee for the payment of principal (including sinking fund installments) of, premium, if any, and interest on the Bonds or paid to it by the Company or under a Liquidity Facility in trust for the benefit of the Bondowners until such sums shall be paid to the Bondowners or otherwise disposed of as herein provided; (ii) hold all Bonds tendered to it hereunder in trust for the benefit of the respective Bondowners until moneys representing the Purchase Price of such Bonds shall have been delivered to or for the account of or to the order of such Bondowners; (iii) hold all Liquidity Provider Bonds for the benefit of the Liquidity Provider until such Liquidity Provider Bonds shall have been remarketed by the Remarketing Agent or redeemed in the manner set forth in Section 307 and Article V and in the form of Bonds and any Liquidity Facility; (iv) hold all moneys delivered to it hereunder for the purchase of Bonds in trust for the benefit of the person or entity which shall have so delivered such moneys until the Bonds purchased with such moneys shall have been delivered to or for the account of such person or entity; (v) keep such books and records as shall be consistent with prudent industry practice and make such books and records, including the books of registration for the Bonds, available for inspection by the parties hereto, the Liquidity Provider, if any, and the Remarketing Agent, if any, at all reasonable times; (vi) promptly report to the Trustee all authentications of Bonds transferred, exchanged or remarketed and any information received by it concerning the names and addresses of Bondowners; and (vii) give all notices of the Paying Agent at the times and in the manner required by this Agreement and send to the Remarketing Agent, if any, copies of all such notices. The Paying Agent shall be entitled to the advice of counsel (who may be counsel for any party) and shall not be liable for any action taken in good faith in reliance on such advice. The Paying Agent may rely conclusively on any telephone or written notice, certificate or other 31 document furnished to it under this Agreement and reasonably believed by it to be genuine. The Paying Agent shall not be liable for any action taken or omitted to be taken by it in good faith and reasonably believed by it to be within the discretion or power conferred upon it, or taken by it pursuant to any direction or instruction by which it is governed under this Agreement or omitted to be taken by it by reason of the lack of direction or instruction required for such action, or be responsible for the consequences of any error of judgment reasonably made by it. When any payment or other action by the Paying Agent is called for by this Agreement, it may defer such action pending receipt of such evidence, if any, as it may reasonably require in support thereof. A permissive right or power to act shall not be construed as a requirement to act. The Paying Agent shall not in any event be liable for the application or misapplication of funds, or for other acts or defaults, by any person, firm or Company except by their respective directors, officers, agents and employees. No recourse shall be had by the Company, the Authority, the Trustee, the Liquidity Provider, if any, or any Bondowner for any claim based on this Agreement or the Bonds against any director, officer, agent or employee of the Paying Agent unless such claim is based upon the bad faith, fraud or deceit of such person. For the purposes of this Agreement matters shall not be considered to be known to the Paying Agent unless they are known to an officer in its corporate trust division. The Company shall pay to the Paying Agent reasonable compensation for its services and pay or reimburse the Paying Agent for its reasonable expenses and disbursements, including reasonable attorney's fees, hereunder. The Company shall indemnify and save the Paying Agent harmless against any liabilities and reasonable expenses which it may incur in the exercise of its duties hereunder and which are not due to its negligence or bad faith. Any fees, expenses, reimbursements or other charges which the Paying Agent may be entitled to receive from the Company hereunder, if not paid when due, shall bear interest at the "base rate" of the Paying Agent (or, if none, the nearest equivalent). The Company may discharge the Paying Agent from time to time (upon not less than thirty days advance written notice, unless such discharge is for cause) and appoint a successor, but such removal shall not take effect until a successor approved in writing by the Bond Insurer has been appointed and has accepted the appointment. The Company shall also designate a successor if the Paying Agent resigns or becomes ineligible. The Paying Agent may resign by giving at least sixty (60) days' written notice to the parties hereto, but such resignation shall not take effect until a successor approved in writing by the Bond Insurer has been appointed and has accepted the appointment. Each successor Paying Agent shall be a commercial bank or trust company having a capital and surplus of not less than $50,000,000, shall be registered as a transfer agent with the Securities and Exchange Commission, and shall be capable of performing the duties prescribed for it herein in Boston, Massachusetts or New York, New York. The Paying Agent may but need not be the same person as the Trustee. The Company shall give notice of the appointment of a successor Paying Agent in writing to each Bondowner and the Bond Insurer. The Company will promptly certify to the Trustee that it has mailed such notice to all Bondowners, and such certificate will be conclusive evidence that such notice was given in the manner required hereby. In the event of the resignation or removal of the Paying Agent, the Paying Agent shall pay 32 over, transfer, assign and deliver any moneys and Bonds, including Liquidity Provider Bonds and unauthenticated Bonds, held by it, any Liquidity Facility (which transfer shall be made in accordance with the terms thereof), and the books of registry maintained by it in such capacity to its successor or, if there be no successor, to the Trustee, who shall act in the capacity of Paying Agent until a successor is appointed. Any Company, association, partnership or firm which succeeds to the business of the Paying Agent as a whole or substantially as a whole, whether by sale, merger, consolidation or otherwise, shall thereby become vested with all the property, rights and powers of the Paying Agent under this Agreement and shall be subject to all the duties and obligations of the Paying Agent under this Agreement. In the event that the Paying Agent shall resign or be removed, or be dissolved, or if the property or affairs of the Paying Agent shall be taken under the control of any state or federal court or administrative body because of bankruptcy or insolvency, or for any other reason, and the Authority or the Company, as the case may be, shall not have appointed its successor, the Trustee shall appoint a successor and, if no appointment is made within thirty (30) days, shall apply to a court of competent jurisdiction for such appointment. The Paying Agent shall send or cause to be sent notice to Bondowners of a change of address for the delivery of Bonds or notices or the payment of principal or purchase price of Bonds. Section 311. Payment Procedure Pursuant to Bond Insurance Policy. In the event that, on the second Business Day, and again on the Business Day, prior to the payment date on the Bonds, the Trustee has not received sufficient moneys to pay all principal of and interest on the Bonds due on the second following or following, as the case may be, Business Day, the Trustee shall immediately notify the Bond Insurer or its designee on the same Business Day by telephone, facsimile or telegraph, confirmed in writing by registered or certified mail, of the amount of the deficiency. (a) If the deficiency is made up in whole or in part prior to or on the payment date, the Trustee shall so notify the Bond Insurer or its designee. (b) In addition, if the Trustee has actual notice that any Bondowner has been required to disgorge payments of principal or interest on the Bond to a trustee in bankruptcy or creditors or others pursuant to a final judgment by a court of competent jurisdiction that such payment constitutes an avoidable preference to such Bondowner within the meaning of any applicable bankruptcy laws, then the Trustee shall notify the Bond Insurer or its designee of such fact by telephone, facsimile or telegraphic notice, confirmed in writing by registered or certified mail. (c) The Trustee is hereby irrevocably designated, appointed, directed and authorized to act as attorney-in-fact for Bondowners as follows: 33 (i) If and to the extent there is a deficiency in amounts required to pay interest on the Bonds, the Trustee shall (a) execute and deliver to State Street Bank and Trust Company, N.A., or its successors under the Bond Insurance Policy (the "Insurance Paying Agent"), in form reasonably satisfactory to the Insurance Paying Agent, an instrument appointing the Bond Insurer as agent for such Bondowners in any legal proceeding related to the payment of such interest and an assignment to the Bond Insurer of the claims for interest to which such deficiency relates and which are paid by the Bond Insurer, (b) receive as designee of the respective Bondowners (and not as Trustee) in accordance with the tenor of the Bond Insurance Policy payment from the Insurance Paying Agent with respect to the claims for interest so assigned, and (c) disburse the same to such respective Bondowners; and (ii) If and to the extent of a deficiency in amounts required to pay principal of the Bonds, the Trustee shall (a) execute and deliver to the Insurance Paying Agent in form reasonably satisfactory to the Insurance Paying Agent an instrument appointing the Bond Insurer as agent for such Bondowners in any legal proceeding relating to the payment of such principal and an assignment to the Bond Insurer of any of the Bonds surrendered to the Insurance Paying Agent of so much of the principal amount thereof as has not previously been paid or for which moneys are not held by the Trustee and available for such payment (but such assignment shall be delivered only if payment from the Insurance Paying Agent is received), (b) receive as designee of the respective Bondowners (and not as Trustee) in accordance with the tenor of the Bond Insurance Policy payment therefor from the Insurance Paying Agent, and (c) disburse the same to such Bondowners. (d) Payments with respect to claims for interest on and principal of Bonds disbursed by the Trustee from proceeds of the Bond Insurance Policy shall not be considered to discharge the obligation of the Authority with respect to such Bonds, and the Bond Insurer shall become the owner of such unpaid Bonds and claims for the interest in accordance with the tenor of the assignment made to it under the provisions of this section or otherwise. (e) Irrespective of whether any such assignment is executed and delivered, the Authority and the Trustee hereby agree for the benefit of the Bond Insurer that: (i) They recognize that to the extent the Bond Insurer makes payments, directly or indirectly (as by paying through the Trustee), on account of principal of or interest on the Bonds, the Bond Insurer will be subrogated to the rights of such Owners to receive the amount of such principal and interest from the Authority, with interest thereon as provided and solely from the sources stated in this Agreement and the Bonds; and (ii) They will accordingly pay to the Bond Insurer the amount of such principal and interest (including principal and interest recovered under subparagraph (ii) of the first paragraph of the Bond Insurance Policy, which principal and interest shall be deemed past due and not to have been paid), with interest thereon as provided in this Agreement and 34 the Bonds, but only from the sources and in the manner provided herein for the payment of principal of and interest on the Bonds to Bondowners, and will otherwise treat the Bond Insurer as the owner of such rights to the amount of such principal and interest. (f) Copies of any amendments made to the documents executed in connection with the issuance of the Bonds which are consented to by the Bond Insurer shall be sent to S&P. (g) The Bond Insurer shall receive notice of the resignation or removal of the Trustee and the appointment of a successor thereto. (h) The Bond Insurer shall receive copies of all notices required to be delivered to Bondowners and, on an annual basis, the Company shall provide to the Bond Insurer copies of the Company's audited financial statements and annual budget. (i) Any notice that is required to be given to an owner of the Bonds or to the Trustee or by any party pursuant to this Agreement shall also be provided to the Bond Insurer. All notices required to be given to the Bond Insurer under this Agreement shall be in writing and shall be sent by registered or certified mail addressed to MBIA Insurance Corporation, 113 King Street, Armonk, NY 10504, Attention: Surveillance. Section 312. The Bond Insurer. Except as provided in Subsection 808(b), anything in this Agreement to the contrary notwithstanding, the Bond Insurer shall be deemed to be the owner of the Bonds for purposes of giving consents (including consent to amendments to this Agreement other than those requiring unanimous consent of the affected Bondowners), notices, directions and waivers to the Company, the Authority and the Trustee under this Agreement. (j) Except as provided in Subsection 808(b), the Bond Insurer, acting alone, shall have the right to direct all remedies pursuant to Section 802(b) in an Event of Default, subject to the terms of this Agreement. ARTICLE IV. SPECIAL PROVISIONS RELATING TO AUCTION RATE SECURITIES Section 401. Definitions. In addition to the words and terms elsewhere defined in this Agreement, the following words and terms as used in this Article IV and elsewhere in this Agreement have the following meanings with respect to Bonds in an Auction Rate Period unless the context or use indicates another or different meaning or intent: "Agent Member" means a member of, or participant in, the Securities Depository who 35 shall act on behalf of a Bidder. "Auction" means each periodic implementation of the Auction Procedures. "Auction Agent" means the auctioneer appointed in accordance with Section 410 or 411 of this Agreement and shall initially be The Bank of New York. "Auction Agreement" means the Series A Auction Agreement dated as of October 1, 2001 between the Auction Agent and the Trustee pursuant to which the Auction Agent agrees to follow the procedures specified in this Article IV, with respect to the Bonds while bearing interest at an Auction Rate, as such agreement may from time to time be amended or supplemented. "Auction Date" means during any period in which the Auction Procedures are not suspended in accordance with the provisions hereof, (i) if the Bonds are in a daily Auction Period, each Business Day, (ii) if the Bonds are in a Special Auction Period, the last Business Day of the Special Auction Period, and (iii) if the Bonds are in any other Auction Period, the Business Day next preceding each Interest Payment Date for such Bonds (whether or not an Auction shall be conducted on such date); provided, however, that the last Auction Date with respect to Bonds in an Auction Period other than a daily Auction Period or Special Auction Period shall be the earlier of (a) the Business Day next preceding the Interest Payment Date next preceding the Conversion Date for such Bonds and (b) the Business Day next preceding the Interest Payment Date next preceding the final maturity date for such Bonds; and provided, further, that if the Bonds are in a daily Auction Period, the last Auction Date shall be the earlier of (x) the Business Day next preceding the Conversion Date for such Bonds and (y) the Business Day next preceding the final maturity date for such Bonds. The last Business Day of a Special Auction Period shall be the Auction Date for the Auction Period which begins on the next succeeding Business Day, if any. On the Business Day preceding the conversion from a daily Auction Period to another Auction Period, there shall be two Auctions, one for the last daily Auction Period and one for the first Auction Period following the conversion. The first Auction Date for the Bonds is January 15, 2002. "Auction Index" shall have the meaning specified in Section 407 of this Agreement. "Auction Multiple" means, as of any Auction Date, the Percentage of Auction Index (in effect on such Auction Date) determined as set forth below, based on the Prevailing Rating of the Bonds in effect at the close of business on the Business Day immediately preceding such Auction Date: 36
Percentage Prevailing Rating of Auction Index - ----------------- ---------------- AAA/Aaa 125% AA/Aa 150 A/A 175 BBB/Baa 200 Below BBB/Baa 225
"Auction Period" means (i) a Special Auction Period, (ii) with respect to Bonds in a daily mode, a period beginning on each Business Day and extending to but not including the next succeeding Business Day, (iii) with respect to Bonds in a seven-day mode, a period of generally seven days beginning on the day of the week designated by the Broker-Dealer (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on the day prior to such designated day of the week) and ending on such day of the week thereafter designated by the Broker-Dealer (unless such day of the week is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day), (iv) with respect to Bonds in a 28-day mode, a period of generally 28 days beginning on the day of the week designated by the Broker-Dealer (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on the day prior to such designated day of the week) and ending on such day of the fourth week thereafter designated by the Broker-Dealer (unless such day of the week is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day), (v) with respect to Bonds in a 35-day mode, a period of generally 35 days beginning on the day of the week designated by the Broker-Dealer (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on the day prior to such designated day of the week) and ending on such day of the fifth week thereafter designated by the Broker-Dealer (unless such day of the week is not followed by a Business Day, in which case on the next succeeding day followed by a Business Day), (vi) with respect to Bonds in a three-month mode, a period of generally three months (or shorter period upon a conversion from another Auction Period) beginning on the day following the last day of the prior Auction Period and ending on the first day of the month that is the third calendar month following the beginning date of such Auction Period, and (vii) with respect to Bonds in a semiannual mode, a period of generally six months (or shorter period upon a conversion from another Auction Period) beginning on 37 the day following the last day of the prior Auction Period and ending on the next succeeding May 1 or November 1; provided, however, that if there is a conversion of Bonds (i) from a daily Auction Period to a seven-day Auction Period, the next Auction Period shall begin on the date of the conversion (i.e. the Interest Payment Date for the prior Auction Period) and shall end on such day of the week of the next succeeding week designated by the Broker-Dealer (unless such day of the week is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day), (ii) from a daily Auction Period to a 28-day Auction Period, the next Auction Period shall begin on the date of the conversion (i.e. the Interest Payment Date for the prior Auction Period) and shall end on such day of the week designated by the Broker-Dealer (unless such day of the week is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day) which is more than 21 days but not more than 28 days from such date of conversion, and (iii) from a daily Auction Period to a 35-day Auction Period, the next Auction Period shall begin on the date of the conversion (i.e. the Interest Payment Date for the prior Auction Period) and shall end on such day of the week designated by the Broker-Dealer (unless such day of the week is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day) which is more than 28 days but no more than 35 days from such date of conversion. "Auction Procedures" means the procedures for conducting Auctions for Bonds during an Auction Rate Period set forth in this Article IV. "Auction Rate" means for each Auction Period, (i) if Sufficient Clearing Bids exist, the Winning Bid Rate, provided, however, if all of such Bonds are the subject of Submitted Hold Orders, the Minimum Auction Rate with respect to the Bonds and (ii) if Sufficient Clearing Bids do not exist, the Maximum Auction Rate with respect to the Bonds. "Auction Rate Conversion Date" means the date on which the Bonds convert from an interest rate period other than an Auction Rate Period and begin to bear interest at an Auction Rate. "Auction Rate Period" means after the Initial Period any period of time commencing on the day following the Initial Period and ending on a Conversion Date to a Variable Rate or the Fixed Rate Conversion Date. "Auction Rate Securities" means any Bonds while they bear interest at the Auction Rate. "Available Bonds" means for Bonds on each Auction Date, the aggregate principal amount of such Bonds that are not the subject of Submitted Hold Orders. "Bid" has the meaning specified in subsection (a) of Section 402 of this Agreement. 38 "Bidder" means each Existing Owner and Potential Owner who places an Order. "Broker-Dealer" means any entity that is permitted by law to perform the function required of a Broker-Dealer described in this Agreement that is a member of, or a direct participant in, the Securities Depository, that has been selected by the Company, with the consent of the Authority and Morgan Stanley & Co. Incorporated, so long as Morgan Stanley & Co. Incorporated is a Broker-Dealer, and that is a party to a Broker-Dealer Agreement with the Auction Agent. "Broker-Dealer Agreement" means an agreement among the Auction Agent, the Company and one or more Broker-Dealers pursuant to which such Broker-Dealers agree to follow the procedures described in this Article IV, as such agreement may from to time be amended or supplemented. "Conversion Date" means the respective date on which the Bonds begin to bear interest at a Fixed Rate or in a Variable Rate Mode. "Date of Original Delivery" means December 19, 2001, or such other date or dates on which the respective Bonds are first issued and delivered. "Default Rate" means, in respect of any Auction Period other than a daily Auction Period, a per annum rate equal to two hundred fifty percent (250%) of the Auction Index determined on the Auction Date next preceding the first day of such Auction Period or in the case of Bonds in a daily Auction Period, two hundred fifty percent (250%) of the Auction Index determined on the Auction Date which was the first day of such Auction Period, provided, however, the Default Rate shall not exceed the lesser of (x) 14% per annum or (y) the maximum rate permitted by applicable law, anything herein to the contrary notwithstanding. "Existing Owner" means a Person who is listed as the beneficial owner of Bonds in the records of the Auction Agent. "Fixed Rate" means the fixed rate or rates of interest to be borne by the Bonds converted to Fixed Rate Indebtedness on or after a Fixed Rate Conversion Date. "Fixed Rate Conversion Date" means a date on which all of the Bonds are converted to Fixed Rate Indebtedness as provided in Section 412 hereof. The Fixed Rate Conversion Date shall be (i) the second regularly scheduled Interest Payment Date following the final Auction Date with respect to Bonds bearing interest at an Auction Rate in an Auction Rate Period other than a daily Auction Period, provided that with respect to Bonds in a Special Auction Period, the Fixed Rate Conversion Date shall be the Interest Payment Date immediately following the last day of the final Auction Period, or (ii) the next regularly scheduled Interest Payment Date with respect to Bonds bearing interest at an Auction Rate in a daily Auction Period. "Fixed Rate Indebtedness" means, as of any date of determination, any Bonds bearing 39 interest at a fixed rate for the remainder of their term. "Fixed Rate Mode" means the Mode in which the Bonds bear interest at a Fixed Rate. "Fixed Rate Period" means a period, commencing on a Fixed Rate Conversion Date for the Bonds and ending on the final maturity date therefor, during which such Bonds shall be Fixed Rate Indebtedness. "Hold Order" has the meaning specified in subsection (a) of Section 402 of this Agreement. "Initial Period" means the period from the date of initial delivery of the Bonds through and including January 15, 2002. "Interest Payment Date" with respect to Bonds bearing interest at Auction Rates, means January 16, 2002, and thereafter (a) when used with respect to any Auction Period other than a daily Auction Period or a Special Auction Period, the Business Day immediately following such Auction Period, (b) when used with respect to a daily Auction Period, the first Business Day of the month immediately succeeding such Auction Period, (c) when used with respect to a Special Auction Period of (i) seven or more but fewer than 92 days, the Business Day immediately following such Special Auction Period, or (ii) 92 or more days, the day of the week of each thirteenth week designated by the Broker-Dealer, after the first day of such Special Auction Period, or the next Business Day if such day of the week designated by the Broker-Dealer is not a Business Day and on the Business Day immediately following such Special Auction Period, (d) after the Fixed Rate Conversion Date, each May 1 and November 1, (e) each mandatory tender date, and (f) the maturity date. "Maximum Auction Rate" means as of any Auction Date, a per annum rate of interest equal to the product of the Auction Index multiplied by the Auction Multiple; provided, however, that in no event shall the Maximum Auction Rate exceed the lesser of (x) 14% per annum or (y) the maximum rate permitted by applicable law, anything herein to the contrary notwithstanding. "Minimum Auction Rate" means, as of any Auction Date, a per annum rate of interest equal to 45% of the Auction Index in effect on such Auction Date. "Mode" means the Daily Mode, Weekly Mode, Flexible Mode, Term Rate Mode (all as defined in Section 501), Fixed Rate Mode or Auction Rate Mode. "Order" means a Hold Order, Bid or Sell Order. "Potential Owner" means any Person, including any Existing Owner, who may be interested in acquiring a beneficial interest in the Bonds in addition to the Bonds currently owned by such Person, if any. "Prevailing Rating" means (a) AAA/Aaa, if the Bonds shall have a rating of AAA or 40 better by S&P and a rating of Aaa or better by Moody's, (b) if not AAA/Aaa, AA/Aa if the Bonds shall have a rating of AA- or better by S&P and a rating of Aa3 or better by Moody's, (c) if not AAA/Aaa or AA/Aa, A/A if the Bonds shall have a rating of A- or better by S&P and a rating of A3 or better by Moody's, (d) if not AAA/Aaa, AA/Aa or A/A, BBB/Baa if the Bonds shall have a rating of BBB- or better by S&P and a rating of Baa3 or better by Moody's and (e) if not AAA/Aaa, AA/Aa, A/A or BBB/Baa, then below BBB/Baa, whether or not the Bonds are rated by any securities rating agency. For purposes of this definition, S&P's rating categories of "AAA", "AA-", "A-" and "BBB-" and Moody's rating categories of "Aaa", "Aa3", "A3" and "Baa3" shall be deemed to refer to and include the respective rating categories correlative thereto in the event that any such Rating Agencies shall have changed or modified their generic rating categories or if any successor thereto appointed in accordance with the definitions thereof shall use different rating categories. If the Bonds are not rated by a Rating Agency, the requirement of a rating by such Rating Agency shall be disregarded. If the ratings for the Bonds are split between two of the foregoing categories, the lower rating shall determine the Prevailing Rating. If there is no rating, then the Auction Rate shall be the Maximum Auction Rate. "Principal Office" means, with respect to the Auction Agent, the office thereof designated in writing to the Company, the Authority, the Trustee and the Broker-Dealer. "Purchase Date" means the Conversion Date. "Record Date" means during an Auction Rate Period other than a daily Auction Period, the second Business Day preceding an Interest Payment Date therefor, and during a daily Auction Period, the last Business Day of the month preceding an Interest Payment Date. "Remarketing Agent" has the meaning specified in Section 501. "Sell Order" has the meaning specified in subsection (a) of Section 402 of this Agreement. "Special Auction Period" means any period of not less than seven nor more than 1,092 days which begins on an Interest Payment Date and ends on the day of the week designated by the Broker-Dealer, unless such day of the week designated by the Broker-Dealer is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day. "Submission Deadline" means 1:00 p.m., New York City time, on each Auction Date not in a daily Auction Period and 11:00 a.m., New York City time, on each Auction Date for a series of Bonds in a daily Auction Period, or such other time on such date as shall be specified from time to time by the Auction Agent pursuant to the Auction Agreement as the time by which Broker-Dealers are required to submit Orders to the Auction Agent. "Submitted Bid" has the meaning specified in subsection (b) of Section 404 of this Agreement. 41 "Submitted Hold Order" has the meaning specified in subsection (b) of Section 404 of this Agreement. "Submitted Order" has the meaning specified in subsection (b) of Section 404 of this Agreement. "Submitted Sell Order" has the meaning specified in subsection (b) of Section 404 of this Agreement. "Sufficient Clearing Bids" means an Auction for which the aggregate principal amount of Bonds that are the subject of Submitted Bids by Potential Owners specifying one or more rates not higher than the Maximum Auction Rate is not less than the aggregate principal amount of Bonds that are the subject of Submitted Sell Orders and of Submitted Bids by Existing Owners specifying rates higher than the Maximum Auction Rate. "Winning Bid Rate" means the lowest rate specified in any Submitted Bid which if selected by the Auction Agent as the Auction Rate would cause the aggregate principal amount of Bonds that are the subject of Submitted Bids specifying a rate not greater than such rate to be not less than the aggregate principal amount of Available Bonds. Section 402. Orders by Existing Owners and Potential Owners. (a) Prior to the Submission Deadline on each Auction Date: (i) each Existing Owner may submit to a Broker-Dealer, in writing or by such other method as shall be reasonably acceptable to such Broker-Dealer, information as to: (A) the principal amount of Bonds, if any, held by such Existing Owner which such Existing Owner irrevocably commits to continue to hold for the next succeeding Auction Period without regard to the rate determined by the Auction Procedures for such Auction Period, (B) the principal amount of Bonds, if any, held by such Existing Owner which such Existing Owner irrevocably commits to continue to hold for the next succeeding Auction Period if the rate determined by the Auction Procedures for such Auction Period shall not be less than the rate per annum then specified by such Existing Owner (and which such Existing Owner irrevocably offers to sell on the next succeeding Interest Payment Date (or the same day in the case of a daily Auction Period) if the rate determined by the Auction Procedures for the next succeeding Auction Period shall be less than the rate per annum then specified by such Existing Owner), and/or (C) the principal amount of Bonds, if any, held by such Existing Owner which such Existing Owner irrevocably offers to sell on the next succeeding Interest Payment 42 Date (or on the same day in the case of a daily Auction Period) without regard to the rate determined by the Auction Procedures for the next succeeding Auction Period; and (ii) for the purpose of implementing the Auctions and thereby to achieve the lowest possible interest rate on the Bonds, the Broker-Dealers shall contact Potential Owners, including Persons that are Existing Owners, to determine the principal amount of Bonds, if any, which each such Potential Owner irrevocably offers to purchase if the rate determined by the Auction Procedures for the next succeeding Auction Period is not less than the rate per annum then specified by such Potential Owner. For the purposes hereof, an Order containing the information referred to in clause (i)(A) above is herein referred to as a "Hold Order", an Order containing the information referred to in clause (i)(B) or (ii) above is herein referred to as a "Bid", and an Order containing the information referred to in clause (i)(C) above is herein referred to as a "Sell Order." (b)(i) A Bid by an Existing Owner shall constitute an irrevocable offer to sell: (A) the principal amount of Bonds specified in such Bid if the rate determined by the Auction Procedures on such Auction Date shall be less than the rate specified therein; or (B) such principal amount or a lesser principal amount of Bonds to be determined as described in subsection (a)(v) of Section 405 hereof if the rate determined by the Auction Procedures on such Auction Date shall be equal to such specified rate; or (C) a lesser principal amount of Bonds to be determined as described in subsection (b)(iv) of Section 405 hereof if such specified rate shall be higher than the Maximum Auction Rate and Sufficient Clearing Bids do not exist. (ii) A Sell Order by an Existing Owner shall constitute an irrevocable offer to sell: (A) the principal amount of Bonds specified in such Sell Order; or (B) such principal amount or a lesser principal amount of Bonds as described in subsection (b)(iv) of Section 405 hereof if Sufficient Clearing Bids do not exist. (iii) A Bid by a Potential Owner shall constitute an irrevocable offer to purchase: (A) the principal amount of Bonds specified in such Bid if the rate determined by the Auction Procedures on such Auction Date shall be higher than the rate specified therein; or (B) such principal amount or a lesser principal amount of Bonds as described in subsection (a)(vi) of Section 405 hereof if the rate determined by the Auction Procedures on such Auction Date shall be equal to such specified rate. 43 (c) Anything herein to the contrary notwithstanding: (i) for purposes of any Auction, any Order which specifies Bonds to be held, purchased or sold in a principal amount which is not $25,000 or an integral multiple thereof shall be rounded down to the nearest $25,000, and the Auction Agent shall conduct the Auction Procedures as if such Order had been submitted in such lower amount; (ii) for purposes of any Auction other than during a daily Auction Period, any portion of an Order of an Existing Owner which relates to a Bond which has been called for redemption on or prior to the Interest Payment Date next succeeding such Auction shall be invalid with respect to such portion and the Auction Agent shall conduct the Auction Procedures as if such portion of such Order had not been submitted; (iii) for purposes of any Auction other than during a daily Auction Period, no portion of a Bond which has been called for redemption on or prior to the Interest Payment Date next succeeding such Auction shall be included in the calculation of Available Bonds for such Auction; and (iv) the Auction Procedures shall be suspended during the period commencing on the date of the Auction Agent's receipt of notice from the Trustee or the Authority of the occurrence of an Event of Default resulting from a failure to pay principal, premium or interest on any Bond when due (provided however that for purposes of this provision only payment by the Bond Insurer shall be deemed to cure such Event of Default and no such suspension of the Auction Procedures shall occur) but shall resume two Business Days after the date on which the Auction Agent receives notice from the Trustee that such Event of Default has been waived or cured, with the next Auction to occur on the next regularly scheduled Auction Date occurring thereafter. Section 403. Submission of Orders by Broker-Dealers to Auction Agent. (a) The Broker-Dealer shall submit to the Auction Agent in writing or by such other method as shall be reasonably acceptable to the Auction Agent, including such electronic communication acceptable to the parties, prior to the Submission Deadline on each Auction Date, all Orders obtained by such Broker-Dealer and, if requested, specifying with respect to each Order: (i) the name of the Bidder placing such Order; (ii) the aggregate principal amount of Bonds, if any, that are the subject of such Order; (iii) to the extent that such Bidder is an Existing Owner: (A) the principal amount of Bonds, if any, subject to any Hold Order placed by such Existing Owner; 44 (B) the principal amount of Bonds, if any, subject to any Bid placed by such Existing Owner and the rate specified in such Bid; and (C) the principal amount of Bonds, if any, subject to any Sell Order placed by such Existing Owner; (iv) to the extent such Bidder is a Potential Owner, the rate specified in such Bid. (b) If any rate specified in any Bid contains more than three figures to the right of the decimal point, the Auction Agent shall round such rate up to the next highest one thousandth of one percent (0.001%). (c) If an Order or Orders covering all of the Bonds held by an Existing Owner is not submitted to the Auction Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold Order to have been submitted on behalf of such Existing Owner covering the principal amount of Bonds of such series held by such Existing Owner and not subject to Orders submitted to the Auction Agent; provided, however, that if there is a conversion from one Auction Period to another Auction Period and Orders have not been submitted to the Auction Agent prior to the Submission Deadline covering the aggregate principal amount of Bonds to be converted held by such Existing Owner, the Auction Agent shall deem a Sell Order to have been submitted on behalf of such Existing Owner covering the principal amount of Bonds to be converted held by such Existing Owner not subject to Orders submitted to the Auction Agent. (d) If one or more Orders covering in the aggregate more than the principal amount of Outstanding Bonds held by any Existing Owner are submitted to the Auction Agent, such Orders shall be considered valid as follows: (i) all Hold Orders shall be considered Hold Orders, but only up to and including in the aggregate the principal amount of Bonds held by such Existing Owner; (ii) (A) any Bid of an Existing Owner shall be considered valid as a Bid of an Existing Owner up to and including the excess of the principal amount of Bonds held by such Existing Owner over the principal amount of the Bonds subject to Hold Orders referred to in paragraph (i) above; (B) subject to clause (A) above, all Bids of an Existing Owner with the same rate shall be aggregated and considered a single Bid of an Existing Owner up to and including the excess of the principal amount of Bonds held by such Existing Owner over the principal amount of Bonds held by such Existing Owner subject to Hold Orders referred to in paragraph (i) above; (C) subject to clause (A) above, if more than one Bid with different rates is submitted on behalf of such Existing Owner, such Bids shall be considered Bids of an Existing Owner in the ascending order of their respective rates up to the amount of the excess of the principal amount of Bonds held by such Existing Owner over the principal amount of Bonds held by such 45 Existing Owner subject to Hold Orders referred to in paragraph (i) above; and (D) the principal amount, if any, of such Bonds subject to Bids not considered to be Bids of an Existing Owner under this paragraph (ii) shall be treated as the subject of a Bid by a Potential Owner; (iii) all Sell Orders shall be considered Sell Orders, but only up to and including a principal amount of Bonds equal to the excess of the principal amount of Bonds held by such Existing Owner over the sum of the principal amount of the Bonds considered to be subject to Hold Orders pursuant to paragraph (i) above and the principal amount of Bonds considered to be subject to Bids of such Existing Owner pursuant to paragraph (ii) above. (e) If more than one Bid is submitted on behalf of any Potential Owner, each Bid submitted with the same rate shall be aggregated and considered a single Bid and each Bid submitted with a different rate shall be considered a separate Bid with the rate and the principal amount of Bonds specified therein. (f) Any Bid submitted for Bonds by an Existing Owner or a Potential Owner specifying a rate lower than the Minimum Auction Rate shall be treated as a Bid specifying the Minimum Auction Rate. (g) Neither the Authority, the Company, the Trustee nor the Auction Agent shall be responsible for the failure of any Broker-Dealer to submit an Order to the Auction Agent on behalf of any Existing Owner or Potential Owner. Section 404. Determination of Auction Rate (a) Not later than 9:30 a.m., New York City time, on each Auction Date, the Auction Agent shall advise the Broker-Dealers and the Trustee by telephone or other electronic communication acceptable to the parties of the Minimum Auction Rate, the Maximum Auction Rate and the Auction Index for such Bonds. (b) Promptly after the Submission Deadline on each Auction Date, the Auction Agent shall assemble all Orders submitted or deemed submitted to it by the Broker-Dealers (each such Order as submitted or deemed submitted by a Broker-Dealer being hereinafter referred to as a "Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, and collectively as a "Submitted Order") and shall determine (i) the Available Bonds, (ii) whether there are Sufficient Clearing Bids, and (iii) the Auction Rate. (c) Promptly after the Auction Agent has made the determinations pursuant to subsection (b) above, the Auction Agent shall advise the Trustee by telephone (promptly confirmed in writing), telex or facsimile transmission or other electronic communication acceptable to the parties of the Auction Rate for the next succeeding Auction Period and the Trustee shall promptly notify DTC of such Auction Rate. 46 (d) In the event the Auction Agent fails to calculate, or for any reason fails to timely provide, the Auction Rate for any Auction Period, the Auction Rate for such Auction Period, with respect to the applicable series of Bonds, shall be the Maximum Auction Rate; provided, however, that if the Auction Procedures are suspended due to the failure of principal of, premium or interest on any Bond to be paid, the Auction Rate for the next succeeding Auction Period shall be the Default Rate. (e) In the event of a failed conversion of any series of Bonds to a Variable Rate Period or a Fixed Rate Period or in the event of a failure to change the length of the current Auction Period due to the lack of Sufficient Clearing Bids at the Auction on the Auction Date for the first new Auction Period, the Auction Rate for the next Auction Period shall be the Maximum Auction Rate and the Auction Period shall be a seven-day Auction Period. (f) If the Bonds are not rated by either Moody's or S&P, then the Auction Rate shall be the Maximum Auction Rate. Section 405. Allocation of Bonds. (a) In the event of Sufficient Clearing Bids, subject to the further provisions of subsections (c) and (d) below, Submitted Orders shall be accepted or rejected as follows in the following order of priority: (i) the Submitted Hold Order of each Existing Owner shall be accepted, thus requiring each such Existing Owner to continue to hold the Bonds that are the subject of such Submitted Hold Order; (ii) the Submitted Sell Order of each Existing Owner shall be accepted and the Submitted Bid of each Existing Owner specifying any rate that is higher than the Winning Bid Rate shall be rejected, thus requiring each such Existing Owner to sell the Bonds that are the subject of such Submitted Sell Order or Submitted Bid; (iii) the Submitted Bid of each Existing Owner specifying any rate that is lower than the Winning Bid Rate shall be accepted, thus requiring each such Existing Owner to continue to hold the Bonds that are the subject of such Submitted Bid; (iv) the Submitted Bid of each Potential Owner specifying any rate that is lower than the Winning Bid Rate shall be accepted, thus requiring each such Potential Owner to purchase the Bonds that are the subject of such Submitted Bid; (v) the Submitted Bid of each Existing Owner specifying a rate that is equal to the Winning Bid Rate shall be accepted, thus requiring each such Existing Owner to continue to hold the Bonds that are the subject of such Submitted Bid, but only up to and including the principal amount of Bonds obtained by multiplying (A) the aggregate principal amount of Outstanding Bonds which are not the subject of Submitted Hold Orders described in paragraph (i) above or of Submitted Bids described in paragraphs (iii) or (iv) above by (B) a fraction the numerator of 47 which shall be the principal amount of Outstanding Bonds held by such Existing Owner subject to such Submitted Bid and the denominator of which shall be the aggregate principal amount of Outstanding Bonds subject to such Submitted Bids made by all such Existing Owners that specified a rate equal to the Winning Bid Rate, and the remainder, if any, of such Submitted Bid shall be rejected, thus requiring each such Existing Owner to sell any excess amount of Bonds; (vi) the Submitted Bid of each Potential Owner specifying a rate that is equal to the Winning Bid Rate shall be accepted, thus requiring each such Potential Owner to purchase the Bonds that are the subject of such Submitted Bid, but only in an amount equal to the principal amount of Bonds obtained by multiplying (A) the aggregate principal amount of Outstanding Bonds which are not the subject of Submitted Hold Orders described in paragraph (i) above or of Submitted Bids described in paragraphs (iii), (iv) or (v) above by (B) a fraction the numerator of which shall be the principal amount of Outstanding Bonds subject to such Submitted Bid and the denominator of which shall be the sum of the aggregate principal amount of Outstanding Bonds subject to such Submitted Bids made by all such Potential Owners that specified a rate equal to the Winning Bid Rate, and the remainder of such Submitted Bid shall be rejected; and (vii) the Submitted Bid of each Potential Owner specifying any rate that is higher than the Winning Bid Rate shall be rejected. (b) In the event there are not Sufficient Clearing Bids, subject to the further provisions of subsections (c) and (d) below, Submitted Orders shall be accepted or rejected as follows in the following order of priority: (i) the Submitted Hold Order of each Existing Owner shall be accepted, thus requiring each such Existing Owner to continue to hold the Bonds that are the subject of such Submitted Hold Order; (ii) the Submitted Bid of each Existing Owner specifying any rate that is not higher than the Maximum Auction Rate with respect to the Bonds, shall be accepted, thus requiring each such Existing Owner to continue to hold the Bonds that are the subject of such Submitted Bid; (iii) the Submitted Bid of each Potential Owner specifying any rate that is not higher than the Maximum Auction Rate with respect to the Bonds, shall be accepted, thus requiring each such Potential Owner to purchase the Bonds that are the subject of such Submitted Bid; (iv) the Submitted Sell Orders of each Existing Owner shall be accepted as Submitted Sell Orders and the Submitted Bids of each Existing Owner specifying any rate that is higher than the Maximum Auction Rate with respect to the Bonds, shall be deemed to be and shall be accepted as Submitted Sell Orders, in both cases only up to and including the principal amount of Bonds obtained by multiplying (A) the aggregate principal amount of Bonds subject to Submitted Bids described in paragraph (iii) of this subsection (b) by (B) a fraction the numerator of which shall be the principal amount of Outstanding Bonds held by such Existing Owner subject to such Submitted Sell Order or such Submitted Bid deemed to be a Submitted Sell Order and the 48 denominator of which shall be the principal amount of Outstanding Bonds subject to all such Submitted Sell Orders and such Submitted Bids deemed to be Submitted Sell Orders, and the remainder of each such Submitted Sell Order or Submitted Bid shall be deemed to be and shall be accepted as a Hold Order and each such Existing Owner shall be required to continue to hold such excess amount of Bonds; and (v) the Submitted Bid of each Potential Owner specifying any rate that is higher than the Maximum Auction Rate with respect to the Bonds shall be rejected. (c) If, as a result of the procedures described in subsection (a) or (b) above, any Existing Owner or Potential Owner would be required to purchase or sell an aggregate principal amount of Bonds which is not an integral multiple of $25,000 on any Auction Date, the Auction Agent shall by lot, in such manner as it shall determine in its sole discretion, round up or down the principal amount of Bonds to be purchased or sold by any Existing Owner or Potential Owner on such Auction Date so that the aggregate principal amount of Bonds purchased or sold by each Existing Owner or Potential Owner on such Auction Date shall be an integral multiple of $25,000, even if such allocation results in one or more of such Existing Owners or Potential Owners not purchasing or selling any Bonds on such Auction Date. (d) If, as a result of the procedures described in subsection (a) above, any Potential Owner would be required to purchase less than $25,000 in principal amount of Bonds on any Auction Date, the Auction Agent shall by lot, in such manner as it shall determine in its sole discretion, allocate Bonds for purchase among Potential Owners so that the principal amount of Auction Rate Securities purchased on such Auction Date by any Potential Owner shall be an integral multiple of $25,000, even if such allocation results in one or more of such Potential Owners not purchasing Bonds on such Auction Date. Section 406. Notice of Auction Rate. (a) On each Auction Date, the Auction Agent shall notify by telephone or other telecommunication device or other electronic communication acceptable to the parties or in writing the Broker-Dealer that participated in the Auction held on such Auction Date of the following with respect to Bonds for which an Auction was held on such Auction Date: (i) the Auction Rate determined on such Auction Date for the succeeding Auction Period; (ii) whether Sufficient Clearing Bids existed for the determination of the Winning Bid Rate; (iii) if such Broker-Dealer submitted a Bid or a Sell Order on behalf of an Existing Owner, whether such Bid or Sell Order was accepted or rejected and the principal amount of 49 Bonds, if any, to be sold by such Existing Owner; (iv) if such Broker-Dealer submitted a Bid on behalf of a Potential Owner, whether such Bid was accepted or rejected and the principal amount of Bonds, if any, to be purchased by such Potential Owner; (v) if the aggregate principal amount of the Bonds to be sold by all Existing Owners on whose behalf such Broker-Dealer submitted Bids or Sell Orders is different from the aggregate principal amount of Bonds to be purchased by all Potential Owners on whose behalf such Broker-Dealer submitted a Bid, the name or names of one or more Broker-Dealers (and the Agent Member, if any, of each such other Broker Dealer) and the principal amount of Bonds to be (A) purchased from one or more Existing Owners on whose behalf such other Broker-Dealers submitted Bids or Sell Orders or (B) sold to one or more Potential Owners on whose behalf such Broker-Dealer submitted Bids; and (vi) the immediately succeeding Auction Date. (b) On each Auction Date, with respect to each series of Bonds for which an Auction was held on such Auction Date, the Broker-Dealer that submitted an Order on behalf of any Existing Owner or Potential Owner shall: (i) advise each Existing Owner and Potential Owner on whose behalf such Broker-Dealer submitted an Order as to (A) the Auction Rate determined on such Auction Date, (B) whether any Bid or Sell Order submitted on behalf of each such Owner was accepted or rejected and (C) the immediately succeeding Auction Date; (ii) instruct each Potential Owner on whose behalf such Broker-Dealer submitted a Bid that was accepted, in whole or in part, to instruct such Existing Owner's Agent Member to pay to such Broker-Dealer (or its Agent Member) through the Securities Depository the amount necessary to purchase the principal amount of Bonds to be purchased pursuant to such Bid (including, with respect to the Bonds in a daily Auction Period, accrued interest if the purchase date is not an Interest Payment Date for such Bond) against receipt of such Bonds; and (iii) instruct each Existing Owner on whose behalf such Broker-Dealer submitted a Sell Order that was accepted or a Bid that was rejected, in whole or in part, to instruct such Existing Owner's Agent Member to deliver to such Broker-Dealer (or its Agent Member) through the Securities Depository the principal amount of Bonds to be sold pursuant to such Bid or Sell Order against payment therefor. Section 407. Auction Index. (a) The Auction Index on any Auction Date with respect to Bonds in any Auction Period of 35 days or less shall be the Seven-Day "AA" Non Financial Composite Commercial Paper Rate on such date. The Auction Index with respect to Bonds in any Auction Period greater than 35 days shall be the rate on United States Treasury Securities having a maturity which most closely approximates the length of the Auction Period, as last published in The Bond Buyer. If either rate is unavailable, the Auction Index shall be an index or rate agreed 50 to by all Broker-Dealers and consented to by the Company. "Seven-Day 'AA' Non Financial Composite Commercial Paper Rate" on any date of determination, means (A) the interest equivalent of the seven-day rate on commercial paper placed on behalf of issuers whose corporate bonds are rated AA by S&P, or the equivalent of such rating by S&P, as made available on a discount basis or otherwise by the Federal Reserve Bank of New York for the Business Day immediately preceding such date of determination, or (B) if the Federal Reserve Bank of New York does not make available any such rate, then the arithmetic average of such rates, as quoted on a discount basis or otherwise, by Morgan Stanley & Co. Incorporated, Lehman Commercial Paper Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated or, in lieu of any thereof, their respective affiliates or successors which are commercial paper dealers (the "Commercial Paper Dealers"), to the Auction Agent before the close of business on the Business Day immediately preceding such date of determination. For purposes of the definition of Seven-Day "AA" Non Financial Composite Commercial Paper Rate, the "interest equivalent" means the equivalent yield on a 360-day basis of a discount-basis security to an interest-bearing security. If any Commercial Paper Dealer does not quote a commercial paper rate required to determine the Seven-Day "AA" Non Financial Composite Commercial Paper Rate, the Seven-Day "AA" Non Financial Composite Commercial Paper Rate shall be determined on the basis of the quotation or quotations furnished by the remaining Commercial Paper Dealer or Commercial Paper Dealers and any substitute commercial paper dealer not included within the definition of Commercial Paper Dealer above, which may be CS First Boston Corporation or Goldman Sachs & Co. or their respective affiliates or successors which are commercial paper dealers (a "Substitute Commercial Paper Dealer") selected by the Trustee (who shall be under no liability for such selection) to provide such commercial paper rate or rates not being supplied by any Commercial Paper Dealer or Commercial Paper Dealers, as the case may be, or if the Trustee does not select any such Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers, by the remaining Commercial Paper Dealer or Commercial Paper Dealers. (b) If for any reason on any Auction Date the Auction Index shall not be determined as hereinabove provided in this Section, the Auction Index shall be the Auction Index for the Auction Period ending on such Auction Date. (c) The determination of the Auction Index as provided herein shall be conclusive and binding upon the Company, the Authority, the Trustee, the Broker-Dealers, the Auction Agent and the Owners of the Bonds. Section 408. Miscellaneous Provisions Regarding Auctions. (a) In this Article IV, each reference to the purchase, sale or holding of "Bonds" shall refer to beneficial interests in Bonds, unless the context clearly requires otherwise. (b) During an Auction Rate Period with respect to any Bonds, the provisions of this Agreement and the definitions contained herein and described in this Article IV, including 51 without limitation the definitions of Maximum Auction Rate, Minimum Auction Rate, Auction Index, Default Rate, Auction Multiple and the Auction Rate, may be amended pursuant to this Agreement, by obtaining the consent of the owners of all Outstanding Bonds bearing interest at an Auction Rate as follows. If on the first Auction Date occurring at least 20 days after the date on which the Trustee mailed notice of such proposed amendment to the registered owners of the Outstanding Bonds as required by this Agreement, (i) the Auction Rate which is determined on such date is the Winning Bid Rate and (ii) there is delivered to the Authority and the Trustee an opinion of Bond Counsel to the effect that such amendment shall not adversely affect the validity of the Bonds or any exemption from federal income tax to which the interest on the Bonds would otherwise be entitled, the proposed amendment shall be deemed to have been consented to by the owners of all affected Outstanding Bonds bearing interest at an Auction Rate. (c) During an Auction Rate Period, so long as the ownership of the Bonds is maintained in book-entry form by the Securities Depository, an Existing Owner or a beneficial owner may sell, transfer or otherwise dispose of a Bond only pursuant to a Bid or Sell Order in accordance with the Auction Procedures or to or through a Broker-Dealer, provided that (i) in the case of all transfers other than pursuant to Auctions such Existing Owner or its Broker-Dealer or its Agent Member advises the Auction Agent of such transfer and (ii) a sale, transfer or other disposition of Bonds from a customer of a Broker-Dealer who is listed on the records of that Broker-Dealer as the holder of such Bonds to that Broker-Dealer or another customer of that Broker-Dealer shall not be deemed to be a sale, transfer or other disposition for purposes of this paragraph if such Broker-Dealer remains the Existing Owner of the Bonds so sold, transferred or disposed of immediately after such sale, transfer or disposition. Section 409. Changes in Auction Period or Auction Date. (a) Changes in Auction Period. (i) During any Auction Rate Period, the Company may with the written consent of the Bond Insurer, from time to time on any Interest Payment Date, change the length of the Auction Period with respect to all of the Bonds among daily, seven-days, 28-days, 35-days, three months, six months and a Special Auction Period in order to accommodate economic and financial factors that may affect or be relevant to the length of the Auction Period and the interest rate borne by such Bonds; provided, however, in the case of a change from a Special Auction Period the date of such change shall be the Interest Payment Date immediately following the last day of the final Auction Period. The Company shall initiate the change in the length of the Auction Period by giving written notice to the Trustee, the Bond Insurer, the Auction Agent, the Broker-Dealers and the Securities Depository that the Auction Period shall change if the conditions described herein are satisfied and the proposed effective date of the change, at least 10 Business Days prior to the Auction Date for such Auction Period. In the event that the Company is in default under any of its obligations relating to the Bonds (including without limitation any default under this Agreement or the Bond Insurance Agreement), the Bond Insurer will succeed to any rights of the Company to direct a conversion of the interest rate on the Bonds. For purposes of the preceding sentence, the Trustee shall not be charged with notice or knowledge of any such default other than a default under Section 801(a)(i) unless and except to the extent it has actual knowledge thereof or has received written notice thereof from the Bond Insurer. Notwithstanding the above, the Auction Period for the Bonds will 52 change from 28-days to 35-days after the first such Auction Period, without the need for written consent or notice. (ii) Any such changed Auction Period shall be for a period of one day, seven-days, 28-days, 35-days, three months, six months or a Special Auction Period and shall be for all of the Bonds in an Auction Rate Period. (iii) The change in the length of the Auction Period shall not be allowed unless Sufficient Clearing Bids existed at both the Auction before the date on which the notice of the proposed change was given as provided in this subsection (a) and the Auction immediately preceding the proposed change. (iv) The change in length of the Auction Period shall take effect only if Sufficient Clearing Bids exist at the Auction on the Auction Date for such first Auction Period. For purposes of the Auction for such first Auction Period only, each Existing Owner shall be deemed to have submitted Sell Orders with respect to all of its Bonds except to the extent such Existing Owner submits an Order with respect to such Bonds. If the condition referred to above is not met, the Auction Rate for the next Auction Period shall be the Maximum Auction Rate and the Auction Period shall be a seven-day Auction Period. (b) Changes in Auction Date. During any Auction Rate Period, the Auction Agent, with the written consent of the Company, may specify an earlier Auction Date for the Bonds (but in no event more than five Business Days earlier) than the Auction Date that would otherwise be determined in accordance with the definition of "Auction Date" in order to conform with then current market practice with respect to similar securities or to accommodate economic and financial factors that may affect or be relevant to the day of the week constituting an Auction Date and the interest rate borne on the Bonds. The Auction Agent shall provide notice of its determination to specify an earlier Auction Date for an Auction Period by means of a written notice delivered at least 45 days prior to the proposed changed Auction Date to the Trustee, the Company, the Broker-Dealers and the Securities Depository. Section 410. Auction Agent. (a) The Auction Agent shall be appointed by the Trustee upon, and as designated in, the written direction of the Company to perform the functions specified herein. The Auction Agent shall designate its Principal Office and signify its acceptance of the duties and obligations imposed upon it hereunder by a written instrument, delivered to the Company, the Authority, the Trustee and the Broker-Dealer which shall set forth such procedural and other matters relating to the implementation of the Auction Procedures as shall be satisfactory to the Company and the Trustee. (b) Subject to any applicable governmental restrictions, the Auction Agent may be or become the owner of or trade in Bonds with the same rights as if such entity were not the 53 Auction Agent. Section 411. Qualifications of Auction Agent; Resignation; Removal. The Auction Agent shall be (a) a bank or trust company organized under the laws of the United States of America or any state or territory thereof having a combined capital stock, surplus and undivided profits of at least $30,000,000, or (b) a member of NASD having a capitalization of at least $30,000,000 and, in either case, authorized by law to perform all the duties imposed upon it by this Agreement and a member of or a participant in, the Securities Depository. The Auction Agent may at any time resign and be discharged of the duties and obligations created by this Agreement by giving at least ninety (90) days notice to the Company, the Authority, the Bond Insurer and the Trustee. The Auction Agent may be removed at any time by the Company by written notice, delivered to the Auction Agent, the Authority, the Bond Insurer and the Trustee. Upon any such resignation or removal, the Trustee shall appoint a successor Auction Agent, with the approval of the Bond Insurer, upon, and as designated in, the written direction of the Company meeting the requirements of this Section. In the event of the resignation or removal of the Auction Agent, the Auction Agent shall pay over, assign and deliver any moneys and Bonds held by it in such capacity to its successor. The Auction Agent shall continue to perform its duties hereunder until its successor has been appointed by the Trustee. The Company shall be solely responsible for payment of compensation to the Auction Agent for its services. In the event that the Auction Agent has not been compensated for its services, the Auction Agent may resign by giving thirty (30) days notice to the Company, the Authority and the Trustee even if a successor Auction Agent has not been appointed. Section 412. Conversion. (a) Notice. At the option of the Company, with the prior written consent of the Bond Insurer, all (but not less than all) of the Bonds outstanding may be converted to the Daily Mode, Weekly Mode, Flexible Mode, Term Rate Mode or Fixed Rate Mode on a Conversion Date selected by the Company; provided that the Company's right to convert Bonds to another Mode shall terminate on the date of defeasance of such Bonds pursuant to Section 204; and provided further that no conversion shall be effective if the Bonds to be converted are not fully remarketed on the applicable mandatory tender date. Upon timely written notice from the Company, the Trustee shall give notice of any proposed conversion not fewer than 15 days (or, if the Bonds are then in a six-month Auction Period or a Special Auction Period of more than 180 days, 30 days) before the proposed Conversion Date to the registered owner, the Paying Agent, the Auction Agent and the Broker-Dealer. Such notice will state: (1) the title, outstanding principal amount and CUSIP number(s) of the Bonds to be converted to the Daily Mode, Weekly Mode, Flexible Mode, Term Rate Mode or Fixed Rate Mode; (2) the proposed Conversion Date; (3) that all of the Bonds to be converted will be subject to mandatory tender for purchase on the Conversion Date, at a price equal to par plus accrued interest to the 54 Conversion Date; (4) the consequences of a failed conversion (which shall be as provided in subsection (c) below); (5) the time and address at which the Bonds are to be tendered for purchase; (6) that the conversion of the Bonds to the Daily Mode, Weekly Mode, Flexible Mode, Term Rate Mode or Fixed Rate Mode will not become effective unless the Trustee and the Authority shall have received, no later than one day before the proposed Conversion Date, an opinion of Bond Counsel to the effect that the conversion to the applicable Mode will not adversely affect the exclusion of interest on the Bonds from the gross income of the registered owner or the beneficial owners of the Bonds for federal income tax purposes and, on the proposed Conversion Date, a confirmation of such opinion; and (7) that after the Conversion Date, the registered owner and any beneficial owners shall have no further rights with respect to the Bonds so converted except to receive the purchase price therefor on the Conversion Date, with no interest accruing thereon. Such notice to the owners shall be made by first class mail or, at the Company's option, certified mail, return receipt requested. Any notice mailed as provided in this Section 412 to the registered owner at its address listed in the registration books of the Paying Agent shall be conclusively presumed to have been duly given, whether or not the registered owner received the notice, and the failure of the registered owner to receive any such notice shall not affect the validity of the action described in such notice. For so long as the Bonds are registered in the name of Cede & Co., as nominee for DTC, notices of mandatory tender for purchase of Bonds shall be given to DTC only, and none of the Authority, the Company, the Trustee, or the Paying Agent or any other Person shall have any responsibility for the delivery of any of such notices by DTC to any participants of DTC or by any direct or indirect participants of DTC to beneficial owners of the Bonds. (b) Terms of Bonds in Daily, Weekly, Flexible, Term Rate and Fixed Rate Modes. The Remarketing Agent shall determine the Daily, Weekly, Flexible, Term or Fixed Rate on a Business Day at least one Business Day prior to the proposed Conversion Date to the Daily, Weekly, Flexible, Term Rate or Fixed Rate Mode, as applicable. The Daily, Weekly, Flexible, Term Rate or Fixed Rate shall be determined by the Remarketing Agent as described in Article V. The Bonds so converted shall be subject to optional and mandatory redemption at the times and in the amounts described in Article V. (c) Failure to Convert. If any of the conditions to conversion of the Bonds from the Auction Mode to another Mode are not met, such conversion shall not take effect and the next Auction Period shall be a seven-day Auction Period and the Auction Rate of such Auction Period shall be the Maximum Auction Rate. In no event shall the failure of any Bond to be converted to 55 another Mode be deemed to be a default or an Event of Default hereunder. Section 413. Credit Ratings. The Company shall take all reasonable action necessary to enable at least two nationally recognized statistical rating organizations (as that term is used in the rules and regulations of the Securities and Exchange Commission under the Securities Exchange Act) to provide credit ratings for the Bonds. Section 414. Mandatory Tender. (a) Agreement to Tender. Each registered owner, by its acceptance of the Bonds, agrees to tender its Bonds to the Paying Agent for purchase on a Conversion Date properly endorsed for transfer in blank, at the time and address specified in such notice. (b) Purchase of Tendered Bonds. Delivery to the Paying Agent of Bonds to be tendered for purchase, together with wire payment instructions satisfactory to the Paying Agent, is required to be made on the Purchase Date in accordance with the procedures described in Sections 518 and 519. If the Bonds are delivered after the time described in Sections 518 or 519, as applicable, payment will be made on the next Business Day without any additional accrued interest. Bonds which are required to be tendered for purchase shall cease bearing interest from and after the date tender is required regardless of whether such Bonds are presented for payment and Owners shall have no further rights with respect to such Bonds other than the right to receive payment of the purchase price upon surrender of the Bonds. For so long as the Bonds are registered in the name of Cede & Co., as nominee for DTC, delivery of Bonds required to be tendered for purchase shall be effected by the transfer by a direct participant of DTC on the Purchase Date of a book entry credit to the account of the Paying Agent of a beneficial interest in such Bonds. For so long as the Bonds are registered in the name of Cede & Co., as nominee for DTC, payment of the purchase price shall be paid directly to DTC in accordance with the Representation Letter. In receiving Bonds hereunder, the Paying Agent shall be acting as a conduit and shall not be purchasing such Bonds for its own account. The performance of the Paying Agent's duties is subject to certain terms and standards set forth in this Agreement. 56 ARTICLE V. SPECIAL PROVISIONS RELATING TO VARIABLE RATE AND FIXED RATE MODES Section 501. Definitions. In addition to the words and terms elsewhere defined in this Agreement, the following words and terms as used in this Article V and elsewhere in this Agreement have the following meanings with respect to Bonds in a Variable Rate Mode or Fixed Rate Mode unless the context or use indicates another or different meaning or intent: "Alternate Credit Enhancement" or "Alternate Liquidity Facility" shall mean a letter of credit, insurance policy, line of credit, surety bond, standby purchase agreement or other security or liquidity instrument, as the case may be, issued in accordance with the terms hereof as a replacement or substitute for any Credit Enhancement or Liquidity Facility, as applicable, then in effect. "Alternate Rate" shall mean, on any Rate Determination Date, for any Mode, a rate per annum equal to (a) the BMA Municipal Swap Index of Municipal Market Data, formerly the PSA Municipal Swap Index (as such term is defined in the 1992 ISDA U.S. Municipal Counterparty Definitions) (the "BMA Rate") most recently available as of the date of determination, or (b) if such index is no longer available, or if the BMA Rate is no longer published, the Kenny Index (as such term is defined in the 1992 ISDA U.S. Municipal Counterparty Definitions), or if neither the BMA Rate nor the Kenny Index is published, the index determined to equal the prevailing rate determined by the Remarketing Agent for tax-exempt state and local government bonds meeting criteria determined in good faith by the Remarketing Agent to be comparable under the circumstances to the criteria used by the Bond Market Association to determine the BMA Rate just prior to when the Bond Market Association stopped publishing the BMA Rate. The Tender Agent shall make the determinations required by this determination, upon notification from the Authority, if there is no Remarketing Agent, if the Remarketing Agent fails to make any such determination or if the Remarketing Agent has suspended its remarketing efforts in accordance with the Remarketing Agreement. "Authorized Denominations" shall mean (i) with respect to Bonds in a Daily Mode or Weekly Mode, $100,000 and any integral multiple of $5,000 in excess thereof, (ii) with respect to Bonds in a Flexible Mode, $100,000 and any integral multiple of $1,000 in excess thereof and (iii) with respect to Bonds in a Long-Term Mode, $5,000 and any integral multiple thereof. "Automatic Termination Event" shall mean an event of default set forth in the Reimbursement Agreement between the Company and the Liquidity Provider which would result in the immediate termination of the Liquidity Facility prior to its stated expiration date without at least thirty days' prior notice from the Liquidity Provider to the Tender Agent, other than a 57 termination upon the substitution of an Alternate Liquidity Facility. "Available Amount" shall mean the amount available under the Credit Enhancement or Liquidity Facility, as applicable, to pay the principal of and interest on the Bonds or the Purchase Price of the Bonds, as applicable. "Available Moneys" shall mean (i) moneys held by the Trustee (other than in the Purchase Fund) and continuously subject to a first priority lien under this Agreement for a period of at least 123 days and not commingled with any moneys so held for less than said period and during which period no petition in bankruptcy was filed by or against, and no receivership, insolvency, assignment for the benefit of creditors or other similar proceeding has been commenced by or against, the Company, unless such petition or proceeding was dismissed and all applicable appeal periods have expired without an appeal having been filed, (ii) investment income derived from the investment of moneys described in clause (i) or (iii) any moneys with respect to which an opinion of nationally recognized bankruptcy counsel has been received by the Trustee to the effect that payments by the Trustee in respect of the Bonds, as provided in this Agreement, derived from such moneys would not constitute transfers avoidable under 11 U.S.C. ss.547(b) and recoverable from the Owners under 11 U.S.C. ss.550(a) should the Company be the debtor in a case under Title 11 of the United States Code, as amended. "Beneficial Owner" shall mean, so long as the Bonds are negotiated in the Book-Entry System, any Person who acquires a beneficial ownership interest in a Bond held by the Securities Depository. If at any time the Bonds are not held in the Book-Entry System, Beneficial Owner shall mean Owner for purposes of this Agreement. "Book-Entry System" shall mean the system maintained by the Securities Depository described in Section 301(d) hereof. "Credit Enhancement" shall mean a direct-pay letter of credit, insurance policy, surety bond, line of credit or other instrument then in effect which secures or guarantees the payment of principal of and interest on the Bonds. "Credit Enhancement Failure" or "Liquidity Facility Failure" shall mean a failure of the Credit Provider or Liquidity Provider, as applicable, to pay a properly presented and conforming draw or request for advance under the Credit Enhancement or Liquidity Facility, as applicable, or the filing or commencement of any bankruptcy or insolvency proceedings by or against the Credit Provider or Liquidity Provider, as applicable, or the Credit Provider or Liquidity Provider, as applicable, shall declare a moratorium on the payment of its unsecured debt obligations or shall repudiate the Credit Enhancement or Liquidity Facility, as applicable. "Credit Provider" shall mean any bank, insurance company, pension fund or other financial institution which provides a Credit Enhancement or Alternate Credit Enhancement for the Bonds, including the Bond Insurer. 58 "Current Mode" shall have the meaning specified in Section 509(a)(i) hereof. "Daily Mode" shall mean the Mode during which the Bonds bear interest at the Daily Rate. "Daily Rate" shall mean the per annum interest rate on any Bond in the Daily Mode determined pursuant to Section 506(a) hereof. "Daily Rate Period" shall mean the period during which a Bond in the Daily Mode shall bear a Daily Rate, which shall be from the Business Day upon which a Daily Rate is set to but not including the next succeeding Business Day. "Electronic Means" shall mean telecopy, facsimile transmission, e-mail transmission or other similar electronic means of communication providing evidence of transmission, including a telephonic communication confirmed by any other method set forth in this definition. "Expiration Date" shall mean the stated expiration date of the Credit Enhancement or the Liquidity Facility, as it may be extended from time to time as provided in the Credit Enhancement or the Liquidity Facility, or any earlier date on which the Credit Enhancement or the Liquidity Facility shall terminate, expire or be cancelled. "Favorable Opinion of Bond Counsel" shall mean, with respect to any action the occurrence of which requires such an opinion, an unqualified Opinion of Counsel, which shall be a Bond Counsel, to the effect that such action is permitted under the Act and this Agreement and will not impair the exclusion of interest on the Bonds from gross income for purposes of Federal income taxation or the exemption of interest on the Bonds from personal income taxation under the laws of New Hampshire (subject to the inclusion of any exceptions contained in the opinion delivered upon original issuance of the Bonds). "Fitch" shall mean Fitch, Inc., and its successors and assigns, except that if such Company shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, then the term "Fitch" shall be deemed to refer to any other nationally recognized securities rating agency selected by the Company after consultation with the Remarketing Agent. "Fixed Rate" shall mean the per annum interest rate on any Bond in the Fixed Rate Mode determined pursuant to Sections 507(b) hereof. "Fixed Rate Bond" shall mean a Bond in the Fixed Rate Mode. "Fixed Rate Mode" shall mean the Mode during which the Bonds bear interest at the Fixed Rate. "Fixed Rate Period" shall mean for the Bonds in the Fixed Rate Mode, the period from the Mode Change Date upon which the Bonds were converted to the Fixed Rate Mode to but not 59 including the Maturity Date for the Bonds. "Flexible Rate Bond" shall mean a Bond in the Flexible Mode. "Flexible Mode" shall mean the Mode during which the Bonds bear interest at the Flexible Rate. "Flexible Rate" shall mean the per annum interest rate on a Bond in the Flexible Mode determined for such Bond pursuant to Section 505 hereof. The Bonds in the Flexible Mode may bear interest at different Flexible Rates. "Flexible Rate Period" shall mean the period of from one to 270 calendar days (which period must end on a Business Day) during which a Flexible Rate Bond shall bear interest at a Flexible Rate, as established by the Remarketing Agent pursuant to Section 505 hereof. The Bonds in the Flexible Mode may be in different Flexible Rate Periods. "Interest Accrual Period" shall mean the period during which a Bond accrues interest payable on the next Interest Payment Date applicable thereto. With respect to any Mode, each Interest Accrual Period shall commence on (and include) the last Interest Payment Date to which interest has been paid (or, if no interest has been paid in such Mode, from the date of original authentication and delivery of the Bonds, or the Mode Change Date, as the case may be) to, but not including, the Interest Payment Date on which interest is to be paid. If, at the time of authentication of any Bond, interest is in default or overdue on the Bonds, such Bond shall bear interest from the date to which interest has previously been paid in full or made available for payment in full on Outstanding Bonds. "Interest Amount" shall mean the aggregate amount available under the Credit Enhancement or Liquidity Facility, as applicable, to pay interest accruing on the Bonds or that portion of the Purchase Price constituting interest. "Interest Payment Date" shall mean each date on which interest is to be paid and is: (i) with respect to the Bonds in the Flexible Mode, each Mandatory Purchase Date applicable thereto; (ii) with respect to the Bonds in the Daily Mode or Weekly Mode, the first Business Day of each month; (iii) with respect to the Bonds in a Long-Term Mode, the first day of the sixth calendar month following the month in which such Long-Term Mode takes effect, and the first day of each sixth calendar month thereafter or, upon the receipt by the Trustee of a Favorable Opinion of Bond Counsel, any other six-month interval chosen by the Company (beginning with the first such day which is at least three months after the Mode Change Date) and, with respect to a Term Rate Period, or the final day of the current Interest Period if other than a regular six-month interval; (iv) (without duplication as to any Interest Payment Date listed above) any Mode Change Date, other than a change between a Daily Mode and a Weekly Mode, and each Maturity Date; and (v) with respect to any Liquidity Provider Bonds, the day set forth in the Reimbursement Agreement. "Interest Period" shall mean, for the Bonds in a particular Mode, the period of time that 60 the Bonds bear interest at the rate (per annum) which becomes effective at the beginning of such period, and shall include a Flexible Rate Period, a Daily Rate Period, a Weekly Rate Period, a Term Rate Period and a Fixed Rate Period. "Liquidity Facility" shall mean any letter of credit, line of credit, standby purchase agreement or other instrument then in effect which provides for the purchase of Bonds upon the tender thereof in the event remarketing proceeds are insufficient therefor. "Liquidity Provider" shall mean any bank, insurance company, pension fund or other financial institution which provides a Liquidity Facility or Alternate Liquidity Facility for the Bonds. "Liquidity Provider Bonds" shall mean any Bonds purchased by the Liquidity Provider with funds drawn on or advanced under the Liquidity Facility. "Long-Term Mode" shall mean a Term Rate Mode or a Fixed Rate Mode. "Mandatory Purchase Date" shall mean: (i) with respect to a Flexible Rate Bond the first Business Day following the last day of each Flexible Rate Period with respect to such Bond, (ii) for Bonds in the Term Rate Mode, on the first Business Day following the last day of each Term Rate Period, (iii) any Mode Change Date (except a change in Mode between the Daily Mode and the Weekly Mode), (iv) any Substitution Date, (v) the fifth Business Day prior to the Expiration Date (other than as a result of an Automatic Termination Event), and (vi) the date specified by the Credit Provider or Liquidity Provider in a written notice to the Trustee following the occurrence of an event of default (other than an Automatic Termination Event) under the Reimbursement Agreement, which date shall be a Business Day not less than the number of days specified in the Liquidity Facility after the Trustee's receipt of such notice. "Mode" shall mean, as the context may require, the Flexible Mode, the Daily Mode, the Weekly Mode, the Term Rate Mode, the Auction Rate Mode or the Fixed Rate Mode. "Mode Change Date" shall mean with respect to the Bonds in a particular Mode, the day on which another Mode for the Bonds begins. "Mode Change Notice" shall mean the notice from the Company to the other Notice Parties of the Company's intention to change the Mode with respect to the Bonds. "New Mode" shall have the meaning specified in Section 509(a)(i) hereof. "Notice Parties" shall mean the Authority, the Trustee, the Tender Agent, the Remarketing Agent, the Paying Agent, the Credit Provider, the Liquidity Provider and the Company. "Opinion of Counsel" shall mean a written legal opinion from a firm of attorneys 61 experienced in the matters to be covered in the opinion. "Owner" shall mean the registered owner of a Bond, including the Securities Depository, if any, or its nominee. "Principal Payment Date" shall mean any date upon which the principal amount of Bonds is due hereunder, including the maturity date, any Redemption Date, or the date the maturity of any Bond is accelerated pursuant to the terms hereof or otherwise. "Purchase Date" shall mean (i) for a Bond in the Daily Mode or the Weekly Mode, any Business Day selected by the Beneficial Owner of said Bond pursuant to the provisions of Section 513 hereof, and (ii) any Mandatory Purchase Date. "Purchase Fund" shall mean the fund by that name created in Section 522 hereof. "Purchase Price" shall mean an amount equal to the principal amount of any Bonds purchased on any Purchase Date, plus, in the case of any purchase of Bonds in the Daily Mode or the Weekly Mode and Bonds purchased on a Mandatory Purchase Date that is not an Interest Payment Date, accrued interest, if any. "Rate Determination Date" shall mean any date on which the interest rate on Bonds shall be determined, which, (i) in the case of the Flexible Mode, shall be the first day of an Interest Period; (ii) in the case of the Daily Mode, shall be each Business Day commencing with the first day (which must be a Business Day) the Bonds become subject to the Daily Mode; (iii) in the case of the initial conversion to the Weekly Mode, shall be no later than the Business Day prior to the Mode Change Date, and thereafter, shall be each Wednesday or, if Wednesday is not a Business Day, then the Business Day next preceding such Wednesday; (iv) in the case of the Term Rate Mode, shall be a Business Day no earlier than fifteen (15) Business Days and no later than the Business Day next preceding the first day of an Interest Period, as determined by the Remarketing Agent; and (v) in the case of the Fixed Rate Mode, shall be a date determined by the Remarketing Agent which shall be at least one Business Day prior to the Mode Change Date. "Rating Agencies" shall mean any of Moody's, S&P or Fitch, which is then providing a rating on the Bonds. "Rating Confirmation Notice" shall mean a notice from Moody's, S&P or Fitch, as appropriate, confirming that the rating on the Bonds will not be lowered or withdrawn (other than a withdrawal of a short-term rating upon a change to a Long-Term Mode) as a result of the action proposed to be taken. "Record Date" shall mean (i) with respect to Bonds in a Short-Term Mode, the last Business Day before an Interest Payment Date and (ii) with respect to Bonds in a Long-Term Mode, the fifteenth (15th) day (whether or not a Business Day) of the month next preceding each Interest Payment Date. 62 "Redemption Date" shall mean the date fixed for redemption of Bonds subject to redemption in any notice of redemption given in accordance with the terms hereof. "Redemption Price" shall mean an amount equal to the principal of and premium, if any, and accrued interest, if any, on the Bonds to be paid on the Redemption Date. "Reimbursement Agreement" shall mean any reimbursement agreement, credit agreement, line of credit agreement, standby purchase agreement or other agreement, by and between the Credit Provider or Liquidity Provider, as applicable, and the Company. "Remarketing Agent" shall mean Morgan Stanley & Co. Incorporated, or any other investment banking firm which may be substituted in its place as provided in Section 524 hereof. "Remarketing Agreement" shall mean that certain Remarketing Agreement relating to the Bonds, by and between the Company and the Remarketing Agent or any similar agreement between the Company and the Remarketing Agent, as it may be amended or supplemented from time to time in accordance with its terms. "Remarketing Proceeds Account" shall mean the account by that name created in Section 522(a) hereof. "Short-Term Mode" shall mean the Daily Mode, the Weekly Mode or the Flexible Mode. "Short Term Interest Period" shall mean a Daily Rate Period, a Weekly Rate Period or a Flexible Rate Period. "Substitution Date" shall mean the date upon which an Alternate Credit Enhancement or Alternate Liquidity Facility is substituted for the Credit Enhancement or Liquidity Facility then in effect. "Tender Agent" shall mean the commercial bank, trust company or other entity which may from time to time be appointed to serve as Tender Agent hereunder. Until such time as an alternate Tender Agent is appointed, the Tender Agent shall be the Trustee. "Tender Notice Deadline" shall mean (i) during the Daily Mode, 11:00 A.M. on any Business Day and (ii) during the Weekly Mode, 5:00 P.M. on the Business Day seven days prior to the applicable Purchase Date. "Tender Notice" shall mean a notice delivered by Electronic Means or in writing that states (i) the principal amount of such Bond to be purchased pursuant to Section 513 hereof, (ii) the Purchase Date on which such Bond is to be purchased, (iii) applicable payment instructions with respect to the Bonds being tendered for purchase and (iv) an irrevocable demand for such purchase. "Term Rate" shall mean the per annum interest rate for the Bonds in the Term Rate Mode 63 determined pursuant to Section 507(a) hereof. "Term Rate Mode" shall mean the Mode during which the Bonds bear interest at the Term Rate. "Term Rate Period" shall mean the period from (and including) the Mode Change Date to (but excluding) the last day of the first period that the Bonds shall be in the Term Rate Mode as established by the Company for the Bonds pursuant to Sections 509(a)(i) hereof and, thereafter, the period from (and including) the beginning date of each successive Interest Rate Period selected for the Bonds by the Company pursuant to Section 507(a) while it is in the Term Rate Mode to (but excluding) the commencement date of the next succeeding Interest Period, including another Term Rate Period. Except as otherwise provided in this Agreement, an Interest Period for the Bonds in the Term Rate Mode must be at least 180 days in length. "Weekly Mode" shall mean the Mode during which the Bonds bear interest at the Weekly Rate. "Weekly Rate" shall mean the per annum interest rate on the Bonds in the Weekly Mode determined pursuant to Section 506(b) hereof. "Weekly Rate Period" shall mean the period during which a Bond in the Weekly Mode shall bear a Weekly Rate, which shall be the period commencing on Thursday of each week to and including Wednesday of the following week, except the first Weekly Rate Period which shall be from the Mode Change Date or date of initial issuance of the Bonds, as applicable, to and including the Wednesday of the following week and the last Weekly Rate Period which shall be from and including the Thursday of the week prior to the Mode Change Date to the day next preceding the Mode Change Date. Unless otherwise provided herein, all references to a particular time are to New York City time. Section 502. Medium, Method and Place of Payment and Dating of Bonds. So long as the Bonds are in the Book-Entry System, interest on the Bonds shall be paid by the Paying Agent on the Interest Payment Date by wire transfer of immediately available funds to an account and by the time specified by the Securities Depository. Unless otherwise provided in any writing with or from the Securities Depository, the interest on the Bonds in a Variable Rate Mode or the Fixed Rate Mode shall be paid by the Paying Agent on the Interest Payment Dates by wire transfer of immediately available funds to an account specified by the Owner in a writing delivered to the Paying Agent. Any such specified account shall remain in effect until revised by such Owner by an instrument in writing delivered to the Paying Agent. The principal of and premium, if any, on each Bond shall be payable on the Principal Payment Date, upon surrender thereof at the office of the Paying Agent. Except as may be specifically set forth herein, the Paying Agent, the Trustee, the Bond 64 Insurer, the Remarketing Agent, the Company and the Authority may treat the Owner of a Bond as the absolute owner thereof for all purposes, whether or not such Bond shall be overdue, and the Paying Agent, the Trustee, the Remarketing Agent, the Company and the Authority shall not be affected by any knowledge or notice to the contrary; and payment of the principal of and premium, if any, and interest on such Bond shall be made only to such Owner, which payments shall be valid and effectual to satisfy and discharge the liability of such Bond to the extent of the sum or sums so paid. All Bonds at maturity or on earlier redemption paid pursuant to the provisions of this Section shall be cancelled by the Paying Agent. The Bonds shall be dated as described in Section 301 and, while in a Variable Rate Mode or the Fixed Rate Mode, shall bear interest at the applicable rate or rates during each applicable Interest Accrual Period until the entire principal amount of the respective series of Bonds has been paid. Section 503. Payment of Principal and Interest of Bonds; Acceptance of Terms and Conditions. (a) The interest on the Bonds shall become due and payable on the Interest Payment Dates in each year to and including the respective maturity date, and on each Redemption Date and on the date of any acceleration prior thereto. The principal of the Bonds shall become due and payable on the Principal Payment Dates. (b) By the acceptance of its Bond, the Owner and each Beneficial Owner thereof shall be deemed to have agreed to all the terms and provisions of such Bond as specified in such Bond and this Agreement including, without limitation, the applicable Interest Periods, interest rates (including any applicable Alternate Rate), Purchase Dates, Mandatory Purchase Dates, Purchase Prices, mandatory and optional purchase and redemption provisions applicable to such Bond, method and timing of purchase, redemption, payment, etc. Such Owner and each Beneficial Owner further agree that if, on any date upon which one of its Bonds is to be purchased, redeemed or paid at maturity or earlier due date, funds are on deposit with the Paying Agent or the Trustee to pay the full amount due on such Bond, then such Owner or Beneficial Owner shall have no rights under this Agreement other than to receive such full amount due with respect to such Bond and that interest on such Bond shall cease to accrue as of such date. (c) While any Bonds are Liquidity Provider Bonds, such Bonds shall bear interest and be payable at the times and in the amounts required under the Liquidity Facility (as to which the Trustee, the Bond Insurer and the Paying Agent shall be entitled to receive and rely upon a certificate from the Liquidity Provider). 65 Section 504. Calculation and Payment of Interest; Change in Mode; Maximum Rate. When a Short-Term Mode is in effect, interest shall be calculated on the basis of a 365/366 day year for the actual number of days elapsed. When a Long-Term Mode is in effect, interest shall be calculated on the basis of a 360 day year comprised of twelve 30-day months. Payment of interest on each Bond shall be made on each Interest Payment Date for such Bond for unpaid interest accrued during the Interest Accrual Period to the Owner of record of such Bond on the applicable Record Date. (a) Bonds in any Mode, other than a Fixed Rate Mode, may be changed to any other Mode at the times and in the manner hereinafter provided. Subsequent to such change in Mode (other than a change to a Fixed Rate Mode), the Bonds may again be changed to a different Mode at the times and in the manner hereinafter provided. A Fixed Rate Mode shall be in effect until the respective maturity date, or acceleration thereof prior to such maturity date, and may not be changed to any other Mode. (b) No Bonds shall bear interest at an interest rate higher than the Maximum Rate. (c) In the absence of manifest error, the determination of interest rates (including any determination of rates in connection with a New Mode) and interest periods by the Remarketing Agent and the record of interest rates maintained by the Paying Agent shall be conclusive and binding upon the Remarketing Agent, the Paying Agent, the Trustee, the Authority, the Company, the Owners and the Beneficial Owners. Section 505. Determination of Flexible Rates and Interest Periods During Flexible Mode. An Interest Period for the Bonds in the Flexible Mode shall be of such duration of from one to 270 calendar days, ending on a Business Day or the maturity date, as the Remarketing Agent shall determine in accordance with the provisions of this Section. A Flexible Rate Bond can have an Interest Period, and bear interest at a Flexible Rate, different than another Flexible Rate Bond. In making the determinations with respect to Interest Periods, subject to limitations imposed by the second preceding sentence and in Section 504 hereof, on each Rate Determination Date for a Flexible Rate Bond, the Remarketing Agent shall select for such Bond the Interest Period which would result in the Remarketing Agent being able to remarket such Bond at par in the secondary market at the lowest average interest cost; provided, however, that if the Remarketing Agent has received notice from the Company that the Bonds are to be changed from the Flexible Mode to any other Mode, the Remarketing Agent shall select Interest Periods which do not extend beyond the resulting applicable Mandatory Purchase Date of the Bonds. Except while the Bonds are registered in a Book-Entry System, in order to receive payment of the Purchase Price the Owner of any Bond in the Flexible Mode must present such Bond to the Paying Agent, by 12:00 noon on the Rate Determination Date, in which case, the Paying Agent shall pay the Purchase Price to such Owner by 2:30 P.M. on the same day. 66 By 1:00 P.M. on each Rate Determination Date, the Remarketing Agent, with respect to each Bond in the Flexible Mode which is subject to adjustment on such date, shall determine the Flexible Rate(s) for the Interest Periods then selected for such Bond and shall give notice by Electronic Means to the Paying Agent and the Company, of the Interest Period, the Purchase Date(s) and the Flexible Rate(s). The Remarketing Agent shall make the Flexible Rate and Interest Period available after 2:00 p.m. on each Rate Determination Date by telephone or Electronic Means to any Beneficial Owner or Notice Party requesting such information. Section 506. Determination of Interest Rates During the Daily Mode and the Weekly Mode. The interest rate for the Bonds in the Daily Mode or Weekly Mode shall be the rate of interest per annum determined by the Remarketing Agent on and as of the applicable Rate Determination Date as the minimum rate of interest which, in the opinion of the Remarketing Agent under then-existing market conditions, would result in the sale of the Bonds in the Daily Rate Period or Weekly Rate Period, as applicable, at a price equal to the principal amount thereof, plus interest, if any, accrued through the Rate Determination Date during the then current Interest Accrual Period. (a) During the Daily Mode, the Remarketing Agent shall establish the Daily Rate by 10:00 A.M. on each Rate Determination Date. The Daily Rate for any day during the Daily Mode which is not a Business Day shall be the Daily Rate established on the immediately preceding Rate Determination Date. The Remarketing Agent shall make the Daily Rate available after 10:30 A.M. on each Rate Determination Date by telephone or Electronic Means to any Beneficial Owner or Notice Party requesting such rate. (b) During the Weekly Mode, the Remarketing Agent shall establish the Weekly Rate by 4:00 P.M. on each Rate Determination Date. The Weekly Rate shall be in effect during the applicable Weekly Rate Period. The Remarketing Agent shall make the Weekly Rate available after 5:00 P.M. on the Rate Determination Date by telephone or Electronic Means to any Beneficial Owner or Notice Party requesting such rate. Section 507. Determination of Term Rates and Fixed Rates. (a) Term Rates. Except as provided in the immediately succeeding paragraph, once the Bonds are changed to the Term Rate Mode, the Bonds shall continue in the Term Rate Mode until changed to another Mode in accordance with Section 509 hereof. The Term Rate shall be determined by the Remarketing Agent not later than 4:00 P.M. on the Rate Determination Date, and the Remarketing Agent shall make the Term Rate available by telephone or by Electronic Means to any Notice Party requesting such rate after 5:00 p.m. on the Rate Determination Date. The Term Rate shall be the minimum rate which, in the sole judgment of the Remarketing Agent, would result in a sale of the Bonds at a price equal to the principal amount thereof on the Rate Determination Date for the Interest Period selected by the Company in writing delivered to the Remarketing Agent before such Rate Determination Date. If a new Interest Period is not selected by the Company prior to a Rate Determination Date (for a reason other than a court prohibiting such selection), the new Interest Period shall be the same length as the current Interest Period (or such lesser period as shall be necessary to comply with the last sentence of this paragraph). No 67 Interest Period in the Term Rate Mode may extend beyond the applicable Maturity Date. (b) Fixed Rates. The Remarketing Agent shall determine the Fixed Rate for the Bonds being converted to the Fixed Rate Mode in the manner and at the times as follows: not later than 4:00 P.M. on the applicable Rate Determination Date, the Remarketing Agent shall determine the Fixed Rate. The Fixed Rate shall be the minimum interest rate which, in the sole judgment of the Remarketing Agent, will result in a sale of the Bonds at a price equal to the principal amount thereof on the Rate Determination Date. The Remarketing Agent shall make the Fixed Rate available by telephone or by Electronic Means after 5:00 p.m. on the Rate Determination Date to any Notice Party requesting such Fixed Rate. The Fixed Rate so established shall remain in effect until the Maturity Date of such Bonds. Section 508. Alternate Rates. The following provisions shall apply in the event (i) the Remarketing Agent fails or is unable to determine the interest rate or Interest Period for the Bonds, (ii) the method by which the Remarketing Agent determines the interest rate or Interest Period with respect to the Bonds (or the selection by the Company of the Interest Periods for Bonds in the Term Rate Mode) shall be held to be unenforceable by a court of law of competent jurisdiction or (iii) if the Remarketing Agent suspends its remarketing effort in accordance with the Remarketing Agreement. These provisions shall continue to apply until such time as the Remarketing Agent (or the Company if applicable) again makes such determinations. In the case of clause (ii) above, the Remarketing Agent (or the Company, if applicable) shall again make such determination at such time as there is delivered to the Remarketing Agent and the Authority an opinion of Bond Counsel to the effect that there are no longer any legal prohibitions against such determinations. The following shall be the methods by which the interest rates and, in the case of the Flexible and Term Rate Modes, the Interest Periods, shall be determined for the Bonds as to which either of the events described in clauses (i), (ii) or (iii) shall be applicable. Such methods shall be applicable from and after the date either of the events described in clauses (i), (ii) or (iii) first become applicable to the Bonds until such time as the events described in clauses (i), (ii) or (iii) are no longer applicable to the Bonds. These provisions shall not apply if the Company fails to select an Interest Period for the Bonds in the Term Rate Mode for a reason other than as described in clause (ii) above. (a) For Flexible Rate Bonds, the next Interest Period shall be from, and including, the first day following the last day of the current Interest Period for the Bonds to, but excluding, the next succeeding Business Day and thereafter shall commence on each Business Day and extend to, but exclude, the next succeeding Business Day. For each such Interest Period, the interest rate for the Bonds shall be the applicable Alternate Rate in effect on the Business Day that begins an Interest Period. (b) If the Bonds are in the Daily Mode or the Weekly Mode, then the Bonds shall bear interest during each subsequent Interest Period at the Alternate Rate in effect on the first day of such Interest Period. (c) If the Bonds are then in the Term Rate Mode, then the Bonds shall automatically convert to Flexible Rate Bonds, with an Interest Period commencing on the first day following 68 the last day of the current Interest Period for the Bonds to, but excluding, the next succeeding Business Day and thereafter shall commence on each Business Day and extend to, but exclude, the next succeeding Business Day. For each such Interest Period, the interest rate for the Bonds shall be the applicable Alternate Rate in effect at the beginning of each such Interest Period. Section 509. Changes in Mode. Subject to the provisions of this Section, the Company may effect a change in Mode of the Bonds by following the procedures set forth in this Section; provided that the Company's right to effect a change in Mode of any series of Bonds shall terminate on the date of defeasance pursuant to Section 204. If a change in Mode will make the Bonds subject to Rule 15c2-12 promulgated under the Securities Act of 1934, as amended, the Company will execute a continuing disclosure undertaking satisfying the requirements of such Rule and shall cooperate with the Remarketing Agent and any Underwriter (as defined in such Rule) in satisfying the requirements of such Rule. (a) Changes to Modes Other Than Fixed Rate Mode. With the prior written consent of the Bond Insurer, the Bonds (other than Bonds in the Fixed Rate Mode) may be changed from a Variable Rate Mode to another Mode (other than the Fixed Rate Mode) as follows: (i) Mode Change Notice; Notice to Owners. No later than a Business Day which is at least 30 days (or such shorter time as may be agreed to by the Authority, the Company, the Trustee, the Tender Agent and the Remarketing Agent) preceding the proposed Mode Change Date, the Company shall give written notice to the Notice Parties of its intention to effect a change in the Mode from the Mode then prevailing (for purposes of this Section, the "Current Mode") to another Mode (for purposes of this Section, the "New Mode") specified in such written notice, and, if the change is to a Term Rate Mode, the length of the initial Interest Period as set by the Company, and, if the change is to the Auction Rate Mode, the length of the Auction Period. In the case of a change to a Term Rate Mode or from one Term Rate Mode to another Term Rate Mode, such notice to the Notice Parties shall also include a statement as to whether there will be a Liquidity Facility and/or Credit Enhancement in effect with respect to the Bonds following such change and the identity of any provider of such Liquidity Facility and/or Credit Enhancement. Notice of the proposed change in Mode shall be given by the Tender Agent to the Owners of the Bonds not less than the 15th day next preceding the Mode Change Date. Such notice shall state: (1) the Mode to which the conversion will be made and the Mode Change Date; (2) except in the case of a change from the Daily Mode to the Weekly Mode or from the Weekly Mode to the Daily Mode, that the Bonds will be subject to mandatory tender for purchase on the Mode Change Date and the Purchase Price of the Bonds; and (3) if the Book-Entry System is no longer in effect, information with respect to required delivery of Bond certificates and payment of Purchase Price. (ii) Determination of Interest Rates. The New Mode shall commence on the Mode Change Date and the interest rate(s) (together, in the case of a change to the Flexible Mode, with the Interest Period(s)) shall be determined by the Remarketing Agent (or the Company in the case of the Interest Period for the Bonds converted to the Term Rate Mode) in the manner provided in Sections 505, 506 and 507 and in Article IV 69 hereof, as applicable. (iii) Conditions Precedent: (A) The Mode Change Date shall be: (1) in the case of a change from the Flexible Mode, the next Mandatory Purchase Date for the Flexible Rate Bonds; (2) in the case of a change from the Daily or Weekly Mode, any Business Day; and (3) in the case of a change from the Term Rate Mode to another Mode, or from a Term Rate Period to a Term Rate Period of a different duration, the Mode Change Date shall be limited to any Interest Payment Date on which the Bonds are subject to optional redemption or to the last Interest Payment Date of the current Term Rate Period, as the case may be. Such Bonds shall be purchased on such Mode Change Date at a Purchase Price equal to 100% of the principal amount thereof, provided that if such Bonds are to be purchased on an Interest Payment Date other than the last Interest Payment Date and would otherwise be subject to optional redemption on such Mode Change Date at a Redemption Price of more than 100% of the principal amount thereof, such Bonds shall be purchased at a Purchase Price equal to such Redemption Price. (B) If the Bonds to be converted are in the Flexible Mode, no Interest Period set after delivery by the Company to the Remarketing Agent of the notice of the intention to effect a change in Mode shall extend beyond the proposed Mode Change Date. (C) The following items shall have been delivered to the Trustee, the Paying Agent and the Remarketing Agent on or prior to the Mode Change Date: (1) in the case of a change from a Short-Term Mode to a Long-Term Mode or from a Long-Term Mode to a Short-Term Mode or the Auction Rate Mode, a Favorable Opinion of Bond Counsel dated the Mode Change Date and addressed to the Notice Parties; (2) if there is to be an Alternate Liquidity Facility or Alternate Credit Enhancement delivered in connection with such change, the items required by Section 521(d) hereof; (3) a Rating Confirmation Notice, or if the Mode Change Date is a Mandatory Purchase Date, a notice from the Rating Agencies of the rating(s) to be assigned the Bonds on such Mode Change Date; and (4) written consent from the Bond Insurer. 70 (b) Change to Fixed Rate Mode. At the option of the Company and with the prior written consent of the Bond Insurer, the Bonds may be changed to the Fixed Rate Mode as provided in this Section 509(b). On any Business Day which is at least 30 days (or such shorter time as may be agreed to by the Authority, the Company, the Trustee and the Remarketing Agent, but in any event not less than the 15th day next preceding the Mode Change Date) before the proposed Mode Change Date, the Company shall give written notice to the Notice Parties stating that the Mode will be changed to the Fixed Rate Mode and setting forth the proposed Mode Change Date. Such notice shall also state whether or not there shall be Credit Enhancement with respect to the Bonds following such change and, if so, the identity of the Credit Provider. Any such change in Mode shall be made as follows: (i) Mode Change Date. The Mode Change Date shall be: (A) in the case of a change from the Flexible Mode, the next Mandatory Purchase Date for the Flexible Rate Bonds; (B) in the case of a change from the Daily or Weekly Mode, any Business Day; and (C) in the case of a change from the Term Rate Mode, the Mode Change Date shall be limited to any Interest Payment Date on which the Bonds are subject to optional redemption or to the next Mandatory Purchase Date for the Term Rate Bonds, as the case may be. Such Bonds shall be purchased on such Mode Change Date at a Purchase Price equal to 100% of the principal amount thereof, provided that if such Bonds would otherwise be subject to optional redemption on such Mode Change Date at a Redemption Price of more than 100% of the principal amount thereof, such Bonds shall be purchased at a Purchase Price equal to such Redemption Price. (ii) Notice to Owners. Not less than the 15th day next preceding the Mode Change Date, the Paying Agent shall mail, in the name of the Company, a notice of such proposed change to the Owners of the Bonds stating that the Mode will be changed to the Fixed Rate Mode, the proposed Mode Change Date and that such Owner is required to tender such Owner's Bonds for purchase on such proposed Mode Change Date. (iii) General Provisions Applying to Change to Fixed Rate Mode. The change to the Fixed Rate Mode shall not occur unless the following items shall have been delivered to the Authority, the Company, the Trustee and the Remarketing Agent on or prior to the Mode Change Date: (A) a Favorable Opinion of Bond Counsel dated the Mode Change Date and addressed to the Authority, the Company, the Trustee, the Bond Insurer and the Remarketing Agent; (B) if there is to be Credit Enhancement delivered in connection with such change, the items required by Section 521(d) hereof in connection with the delivery of an 71 Alternate Credit Enhancement, and (C) notice from the Rating Agencies of the rating(s) to be assigned the Bonds on such Mode Change Date. (iv) Determination of Interest Rate. The Fixed Rate for the Bonds to be converted to the Fixed Rate Mode shall be established by the Remarketing Agent on the Rate Determination Date applicable thereto pursuant to the provisions of Section 507(b). Such Rate shall remain in effect until the maturity date of the Bonds. (v) Redemption Terms. Upon conversion of the Bonds to the Fixed Rate Mode, the Bonds shall be remarketed at par, shall mature on the same maturity date and be subject to the same mandatory and optional redemption provisions as set forth in this Agreement for any prior Mode; provided, however, that if the Company shall deliver to the Trustee a Favorable Opinion of Bond Counsel, the Company may elect to (1) change the optional redemption dates and/or premiums set forth in Section 512(b) hereof, and/or (2) sell some or all of the Bonds at a premium or a discount to par. (c) Failure to Satisfy Conditions Precedent to a Mode Change. In the event the conditions described above in subsections (a) or (b), as applicable, of this Section have not been satisfied by the applicable Mode Change Date, then the New Mode shall not take effect (although any mandatory tender shall be made on such date if notice has been sent to the Owners stating that such Bonds would be subject to mandatory purchase on such date). If the failed change in Mode was from the Flexible Mode, the Bonds shall remain in the Flexible Mode with interest rates and Interest Periods to be established by the Remarketing Agent on the failed Mode Change Date in accordance with Section 505 hereof. If the failed change in Mode was from the Daily Mode, the Bonds shall remain in the Daily Mode, and if the failed change in Mode was from the Weekly Mode, the Bonds shall remain in the Weekly Mode, in each case with interest rates established in accordance with the applicable provisions of Section 506 hereof on and as of the failed Mode Change Date. If the failed change in Mode was from the Term Rate Mode, then the Bonds shall stay in the Term Rate Mode for an Interest Period ending on the following Interest Payment Date for the Bonds in the Term Rate Mode and the interest rate shall be established by the Remarketing Agent on the failed Mode Change Date in accordance with Section 507(a) hereof. (d) Recission of Election. Notwithstanding anything herein to the contrary, the Company may rescind any election by it to change a Mode as described above prior to the Mode Change Date by giving written notice thereof to the Notice Parties prior to such Mode Change Date. If the Tender Agent receives notice of such rescission prior to the time the Tender Agent has given notice to the holders of the Bonds, then such notice of change in Mode shall be of no force and effect. If the Tender Agent receives notice from the Company of rescission of a Mode change after the Tender Agent has given notice thereof to the holders of the Bonds, then if the proposed Mode Change Date would have been a Mandatory Purchase Date, such date shall continue to be a Mandatory Purchase Date. If the proposed change in Mode was from the Flexible Mode, the Bonds shall remain in the Flexible Mode with interest rates and Interest 72 Periods to be established by the Remarketing Agent on the proposed Mode Change Date in accordance with Section 505 hereof. If the proposed change in Mode was from the Daily Mode, the Bonds shall remain in the Daily Mode, and if the proposed change in Mode was from the Weekly Mode, the Bonds shall remain in the Weekly Mode, in each case with interest rates established in accordance with the applicable provisions of Section 506 hereof on and as of the proposed Mode Change Date. If the proposed change in Mode was from the Term Rate Mode, then the Bonds shall stay in the Term Rate Mode for an Interest Period ending on the following Interest Payment Date for the Bonds in the Term Rate Mode and the interest rate shall be established by the Remarketing Agent on the proposed Mode Change Date in accordance with Section 507(a) hereof. If the Remarketing Agent is unable to determine the interest rate on the proposed Mode Change Date, the provisions of Section 508 shall apply. Section 510. Optional Redemption of Flexible Rate Bonds. Bonds in the Flexible Mode are not subject to optional redemption prior to their respective Purchase Dates. Bonds in the Flexible Mode shall be subject to redemption at the option of the Company in whole or in part on their respective Purchase Dates at a redemption price equal to the principal amount thereof. Section 511. Optional Redemption of Bonds in the Daily Mode or the Weekly Mode. Bonds in the Daily Mode or the Weekly Mode are subject to optional redemption by the Company, in whole or in part, in Authorized Denominations on any date, at a redemption price equal to the principal amount thereof, plus, accrued interest, if any, from the end of the preceding Interest Accrual Period to the Redemption Date. Section 512. Optional Redemption of Bonds in the Term Rate or the Fixed Rate Mode. Bonds in a Term Rate Mode shall be subject to redemption, in whole or in part, on their individual Mandatory Purchase Dates, at the option of the Company at a redemption price equal to the principal amount thereof. (a) Bonds in the Term Rate Mode or Fixed Rate Mode are subject to redemption in whole on any date or in part on any Interest Payment Date (and if in part by lot or by such other method as the Paying Agent determines to be fair and reasonable and in Authorized Denominations) at the redemption prices set forth below, together with accrued interest, if any, to the redemption date: 73
- -------------------------------------------------------------------------------------------------------------- LENGTH OF LONG-TERM COMMENCEMENT OF REDEMPTION PRICE INTEREST RATE PERIOD REDEMPTION PERIOD - -------------------------------------------------------------------------------------------------------------- Greater than or equal to 15 Tenth anniversary of the 102%, declining by 1.0% on years commencement of Long-Term each succeeding anniversary of Interest Rate Period the first day of the redemption period until reaching 100% and thereafter at 100% - -------------------------------------------------------------------------------------------------------------- Less than 15 years and greater Seventh anniversary of the 102%, declining by 1.0% on than or equal to 10 years commencement of Long-Term each succeeding anniversary of Interest Rate Period the first day of the redemption period until reaching 100% and thereafter at 100% - -------------------------------------------------------------------------------------------------------------- Less than 10 years and greater Third anniversary of the 101%, declining by 1.0% on than or equal to 5 years commencement of Long-Term each succeeding anniversary of Interest Rate Period the first day of the redemption period until reaching 100% and thereafter at 100% - -------------------------------------------------------------------------------------------------------------- Less than 5 years Bonds not subject to optional redemption - --------------------------------------------------------------------------------------------------------------
(b) The Company, in connection with a change to a Long-Term Mode, may waive or otherwise alter its rights to direct the redemption of any such Bonds so changed to a Long-Term Mode at any time without premium; provided that notice describing the waiver or alteration shall be submitted to the Paying Agent, the Trustee and the Remarketing Agent, together with a Favorable Opinion of Bond Counsel, addressed to them. (c) If a Credit Enhancement is then in effect and the Redemption Price includes any premium, the right of the Company to direct an optional redemption is subject to the condition that the Trustee has received, prior to the date on which notice of redemption is required to be given to Owners, either Available Moneys of the Company sufficient to cover the premium due on the Redemption Date or written confirmation from the Credit Provider that it can draw under the Credit Enhancement on the proposed redemption date in an aggregate amount sufficient to cover the principal of and premium and interest due on the Redemption Date. Section 513. Optional Tenders of Bonds in the Daily Mode or the Weekly Mode. Subject to Section 518 hereof, the Beneficial Owners of Bonds in a Daily Mode or a Weekly Mode may elect to have their Bonds (or portions of those Bonds in amounts equal to an Authorized Denominations) purchased on any Business Day at a price equal to the Purchase Price, upon delivery of a Tender Notice by the Tender Notice Deadline. Section 514. Mandatory Purchase on Mandatory Purchase Date. The Bonds shall be subject to mandatory purchase on each Mandatory Purchase Date. The Tender Agent shall give notice of such mandatory purchase by mail to the Owners of the Bonds subject to mandatory purchase (a) no less than thirty (30) days prior to the Mandatory Purchase Date in the case of a mandatory purchase (i) at the end of an Interest Period for Bonds in a Term-Rate Mode or (ii) on 74 a Substitution Date; (b) no less than 15 days prior to the Mandatory Purchase Date in the case of a mandatory purchase on a Mode Change Date; and (c) no less than the number of days specified in the Liquidity Facility prior to the Mandatory Purchase Date (i) following notice from the Credit Provider or Liquidity Provider of an event of default under the Reimbursement Agreement or (ii) immediately preceding any Expiration Date. No notice shall be given of the Mandatory Purchase Date at the end of each Interest Period for Flexible Rate Bonds. Any notice shall state the Mandatory Purchase Date, the Purchase Price, the numbers of the Bonds to be purchased if less than all of the Bonds owned by such Owner are to be purchased, and that interest on Bonds subject to mandatory purchase shall cease to accrue from and after the Mandatory Purchase Date. The failure to mail such notice with respect to any Bond shall not affect the validity of the mandatory purchase of any other Bond with respect to which notice was so mailed. Any notice mailed will be conclusively presumed to have been given, whether or not actually received by any Owner or Beneficial Owner. Section 515. Remarketing of Bonds; Notices. (a) Remarketing of Bonds. The Remarketing Agent shall use its best efforts to offer for sale: (i) all Bonds or portions thereof as to which notice of tender pursuant to Section 513 hereof has been given; and (ii) all Bonds required to be purchased on a Mandatory Purchase Date described in clauses (i), (ii) or (iii) of the definition thereof; and (iii) any Liquidity Provider Bonds (A) purchased on a Purchase Date described in clause (i) or (ii) above, (B) with respect to which the Liquidity Provider has provided notice to the Trustee and the Remarketing Agent that it is ready to reinstate the Available Amount, (C) with respect to which an Alternate Liquidity Facility and Alternate Credit Enhancement are in effect (if such funds were secured by a Credit Enhancement prior to becoming Liquidity Provider Bonds which Credit Enhancement is no longer in effect), or (D) which are being marketed as Fixed Rate Bonds. (b) Notice of Remarketing; Registration Instructions; New Bonds. On each date on which a Bond is to be purchased: (i) the Remarketing Agent shall notify by Electronic Means the Tender Agent by 12:00 noon if it has been unable to remarket any tendered Bonds, and shall include in such notice the principal amount of Bonds it has been unable to remarket; (ii) unless the Remarketing Agent has delivered the notice described in clause (i) above, the Remarketing Agent shall notify the Tender Agent by Electronic Means not later than 1:00 P.M. of the names of the purchasers of the remarketed Bonds and such information as may be necessary to register the Bonds and the registration instructions (i.e., the names, addresses and taxpayer identification numbers of the purchasers and the 75 desired Authorized Denominations) with respect thereto; and (iii) if the Bonds are no longer in the Book-Entry System, the Tender Agent shall authenticate new Bonds for the respective purchasers thereof which shall be available for pick-up by the Remarketing Agent not later than 2:30 P.M. (c) Draw on Liquidity Facility. On each date on which a Bond is to be purchased, if the Remarketing Agent shall have given notice to the Tender Agent pursuant to clause (b)(i) above that it has been unable to remarket any of the Bonds, the Tender Agent shall direct the Trustee (if the two are separate entities) to draw on the Liquidity Facility (or if there is no Liquidity Facility or the Liquidity Facility is unavailable to honor such draw, request funds from the Company) by 12:30 P.M. in an amount equal to the Purchase Price of all such Bonds which have not been successfully remarketed. Section 516. Source of Funds for Purchase of Bonds. By the close of business on the date on which a Bond is to be purchased, and except as set forth in Section 518(b)(ii) hereof, the Tender Agent shall purchase tendered Bonds from the tendering Owners at the applicable Purchase Price by wire transfer in immediately available funds. Funds for the payment of such Purchase Price shall be derived solely from the following sources in the order of priority indicated and none of the Tender Agent, the Trustee nor the Remarketing Agent shall be obligated to provide funds from any other source: (a) immediately available funds on deposit in the Remarketing Proceeds Account; (b) immediately available funds on deposit in the Liquidity Facility Purchase Account; (c) Available Moneys of the Company; and (d) Other moneys of the Company. Section 517. Delivery of Bonds. On each date on which a Bond is to be purchased, such Bond shall be delivered as follows: (a) Bonds sold by the Remarketing Agent and described in Section 516(a) hereof shall be delivered by the Remarketing Agent to the purchasers of such Bonds by 3:00 P.M.; and (b) Bonds purchased by the Tender Agent with moneys described in Section 516(b) hereof shall be registered immediately in the name of the Liquidity Provider or its nominee (which may be the Securities Depository) on or before 3:00 P.M. (c) Bonds purchased by the Company with moneys described in Section 516(c) or (d) hereof shall be registered immediately in the name of the Company or its nominee on or before 3:00 P.M. Bonds so owned by the Company shall continue to be outstanding under the terms of this Agreement and be subject to all of the terms and conditions of this Agreement and shall be 76 subject to remarketing by the Remarketing Agent. Section 518. Book-Entry Tenders. (a) Notwithstanding any other provision of this Article V to the contrary, all tenders for purchase during any period in which the Bonds are registered in the name of Cede & Co. (or the nominee of any successor Securities Depository) shall be subject to the terms and conditions set forth in the Representation Letter and to any regulations promulgated by DTC (or any successor Securities Depository). For so long as the Bonds are registered in the name of Cede & Co., as nominee for DTC, the tender option rights of Holders of Bonds may be exercised only by a Direct Participant of DTC acting, directly or indirectly, on behalf of a Beneficial Owner of Bonds by giving notice of its election to tender Bonds or portions thereof at the times and in the manner described above. Beneficial Owners will not have any rights to tender Bonds directly to the Tender Agent. Procedures under which a Beneficial Owner may direct a Direct Participant or DTC, or an Indirect Participant of DTC acting through a Direct Participant of DTC, to exercise a tender option right in respect of Bonds or portions thereof in an amount equal to all or a portion of such Beneficial Owner's beneficial ownership interest therein shall be governed by standing instructions and customary practices determined by such Direct Participant or Indirect Participant. For so long as the Bonds are registered in the name of Cede & Co., as nominee for DTC, delivery of Bonds required to be tendered for purchase shall be effected by the transfer by a Direct Participant on the applicable Purchase Date of a book-entry credit to the account of the Tender Agent of a beneficial interest in such Bonds. (b) Notwithstanding anything expressed or implied herein to the contrary, so long as the Book-Entry System for the Bonds is maintained: (i) there shall be no requirement of physical delivery to or by the Tender Agent, the Remarketing Agent or the Trustee of: (A) any Bonds subject to mandatory or optional purchase as a condition to the payment of the Purchase Price therefor; (B) any Bonds that have become Liquidity Provider Bonds; or (C) any remarketing proceeds of such Bonds or Liquidity Provider Bonds; and (ii) except as provided in (iii) below, none of the Trustee, the Tender Agent nor the Paying Agent shall have any responsibility for paying the Purchase Price of any tendered Bond or for remitting remarketing proceeds to any person; and (iii) the Trustee's sole responsibilities in connection with the purchase and remarketing of a tendered Bond shall be to: (A) draw upon the Liquidity Facility in the event the Remarketing 77 Agent notifies the Tender Agent as provided herein that such Bond has not been remarketed on or before the Purchase Date therefor, which draw shall be in an amount equal to the difference between such Purchase Price and any remarketing proceeds received by Remarketing Agent in connection with a partial remarketing of such Bond, and to remit the amount so drawn to or upon the order of the Securities Depository for the benefit of the tendering Beneficial Owners; and (B) remit any proceeds derived from the remarketing of a Liquidity Provider Bond to the Liquidity Provider. Section 519. No Book-Entry System. If at any time the Bonds shall no longer be in the Book-Entry System, the following procedures shall be followed: (a) Bonds shall be delivered (with all necessary endorsements) at or before 12:00 noon on the Purchase Date at the office of the Paying Agent in New York, New York; provided, however, that payment of the Purchase Price shall be made pursuant to this Section only if the Bond so delivered to the Paying Agent conforms in all respects to the description thereof in the notice described in this Section. Payment of the Purchase Price with respect to purchases under this Section shall be made to the Owners of tendered Bonds by wire transfer in immediately available funds by the Paying Agent by 3:00 P.M. on the Purchase Date. (b) If a Bond to be purchased is not delivered by the Owner to the Paying Agent by 12:00 noon on the date on which such Bond is to be purchased, the Paying Agent shall hold any funds received for the purchase of those Bonds in trust in a separate account and shall pay such funds to the former Owners of the Bonds upon presentation of the Bonds. Such undelivered Bonds shall cease to accrue interest as to the former Owners on such purchase date and moneys representing the Purchase Price shall be available against delivery of those Bonds at the Principal Office of the Paying Agent; provided, however, that any funds which shall be so held by the Paying Agent and which remain unclaimed by the former Owner of a Bond not presented for purchase for a period of three years after delivery of such funds to the Paying Agent, shall, to the extent permitted by law, upon request in writing by the Company and the furnishing of security or indemnity to the Paying Agent's satisfaction, be paid to the Company free of any trust or lien and thereafter the former Owner of such Bond shall look only to the Company as an unsecured creditor and then only to the extent of the amounts so received by the Company without any interest thereon and the Paying Agent shall have no further responsibility with respect to such moneys or payment of the purchase price of such Bonds. The Paying Agent shall authenticate a replacement Bond for any undelivered Bond which may then be remarketed by the Remarketing Agent. (c) The Paying Agent shall hold all Bonds properly tendered to it for purchase hereunder as agent and bailee of, and in escrow for the benefit of, the respective Owners of the Bonds which shall have so tendered such Bonds until moneys representing the Purchase Price of such Bonds shall have been delivered to or for the account of or to the order of such Owners. Section 520. No Purchases or Sales After Credit Provider or Liquidity Provider Failure. Anything in this Agreement to the contrary notwithstanding, if there shall have occurred and be 78 continuing either a Credit Enhancement Failure or a Liquidity Facility Failure, the Remarketing Agent shall not remarket any Bonds. All other provisions of this Agreement, including without limitation, those relating to the setting of interest rates and Interest Periods and mandatory and optional purchases, shall remain in full force and effect during the continuance of such Credit Enhancement Failure or Liquidity Facility Failure, as the case may be. Section 521. Credit Enhancement and Liquidity Facility. While any Credit Enhancement is in effect with respect to any Bonds, the Trustee shall, on the Business Day preceding each Interest Payment Date and Principal Payment Date, before 4:00 P.M. on such day, draw on the Credit Enhancement in accordance with the terms thereof so as to receive thereunder with respect to Bonds covered by the Credit Enhancement by 1:00 P.M. on said Interest Payment Date and Principal Payment Date, an amount, in immediately available funds, equal to the amount of interest and principal payable on such Bonds on such Interest Payment Date and Principal Payment Date. The proceeds of such draws shall be deposited in an account dedicated to such purpose. (a) On each date on which a Bond is to be purchased, the Trustee, at the direction of the Tender Agent as provided in Section 515(c) hereof, by demand given by Electronic Means before 12:30 P.M., shall draw on the Liquidity Facility in accordance with the terms thereof so as to receive thereunder by 2:30 P.M. on such date an amount, in immediately available funds, sufficient, together with the proceeds of the remarketing of Bonds on such date, to enable the Tender Agent to pay the Purchase Price in connection therewith. The proceeds of such draw shall be paid to the Tender Agent, who shall deposit said proceeds in the Liquidity Facility Purchase Account pursuant to Section 522(b) hereof. (b) Notwithstanding the foregoing paragraphs of this Section, if the Credit Provider and the Liquidity Provider are the same entity, the Trustee shall not draw on the Credit Enhancement with respect to any payments due or made in connection with Liquidity Provider Bonds. In no event shall the Trustee draw on the Credit Enhancement with respect to any payments made or made in connection with Bonds not covered by the Credit Enhancement or Bonds owned by the Company. (c) If at any time there shall have been delivered to the Trustee (i) an Alternate Credit Enhancement or an Alternate Liquidity Facility in substitution for the Credit Enhancement or Liquidity Facility then in effect, (ii) a Favorable Opinion of Bond Counsel, (iii) a written Opinion of Counsel for the provider of the Alternate Credit Enhancement or Alternate Liquidity Facility, as applicable, to the effect that such Alternate Credit Enhancement or Alternate Liquidity Facility is a valid, legal and binding obligation of the provider thereof (subject to customary exceptions), and (iv) unless waived by such entity, written evidence satisfactory to the Credit Provider and the Liquidity Provider of the provision for purchase from the Liquidity Provider of all Liquidity Provider Bonds, at a price equal to the principal amount thereof plus accrued and unpaid interest, and payment of all amounts due to the Credit Provider and the Liquidity Provider under the 79 Reimbursement Agreement(s) on or before the effective date of such Alternate Letter of Credit or Alternate Liquidity Facility, then the Trustee shall accept such Alternate Letter of Credit or Alternate Liquidity Facility on the Substitution Date and shall surrender the Credit Enhancement or Liquidity Facility then in effect to the provider thereof on the Substitution Date. The Company shall give the Notice Parties written notice of the proposed substitution of an Alternate Credit Enhancement or Alternate Liquidity Facility no less than thirty (30) days prior to the proposed Substitution Date. The Trustee shall give notice of such proposed substitution by mail to the Beneficial Owners of the Bonds as identified by the Remarketing Agent and to the registered owners (subject to procedures of the Securities Depository) no less than fifteen (15) days prior to the proposed Substitution Date. Section 522. Purchase Fund. There is hereby established and there shall be maintained with the Tender Agent, as agent for the Trustee, a separate fund to be known as the "Purchase Fund." The Tender Agent shall further establish separate accounts within the Purchase Fund to be known as the "Liquidity Facility Purchase Account" and the "Remarketing Proceeds Account" and the "Company Purchase Account." (a) Remarketing Proceeds Account. Upon receipt of the proceeds of a remarketing of a Bond on the date such bond is to be purchased, the Tender Agent shall deposit such proceeds in the Remarketing Proceeds Account for application to the Purchase Price of the Bonds. Notwithstanding the foregoing, upon the receipt of the proceeds of a remarketing of Liquidity Provider Bonds, the Tender Agent shall immediately pay such proceeds to the Liquidity Provider to the extent of any amount owing to the Liquidity Provider. (b) Liquidity Facility Purchase Account. Upon receipt from the Trustee of the immediately available funds transferred to the Tender Agent pursuant to Section 521(b) hereof, the Tender Agent shall deposit such money in the Liquidity Facility Purchase Account for application to the Purchase Price of the Bonds to the extent that the moneys on deposit in the Remarketing Proceeds Account shall not be sufficient. Any amounts deposited in the Liquidity Facility Purchase Account and not needed with respect to the Purchase Price for any Bonds shall be immediately returned to the Liquidity Provider. (c) Company Purchase Account. Upon receipt of Funds from the Company pursuant to Section 516(c) or (d) hereof, the Tender Agent shall deposit such Funds in the Company Purchase Account for application to the Purchase Price of the Bonds. Any amounts deposited in the Company Purchase Account and not needed with respect to the Purchase Price for any Bonds shall be immediately refunded to the Company. (d) Investment. Amounts held in the Liquidity Facility Purchase Account and the Remarketing Proceeds Account by the Paying Agent shall be held uninvested and separate and apart from all other funds and accounts. Section 523. Inadequate Funds for Tenders. If sufficient funds are not available for the purchase of all tendered Bonds required to be purchased on any Purchase Date, the Trustee shall take all actions reasonably available to it to obtain remarketing proceeds from the Remarketing 80 Agent and sufficient funds from the Liquidity Provider or the Company to purchase all such Bonds on or before 12:00 noon, New York City time, on the Business Day next succeeding such Purchase Date. Thereafter, the Trustee shall continue to take all such action reasonably available to it to obtain such remarketing proceeds from the Remarketing Agent and such funds from the Liquidity Provider or the Company. Any obligations of the Remarketing Agent, the Credit Provider or the Company to cause the deposit of such funds from remarketing proceeds, proceeds of the Credit Enhancement or other amounts, respectively, shall remain enforceable pursuant to this Agreement, and such obligation shall only be discharged at such time as funds are deposited with the Trustee in an amount sufficient to purchase all such Bonds, together with any interest which has accrued on such Bonds to the subsequent actual purchase date. Section 524. Appointment of Remarketing Agent. The Remarketing Agent is hereby appointed to remarket Bonds pursuant to this Agreement, and to keep such books and records as shall be consistent with prudent industry practice and to make such books and records available for inspection by the Notice Parties at all reasonable times. The Remarketing Agent shall act as such under the Remarketing Agreement. (a) The Remarketing Agent may at any time resign and be discharged of the duties and obligations created by this Agreement by giving at least ten (10) days' notice to the Notice Parties. The Remarketing Agent may suspend its remarketing efforts as set forth in the Remarketing Agreement. The Remarketing Agent may be removed at any time, at the direction of the Company, by an instrument filed with the Remarketing Agent, the Trustee and the Paying Agent and upon at least ten (10) days' notice to the Remarketing Agent. Any successor Remarketing Agent shall be selected by the Company, and shall be a member of the National Association of Securities Dealers, Inc., shall have a capitalization of at least fifteen million dollars ($15,000,000), shall be authorized by law to perform all the duties set forth in this Agreement and shall be reasonably acceptable to the Credit Provider and Liquidity Provider. The Company's delivery to the Trustee of a certificate setting forth the effective date of the appointment of a successor Remarketing Agent and the name of such successor shall be conclusive evidence that (i) if applicable, the predecessor Remarketing Agent has been removed in accordance with the provisions of this Agreement and (ii) such successor has been appointed and is qualified to act as Remarketing Agent under the terms of this Agreement. (b) If the Remarketing Agent consolidates with, merges or converts into, or transfers all or substantially all of its assets (or, in the case of a bank, national banking association or trust company, its corporate assets) to, another Company, the resulting, surviving or transferee Company without any further act shall be the successor Remarketing Agent. 81 ARTICLE VI. THE PROJECT Section 601. Company not to Impair Tax Status; Use of Project Facilities. Notwithstanding any provision herein to the contrary, the Company did not use any of the proceeds of the 1989 Bonds, the 1991 Series A Bonds, the 1991 Series C Bonds or the Loan (or the income earned through the investment thereof, if any) and did not take or omit any action or permit any action to be taken or omitted with the result that interest on the Bonds is included in the gross income of the owners thereof for federal income tax purposes. The use of the Project Facilities (or facilities replacing the same) is in furtherance of the purpose of air or water pollution control or sewage or solid waste disposal and in compliance with the Act. Section 602. Qualification of Project Facilities. Notwithstanding any provision herein to the contrary, the Company did not permit the Project Facilities to fail to qualify as (a) "industrial facilities" under the Act, and (b) a facility described in Section 1312(a) of the Tax Reform Act of 1986, or (c) "sewage or solid waste disposal facilities" or "air or water pollution control facilities" within the meaning of Section 103(b)(4)(E) or (F) of the 1954 Code. The Company acknowledges that it is not relying on any representation of any kind by the Authority or the Trustee concerning the nature or condition of the Project Facilities. Neither the Authority nor the Trustee shall be liable to the Company or any other person for any latent or patent defect in the Project Facilities. Section 603. Reserved . Section 604. Reserved. Section 605. Disposition and Use of Project Facilities. The Company has transferred its interest in the Project Facilities to NAEC. NAEC is expected to transfer the Project Facilities to an unaffiliated party pursuant to an order of the New Hampshire Public Utilities Commission. No Bonds shall be issued under this Agreement until the Authority, the Company, the Trustee and NAEC have executed and delivered a Series A Seabrook Pollution Control Facilities Agreement substantially in the form attached hereto as Exhibit C (such Agreement and each subsequent agreement providing for a Seabrook Transfer, a "Facilities Agreement"). No sale, lease, transfer or other disposition of the Project Facilities or the Station shall relieve the Company of any of its obligations under this Agreement. 82 ARTICLE VII. ADDITIONAL COVENANTS OF THE COMPANY Section 701. Existence and Good Standing; Merger; Consolidation. The Company will maintain its corporate existence, qualification to do business and good standing under the laws of the State of New Hampshire and will maintain itself as a foreign corporation duly qualified to do business and in good standing, where applicable, in each jurisdiction in which the failure to so qualify would have a material adverse effect upon its business or properties. The Company shall not merge or consolidate with or sell all or substantially all of its assets to another entity, except that the Company may so merge or consolidate with or sell all or substantially all of its assets to another corporation if (i) the surviving or transferee corporation is qualified to do business in New Hampshire, (ii) the surviving or transferee corporation (if not the Company) has assumed in writing all of the Company's obligations hereunder and under the Series I First Mortgage Bonds, and (iii) upon such assumption there will not be a Default hereunder, or under the First Mortgage Bond Indenture (disregarding any required passage of time or giving of notice thereunder). The Company shall not change its name or reorganize or change its legal structure or merge or consolidate with or sell all or substantially all its assets to another entity without at least thirty (30) days notice to the Trustee (unless the Trustee agrees to a shorter period). Section 702. Indemnification by the Company. The Company, regardless of any agreement to maintain insurance, shall and does hereby indemnify the Authority and the Trustee against (a) any and all claims by any person related to the participation of the Authority or the Trustee in the transactions contemplated by this Agreement, including without limitation claims arising out of any condition of the Project Facilities or Station or the construction, use, occupancy or management thereof; any accident, injury or damage to any person occurring in or about the Station; any breach by the Company of its obligations under this Agreement; any act or omission of the Company or any of its agents, contractors, servants, employees or licensees; or the offering, issuance, sale or any resale of the Bonds to the extent permitted by law, and (b) all costs, counsel fees, expenses or liabilities reasonably incurred in connection with any such claim or any action or proceeding brought thereon. In case any action or proceeding is brought against the Authority or the Trustee by reason of any such claim, the Company will defend the same at its expense upon notice from the Authority or the Trustee, and the Authority or the Trustee, as the case may be, will cooperate with the Company, at the expense of the Company, in connection therewith. Section 703. Continuing Disclosure. The Company and the Trustee hereby covenant and agree that each will comply with and carry out all of the provisions of the Continuing Disclosure Agreement applicable to it and this Section 703 of this Agreement. The Authority shall have no liability to the owners of the Bonds or any other person with respect to such disclosure matters. Notwithstanding any other provision of this Agreement, failure of the Company or the Trustee to comply with the Continuing Disclosure Agreement shall not be considered an Event of Default; however, the Trustee may (and, at the request of the owners of at least 25% aggregate principal amount of Outstanding Bonds, shall) or any owner (including a beneficial owner) of Bonds may seek specific performance of the Company's or the Trustee's obligations to comply with the Continuing Disclosure Agreement or this Section 703 and not for 83 money damages in any amount. ARTICLE VIII. DEFAULT AND REMEDIES Section 801. Default. (a) Events of Default; Default. "Event of Default" in this Agreement means any one of the events set forth below and "Default" means any Event of Default without regard to any lapse of time or notice. (i) Debt Service on Bonds. Any payment of interest, principal or premium on the Bonds or any Purchase Price for Bonds shall not be paid when the same becomes due and payable. (ii) Other Obligations. The Company shall fail to observe or perform any of its other covenants or agreements contained herein, or the Seabrook Transferee shall fail to observe or perform any of its covenants or agreements related to the Project Facilities contained in the Facilities Agreement, and such failure shall continue for a period of sixty (60) days after written notice given to the Company by the Trustee, the Bond Insurer or the Bondowners of at least 25% in principal amount of the Bonds Outstanding; provided, however, that if such Default cannot be cured by the Company or the Seabrook Transferee within such sixty-day period, it shall not constitute an Event of Default if, with the written consent of the Bond Insurer (which shall not be unreasonably withheld) curative action is instituted by the Company or the Seabrook Transferee within such sixty-day period and thereafter is diligently pursued until such Default is cured. (iii) First Mortgage Bond Default. The occurrence of any "event of default" as defined in the First Mortgage Bond Indenture. (iv) Bond Insurance Agreement Default. The Trustee shall have received written notice from the Bond Insurer of the occurrence of any "Event of Default" as defined in the Bond Insurance Agreement. The Company agrees to notify the Authority, the Trustee and the Bond Insurer promptly in writing of the occurrence of any Default or Event of Default of which it has knowledge. Immediately after becoming aware of an Event of Default under (i) above, or within five (5) days or the next Business Day if such fifth day is not a Business Day after becoming aware of a Default or an Event of Default under (ii), (iii), or (iv) above, the Trustee will give notice to the Bondowners and, in the case of an Event of Default under (i), (ii) or (iv) above, to the First Mortgage Bond Trustee. Notwithstanding anything in this section to the contrary, no action or failure to act by the Company or the Seabrook Transferee which results in interest on the Bonds becoming includable in gross income of the owners thereof for federal income tax purposes shall constitute a Default 84 or Event of Default under this Agreement so long as (I) the Company shall have delivered the opinion described in clause (i) of Subsection 307(c) or shall have complied with the second sentence of Subsection 307(d) and (II) the redemption provided by Subsection 307(c) occurs. In such event, no Bondowner shall be entitled to any claim for monetary damages hereunder and the redemption of the Bonds as provided under Subsection 307(c) shall be the exclusive recourse of Bondowners. (b) Waiver. At any time before an acceleration pursuant to Section 802, the Trustee may waive a Default (other than a Default in the payment of principal of, premium, if any, or interest on the Bonds) and its consequences, with the written consent of the Bond Insurer, by written notice to the Company, and in the absence of any inconsistent instructions from Bondowners pursuant to Sections 805 or 1101 shall do so, with the written consent of the Bond Insurer, upon written instruction of the owners of at least twenty-five per cent (25%) in principal amount of the Outstanding Bonds. No waiver under this section shall affect the right of the Trustee or the Authority to enforce the payment of any amounts owing to it. Any cure or waiver of any "event of default" under the First Mortgage Bond Indenture and a rescission and annulment of its consequences shall constitute a cure or waiver of the corresponding Event of Default under Paragraph 801(a)(iii) and a rescission and annulment of the consequences thereof, and the Trustee, upon obtaining knowledge thereof, shall give written notice of such cure or waiver, rescission or annulment to the Authority and the Company, and shall give notice thereof by mail to all Bondowners; but no such cure or waiver, rescission and annulment shall extend to or affect any subsequent Event of Default or impair any right or remedy consequent thereon. Section 802. Remedies for Events of Default. If an Event of Default occurs and is continuing: (a) Acceleration. With the written consent of the Bond Insurer the Trustee may, and upon the written request of the Bondowners of at least 25% in principal amount of the Bonds Outstanding, shall, by written notice to the Authority, the Company, the Bond Insurer, the Liquidity Provider, if any, and the Remarketing Agent, if any, declare immediately due and payable the principal amount of the Outstanding Bonds and accrued interest thereon, whereupon the same shall become immediately due and payable without any further action or notice. If at any time after such acceleration and before any judgment or decree for the payment of moneys with respect thereto has been entered all amounts payable hereunder except principal of and interest on the Bonds which are due solely by reason of such acceleration shall have been paid or provided for by deposit with the Trustee and all existing Defaults shall have been cured or waived, then the Bondowners representing a majority in principal amount of the Bonds Outstanding may annul such acceleration and its consequences by written notice to the Authority, the Trustee and the Company. Such annulment shall be binding upon the Authority, the Trustee and all of the Bondowners, but no such annulment shall extend to or affect any subsequent Default or impair any right or remedy consequent thereto. 85 (b) Rights as a Secured Party. The Trustee may with the written consent of the Bond Insurer and shall, at the written direction of the Bond Insurer exercise all of the rights and remedies of a secured party under the UCC, subject to the terms of this Agreement. Notice sent by registered or certified mail, postage prepaid, or delivered during business hours, to the Company at least seven (7) days before an event under UCC Section 9-611(b) or any successor provision of law shall constitute reasonable notification of such event. Section 803. Court Proceedings. The Trustee and the Bond Insurer may enforce the provisions of this Agreement by appropriate legal proceedings for the specific performance of any covenant, obligation or agreement contained herein whether or not a Default or an Event of Default exists, or for the enforcement of any other appropriate legal or equitable remedy, and may recover damages caused by any breach by the Company of the provisions of this Agreement, including (to the extent this Agreement may lawfully provide) court costs, reasonable attorney's fees and other costs and expenses incurred in enforcing the obligations of the Company hereunder. The Authority may likewise enforce obligations owed to it hereunder which it has not assigned to the Trustee. All rights under this Agreement and the Bonds may be enforced by the Trustee without the possession of any Bonds or the production thereof at the trial or other proceedings relative thereto, and any proceeding instituted by the Trustee shall be brought in its name for the ratable benefit of the Bondowners. Section 804. Revenues after Default. After the occurrence of an Event of Default, any funds pledged as security hereunder and any other moneys received by the Trustee (other than amounts irrevocably set aside to pay particular Bonds), after payment or reimbursement of the reasonable expenses of the Trustee and the Authority in connection therewith shall be applied, first, to any other amounts owing to the Trustee; second, to any other amounts owing to the Authority other than the Authority's Service Charge; third, to amounts due under Section 305(a), which amounts shall be applied to the payment of principal of, premium, if any, and interest on the Bonds in the order specified in Section 304; fourth, to the Authority's Service Charge; and fifth, to other obligations of the Company hereunder in such order as determined by the Trustee. Any amounts remaining after the satisfaction of all obligations of the Company hereunder shall be paid to the Company. Section 805. Rights of Bondowners. If an Event of Default occurs and is continuing, and if the Bondowners representing not less than 25% in principal amount of the Bonds Outstanding shall have requested the Trustee in writing to exercise one or more of the rights and remedies provided hereunder and offered it indemnity as provided in Subsection 902(e), the Trustee shall be required to exercise such one or more of the rights and remedies hereunder as the Trustee shall determine to be in the best interest of the Bondowners and not inconsistent with any directions given in accordance with Section 1101. No Bondowner shall have any right to institute an action in law or equity or to pursue any other remedy hereunder with respect to any Bond unless (i) an Event of Default of which the Trustee has been notified has occurred and Bondowners representing not less than 25% in principal amount of the Bonds Outstanding shall have requested the Trustee in writing to exercise its rights and remedies with respect thereto and shall have offered the Trustee reasonable opportunity to do so and indemnity as provided in Subsection 902(e), and (ii) the Trustee shall within a reasonable time thereafter fail to exercise 86 any of such rights or remedies. No Bondowner shall have any right to institute any action or pursue any other remedy if and to the extent that the surrender, impairment, waiver, or loss of the lien of this Agreement would, under applicable law, result. Notwithstanding the foregoing, each Bondowner shall have a right of action to enforce payment of the Bonds at and after the due date thereof at the place, from the sources and in the manner expressed in the Bonds. Section 806. Performance of Company's Obligations. If the Company shall fail to observe or perform any of its agreements or obligations hereunder, the Authority or the Trustee may perform the same in its own name or in the Company's name and each is hereby irrevocably appointed the Company's attorney-in-fact for such purpose. Unless an Event of Default exists, the Authority or the Trustee, as the case may be, shall give at least five (5) days' notice to the Company before taking action under this section, except that in case of emergency as reasonably determined by the acting party, it may act on lesser notice or give the notice promptly after rather than before taking the action. The reasonable cost of any such action performed by the Trustee or the Authority shall be paid or reimbursed by the Company within thirty (30) days after the Trustee or the Authority notify the Company of such cost. Section 807. Remedies Cumulative; No Waiver. The rights and remedies under this Agreement shall be cumulative and shall not exclude any other rights and remedies allowed by law, provided there is no duplication of recovery. Neither the failure to insist upon a strict performance of any of the obligations of the Company, nor the failure to exercise any remedy for any violation thereof, shall be taken as a waiver for the future of the right to insist upon strict performance of the obligation or to exercise any remedy for the violation. Section 808. Rights of Bond Insurer. (a) Anything in this Agreement to the contrary notwithstanding, except as provided in subsection (b), upon the occurrence and continuance of an Event of Default, the Bond Insurer shall be entitled to control and direct the enforcement of all rights and remedies granted to the Bondowners or the Trustee for the benefit of the Bondowners under this Agreement, including, without limitation, acceleration of the principal of the Bonds as described in this Agreement and the right to annul any declaration of acceleration, and the Bond Insurer shall also be entitled to approve all waivers of Events of Default with respect to the Bonds. (b) Anything in this Agreement to the contrary notwithstanding, the provisions contained in this Section 808 and all other rights and remedies granted to the Bond Insurer under this Agreement shall be null and void upon the happening and during the continuance of any of the following (a "Bond Insurer Default"): (1) a Bond Insurer Event of Insolvency, except to the extent of payments made by the Bond Insurer under the Bond Insurance Policy which are not voidable preferences; or (2) failure of the Bond Insurer to pay in accordance with the Bond Insurance Policy, except to the extent of prior payments made by the Bond Insurer under the Bond Insurance Policy which are not voidable preferences. 87 ARTICLE IX. THE TRUSTEE Section 901. Corporate Organization, Authorization and Capacity. The Trustee represents and warrants that it is a trust company duly organized and validly existing under the laws of The Commonwealth of Massachusetts and duly licensed in Massachusetts, with the capacity to exercise the powers and duties of the Trustee hereunder, and that by proper corporate action it has duly authorized the execution and delivery of this Agreement. Section 902. Rights and Duties of the Trustee. (a) Moneys to be Held in Trust. All moneys deposited with the Trustee under this Agreement (other than amounts received for its own use) shall be held by the Trustee in trust and applied subject to the provisions of this Agreement, but need not be segregated from other funds except as required herein or by law. (b) Accounts. The Trustee shall keep proper accounts of its transactions hereunder (separate from its other accounts), which shall be open to inspection at reasonable times and upon reasonable advance written request by the Authority, the Bond Insurer, the Company and the Bondowners and their representatives duly authorized in writing. (c) Performance of the Authority's Obligations. If the Authority shall fail to observe or perform any agreement or obligation contained in this Agreement, the Trustee may take whatever legal proceedings may be required to compel full performance by the Authority of its obligations, and in addition, the Trustee may, to whatever extent it deems appropriate for the protection of the Bondowners, itself or the Company, perform any such obligation in the name of the Authority and on its behalf. (d) Responsibility. The Trustee shall be entitled to the advice of counsel (who may be the Trustee's counsel, counsel for the Authority, the Company or any Bondowner) and shall be wholly protected as to any action taken or omitted to be taken in good faith in reliance on such advice. The Trustee may rely conclusively on any notice, certificate or other document furnished to it hereunder and reasonably believed by it to be genuine. The Trustee shall not be liable for any action taken by it in good faith and reasonably believed by it to be within the discretion or powers conferred upon it, in good faith omitted to be taken by it and reasonably believed to be beyond the discretion or powers conferred upon it, taken by it pursuant to any direction or instruction by which it is governed hereunder, or omitted to be taken by it by reason of the lack of direction or instruction required hereby for such action; nor shall it be responsible for the consequences of any error of judgment reasonably made by it. The duties of the Trustee are those expressly set forth in this Agreement, and no additional duties shall be implied. When any payment, consent or other action by it is called for hereby, it may defer such action pending receipt of such evidence, if any, as it may require in support thereof. The Trustee shall in no event be liable for the application or misapplication of funds, or for other acts or defaults by any person, firm, or Company, except its own directors, officers, and employees. No recourse shall be had by the Company, the Authority or any Bondowner for any claim based on this Agreement or any Bond against any director, officer, employee, or agent of the Trustee alleging personal 88 liability on the part of such person, unless such claim is based upon the bad faith, negligence, fraud or deceit of such person. The Trustee has no responsibility for the validity or sufficiency of this Agreement or the Bonds or any security therefor. (e) Limitations on Actions. The Trustee shall not be required to monitor the financial condition of the Company or the physical condition of the Project Facilities and, unless otherwise expressly provided, shall not have any responsibility with respect to notices, certificates or other documents filed with it hereunder, except to make them available for inspection by the Bondowners. The Trustee shall not be deemed to have knowledge of and shall not be required to take notice of any Default or Event of Default, except for a Default or Event of Default described in Paragraph 801(a)(i) relating to the payment of principal of, premium, if any, and interest on or Purchase Price of the Bonds, unless the Trustee shall be specifically notified in writing by the Company, the Authority or Bondowners representing not less than 25% in principal amount of the Bonds Outstanding , or in the case of a Default or Event of Default described in Paragraph 801(a)(iii), the Trustee shall be notified in writing by the First Mortgage Bond Trustee. The Trustee shall not be required to take any remedial action (other than the giving of notice) unless indemnity reasonably satisfactory to it is furnished for any expense or liability to be incurred therein, other than liability for failure to meet the standards set forth in this section. The Trustee shall be entitled to reimbursement from the Company for its expenses reasonably incurred or advances reasonably made, which reimbursement shall be due and payable thirty (30) days after notifying the Company of such expenses or advances, in the exercise of its rights or the performance of its obligations hereunder, whether or not it acts without previously obtaining indemnity. A permissive right or power to act shall not be construed as a requirement to act. Upon receipt of written notice, direction, instruction, and indemnity as provided above and, after making such investigation, if any, as it deems appropriate to verify the occurrence of any Default of which it is notified by the Bondowners, the Trustee shall pursue such remedies hereunder (not contrary to such direction) as it deems appropriate for the protection of the Bondowners; and in its actions under this provision, the Trustee shall be required to act for the protection of the Bondowners with the same prudence as would be expected of a prudent person in the conduct of such person's affairs. (f) Financial Obligations. Nothing contained in this Agreement shall in any way obligate the Trustee to pay any debt or meet any financial obligations to any person in relation to the Project Facilities except from moneys received under the provisions of this Agreement (including from the exercise of its rights and remedies hereunder) other than moneys received for its own purposes. (g) Registration Books. The Trustee will keep books for the registration of the Bonds and transfers thereof as provided in this Agreement. The Trustee shall furnish a list of the Bondowners to the Authority, the Bond Insurer or Company at any time upon its request, and to Bondowners representing at least 15% in principal amount of the Outstanding Bonds, at any time upon their request. 89 (h) Ownership of Bonds. The Trustee or any affiliate of the Trustee may be or become the owner of Bonds with the same rights as if it were not Trustee. (i) No Surety Bond. The Trustee shall not be required to furnish any bond or surety. (j) Requests by the Company. Upon any request by the Company to the Trustee to take any action under this Agreement (including but not limited to any proposed amendment pursuant to Section 1201) the Trustee shall be entitled to receive from the Company prior to taking such action, and to rely upon, a certificate of a Company Representative and an opinion of counsel reasonably satisfactory to the Trustee (who may be counsel to the Company), and, if applicable in the reasonable judgment of the Trustee, a certificate of an accountant satisfactory to the Company (who may be an employee of the Company), each to the effect that in the signer's opinion all conditions precedent applicable to such action under this Agreement, if any, have been satisfied (and, in the case of the certificate of the Company Representative, including but not limited to the absence of any Default or Event of Default) and such action is permitted by this Agreement. (k) Trustee as Holder of Series I First Mortgage Bonds. So long as no Default has occurred and is continuing, the Trustee may, but shall have no obligation to, take any action in its capacity as the registered holder of the Series I First Mortgage Bonds (other than the duty to exercise reasonable care in the safekeeping thereof and the giving of notices set forth below), unless and except to the extent the Trustee is directed in writing by the Bondowners as provided in Section 1101 of this Agreement. The Trustee shall promptly notify the Bondowners of the receipt of and contents of any notice it receives under the First Mortgage Bond Indenture (other than notices solely of payments being made on the Series I First Mortgage Bonds. Section 903. Fees and Expenses of the Trustee. The Company shall pay to the Trustee reasonable compensation for its services and prepay or reimburse the Trustee for its reasonable expenses and disbursements, including attorney's fees, hereunder. The Company shall indemnify and save the Trustee harmless against any and all (a) claims as set forth in Section 702 above, (b) costs, counsel fees, expenses and liabilities reasonably incurred in connection with such claims, and (c) costs, counsel fees, expenses and liabilities which it may incur in or arising from the administration, performance or exercise of its rights, powers, responsibilities or duties hereunder and which are not due to the bad faith, negligence, fraud or deceit of any director, officer, employee or agent of the Trustee. Any fees, expenses, reimbursements, or other charges which the Trustee may be entitled to receive from the Company hereunder shall be due and payable thirty (30) days after a request for payment has been made by the Trustee, and if not otherwise paid, shall be a first lien upon any funds or other property then or thereafter held hereunder by the Trustee. If any such moneys are so applied, the Company shall be immediately obligated to restore the moneys so applied. Section 904. Resignation or Removal of Trustee. The Trustee may resign on not less than sixty (60) days' notice given in writing to the Authority, the Bondowners, the Bond Insurer and the Company, but such resignation shall not take effect until a successor, approved by the Bond Insurer (which consent shall not be unreasonably withheld), has been appointed and has 90 assumed the duties hereunder. The Trustee will promptly certify to the other parties that it has mailed such notice to all Bondowners and such certificate shall be conclusive evidence that such notice was given in the manner required hereby. The Trustee may be removed by written notice to the parties from the Bondowners representing a majority in principal amount of the Bonds Outstanding, upon not less than (30) days advance written notice (unless such removal is for cause), but no such removal shall take effect until a successor has been appointed and assumed the duties hereunder. A petition in a court of competent jurisdiction for removal of the Trustee and the appointment of a successor may be filed by the Bondowners representing not less than 25% in principal amount of the Bonds Outstanding. Section 905. Successor Trustee. Any Company or association which succeeds to the corporate trust business of the Trustee as a whole, or substantially as a whole, whether by sale, merger, consolidation or otherwise, shall become vested with all the property, rights and powers of the Trustee hereunder, without any further act or conveyance. In case the Trustee resigns or is removed or becomes incapable of acting, or becomes bankrupt or insolvent, or if a receiver, liquidator or conservator of the Trustee or of its property is appointed, or if a public officer takes charge or control of the Trustee, or of its property or affairs, a successor shall be appointed by written notice from the Company to the Authority and the Bond Insurer. The Company shall notify the Bondowners of the appointment in writing within twenty (20) days from the appointment. The Company will promptly certify to the successor Trustee that it has mailed such notice to all Bondowners and such certificate will be conclusive evidence that such notice was given in the manner required hereby. If no appointment of a successor is made within twenty (20) days after the giving of written notice in accordance with Section 904 or after the occurrence of any other event requiring or authorizing such appointment, the outgoing Trustee or any Bondowner may apply to any court of competent jurisdiction for the appointment of such a successor, and such court may thereupon, after such notice, if any, as such court may deem proper, appoint such successor. Any successor Trustee appointed under this section shall be a trust company or a bank having the powers of a trust company that meets the requirements of the Act and has a capital and surplus of not less than $50,000,000. Any such successor Trustee shall notify the Authority and the Company of its acceptance of the appointment and, upon giving such notice, shall become Trustee, vested with all the property, rights and powers of the Trustee hereunder, without any further act or conveyance. Such successor Trustee shall execute, deliver, record and file such instruments as are required to confirm or perfect its succession hereunder and any predecessor Trustee shall from time to time execute, deliver, record and file such instruments as the incumbent Trustee may reasonably require to confirm or perfect any succession hereunder. 91 ARTICLE X. THE AUTHORITY Section 1001. Limited Obligation. Under no circumstances shall the Authority be obligated directly or indirectly to pay Project Costs, principal of or premium, if any, and interest on the Bonds, or expenses of operation, maintenance and upkeep of the Project Facilities except from Bond proceeds or from funds received under this Agreement, exclusive of funds received hereunder by the Authority for its own use. This Agreement does not create any debt of the State of New Hampshire with respect to the Project Facilities other than a special obligation of the Authority acting on behalf of the State of New Hampshire pursuant to the Act. Nothing contained herein shall in any way obligate the State of New Hampshire to raise any money by taxation or use other public funds for any purpose in relation to the Project Facilities. Neither the State of New Hampshire nor the Authority shall pay or promise to pay any debt or meet any financial obligation to any person at any time in relation to the Project Facilities except (i) from moneys received or to be received under the provisions hereof or derived from the exercise of the Authority's right hereunder, other than moneys received for its own purposes, or (ii) as may be required by law other than the provisions of the Act. Nothing contained in this Agreement shall be construed to require or authorize the Authority to operate the Project Facilities itself or to conduct any business enterprise in connection therewith. Section 1002. Rights and Duties of the Authority. (a) Remedies of the Authority. Notwithstanding any contrary provision in this Agreement, the Authority shall have the right to take any action or make any decision with respect to proceedings for indemnity against the liability of the Authority and for collection or reimbursement from sources other than moneys or property held under this Agreement or subject to the lien hereof. The Authority may enforce its rights under this Agreement which have not been assigned to the Trustee by legal proceedings for the specific performance of any obligation contained herein or for the enforcement of any other appropriate legal or equitable remedy, and may recover damages caused by any breach by the Company of its obligations to the Authority under this Agreement, including court costs, reasonable attorney's fees and other costs and expenses incurred in enforcing such obligations. (b) Limitations on Actions. The Authority shall not be required to monitor the financial condition of the Company or the physical condition of the Project Facilities and, unless otherwise expressly provided, shall not have any responsibility with respect to notices, certificates or other documents filed with it hereunder. The Authority shall not be required to take notice of any breach or default except when given notice thereof by the Trustee. The Authority shall not be responsible for the payment of any rebate to the United States of America under IRC ss. 148(f). The Authority shall not be required to take any action unless indemnity reasonably satisfactory to it is furnished for expenses or liability to be incurred therein (other than the giving of notice). The Authority, upon written request of the Bondowners or the Trustee, and upon receipt of reasonable indemnity for expenses or liability, shall cooperate to the extent reasonably necessary to enable the Trustee to exercise any power granted to the Trustee by this Agreement. The Authority shall be entitled to reimbursement pursuant to Section 1003 to the 92 extent that it acts without previously obtaining full indemnity. (c) Responsibility. The Authority shall be entitled to the advice of counsel (who may be counsel for any party or for any Bondowner) and shall be wholly protected as to any action taken or omitted to be taken in good faith in reliance on such advice. The Authority may rely conclusively on any notice, certificate or other document furnished to it under this Agreement and reasonably believed by it to be genuine. The Authority shall not be liable for any action taken by it in good faith and reasonably believed by it to be within the discretion or power conferred upon it, or in good faith omitted to be taken by it and reasonably believed to be beyond such discretion or power, or taken by it pursuant to any direction or instruction by which it is governed under this Agreement or omitted to be taken by it by reason of the lack of direction or instruction required for such action under this Agreement, or be responsible for the consequences of any error of judgment reasonably made by it. When any payment, consent or other action by the Authority is called for by this Agreement, the Authority may defer such action pending such investigation or inquiry or receipt of such evidence, if any, as it may require in support thereof. A permissive right or power to act shall not be construed as a requirement to act, and no delay in the exercise of a right or power shall affect the subsequent exercise thereof. The Authority shall in no event be liable for the application or misapplication of funds, or for other acts or defaults by any person or entity except by its own directors, officers and employees. No recourse shall be had by the Company, the Trustee or any Bondowner for any claim based on this Agreement or the Bonds against any director, officer, employee or agent of the Authority unless such claim is based upon the bad faith, fraud or deceit of such person. No covenant, obligation or agreement of the Authority contained in this Agreement shall be deemed to be a covenant, obligation or agreement of any present or future director, officer, employee or agent of the Authority in his individual capacity, and no person executing a Bond shall be liable personally thereon or be subject to any personal liability or accountability by reason of the issuance thereof. Section 1003. Expenses of the Authority. The Company shall pay when due the Authority's Service Charge and shall prepay or reimburse the Authority within thirty (30) days after notice for all expenses (including reasonable attorney's fees) incurred by the Authority in connection with the issuance and carrying of the Bonds and all expenses reasonably incurred or advances reasonably made in the exercise of the Authority's rights or the performance of its obligations hereunder. Any fees, expenses, reimbursements or other charges which the Authority may be entitled to receive from the Company hereunder, if not paid within ten (10) days of when they are due, shall bear a late charge equal to 5% of the amount overdue, and if not paid within sixty (60) days, shall bear interest at 12% per annum. Section 1004. Matters to be Considered by Authority. In approving, concurring in or consenting to action or in exercising any discretion or in making any determination under this Agreement, the Authority may consider the interests of the public, which shall include the anticipated effect of any transaction on tax revenues and employment, as well as the interests of the other parties hereto and the Bondowners; provided, however, nothing herein shall be construed as conferring on any person other than the other parties and the Bondowners any right to notice, hearing or participation in the Authority's consideration, and nothing in this section shall be construed as conferring on any of them any right additional to those conferred elsewhere 93 herein. Subject to the foregoing, the Authority will not unreasonably withhold any approval or consent to be given by it hereunder. Section 1005. Actions by Authority. Any action which may be taken by the Authority hereunder shall be deemed sufficiently taken if taken on its behalf by its Chairman, its Vice Chairman or its Executive Director or by any other director, officer or agent whom it may designate from time to time. ARTICLE XI. THE BONDOWNERS Section 1101. Action by Bondowners. Subject to Subsections 312, 801(b), 802(a), 808 and Section 1201 (as to the waivers and consents granted thereby), Bondowners representing a majority in principal amount of the Bonds Outstanding shall have the right at any time, by written notice to the Trustee and upon offering it indemnity as provided in Subsection 902(e), to direct the Trustee (i) in the granting of any consents, waivers or similar actions pertaining to the Bonds, (ii) in the time, method and place of conducting all proceedings, (iii) in the exercise of any rights or remedies available to the Trustee hereunder, or (iv) in the exercise of any other right or power conferred upon the Trustee for the protection of the Bondowners, provided that such direction shall be in accordance with the provisions of law and this Agreement, and the Trustee may take any other action determined proper by the Trustee which is not inconsistent with such direction. Except with respect to the matters provided below and subject to Section 808, Bondowners representing a majority in principal amount of the Bonds Outstanding shall have the right, at any time, by written notice to the Trustee and the offering of indemnity as provided in Subsection 902(e), to direct the Trustee, as holder of all of the Series I First Mortgage Bonds, to exercise the rights available to it as holder of such bonds under the First Mortgage Bond Indenture, including, without limitation, as to rendering notice to the First Mortgage Bond Trustee of the occurrence of a default thereunder, the institution of any suit, action or proceeding to enforce payments on the Series I First Mortgage Bonds which were not paid when due or other proceeding in respect of the First Mortgage Bond Indenture which the Trustee, as holder of the Series I First Mortgage Bonds, is entitled to institute, and as to the time, place and method of any such proceeding for any remedy available to the Trustee, as holder of the Series I First Mortgage Bonds, subject however to compliance with the applicable provisions of the First Mortgage Bond Indenture. Where the First Mortgage Bond Trustee is required or permitted to take any action under the First Mortgage Bond Indenture upon the direction, authorization, consent, notice or request of the holders of a specified percentage of principal amount of bonds outstanding thereunder or of outstanding bonds thereunder which would be adversely affected by such action, including with respect to acceleration of the maturity of such bonds under Section 10.1 of the First Mortgage Bond Indenture, the time, method and place of proceedings and waivers of events of default, as provided in Section 10.12 of the First Mortgage Bond Indenture and amendments of the First Mortgage Bond Indenture under Article 15 thereof, each Bondowner shall be deemed the holder of its pro-rata portion of the principal amount of Series I First Mortgage Bonds and shall have the right to direct the Trustee whether or not to render such direction, authorization, consent, notice 94 or request under the First Mortgage Bond Indenture in respect of such Bondowner's pro-rata portion, whereupon the Trustee shall notify the First Mortgage Bond Trustee of the action to be taken in respect of the applicable principal amount of Series I First Mortgage Bonds. Any request, authorization, direction, notice, consent, waiver or other action provided by this Agreement to be given or taken by Bondowners may be contained in and evidenced by one or more writings of substantially the same tenor signed by the Bondowners of the requisite percentage of principal amount of Bonds Outstanding or their attorneys duly appointed in writing. Proof of the execution of any such instrument, or of any instrument appointing any such attorney, shall be sufficient for any purpose of this Agreement (except as otherwise herein expressly provided) if made in the following manner, but the Authority or the Trustee may nevertheless in its discretion require further or other proof in cases where it deems the same desirable: The fact and date of the execution by any Bondowner or his or her attorney of such instrument may be proved by the certificate, which need not be acknowledged or verified, of an officer of a bank or trust company satisfactory to the Authority or to the Trustee or of any notary public or other officer authorized to take acknowledgements of the deeds to be recorded in the state in which he purports to act, that the person signing such request or other instrument acknowledged to him or her the execution thereof, or by an affidavit of a witness of such execution, duly sworn to before such notary public or other officer. The authority of the person or persons executing any such instrument on behalf of a corporate Bondowner may be established without further proof if such instrument is signed by a person purporting to be the president or a vice president of such corporation with a corporate seal affixed and attested by a person purporting to be its clerk or secretary or an assistant clerk or assistant secretary. The ownership of Bonds and the amount, numbers and other identification, and date of holding the same shall be proved by the registry books for the Bonds maintained by the Trustee. Any request, consent or vote of the owner of any Bond shall bind all future owners of such Bond. Bonds owned or held by or for the account of the Authority, the Company, or any related person to the Company within the meaning of Section 147(a) of the IRC shall not be deemed Outstanding Bonds for the purpose of any consent or other action by Bondowners. ARTICLE XII. AMENDMENTS AND MISCELLANEOUS Section 1201. Amendments. (a) Without Bondowners' Consent. The parties may from time to time, but with the consent of the Bond Insurer, without the consent of any Bondowner, amend this Agreement in order to (i) cure any ambiguity, defect or omission in the Agreement that does not materially adversely affect the interests of the Bondowners, (ii) grant additional rights or security to the Trustee for the benefit of the Bondowners, (iii) add additional Events of Default as shall not be inconsistent with the provisions of this Agreement and which shall not materially adversely 95 affect the interests of the Bondowners, (iv) qualify this Agreement under the Trust Indenture Act of 1939, as amended, or corresponding provisions of federal laws from time to time in effect, or (v) make such other provisions in regard to matters or questions arising under this Agreement as shall not be inconsistent with the provisions of this Agreement and which shall not materially adversely affect the interests of the Bondowners. Provisions of this Agreement may also be amended by the parties without Bondowner consent in any respect, including the release of the First Mortgage Bonds, on the date of any mandatory tender of the Bonds, provided that notice of any such amendment is included in the notice of mandatory tender for purchase described in Sections 412 and 514. The Company acting alone may amend the Maximum Rate to a higher interest rate without Bondowner consent, provided that, if a Liquidity Facility is then in effect, it entitles the Paying Agent to draw upon or demand and receive in immediately available funds an amount equal to the principal amount of the Bonds then outstanding plus a number of days of accrued interest at such amended Maximum Rate at least equal to the number of days required to be covered under this Agreement. In addition, with the consent of the Broker-Dealer, the provisions of this Agreement concerning the Auction Procedures, including without limitation the mandatory tender provisions and amending the Auction Period, Auction Date and Interest Payment Dates as provided in this Agreement, and the definitions applicable thereto, including without limitation, the definition of Maximum Auction Rate, may be amended (i) by obtaining the consent of the Bond Insurer and the consent of the Trustee if the Trustee determines that such amendment does not materially adversely affect the rights of any Bondowner (it being agreed that in making such determination the Trustee may rely upon a certificate to such effect of the Broker-Dealer) or (ii) by obtaining the consent of the beneficial owners of the Bonds, or (iii) on any Auction Date on which Sufficient Clearing Bids have been made or all of the Auction Rate Securities are subject to Submitted Hold Orders. In the case of clause (iii) above, if on the first Auction Date occurring at least 20 days after the date on which the Trustee mailed notice to the registered owners of the Auction Rate Securities as required by this Agreement, Sufficient Clearing Bids have been received or all of the Auction Rate Securities are subject to Submitted Hold Orders, the proposed amendment shall be deemed to have been consented to by the owners of all Auction Rate Securities. (b) With Bondowners' Consent. Except as set forth in Subsection 1201(a), the parties may from time to time amend this Agreement with the consent of the Bond Insurer and the owners of more than 50% in aggregate principal amount of the Bonds Outstanding; provided, that no amendment shall be made which adversely affects the rights of some but less than all the Bonds Outstanding without the consent of the owners of more than 50% in aggregate principal amount of the Bonds so affected; and provided further, that no amendment of this Agreement shall be effective to (i) change the principal, premium or interest on any Bonds, (ii) change the interest payment dates, maturity dates or redemption provisions of any Bonds, (iii) reduce the percentage of Bondowners whose consent is required for the amendment of this Agreement or (iv) modify the lien upon or pledge of the payments and other revenues assigned and pledged hereunder, without the consent, in each case, of the owner of each Bond which would be affected by the action proposed to be taken. Any amendment of this Agreement made under this or the preceding Subsection shall be accompanied by an opinion of Bond Counsel reasonably 96 satisfactory to the Trustee to the effect that the amendment is permitted by this Agreement and that it will not affect the exclusion of interest on the Bonds from gross income of the owners thereof for federal income tax purposes. When the Trustee determines that the requisite number of consents have been obtained for an amendment which requires Bondowner consent, it shall, within ninety (90) days, file a certificate to that effect in its records and give notice thereof to the Bondowners. No action or proceeding to invalidate the amendment shall be instituted or maintained unless it is commenced within sixty (60) days after such notice. The validity of the amendment shall not be adversely affected by any failure to give notice or any defect in the notice. A consent to an amendment may be revoked by a notice given by the Bondowner and received by the Trustee prior to the Trustee's certification that the requisite consents have been obtained. Section 1202. Notices. All notices to the Authority, the Trustee, the Company, the Bond Insurer or the Bondowners unless otherwise specified shall be in writing and shall be deemed sufficiently given if delivered by registered or certified mail, postage prepaid, or delivered during business hours as follows: (i) to the Authority at 14 Dixon Avenue, Suite 101, Concord, New Hampshire 03301, attention of the Executive Director, (ii) to the Trustee at 225 Asylum Street, 23rd Floor, Hartford, Connecticut 06103, attention of Corporate Trust Department, (iii) to the Company at 1000 Elm Street, Manchester, New Hampshire 03105, attention of Assistant Treasurer - Finance, with a copy to Northeast Utilities Service Company, P.O. Box 270, Hartford, Connecticut 06141-0270 (if by U.S. Mail) and 107 Selden Street, Berlin, Connecticut 06037 (if by courier), attention of Assistant Treasurer - Finance, (iv) to the Bond Insurer at 113 King Street, Armonk, New York 10504, attention of IPM-PCF, or, as to all of the foregoing, to such other address as the addressee shall have indicated by prior written notice to the one giving notice. All notices to a Bondowner shall be in writing and shall be deemed sufficiently given if sent by first class mail, postage prepaid, to the Bondowner at the address shown on the registration books for the Bonds maintained by the Trustee. A Bondowner may direct the Trustee to change its address as shown on the registration books by written notice to the Trustee. All notices to Bondowners shall identify the Bonds by name, CUSIP number, date of original issuance, maturity date, and such other descriptive information as may be needed to identify accurately the Bonds. All notices sent to Bondowners by the Trustee shall simultaneously be sent by registered or certified mail, postage prepaid, to all registered securities depositories that are registered owners of the Bonds, provided that the failure to give such notice shall not affect the validity of any notice given to Bondowners. Notice hereunder may be waived prospectively or retroactively by the person entitled to the notice, but no waiver shall affect any notice requirement as to other persons. Section 1203. Agreement Not for the Benefit of Other Parties. This Agreement is not intended for the benefit of and shall not be construed to create rights in parties other than the Authority, the Company, the Trustee, the Bondowners, the Bond Insurer and the respective directors, members, officers, employees and agents of the Authority and the Trustee to the extent 97 specified in Sections 902 and 1002. Section 1204. Severability. In the event that any provision of this Agreement shall be held to be invalid in any circumstance, such invalidity shall not affect any other provisions or circumstances. Section 1205. Counterparts. This Agreement may be executed and delivered in any number of counterparts, each of which shall be deemed to be an original; but such counterparts together shall constitute one and the same instrument. Section 1206. Captions. The captions and table of contents of this Agreement are for convenience only and shall not affect the construction hereof. Section 1207. Governing Law. This Agreement shall be governed by the laws of the State of New Hampshire. Section 1208. Payment Date Not a Business Day. If any payment, redemption or maturity date for principal, premium or interest shall be (i) a Sunday or a legal holiday, or (ii) a day on which banking institutions are authorized pursuant to law to close and on which the corporate trust office of the Trustee or the First Mortgage Bond Trustee is not open for business, then the payment thereof may be made on the next succeeding day not a day specified in (i) or (ii) with the same force and effect as if made on the specified payment date and no interest shall accrue for the period after the specified payment date. 98 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed under seal all as of the date first above written. BUSINESS FINANCE AUTHORITY OF THE STATE OF NEW HAMPSHIRE (Seal) By:_____________________________________ Jack Donovan Executive Director PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE (Seal) By:_____________________________________ Randy A. Shoop Assistant Treasurer - Finance STATE STREET BANK AND TRUST COMPANY, as Trustee (Seal) By:_____________________________________ Name: Title: 99 EXHIBIT A A-1 THE PROJECT FACILITIES The Project Facilities to be financed by the Bonds consist of certain air or water pollution control and sewage or solid waste disposal facilities at the Seabrook Station Plant, Unit No. 1, in which Public Service Company of New Hampshire had, at the time of the issue of the 1991 Series A Bonds and the 1991 Series C Bonds, a 35.56942 percent ownership interest. The Project Facilities include the following: Waste Water Run-Off System The Waste Water Run-Off System collects and treats yard area drainage to remove pollutants. The System includes catch basins, yard waste water drain pipes, and a site settling pond. Chemical and Oily Waste Treatment System The Chemical and Oily Waste Treatment System collects, stores, processes, treats and disposes of non-radioactive chemical and oily wastes. The wastes result from construction, start-up and operation of the Seabrook Station Plant. The wastes are collected and treated to remove pollutants. The System includes tanks, an acid and caustic handling system, waste lagoons, system flush piping, and oil separator, curbs and drains, pipes, valves, transfer pumps, controls and instrumentation and related support equipment. Sanitary Waste System Sanitary waste is collected, treated and disposed of by the Sanitary Waste System. The System includes sanitary drains, sumps and pumps, a holding tank, a pump station, a sewage treatment plant, piping, transfer pumps and related support equipment. Radioactive Gaseous Waste System The Radioactive Gaseous Waste System collects, processes, stores and treats radioactive gaseous waste produced during normal operations. The System includes the following components: a main gas collection header, a waste gas condenser with associated primary cooling water components, gas chiller compressor units, iodine guard beds, a regeneration subsystem for dryers, waste gas dryers, a waste gas compressor package, ambient carbon delay beds, particulate filters, an after cooler, a hydrogen surge tank, a waste gas radiation monitor, an equipment vent system, a hydrogenated vent header, and associated piping, valves, controls and instrumentation. Exhaust Filtration System The Exhaust Filtration System collects, filters and discharges exhaust containing low level radioactive contamination resulting from normal operations. The System includes exhaust filters, exhaust fans, exhaust ducts, plenums, dampers, piping, flow control valves, and controls and instrumentation. A-2 Liquid Radwaste System The Liquid Radwaste System collects, processes, treats, recycles and disposes of low level radioactive liquid waste resulting from normal operations. The System includes tanks, filters, strainers, pumps, a reboiler, an evaporator, an evaporator distillate condenser, an evaporator distillate accumulator, an evaporator distillate cooler, an evaporator bottoms cooler, a waste demineralizer and filter, equipment drains, chemical drains, a radiation monitor, and associated controls and instrumentation. Boron Recycle System The Boron Recycle System collects, stores, treats, recycles and disposes of reactor coolant letdown during normal operations. This System is required to maintain reactor coolant letdown in accordance with federal pollution control standards as to radioactivity. The System includes the following components: Drain tanks, a degasifier, a preheater, a degasifier regenerative heat exchanger, trim coolers, a degasifier prefilter, cesium removal ion exchangers, recovery filters, waste storage tanks, recovery evaporator packages, recovery test tanks, recovery demineralizers, recovery demineralizer filters, a letdown rehead heat exchanger, a letdown chiller heat exchanger, a letdown moderating heat exchanger, a chiller surge tank, a chiller, thermal regenerative demineralizers, radiation monitors, associated pumps, piping and valves, and controls and instrumentation. Steam Generator Blowdown Treatment System The Steam Generator Blowdown Treatment System collects, processes, stores and treats steam generator blowdown for discharge or recycle during normal operation. This is necessary in compliance with pollution control requirements which limit the discharge of untreated steam generator blowdown. The System includes the following components: Blowdown evaporators, an evaporator distillate condenser, an evaporator condensate accumulator, an evaporator distillate pump, an evaporator condensate cooler, an evaporator bottoms pump, an evaporator bottoms cooler, blowdown demineralizers, acid and caustic systems, blowdown heat exchangers, and associated piping, controls and instrumentation. Solid Radwaste System The Solid Radwaste System collects, stores, packages and prepares solid radioactive waste for disposal. Radioactive solid wastes processed by this System include spent demineralizer resins, expended filter cartridges, evaporator concentrates as well as dry active waste consisting of rags, clothing, paper and other trash. The System includes the following components: A spent resin storage tank, an evaporator bottoms storage tank, associated collection piping, pumps and valves, a dry waste compactor, a filter transfer vehicle, and associated controls and instrumentation. Waste Processing Building A-3 The Waste Processing Building is a reinforced concrete structure which houses equipment used for exempt facilities. The purpose of this building is to house the air and water pollution control facilities and the solid waste disposal facilities. Auxiliary Building The Auxiliary Building is a reinforced concrete structure which houses both pollution control and production related equipment. Pollution control facilities located in the Auxiliary Building include portions of the liquid radwaste and gaseous radwaste systems. The cost of the Auxiliary Building and general support equipment has been allocated to the exempt facilities according to the ratio of space used for qualified equipment to the total space used in the building for all equipment. Spent Nuclear Fuel Facility The Spent Nuclear Fuel Facility is located in a separate building with enclosed fuel handling equipment for production functions and for spent fuel storage. The fuel handling facility includes a Seismic Category 1 structure containing a spent fuel pool with racks, spent fuel cooling and purification systems, a new fuel storage area, a spent fuel cask loading pit, and a cask washdown area. Also included are cranes and equipment supporting the fuel handling operations as well as the transfer canal leading the reactor containment. The cost of the Spent Nuclear Fuel Facility is determined through an allocation of the cost of the overall fuel facility between spent fuel facilities and production facilities. Circulating Water System The Circulating Water System will provide cooling water to the main condensers of Seabrook Station. The Circulating Water System is a once-through system using sea water from the Atlantic Ocean to remove the heat of condensation from the steam cycle and to dispose of that heat in an environmentally acceptable manner. The points of inlet and discharge of the cooling water are offshore, east of Hampton Beach, New Hampshire. The System includes the following structures: Two 19-foot inside diameter tunnels, lined with reinforced concrete, which connect the plant with the offshore inlet and outlet structures; a pumphouse, located at the plant site which encloses traveling screens and pumps for the circulating water and service water systems; and a piping system at the plant site, for the most part underground, interconnecting the tunnels, the pumphouse, and the condensers. The tunnels extend through the underlying rock in an east-west direction at an elevation between 200 and 250 feet below sea level. They end at the plant site with two 19-foot diameter vertical shafts, which reach above grade transforming at the top into two transition boxes open to the atmosphere. At the offshore end, the intake tunnel terminates with three 9-foot inside diameter vertical shafts connecting to three submerged inlet heads. The discharge tunnel terminates with eleven 5-foot inside diameter vertical shafts, each connecting to a submerged bifurcated diffuser head. A-4 Service Water Cooling Tower System The Service Water Cooling Tower System disposes of waste heat from the plant service water system. Waste heat from equipment throughout the plant is collected by the service water cooling system piping. The service water transfers waste heat to the service water cooling tower, which discharges heat to the atmosphere, thereby controlling discharge of waste heat to the natural water resources adjacent to the station. The Service Water Cooling Tower System components include the service water cooling tower, service water piping, pumps and associated electrical service, mechanical equipment, controls and instrumentation. Screen Wash System The Screen Wash System collects, stores and disposes of debris removed from the circulating and service water systems. This debris is solid waste with no market or other value. After removal, the debris is transferred to a landfill for final disposal. The components of the Screen Wash System include the screen wash pumps, trash trough, trash container, piping and valves, associated electrical service, mechanical equipment, controls and instrumentation. A-5 EXHIBIT B B-1 SERIES A SEABROOK POLLUTION CONTROL FACILITIES AGREEMENT This Series A Seabrook Pollution Control Facilities Agreement (this "Facilities Agreement") is entered into as of December 19, 2001 by the Business Finance Authority of the State of New Hampshire (with its successors, the "Authority"), a body corporate and politic created under New Hampshire Revised Statutes Annotated 162-A:3; Public Service Company of New Hampshire (with its successors, the "Company"), a New Hampshire corporation; North Atlantic Energy Corporation (with its successors, "NAEC"), a New Hampshire corporation; and State Street Bank and Trust Company, a Massachusetts trust company, as Trustee (with its successors, the "Trustee"), under a Series A Loan and Trust Agreement dated as of October 1, 2001 (the "LTA") among the Authority, the Company and the Trustee, which secures the Authority's $89,250,000 in aggregate principal amount Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - - 2001 Tax-Exempt Series A) (the "Bonds"). Capitalized terms not otherwise defined herein shall have the meaning given them in the LTA. This Facilities Agreement is entered into pursuant to Section 605 of the LTA in connection with the issuance of the Bonds by the Authority on behalf of the Company and the proposed transfer by NAEC of its interest in the Station (including the Project Facilities) to an unaffiliated party. The purpose of this Facilities Agreement is to ensure the continued exclusion of interest on the Bonds from gross income of the owners thereof for federal income tax purposes and to satisfy certain requirements of the Authority with respect to facilities financed under the Act. This Facilities Agreement shall remain in effect so long as NAEC owns the Project Facilities and until no Bonds remain Outstanding. In consideration of the mutual promises contained in this Facilities Agreement, the rights conferred and the obligations assumed hereby, and other good and valuable consideration, the receipt of which is hereby acknowledged, each of the Company, NAEC, the Authority and the Trustee agree, assign, covenant, grant, pledge, promise, represent and warrant as set forth herein for their own benefit and for the benefit of the Bondowners. Section 1. Representations and Covenants of the Company. The Company represents, warrants, covenants and agrees as follows: (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of New Hampshire; is duly qualified to do business and in good standing in each jurisdiction in which the failure so to qualify would have a material adverse affect on its business or properties; and has full corporate power to enter into this Facilities Agreement. (b) This Facilities Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding obligation of the Company enforceable against the Company as provided herein and in the LTA, subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights and to the exercise of judicial discretion in appropriate cases. B-2 (c) No Default or Event of Default exists under the LTA. (d) The Company has obtained all regulatory approvals necessary to enter into this Facilities Agreement and all such approvals have become final. (e) The Company's execution and delivery of this Facilities Agreement does not violate or constitute a default under the Company's charter or by-laws, any applicable law, any order or decree of any court or governmental authority having jurisdiction over the Company, or any agreement or instrument binding on the Company or its properties. Section 2. Representations and Covenants of NAEC. NAEC represents, warrants, covenants and agrees as follows: (a) NAEC is a corporation duly organized, validly existing and in good standing under the laws of the State of New Hampshire; is duly qualified to do business and in good standing in the State of New Hampshire and in each jurisdiction in which the failure so to qualify would have a material adverse affect on its business or properties; and has full corporate power to enter into this Facilities Agreement. (b) This Facilities Agreement has been duly authorized, executed and delivered by NAEC and constitutes a valid and binding obligation of NAEC enforceable against NAEC as provided herein, subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights and to the exercise of judicial discretion in appropriate cases. (c) NAEC has obtained all regulatory approvals necessary to enter into this Facilities Agreement and all such approvals have become final. (d) NAEC's execution and delivery of this Facilities Agreement does not violate or constitute a default under NAEC's charter or by-laws, any applicable law, any order or decree of any court or governmental authority having jurisdiction over NAEC, or any agreement or instrument binding on NAEC or its properties. (e) NAEC will maintain its corporate existence and its qualification to do business and good standing under the laws of the State of New Hampshire and will maintain itself as a foreign corporation duly qualified to do business and in good standing, where applicable, in each jurisdiction in which the failure to so qualify would have a material adverse effect upon its business or properties. NAEC shall not merge or consolidate with or sell all or substantially all of its assets to another entity, except that the NAEC may so merge or consolidate with or sell all or substantially all of its assets to another corporation if (i) the surviving or transferee corporation is qualified to do business in New Hampshire, and (ii) the surviving or transferee corporation (if not NAEC) has assumed in writing all of NAEC's obligations hereunder. Section 3. Use of the Project. (a) Notwithstanding any provision herein or in the LTA to the contrary, NAEC will not operate the Project Facilities in any manner, and will not take or B-3 omit any action or permit any action to be taken or omitted with the result that interest on the Bonds is included in the gross income of the owners thereof for federal income tax purposes. NAEC's use of the Project Facilities (or facilities replacing the same) shall be in furtherance of the purpose of air or water pollution control or sewage or solid waste disposal and in compliance with the Act. (b) Notwithstanding any provision herein or in the LTA to the contrary, NAEC shall not permit the Project Facilities to fail to qualify as (1) "industrial facilities" under the Act, (2) a facility described in Section 1312(a) of the Tax Reform Act of 1986, or (3) "sewage or solid waste disposal facilities" or "air or water pollution control facilities" within the meaning of Section 103(b)(4)(E) or (F) of the 1954 Code. NAEC acknowledges that it is fully familiar with the physical condition of the Project Facilities and that it is not relying on any representation of any kind by the Authority or the Trustee concerning the nature or condition thereof. Neither the Authority nor the Trustee shall be liable to NAEC or any other person for any latent or patent defect in the Project Facilities. (c) In the maintenance, improvement and operation of the Project Facilities, NAEC will comply in all material respects with all applicable building, subdivision, zoning and land use, environmental protection, sanitary and safety and other laws, rules and regulations, and will not permit any nuisance thereat and will, to the extent of its ownership and control, permit no nuisance to be committed thereat by others while NAEC is, or is entitled to be, in possession thereof. It shall not be a breach of this section if NAEC fails to comply with such laws, rules and regulations during any period in which NAEC shall in good faith be diligently contesting the validity thereof. (d) NAEC shall pay in a timely manner all costs of maintaining and operating the Project Facilities, including without limitation all taxes, excises and other governmental charges lawfully levied thereon or with respect to its interests therein or use thereof to the extent of NAEC's interest therein. It shall not be a breach of this section if NAEC fails to pay any such costs, taxes or charges during any period in which NAEC shall in good faith be contesting the validity or amount thereof and no foreclosure proceedings have been commenced, unless the procedures applicable to such contest require payment thereof and proceedings for their refund or abatement. (e) NAEC shall not sell, lease, transfer or otherwise dispose of the Project Facilities (other than the grant of a mortgage pursuant to a financing transaction) unless (i) it obtains the consent of the Authority, which consent shall not be unreasonably withheld, provided, however, that no such consent shall be required if such transaction has been approved by or consented to by the New Hampshire Public Utilities Commission; (ii) it obtains an opinion of Bond Counsel addressed to and reasonably satisfactory to the Trustee and the Authority that such sale, lease, transfer or other disposition will not affect the exclusion of the interest on the Bonds from the gross income of the owners thereof for federal income tax purposes; and (iii) the sale, lease, transfer or other disposition is made pursuant to a written agreement executed and delivered by NAEC and the transferee, under which agreement the transferee agrees to be bound by covenants substantially similar in all material respects to the covenants set forth in Attachment 1 hereto. B-4 NAEC shall not make any material change in the purposes for which the Project Facilities are used without the consent of the Authority, which consent shall not be unreasonably withheld. NAEC at its own expense may alter, remodel or improve the Project Facilities and construct other facilities at the site of the Project Facilities, provided such action shall not result in any substantial change in the Project Facilities or the character of the activities conducted by NAEC at the Project Facilities site without the consent of the Authority, which consent shall not be unreasonably withheld. (f) The Authority and the Trustee and their respective duly authorized agents shall have the right at all reasonable times and upon the furnishing of reasonable notice under the circumstances to examine the books and records of NAEC relating to the Project Facilities. (g) The undertakings of NAEC contained in Subsections 3(b), (c), (d) and (e) are limited to those consistent with NAEC's undivided percentage interest in the facilities of which the Project Facilities are a part. Section 4. Indemnification by NAEC. NAEC, regardless of any agreement to maintain insurance, shall and hereby does indemnify the Authority and the Trustee against (a) any and all claims by any person related to the participation of the Authority or the Trustee in the financing of the Project Facilities, including without limitation claims arising out of any condition of the Project Facilities or Station or the construction, use, occupancy or management thereof; any accident, injury or damage to any person occurring in or about the Station; any breach by NAEC of its obligations under this Facilities Agreement; any act or omission of NAEC or any of its agents, contractors, servants, employees or licensees; and (b) all costs, counsel fees, expenses or liabilities reasonably incurred in connection with any such claim or any action or proceeding brought thereon. In case any action or proceeding is brought against the Authority or the Trustee by reason of any such claim, NAEC will defend the same at its expense upon notice from the Authority or the Trustee, and the Authority or the Trustee, as the case may be, will cooperate with NAEC, at the expense of NAEC, in connection therewith. Section 5. Failure to Comply. NAEC shall immediately notify the Authority, the Company and the Trustee of any failure to observe or perform any of its covenants or agreements contained herein, and thereafter shall keep the Authority, the Company and the Trustee informed with respect to any curative action instituted by NAEC in order to cure such failure. Section 6. Amendment. This Facilities Agreement may be amended by the parties hereto, provided, however, that in connection with any amendment the Company or NAEC shall furnish the Authority and the Trustee with an opinion of Bond Counsel stating that the amendment will not impair the exclusion of interest on the Bonds from gross income of the owners thereof for federal income tax purposes. Section 7. Agreement Not for the Benefit of Other Parties. This Facilities Agreement is not intended for the benefit of and shall not be construed to create rights in parties other than the Authority, the Company, NAEC, the Trustee and the Bondowners. B-5 Section 8. Severability. In the event that any provision of this Facilities Agreement shall be held to be invalid in any circumstance, such invalidity shall not affect any other provisions or circumstances. Section 9. Counterparts. This Facilities Agreement may be executed and delivered in any number of counterparts, each of which shall be deemed to be an original; but such counterparts together shall constitute one and the same instrument. Section 10. Governing Law. This Facilities Agreement shall be governed by the laws of the State of New Hampshire. IN WITNESS WHEREOF, the parties have caused this Facilities Agreement to be duly executed as of the date first above written. BUSINESS FINANCE AUTHORITY OF THE STATE OF NEW HAMPSHIRE By:_____________________________________ Jack Donovan Executive Director PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE By:_____________________________________ Randy A. Shoop Assistant Treasurer-Finance NORTH ATLANTIC ENERGY CORPORATION By:_____________________________________ STATE STREET BANK AND TRUST COMPANY, as Trustee By:_____________________________________ B-6 ATTACHMENT 1 TO SERIES A SEABROOK POLLUTION CONTROL FACILITIES AGREEMENT COVENANTS (SUBSTANTIALLY SIMILAR IN ALL MATERIAL RESPECTS) TO BE INCLUDED IN PURCHASE AND SALE AGREEMENT Section 1.1. [Caption] (a) Pollution Control Revenue Bonds. (i) The Buyer acknowledges that: (A) The Pollution Control Facilities have been financed, and refinanced, in whole or in part, with proceeds of the issuance and sale of the Pollution Control Bonds; (B) The Company is the economic obligor and conduit borrower in respect of certain of the Pollution Control Bonds, as specified in Schedule _____; (C) The interest paid or accrued on the Pollution Control Bonds is not included in the gross income of the holders of the Pollution Control Bonds (the "PC Bondholders") for purposes of federal income taxation; (D) Pursuant to the Internal Revenue Code of 1954, as amended, and the Code, the basis for the federal income tax exclusion for interest payable to the PC Bondholders is the use of the Pollution Control Facilities for certain qualified purposes which include (I) the abatement or control of air or atmospheric pollution or contamination, (II) the abatement or control of water pollution or contamination, (III) sewage disposal and/or (IV) the disposal of solid waste; (E) The use of all or part of the Pollution Control Facilities for a purpose other than the qualifying purpose or purposes described in subclause (D) above for which the Pollution Control Bonds that financed or refinanced them were issued may cause (I) the interest payable on all or part of the Pollution Control Bonds to be includable in the federal gross income of the PC Bondholders possibly with retroactive effect, unless remedial action is promptly taken to redeem or defease the Pollution Control Bonds or a portion thereof, and/or (II) the deductibility of the interest payable by the Company on all or part of the Pollution Control Bonds to be disallowed by Section 150(b) of the Code; and (F) Any breach by the Buyer or any subsequent transferee of all or any part of the Pollution Control Facilities of its obligations under this Section 1.1(a) could result in the incurrence by the Company of additional costs and expenses, including, but not limited to, an increase in the rate of interest required to be paid to the PC Bondholders, liability to B-7 some or all of the PC Bondholders for their failure to include interest payable on the Pollution Control Bonds in their respective federal gross income in the event of a final determination of taxability by the IRS, loss of the interest deduction to the Company under Section 150(b) of the Code and transaction costs relating to any refinancing, redemption and/or defeasance of all or part of the Pollution Control Bonds. (ii) In order to avoid any or all of the consequences described in clauses (E) and (F) above, the Buyer agrees that it will not use, or permit the use of, all or part of the Pollution Control Facilities for any purpose except (x) the current use of such Pollution Control Facilities or (y) as "sewage or solid waste disposal facilities" or "air or water pollution control facilities" within the meaning of Section 103(b)(4)(E) or (F) of the Internal Revenue Code of 1954, as amended, as contemplated by the tax compliance documents or non-arbitrage certificates for the Pollution Control Bonds that financed or refinanced such Pollution Control Facilities (copies of which with respect to all of the Pollution Control Facilities have been provided to the Buyer by NAEC or the Company), unless the Buyer shall have obtained at its own expense an opinion of nationally recognized bond counsel reasonably acceptable to NAEC or the Company ("Bond Counsel") addressed to and reasonably satisfactory to NAEC and the Company that such proposed change in use of the Pollution Control Facilities or part thereof will not impair (x) the exclusion from gross income of the interest on any Pollution Control Bonds for federal income tax purposes or (y) the deductibility of the interest payable on any Pollution Control Bonds by the Company under Section 150(b) of the Code. (iii) The provisions of Section 1.1(a)(ii) shall not prohibit the Buyer from ceasing to operate, maintain or repair any element or item of the Pollution Control Facilities, suspending the operation of the Pollution Control Facilities on a temporary basis, or terminating the operation of the Pollution Control Facilities on a permanent basis and shutting down the Pollution Control Facilities; provided, however, that the Pollution Control Facilities, in whole or in part, shall not be maintained in such a manner as to prevent their being reactivated and used for a purpose permitted by Section 1.1(a)(ii), nor be retired and/or decommissioned, dismantled or sold as scrap, unless the Buyer has obtained at its own expense an opinion of Bond Counsel addressed to and reasonably satisfactory to NAEC and the Company that this action will not impair either (x) the exclusion from gross income of the interest on any Pollution Control Bonds for federal income tax purposes or (y) the deductibility of the interest payable with respect to any Pollution Control Bonds by the Company under Section 150(b) of the Code. The Buyer shall provide to NAEC and the Company written notice at least thirty (30) days in advance of any permanent shut-down, retirement, abandonment or decommissioning of Seabrook or the Pollution Control Facilities in whole or in part and shall in good faith by written notice to NAEC and the Company describe the affected property so that NAEC and the Company can determine which issue or issues of Pollution Control Bonds financed or refinanced such affected property. (iv) It is expressly understood and agreed that this Section 1.1(a) shall not prohibit the use by the Buyer of tax-exempt bonds to finance or refinance any improvements to the Pollution Control Facilities made on or after the Closing Date or any assets other than the Pollution Control Facilities, provided that no breach by the Buyer of its covenants in this Section 1.1(a) shall result from such improvements. B-8 (v) The Buyer shall indemnify NAEC and the Company for any costs and expenses incurred by NAEC or the Company, respectively, solely as a result of any breach by the Buyer of its covenants in this Section 1.1(a). (vi) NAEC shall, or shall cause the Company to, notify the Buyer in writing of the maturity or redemption of any issue of the Pollution Control Bonds. (vii) If NAEC or the Company shall have notified the Buyer that it has refinanced any of the Pollution Control Bonds with new bonds, the provisions of this Section 1.1(a), if applicable, shall apply with respect to such new bonds as though they were the Pollution Control Bonds. (viii) The Buyer and any transferee or subsequent transferee will not sell or otherwise transfer all or part of the Pollution Control Facilities unless its transferee covenants in writing for the benefit of NAEC and the Company to comply with and to satisfy the covenants of this Section 1.1(a) (including without limitation the covenants of this clause (viii)) with respect to its ownership and use of such Pollution Control Facilities. (ix) The covenants of this Section 1.1(a) shall survive Closing and shall continue in effect and bind the Buyer and any transferee or subsequent transferee of all or part of the Pollution Control Facilities so long as any of the Pollution Control Bonds remain outstanding. RELATED DEFINITIONS "Agreement" means this [Purchase and Sale Agreement], together with Schedules and Exhibits hereto, as the same may be amended from time to time. "Bond Counsel" has the meaning set forth in Section 1.1(a)(ii). "Buyer" [define as the buyer under the Purchase and Sale Agreement]. "Closing" means the closing of the transactions contemplated by this Agreement. "Closing Date" means the date on which the Closing takes place. "Code" means the Internal Revenue Code of 1986, as amended. "Company" [define to mean the Company, as defined in the Facilities Agreement]. "Exhibit" means an exhibit to this Agreement. "Facilities Agreement" means the Series A Seabrook Pollution Control Facilities Agreement to which this Attachment 1 is attached. "IRS" means the Internal Revenue Service or any successor agency. B-9 "LTA" means the LTA, as defined in the Facilities Agreement. "NAEC" [define to mean NAEC, as defined in the Facilities Agreement]. "PC Bondholders" has the meaning set forth in Section 1.1(a)(i)(C). "Pollution Control Bonds" [define to include the Bonds, as defined in the LTA.]. "Pollution Control Facilities" [define to include the Project Facilities, as defined in the LTA.]. "Schedule" means a schedule to this Agreement. "Seabrook" [define to mean the Station, as defined in the LTA]. B-10 EX-4.3.6 8 y58564c.txt EXHIBIT 4.3.6 EXECUTION COPY SERIES B LOAN AND TRUST AGREEMENT among BUSINESS FINANCE AUTHORITY OF THE STATE OF NEW HAMPSHIRE and PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE and STATE STREET BANK AND TRUST COMPANY, as Trustee Dated as of October 1, 2001 Providing for the Issue of: $89,250,000 Business Finance Authority of the State of New Hampshire Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project--2001 Tax-Exempt Series B) Auction Rate Securities Dated the Date of Delivery TABLE OF CONTENTS
Page ---- ARTICLE I. INTRODUCTION AND DEFINITIONS 1 Section 101. Description of the Agreement and the Parties 1 Section 102. Definitions 2 (a) Words 2 (b) Number and Gender 6 (c) Use of Examples 6 ARTICLE II. LOAN OF BOND PROCEEDS; THE ASSIGNMENT AND PLEDGE 7 Section 201. Loan of Bond Proceeds; Issue of First Mortgage Bonds 7 Section 202. Assignment and Pledge of the Authority 7 Section 203. Further Assurance 8 Section 204. Defeasance 8 ARTICLE III. THE BORROWING 10 Section 301. The Bonds 10 (a) Details of the Bonds 10 (b) Form of Bonds 10 (c) Replacement of Bonds 20 (d) Registration of Bonds in the Book-Entry Only System 20 (e) Interest on Overdue Principal 23 (f) Cancellation and Destruction of Bonds 23 Section 302. Application of Bond Proceeds 23 Section 303. Bond Fund 23 Section 304. Application of Moneys 24
i
Page ---- Section 305. Payments by the Company 25 (a) Debt Service 25 (b) Additional Payments 25 (c) Unclaimed Moneys 25 (d) Rebate 25 (e) Purchase Price 25 Section 306. Unconditional Obligation 26 Section 307. Redemption of the Bonds 26 (a) Optional Redemption 26 (b) Reserved 27 (c) Mandatory Taxability Redemption 27 (d) Notice to the Trustee 27 (e) Payment of Redemption Price and Accrued Interest 28 (f) Notice of Redemption 28 Section 308. Investments 28 Section 309. Tax Status of Bonds 30 Section 310. Paying Agent 31 Section 311. Payment Procedure Pursuant to Bond Insurance Policy 33 Section 312. The Bond Insurer 35 ARTICLE IV. SPECIAL PROVISIONS RELATING TO AUCTION RATE SECURITIES 35 Section 401. Definitions 35 Section 402. Orders by Existing Owners and Potential Owners 42
ii
Page ---- Section 403. Submission of Orders by Broker-Dealers to Auction Agent 44 Section 404. Determination of Auction Rate 46 Section 405. Allocation of Bonds 47 Section 406. Notice of Auction Rate 49 Section 407. Auction Index 50 Section 408. Miscellaneous Provisions Regarding Auctions 51 Section 409. Changes in Auction Period or Auction Date 52 Section 410. Auction Agent 53 Section 411. Qualifications of Auction Agent; Resignation; Removal 53 Section 412. Conversion 54 Section 413. Credit Ratings 56 Section 414. Mandatory Tender 56 (a) Agreement to Tender 56 (b) Purchase of Tendered Bonds 56 ARTICLE V. SPECIAL PROVISIONS RELATING TO VARIABLE RATE AND FIXED RATE MODES 56 Section 501. Definitions 56 Section 502. Medium, Method and Place of Payment and Dating of Bonds 64 Section 503. Payment of Principal and Interest of Bonds; Acceptance of Terms and Conditions 65 Section 504. Calculation and Payment of Interest; Change in Mode; Maximum Rate 65 Section 505. Determination of Flexible Rates and Interest Periods During Flexible Mode 66 Section 506. Determination of Interest Rates During the Daily Mode and the Weekly Mode 66 Section 507. Determination of Term Rates and Fixed Rates 67
iii
Page ---- (a) Term Rates 67 (b) Fixed Rates 67 Section 508. Alternate Rates 67 Section 509. Changes in Mode 68 (a) Changes to Modes Other Than Fixed Rate Mode 68 (b) Change to Fixed Rate Mode 70 (c) Failure to Satisfy Conditions Precedent to a Mode Change 72 (d) Recission of Election 72 Section 510. Optional Redemption of Flexible Rate Bonds 72 Section 511. Optional Redemption of Bonds in the Daily Mode or the Weekly Mode 73 Section 512. Optional Redemption of Bonds in the Term Rate or the Fixed Rate Mode 73 Section 513. Optional Tenders of Bonds in the Daily Mode or the Weekly Mode 74 Section 514. Mandatory Purchase on Mandatory Purchase Date 74 Section 515. Remarketing of Bonds; Notices 75 (a) Remarketing of Bonds 75 (b) Notice of Remarketing; Registration Instructions; New Bonds 75 (c) Draw on Liquidity Facility 75 Section 516. Source of Funds for Purchase of Bonds 76 Section 517. Delivery of Bonds 76 Section 518. Book-Entry Tenders 77 Section 519. No Book-Entry System 78 Section 520. No Purchases or Sales After Credit Provider or Liquidity Provider Failure 78
iv
Page ---- Section 521. Credit Enhancement and Liquidity Facility 79 Section 522. Purchase Fund 80 (a) Remarketing Proceeds Account 80 (b) Liquidity Facility Purchase Account 80 (c) Company Purchase Account 80 (d) Investment 80 Section 523. Inadequate Funds for Tenders 80 Section 524. Appointment of Remarketing Agent 81 ARTICLE VI. THE PROJECT 82 Section 601. Company not to Impair Tax Status; Use of Project Facilities 82 Section 602. Qualification of Project Facilities 82 Section 603. Reserved 82 Section 604. Reserved 82 Section 605. Disposition and Use of Project Facilities 82 ARTICLE VII. ADDITIONAL COVENANTS OF THE COMPANY 83 Section 701. Existence and Good Standing; Merger; Consolidation 83 Section 702. Indemnification by the Company 83 Section 703. Continuing Disclosure 83 ARTICLE VIII. DEFAULT AND REMEDIES 84 Section 801. Default 84 Section 802. Remedies for Events of Default 85 (a) Acceleration 85
v
Page ---- (b) Rights as a Secured Party 86 Section 803. Court Proceedings 86 Section 804. Revenues after Default 86 Section 805. Rights of Bondowners 86 Section 806. Performance of Company's Obligations 87 Section 807. Remedies Cumulative; No Waiver 87 Section 808. Rights of Bond Insurer 87 ARTICLE IX. THE TRUSTEE 88 Section 901. Corporate Organization, Authorization and Capacity 88 Section 902. Rights and Duties of the Trustee 88 (a) Moneys to be Held in Trust 88 (b) Accounts 88 (c) Performance of the Authority's Obligations 88 (d) Responsibility 88 (e) Limitations on Actions 89 (f) Financial Obligations 89 (g) Registration Books 89 (h) Ownership of Bonds 90 (i) No Surety Bond 90 (j) Requests by the Company 90 (k) Trustee as Holder of Series J First Mortgage Bonds 90 Section 903. Fees and Expenses of the Trustee 90
vi
Page ---- Section 904. Resignation or Removal of Trustee 90 Section 905. Successor Trustee 91 ARTICLE X. THE AUTHORITY 92 Section 1001. Limited Obligation 92 Section 1002. Rights and Duties of the Authority 92 (a) Remedies of the Authority 92 (b) Limitations on Actions 92 (c) Responsibility 93 Section 1003. Expenses of the Authority 93 Section 1004. Matters to be Considered by Authority 93 Section 1005. Actions by Authority 94 ARTICLE XI. THE BONDOWNERS 94 Section 1101. Action by Bondowners 94 ARTICLE XII. AMENDMENTS AND MISCELLANEOUS 95 Section 1201. Amendments 95 (a) Without Bondowners Consent 95 (b) With Bondowners Consent 96 Section 1202. Notices 97 Section 1203. Agreement Not for the Benefit of Other Parties 97 Section 1204. Severability 98 Section 1205. Counterparts 98 Section 1206. Captions 98 Section 1207. Governing Law 98 Section 1208. Payment Date Not a Business Day 98 EXHIBIT A THE PROJECT FACILITIES A-1 EXHIBIT B SERIES B SEABROOK POLLUTION CONTROL FACILITIES AGREEMENT B-1
vii ARTICLE I. INTRODUCTION AND DEFINITIONS Section 101. Description of the Agreement and the Parties. This SERIES B LOAN AND TRUST AGREEMENT (the "Agreement") is entered into as of October 1, 2001 by the Business Finance Authority of the State of New Hampshire (with its successors, the "Authority" and formerly The Industrial Development Authority of the State of New Hampshire), a body corporate and politic created under New Hampshire RSA 162-A:3; Public Service Company of New Hampshire (with its successors, the "Company"), a New Hampshire corporation; and State Street Bank and Trust Company, a Massachusetts trust company, as Trustee (with its successors, the "Trustee"). This Agreement is a financing document combined with a security document as one instrument in accordance with New Hampshire RSA Chapter 162-I (the "Act") and relates to industrial facilities as defined in Paragraphs 2, VII(d) and (e) of the Act and located in the Town of Seabrook, Rockingham County, New Hampshire. This Agreement provides for the following transactions: (a) the Authority's issue of the Bonds; (b) the Authority's loan of the proceeds of the Bonds to the Company to refund a portion of the outstanding balance of the Authority's $112,500,000 7.65% Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project--1991 Tax-Exempt Series C) (the "1991 Series C Bonds") which 1991 Series C Bonds were originally issued for the purpose of financing the acquisition, construction and installation of the Project Facilities; (c) the Company's repayment of the loan of Bond proceeds from the Authority through payment to the Trustee of all amounts necessary to pay the Bonds issued by the Authority; (d) the Company's agreement to evidence and secure its repayment obligations hereunder by the issuance of the Series J First Mortgage Bonds; and (e) the Authority's assignment to the Trustee in trust for the benefit and security of the Bondowners and the Bond Insurer of the Authority's rights in respect of the loan to the Company hereunder, including repayment of the loan to be received from the Company. In consideration of the mutual promises contained in this Agreement, the rights conferred and the obligations assumed hereby, and other good and valuable consideration, the receipt of which is hereby acknowledged, each of the Company, the Authority and the Trustee agree, assign, covenant, grant, pledge, promise, represent and warrant as set forth herein for their own benefit and for the benefit of the Bondowners and the Bond Insurer. 1 Section 102. Definitions. (a) Words. In addition to terms defined elsewhere herein, the following terms have the following meanings in this Agreement, unless the context otherwise requires: (i) "Act" has the meaning set forth in Section 101. (ii) "Auction Rate Mode" means the mode during which the Bonds bear interest at an Auction Rate. (iii) "Authority's Service Charge" means payment to the Authority for its own use of .375% of the principal amount of the Bonds payable on the date of the issue of the Bonds and an additional .375% of the then Outstanding principal balance of the Bonds payable on the date which is three years from the date of the issue of the Bonds. (iv) "Bond Counsel" means Palmer & Dodge LLP or such other nationally recognized bond counsel selected by the Company and reasonably satisfactory to the Trustee and the Bond Insurer. (v) "Bond Fund" means the fund established under Section 303. (vi) "Bond Insurance Agreement" means the Reimbursement and Indemnity Agreement dated as of December 19, 2001, between the Company and the Bond Insurer. (vii) "Bond Insurance Policy" means the financial guaranty insurance policy issued by the Bond Insurer insuring the payment when due of the principal of and interest on the Bonds as provided therein. (viii) "Bond Insurer" means MBIA Insurance Corporation, a New York stock insurance company. (ix) "Bond Insurer Default" has the meaning defined in Section 808(b). (x) "Bond Insurer Event of Insolvency" means the institution of a proceeding in a court having jurisdiction in the premises seeking an order for relief, rehabilitation, reorganization, conservation, liquidation or dissolution in respect of the Bond Insurer and the continuance of such proceeding for a period of sixty (60) consecutive days or such court enters an order granting the relief sought in such proceeding and such order is not reversed or action thereunder stayed within sixty (60) days of such entry. (xi) "Bondowners", "owners" or words of similar import means the registered owners of the Bonds from time to time as shown in the books kept by the Trustee as bond registrar, except that wherever appropriate the term "owners" shall mean the owners of the Bonds for federal income tax purposes. 2 (xii) "Bonds" means the $89,250,000 principal amount of the Business Finance Authority of the State of New Hampshire Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - 2001 Tax-Exempt Series B) dated the date of delivery and substantially in the form set forth in Subsection 301(a) and any bond or bonds duly issued in exchange or replacement therefor. (xiii) "Book-Entry Only System" means the system of registration of the Bonds described in Subsection 301(d). (xiv) "Business Day" means a day other than a Saturday or Sunday and on which banks in each of the cities in which the principal offices of the Trustee, the First Mortgage Bond Trustee, the Remarketing Agent, if any, and the Paying Agent and the office of the Liquidity Provider at which draws on a Liquidity Facility, if any, are made are located are not required or authorized to remain closed and on which the New York Stock Exchange or the payment system of the Federal Reserve System is not closed. (xv) "Company Bonds" shall have the meaning set forth in Section 305(e). (xvi) "Company Representative" means the person or persons at the time designated to act on behalf of the Company in a written certificate (or any alternate or alternates at the time so designated) furnished to the Trustee, containing the specimen signature of such person or persons and signed on behalf of the Company by its Chairman, Vice Chairman, President, Chief Financial Officer, Treasurer, any Assistant Treasurer, or any Vice President. (xvii) "Continuing Disclosure Agreement" means the Continuing Disclosure Agreement between the Company and the Trustee dated the date of issuance and delivery of the Bonds as originally executed and as it may be amended from time to time in accordance with its terms. (xviii) "Debt Service" means all money payable to the Bondowners in accordance with the terms hereof and of the Bonds including (i) principal, (ii) interest and (iii) any premium. (xix) "Default" has the meaning given such term in Section 801. (xx) "Event of Default" has the meaning given such term in Section 801. (xxi) "Facilities Agreement" has the meaning given to it in Section 605. (xxii) "Federal Tax Statement" means the Statement as to Tax Exempt Status of Bonds executed by the Company in connection with the original issuance of the Bonds and delivered to the Trustee. (xxiii) "First Mortgage Bond Indenture" means the First Mortgage Indenture 3 dated as of August 15, 1978, as amended, and the Twelfth Supplemental Indenture thereto dated as of December 1, 2001 between the Company and First Union National Bank, successor to First Fidelity Bank, National Association, New Jersey, as Trustee, as amended and supplemented from time to time. (xxiv) "First Mortgage Bond Trustee" means the trustee under the First Mortgage Bond Indenture. (xxv) "IRC" means the Internal Revenue Code of 1986, as it may be amended from time to time. (xxvi) "Loan" has the meaning given such term in Section 201. (xxvii) "Maximum Rate" means the lesser of fourteen percent (14%) per annum (or such separate rates for Bonds and Liquidity Provider Bonds as may be provided for by amendment to this Agreement) and the maximum rate of interest permitted by applicable law. (xxviii) "MBIA" means MBIA Insurance Corporation, the principal operating subsidiary of MBIA Inc., a New York Stock Exchange listed company, as Bond Insurer. (xxix) "Moody's" means Moody's Investors Service, a corporation duly organized and existing under and by virtue of the laws of the State of Delaware, and its successors and assigns, except that if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, then the term "Moody's" shall be deemed to refer to any other nationally recognized securities rating agency selected by the Company after consultation with the Remarketing Agent. (xxx) "NAEC" means North Atlantic Energy Corporation, a New Hampshire corporation and an affiliate of the Company. (xxxi) "1954 Code" means the Internal Revenue Code of 1954, as amended, as applicable to the Bonds and the Project Facilities. (xxxii) "Outstanding", when used to modify Bonds, refers to Bonds issued, authenticated, and delivered under this Agreement, excluding: (i) Bonds which have been exchanged or replaced; (ii) Bonds which have been paid; (iii) Bonds which have become due and for the payment of which moneys have been duly provided; and (iv) Bonds with respect to which this Agreement has been defeased pursuant to Section 204. (xxxiii) "Paying Agent" means State Street Bank and Trust Company, as Paying Agent under this Agreement and its successors in such capacity. 4 (xxxiv) "Permitted Investments" has the meaning given such term in Section 308. (xxxv) The word "person" means any individual or entity so recognized by law. (xxxvi) "Project Costs" means the Company's cost of acquisition or construction and installation of the Project Facilities which are "project costs" within the meaning of Paragraph 2, IX of the Act, including, but not limited to, the cost of issuing the Bonds, obtaining professional and advisory services, and certain interest on the Bonds, which may be paid from Bond proceeds pursuant to the Act. (xxxvii) "Project Facilities" means the Company's former ownership share of the sewage or solid waste disposal and air or water pollution control facilities at the Station as of the date of issuance of the Bonds described generally in the attached Exhibit A. (xxxviii) "Refunding Trust Agreement" means the Refunding Trust Agreement, among the Authority, the Company and State Street Bank and Trust Company, as trustee for the 1991 Series C Bonds, dated as of October 1, 2001. (xxxix) "S&P" means Standard & Poor's Ratings Services, a division of McGraw-Hill, duly organized and existing under and by virtue of the laws of the State of New York, and its successors and assigns, except that if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, then the term "S&P" shall be deemed to refer to any other nationally recognized securities rating agency selected by the Company after consultation with the Remarketing Agent. (xl) "Seabrook Transfer" means each of the transfer by the Company of its interest in the Station (including the Project Facilities) to NAEC, as of June 5, 1992, the proposed transfer by NAEC of such interest to an unaffilated party pursuant to an order of the New Hampshire Public Utilities Commission and any subsequent transfer of such interest. (xli) "Seabrook Transferee" means each of NAEC, any subsequent owner or owners of the Project Facilities pursuant to a Seabrook Transfer, and its or their successors. (xlii) "Securities Depository" means The Depository Trust Company and its successors and assigns or any other securities depository selected by the Company which agrees to follow the procedures required to be followed by such securities depository in connection with the Bonds. (xliii) "Series J First Mortgage Bonds" means the $89,250,000 in aggregate principal amount First Mortgage Bonds, Series J issued by the Company and delivered to the Trustee pursuant to Section 201 of this Agreement and the First Mortgage Bond 5 Indenture to evidence and secure the Company's obligation to repay the Loan. (xliv) "Station" means Unit No. 1 of the nuclear electric generating plant located in Seabrook, New Hampshire, of which the Company is a joint owner. (xlv) "Trustee" means the State Street Bank and Trust Company, as trustee under this Agreement and its successors in such capacity. (xlvi) "UCC" means the New Hampshire Uniform Commercial Code (New Hampshire Revised Statutes Annotated Chapter 382-A). (xlvii) "Variable Rate Mode" means the Daily Mode, Weekly Mode, Flexible Mode or Term Rate Mode (all as defined in Section 501). Except in the Bonds, "here" in such words as "hereby", "herein", "hereof" or "hereunder" means this Agreement as a whole rather than the particular section, subsection, paragraph, subparagraph, clause or subclause in which the word appears; and in the Bonds it refers thereto. (b) Number and Gender. Wherever appropriate (1) the singular and plural forms of words and (2) words of different gender shall, within those respective classifications, be deemed interchangeable. (c) Use of Examples. When a condition, class, category, circumstance or other concept is described in general terms herein and a list of possible examples or components of what has been described generally is associated with that description, and regardless of whether the words "include" or "including" or the like are also used, the listing shall be deemed illustrative only and shall not be construed as excluding other possible examples or components or as otherwise limiting the generality of the description in any way. 6 ARTICLE II. LOAN OF BOND PROCEEDS; THE ASSIGNMENT AND PLEDGE Section 201. Loan of Bond Proceeds; Issue of First Mortgage Bonds. The Authority shall issue the Bonds pursuant to the Act in the amount, in the form, and with the terms provided herein, and shall loan to the Company such amount (the Loan) to refinance Project Costs as hereinafter provided. The Company agrees to repay the Loan of the aggregate principal amount of the Bonds in the amounts and at the times necessary to pay principal of, premium, if any, and interest on the Bonds by making the payments required under Section 305, and to evidence and secure the Company's obligation to do so, the Company shall issue and deliver to the Trustee a like aggregate principal amount of its Series J First Mortgage Bonds in the form set forth in the First Mortgage Bond Indenture. Upon payment of the principal of and premium, if any, on any of the Bonds and payment of all accrued interest in connection therewith, whether at maturity or prior to maturity by redemption or otherwise, or upon provision for the payment thereof having been made in accordance with Section 204, Series J First Mortgage Bonds in an aggregate principal amount equal to the aggregate principal amount of the Bonds so paid, or for the payment of which such provision has been made, shall be deemed fully paid and the obligations of the Company thereunder terminated as provided in the First Mortgage Indenture and shall be surrendered by the Trustee to the First Mortgage Bond Trustee for cancellation. The Trustee shall promptly notify the First Mortgage Bond Trustee by telephone, confirmed in writing, of any default in the payment of principal of, and premium, if any, and interest on the Bonds, and shall promptly notify the First Mortgage Bond Trustee by telephone, confirmed in writing of any payment of principal of and premium, if any, and interest (other than payment of regularly scheduled interest) on the Bonds, or if the Bonds have been paid or deemed paid, defeased, redeemed, retired, surrendered or canceled. In accordance with the terms thereof, the Series J First Mortgage Bonds shall be issued to and registered in the name of the Trustee and shall not be sold, assigned, pledged or transferred, except to effect transfer to any successor Trustee hereunder. The Series J First Mortgage Bonds shall have a principal amount, an interest rate, a maturity date and redemption provisions corresponding to the Bonds. Payments of principal of and premium, if any, and interest on the Series J First Mortgage Bonds shall upon receipt by the Trustee be deemed to constitute payments of corresponding amounts by the Company in respect of the Bonds pursuant to Subsection 305(a). Section 202. Assignment and Pledge of the Authority. The Authority, for consideration paid as hereinabove acknowledged, hereby irrevocably assigns and pledges to the Trustee in trust for the security of the Bondowners upon the terms hereof all of the Authority's right, title and interest in (i) respect of the Loan and all payments thereon, (ii) all moneys and securities held by the Trustee for deposit in, or deposited in, the Bond Fund and investment earnings thereon, (iii) the Series J First Mortgage Bonds, all bonds issued in replacement thereof or in exchange or substitution therefor and all payments on, and proceeds of, the foregoing, and (iv) any collateral security for, and all proceeds of, any of the foregoing. The Trustee shall hold (a) all the rights, title and interest received under this section and (b) all payments (exclusive of funds to which the Trustee is entitled in its own right as fees, reimbursement, indemnity or otherwise) received from the Company or derived from the exercise of the Authority's powers hereunder (which shall include all payments under Subsection 305(a)) and in respect of the Series J First Mortgage 7 Bonds in trust for the security of the Bondowners in accordance with the provisions hereof. Section 203. Further Assurance. The Company and the Authority shall from time to time execute, deliver and record and file such instruments as may be necessary to perfect or to maintain or continue the perfection of, or as the Trustee may reasonably require to confirm, perfect or maintain the security created hereby and the assignment and pledge of rights hereunder. Section 204. Defeasance. When there are in the Bond Fund sufficient funds, or non-callable and non-prepayable obligations issued by, or the full and timely payment of which are guaranteed by, the United States of America, in such principal amount, bearing interest at such rates and with such maturities as will provide, without reinvestment, sufficient amounts to pay principal or Purchase Price of, premium, if any, and interest on the Bonds as and when such amounts become due and, prior to the Fixed Rate Conversion Date or change to the Fixed Rate, as applicable, to pay the Purchase Price thereof whenever the same may be payable, as determined through a verification report or computation, which may be prepared by the Company, and when all the rights hereunder of the Authority and the Trustee have been provided for (1) the Bondowners will cease to be entitled to any right, benefit or security under this Agreement except the right to receive payment of the funds deposited and held for payment and other rights set forth below or which by their nature cannot be satisfied prior to or simultaneously with termination of the lien hereof, (2) the security interests created by this Agreement (except in such funds and investments) shall terminate, and (3) the Authority and the Trustee shall execute and deliver such instruments as may be necessary to discharge the lien and security interests created hereunder; provided, however, that, if within ninety (90) days of such deposit, the Bonds are not to be redeemed in full prior to maturity or paid in full at maturity, the Trustee and the Bond Insurer shall have received on the date of the deposit an opinion of Bond Counsel to the effect that such deposit and the investment thereof will not affect the exclusion of interest on the Bonds from gross income of the owners thereof for federal income tax purposes; and provided further that if any Bonds are to be redeemed prior to the maturity thereof, such Bonds shall have been duly called for redemption or irrevocable instructions for such a call shall have been given to the Trustee. Upon such defeasance, the funds and investments required to pay or redeem the Bonds in full shall be irrevocably set aside for such purpose. The Trustee shall cause to be mailed to all Bondowners within fifteen (15) days of the conditions of this section being met in the manner herein specified for redemption of Bonds a notice stating that such conditions have been met and that the lien of this Agreement has been discharged, and, if the Bonds are to be redeemed prior to maturity, specifying the date of redemption and the redemption price. Any funds or property held by the Trustee for payment of the Bonds under this section and not required for such payment shall (unless there is an Event of Default hereunder, in which case they shall be applied as provided in Section 604), after satisfaction of all the rights of the Authority and the Trustee, and payment of the rebate, if any, due to the United States of America under IRC ss.148(f), and upon such indemnification, if any, as the Authority or the Trustee may reasonably require, be distributed to the Company. If Bonds are not presented for final payment when due and moneys are available in the hands of the Trustee therefor, the Trustee shall, without liability for interest thereon, continue to hold the moneys held for that purpose subject to 8 Subsection 305(c), and interest shall cease to accrue on the principal amount represented thereby. When there are in the Bond Fund funds or securities as described in the preceding paragraph as are sufficient to pay principal or Purchase Price of, premium, if any, and interest on, some but not all of the Bonds in full as and when such amounts become due and all of the other conditions in the preceding paragraph have been met with respect to such Bonds, the particular Bonds (or portions thereof) for which such provision for payment shall have been considered made shall be selected by lot by the Trustee (or, if the Bonds are then registered to CEDE & CO. and the Book-Entry Only System is then in effect, by The Depository Trust Company) and thereupon the Trustee and the Authority shall take similar action to release the security interests created by this Agreement in respect of such Bonds (except in such funds or securities and investments thereon), subject however to compliance with the applicable conditions set forth in the provisos above. Notwithstanding the foregoing, those provisions relating to the maturity of Bonds, interest payments and dates thereof and the Trustee's remedies with respect thereto, and provisions relating to exchange, transfer and registration of Bonds, replacement and cancellation of Bonds, the holding of moneys in trust and the duties of the Trustee in connection with all of the foregoing and the fees, expenses and indemnities of the Trustee and the Authority, shall remain in full force and effect and shall be binding upon the Trustee, the Authority, the Company and the Bondowners notwithstanding the release and discharge of this Agreement and the lien on the Series J First Mortgage Bonds until the Bonds have been actually paid in full. Notwithstanding anything herein to the contrary, if moneys or governmental obligations have been deposited or set aside with the Trustee pursuant to the provisions of this Section 204 and the principal of, premium, if any, and interest on the Bonds shall not, in fact, have been actually paid in full, no amendment to the provisions of this Section 204 will be made without the consent of the owner of each of the Bonds affected thereby. Subject to Section 808(b), any defeasance of the Bonds shall require the prior written consent, which consent shall not be unreasonably withheld, of the Bond Insurer. Notwithstanding anything herein to the contrary, in the event that the principal and/or interest due on the Bonds shall be paid by the Bond Insurer pursuant to the Bond Insurance Policy, the Bonds shall remain Outstanding for all purposes, not be defeased or otherwise satisfied and not be considered paid by the Company, and the assignment and pledge hereunder and all covenants, agreements and other obligations of the Company to the registered owners of the Bonds shall continue to exist and shall run to the benefit of the Bond Insurer, and the Bond Insurer shall be subrogated to the rights of such Bondowners. 9 ARTICLE III. THE BORROWING Section 301. The Bonds. (a) Details of the Bonds. The Bonds shall be issued in fully registered form and shall be numbered from 1 upwards in the order of their issuance or in any other manner deemed appropriate by the Paying Agent and the Authority. The Bonds shall be initially in the denomination of $25,000 or any integral multiple thereof prior to the Conversion Date and thereafter in Authorized Denominations as defined in Section 501. The Bonds shall be dated the date of original delivery thereof, and interest shall accrue from that date. The interest on Bonds until they come due shall be payable on the interest payment dates applicable to the Mode the Bonds are in from time to time; provided, however, that Liquidity Provider Bonds shall bear interest as described in Section 503. The Bonds shall be initially in the Auction Rate Mode. Bonds shall be signed on behalf of the Authority by the manual or facsimile signature of any two of the Chairman, Vice Chairman, Treasurer, and Executive Director and the corporate seal of the Authority or a facsimile thereof shall be engraved or otherwise reproduced thereon. The Certificate of Authentication of the Trustee shall be manually signed on behalf of the Trustee. No bonds shall be issued under this Agreement other than the Bonds. In case any officer of the Authority whose manual or facsimile signature shall appear on any Bonds shall cease to be such officer before the delivery thereof, such manual or facsimile signature shall nevertheless be valid and sufficient for all purposes as if he or she had remained in office until after such delivery. The Bonds shall mature on May 1, 2021 and shall bear interest as provided in this Agreement for the Mode they are in from time to time. The Bonds are subject to redemption and optional and mandatory tender for purchase all as described in Articles IV and V of this Agreement and the form of Bonds. (b) Form of Bonds. (i) The Bonds initially shall be issued in substantially the following form: Unless this bond is presented by an authorized representative of The Depository Trust Company, a New York Company ("DTC"), to the Authority (as defined below) or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. 10 Registered No. R $___________ UNITED STATES OF AMERICA STATE OF NEW HAMPSHIRE BUSINESS FINANCE AUTHORITY OF THE STATE OF NEW HAMPSHIRE Pollution Control Revenue Bond (Public Service Company of New Hampshire Project-- 2001 Tax-Exempt Series B) CUSIP: 64468C AU 8 INITIAL INTEREST RATE: 1.55% INITIAL PERIOD: December 19, 2001 through and including January 22, 2002 MATURITY DATE: May 1, 2021 DATE OF THIS BOND: December 19, 2001 (Date as of which Bonds of this series were initially issued) MODE: Auction Rate (as of Date of Registration) REGISTERED OWNER: CEDE & CO. DATE OF REGISTRATION: PRINCIPAL AMOUNT: DOLLARS THIS BOND DOES NOT CONSTITUTE AN INDEBTEDNESS OF THE STATE OF NEW HAMPSHIRE OR OF THE AUTHORITY EXCEPT TO THE EXTENT PERMITTED BY NEW HAM-PSHIRE RSA CHAPTER 162-I. ALL AMOUNTS OWED HEREUNDER ARE PAYABLE ONLY FROM THE SOURCES PROVIDED IN THE LOAN AND TRUST AGREEMENT DESCRIBED BELOW, AND NO PUBLIC FUNDS MAY BE USED FOR THAT PURPOSE. The Business Finance Authority of the State of New Hampshire (the "Authority"), for value received, promises to pay to the REGISTERED OWNER, or registered assigns, but solely from the moneys to be provided under the Agreement mentioned below, upon presentation and surrender hereof, in lawful money of the United States of America, the PRINCIPAL AMOUNT on the MATURITY DATE, unless paid earlier as provided below, with interest from the most recent Interest Payment Date (as defined in the Agreement) to which interest has been paid or duly provided for or, if no interest has been paid, from the DATE OF THIS BOND, as the rates determined as set forth below, payable on each Interest Payment Date. This bond is one of a series of Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project-2001 Tax-Exempt Series B) (the "Bonds") in the 11 aggregate principal amount of $89,250,000 issued under New Hampshire Chapter RSA 162-I (the "Act"). The proceeds of the Bonds are being loaned to Public Service Company of New Hampshire (the "Company"), a New Hampshire corporation, pursuant to a Series B Loan and Trust Agreement (the "Agreement") dated as of October 1, 2001 among the Company, the Authority and the Trustee to refinance certain costs associated with the Company's prior ownership interest in air or water pollution control and sewage or solid waste disposal facilities installed for use by Unit No. 1 at the nuclear electric generating station (the "Station") in Seabrook, New Hampshire (the "Project Facilities"). Pursuant to the Agreement, the Company has unconditionally agreed to repay such loan in the amounts and at the times necessary to pay the principal of, premium, if any, and interest on the Bonds when due. To evidence and secure such loan the Company has issued and delivered to the Trustee its First Mortgage Bonds, Series J (the "Series J First Mortgage Bonds") issued under the First Mortgage Indenture dated as of August 15, 1978, as amended, and the Twelfth Supplemental Indenture thereto dated as of December 1, 2001 between the Company and First Union National Bank, successor to First Fidelity Bank, National Association, New Jersey, as Trustee (as amended and supplemented from time to time, the "First Mortgage Bond Indenture") in an aggregate principal amount and with an interest rate, maturity date and redemption provisions corresponding to those of the Bonds. As provided in the Agreement, payments of principal of, and premium, if any, and interest on the Series J First Mortgage Bonds shall, upon receipt by the Trustee, be deemed to constitute payments in corresponding amounts by the Company in respect of the Bonds. Reference is hereby made to the Agreement for the provisions thereof with respect to the rights, limitations of rights, duties, obligations and immunities of the Company, the Authority, the Trustee and the Bondowners, including the order of payments in the event of insufficient funds, the disposition of unclaimed moneys held by the Trustee and restrictions on the rights of owners of the Bonds to bring suit. The Agreement may be amended to the extent and in the manner provided therein. Copies of the Agreement are available for inspection at the corporate trust office of the Trustee. Unless otherwise defined herein, capitalized terms shall have the meanings given them in the Agreement. If an Event of Default (as defined in the Agreement) occurs and is continuing, the Trustee may, and upon the written request of Bondowners of at least 25% in principal amount of the Bonds outstanding shall, declare the principal of all Bonds then outstanding and the interest accrued thereon immediately due and payable in accordance with the Agreement. The Bondowners shall have no right to institute any proceeding or pursue any other remedy to enforce the Bonds or the covenants of the Company under the Agreement except as provided therein. The Bonds shall be issued initially in the Auction Rate Mode. This bond is initially issued in a thirty-five day Auction Period. At the option of the Company and upon certain terms and conditions provided for in the Agreement, this bond may at any time be converted to a daily, seven-day, 28-day, 35-day, three-month or six-month Auction Period or a Special Auction Period or converted to a Variable Rate Mode or to Fixed Rate Indebtedness, all as provided in the Agreement. Until conversion to the Daily Mode, Weekly Mode, Flexible Mode, Term Rate Mode or Fixed Rate Mode as provided below, this bond shall bear interest at an Auction Rate. The Auction Rate shall be the rate of interest determined by the auction agent designated as provided in the Agreement (herein, with its successors, the "Auction Agent") for each Auction 12 Period or Special Auction Period, as defined below, pursuant to the Auction Procedures. In no event may the Auction Rate exceed the Maximum Auction Rate (as defined in the Agreement, initially the lesser of fourteen percent (14%) per annum or the maximum rate permitted by applicable law). The Bonds shall bear interest during the INITIAL PERIOD at the INITIAL INTEREST RATE. Thereafter, the Auction Agent shall redetermine the Auction Rate for each Auction Period as provided in the Agreement. The amount of interest due on any Interest Payment Date shall be the amount of unpaid interest accrued on this bond through the day preceding such Interest Payment Date or, if such Interest Payment Date is not a Business Day, through the day preceding the first Business Day succeeding such Interest Payment Date. The Auction Rate and the applicable auction procedures shall be as set forth in the Agreement, to which specific reference is made and which provisions are specifically incorporated herein by reference. Upon conversion or reconversion to a Variable Rate Mode or the Fixed Rate Mode, this bond is subject to mandatory tender for purchase as described below. Each conversion of the Bonds from the Auction Mode to another Mode shall be subject to the conditions set forth herein and in the Agreement. In the event that the conditions for a proposed conversion from the Auction Rate Mode to a new Mode are not met (i) such new Mode shall not take effect on the proposed conversion date, notwithstanding any prior notice to the Bondowners of such conversion and (ii) the next Auction Period shall be a seven-day Auction Period and the Auction Rate shall be the Maximum Auction Rate. In no event shall the failure of this bond to be converted to another Mode be deemed to be a default or an Event of Default (as defined in the Agreement). Each determination and redetermination of the Auction Rate shall be conclusive and binding on the Authority, the Trustee, the Paying Agent, the Bond Insurer, the Company and the Bondowners. While this bond is in the Auction Rate Mode in a daily, seven-day, 28-day, 35-day or three-month Auction Period or Special Auction Period of 180 days or less, interest shall be computed on the basis of a 360-day year for the actual number of days elapsed. While this bond is in the Auction Rate Mode in a six-month Auction Period or Special Auction Period of more than 180 days, interest shall be computed on the basis of a 360-day year consisting of twelve 30-day months. From and after the date on which this bond becomes due, any unpaid principal will bear interest at the then effective interest rate until paid or duly provided for. Principal and interest on this bond is payable while this bond is in the Auction Rate Mode, by check mailed to the REGISTERED OWNER hereof, or by wire or bank transfer within the continental United States of America of immediately available funds to any REGISTERED OWNER of $1,000,000 or more in principal amount of the Series Bonds upon written request of such REGISTERED OWNER received by the Trustee not less than five days prior to the record date, determined as of the close of business on the applicable record date, at its address as shown on the registration books maintained by the Paying Agent. The Purchase Price of Bonds tendered for purchase shall be paid as provided below. 13 The record date for payment of interest while this bond is in an Auction Rate Period other than a daily Auction Period is the second Business Day preceding the date on which interest is to be paid, and during a daily Auction Period, the last Business Day of the month preceding the date on which interest is to be paid. AFTER THE FIXED RATE CONVERSION DATE, THE REGISTERED OWNER SHALL HAVE NO RIGHT TO TENDER THIS BOND FOR PURCHASE. This bond is subject to mandatory tender for purchase at a price of par plus accrued interest, if any, to the Purchase Date, on the Conversion Date from the Auction Rate Mode to another Mode. Notice of mandatory tender shall be given or caused to be given by the Trustee in writing to the REGISTERED OWNER at least fifteen (15) days (or, if this bond is then in a six-month Auction Period or a Special Auction Period of more than 180 days, 30 days) prior to the mandatory Purchase Date. The owner of this bond, by acceptance hereof, agrees to sell and surrender this bond at such price to any purchaser determined in accordance with the provisions of the Agreement in the event of such mandatory tender and, on such Purchase Date, to surrender this bond to the Paying Agent for payment of the Purchase Price. From and after the Purchase Date, no further interest on this bond shall be payable to the REGISTERED OWNER, provided that there are sufficient funds available on the Conversion Date to pay the purchase price. All notices of tender of Bonds and deliveries of Bonds subject to mandatory tender shall be made to the Paying Agent at 2 Avenue de Lafayette, Boston, MA 02111, Attention: Corporate Trust Department. The Purchase Price of Bonds in the Auction Rate Mode tendered for purchase is payable by wire or bank transfer within the continental United States of America in immediately available funds from the Paying Agent to the REGISTERED OWNER at its address shown on the registration books maintained by the Paying Agent. If on any date this bond is subject to mandatory tender for purchase, payment of the Purchase Price of this bond to such owner shall be made on the Purchase Date if presentation and surrender of this bond is made prior to 1:00 P.M., New York City time, or on the next Business Day without any additional accrued interest if presentation and surrender of this bond made after 1:00 P.M., New York City time. This bond is also subject to optional redemption at 100% of the principal amount so redeemed plus accrued interest to the redemption date prior to the Fixed Rate Conversion Date at the direction of the Company in whole or in part on any Interest Payment Date immediately following the last day of an Auction Period during an Auction Rate Period; provided that in the event of any partial redemption of the Bonds prior to the Fixed Rate Conversion Date, the aggregate principal amount so redeemed shall be an integral multiple of $25,000 and the aggregate principal amount of the Bonds of this series bearing interest at an Auction Rate that will remain Outstanding shall be at least $10,000,000 unless otherwise consented to by the Broker-Dealer. The Bonds are subject to mandatory redemption at any time at a redemption price of 100% of the principal amount of the Bonds so redeemed plus accrued interest to the redemption date in the event (i) the Company delivers to the Trustee an opinion of nationally recognized 14 bond counsel selected by the Company and reasonably satisfactory to the Trustee ("Bond Counsel") stating that interest on the Bonds is or will become includable in gross income of the owners thereof for federal income tax purposes, or (ii) it is finally determined by the Internal Revenue Service or a court of competent jurisdiction, as a result of (A) a proceeding in which the Company has participated or been given notice and an opportunity to participate, and (B) either a failure by the Company or the Seabrook Transferee (as defined in the Agreement) to observe any covenant or agreement undertaken in or pursuant to the Agreement or a Seabrook Transfer (as defined in the Agreement), or the inaccuracy of any representation made by the Company or the Seabrook Transferee in or pursuant to the Agreement or a Seabrook Transfer, that interest payable on the Bonds is includable for federal income tax purposes in the gross income of any owner thereof (other than an owner which is a substantial user or a related person within the meaning of Section 147(a) of the Internal Revenue Code of 1986). Any determination under clause (ii) above will not be considered final for this purpose until the earliest of the conclusion of any appellate review, the denial of appellate review or the expiration of the period for seeking appellate review. Redemption under this paragraph shall be in whole unless not later than forty-five (45) days prior to the redemption date the Company delivers to the Trustee an opinion of Bond Counsel reasonably satisfactory to the Trustee to the effect that a redemption of less than all of the Bonds will preserve the tax-exempt status of interest on the remaining Bonds outstanding subsequent to such redemption. Any such redemption shall be made on the 60th day after the date on which the opinion described in clause (i) is delivered or the determination described in clause (ii) becomes final or on such earlier date as the Company may designate by notice given to the Trustee at least forty-five (45) days prior to such designated date. If such redemption shall occur in accordance with the terms of the Agreement, then such failure by the Company or the Seabrook Transferee to observe such covenant or agreement, or the inaccuracy of any such representation will not, in and of itself, constitute a default thereunder. If the Trustee receives written notice from any Bondowner stating that (i) such Bondowner has been notified in writing by the Internal Revenue Service that it proposes to include the interest on the Bonds in the gross income of such owner for federal income tax purposes, or any other proceeding has been instituted against such owner which may lead to a like determination, and (ii) such owner will afford the Company the opportunity to participate at its own expense in the proceeding, either directly or in the name of such owner, until the conclusion of any appellate review, and the Trustee has examined such written notice and it appears to be accurate on its face, then the Trustee shall promptly give notice thereof to the Company, the Authority, and each Bondowner whose Bonds may be affected. The Trustee shall thereafter keep itself reasonably informed of the progress of any administrative proceedings or litigation relating to such notice. Under the Agreement the Company is required to give the Trustee written notice of such a final determination within forty-five (45) days of such final determination. If less than all of the outstanding Bonds are to be called for redemption, the Bonds or portions thereof to be redeemed will be selected by the Trustee by lot or in any customary manner as determined by the Trustee in units of $25,000, provided that for so long as CEDE & CO., as nominee of the Depository Trust Company ("DTC"), is the REGISTERED OWNER and the Book-Entry Only System (as defined in the Agreement) is in effect, the particular Bonds or 15 portions thereof to be redeemed shall be selected by DTC, in such manner as DTC may determine. In the event this bond (or any portion thereof) is selected for redemption prior to the Fixed Rate Conversion Date, notice will be mailed by the Trustee no fewer than 15 days (and no fewer than 30 days when this bond is in a six-month Auction Period or a Special Auction Period of 180 days or more) prior to the redemption date to the REGISTERED OWNER. Failure to mail notice to the owner of any other Bond or any defect in the notice to such other owner shall not affect the redemption of this bond. The Trustee shall give or cause to be given notice of any redemption of this bond as provided above to the REGISTERED OWNER at its address shown on the registration books maintained by the Paying Agent. A certificate of the Trustee shall conclusively establish the mailing of any such notice for all purposes. Notice of redemption having been duly mailed, this bond, or the portion called for redemption, will become due and payable on the redemption date at the applicable redemption price and, moneys for the redemption having been deposited with the Paying Agent, from and after the date fixed for redemption, interest on this bond (or such portion) will no longer accrue. IN CERTAIN CIRCUMSTANCES SET OUT HEREIN, THIS BOND (OR PORTION THEREOF) IS SUBJECT TO PURCHASE OR REDEMPTION, IN EACH CASE UPON NOTICE TO OR FROM THE OWNER HEREOF AS OF A DATE PRIOR TO SUCH PURCHASE OR REDEMPTION. IN EACH SUCH EVENT AND UPON DEPOSIT OF THE PURCHASE OR REDEMPTION PRICE WITH THE PAYING AGENT ON THE PURCHASE OR REDEMPTION DATE, AS THE CASE MAY BE, THIS BOND (OR PORTION THEREOF) SHALL CEASE TO BE DEEMED TO BE OUTSTANDING UNDER THE AGREEMENT, INTEREST HEREON SHALL CEASE TO ACCRUE AS OF THE PURCHASE OR REDEMPTION DATE, AND THE REGISTERED OWNER HEREOF SHALL BE ENTITLED ONLY TO RECEIVE THE PURCHASE OR REDEMPTION PRICE SO DEPOSITED WITH THE PAYING AGENT BUT ONLY UPON SURRENDER OF THIS BOND TO THE PAYING AGENT. This bond is transferable by the REGISTERED OWNER, in person or by its attorney duly authorized in writing, at the principal corporate trust office of the Paying Agent, upon surrender of this bond to the Paying Agent for cancellation. Upon the transfer, a new Bond or Bonds in authorized denominations of the same aggregate principal amount will be issued to the transferee at the same office. This bond may also be exchanged at the principal corporate trust office of the Paying Agent for a new Bond or Bonds in authorized denominations of the same aggregate principal amount without transfer to a new registered owner. Exchanges and transfers will be without expense to the owner except for applicable taxes or other governmental charges, if any. The Paying Agent will not be required to make an exchange or transfer of this bond (except in connection with any mandatory tender of this bond) (i) if this bond (or any portion thereof) has been selected for redemption or (ii) during the fifteen (15) days preceding any date fixed for selection for redemption if this bond (or any portion thereof) is eligible to be selected for redemption. The Bonds are issuable only in fully registered form in the denominations of $25,000 or 16 any multiple thereof with respect to Bonds in the Auction Rate Mode. The Authority, the Trustee and the Company may treat the REGISTERED OWNER as the absolute owner of this bond for all purposes, notwithstanding any notice to the contrary. No director, officer, employee or agent of the Authority nor any person executing this bond (by facsimile signature or otherwise) shall be personally liable, either jointly or severally, hereon or be subject to any personal liability or accountability by reason of the issuance hereof. This bond shall not be valid until the Certificate of Authentication has been signed by the Trustee. BUSINESS FINANCE AUTHORITY OF THE STATE OF NEW HAMPSHIRE By: Chairman (Seal) By: Executive Director Certificate Of Authentication This bond is one of the Bonds described in the Agreement. STATE STREET BANK AND TRUST COMPANY, as Trustee By: ______________________________ Authorized Signer 17 STATEMENT OF INSURANCE MBIA Insurance Corporation (the "Insurer") has issued a policy containing the following provisions, such policy being on file at the principal corporate trust office of the Trustee (which on the date of this Bond is State Street Bank and Trust Company, Boston, Massachusetts). The Insurer, in consideration of the payment of the premium and subject to the terms of this policy, hereby unconditionally and irrevocably guarantees to any owner, as hereinafter defined, of the following described obligations, the full and complete payment required to be made by or on behalf of the Issuer to State Street Bank and Trust Company, or its successor, as Paying Agent for the Bonds (the "Paying Agent") of an amount equal to (i) the principal of (either at the stated maturity or by any advancement of maturity pursuant to a mandatory sinking fund payment) and interest on, the Obligations (as that term is defined below) as such payments shall become due but shall not be so paid (except that in the event of any acceleration of the due date of such principal by reason of mandatory or optional redemption or acceleration resulting from default or otherwise, other than any advancement of maturity pursuant to a mandatory sinking fund payment, the payments guaranteed hereby shall be made in such amounts and at such times as such payments of principal would have been due had there not been any such acceleration); and (ii) the reimbursement of any such payment which is subsequently recovered from any owner pursuant to a final judgment by a court of competent jurisdiction that such payment constitutes an avoidable preference to such owner within the meaning of any applicable bankruptcy law. The amounts referred to in clauses (i) and (ii) of the preceding sentence shall be referred to herein collectively as the "Insured Amounts". "Obligations" shall mean: $89,250,000 Business Finance Authority of the State of New Hampshire Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project--2001 Tax-Exempt Series B) Auction Rate Securities Upon receipt of telephonic notice, such notice subsequently confirmed in writing by registered or certified mail, or upon receipt of written notice by registered or certified mail, by the Insurer from the Paying Agent or any owner of an Obligation the payment of an Insured Amount for which is then due, that such required payment has not been made, the Insurer on the due date of such payment or within one business day after receipt of notice of such nonpayment, whichever is later, will make a deposit of funds, in an account with State Street Bank and Trust Company, N.A., in New York, New York, or its successor, sufficient for the payment of any such Insured Amounts which are then due. Upon presentment and surrender of such Obligations or presentment of such other proof of ownership of the Obligations, together with any appropriate instruments of assignment to evidence the assignment of the Insured Amounts due on the Obligations as are paid by the Insurer, and appropriate instruments to effect the appointment of the Insurer as agent for such owners of the Obligations in any legal proceeding related to payment of Insured Amounts on the Obligations, such instruments being in a form satisfactory to State Street Bank and Trust Company, N.A., State Street Bank and Trust Company, N.A. shall disburse to such owners or the Paying Agent payment of the Insured Amounts due on such 18 Obligations, less any amount held by the Paying Agent for the payment of such Insured Amounts and legally available therefor. This policy does not insure against loss of any prepayment premium which may at any time be payable with respect to any Obligation. As used herein, the term "owner" shall mean the registered owner of any Obligation as indicated in the books maintained by the Paying Agent, the Issuer, or any designee of the Issuer for such purpose. The term owner shall not include the Authority or any party whose agreement with the Issuer constitutes the underlying security for the Obligations. Any service of process on the Insurer may be made to the Insurer at its offices located at 113 King Street, Armonk, New York 10504 and such service of process shall be valid and binding. This policy is non-cancelable for any reason. The premium on this policy is not refundable for any reason including the payment prior to maturity of the Obligations. The policy has been endorsed as follows: It is further understood that this policy shall guarantee to the owner or holder, as defined in the policy, the full and complete payments required to be made by or on behalf of the Issuer if there occurs pursuant to the terms of the Obligations an event which results in the loss of the tax exempt status of the interest on the Obligations, including any principal, interest or premium payments payable thereon, if any, as and when thereby required. This endorsement forms a part of the policy to which it is attached, effective on the inception date of the policy. MBIA INSURANCE CORPORATION ASSIGNMENT For value received the undersigned sells, assigns and transfers this bond to (NAME AND ADDRESS OF ASSIGNEE) Social Security or Other Identifying Number of Assignee and irrevocably appoints 19 attorney-in-fact to transfer it on the books kept for registration of the bond, with full power of substitution. NOTE: The signature to this assignment must correspond with the name as written on the face of the bond without alteration or enlargement or other change and must be guaranteed by a Participant in a Recognized Signature Guaranty Medallion Program. Dated: Signature Guaranteed: Participant in a Recognized Signature Guaranty Medallion Program By: Authorized Signature (ii) In the event of a conversion of any series of the Bonds from the Auction Rate Mode to any other Mode, the Company shall cause to be prepared and Trustee shall deliver, new Bonds to the owners thereof in substantially the form set forth in Subsection 301(b)(i) with such insertions and deletions as are necessary or desirable, as determined by the Company, to reflect the terms of the Bonds in the Daily Mode, Weekly Mode, Flexible Mode, Term Rate Mode or Fixed Rate Mode, as applicable. (c) Replacement of Bonds. Replacement Bonds shall be issued pursuant to applicable law as a result of the destruction, loss or mutilation of the Bonds. The costs of a replacement shall be paid or reimbursed by the applicant, who shall indemnify the Authority, the Trustee, the Paying Agent and the Company against all liability and expense in connection therewith. (d) Registration of Bonds in the Book-Entry Only System. (i) The provisions of this Subsection 301(d) shall apply with respect to any Bond registered to CEDE & CO. or any other nominee of The Depository Trust Company (DTC) while the Book-Entry Only System (meaning the system of registration described in paragraph (ii) of this Subsection 301(d)) is in effect. (ii) The Bonds shall be issued in the form of a separate single authenticated fully registered Bond for each Mode of Bonds in substantially the form set forth in 20 Subsection 301(b). Any legend required to be on the Bonds by DTC may be added by the Trustee or Paying Agent. On the date of original delivery thereof, the Bonds shall be registered in the registry books of the Paying Agent in the name of CEDE & CO., as nominee of The Depository Trust Company as agent for the Authority in maintaining the Book-Entry Only System. With respect to Bonds registered in the registry books kept by the Paying Agent in the name of CEDE & CO., as nominee of DTC, the Authority, the Paying Agent, the Remarketing Agent, if any, the Company and the Trustee shall have no responsibility or obligation to any Participant (which means securities brokers and dealers, banks, trust companies, clearing Companys and various other entities, some of whom or their representatives own DTC) or to any Beneficial Owner (which means, when used with reference to the Book-Entry Only System, the person who is considered the beneficial owner of the Bonds pursuant to the arrangements for book entry determination of ownership applicable to DTC) with respect to the following: (A) the accuracy of the records of DTC, CEDE & CO. or any Participant with respect to any ownership interest in the Bonds, (B) the delivery to or from any Participant, any Beneficial Owner or any other person, other than DTC, of any notice with respect to the Bonds, including any notice of redemption or tender (whether mandatory or optional), or (C) the payment to any Participant, any Beneficial Owner or any other person, other than DTC, of any amount with respect to the principal of or premium, if any, or interest on the Bonds. The Paying Agent shall pay all principal of and premium, if any, and interest on the Bonds only to or upon the order of DTC, and all such payments shall be valid and effective fully to satisfy and discharge the Authority's obligations with respect to the principal of and premium, if any, and interest on such Bonds to the extent of the sum or sums so paid. No person other than DTC shall be entitled to receive an authenticated Bond evidencing the obligation of the Authority to make payments of principal of and premium, if any, and interest pursuant to this Agreement. Upon delivery by DTC to the Trustee or the Paying Agent of written notice to the effect that DTC has determined to substitute a new nominee in place of CEDE & CO., the words "CEDE & CO." in this Agreement shall refer to such new nominee of DTC. (iii) Upon receipt by the Authority and the Trustee, the Paying Agent or the Remarketing Agent, if any, of written notice from DTC to the effect that DTC is unable or unwilling to discharge its responsibilities, the Paying Agent shall issue, transfer and exchange Bonds as requested by DTC in appropriate amounts, and whenever DTC requests the Authority, the Paying Agent, the Trustee and the Remarketing Agent, if any, to do so, the Trustee, the Paying Agent, the Remarketing Agent, if any, and the Authority will cooperate with DTC in taking appropriate action after reasonable notice (A) to arrange for a substitute bond depository willing and able upon reasonable and customary terms to maintain custody of the Bonds or (B) to make available Bonds registered in whatever name or names the Bondowners transferring or exchanging such Bonds shall designate. (iv) In the event the Company determines that it is in the best interests of the Beneficial Owners that they be able to obtain Bond certificates, the Authority may so notify DTC, the Paying Agent, the Remarketing Agent, if any, and the Trustee, 21 whereupon DTC will notify the Participants of the availability through DTC of Bond certificates. In such event, the Paying Agent shall issue, transfer and exchange Bond certificates of the initial series as requested by DTC in appropriate amounts and in authorized denominations. Whenever DTC requests the Authority and the Paying Agent to do so, the Paying Agent and the Authority will cooperate with DTC in taking appropriate action after reasonable notice to make available Bonds registered in whatever name or names the Beneficial Owners transferring or exchanging Bonds shall designate. (v) Notwithstanding any other provision of this Agreement to the contrary, so long as any Bond is registered in the name of CEDE & CO., as nominee of DTC, all payments with respect to the Purchase Price and principal of and premium, if any, and interest on such Bond and all notices with respect to such Bond shall be made and given, respectively, to DTC as provided in the Authority's Letter of Representation (the "Representation Letter") for the Bonds dated December 4, 2001. The form of such Representation Letter may be modified in a manner consistent with the provisions of this Agreement upon conversion or reconversion of the Bonds to another Mode or Rate Period in which the Book-Entry Only System is in effect. (vi) Notwithstanding any provision in Section 307 to the contrary, so long as all of the Bonds Outstanding are held in the Book-Entry Only System, (A) if less than all of such Bonds are to be redeemed upon any redemption of Bonds hereunder, the particular Bonds or portions of Bonds of such series to be redeemed shall be selected by DTC in such manner as DTC may determine, and (B) if less than all of such Bonds are to be converted to a different Mode, upon any conversion to such Mode hereunder, the beneficial interests in particular Bonds or portions of Bonds to be converted shall be selected by DTC in such manner as DTC may determine. (vii) So long as the Book-Entry Only System is in effect, a Beneficial Owner who elects to have its Bonds purchased or tendered pursuant to the Agreement shall effect delivery by causing a Participant to transfer the Beneficial Owner's interest in the Bonds pursuant to the Book-Entry Only System. The requirement for physical delivery of Bonds in connection with a demand for purchase or a mandatory tender for purchase will be deemed satisfied when the ownership rights in the Bonds are transferred in accordance with the Book-Entry Only System. (viii) While the Bonds bear interest in a Variable Rate Mode, so long as the Book-Entry Only System is in effect, the Remarketing Agent, if any, shall communicate to DTC information concerning the purchasers of Tendered Bonds as may be necessary or appropriate, and, notwithstanding any provision in the Representations Letter to the contrary, the Remarketing Agent shall continue to remit to the Paying Agent interest rate determination information pursuant to the terms of this Agreement. (ix) While the Bonds bear interest in a Variable Rate Mode, notwithstanding any provision of this Agreement to the contrary, if the Book-Entry Only System is in effect while a Liquidity Facility is in effect, Company Bonds or Liquidity Provider Bonds, 22 if any, shall be registered in the name of the Company or the Liquidity Provider, as the case may be, and a separate Bond certificate shall be issued to and held by the Paying Agent for the Company or the Liquidity Provider, as the case may be, and the registration books maintained by the Paying Agent shall indicate (i) the Company or the Liquidity Provider, as the case may be, as the owner of any Company Bonds or Liquidity Provider Bonds and (ii) that CEDE & CO. is no longer the owner of such Company Bonds or Liquidity Provider Bonds, as the case may be. Upon any Bond ceasing to be a Company Bond or Liquidity Provider Bond, as the case may be, such Bond shall be re-registered in the name of CEDE & CO. (e) Interest on Overdue Principal. Any overdue principal of any Bond shall bear interest after its maturity or acceleration at the then-effective interest rate of the Bonds. (f) Cancellation and Destruction of Bonds. All Bonds paid or redeemed in full, either at or before maturity, shall be delivered to the Trustee when such payment or redemption is made, and such Bonds, and all Bonds surrendered in any exchanges or transfers, shall thereupon be promptly canceled. All Bonds acquired and owned by the Company and delivered to the Trustee for cancellation shall be deemed paid and shall be promptly canceled. Bonds so canceled may at any time be cremated or otherwise destroyed by the Trustee, which shall execute a certificate of cremation or destruction in duplicate by the signature of one of its authorized officers describing the Bonds so cremated or otherwise destroyed, and one executed certificate shall be filed with the Authority and the other executed certificate shall be retained by the Trustee. Section 302. Application of Bond Proceeds. The Authority shall loan the proceeds of the Bonds to the Company by promptly causing (A) the accrued interest, if any, to be deposited in the Bond Fund and (B) $89,250,000 to be deposited with State Street Bank and Trust Company, as trustee under the Refunding Trust Agreement, to refund a portion of the 1991 Series C Bonds on a current basis. The Company represents and warrants that (i) substantially all of the proceeds (within the meaning of the 1954 Code) of the Authority's $112,500,000 Adjustable Rate Solid Waste Disposal and Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project-1989 Series) (the "1989 Bonds"), which were refunded by the 1991 Series C Bonds, were spent to pay directly or to reimburse the Company for Project Costs; (ii) such Project Costs were incurred by and were chargeable to the capital account of the Company; (iii) such Project Costs are costs of "sewage or solid waste disposal facilities" or "air or water pollution control facilities" within the meaning of Section 103(b)(4)(E) or (F) of the 1954 Code incurred and paid after January 14, 1976; and (iv) such Project Costs were for an "industrial facility" within the meaning of Paragraphs 2, VII (d) and (e) of the Act. The Company shall pay expenses and costs of issuance of the Bonds from its own funds. Section 303. Bond Fund. A Bond Fund is hereby established with the Trustee for the account of the Company, and moneys shall be deposited therein as provided in this Agreement. The Company hereby grants to the Trustee for the benefit of the Bondowners a lien on and security interest in all deposits in the Bond Fund. The moneys in the Bond Fund and any investments held as part of such Fund shall be held in trust and, except as otherwise provided in 23 Sections 304, 804 and 903, shall be applied by the Trustee solely to the payment of principal of, premium, if any, and interest on the Bonds. If at any time the amount in the Bond Fund exceeds the amount necessary to pay or redeem the Bonds in full, and all amounts owing or to be owing under this Agreement to the Authority and the Trustee have been paid or provided for to the reasonable satisfaction of the Trustee and the Authority, then the excess shall be paid to the Company except as otherwise may be required by applicable law. When moneys in the Bond Fund are to be applied to the payment of the Bonds, such moneys shall be transferred by the Trustee to itself for the account of the Authority and shall then be so applied. The Trustee shall pay out of the Bond Fund on each payment date the amount required for the payment of principal of, premium, if any, and interest on the Bonds payable on such date (whether at maturity, upon redemption, by acceleration or otherwise). Section 304. Application of Moneys. If available moneys in the Bond Fund are not sufficient on any day to pay all principal of, premium, if any, and interest on the Outstanding Bonds then due or overdue, such moneys shall, after payment of all amounts owing to the Trustee and the Authority under this Agreement, be applied first to the payment of interest, including interest on overdue principal, in the order in which the same became due (pro rata with respect to interest which became due at the same time) and second to the pro rata payment of principal and premium, if any, without regard to the order in which the same became due, in each case pro rata among Bondowners. For this purpose interest on overdue principal shall be treated as coming due on the first day of each month. Whenever moneys are applied pursuant to this section, such moneys shall be applied by the Trustee at such times, and from time to time, as the Trustee in its discretion shall determine, having due regard to the amount of such moneys available and the likelihood of additional moneys becoming available for such application in the future. Whenever the Trustee shall exercise such discretion it shall fix the date (which shall be the first day of a month unless the Trustee shall deem another date more suitable) upon which such application is to be made, and upon such date interest on the amounts of principal paid on such date shall cease to accrue. The Trustee shall give such notice as it may deem appropriate of the fixing of any such date. When interest or a portion of the principal is to be paid on an overdue Bond, the Trustee may require presentation of the Bond for endorsement of the payment. 24 Section 305. Payments by the Company. (a) Debt Service. Not later than the opening of business on the second Business Day preceding an Interest Payment Date or the date on which a payment of principal or redemption premium or Purchase Price is due, at maturity, upon redemption, by acceleration or otherwise, the Company shall pay or cause to be paid to the Trustee for deposit in the Bond Fund an amount in immediately available funds on such date equal to the payment then coming due less the amount, if any, then in the Bond Fund and available to pay Debt Service. At any time when any principal of the Bonds is overdue, the Company shall also have a continuing obligation to pay to the Trustee for deposit in the Bond Fund an amount equal to interest on the overdue principal, but the payments required under this section shall not otherwise bear interest. The Company may make payments to the Bond Fund earlier than required by this section, but such payments shall not affect the accrual of interest. If any moneys are invested in accordance with this Agreement and a loss results therefrom so that there are insufficient funds to pay principal of, premium, if any, and interest on the Bonds when due, the Company shall supply the deficiency. (b) Additional Payments. (i) The Company shall pay when due the Authority's Service Charge and other expenses as provided in Section 1003. (ii) Within thirty (30) days after notice from the Trustee, the Company shall pay to the Trustee the reasonable fees and expenses of the Trustee as set forth in Section 903 and other indemnified or reimbursable amounts. (c) Unclaimed Moneys. Except as may otherwise be required by applicable law, in case any moneys deposited with the Trustee for the payment of the principal of, premium, if any, or interest on any Bond remain unclaimed for three years after such principal, premium, if any, or interest has become due and payable, the Trustee may, and upon receipt of a written request of the Company Representative shall, pay over to the Company the amount so deposited and thereupon the Trustee and the Authority shall be released from any further liability with respect to the payment of such principal, premium or interest, and the owner of such Bond shall be entitled (subject to any applicable statute of limitations) to look only to the Company as an unsecured creditor for the payment thereof. (d) Rebate. The Company shall pay to the United States of America when due any rebate with respect to the Bonds pursuant to IRC ss.148(f). (e) Purchase Price. If the amount available from a Liquidity Facility, together with all other amounts received by the Paying Agent for the purchase of Bonds tendered pursuant to Sections 414, 513 or 514, is not sufficient to pay the Purchase Price of such Bonds on the Purchase Date, the Paying Agent shall before 12:00 P.M., New York City time, on such Purchase Date, notify the Company and the Trustee of such deficiency by telephone or telegraph promptly confirmed in writing. The Company shall pay to the Paying Agent in immediately available funds by 12:30 P.M. New York City time, on the Purchase Date for Bonds tendered pursuant to 25 Sections 414, 513 or 514, an amount equal to the Purchase Price of such Bonds less the amount, if any, available to pay the Purchase Price in accordance with Sections 414, 513 or 514 as the case may be, from the proceeds of the remarketing of such Bonds or from drawings on the Liquidity Facility, as reported by the Paying Agent. Bonds so purchased with moneys furnished by the Company ("Company Bonds") shall be registered to the Company, but shall be delivered to and held by the Paying Agent for the account of the Company until transferred pursuant to the following sentence or cancelled. Company Bonds held by the Paying Agent shall, upon written instructions of the Company, be cancelled or transferred to the Remarketing Agent for delivery to or at the direction of any purchaser of such Bonds from the Company which the Company certifies is a person other than the Company or a "related person" as such term is used in Section 144(a)(3) of the IRC, whereupon such Bonds shall no longer be Company Bonds. Any Company Bond shall not be subject to purchase under Sections 513 and 514 and, if so registered for a period of ninety (90) days without being resold, shall be canceled, and the Company shall deliver the Bonds to the Paying Agent. Section 306. Unconditional Obligation. The obligation of the Company to make payments under this Agreement shall be absolute and unconditional, shall be binding and enforceable in all circumstances whatsoever as provided in the Act and shall not be subject to set-off, recoupment or counterclaim, and shall be a general obligation of the Company to which the full faith and credit of the Company are pledged. The Company shall be obligated to make such payments whether or not the Project Facilities have ceased to exist or be functional to any extent from any cause whatsoever. The Company shall be obligated to make such payments regardless of whether it is in possession or entitled to be in possession of the Project Facilities. Section 307. Redemption of the Bonds. The Bonds shall be subject to redemption prior to maturity under the circumstances, in the manner and subject to the conditions provided in this section, in Article IV and V and in the form of Bonds. Whenever Bonds are called for redemption, the accrued interest thereon shall become due on the redemption date. Transfers and payments for the purpose of redeeming Bonds under this Agreement shall be made on behalf of the Authority, and the Authority hereby consents to any redemption of Bonds in accordance herewith. Except as otherwise provided in Subsection 301(d), if less than all of the Bonds are to be redeemed, the Bonds to be redeemed shall be selected by the Trustee by lot or in any customary manner as determined by the Trustee provided that the Trustee shall redeem prior to any other Bonds (i) Bonds that are Liquidity Provider Bonds at the time of selection for redemption and (ii) after the redemption of such Liquidity Provider Bonds, Bonds that are Company Bonds at the time of selection for redemption. (a) Optional Redemption. The Bonds may be redeemed at the times and prices as provided in the form of Bonds and in Article V at the option of the Company upon written notice given by the Company to the Authority, the Remarketing Agent, if any, the Trustee and the Paying Agent at the time specified in the form of Bonds or Article V, as applicable, or, after the Fixed Rate Conversion Date or change to the Fixed Rate, at least sixty (60) days, before the redemption date. 26 (b) Reserved. (c) Mandatory Taxability Redemption. The Outstanding Bonds are subject to mandatory redemption at any time at a redemption price of 100% of the principal amount of the Bonds so redeemed plus accrued interest to the redemption date in the event (i) the Company delivers to the Trustee and the Bond Insurer an opinion of Bond Counsel stating that interest on the Bonds is or will become includable in gross income of the owners thereof for federal income tax purposes, or (ii) it is finally determined by the Internal Revenue Service or a court of competent jurisdiction, as a result of (A) a proceeding in which the Company has participated or been given notice and an opportunity to participate, and (B) either a failure by the Company or the Seabrook Transferee to observe any covenant or agreement undertaken in or pursuant to this Agreement or a Seabrook Transfer, or the inaccuracy of any representation made by the Company or the Seabrook Transferee in or pursuant to this Agreement or a Seabrook Transfer, that interest payable on the Bonds is includable for federal income tax purposes in the gross income of any owner thereof (other than an owner which is a "substantial user" or a "related person" within the meaning of IRC Section 147(a)). Any determination under clause (ii) above will not be considered final for this purpose until the earliest of the conclusion of any appellate review, the denial of appellate review or the expiration of the period for seeking appellate review. Redemption under this Subsection 307(c) shall be in whole unless, not later than forty-five (45) days prior to the redemption date, the Company delivers to the Trustee an opinion of Bond Counsel to the effect that a redemption of less than all of the Bonds will preserve the tax-exempt status of interest on the remaining Bonds outstanding subsequent to such redemption. Any redemption under this Subsection 307(c) shall be made on the 60th day after the date on which the opinion described in clause (i) is delivered or the determination described in clause (ii) becomes final or on such earlier date as the Company may designate by notice given to the Trustee at least forty-five (45) days prior to such designated date. If such redemption shall occur in accordance with the terms of this Agreement, then such failure by the Company or the Seabrook Transferee to observe such covenant or agreement, or the inaccuracy of any such representations will not, in and of itself, constitute a Default hereunder. If the Trustee receives written notice from any Bondowner stating that (I) such Bondowner has been notified in writing by the Internal Revenue Service that it proposes to include the interest on the Bonds in the gross income of such owner for federal income tax purposes, or any other proceeding has been instituted against such owner which may lead to a like determination, and (II) such owner will afford the Company the opportunity to participate at its own expense in the proceeding, either directly or in the name of such owner, until the conclusion of any appellate review, and the Trustee has examined such written notice and it appears to be accurate on its face, then the Trustee shall promptly give notice thereof to the Company, the Authority, and each Bondowner whose Bonds may be affected. The Trustee shall thereafter keep itself reasonably informed of the progress of any administrative proceedings or litigation relating to such notice. (d) Notice to the Trustee. The Company shall exercise its option to have Bonds redeemed under Subsection 307(a) by giving written notice to the Trustee at least forty-five (45) days before the redemption date. The Company shall keep the Trustee informed of the progress 27 of any proceeding referred to in Subclause 307(c)(ii)(A) and shall give written notice to the Trustee within forty-five (45) days after it has actual knowledge of a final determination as described in Clause 307(c)(ii). (e) Payment of Redemption Price and Accrued Interest. Whenever Bonds are called for redemption, the accrued interest thereon shall become due on the redemption date and shall be paid from the Bond Fund to the extent available therein. To the extent not otherwise provided, the Company shall deposit with the Trustee prior to the redemption date a sufficient sum to pay the redemption price and accrued interest. (f) Notice of Redemption. When Bonds are to be redeemed, the Trustee shall give notice to Bondowners in the name of the Authority as provided in the form of Bond and this Subsection 307(f), which notice shall identify the Bonds or portions thereof to be redeemed and state the date fixed for redemption and the place or places of payment of the redemption price. The notice shall further state that on such date there shall become due and payable upon each Bond or portion thereof to be redeemed the redemption price thereof, together with interest accrued to the redemption date, that money available therefor having been deposited with the Trustee, from and after such date, interest thereon shall cease to accrue and that the Bonds or portions thereof called for redemption shall cease to be entitled to any benefit under this Agreement except the right to receive payment of the redemption price. Failure to mail notice to a particular Bondowner, or any defect in the notice to such Bondowner, shall not affect the redemption of any other Bond. Section 308. Investments. (a) Pending their use under this Agreement, moneys in the Bond Fund may be invested or reinvested by the Trustee at the written direction of the Company Representative (upon which the Trustee may conclusively rely) in Permitted Investments, as defined below, with maturities at or before the time when such moneys are required to be available and shall be so invested upon and pursuant to written direction of the Company if no Default known to the Trustee then exists under this Agreement; provided that the Company shall not request, authorize or permit any investment which would cause any of the Bonds to be classified as "arbitrage bonds" as defined in IRC ss.148(a). Any investments and proceeds thereof shall be held by the Trustee as part of the Bond Fund and shall be sold or redeemed at the direction of the Company to the extent necessary to make payments or transfers or anticipated payments or transfers from such Fund. (b) Any interest or dividends realized from an investment and any profit realized upon the sale or disposition thereof shall be credited to the Bond Fund and any loss shall be charged thereto. (c) (1) The term "Permitted Investments" means (A) Direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury, and CATS and TIGRS) or obligations the principal of and interest on which are unconditionally guaranteed by the United States of America; (B) Bonds, 28 debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following federal agencies and provided such obligations are backed by the full faith and credit of the United States of America (stripped securities are only permitted if they have been stripped by the agency itself): (i) U.S. Export-Import Bank (Eximbank) - Direct obligations or fully guaranteed certificates of beneficial ownership; (ii) Farmers Home Administration (FmHA) - Certificates of beneficial ownership; (iii) Federal Financing Bank (iv) Federal Housing Administration Debentures (FHA) (v) General Services Administration - Participation certificates (vi) Government National Mortgage Association (GNMA or "Ginnie Mae") - GNMA - guaranteed mortgage-backed bonds and GNMA - guaranteed pass-through obligations (vii) U.S. Maritime Administration - Guaranteed Title XI financing (viii) U.S. Department of Housing and Urban Development (HUD) - Project Notes, Local Authority Bonds, New Communities Debentures - U.S. government guaranteed debentures, U.S. Public Housing Notes and Bonds - U.S. government guaranteed public housing notes and bonds; (C) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following non-full faith and credit U.S. government agencies (stripped securities are only permitted if they have been stripped by the agency itself): (i) Federal Home Loan Bank System - Senior debt obligations (ix) Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac") - Participation Certificates and Senior debt obligations (x) Federal National Mortgage Association (FNMA or "Fannie Mae") - Mortgage-backed securities and senior debt obligations (xi) Student Loan Marketing Association (SLMA or "Sallie Mae") - Senior debt obligations (xii) Resolution Funding Corp. (REFCORP) obligations, and 29 (xiii) Farm Credit System - Consolidated systemwide bonds and notes; (D) Money market funds registered under the Federal Investment Company Act of 1940, whose shares are registered under the Federal Securities Act of 1933, and having a rating by S&P of AAAm-G; AAAm; or Aam; (E) Certificates of deposit secured at all times by collateral described in (A) and/or (B) above. Such certificates must be issued by commercial banks, savings and loan associations or mutual savings banks. The collateral must be held by a third party and the bondholders must have a perfected first security interest in the collateral; (F) Certificates of deposit, savings accounts, deposit accounts or money market deposits which are fully insured by FDIC, including BIF and SAIF; (G) Investment Agreements, including GIC's, acceptable to the Bond Insurer; (H) Commercial paper rated, at the time of purchase, "Prime - 1" by Moody's and "A-1" or better by S&P; (I) Bonds or notes issued by any state or municipality which are rated by Moody's and S&P in one of the two highest rating categories assigned by such agencies; (J) Federal funds or bankers acceptances with a maximum term of one year of any bank which has an unsecured, uninsured and unguaranteed obligation rating of "Prime - 1" or "A3" or better by Moody's and "A-1" or "A" or better by S&P; and (K) Repurchase agreements acceptable to the Bond Insurer. (2) Notwithstanding the immediately preceding paragraph Permitted Investments shall not include the following: (i) obligations the principal of and interest on which are unconditionally guaranteed by the United States of America, certificates of deposit and bankers' acceptances, in each case with yields lower than the yield available on comparable obligations of the United States Treasury; or (xiv) any demand deposit or similar account with a bank, trust company or broker, unless the account is used for holding funds for a short period of time until such funds are reinvested or spent. Any of the requirements of this paragraph (2) shall not apply to moneys as to which the Trustee and the Authority shall have received an opinion of nationally recognized bond counsel to the effect that such requirements are not necessary to preserve the exclusion of interest on Bonds from the gross income of the owner thereof for federal income tax purposes. Any such Permitted Investments obtained from or through, or issued by, the Trustee in its commercial banking or other capacity, or any of its affiliates, shall be permitted (provided that such investment otherwise qualifies in accordance with the definition of "Permitted Investments"). Section 309. Tax Status of Bonds. The Company will perform its obligations and agreements contained in the Federal Tax Statement as if they were set forth herein. All representations of the Company in the Federal Tax Statement shall be treated as if they were set forth herein. Any covenants, agreements or representations made by the Company or any transferee of the Project Facilities (or any successor to such a transferee) in connection with such a transfer shall be performed and treated as if set forth herein. The Authority will cooperate with the Bondowners and the Company to the extent deemed necessary or permitted by law in the 30 opinion of bond counsel to the Authority in order to preserve the exclusion of interest on the Bonds from the gross income of the owners thereof for federal income tax purposes. Section 310. Paying Agent. The Paying Agent shall act as such and as Bond registrar and transfer agent. The Paying Agent, which may act by means of agents, shall signify its acceptance of the duties and obligations imposed upon it hereunder by its written instrument of acceptance addressed and delivered to the parties hereto under which the Paying Agent will agree to: (i) hold all sums delivered to it by the Trustee for the payment of principal (including sinking fund installments) of, premium, if any, and interest on the Bonds or paid to it by the Company or under a Liquidity Facility in trust for the benefit of the Bondowners until such sums shall be paid to the Bondowners or otherwise disposed of as herein provided; (ii) hold all Bonds tendered to it hereunder in trust for the benefit of the respective Bondowners until moneys representing the Purchase Price of such Bonds shall have been delivered to or for the account of or to the order of such Bondowners; (iii) hold all Liquidity Provider Bonds for the benefit of the Liquidity Provider until such Liquidity Provider Bonds shall have been remarketed by the Remarketing Agent or redeemed in the manner set forth in Section 307 and Article V and in the form of Bonds and any Liquidity Facility; (iv) hold all moneys delivered to it hereunder for the purchase of Bonds in trust for the benefit of the person or entity which shall have so delivered such moneys until the Bonds purchased with such moneys shall have been delivered to or for the account of such person or entity; (v) keep such books and records as shall be consistent with prudent industry practice and make such books and records, including the books of registration for the Bonds, available for inspection by the parties hereto, the Liquidity Provider, if any, and the Remarketing Agent, if any, at all reasonable times; (vi) promptly report to the Trustee all authentications of Bonds transferred, exchanged or remarketed and any information received by it concerning the names and addresses of Bondowners; and (vii) give all notices of the Paying Agent at the times and in the manner required by this Agreement and send to the Remarketing Agent, if any, copies of all such notices. The Paying Agent shall be entitled to the advice of counsel (who may be counsel for any party) and shall not be liable for any action taken in good faith in reliance on such advice. The Paying Agent may rely conclusively on any telephone or written notice, certificate or other 31 document furnished to it under this Agreement and reasonably believed by it to be genuine. The Paying Agent shall not be liable for any action taken or omitted to be taken by it in good faith and reasonably believed by it to be within the discretion or power conferred upon it, or taken by it pursuant to any direction or instruction by which it is governed under this Agreement or omitted to be taken by it by reason of the lack of direction or instruction required for such action, or be responsible for the consequences of any error of judgment reasonably made by it. When any payment or other action by the Paying Agent is called for by this Agreement, it may defer such action pending receipt of such evidence, if any, as it may reasonably require in support thereof. A permissive right or power to act shall not be construed as a requirement to act. The Paying Agent shall not in any event be liable for the application or misapplication of funds, or for other acts or defaults, by any person, firm or Company except by their respective directors, officers, agents and employees. No recourse shall be had by the Company, the Authority, the Trustee, the Liquidity Provider, if any, or any Bondowner for any claim based on this Agreement or the Bonds against any director, officer, agent or employee of the Paying Agent unless such claim is based upon the bad faith, fraud or deceit of such person. For the purposes of this Agreement matters shall not be considered to be known to the Paying Agent unless they are known to an officer in its corporate trust division. The Company shall pay to the Paying Agent reasonable compensation for its services and pay or reimburse the Paying Agent for its reasonable expenses and disbursements, including reasonable attorney's fees, hereunder. The Company shall indemnify and save the Paying Agent harmless against any liabilities and reasonable expenses which it may incur in the exercise of its duties hereunder and which are not due to its negligence or bad faith. Any fees, expenses, reimbursements or other charges which the Paying Agent may be entitled to receive from the Company hereunder, if not paid when due, shall bear interest at the "base rate" of the Paying Agent (or, if none, the nearest equivalent). The Company may discharge the Paying Agent from time to time (upon not less than thirty days advance written notice, unless such discharge is for cause) and appoint a successor, but such removal shall not take effect until a successor approved in writing by the Bond Insurer has been appointed and has accepted the appointment. The Company shall also designate a successor if the Paying Agent resigns or becomes ineligible. The Paying Agent may resign by giving at least sixty (60) days' written notice to the parties hereto, but such resignation shall not take effect until a successor approved in writing by the Bond Insurer has been appointed and has accepted the appointment. Each successor Paying Agent shall be a commercial bank or trust company having a capital and surplus of not less than $50,000,000, shall be registered as a transfer agent with the Securities and Exchange Commission, and shall be capable of performing the duties prescribed for it herein in Boston, Massachusetts or New York, New York. The Paying Agent may but need not be the same person as the Trustee. The Company shall give notice of the appointment of a successor Paying Agent in writing to each Bondowner and the Bond Insurer. The Company will promptly certify to the Trustee that it has mailed such notice to all Bondowners, and such certificate will be conclusive evidence that such notice was given in the manner required hereby. In the event of the resignation or removal of the Paying Agent, the Paying Agent shall pay 32 over, transfer, assign and deliver any moneys and Bonds, including Liquidity Provider Bonds and unauthenticated Bonds, held by it, any Liquidity Facility (which transfer shall be made in accordance with the terms thereof), and the books of registry maintained by it in such capacity to its successor or, if there be no successor, to the Trustee, who shall act in the capacity of Paying Agent until a successor is appointed. Any Company, association, partnership or firm which succeeds to the business of the Paying Agent as a whole or substantially as a whole, whether by sale, merger, consolidation or otherwise, shall thereby become vested with all the property, rights and powers of the Paying Agent under this Agreement and shall be subject to all the duties and obligations of the Paying Agent under this Agreement. In the event that the Paying Agent shall resign or be removed, or be dissolved, or if the property or affairs of the Paying Agent shall be taken under the control of any state or federal court or administrative body because of bankruptcy or insolvency, or for any other reason, and the Authority or the Company, as the case may be, shall not have appointed its successor, the Trustee shall appoint a successor and, if no appointment is made within thirty (30) days, shall apply to a court of competent jurisdiction for such appointment. The Paying Agent shall send or cause to be sent notice to Bondowners of a change of address for the delivery of Bonds or notices or the payment of principal or purchase price of Bonds. Section 311. Payment Procedure Pursuant to Bond Insurance Policy. In the event that, on the second Business Day, and again on the Business Day, prior to the payment date on the Bonds, the Trustee has not received sufficient moneys to pay all principal of and interest on the Bonds due on the second following or following, as the case may be, Business Day, the Trustee shall immediately notify the Bond Insurer or its designee on the same Business Day by telephone, facsimile or telegraph, confirmed in writing by registered or certified mail, of the amount of the deficiency. (a) If the deficiency is made up in whole or in part prior to or on the payment date, the Trustee shall so notify the Bond Insurer or its designee. (b) In addition, if the Trustee has actual notice that any Bondowner has been required to disgorge payments of principal or interest on the Bond to a trustee in bankruptcy or creditors or others pursuant to a final judgment by a court of competent jurisdiction that such payment constitutes an avoidable preference to such Bondowner within the meaning of any applicable bankruptcy laws, then the Trustee shall notify the Bond Insurer or its designee of such fact by telephone, facsimile or telegraphic notice, confirmed in writing by registered or certified mail. (c) The Trustee is hereby irrevocably designated, appointed, directed and authorized to act as attorney-in-fact for Bondowners as follows: 33 (i) If and to the extent there is a deficiency in amounts required to pay interest on the Bonds, the Trustee shall (a) execute and deliver to State Street Bank and Trust Company, N.A., or its successors under the Bond Insurance Policy (the "Insurance Paying Agent"), in form reasonably satisfactory to the Insurance Paying Agent, an instrument appointing the Bond Insurer as agent for such Bondowners in any legal proceeding related to the payment of such interest and an assignment to the Bond Insurer of the claims for interest to which such deficiency relates and which are paid by the Bond Insurer, (b) receive as designee of the respective Bondowners (and not as Trustee) in accordance with the tenor of the Bond Insurance Policy payment from the Insurance Paying Agent with respect to the claims for interest so assigned, and (c) disburse the same to such respective Bondowners; and (ii) If and to the extent of a deficiency in amounts required to pay principal of the Bonds, the Trustee shall (a) execute and deliver to the Insurance Paying Agent in form reasonably satisfactory to the Insurance Paying Agent an instrument appointing the Bond Insurer as agent for such Bondowners in any legal proceeding relating to the payment of such principal and an assignment to the Bond Insurer of any of the Bonds surrendered to the Insurance Paying Agent of so much of the principal amount thereof as has not previously been paid or for which moneys are not held by the Trustee and available for such payment (but such assignment shall be delivered only if payment from the Insurance Paying Agent is received), (b) receive as designee of the respective Bondowners (and not as Trustee) in accordance with the tenor of the Bond Insurance Policy payment therefor from the Insurance Paying Agent, and (c) disburse the same to such Bondowners. (d) Payments with respect to claims for interest on and principal of Bonds disbursed by the Trustee from proceeds of the Bond Insurance Policy shall not be considered to discharge the obligation of the Authority with respect to such Bonds, and the Bond Insurer shall become the owner of such unpaid Bonds and claims for the interest in accordance with the tenor of the assignment made to it under the provisions of this section or otherwise. (e) Irrespective of whether any such assignment is executed and delivered, the Authority and the Trustee hereby agree for the benefit of the Bond Insurer that: (i) They recognize that to the extent the Bond Insurer makes payments, directly or indirectly (as by paying through the Trustee), on account of principal of or interest on the Bonds, the Bond Insurer will be subrogated to the rights of such Owners to receive the amount of such principal and interest from the Authority, with interest thereon as provided and solely from the sources stated in this Agreement and the Bonds; and (ii) They will accordingly pay to the Bond Insurer the amount of such principal and interest (including principal and interest recovered under subparagraph (ii) of the first paragraph of the Bond Insurance Policy, which principal and interest shall be deemed past due and not to have been paid), with interest thereon as provided in this Agreement and 34 the Bonds, but only from the sources and in the manner provided herein for the payment of principal of and interest on the Bonds to Bondowners, and will otherwise treat the Bond Insurer as the owner of such rights to the amount of such principal and interest. (f) Copies of any amendments made to the documents executed in connection with the issuance of the Bonds which are consented to by the Bond Insurer shall be sent to S&P. (g) The Bond Insurer shall receive notice of the resignation or removal of the Trustee and the appointment of a successor thereto. (h) The Bond Insurer shall receive copies of all notices required to be delivered to Bondowners and, on an annual basis, the Company shall provide to the Bond Insurer copies of the Company's audited financial statements and annual budget. (i) Any notice that is required to be given to an owner of the Bonds or to the Trustee or by any party pursuant to this Agreement shall also be provided to the Bond Insurer. All notices required to be given to the Bond Insurer under this Agreement shall be in writing and shall be sent by registered or certified mail addressed to MBIA Insurance Corporation, 113 King Street, Armonk, NY 10504, Attention: Surveillance. Section 312. The Bond Insurer. Except as provided in Subsection 808(b), anything in this Agreement to the contrary notwithstanding, the Bond Insurer shall be deemed to be the owner of the Bonds for purposes of giving consents (including consent to amendments to this Agreement other than those requiring unanimous consent of the affected Bondowners), notices, directions and waivers to the Company, the Authority and the Trustee under this Agreement. (j) Except as provided in Subsection 808(b), the Bond Insurer, acting alone, shall have the right to direct all remedies pursuant to Section 802(b) in an Event of Default, subject to the terms of this Agreement. ARTICLE IV. SPECIAL PROVISIONS RELATING TO AUCTION RATE SECURITIES Section 401. Definitions. In addition to the words and terms elsewhere defined in this Agreement, the following words and terms as used in this Article IV and elsewhere in this Agreement have the following meanings with respect to Bonds in an Auction Rate Period unless the context or use indicates another or different meaning or intent: "Agent Member" means a member of, or participant in, the Securities Depository who 35 shall act on behalf of a Bidder. "Auction" means each periodic implementation of the Auction Procedures. "Auction Agent" means the auctioneer appointed in accordance with Section 410 or 411 of this Agreement and shall initially be The Bank of New York. "Auction Agreement" means the Series B Auction Agreement dated as of October 1, 2001 between the Auction Agent and the Trustee pursuant to which the Auction Agent agrees to follow the procedures specified in this Article IV, with respect to the Bonds while bearing interest at an Auction Rate, as such agreement may from time to time be amended or supplemented. "Auction Date" means during any period in which the Auction Procedures are not suspended in accordance with the provisions hereof, (i) if the Bonds are in a daily Auction Period, each Business Day, (ii) if the Bonds are in a Special Auction Period, the last Business Day of the Special Auction Period, and (iii) if the Bonds are in any other Auction Period, the Business Day next preceding each Interest Payment Date for such Bonds (whether or not an Auction shall be conducted on such date); provided, however, that the last Auction Date with respect to Bonds in an Auction Period other than a daily Auction Period or Special Auction Period shall be the earlier of (a) the Business Day next preceding the Interest Payment Date next preceding the Conversion Date for such Bonds and (b) the Business Day next preceding the Interest Payment Date next preceding the final maturity date for such Bonds; and provided, further, that if the Bonds are in a daily Auction Period, the last Auction Date shall be the earlier of (x) the Business Day next preceding the Conversion Date for such Bonds and (y) the Business Day next preceding the final maturity date for such Bonds. The last Business Day of a Special Auction Period shall be the Auction Date for the Auction Period which begins on the next succeeding Business Day, if any. On the Business Day preceding the conversion from a daily Auction Period to another Auction Period, there shall be two Auctions, one for the last daily Auction Period and one for the first Auction Period following the conversion. The first Auction Date for the Bonds is January 22, 2002. "Auction Index" shall have the meaning specified in Section 407 of this Agreement. "Auction Multiple" means, as of any Auction Date, the Percentage of Auction Index (in effect on such Auction Date) determined as set forth below, based on the Prevailing Rating of the Bonds in effect at the close of business on the Business Day immediately preceding such Auction Date: 36
Percentage Prevailing Rating of Auction Index ----------------- ---------------- AAA/Aaa 125% AA/Aa 150 A/A 175 BBB/Baa 200 Below BBB/Baa 225
"Auction Period" means (i) a Special Auction Period, (ii) with respect to Bonds in a daily mode, a period beginning on each Business Day and extending to but not including the next succeeding Business Day, (iii) with respect to Bonds in a seven-day mode, a period of generally seven days beginning on the day of the week designated by the Broker-Dealer (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on the day prior to such designated day of the week) and ending on such day of the week thereafter designated by the Broker-Dealer (unless such day of the week is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day), (iv) with respect to Bonds in a 28-day mode, a period of generally 28 days beginning on the day of the week designated by the Broker-Dealer (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on the day prior to such designated day of the week) and ending on such day of the fourth week thereafter designated by the Broker-Dealer (unless such day of the week is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day), (v) with respect to Bonds in a 35-day mode, a period of generally 35 days beginning on the day of the week designated by the Broker-Dealer (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on the day prior to such designated day of the week) and ending on such day of the fifth week thereafter designated by the Broker-Dealer (unless such day of the week is not followed by a Business Day, in which case on the next succeeding day followed by a Business Day), (vi) with respect to Bonds in a three-month mode, a period of generally three months (or shorter period upon a conversion from another Auction Period) beginning on the day following the last day of the prior Auction Period and ending on the first day of the month that is the third calendar month following the beginning date of such Auction Period, and (vii) with respect to Bonds in a semiannual mode, a period of generally six months (or shorter period upon a conversion from another Auction Period) beginning on 37 the day following the last day of the prior Auction Period and ending on the next succeeding May 1 or November 1; provided, however, that if there is a conversion of Bonds (i) from a daily Auction Period to a seven-day Auction Period, the next Auction Period shall begin on the date of the conversion (i.e. the Interest Payment Date for the prior Auction Period) and shall end on such day of the week of the next succeeding week designated by the Broker-Dealer (unless such day of the week is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day), (ii) from a daily Auction Period to a 28-day Auction Period, the next Auction Period shall begin on the date of the conversion (i.e. the Interest Payment Date for the prior Auction Period) and shall end on such day of the week designated by the Broker-Dealer (unless such day of the week is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day) which is more than 21 days but not more than 28 days from such date of conversion, and (iii) from a daily Auction Period to a 35-day Auction Period, the next Auction Period shall begin on the date of the conversion (i.e. the Interest Payment Date for the prior Auction Period) and shall end on such day of the week designated by the Broker-Dealer (unless such day of the week is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day) which is more than 28 days but no more than 35 days from such date of conversion. "Auction Procedures" means the procedures for conducting Auctions for Bonds during an Auction Rate Period set forth in this Article IV. "Auction Rate" means for each Auction Period, (i) if Sufficient Clearing Bids exist, the Winning Bid Rate, provided, however, if all of such Bonds are the subject of Submitted Hold Orders, the Minimum Auction Rate with respect to the Bonds and (ii) if Sufficient Clearing Bids do not exist, the Maximum Auction Rate with respect to the Bonds. "Auction Rate Conversion Date" means the date on which the Bonds convert from an interest rate period other than an Auction Rate Period and begin to bear interest at an Auction Rate. "Auction Rate Period" means after the Initial Period any period of time commencing on the day following the Initial Period and ending on a Conversion Date to a Variable Rate or the Fixed Rate Conversion Date. "Auction Rate Securities" means any Bonds while they bear interest at the Auction Rate. "Available Bonds" means for Bonds on each Auction Date, the aggregate principal amount of such Bonds that are not the subject of Submitted Hold Orders. "Bid" has the meaning specified in subsection (a) of Section 402 of this Agreement. 38 "Bidder" means each Existing Owner and Potential Owner who places an Order. "Broker-Dealer" means any entity that is permitted by law to perform the function required of a Broker-Dealer described in this Agreement that is a member of, or a direct participant in, the Securities Depository, that has been selected by the Company, with the consent of the Authority and Morgan Stanley & Co. Incorporated, so long as Morgan Stanley & Co. Incorporated is a Broker-Dealer, and that is a party to a Broker-Dealer Agreement with the Auction Agent. "Broker-Dealer Agreement" means an agreement among the Auction Agent, the Company and one or more Broker-Dealers pursuant to which such Broker-Dealers agree to follow the procedures described in this Article IV, as such agreement may from to time be amended or supplemented. "Conversion Date" means the respective date on which the Bonds begin to bear interest at a Fixed Rate or in a Variable Rate Mode. "Date of Original Delivery" means December 19, 2001, or such other date or dates on which the respective Bonds are first issued and delivered. "Default Rate" means, in respect of any Auction Period other than a daily Auction Period, a per annum rate equal to two hundred fifty percent (250%) of the Auction Index determined on the Auction Date next preceding the first day of such Auction Period or in the case of Bonds in a daily Auction Period, two hundred fifty percent (250%) of the Auction Index determined on the Auction Date which was the first day of such Auction Period, provided, however, the Default Rate shall not exceed the lesser of (x) 14% per annum or (y) the maximum rate permitted by applicable law, anything herein to the contrary notwithstanding. "Existing Owner" means a Person who is listed as the beneficial owner of Bonds in the records of the Auction Agent. "Fixed Rate" means the fixed rate or rates of interest to be borne by the Bonds converted to Fixed Rate Indebtedness on or after a Fixed Rate Conversion Date. "Fixed Rate Conversion Date" means a date on which all of the Bonds are converted to Fixed Rate Indebtedness as provided in Section 412 hereof. The Fixed Rate Conversion Date shall be (i) the second regularly scheduled Interest Payment Date following the final Auction Date with respect to Bonds bearing interest at an Auction Rate in an Auction Rate Period other than a daily Auction Period, provided that with respect to Bonds in a Special Auction Period, the Fixed Rate Conversion Date shall be the Interest Payment Date immediately following the last day of the final Auction Period, or (ii) the next regularly scheduled Interest Payment Date with respect to Bonds bearing interest at an Auction Rate in a daily Auction Period. "Fixed Rate Indebtedness" means, as of any date of determination, any Bonds bearing 39 interest at a fixed rate for the remainder of their term. "Fixed Rate Mode" means the Mode in which the Bonds bear interest at a Fixed Rate. "Fixed Rate Period" means a period, commencing on a Fixed Rate Conversion Date for the Bonds and ending on the final maturity date therefor, during which such Bonds shall be Fixed Rate Indebtedness. "Hold Order" has the meaning specified in subsection (a) of Section 402 of this Agreement. "Initial Period" means the period from the date of initial delivery of the Bonds through and including January 22, 2002. "Interest Payment Date" with respect to Bonds bearing interest at Auction Rates, means January 23, 2002, and thereafter (a) when used with respect to any Auction Period other than a daily Auction Period or a Special Auction Period, the Business Day immediately following such Auction Period, (b) when used with respect to a daily Auction Period, the first Business Day of the month immediately succeeding such Auction Period, (c) when used with respect to a Special Auction Period of (i) seven or more but fewer than 92 days, the Business Day immediately following such Special Auction Period, or (ii) 92 or more days, the day of the week of each thirteenth week designated by the Broker-Dealer, after the first day of such Special Auction Period, or the next Business Day if such day of the week designated by the Broker-Dealer is not a Business Day and on the Business Day immediately following such Special Auction Period, (d) after the Fixed Rate Conversion Date, each May 1 and November 1, (e) each mandatory tender date, and (f) the maturity date. "Maximum Auction Rate" means as of any Auction Date, a per annum rate of interest equal to the product of the Auction Index multiplied by the Auction Multiple; provided, however, that in no event shall the Maximum Auction Rate exceed the lesser of (x) 14% per annum or (y) the maximum rate permitted by applicable law, anything herein to the contrary notwithstanding. "Minimum Auction Rate" means, as of any Auction Date, a per annum rate of interest equal to 45% of the Auction Index in effect on such Auction Date. "Mode" means the Daily Mode, Weekly Mode, Flexible Mode, Term Rate Mode (all as defined in Section 501), Fixed Rate Mode or Auction Rate Mode. "Order" means a Hold Order, Bid or Sell Order. "Potential Owner" means any Person, including any Existing Owner, who may be interested in acquiring a beneficial interest in the Bonds in addition to the Bonds currently owned by such Person, if any. "Prevailing Rating" means (a) AAA/Aaa, if the Bonds shall have a rating of AAA or 40 better by S&P and a rating of Aaa or better by Moody's, (b) if not AAA/Aaa, AA/Aa if the Bonds shall have a rating of AA- or better by S&P and a rating of Aa3 or better by Moody's, (c) if not AAA/Aaa or AA/Aa, A/A if the Bonds shall have a rating of A- or better by S&P and a rating of A3 or better by Moody's, (d) if not AAA/Aaa, AA/Aa or A/A, BBB/Baa if the Bonds shall have a rating of BBB- or better by S&P and a rating of Baa3 or better by Moody's and (e) if not AAA/Aaa, AA/Aa, A/A or BBB/Baa, then below BBB/Baa, whether or not the Bonds are rated by any securities rating agency. For purposes of this definition, S&P's rating categories of "AAA", "AA-", "A-" and "BBB-" and Moody's rating categories of "Aaa", "Aa3", "A3" and "Baa3" shall be deemed to refer to and include the respective rating categories correlative thereto in the event that any such Rating Agencies shall have changed or modified their generic rating categories or if any successor thereto appointed in accordance with the definitions thereof shall use different rating categories. If the Bonds are not rated by a Rating Agency, the requirement of a rating by such Rating Agency shall be disregarded. If the ratings for the Bonds are split between two of the foregoing categories, the lower rating shall determine the Prevailing Rating. If there is no rating, then the Auction Rate shall be the Maximum Auction Rate. "Principal Office" means, with respect to the Auction Agent, the office thereof designated in writing to the Company, the Authority, the Trustee and the Broker-Dealer. "Purchase Date" means the Conversion Date. "Record Date" means during an Auction Rate Period other than a daily Auction Period, the second Business Day preceding an Interest Payment Date therefor, and during a daily Auction Period, the last Business Day of the month preceding an Interest Payment Date. "Remarketing Agent" has the meaning specified in Section 501. "Sell Order" has the meaning specified in subsection (a) of Section 402 of this Agreement. "Special Auction Period" means any period of not less than seven nor more than 1,092 days which begins on an Interest Payment Date and ends on the day of the week designated by the Broker-Dealer, unless such day of the week designated by the Broker-Dealer is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day. "Submission Deadline" means 1:00 p.m., New York City time, on each Auction Date not in a daily Auction Period and 11:00 a.m., New York City time, on each Auction Date for a series of Bonds in a daily Auction Period, or such other time on such date as shall be specified from time to time by the Auction Agent pursuant to the Auction Agreement as the time by which Broker-Dealers are required to submit Orders to the Auction Agent. "Submitted Bid" has the meaning specified in subsection (b) of Section 404 of this Agreement. 41 "Submitted Hold Order" has the meaning specified in subsection (b) of Section 404 of this Agreement. "Submitted Order" has the meaning specified in subsection (b) of Section 404 of this Agreement. "Submitted Sell Order" has the meaning specified in subsection (b) of Section 404 of this Agreement. "Sufficient Clearing Bids" means an Auction for which the aggregate principal amount of Bonds that are the subject of Submitted Bids by Potential Owners specifying one or more rates not higher than the Maximum Auction Rate is not less than the aggregate principal amount of Bonds that are the subject of Submitted Sell Orders and of Submitted Bids by Existing Owners specifying rates higher than the Maximum Auction Rate. "Winning Bid Rate" means the lowest rate specified in any Submitted Bid which if selected by the Auction Agent as the Auction Rate would cause the aggregate principal amount of Bonds that are the subject of Submitted Bids specifying a rate not greater than such rate to be not less than the aggregate principal amount of Available Bonds. Section 402. Orders by Existing Owners and Potential Owners. (a) Prior to the Submission Deadline on each Auction Date: (i) each Existing Owner may submit to a Broker-Dealer, in writing or by such other method as shall be reasonably acceptable to such Broker-Dealer, information as to: (A) the principal amount of Bonds, if any, held by such Existing Owner which such Existing Owner irrevocably commits to continue to hold for the next succeeding Auction Period without regard to the rate determined by the Auction Procedures for such Auction Period, (B) the principal amount of Bonds, if any, held by such Existing Owner which such Existing Owner irrevocably commits to continue to hold for the next succeeding Auction Period if the rate determined by the Auction Procedures for such Auction Period shall not be less than the rate per annum then specified by such Existing Owner (and which such Existing Owner irrevocably offers to sell on the next succeeding Interest Payment Date (or the same day in the case of a daily Auction Period) if the rate determined by the Auction Procedures for the next succeeding Auction Period shall be less than the rate per annum then specified by such Existing Owner), and/or (C) the principal amount of Bonds, if any, held by such Existing Owner which such Existing Owner irrevocably offers to sell on the next succeeding Interest Payment 42 Date (or on the same day in the case of a daily Auction Period) without regard to the rate determined by the Auction Procedures for the next succeeding Auction Period; and (ii) for the purpose of implementing the Auctions and thereby to achieve the lowest possible interest rate on the Bonds, the Broker-Dealers shall contact Potential Owners, including Persons that are Existing Owners, to determine the principal amount of Bonds, if any, which each such Potential Owner irrevocably offers to purchase if the rate determined by the Auction Procedures for the next succeeding Auction Period is not less than the rate per annum then specified by such Potential Owner. For the purposes hereof, an Order containing the information referred to in clause (i)(A) above is herein referred to as a "Hold Order", an Order containing the information referred to in clause (i)(B) or (ii) above is herein referred to as a "Bid", and an Order containing the information referred to in clause (i)(C) above is herein referred to as a "Sell Order." (b)(i) A Bid by an Existing Owner shall constitute an irrevocable offer to sell: (A) the principal amount of Bonds specified in such Bid if the rate determined by the Auction Procedures on such Auction Date shall be less than the rate specified therein; or (B) such principal amount or a lesser principal amount of Bonds to be determined as described in subsection (a)(v) of Section 405 hereof if the rate determined by the Auction Procedures on such Auction Date shall be equal to such specified rate; or (C) a lesser principal amount of Bonds to be determined as described in subsection (b)(iv) of Section 405 hereof if such specified rate shall be higher than the Maximum Auction Rate and Sufficient Clearing Bids do not exist. (ii) A Sell Order by an Existing Owner shall constitute an irrevocable offer to sell: (A) the principal amount of Bonds specified in such Sell Order; or (B) such principal amount or a lesser principal amount of Bonds as described in subsection (b)(iv) of Section 405 hereof if Sufficient Clearing Bids do not exist. (iii) A Bid by a Potential Owner shall constitute an irrevocable offer to purchase: (A) the principal amount of Bonds specified in such Bid if the rate determined by the Auction Procedures on such Auction Date shall be higher than the rate specified therein; or (B) such principal amount or a lesser principal amount of Bonds as described in subsection (a)(vi) of Section 405 hereof if the rate determined by the Auction Procedures on such Auction Date shall be equal to such specified rate. 43 (c) Anything herein to the contrary notwithstanding: (i) for purposes of any Auction, any Order which specifies Bonds to be held, purchased or sold in a principal amount which is not $25,000 or an integral multiple thereof shall be rounded down to the nearest $25,000, and the Auction Agent shall conduct the Auction Procedures as if such Order had been submitted in such lower amount; (ii) for purposes of any Auction other than during a daily Auction Period, any portion of an Order of an Existing Owner which relates to a Bond which has been called for redemption on or prior to the Interest Payment Date next succeeding such Auction shall be invalid with respect to such portion and the Auction Agent shall conduct the Auction Procedures as if such portion of such Order had not been submitted; (iii) for purposes of any Auction other than during a daily Auction Period, no portion of a Bond which has been called for redemption on or prior to the Interest Payment Date next succeeding such Auction shall be included in the calculation of Available Bonds for such Auction; and (iv) the Auction Procedures shall be suspended during the period commencing on the date of the Auction Agent's receipt of notice from the Trustee or the Authority of the occurrence of an Event of Default resulting from a failure to pay principal, premium or interest on any Bond when due (provided however that for purposes of this provision only payment by the Bond Insurer shall be deemed to cure such Event of Default and no such suspension of the Auction Procedures shall occur) but shall resume two Business Days after the date on which the Auction Agent receives notice from the Trustee that such Event of Default has been waived or cured, with the next Auction to occur on the next regularly scheduled Auction Date occurring thereafter. Section 403. Submission of Orders by Broker-Dealers to Auction Agent. (a) The Broker-Dealer shall submit to the Auction Agent in writing or by such other method as shall be reasonably acceptable to the Auction Agent, including such electronic communication acceptable to the parties, prior to the Submission Deadline on each Auction Date, all Orders obtained by such Broker-Dealer and, if requested, specifying with respect to each Order: (i) the name of the Bidder placing such Order; (ii) the aggregate principal amount of Bonds, if any, that are the subject of such Order; (iii) to the extent that such Bidder is an Existing Owner: (A) the principal amount of Bonds, if any, subject to any Hold Order placed by such Existing Owner; 44 (B) the principal amount of Bonds, if any, subject to any Bid placed by such Existing Owner and the rate specified in such Bid; and (C) the principal amount of Bonds, if any, subject to any Sell Order placed by such Existing Owner; (iv) to the extent such Bidder is a Potential Owner, the rate specified in such Bid. (b) If any rate specified in any Bid contains more than three figures to the right of the decimal point, the Auction Agent shall round such rate up to the next highest one thousandth of one percent (0.001%). (c) If an Order or Orders covering all of the Bonds held by an Existing Owner is not submitted to the Auction Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold Order to have been submitted on behalf of such Existing Owner covering the principal amount of Bonds of such series held by such Existing Owner and not subject to Orders submitted to the Auction Agent; provided, however, that if there is a conversion from one Auction Period to another Auction Period and Orders have not been submitted to the Auction Agent prior to the Submission Deadline covering the aggregate principal amount of Bonds to be converted held by such Existing Owner, the Auction Agent shall deem a Sell Order to have been submitted on behalf of such Existing Owner covering the principal amount of Bonds to be converted held by such Existing Owner not subject to Orders submitted to the Auction Agent. (d) If one or more Orders covering in the aggregate more than the principal amount of Outstanding Bonds held by any Existing Owner are submitted to the Auction Agent, such Orders shall be considered valid as follows: (i) all Hold Orders shall be considered Hold Orders, but only up to and including in the aggregate the principal amount of Bonds held by such Existing Owner; (ii) (A) any Bid of an Existing Owner shall be considered valid as a Bid of an Existing Owner up to and including the excess of the principal amount of Bonds held by such Existing Owner over the principal amount of the Bonds subject to Hold Orders referred to in paragraph (i) above; (B) subject to clause (A) above, all Bids of an Existing Owner with the same rate shall be aggregated and considered a single Bid of an Existing Owner up to and including the excess of the principal amount of Bonds held by such Existing Owner over the principal amount of Bonds held by such Existing Owner subject to Hold Orders referred to in paragraph (i) above; (C) subject to clause (A) above, if more than one Bid with different rates is submitted on behalf of such Existing Owner, such Bids shall be considered Bids of an Existing Owner in the ascending order of their respective rates up to the amount of the excess of the principal amount of Bonds held by such Existing Owner over the principal amount of Bonds held by such 45 Existing Owner subject to Hold Orders referred to in paragraph (i) above; and (D) the principal amount, if any, of such Bonds subject to Bids not considered to be Bids of an Existing Owner under this paragraph (ii) shall be treated as the subject of a Bid by a Potential Owner; (iii) all Sell Orders shall be considered Sell Orders, but only up to and including a principal amount of Bonds equal to the excess of the principal amount of Bonds held by such Existing Owner over the sum of the principal amount of the Bonds considered to be subject to Hold Orders pursuant to paragraph (i) above and the principal amount of Bonds considered to be subject to Bids of such Existing Owner pursuant to paragraph (ii) above. (e) If more than one Bid is submitted on behalf of any Potential Owner, each Bid submitted with the same rate shall be aggregated and considered a single Bid and each Bid submitted with a different rate shall be considered a separate Bid with the rate and the principal amount of Bonds specified therein. (f) Any Bid submitted for Bonds by an Existing Owner or a Potential Owner specifying a rate lower than the Minimum Auction Rate shall be treated as a Bid specifying the Minimum Auction Rate. (g) Neither the Authority, the Company, the Trustee nor the Auction Agent shall be responsible for the failure of any Broker-Dealer to submit an Order to the Auction Agent on behalf of any Existing Owner or Potential Owner. Section 404. Determination of Auction Rate (a) Not later than 9:30 a.m., New York City time, on each Auction Date, the Auction Agent shall advise the Broker-Dealers and the Trustee by telephone or other electronic communication acceptable to the parties of the Minimum Auction Rate, the Maximum Auction Rate and the Auction Index for such Bonds. (b) Promptly after the Submission Deadline on each Auction Date, the Auction Agent shall assemble all Orders submitted or deemed submitted to it by the Broker-Dealers (each such Order as submitted or deemed submitted by a Broker-Dealer being hereinafter referred to as a "Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, and collectively as a "Submitted Order") and shall determine (i) the Available Bonds, (ii) whether there are Sufficient Clearing Bids, and (iii) the Auction Rate. (c) Promptly after the Auction Agent has made the determinations pursuant to subsection (b) above, the Auction Agent shall advise the Trustee by telephone (promptly confirmed in writing), telex or facsimile transmission or other electronic communication acceptable to the parties of the Auction Rate for the next succeeding Auction Period and the Trustee shall promptly notify DTC of such Auction Rate. 46 (d) In the event the Auction Agent fails to calculate, or for any reason fails to timely provide, the Auction Rate for any Auction Period, the Auction Rate for such Auction Period, with respect to the applicable series of Bonds, shall be the Maximum Auction Rate; provided, however, that if the Auction Procedures are suspended due to the failure of principal of, premium or interest on any Bond to be paid, the Auction Rate for the next succeeding Auction Period shall be the Default Rate. (e) In the event of a failed conversion of any series of Bonds to a Variable Rate Period or a Fixed Rate Period or in the event of a failure to change the length of the current Auction Period due to the lack of Sufficient Clearing Bids at the Auction on the Auction Date for the first new Auction Period, the Auction Rate for the next Auction Period shall be the Maximum Auction Rate and the Auction Period shall be a seven-day Auction Period. (f) If the Bonds are not rated by either Moodys or S&P, then the Auction Rate shall be the Maximum Auction Rate. Section 405. Allocation of Bonds. (a) In the event of Sufficient Clearing Bids, subject to the further provisions of subsections (c) and (d) below, Submitted Orders shall be accepted or rejected as follows in the following order of priority: (i) the Submitted Hold Order of each Existing Owner shall be accepted, thus requiring each such Existing Owner to continue to hold the Bonds that are the subject of such Submitted Hold Order; (ii) the Submitted Sell Order of each Existing Owner shall be accepted and the Submitted Bid of each Existing Owner specifying any rate that is higher than the Winning Bid Rate shall be rejected, thus requiring each such Existing Owner to sell the Bonds that are the subject of such Submitted Sell Order or Submitted Bid; (iii) the Submitted Bid of each Existing Owner specifying any rate that is lower than the Winning Bid Rate shall be accepted, thus requiring each such Existing Owner to continue to hold the Bonds that are the subject of such Submitted Bid; (iv) the Submitted Bid of each Potential Owner specifying any rate that is lower than the Winning Bid Rate shall be accepted, thus requiring each such Potential Owner to purchase the Bonds that are the subject of such Submitted Bid; (v) the Submitted Bid of each Existing Owner specifying a rate that is equal to the Winning Bid Rate shall be accepted, thus requiring each such Existing Owner to continue to hold the Bonds that are the subject of such Submitted Bid, but only up to and including the principal amount of Bonds obtained by multiplying (A) the aggregate principal amount of Outstanding Bonds which are not the subject of Submitted Hold Orders described in paragraph (i) above or of Submitted Bids described in paragraphs (iii) or (iv) above by (B) a fraction the numerator of 47 which shall be the principal amount of Outstanding Bonds held by such Existing Owner subject to such Submitted Bid and the denominator of which shall be the aggregate principal amount of Outstanding Bonds subject to such Submitted Bids made by all such Existing Owners that specified a rate equal to the Winning Bid Rate, and the remainder, if any, of such Submitted Bid shall be rejected, thus requiring each such Existing Owner to sell any excess amount of Bonds; (vi) the Submitted Bid of each Potential Owner specifying a rate that is equal to the Winning Bid Rate shall be accepted, thus requiring each such Potential Owner to purchase the Bonds that are the subject of such Submitted Bid, but only in an amount equal to the principal amount of Bonds obtained by multiplying (A) the aggregate principal amount of Outstanding Bonds which are not the subject of Submitted Hold Orders described in paragraph (i) above or of Submitted Bids described in paragraphs (iii), (iv) or (v) above by (B) a fraction the numerator of which shall be the principal amount of Outstanding Bonds subject to such Submitted Bid and the denominator of which shall be the sum of the aggregate principal amount of Outstanding Bonds subject to such Submitted Bids made by all such Potential Owners that specified a rate equal to the Winning Bid Rate, and the remainder of such Submitted Bid shall be rejected; and (vii) the Submitted Bid of each Potential Owner specifying any rate that is higher than the Winning Bid Rate shall be rejected. (b) In the event there are not Sufficient Clearing Bids, subject to the further provisions of subsections (c) and (d) below, Submitted Orders shall be accepted or rejected as follows in the following order of priority: (i) the Submitted Hold Order of each Existing Owner shall be accepted, thus requiring each such Existing Owner to continue to hold the Bonds that are the subject of such Submitted Hold Order; (ii) the Submitted Bid of each Existing Owner specifying any rate that is not higher than the Maximum Auction Rate with respect to the Bonds, shall be accepted, thus requiring each such Existing Owner to continue to hold the Bonds that are the subject of such Submitted Bid; (iii) the Submitted Bid of each Potential Owner specifying any rate that is not higher than the Maximum Auction Rate with respect to the Bonds, shall be accepted, thus requiring each such Potential Owner to purchase the Bonds that are the subject of such Submitted Bid; (iv) the Submitted Sell Orders of each Existing Owner shall be accepted as Submitted Sell Orders and the Submitted Bids of each Existing Owner specifying any rate that is higher than the Maximum Auction Rate with respect to the Bonds, shall be deemed to be and shall be accepted as Submitted Sell Orders, in both cases only up to and including the principal amount of Bonds obtained by multiplying (A) the aggregate principal amount of Bonds subject to Submitted Bids described in paragraph (iii) of this subsection (b) by (B) a fraction the numerator of which shall be the principal amount of Outstanding Bonds held by such Existing Owner subject to such Submitted Sell Order or such Submitted Bid deemed to be a Submitted Sell Order and the 48 denominator of which shall be the principal amount of Outstanding Bonds subject to all such Submitted Sell Orders and such Submitted Bids deemed to be Submitted Sell Orders, and the remainder of each such Submitted Sell Order or Submitted Bid shall be deemed to be and shall be accepted as a Hold Order and each such Existing Owner shall be required to continue to hold such excess amount of Bonds; and (v) the Submitted Bid of each Potential Owner specifying any rate that is higher than the Maximum Auction Rate with respect to the Bonds shall be rejected. (c) If, as a result of the procedures described in subsection (a) or (b) above, any Existing Owner or Potential Owner would be required to purchase or sell an aggregate principal amount of Bonds which is not an integral multiple of $25,000 on any Auction Date, the Auction Agent shall by lot, in such manner as it shall determine in its sole discretion, round up or down the principal amount of Bonds to be purchased or sold by any Existing Owner or Potential Owner on such Auction Date so that the aggregate principal amount of Bonds purchased or sold by each Existing Owner or Potential Owner on such Auction Date shall be an integral multiple of $25,000, even if such allocation results in one or more of such Existing Owners or Potential Owners not purchasing or selling any Bonds on such Auction Date. (d) If, as a result of the procedures described in subsection (a) above, any Potential Owner would be required to purchase less than $25,000 in principal amount of Bonds on any Auction Date, the Auction Agent shall by lot, in such manner as it shall determine in its sole discretion, allocate Bonds for purchase among Potential Owners so that the principal amount of Auction Rate Securities purchased on such Auction Date by any Potential Owner shall be an integral multiple of $25,000, even if such allocation results in one or more of such Potential Owners not purchasing Bonds on such Auction Date. Section 406. Notice of Auction Rate. (a) On each Auction Date, the Auction Agent shall notify by telephone or other telecommunication device or other electronic communication acceptable to the parties or in writing the Broker-Dealer that participated in the Auction held on such Auction Date of the following with respect to Bonds for which an Auction was held on such Auction Date: (i) the Auction Rate determined on such Auction Date for the succeeding Auction Period; (ii) whether Sufficient Clearing Bids existed for the determination of the Winning Bid Rate; (iii) if such Broker-Dealer submitted a Bid or a Sell Order on behalf of an Existing Owner, whether such Bid or Sell Order was accepted or rejected and the principal amount of 49 Bonds, if any, to be sold by such Existing Owner; (iv) if such Broker-Dealer submitted a Bid on behalf of a Potential Owner, whether such Bid was accepted or rejected and the principal amount of Bonds, if any, to be purchased by such Potential Owner; (v) if the aggregate principal amount of the Bonds to be sold by all Existing Owners on whose behalf such Broker-Dealer submitted Bids or Sell Orders is different from the aggregate principal amount of Bonds to be purchased by all Potential Owners on whose behalf such Broker-Dealer submitted a Bid, the name or names of one or more Broker-Dealers (and the Agent Member, if any, of each such other Broker Dealer) and the principal amount of Bonds to be (A) purchased from one or more Existing Owners on whose behalf such other Broker-Dealers submitted Bids or Sell Orders or (B) sold to one or more Potential Owners on whose behalf such Broker-Dealer submitted Bids; and (vi) the immediately succeeding Auction Date. (b) On each Auction Date, with respect to each series of Bonds for which an Auction was held on such Auction Date, the Broker-Dealer that submitted an Order on behalf of any Existing Owner or Potential Owner shall: (i) advise each Existing Owner and Potential Owner on whose behalf such Broker-Dealer submitted an Order as to (A) the Auction Rate determined on such Auction Date, (B) whether any Bid or Sell Order submitted on behalf of each such Owner was accepted or rejected and (C) the immediately succeeding Auction Date; (ii) instruct each Potential Owner on whose behalf such Broker-Dealer submitted a Bid that was accepted, in whole or in part, to instruct such Existing Owner's Agent Member to pay to such Broker-Dealer (or its Agent Member) through the Securities Depository the amount necessary to purchase the principal amount of Bonds to be purchased pursuant to such Bid (including, with respect to the Bonds in a daily Auction Period, accrued interest if the purchase date is not an Interest Payment Date for such Bond) against receipt of such Bonds; and (iii) instruct each Existing Owner on whose behalf such Broker-Dealer submitted a Sell Order that was accepted or a Bid that was rejected, in whole or in part, to instruct such Existing Owner's Agent Member to deliver to such Broker-Dealer (or its Agent Member) through the Securities Depository the principal amount of Bonds to be sold pursuant to such Bid or Sell Order against payment therefor. Section 407. Auction Index. (a) The Auction Index on any Auction Date with respect to Bonds in any Auction Period of 35 days or less shall be the Seven-Day "AA" Non Financial Composite Commercial Paper Rate on such date. The Auction Index with respect to Bonds in any Auction Period greater than 35 days shall be the rate on United States Treasury Securities having a maturity which most closely approximates the length of the Auction Period, as last published in The Bond Buyer. If either rate is unavailable, the Auction Index shall be an index or rate agreed 50 to by all Broker-Dealers and consented to by the Company. "Seven-Day 'AA' Non Financial Composite Commercial Paper Rate" on any date of determination, means (A) the interest equivalent of the seven-day rate on commercial paper placed on behalf of issuers whose corporate bonds are rated AA by S&P, or the equivalent of such rating by S&P, as made available on a discount basis or otherwise by the Federal Reserve Bank of New York for the Business Day immediately preceding such date of determination, or (B) if the Federal Reserve Bank of New York does not make available any such rate, then the arithmetic average of such rates, as quoted on a discount basis or otherwise, by Morgan Stanley & Co. Incorporated, Lehman Commercial Paper Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated or, in lieu of any thereof, their respective affiliates or successors which are commercial paper dealers (the "Commercial Paper Dealers"), to the Auction Agent before the close of business on the Business Day immediately preceding such date of determination. For purposes of the definition of Seven-Day "AA" Non Financial Composite Commercial Paper Rate, the interest equivalent means the equivalent yield on a 360-day basis of a discount-basis security to an interest-bearing security. If any Commercial Paper Dealer does not quote a commercial paper rate required to determine the Seven-Day "AA" Non Financial Composite Commercial Paper Rate, the Seven-Day "AA" Non Financial Composite Commercial Paper Rate shall be determined on the basis of the quotation or quotations furnished by the remaining Commercial Paper Dealer or Commercial Paper Dealers and any substitute commercial paper dealer not included within the definition of Commercial Paper Dealer above, which may be CS First Boston Corporation or Goldman Sachs & Co. or their respective affiliates or successors which are commercial paper dealers (a "Substitute Commercial Paper Dealer") selected by the Trustee (who shall be under no liability for such selection) to provide such commercial paper rate or rates not being supplied by any Commercial Paper Dealer or Commercial Paper Dealers, as the case may be, or if the Trustee does not select any such Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers, by the remaining Commercial Paper Dealer or Commercial Paper Dealers. (b) If for any reason on any Auction Date the Auction Index shall not be determined as hereinabove provided in this Section, the Auction Index shall be the Auction Index for the Auction Period ending on such Auction Date. (c) The determination of the Auction Index as provided herein shall be conclusive and binding upon the Company, the Authority, the Trustee, the Broker-Dealers, the Auction Agent and the Owners of the Bonds. Section 408. Miscellaneous Provisions Regarding Auctions. (a) In this Article IV, each reference to the purchase, sale or holding of "Bonds" shall refer to beneficial interests in Bonds, unless the context clearly requires otherwise. (b) During an Auction Rate Period with respect to any Bonds, the provisions of this Agreement and the definitions contained herein and described in this Article IV, including 51 without limitation the definitions of Maximum Auction Rate, Minimum Auction Rate, Auction Index, Default Rate, Auction Multiple and the Auction Rate, may be amended pursuant to this Agreement, by obtaining the consent of the owners of all Outstanding Bonds bearing interest at an Auction Rate as follows. If on the first Auction Date occurring at least 20 days after the date on which the Trustee mailed notice of such proposed amendment to the registered owners of the Outstanding Bonds as required by this Agreement, (i) the Auction Rate which is determined on such date is the Winning Bid Rate and (ii) there is delivered to the Authority and the Trustee an opinion of Bond Counsel to the effect that such amendment shall not adversely affect the validity of the Bonds or any exemption from federal income tax to which the interest on the Bonds would otherwise be entitled, the proposed amendment shall be deemed to have been consented to by the owners of all affected Outstanding Bonds bearing interest at an Auction Rate. (c) During an Auction Rate Period, so long as the ownership of the Bonds is maintained in book-entry form by the Securities Depository, an Existing Owner or a beneficial owner may sell, transfer or otherwise dispose of a Bond only pursuant to a Bid or Sell Order in accordance with the Auction Procedures or to or through a Broker-Dealer, provided that (i) in the case of all transfers other than pursuant to Auctions such Existing Owner or its Broker-Dealer or its Agent Member advises the Auction Agent of such transfer and (ii) a sale, transfer or other disposition of Bonds from a customer of a Broker-Dealer who is listed on the records of that Broker-Dealer as the holder of such Bonds to that Broker-Dealer or another customer of that Broker-Dealer shall not be deemed to be a sale, transfer or other disposition for purposes of this paragraph if such Broker-Dealer remains the Existing Owner of the Bonds so sold, transferred or disposed of immediately after such sale, transfer or disposition. Section 409. Changes in Auction Period or Auction Date. (a) Changes in Auction Period. (i) During any Auction Rate Period, the Company may with the written consent of the Bond Insurer, from time to time on any Interest Payment Date, change the length of the Auction Period with respect to all of the Bonds among daily, seven-days, 28-days, 35-days, three months, six months and a Special Auction Period in order to accommodate economic and financial factors that may affect or be relevant to the length of the Auction Period and the interest rate borne by such Bonds; provided, however, in the case of a change from a Special Auction Period the date of such change shall be the Interest Payment Date immediately following the last day of the final Auction Period. The Company shall initiate the change in the length of the Auction Period by giving written notice to the Trustee, the Bond Insurer, the Auction Agent, the Broker-Dealers and the Securities Depository that the Auction Period shall change if the conditions described herein are satisfied and the proposed effective date of the change, at least 10 Business Days prior to the Auction Date for such Auction Period. In the event that the Company is in default under any of its obligations relating to the Bonds (including without limitation any default under this Agreement or the Bond Insurance Agreement), the Bond Insurer will succeed to any rights of the Company to direct a conversion of the interest rate on the Bonds. The Trustee shall not be charged with knowledge or notice of any such default, other than a default under Section 801(a)(i) unless and except to the extent it has actual knowledge thereof or has received written notice thereof from the Insurer. 52 (ii) Any such changed Auction Period shall be for a period of one day, seven-days, 28-days, 35-days, three months, six months or a Special Auction Period and shall be for all of the Bonds in an Auction Rate Period. (iii) The change in the length of the Auction Period shall not be allowed unless Sufficient Clearing Bids existed at both the Auction before the date on which the notice of the proposed change was given as provided in this subsection (a) and the Auction immediately preceding the proposed change. (iv) The change in length of the Auction Period shall take effect only if Sufficient Clearing Bids exist at the Auction on the Auction Date for such first Auction Period. For purposes of the Auction for such first Auction Period only, each Existing Owner shall be deemed to have submitted Sell Orders with respect to all of its Bonds except to the extent such Existing Owner submits an Order with respect to such Bonds. If the condition referred to above is not met, the Auction Rate for the next Auction Period shall be the Maximum Auction Rate and the Auction Period shall be a seven-day Auction Period. (b) Changes in Auction Date. During any Auction Rate Period, the Auction Agent, with the written consent of the Company, may specify an earlier Auction Date for the Bonds (but in no event more than five Business Days earlier) than the Auction Date that would otherwise be determined in accordance with the definition of Auction Date in order to conform with then current market practice with respect to similar securities or to accommodate economic and financial factors that may affect or be relevant to the day of the week constituting an Auction Date and the interest rate borne on the Bonds. The Auction Agent shall provide notice of its determination to specify an earlier Auction Date for an Auction Period by means of a written notice delivered at least 45 days prior to the proposed changed Auction Date to the Trustee, the Company, the Broker-Dealers and the Securities Depository. Section 410. Auction Agent. (a) The Auction Agent shall be appointed by the Trustee upon, and as designated in, the written direction of the Company to perform the functions specified herein. The Auction Agent shall designate its Principal Office and signify its acceptance of the duties and obligations imposed upon it hereunder by a written instrument, delivered to the Company, the Authority, the Trustee and the Broker-Dealer which shall set forth such procedural and other matters relating to the implementation of the Auction Procedures as shall be satisfactory to the Company and the Trustee. (b) Subject to any applicable governmental restrictions, the Auction Agent may be or become the owner of or trade in Bonds with the same rights as if such entity were not the Auction Agent. Section 411. Qualifications of Auction Agent; Resignation; Removal. The Auction 53 Agent shall be (a) a bank or trust company organized under the laws of the United States of America or any state or territory thereof having a combined capital stock, surplus and undivided profits of at least $30,000,000, or (b) a member of NASD having a capitalization of at least $30,000,000 and, in either case, authorized by law to perform all the duties imposed upon it by this Agreement and a member of or a participant in, the Securities Depository. The Auction Agent may at any time resign and be discharged of the duties and obligations created by this Agreement by giving at least ninety (90) days notice to the Company, the Authority, the Bond Insurer and the Trustee. The Auction Agent may be removed at any time by the Company by written notice, delivered to the Auction Agent, the Authority, the Bond Insurer and the Trustee. Upon any such resignation or removal, the Trustee shall appoint a successor Auction Agent, with the approval of the Bond Insurer, upon, and as designated in, the written direction of the Company meeting the requirements of this Section. In the event of the resignation or removal of the Auction Agent, the Auction Agent shall pay over, assign and deliver any moneys and Bonds held by it in such capacity to its successor. The Auction Agent shall continue to perform its duties hereunder until its successor has been appointed by the Trustee. The Company shall be solely responsible for payment of compensation to the Auction Agent for its services. In the event that the Auction Agent has not been compensated for its services, the Auction Agent may resign by giving thirty (30) days notice to the Company, the Authority and the Trustee even if a successor Auction Agent has not been appointed. Section 412. Conversion. (a) Notice. At the option of the Company, with the prior written consent of the Bond Insurer, all (but not less than all) of the Bonds outstanding may be converted to the Daily Mode, Weekly Mode, Flexible Mode, Term Rate Mode or Fixed Rate Mode on a Conversion Date selected by the Company; provided that the Company's right to convert Bonds to another Mode shall terminate on the date of defeasance of such Bonds pursuant to Section 204; and provided further that no conversion shall be effective if the Bonds to be converted are not fully remarketed on the applicable mandatory tender date. Upon timely written notice from the Company, the Trustee shall give notice of any proposed conversion not fewer than 15 days (or, if the Bonds are then in a six-month Auction Period or a Special Auction Period of more than 180 days, 30 days) before the proposed Conversion Date to the registered owner, the Paying Agent, the Auction Agent and the Broker-Dealer. Such notice will state: (1) the title, outstanding principal amount and CUSIP number(s) of the Bonds to be converted to the Daily Mode, Weekly Mode, Flexible Mode, Term Rate Mode or Fixed Rate Mode; (2) the proposed Conversion Date; (3) that all of the Bonds to be converted will be subject to mandatory tender for purchase on the Conversion Date, at a price equal to par plus accrued interest to the Conversion Date; (4) the consequences of a failed conversion (which shall be as provided in 54 subsection (c) below); (5) the time and address at which the Bonds are to be tendered for purchase; (6) that the conversion of the Bonds to the Daily Mode, Weekly Mode, Flexible Mode, Term Rate Mode or Fixed Rate Mode will not become effective unless the Trustee and the Authority shall have received, no later than one day before the proposed Conversion Date, an opinion of Bond Counsel to the effect that the conversion to the applicable Mode will not adversely affect the exclusion of interest on the Bonds from the gross income of the registered owner or the beneficial owners of the Bonds for federal income tax purposes and, on the proposed Conversion Date, a confirmation of such opinion; and (7) that after the Conversion Date, the registered owner and any beneficial owners shall have no further rights with respect to the Bonds so converted except to receive the purchase price therefor on the Conversion Date, with no interest accruing thereon. Such notice to the owners shall be made by first class mail or, at the Company's option, certified mail, return receipt requested. Any notice mailed as provided in this Section 412 to the registered owner at its address listed in the registration books of the Paying Agent shall be conclusively presumed to have been duly given, whether or not the registered owner received the notice, and the failure of the registered owner to receive any such notice shall not affect the validity of the action described in such notice. For so long as the Bonds are registered in the name of Cede & Co., as nominee for DTC, notices of mandatory tender for purchase of Bonds shall be given to DTC only, and none of the Authority, the Company, the Trustee, or the Paying Agent or any other Person shall have any responsibility for the delivery of any of such notices by DTC to any participants of DTC or by any direct or indirect participants of DTC to beneficial owners of the Bonds. (b) Terms of Bonds in Daily, Weekly, Flexible, Term Rate and Fixed Rate Modes. The Remarketing Agent shall determine the Daily, Weekly, Flexible, Term or Fixed Rate on a Business Day at least one Business Day prior to the proposed Conversion Date to the Daily, Weekly, Flexible, Term Rate or Fixed Rate Mode, as applicable. The Daily, Weekly, Flexible, Term Rate or Fixed Rate shall be determined by the Remarketing Agent as described in Article V. The Bonds so converted shall be subject to optional and mandatory redemption at the times and in the amounts described in Article V. (c) Failure to Convert. If any of the conditions to conversion of the Bonds from the Auction Mode to another Mode are not met, such conversion shall not take effect and the next Auction Period shall be a seven-day Auction Period and the Auction Rate of such Auction Period shall be the Maximum Auction Rate. In no event shall the failure of any Bond to be converted to another Mode be deemed to be a default or an Event of Default hereunder. 55 Section 413. Credit Ratings. The Company shall take all reasonable action necessary to enable at least two nationally recognized statistical rating organizations (as that term is used in the rules and regulations of the Securities and Exchange Commission under the Securities Exchange Act) to provide credit ratings for the Bonds. Section 414. Mandatory Tender. (a) Agreement to Tender. Each registered owner, by its acceptance of the Bonds, agrees to tender its Bonds to the Paying Agent for purchase on a Conversion Date properly endorsed for transfer in blank, at the time and address specified in such notice. (b) Purchase of Tendered Bonds. Delivery to the Paying Agent of Bonds to be tendered for purchase, together with wire payment instructions satisfactory to the Paying Agent, is required to be made on the Purchase Date in accordance with the procedures described in Sections 518 and 519. If the Bonds are delivered after the time described in Sections 518 or 519, as applicable, payment will be made on the next Business Day without any additional accrued interest. Bonds which are required to be tendered for purchase shall cease bearing interest from and after the date tender is required regardless of whether such Bonds are presented for payment and Owners shall have no further rights with respect to such Bonds other than the right to receive payment of the purchase price upon surrender of the Bonds. For so long as the Bonds are registered in the name of Cede & Co., as nominee for DTC, delivery of Bonds required to be tendered for purchase shall be effected by the transfer by a direct participant of DTC on the Purchase Date of a book entry credit to the account of the Paying Agent of a beneficial interest in such Bonds. For so long as the Bonds are registered in the name of Cede & Co., as nominee for DTC, payment of the purchase price shall be paid directly to DTC in accordance with the Representation Letter. In receiving Bonds hereunder, the Paying Agent shall be acting as a conduit and shall not be purchasing such Bonds for its own account. The performance of the Paying Agent's duties is subject to certain terms and standards set forth in this Agreement. ARTICLE V. SPECIAL PROVISIONS RELATING TO VARIABLE RATE AND FIXED RATE MODES Section 501. Definitions. In addition to the words and terms elsewhere defined in this Agreement, the following words and terms as used in this Article V and elsewhere in this Agreement have the following meanings with respect to Bonds in a Variable Rate Mode or Fixed Rate Mode unless the context or use indicates another or different meaning or intent: 56 "Alternate Credit Enhancement" or "Alternate Liquidity Facility" shall mean a letter of credit, insurance policy, line of credit, surety bond, standby purchase agreement or other security or liquidity instrument, as the case may be, issued in accordance with the terms hereof as a replacement or substitute for any Credit Enhancement or Liquidity Facility, as applicable, then in effect. "Alternate Rate" shall mean, on any Rate Determination Date, for any Mode, a rate per annum equal to (a) the BMA Municipal Swap Index of Municipal Market Data, formerly the PSA Municipal Swap Index (as such term is defined in the 1992 ISDA U.S. Municipal Counterparty Definitions) (the BMA Rate) most recently available as of the date of determination, or (b) if such index is no longer available, or if the BMA Rate is no longer published, the Kenny Index (as such term is defined in the 1992 ISDA U.S. Municipal Counterparty Definitions), or if neither the BMA Rate nor the Kenny Index is published, the index determined to equal the prevailing rate determined by the Remarketing Agent for tax-exempt state and local government bonds meeting criteria determined in good faith by the Remarketing Agent to be comparable under the circumstances to the criteria used by the Bond Market Association to determine the BMA Rate just prior to when the Bond Market Association stopped publishing the BMA Rate. The Tender Agent shall make the determinations required by this determination, upon notification from the Authority, if there is no Remarketing Agent, if the Remarketing Agent fails to make any such determination or if the Remarketing Agent has suspended its remarketing efforts in accordance with the Remarketing Agreement. "Authorized Denominations" shall mean (i) with respect to Bonds in a Daily Mode or Weekly Mode, $100,000 and any integral multiple of $5,000 in excess thereof, (ii) with respect to Bonds in a Flexible Mode, $100,000 and any integral multiple of $1,000 in excess thereof and (iii) with respect to Bonds in a Long-Term Mode, $5,000 and any integral multiple thereof. "Automatic Termination Event" shall mean an event of default set forth in the Reimbursement Agreement between the Company and the Liquidity Provider which would result in the immediate termination of the Liquidity Facility prior to its stated expiration date without at least thirty days prior notice from the Liquidity Provider to the Tender Agent, other than a termination upon the substitution of an Alternate Liquidity Facility. "Available Amount" shall mean the amount available under the Credit Enhancement or Liquidity Facility, as applicable, to pay the principal of and interest on the Bonds or the Purchase Price of the Bonds, as applicable. "Available Moneys" shall mean (i) moneys held by the Trustee (other than in the Purchase Fund) and continuously subject to a first priority lien under this Agreement for a period of at least 123 days and not commingled with any moneys so held for less than said period and during which period no petition in bankruptcy was filed by or against, and no receivership, insolvency, assignment for the benefit of creditors or other similar proceeding has been commenced by or against, the Company, unless such petition or proceeding was dismissed and all applicable appeal periods have expired without an appeal having been filed, (ii) investment income derived from the investment of moneys described in clause (i) or (iii) any moneys with 57 respect to which an opinion of nationally recognized bankruptcy counsel has been received by the Trustee to the effect that payments by the Trustee in respect of the Bonds, as provided in this Agreement, derived from such moneys would not constitute transfers avoidable under 11 U.S.C. ss. 547(b) and recoverable from the Owners under 11 U.S.C. ss. 550(a) should the Company be the debtor in a case under Title 11 of the United States Code, as amended. "Beneficial Owner" shall mean, so long as the Bonds are negotiated in the Book-Entry System, any Person who acquires a beneficial ownership interest in a Bond held by the Securities Depository. If at any time the Bonds are not held in the Book-Entry System, Beneficial Owner shall mean Owner for purposes of this Agreement. "Book-Entry System" shall mean the system maintained by the Securities Depository described in Section 301(d) hereof. "Credit Enhancement" shall mean a direct-pay letter of credit, insurance policy, surety bond, line of credit or other instrument then in effect which secures or guarantees the payment of principal of and interest on the Bonds. "Credit Enhancement Failure" or "Liquidity Facility Failure" shall mean a failure of the Credit Provider or Liquidity Provider, as applicable, to pay a properly presented and conforming draw or request for advance under the Credit Enhancement or Liquidity Facility, as applicable, or the filing or commencement of any bankruptcy or insolvency proceedings by or against the Credit Provider or Liquidity Provider, as applicable, or the Credit Provider or Liquidity Provider, as applicable, shall declare a moratorium on the payment of its unsecured debt obligations or shall repudiate the Credit Enhancement or Liquidity Facility, as applicable. "Credit Provider" shall mean any bank, insurance company, pension fund or other financial institution which provides a Credit Enhancement or Alternate Credit Enhancement for the Bonds, including the Bond Insurer. "Current Mode" shall have the meaning specified in Section 509(a)(i) hereof. "Daily Mode" shall mean the Mode during which the Bonds bear interest at the Daily Rate. "Daily Rate" shall mean the per annum interest rate on any Bond in the Daily Mode determined pursuant to Section 506(a) hereof. "Daily Rate Period" shall mean the period during which a Bond in the Daily Mode shall bear a Daily Rate, which shall be from the Business Day upon which a Daily Rate is set to but not including the next succeeding Business Day. "Electronic Means" shall mean telecopy, facsimile transmission, e-mail transmission or other similar electronic means of communication providing evidence of transmission, including a 58 telephonic communication confirmed by any other method set forth in this definition. "Expiration Date" shall mean the stated expiration date of the Credit Enhancement or the Liquidity Facility, as it may be extended from time to time as provided in the Credit Enhancement or the Liquidity Facility, or any earlier date on which the Credit Enhancement or the Liquidity Facility shall terminate, expire or be cancelled. "Favorable Opinion of Bond Counsel" shall mean, with respect to any action the occurrence of which requires such an opinion, an unqualified Opinion of Counsel, which shall be a Bond Counsel, to the effect that such action is permitted under the Act and this Agreement and will not impair the exclusion of interest on the Bonds from gross income for purposes of Federal income taxation or the exemption of interest on the Bonds from personal income taxation under the laws of New Hampshire (subject to the inclusion of any exceptions contained in the opinion delivered upon original issuance of the Bonds). "Fitch" shall mean Fitch, Inc., and its successors and assigns, except that if such Company shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, then the term "Fitch" shall be deemed to refer to any other nationally recognized securities rating agency selected by the Company after consultation with the Remarketing Agent. "Fixed Rate" shall mean the per annum interest rate on any Bond in the Fixed Rate Mode determined pursuant to Sections 507(b) hereof. "Fixed Rate Bond" shall mean a Bond in the Fixed Rate Mode. "Fixed Rate Mode" shall mean the Mode during which the Bonds bear interest at the Fixed Rate. "Fixed Rate Period" shall mean for the Bonds in the Fixed Rate Mode, the period from the Mode Change Date upon which the Bonds were converted to the Fixed Rate Mode to but not including the Maturity Date for the Bonds. "Flexible Rate Bond" shall mean a Bond in the Flexible Mode. "Flexible Mode" shall mean the Mode during which the Bonds bear interest at the Flexible Rate. "Flexible Rate" shall mean the per annum interest rate on a Bond in the Flexible Mode determined for such Bond pursuant to Section 505 hereof. The Bonds in the Flexible Mode may bear interest at different Flexible Rates. "Flexible Rate Period" shall mean the period of from one to 270 calendar days (which period must end on a Business Day) during which a Flexible Rate Bond shall bear interest at a Flexible Rate, as established by the Remarketing Agent pursuant to Section 505 hereof. The 59 Bonds in the Flexible Mode may be in different Flexible Rate Periods. "Interest Accrual Period" shall mean the period during which a Bond accrues interest payable on the next Interest Payment Date applicable thereto. With respect to any Mode, each Interest Accrual Period shall commence on (and include) the last Interest Payment Date to which interest has been paid (or, if no interest has been paid in such Mode, from the date of original authentication and delivery of the Bonds, or the Mode Change Date, as the case may be) to, but not including, the Interest Payment Date on which interest is to be paid. If, at the time of authentication of any Bond, interest is in default or overdue on the Bonds, such Bond shall bear interest from the date to which interest has previously been paid in full or made available for payment in full on Outstanding Bonds. "Interest Amount" shall mean the aggregate amount available under the Credit Enhancement or Liquidity Facility, as applicable, to pay interest accruing on the Bonds or that portion of the Purchase Price constituting interest. "Interest Payment Date" shall mean each date on which interest is to be paid and is: (i) with respect to the Bonds in the Flexible Mode, each Mandatory Purchase Date applicable thereto; (ii) with respect to the Bonds in the Daily Mode or Weekly Mode, the first Business Day of each month; (iii) with respect to the Bonds in a Long-Term Mode, the first day of the sixth calendar month following the month in which such Long-Term Mode takes effect, and the first day of each sixth calendar month thereafter or, upon the receipt by the Trustee of a Favorable Opinion of Bond Counsel, any other six-month interval chosen by the Company (beginning with the first such day which is at least three months after the Mode Change Date) and, with respect to a Term Rate Period, or the final day of the current Interest Period if other than a regular six-month interval; (iv) (without duplication as to any Interest Payment Date listed above) any Mode Change Date, other than a change between a Daily Mode and a Weekly Mode, and each Maturity Date; and (v) with respect to any Liquidity Provider Bonds, the day set forth in the Reimbursement Agreement. "Interest Period" shall mean, for the Bonds in a particular Mode, the period of time that the Bonds bear interest at the rate (per annum) which becomes effective at the beginning of such period, and shall include a Flexible Rate Period, a Daily Rate Period, a Weekly Rate Period, a Term Rate Period and a Fixed Rate Period. "Liquidity Facility" shall mean any letter of credit, line of credit, standby purchase agreement or other instrument then in effect which provides for the purchase of Bonds upon the tender thereof in the event remarketing proceeds are insufficient therefor. "Liquidity Provider" shall mean any bank, insurance company, pension fund or other financial institution which provides a Liquidity Facility or Alternate Liquidity Facility for the Bonds. "Liquidity Provider Bonds" shall mean any Bonds purchased by the Liquidity Provider 60 with funds drawn on or advanced under the Liquidity Facility. "Long-Term Mode" shall mean a Term Rate Mode or a Fixed Rate Mode. "Mandatory Purchase Date" shall mean: (i) with respect to a Flexible Rate Bond the first Business Day following the last day of each Flexible Rate Period with respect to such Bond, (ii) for Bonds in the Term Rate Mode, on the first Business Day following the last day of each Term Rate Period, (iii) any Mode Change Date (except a change in Mode between the Daily Mode and the Weekly Mode), (iv) any Substitution Date, (v) the fifth Business Day prior to the Expiration Date (other than as a result of an Automatic Termination Event), and (vi) the date specified by the Credit Provider or Liquidity Provider in a written notice to the Trustee following the occurrence of an event of default (other than an Automatic Termination Event) under the Reimbursement Agreement, which date shall be a Business Day not less than the number of days specified in the Liquidity Facility after the Trustee's receipt of such notice. "Mode" shall mean, as the context may require, the Flexible Mode, the Daily Mode, the Weekly Mode, the Term Rate Mode, the Auction Rate Mode or the Fixed Rate Mode. "Mode Change Date" shall mean with respect to the Bonds in a particular Mode, the day on which another Mode for the Bonds begins. "Mode Change Notice" shall mean the notice from the Company to the other Notice Parties of the Company's intention to change the Mode with respect to the Bonds. "New Mode" shall have the meaning specified in Section 509(a)(i) hereof. "Notice Parties" shall mean the Authority, the Trustee, the Tender Agent, the Remarketing Agent, the Paying Agent, the Credit Provider, the Liquidity Provider and the Company. "Opinion of Counsel" shall mean a written legal opinion from a firm of attorneys experienced in the matters to be covered in the opinion. "Owner" shall mean the registered owner of a Bond, including the Securities Depository, if any, or its nominee. "Principal Payment Date" shall mean any date upon which the principal amount of Bonds is due hereunder, including the maturity date, any Redemption Date, or the date the maturity of any Bond is accelerated pursuant to the terms hereof or otherwise. "Purchase Date" shall mean (i) for a Bond in the Daily Mode or the Weekly Mode, any Business Day selected by the Beneficial Owner of said Bond pursuant to the provisions of Section 513 hereof, and (ii) any Mandatory Purchase Date. 61 "Purchase Fund" shall mean the fund by that name created in Section 522 hereof. "Purchase Price" shall mean an amount equal to the principal amount of any Bonds purchased on any Purchase Date, plus, in the case of any purchase of Bonds in the Daily Mode or the Weekly Mode and Bonds purchased on a Mandatory Purchase Date that is not an Interest Payment Date, accrued interest, if any. "Rate Determination Date" shall mean any date on which the interest rate on Bonds shall be determined, which, (i) in the case of the Flexible Mode, shall be the first day of an Interest Period; (ii) in the case of the Daily Mode, shall be each Business Day commencing with the first day (which must be a Business Day) the Bonds become subject to the Daily Mode; (iii) in the case of the initial conversion to the Weekly Mode, shall be no later than the Business Day prior to the Mode Change Date, and thereafter, shall be each Wednesday or, if Wednesday is not a Business Day, then the Business Day next preceding such Wednesday; (iv) in the case of the Term Rate Mode, shall be a Business Day no earlier than fifteen (15) Business Days and no later than the Business Day next preceding the first day of an Interest Period, as determined by the Remarketing Agent; and (v) in the case of the Fixed Rate Mode, shall be a date determined by the Remarketing Agent which shall be at least one Business Day prior to the Mode Change Date. "Rating Agencies" shall mean any of Moodys, S&P or Fitch, which is then providing a rating on the Bonds. "Rating Confirmation Notice" shall mean a notice from Moodys, S&P or Fitch, as appropriate, confirming that the rating on the Bonds will not be lowered or withdrawn (other than a withdrawal of a short-term rating upon a change to a Long-Term Mode) as a result of the action proposed to be taken. "Record Date" shall mean (i) with respect to Bonds in a Short-Term Mode, the last Business Day before an Interest Payment Date and (ii) with respect to Bonds in a Long-Term Mode, the fifteenth (15th) day (whether or not a Business Day) of the month next preceding each Interest Payment Date. "Redemption Date" shall mean the date fixed for redemption of Bonds subject to redemption in any notice of redemption given in accordance with the terms hereof. "Redemption Price" shall mean an amount equal to the principal of and premium, if any, and accrued interest, if any, on the Bonds to be paid on the Redemption Date. "Reimbursement Agreement" shall mean any reimbursement agreement, credit agreement, line of credit agreement, standby purchase agreement or other agreement, by and between the Credit Provider or Liquidity Provider, as applicable, and the Company. "Remarketing Agent" shall mean Morgan Stanley & Co. Incorporated, or any other investment banking firm which may be substituted in its place as provided in Section 524 hereof. 62 "Remarketing Agreement" shall mean that certain Remarketing Agreement relating to the Bonds, by and between the Company and the Remarketing Agent or any similar agreement between the Company and the Remarketing Agent, as it may be amended or supplemented from time to time in accordance with its terms. "Remarketing Proceeds Account" shall mean the account by that name created in Section 522(a) hereof. "Short-Term Mode" shall mean the Daily Mode, the Weekly Mode or the Flexible Mode. "Short Term Interest Period" shall mean a Daily Rate Period, a Weekly Rate Period or a Flexible Rate Period. "Substitution Date" shall mean the date upon which an Alternate Credit Enhancement or Alternate Liquidity Facility is substituted for the Credit Enhancement or Liquidity Facility then in effect. "Tender Agent" shall mean the commercial bank, trust company or other entity which may from time to time be appointed to serve as Tender Agent hereunder. Until such time as an alternate Tender Agent is appointed, the Tender Agent shall be the Trustee. "Tender Notice Deadline" shall mean (i) during the Daily Mode, 11:00 A.M. on any Business Day and (ii) during the Weekly Mode, 5:00 P.M. on the Business Day seven days prior to the applicable Purchase Date. "Tender Notice" shall mean a notice delivered by Electronic Means or in writing that states (i) the principal amount of such Bond to be purchased pursuant to Section 513 hereof, (ii) the Purchase Date on which such Bond is to be purchased, (iii) applicable payment instructions with respect to the Bonds being tendered for purchase and (iv) an irrevocable demand for such purchase. "Term Rate" shall mean the per annum interest rate for the Bonds in the Term Rate Mode determined pursuant to Section 507(a) hereof. "Term Rate Mode" shall mean the Mode during which the Bonds bear interest at the Term Rate. "Term Rate Period" shall mean the period from (and including) the Mode Change Date to (but excluding) the last day of the first period that the Bonds shall be in the Term Rate Mode as established by the Company for the Bonds pursuant to Sections 509(a)(i) hereof and, thereafter, the period from (and including) the beginning date of each successive Interest Rate Period selected for the Bonds by the Company pursuant to Section 507(a) while it is in the Term Rate Mode to (but excluding) the commencement date of the next succeeding Interest Period, including another Term Rate Period. Except as otherwise provided in this Agreement, an Interest 63 Period for the Bonds in the Term Rate Mode must be at least 180 days in length. "Weekly Mode" shall mean the Mode during which the Bonds bear interest at the Weekly Rate. "Weekly Rate" shall mean the per annum interest rate on the Bonds in the Weekly Mode determined pursuant to Section 506(b) hereof. "Weekly Rate Period" shall mean the period during which a Bond in the Weekly Mode shall bear a Weekly Rate, which shall be the period commencing on Thursday of each week to and including Wednesday of the following week, except the first Weekly Rate Period which shall be from the Mode Change Date or date of initial issuance of the Bonds, as applicable, to and including the Wednesday of the following week and the last Weekly Rate Period which shall be from and including the Thursday of the week prior to the Mode Change Date to the day next preceding the Mode Change Date. Unless otherwise provided herein, all references to a particular time are to New York City time. Section 502. Medium, Method and Place of Payment and Dating of Bonds. So long as the Bonds are in the Book-Entry System, interest on the Bonds shall be paid by the Paying Agent on the Interest Payment Date by wire transfer of immediately available funds to an account and by the time specified by the Securities Depository. Unless otherwise provided in any writing with or from the Securities Depository, the interest on the Bonds in a Variable Rate Mode or the Fixed Rate Mode shall be paid by the Paying Agent on the Interest Payment Dates by wire transfer of immediately available funds to an account specified by the Owner in a writing delivered to the Paying Agent. Any such specified account shall remain in effect until revised by such Owner by an instrument in writing delivered to the Paying Agent. The principal of and premium, if any, on each Bond shall be payable on the Principal Payment Date, upon surrender thereof at the office of the Paying Agent. Except as may be specifically set forth herein, the Paying Agent, the Trustee, the Bond Insurer, the Remarketing Agent, the Company and the Authority may treat the Owner of a Bond as the absolute owner thereof for all purposes, whether or not such Bond shall be overdue, and the Paying Agent, the Trustee, the Remarketing Agent, the Company and the Authority shall not be affected by any knowledge or notice to the contrary; and payment of the principal of and premium, if any, and interest on such Bond shall be made only to such Owner, which payments shall be valid and effectual to satisfy and discharge the liability of such Bond to the extent of the sum or sums so paid. All Bonds at maturity or on earlier redemption paid pursuant to the provisions of this Section shall be cancelled by the Paying Agent. The Bonds shall be dated as described in Section 301 and, while in a Variable Rate Mode or the Fixed Rate Mode, shall bear interest at the applicable rate or rates during each applicable Interest Accrual Period until the entire principal amount of the respective series of Bonds has 64 been paid. Section 503. Payment of Principal and Interest of Bonds; Acceptance of Terms and Conditions. (a) The interest on the Bonds shall become due and payable on the Interest Payment Dates in each year to and including the respective maturity date, and on each Redemption Date and on the date of any acceleration prior thereto. The principal of the Bonds shall become due and payable on the Principal Payment Dates. (b) By the acceptance of its Bond, the Owner and each Beneficial Owner thereof shall be deemed to have agreed to all the terms and provisions of such Bond as specified in such Bond and this Agreement including, without limitation, the applicable Interest Periods, interest rates (including any applicable Alternate Rate), Purchase Dates, Mandatory Purchase Dates, Purchase Prices, mandatory and optional purchase and redemption provisions applicable to such Bond, method and timing of purchase, redemption, payment, etc. Such Owner and each Beneficial Owner further agree that if, on any date upon which one of its Bonds is to be purchased, redeemed or paid at maturity or earlier due date, funds are on deposit with the Paying Agent or the Trustee to pay the full amount due on such Bond, then such Owner or Beneficial Owner shall have no rights under this Agreement other than to receive such full amount due with respect to such Bond and that interest on such Bond shall cease to accrue as of such date. (c) While any Bonds are Liquidity Provider Bonds, such Bonds shall bear interest and be payable at the times and in the amounts required under the Liquidity Facility (as to which the Trustee, the Bond Insurer and the Paying Agent shall be entitled to receive and rely upon a certificate from the Liquidity Provider). Section 504. Calculation and Payment of Interest; Change in Mode; Maximum Rate. When a Short-Term Mode is in effect, interest shall be calculated on the basis of a 365/366 day year for the actual number of days elapsed. When a Long-Term Mode is in effect, interest shall be calculated on the basis of a 360 day year comprised of twelve 30-day months. Payment of interest on each Bond shall be made on each Interest Payment Date for such Bond for unpaid interest accrued during the Interest Accrual Period to the Owner of record of such Bond on the applicable Record Date. (a) Bonds in any Mode, other than a Fixed Rate Mode, may be changed to any other Mode at the times and in the manner hereinafter provided. Subsequent to such change in Mode (other than a change to a Fixed Rate Mode), the Bonds may again be changed to a different Mode at the times and in the manner hereinafter provided. A Fixed Rate Mode shall be in effect until the respective maturity date, or acceleration thereof prior to such maturity date, and may not be changed to any other Mode. 65 (b) No Bonds shall bear interest at an interest rate higher than the Maximum Rate. (c) In the absence of manifest error, the determination of interest rates (including any determination of rates in connection with a New Mode) and interest periods by the Remarketing Agent and the record of interest rates maintained by the Paying Agent shall be conclusive and binding upon the Remarketing Agent, the Paying Agent, the Trustee, the Authority, the Company, the Owners and the Beneficial Owners. Section 505. Determination of Flexible Rates and Interest Periods During Flexible Mode. An Interest Period for the Bonds in the Flexible Mode shall be of such duration of from one to 270 calendar days, ending on a Business Day or the maturity date, as the Remarketing Agent shall determine in accordance with the provisions of this Section. A Flexible Rate Bond can have an Interest Period, and bear interest at a Flexible Rate, different than another Flexible Rate Bond. In making the determinations with respect to Interest Periods, subject to limitations imposed by the second preceding sentence and in Section 504 hereof, on each Rate Determination Date for a Flexible Rate Bond, the Remarketing Agent shall select for such Bond the Interest Period which would result in the Remarketing Agent being able to remarket such Bond at par in the secondary market at the lowest average interest cost; provided, however, that if the Remarketing Agent has received notice from the Company that the Bonds are to be changed from the Flexible Mode to any other Mode, the Remarketing Agent shall select Interest Periods which do not extend beyond the resulting applicable Mandatory Purchase Date of the Bonds. Except while the Bonds are registered in a Book-Entry System, in order to receive payment of the Purchase Price the Owner of any Bond in the Flexible Mode must present such Bond to the Paying Agent, by 12:00 noon on the Rate Determination Date, in which case, the Paying Agent shall pay the Purchase Price to such Owner by 2:30 P.M. on the same day. By 1:00 P.M. on each Rate Determination Date, the Remarketing Agent, with respect to each Bond in the Flexible Mode which is subject to adjustment on such date, shall determine the Flexible Rate(s) for the Interest Periods then selected for such Bond and shall give notice by Electronic Means to the Paying Agent and the Company, of the Interest Period, the Purchase Date(s) and the Flexible Rate(s). The Remarketing Agent shall make the Flexible Rate and Interest Period available after 2:00 p.m. on each Rate Determination Date by telephone or Electronic Means to any Beneficial Owner or Notice Party requesting such information. Section 506. Determination of Interest Rates During the Daily Mode and the Weekly Mode. The interest rate for the Bonds in the Daily Mode or Weekly Mode shall be the rate of interest per annum determined by the Remarketing Agent on and as of the applicable Rate Determination Date as the minimum rate of interest which, in the opinion of the Remarketing Agent under then-existing market conditions, would result in the sale of the Bonds in the Daily Rate Period or Weekly Rate Period, as applicable, at a price equal to the principal amount thereof, plus interest, if any, accrued through the Rate Determination Date during the then current Interest Accrual Period. (a) During the Daily Mode, the Remarketing Agent shall establish the Daily Rate by 66 10:00 A.M. on each Rate Determination Date. The Daily Rate for any day during the Daily Mode which is not a Business Day shall be the Daily Rate established on the immediately preceding Rate Determination Date. The Remarketing Agent shall make the Daily Rate available after 10:30 A.M. on each Rate Determination Date by telephone or Electronic Means to any Beneficial Owner or Notice Party requesting such rate. (b) During the Weekly Mode, the Remarketing Agent shall establish the Weekly Rate by 4:00 P.M. on each Rate Determination Date. The Weekly Rate shall be in effect during the applicable Weekly Rate Period. The Remarketing Agent shall make the Weekly Rate available after 5:00 P.M. on the Rate Determination Date by telephone or Electronic Means to any Beneficial Owner or Notice Party requesting such rate. Section 507. Determination of Term Rates and Fixed Rates. (a) Term Rates. Except as provided in the immediately succeeding paragraph, once the Bonds are changed to the Term Rate Mode, the Bonds shall continue in the Term Rate Mode until changed to another Mode in accordance with Section 509 hereof. The Term Rate shall be determined by the Remarketing Agent not later than 4:00 P.M. on the Rate Determination Date, and the Remarketing Agent shall make the Term Rate available by telephone or by Electronic Means to any Notice Party requesting such rate after 5:00 p.m. on the Rate Determination Date. The Term Rate shall be the minimum rate which, in the sole judgment of the Remarketing Agent, would result in a sale of the Bonds at a price equal to the principal amount thereof on the Rate Determination Date for the Interest Period selected by the Company in writing delivered to the Remarketing Agent before such Rate Determination Date. If a new Interest Period is not selected by the Company prior to a Rate Determination Date (for a reason other than a court prohibiting such selection), the new Interest Period shall be the same length as the current Interest Period (or such lesser period as shall be necessary to comply with the last sentence of this paragraph). No Interest Period in the Term Rate Mode may extend beyond the applicable Maturity Date. (b) Fixed Rates. The Remarketing Agent shall determine the Fixed Rate for the Bonds being converted to the Fixed Rate Mode in the manner and at the times as follows: not later than 4:00 P.M. on the applicable Rate Determination Date, the Remarketing Agent shall determine the Fixed Rate. The Fixed Rate shall be the minimum interest rate which, in the sole judgment of the Remarketing Agent, will result in a sale of the Bonds at a price equal to the principal amount thereof on the Rate Determination Date. The Remarketing Agent shall make the Fixed Rate available by telephone or by Electronic Means after 5:00 p.m. on the Rate Determination Date to any Notice Party requesting such Fixed Rate. The Fixed Rate so established shall remain in effect until the Maturity Date of such Bonds. Section 508. Alternate Rates. The following provisions shall apply in the event (i) the Remarketing Agent fails or is unable to determine the interest rate or Interest Period for the Bonds, (ii) the method by which the Remarketing Agent determines the interest rate or Interest Period with respect to the Bonds (or the selection by the Company of the Interest Periods for Bonds in the Term Rate Mode) shall be held to be unenforceable by a court of law of competent jurisdiction or (iii) if the Remarketing Agent suspends its remarketing effort in accordance with 67 the Remarketing Agreement. These provisions shall continue to apply until such time as the Remarketing Agent (or the Company if applicable) again makes such determinations. In the case of clause (ii) above, the Remarketing Agent (or the Company, if applicable) shall again make such determination at such time as there is delivered to the Remarketing Agent and the Authority an opinion of Bond Counsel to the effect that there are no longer any legal prohibitions against such determinations. The following shall be the methods by which the interest rates and, in the case of the Flexible and Term Rate Modes, the Interest Periods, shall be determined for the Bonds as to which either of the events described in clauses (i), (ii) or (iii) shall be applicable. Such methods shall be applicable from and after the date either of the events described in clauses (i), (ii) or (iii) first become applicable to the Bonds until such time as the events described in clauses (i), (ii) or (iii) are no longer applicable to the Bonds. These provisions shall not apply if the Company fails to select an Interest Period for the Bonds in the Term Rate Mode for a reason other than as described in clause (ii) above. (a) For Flexible Rate Bonds, the next Interest Period shall be from, and including, the first day following the last day of the current Interest Period for the Bonds to, but excluding, the next succeeding Business Day and thereafter shall commence on each Business Day and extend to, but exclude, the next succeeding Business Day. For each such Interest Period, the interest rate for the Bonds shall be the applicable Alternate Rate in effect on the Business Day that begins an Interest Period. (b) If the Bonds are in the Daily Mode or the Weekly Mode, then the Bonds shall bear interest during each subsequent Interest Period at the Alternate Rate in effect on the first day of such Interest Period. (c) If the Bonds are then in the Term Rate Mode, then the Bonds shall automatically convert to Flexible Rate Bonds, with an Interest Period commencing on the first day following the last day of the current Interest Period for the Bonds to, but excluding, the next succeeding Business Day and thereafter shall commence on each Business Day and extend to, but exclude, the next succeeding Business Day. For each such Interest Period, the interest rate for the Bonds shall be the applicable Alternate Rate in effect at the beginning of each such Interest Period. Section 509. Changes in Mode. Subject to the provisions of this Section, the Company may effect a change in Mode of the Bonds by following the procedures set forth in this Section; provided that the Company's right to effect a change in Mode of any series of Bonds shall terminate on the date of defeasance pursuant to Section 204. If a change in Mode will make the Bonds subject to Rule 15c2-12 promulgated under the Securities Act of 1934, as amended, the Company will execute a continuing disclosure undertaking satisfying the requirements of such Rule and shall cooperate with the Remarketing Agent and any Underwriter (as defined in such Rule) in satisfying the requirements of such Rule. (a) Changes to Modes Other Than Fixed Rate Mode. With the prior written consent of the Bond Insurer, the Bonds (other than Bonds in the Fixed Rate Mode) may be changed from a Variable Rate Mode to another Mode (other than the Fixed Rate Mode) as follows: 68 (i) Mode Change Notice; Notice to Owners. No later than a Business Day which is at least 30 days (or such shorter time as may be agreed to by the Authority, the Company, the Trustee, the Tender Agent and the Remarketing Agent) preceding the proposed Mode Change Date, the Company shall give written notice to the Notice Parties of its intention to effect a change in the Mode from the Mode then prevailing (for purposes of this Section, the "Current Mode") to another Mode (for purposes of this Section, the "New Mode") specified in such written notice, and, if the change is to a Term Rate Mode, the length of the initial Interest Period as set by the Company, and, if the change is to the Auction Rate Mode, the length of the Auction Period. In the case of a change to a Term Rate Mode or from one Term Rate Mode to another Term Rate Mode, such notice to the Notice Parties shall also include a statement as to whether there will be a Liquidity Facility and/or Credit Enhancement in effect with respect to the Bonds following such change and the identity of any provider of such Liquidity Facility and/or Credit Enhancement. Notice of the proposed change in Mode shall be given by the Tender Agent to the Owners of the Bonds not less than the 15th day next preceding the Mode Change Date. Such notice shall state: (1) the Mode to which the conversion will be made and the Mode Change Date; (2) except in the case of a change from the Daily Mode to the Weekly Mode or from the Weekly Mode to the Daily Mode, that the Bonds will be subject to mandatory tender for purchase on the Mode Change Date and the Purchase Price of the Bonds; and (3) if the Book-Entry System is no longer in effect, information with respect to required delivery of Bond certificates and payment of Purchase Price. (ii) Determination of Interest Rates. The New Mode shall commence on the Mode Change Date and the interest rate(s) (together, in the case of a change to the Flexible Mode, with the Interest Period(s)) shall be determined by the Remarketing Agent (or the Company in the case of the Interest Period for the Bonds converted to the Term Rate Mode) in the manner provided in Sections 505, 506 and 507 and in Article IV hereof, as applicable. (iii) Conditions Precedent: (A) The Mode Change Date shall be: (1) in the case of a change from the Flexible Mode, the next Mandatory Purchase Date for the Flexible Rate Bonds; (2) in the case of a change from the Daily or Weekly Mode, any Business Day; and (3) in the case of a change from the Term Rate Mode to another Mode, or from a Term Rate Period to a Term Rate Period of a different duration, the Mode Change Date shall be limited to any Interest Payment Date on which the Bonds are subject to optional redemption or to the last Interest Payment Date of the current Term Rate Period, as the case may be. Such Bonds shall be purchased on such Mode Change Date at a Purchase Price equal to 100% of the principal amount thereof, provided that if such Bonds are to be purchased 69 on an Interest Payment Date other than the last Interest Payment Date and would otherwise be subject to optional redemption on such Mode Change Date at a Redemption Price of more than 100% of the principal amount thereof, such Bonds shall be purchased at a Purchase Price equal to such Redemption Price. (B) If the Bonds to be converted are in the Flexible Mode, no Interest Period set after delivery by the Company to the Remarketing Agent of the notice of the intention to effect a change in Mode shall extend beyond the proposed Mode Change Date. (C) The following items shall have been delivered to the Trustee, the Paying Agent and the Remarketing Agent on or prior to the Mode Change Date: (1) in the case of a change from a Short-Term Mode to a Long-Term Mode or from a Long-Term Mode to a Short-Term Mode or the Auction Rate Mode, a Favorable Opinion of Bond Counsel dated the Mode Change Date and addressed to the Notice Parties; (2) if there is to be an Alternate Liquidity Facility or Alternate Credit Enhancement delivered in connection with such change, the items required by Section 521(d) hereof; (3) a Rating Confirmation Notice, or if the Mode Change Date is a Mandatory Purchase Date, a notice from the Rating Agencies of the rating(s) to be assigned the Bonds on such Mode Change Date; and (4) written consent from the Bond Insurer. (b) Change to Fixed Rate Mode. At the option of the Company and with the prior written consent of the Bond Insurer, the Bonds may be changed to the Fixed Rate Mode as provided in this Section 509(b). On any Business Day which is at least 30 days (or such shorter time as may be agreed to by the Authority, the Company, the Trustee and the Remarketing Agent, but in any event not less than the 15th day next preceding the Mode Change Date) before the proposed Mode Change Date, the Company shall give written notice to the Notice Parties stating that the Mode will be changed to the Fixed Rate Mode and setting forth the proposed Mode Change Date. Such notice shall also state whether or not there shall be Credit Enhancement with respect to the Bonds following such change and, if so, the identity of the Credit Provider. Any such change in Mode shall be made as follows: (i) Mode Change Date. The Mode Change Date shall be: (A) in the case of a change from the Flexible Mode, the next Mandatory Purchase Date for the Flexible Rate Bonds; (B) in the case of a change from the Daily or Weekly Mode, any 70 Business Day; and (C) in the case of a change from the Term Rate Mode, the Mode Change Date shall be limited to any Interest Payment Date on which the Bonds are subject to optional redemption or to the next Mandatory Purchase Date for the Term Rate Bonds, as the case may be. Such Bonds shall be purchased on such Mode Change Date at a Purchase Price equal to 100% of the principal amount thereof, provided that if such Bonds would otherwise be subject to optional redemption on such Mode Change Date at a Redemption Price of more than 100% of the principal amount thereof, such Bonds shall be purchased at a Purchase Price equal to such Redemption Price. (ii) Notice to Owners. Not less than the 15th day next preceding the Mode Change Date, the Paying Agent shall mail, in the name of the Company, a notice of such proposed change to the Owners of the Bonds stating that the Mode will be changed to the Fixed Rate Mode, the proposed Mode Change Date and that such Owner is required to tender such Owners Bonds for purchase on such proposed Mode Change Date. (iii) General Provisions Applying to Change to Fixed Rate Mode. The change to the Fixed Rate Mode shall not occur unless the following items shall have been delivered to the Authority, the Company, the Trustee and the Remarketing Agent on or prior to the Mode Change Date: (A) a Favorable Opinion of Bond Counsel dated the Mode Change Date and addressed to the Authority, the Company, the Trustee, the Bond Insurer and the Remarketing Agent; (B) if there is to be Credit Enhancement delivered in connection with such change, the items required by Section 521(d) hereof in connection with the delivery of an Alternate Credit Enhancement, and (C) notice from the Rating Agencies of the rating(s) to be assigned the Bonds on such Mode Change Date. (iv) Determination of Interest Rate. The Fixed Rate for the Bonds to be converted to the Fixed Rate Mode shall be established by the Remarketing Agent on the Rate Determination Date applicable thereto pursuant to the provisions of Section 507(b). Such Rate shall remain in effect until the maturity date of the Bonds. (v) Redemption Terms. Upon conversion of the Bonds to the Fixed Rate Mode, the Bonds shall be remarketed at par, shall mature on the same maturity date and be subject to the same mandatory and optional redemption provisions as set forth in this Agreement for any prior Mode; provided, however, that if the Company shall deliver to the Trustee a Favorable Opinion of Bond Counsel, the Company may elect to (1) change the optional redemption dates and/or premiums set forth in Section 512(b) hereof, and/or 71 (2) sell some or all of the Bonds at a premium or a discount to par. (c) Failure to Satisfy Conditions Precedent to a Mode Change. In the event the conditions described above in subsections (a) or (b), as applicable, of this Section have not been satisfied by the applicable Mode Change Date, then the New Mode shall not take effect (although any mandatory tender shall be made on such date if notice has been sent to the Owners stating that such Bonds would be subject to mandatory purchase on such date). If the failed change in Mode was from the Flexible Mode, the Bonds shall remain in the Flexible Mode with interest rates and Interest Periods to be established by the Remarketing Agent on the failed Mode Change Date in accordance with Section 505 hereof. If the failed change in Mode was from the Daily Mode, the Bonds shall remain in the Daily Mode, and if the failed change in Mode was from the Weekly Mode, the Bonds shall remain in the Weekly Mode, in each case with interest rates established in accordance with the applicable provisions of Section 506 hereof on and as of the failed Mode Change Date. If the failed change in Mode was from the Term Rate Mode, then the Bonds shall stay in the Term Rate Mode for an Interest Period ending on the following Interest Payment Date for the Bonds in the Term Rate Mode and the interest rate shall be established by the Remarketing Agent on the failed Mode Change Date in accordance with Section 507(a) hereof. (d) Recission of Election. Notwithstanding anything herein to the contrary, the Company may rescind any election by it to change a Mode as described above prior to the Mode Change Date by giving written notice thereof to the Notice Parties prior to such Mode Change Date. If the Tender Agent receives notice of such rescission prior to the time the Tender Agent has given notice to the holders of the Bonds, then such notice of change in Mode shall be of no force and effect. If the Tender Agent receives notice from the Company of rescission of a Mode change after the Tender Agent has given notice thereof to the holders of the Bonds, then if the proposed Mode Change Date would have been a Mandatory Purchase Date, such date shall continue to be a Mandatory Purchase Date. If the proposed change in Mode was from the Flexible Mode, the Bonds shall remain in the Flexible Mode with interest rates and Interest Periods to be established by the Remarketing Agent on the proposed Mode Change Date in accordance with Section 505 hereof. If the proposed change in Mode was from the Daily Mode, the Bonds shall remain in the Daily Mode, and if the proposed change in Mode was from the Weekly Mode, the Bonds shall remain in the Weekly Mode, in each case with interest rates established in accordance with the applicable provisions of Section 506 hereof on and as of the proposed Mode Change Date. If the proposed change in Mode was from the Term Rate Mode, then the Bonds shall stay in the Term Rate Mode for an Interest Period ending on the following Interest Payment Date for the Bonds in the Term Rate Mode and the interest rate shall be established by the Remarketing Agent on the proposed Mode Change Date in accordance with Section 507(a) hereof. If the Remarketing Agent is unable to determine the interest rate on the proposed Mode Change Date, the provisions of Section 508 shall apply. Section 510. Optional Redemption of Flexible Rate Bonds. Bonds in the Flexible Mode are not subject to optional redemption prior to their respective Purchase Dates. Bonds in the Flexible Mode shall be subject to redemption at the option of the Company in whole or in part on 72 their respective Purchase Dates at a redemption price equal to the principal amount thereof. Section 511. Optional Redemption of Bonds in the Daily Mode or the Weekly Mode. Bonds in the Daily Mode or the Weekly Mode are subject to optional redemption by the Company, in whole or in part, in Authorized Denominations on any date, at a redemption price equal to the principal amount thereof, plus, accrued interest, if any, from the end of the preceding Interest Accrual Period to the Redemption Date. Section 512. Optional Redemption of Bonds in the Term Rate or the Fixed Rate Mode. Bonds in a Term Rate Mode shall be subject to redemption, in whole or in part, on their individual Mandatory Purchase Dates, at the option of the Company at a redemption price equal to the principal amount thereof. (a) Bonds in the Term Rate Mode or Fixed Rate Mode are subject to redemption in whole on any date or in part on any Interest Payment Date (and if in part by lot or by such other method as the Paying Agent determines to be fair and reasonable and in Authorized Denominations) at the redemption prices set forth below, together with accrued interest, if any, to the redemption date:
- --------------------------------------------------------------------------------------------------------------------- LENGTH OF LONG-TERM COMMENCEMENT OF REDEMPTION PRICE INTEREST RATE PERIOD REDEMPTION PERIOD - --------------------------------------------------------------------------------------------------------------------- Greater than or equal to 15 Tenth anniversary of the 102%, declining by 1.0% on each years commencement of Long-Term succeeding anniversary of the Interest Rate Period first day of the redemption period until reaching 100% and thereafter at 100% - --------------------------------------------------------------------------------------------------------------------- Less than 15 years and greater Seventh anniversary of the 102%, declining by 1.0% on each than or equal to 10 years commencement of Long-Term succeeding anniversary of the Interest Rate Period first day of the redemption period until reaching 100% and thereafter at 100% - --------------------------------------------------------------------------------------------------------------------- Less than 10 years and Third anniversary of the 101%, declining by 1.0% on each greater than or equal to commencement of Long-Term succeeding anniversary of the 5 years Interest Rate Period first day of the redemption period until reaching 100% and thereafter at 100% - --------------------------------------------------------------------------------------------------------------------- Less than 5 years Bonds not subject to optional redemption - ---------------------------------------------------------------------------------------------------------------------
73 (b) The Company, in connection with a change to a Long-Term Mode, may waive or otherwise alter its rights to direct the redemption of any such Bonds so changed to a Long-Term Mode at any time without premium; provided that notice describing the waiver or alteration shall be submitted to the Paying Agent, the Trustee and the Remarketing Agent, together with a Favorable Opinion of Bond Counsel, addressed to them. (c) If a Credit Enhancement is then in effect and the Redemption Price includes any premium, the right of the Company to direct an optional redemption is subject to the condition that the Trustee has received, prior to the date on which notice of redemption is required to be given to Owners, either Available Moneys of the Company sufficient to cover the premium due on the Redemption Date or written confirmation from the Credit Provider that it can draw under the Credit Enhancement on the proposed redemption date in an aggregate amount sufficient to cover the principal of and premium and interest due on the Redemption Date. Section 513. Optional Tenders of Bonds in the Daily Mode or the Weekly Mode. Subject to Section 518 hereof, the Beneficial Owners of Bonds in a Daily Mode or a Weekly Mode may elect to have their Bonds (or portions of those Bonds in amounts equal to an Authorized Denominations) purchased on any Business Day at a price equal to the Purchase Price, upon delivery of a Tender Notice by the Tender Notice Deadline. Section 514. Mandatory Purchase on Mandatory Purchase Date. The Bonds shall be subject to mandatory purchase on each Mandatory Purchase Date. The Tender Agent shall give notice of such mandatory purchase by mail to the Owners of the Bonds subject to mandatory purchase (a) no less than thirty (30) days prior to the Mandatory Purchase Date in the case of a mandatory purchase (i) at the end of an Interest Period for Bonds in a Term-Rate Mode or (ii) on a Substitution Date; (b) no less than 15 days prior to the Mandatory Purchase Date in the case of a mandatory purchase on a Mode Change Date; and (c) no less than the number of days specified in the Liquidity Facility prior to the Mandatory Purchase Date (i) following notice from the Credit Provider or Liquidity Provider of an event of default under the Reimbursement Agreement or (ii) immediately preceding any Expiration Date. No notice shall be given of the Mandatory Purchase Date at the end of each Interest Period for Flexible Rate Bonds. Any notice shall state the Mandatory Purchase Date, the Purchase Price, the numbers of the Bonds to be purchased if less than all of the Bonds owned by such Owner are to be purchased, and that interest on Bonds subject to mandatory purchase shall cease to accrue from and after the Mandatory Purchase Date. The failure to mail such notice with respect to any Bond shall not affect the validity of the mandatory purchase of any other Bond with respect to which notice was so mailed. Any notice mailed will be conclusively presumed to have been given, whether or not actually received by any Owner or Beneficial Owner. 74 Section 515. Remarketing of Bonds; Notices. (a) Remarketing of Bonds. The Remarketing Agent shall use its best efforts to offer for sale: (i) all Bonds or portions thereof as to which notice of tender pursuant to Section 513 hereof has been given; and (ii) all Bonds required to be purchased on a Mandatory Purchase Date described in clauses (i), (ii) or (iii) of the definition thereof; and (iii) any Liquidity Provider Bonds (A) purchased on a Purchase Date described in clause (i) or (ii) above, (B) with respect to which the Liquidity Provider has provided notice to the Trustee and the Remarketing Agent that it is ready to reinstate the Available Amount, (C) with respect to which an Alternate Liquidity Facility and Alternate Credit Enhancement are in effect (if such funds were secured by a Credit Enhancement prior to becoming Liquidity Provider Bonds which Credit Enhancement is no longer in effect), or (D) which are being marketed as Fixed Rate Bonds. (b) Notice of Remarketing; Registration Instructions; New Bonds. On each date on which a Bond is to be purchased: (i) the Remarketing Agent shall notify by Electronic Means the Tender Agent by 12:00 noon if it has been unable to remarket any tendered Bonds, and shall include in such notice the principal amount of Bonds it has been unable to remarket; (ii) unless the Remarketing Agent has delivered the notice described in clause (i) above, the Remarketing Agent shall notify the Tender Agent by Electronic Means not later than 1:00 P.M. of the names of the purchasers of the remarketed Bonds and such information as may be necessary to register the Bonds and the registration instructions (i.e., the names, addresses and taxpayer identification numbers of the purchasers and the desired Authorized Denominations) with respect thereto; and (iii) if the Bonds are no longer in the Book-Entry System, the Tender Agent shall authenticate new Bonds for the respective purchasers thereof which shall be available for pick-up by the Remarketing Agent not later than 2:30 P.M. (c) Draw on Liquidity Facility. On each date on which a Bond is to be purchased, if the Remarketing Agent shall have given notice to the Tender Agent pursuant to clause (b)(i) above that it has been unable to remarket any of the Bonds, the Tender Agent shall direct the Trustee (if the two are separate entities) to draw on the Liquidity Facility (or if there is no Liquidity Facility or the Liquidity Facility is unavailable to honor such draw, request funds from the Company) by 12:30 P.M. in an amount equal to the Purchase Price of all such Bonds which have not been successfully remarketed. 75 Section 516. Source of Funds for Purchase of Bonds. By the close of business on the date on which a Bond is to be purchased, and except as set forth in Section 518(b)(ii) hereof, the Tender Agent shall purchase tendered Bonds from the tendering Owners at the applicable Purchase Price by wire transfer in immediately available funds. Funds for the payment of such Purchase Price shall be derived solely from the following sources in the order of priority indicated and none of the Tender Agent, the Trustee nor the Remarketing Agent shall be obligated to provide funds from any other source: (a) immediately available funds on deposit in the Remarketing Proceeds Account; (b) immediately available funds on deposit in the Liquidity Facility Purchase Account; (c) Available Moneys of the Company; and (d) Other moneys of the Company. Section 517. Delivery of Bonds. On each date on which a Bond is to be purchased, such Bond shall be delivered as follows: (a) Bonds sold by the Remarketing Agent and described in Section 516(a) hereof shall be delivered by the Remarketing Agent to the purchasers of such Bonds by 3:00 P.M.; and (b) Bonds purchased by the Tender Agent with moneys described in Section 516(b) hereof shall be registered immediately in the name of the Liquidity Provider or its nominee (which may be the Securities Depository) on or before 3:00 P.M. (c) Bonds purchased by the Company with moneys described in Section 516(c) or (d) hereof shall be registered immediately in the name of the Company or its nominee on or before 3:00 P.M. Bonds so owned by the Company shall continue to be outstanding under the terms of this Agreement and be subject to all of the terms and conditions of this Agreement and shall be subject to remarketing by the Remarketing Agent. 76 Section 518. Book-Entry Tenders. (a) Notwithstanding any other provision of this Article V to the contrary, all tenders for purchase during any period in which the Bonds are registered in the name of Cede & Co. (or the nominee of any successor Securities Depository) shall be subject to the terms and conditions set forth in the Representation Letter and to any regulations promulgated by DTC (or any successor Securities Depository). For so long as the Bonds are registered in the name of Cede & Co., as nominee for DTC, the tender option rights of Holders of Bonds may be exercised only by a Direct Participant of DTC acting, directly or indirectly, on behalf of a Beneficial Owner of Bonds by giving notice of its election to tender Bonds or portions thereof at the times and in the manner described above. Beneficial Owners will not have any rights to tender Bonds directly to the Tender Agent. Procedures under which a Beneficial Owner may direct a Direct Participant or DTC, or an Indirect Participant of DTC acting through a Direct Participant of DTC, to exercise a tender option right in respect of Bonds or portions thereof in an amount equal to all or a portion of such Beneficial Owner's beneficial ownership interest therein shall be governed by standing instructions and customary practices determined by such Direct Participant or Indirect Participant. For so long as the Bonds are registered in the name of Cede & Co., as nominee for DTC, delivery of Bonds required to be tendered for purchase shall be effected by the transfer by a Direct Participant on the applicable Purchase Date of a book-entry credit to the account of the Tender Agent of a beneficial interest in such Bonds. (b) Notwithstanding anything expressed or implied herein to the contrary, so long as the Book-Entry System for the Bonds is maintained: (i) there shall be no requirement of physical delivery to or by the Tender Agent, the Remarketing Agent or the Trustee of: (A) any Bonds subject to mandatory or optional purchase as a condition to the payment of the Purchase Price therefor; (B) any Bonds that have become Liquidity Provider Bonds; or (C) any remarketing proceeds of such Bonds or Liquidity Provider Bonds; and (ii) except as provided in (iii) below, none of the Trustee, the Tender Agent nor the Paying Agent shall have any responsibility for paying the Purchase Price of any tendered Bond or for remitting remarketing proceeds to any person; and (iii) the Trustee's sole responsibilities in connection with the purchase and remarketing of a tendered Bond shall be to: (A) draw upon the Liquidity Facility in the event the Remarketing Agent notifies the Tender Agent as provided herein that such Bond has not been remarketed on or before the Purchase Date therefor, which draw shall be in an amount equal to the difference 77 between such Purchase Price and any remarketing proceeds received by Remarketing Agent in connection with a partial remarketing of such Bond, and to remit the amount so drawn to or upon the order of the Securities Depository for the benefit of the tendering Beneficial Owners; and (B) remit any proceeds derived from the remarketing of a Liquidity Provider Bond to the Liquidity Provider. Section 519. No Book-Entry System. If at any time the Bonds shall no longer be in the Book-Entry System, the following procedures shall be followed: (a) Bonds shall be delivered (with all necessary endorsements) at or before 12:00 noon on the Purchase Date at the office of the Paying Agent in New York, New York; provided, however, that payment of the Purchase Price shall be made pursuant to this Section only if the Bond so delivered to the Paying Agent conforms in all respects to the description thereof in the notice described in this Section. Payment of the Purchase Price with respect to purchases under this Section shall be made to the Owners of tendered Bonds by wire transfer in immediately available funds by the Paying Agent by 3:00 P.M. on the Purchase Date. (b) If a Bond to be purchased is not delivered by the Owner to the Paying Agent by 12:00 noon on the date on which such Bond is to be purchased, the Paying Agent shall hold any funds received for the purchase of those Bonds in trust in a separate account and shall pay such funds to the former Owners of the Bonds upon presentation of the Bonds. Such undelivered Bonds shall cease to accrue interest as to the former Owners on such purchase date and moneys representing the Purchase Price shall be available against delivery of those Bonds at the Principal Office of the Paying Agent; provided, however, that any funds which shall be so held by the Paying Agent and which remain unclaimed by the former Owner of a Bond not presented for purchase for a period of three years after delivery of such funds to the Paying Agent, shall, to the extent permitted by law, upon request in writing by the Company and the furnishing of security or indemnity to the Paying Agent's satisfaction, be paid to the Company free of any trust or lien and thereafter the former Owner of such Bond shall look only to the Company as an unsecured creditor and then only to the extent of the amounts so received by the Company without any interest thereon and the Paying Agent shall have no further responsibility with respect to such moneys or payment of the purchase price of such Bonds. The Paying Agent shall authenticate a replacement Bond for any undelivered Bond which may then be remarketed by the Remarketing Agent. (c) The Paying Agent shall hold all Bonds properly tendered to it for purchase hereunder as agent and bailee of, and in escrow for the benefit of, the respective Owners of the Bonds which shall have so tendered such Bonds until moneys representing the Purchase Price of such Bonds shall have been delivered to or for the account of or to the order of such Owners. Section 520. No Purchases or Sales After Credit Provider or Liquidity Provider Failure. Anything in this Agreement to the contrary notwithstanding, if there shall have occurred and be continuing either a Credit Enhancement Failure or a Liquidity Facility Failure, the Remarketing Agent shall not remarket any Bonds. All other provisions of this Agreement, including without 78 limitation, those relating to the setting of interest rates and Interest Periods and mandatory and optional purchases, shall remain in full force and effect during the continuance of such Credit Enhancement Failure or Liquidity Facility Failure, as the case may be. Section 521. Credit Enhancement and Liquidity Facility. While any Credit Enhancement is in effect with respect to any Bonds, the Trustee shall, on the Business Day preceding each Interest Payment Date and Principal Payment Date, before 4:00 P.M. on such day, draw on the Credit Enhancement in accordance with the terms thereof so as to receive thereunder with respect to Bonds covered by the Credit Enhancement by 1:00 P.M. on said Interest Payment Date and Principal Payment Date, an amount, in immediately available funds, equal to the amount of interest and principal payable on such Bonds on such Interest Payment Date and Principal Payment Date. The proceeds of such draws shall be deposited in an account dedicated to such purpose. (a) On each date on which a Bond is to be purchased, the Trustee, at the direction of the Tender Agent as provided in Section 515(c) hereof, by demand given by Electronic Means before 12:30 P.M., shall draw on the Liquidity Facility in accordance with the terms thereof so as to receive thereunder by 2:30 P.M. on such date an amount, in immediately available funds, sufficient, together with the proceeds of the remarketing of Bonds on such date, to enable the Tender Agent to pay the Purchase Price in connection therewith. The proceeds of such draw shall be paid to the Tender Agent, who shall deposit said proceeds in the Liquidity Facility Purchase Account pursuant to Section 522(b) hereof. (b) Notwithstanding the foregoing paragraphs of this Section, if the Credit Provider and the Liquidity Provider are the same entity, the Trustee shall not draw on the Credit Enhancement with respect to any payments due or made in connection with Liquidity Provider Bonds. In no event shall the Trustee draw on the Credit Enhancement with respect to any payments made or made in connection with Bonds not covered by the Credit Enhancement or Bonds owned by the Company. (c) If at any time there shall have been delivered to the Trustee (i) an Alternate Credit Enhancement or an Alternate Liquidity Facility in substitution for the Credit Enhancement or Liquidity Facility then in effect, (ii) a Favorable Opinion of Bond Counsel, (iii) a written Opinion of Counsel for the provider of the Alternate Credit Enhancement or Alternate Liquidity Facility, as applicable, to the effect that such Alternate Credit Enhancement or Alternate Liquidity Facility is a valid, legal and binding obligation of the provider thereof (subject to customary exceptions), and (iv) unless waived by such entity, written evidence satisfactory to the Credit Provider and the Liquidity Provider of the provision for purchase from the Liquidity Provider of all Liquidity Provider Bonds, at a price equal to the principal amount thereof plus accrued and unpaid interest, and payment of all amounts due to the Credit Provider and the Liquidity Provider under the Reimbursement Agreement(s) on or before the effective date of such Alternate Letter of Credit or Alternate Liquidity Facility, then the Trustee shall accept such Alternate Letter of Credit or 79 Alternate Liquidity Facility on the Substitution Date and shall surrender the Credit Enhancement or Liquidity Facility then in effect to the provider thereof on the Substitution Date. The Company shall give the Notice Parties written notice of the proposed substitution of an Alternate Credit Enhancement or Alternate Liquidity Facility no less than thirty (30) days prior to the proposed Substitution Date. The Trustee shall give notice of such proposed substitution by mail to the Beneficial Owners of the Bonds as identified by the Remarketing Agent and to the registered owners (subject to procedures of the Securities Depository) no less than fifteen (15) days prior to the proposed Substitution Date. Section 522. Purchase Fund. There is hereby established and there shall be maintained with the Tender Agent, as agent for the Trustee, a separate fund to be known as the "Purchase Fund". The Tender Agent shall further establish separate accounts within the Purchase Fund to be known as the "Liquidity Facility Purchase Account" and the "Remarketing Proceeds Account" and the "Company Purchase Account". (a) Remarketing Proceeds Account. Upon receipt of the proceeds of a remarketing of a Bond on the date such bond is to be purchased, the Tender Agent shall deposit such proceeds in the Remarketing Proceeds Account for application to the Purchase Price of the Bonds. Notwithstanding the foregoing, upon the receipt of the proceeds of a remarketing of Liquidity Provider Bonds, the Tender Agent shall immediately pay such proceeds to the Liquidity Provider to the extent of any amount owing to the Liquidity Provider. (b) Liquidity Facility Purchase Account. Upon receipt from the Trustee of the immediately available funds transferred to the Tender Agent pursuant to Section 521(b) hereof, the Tender Agent shall deposit such money in the Liquidity Facility Purchase Account for application to the Purchase Price of the Bonds to the extent that the moneys on deposit in the Remarketing Proceeds Account shall not be sufficient. Any amounts deposited in the Liquidity Facility Purchase Account and not needed with respect to the Purchase Price for any Bonds shall be immediately returned to the Liquidity Provider. (c) Company Purchase Account. Upon receipt of Funds from the Company pursuant to Section 516(c) or (d) hereof, the Tender Agent shall deposit such Funds in the Company Purchase Account for application to the Purchase Price of the Bonds. Any amounts deposited in the Company Purchase Account and not needed with respect to the Purchase Price for any Bonds shall be immediately refunded to the Company. (d) Investment. Amounts held in the Liquidity Facility Purchase Account and the Remarketing Proceeds Account by the Paying Agent shall be held uninvested and separate and apart from all other funds and accounts. Section 523. Inadequate Funds for Tenders. If sufficient funds are not available for the purchase of all tendered Bonds required to be purchased on any Purchase Date, the Trustee shall take all actions reasonably available to it to obtain remarketing proceeds from the Remarketing Agent and sufficient funds from the Liquidity Provider or the Company to purchase all such Bonds on or before 12:00 noon, New York City time, on the Business Day next succeeding such 80 Purchase Date. Thereafter, the Trustee shall continue to take all such action reasonably available to it to obtain such remarketing proceeds from the Remarketing Agent and such funds from the Liquidity Provider or the Company. Any obligations of the Remarketing Agent, the Credit Provider or the Company to cause the deposit of such funds from remarketing proceeds, proceeds of the Credit Enhancement or other amounts, respectively, shall remain enforceable pursuant to this Agreement, and such obligation shall only be discharged at such time as funds are deposited with the Trustee in an amount sufficient to purchase all such Bonds, together with any interest which has accrued on such Bonds to the subsequent actual purchase date. Section 524. Appointment of Remarketing Agent. The Remarketing Agent is hereby appointed to remarket Bonds pursuant to this Agreement, and to keep such books and records as shall be consistent with prudent industry practice and to make such books and records available for inspection by the Notice Parties at all reasonable times. The Remarketing Agent shall act as such under the Remarketing Agreement. (a) The Remarketing Agent may at any time resign and be discharged of the duties and obligations created by this Agreement by giving at least ten (10) days' notice to the Notice Parties. The Remarketing Agent may suspend its remarketing efforts as set forth in the Remarketing Agreement. The Remarketing Agent may be removed at any time, at the direction of the Company, by an instrument filed with the Remarketing Agent, the Trustee and the Paying Agent and upon at least ten (10) days' notice to the Remarketing Agent. Any successor Remarketing Agent shall be selected by the Company, and shall be a member of the National Association of Securities Dealers, Inc., shall have a capitalization of at least fifteen million dollars ($15,000,000), shall be authorized by law to perform all the duties set forth in this Agreement and shall be reasonably acceptable to the Credit Provider and Liquidity Provider. The Company's delivery to the Trustee of a certificate setting forth the effective date of the appointment of a successor Remarketing Agent and the name of such successor shall be conclusive evidence that (i) if applicable, the predecessor Remarketing Agent has been removed in accordance with the provisions of this Agreement and (ii) such successor has been appointed and is qualified to act as Remarketing Agent under the terms of this Agreement. (b) If the Remarketing Agent consolidates with, merges or converts into, or transfers all or substantially all of its assets (or, in the case of a bank, national banking association or trust company, its corporate assets) to, another Company, the resulting, surviving or transferee Company without any further act shall be the successor Remarketing Agent. 81 ARTICLE VI. THE PROJECT Section 601. Company not to Impair Tax Status; Use of Project Facilities. Notwithstanding any provision herein to the contrary, the Company did not use any of the proceeds of the 1989 Bonds, the 1991 Series C Bonds or the Loan (or the income earned through the investment thereof, if any) and did not take or omit any action or permit any action to be taken or omitted with the result that interest on the Bonds is included in the gross income of the owners thereof for federal income tax purposes. The use of the Project Facilities (or facilities replacing the same) is in furtherance of the purpose of air or water pollution control or sewage or solid waste disposal and in compliance with the Act. Section 602. Qualification of Project Facilities. Notwithstanding any provision herein to the contrary, the Company did not permit the Project Facilities to fail to qualify as (a) "industrial facilities" under the Act, and (b) a facility described in Section 1312(a) of the Tax Reform Act of 1986, or (c) "sewage or solid waste disposal facilities" or "air or water pollution control facilities" within the meaning of Section 103(b)(4)(E) or (F) of the 1954 Code. The Company acknowledges that it is not relying on any representation of any kind by the Authority or the Trustee concerning the nature or condition of the Project Facilities. Neither the Authority nor the Trustee shall be liable to the Company or any other person for any latent or patent defect in the Project Facilities. Section 603. Reserved. Section 604. Reserved. Section 605. Disposition and Use of Project Facilities. The Company has transferred its interest in the Project Facilities to NAEC. NAEC is expected to transfer the Project Facilities to an unaffiliated party pursuant to an order of the New Hampshire Public Utilities Commission. No Bonds shall be issued under this Agreement until the Authority, the Company, the Trustee and NAEC have executed and delivered a Series B Seabrook Pollution Control Facilities Agreement substantially in the form attached hereto as Exhibit C (such Agreement and each subsequent agreement providing for a Seabrook Transfer, a "Facilities Agreement"). No sale, lease, transfer or other disposition of the Project Facilities or the Station shall relieve the Company of any of its obligations under this Agreement. 82 ARTICLE VII. ADDITIONAL COVENANTS OF THE COMPANY Section 701. Existence and Good Standing; Merger; Consolidation. The Company will maintain its corporate existence, qualification to do business and good standing under the laws of the State of New Hampshire and will maintain itself as a foreign corporation duly qualified to do business and in good standing, where applicable, in each jurisdiction in which the failure to so qualify would have a material adverse effect upon its business or properties. The Company shall not merge or consolidate with or sell all or substantially all of its assets to another entity, except that the Company may so merge or consolidate with or sell all or substantially all of its assets to another corporation if (i) the surviving or transferee corporation is qualified to do business in New Hampshire, (ii) the surviving or transferee corporation (if not the Company) has assumed in writing all of the Company's obligations hereunder and under the Series J First Mortgage Bonds, and (iii) upon such assumption there will not be a Default hereunder, or under the First Mortgage Bond Indenture (disregarding any required passage of time or giving of notice thereunder). The Company shall not change its name or reorganize or change its legal structure or merge or consolidate with or sell all or substantially all its assets to another entity without at least thirty (30) days notice to the Trustee (unless the Trustee agrees to a shorter period). Section 702. Indemnification by the Company. The Company, regardless of any agreement to maintain insurance, shall and does hereby indemnify the Authority and the Trustee against (a) any and all claims by any person related to the participation of the Authority or the Trustee in the transactions contemplated by this Agreement, including without limitation claims arising out of any condition of the Project Facilities or Station or the construction, use, occupancy or management thereof; any accident, injury or damage to any person occurring in or about the Station; any breach by the Company of its obligations under this Agreement; any act or omission of the Company or any of its agents, contractors, servants, employees or licensees; or the offering, issuance, sale or any resale of the Bonds to the extent permitted by law, and (b) all costs, counsel fees, expenses or liabilities reasonably incurred in connection with any such claim or any action or proceeding brought thereon. In case any action or proceeding is brought against the Authority or the Trustee by reason of any such claim, the Company will defend the same at its expense upon notice from the Authority or the Trustee, and the Authority or the Trustee, as the case may be, will cooperate with the Company, at the expense of the Company, in connection therewith. Section 703. Continuing Disclosure. The Company and the Trustee hereby covenant and agree that each will comply with and carry out all of the provisions of the Continuing Disclosure Agreement applicable to it and this Section 703 of this Agreement. The Authority shall have no liability to the owners of the Bonds or any other person with respect to such disclosure matters. Notwithstanding any other provision of this Agreement, failure of the Company or the Trustee to comply with the Continuing Disclosure Agreement shall not be considered an Event of Default; however, the Trustee may (and, at the request of the owners of at least 25% aggregate principal amount of Outstanding Bonds, shall) or any owner (including a beneficial owner) of Bonds may seek specific performance of the Company's or the Trustees obligations to comply with the Continuing Disclosure Agreement or this Section 703 and not for 83 money damages in any amount. ARTICLE VIII. DEFAULT AND REMEDIES Section 801. Default. (a) Events of Default; Default. "Event of Default" in this Agreement means any one of the events set forth below and "Default" means any Event of Default without regard to any lapse of time or notice. (i) Debt Service on Bonds. Any payment of interest, principal or premium on the Bonds or any Purchase Price for Bonds shall not be paid when the same becomes due and payable. (ii) Other Obligations. The Company shall fail to observe or perform any of its other covenants or agreements contained herein, or the Seabrook Transferee shall fail to observe or perform any of its covenants or agreements related to the Project Facilities contained in the Facilities Agreement, and such failure shall continue for a period of sixty (60) days after written notice given to the Company by the Trustee, the Bond Insurer or the Bondowners of at least 25% in principal amount of the Bonds Outstanding; provided, however, that if such Default cannot be cured by the Company or the Seabrook Transferee within such sixty-day period, it shall not constitute an Event of Default if, with the written consent of the Bond Insurer (which shall not be unreasonably withheld) curative action is instituted by the Company or the Seabrook Transferee within such sixty-day period and thereafter is diligently pursued until such Default is cured. (iii) First Mortgage Bond Default. The occurrence of any "event of default" as defined in the First Mortgage Bond Indenture. (iv) Bond Insurance Agreement Default. The Trustee shall have received written notice from the Bond Insurer of the occurrence of any "Event of Default" as defined in the Bond Insurance Agreement. The Company agrees to notify the Authority, the Trustee and the Bond Insurer promptly in writing of the occurrence of any Default or Event of Default of which it has knowledge. Immediately after becoming aware of an Event of Default under (i) above, or within five (5) days or the next Business Day if such fifth day is not a Business Day after becoming aware of a Default or an Event of Default under (ii), (iii), or (iv) above, the Trustee will give notice to the Bondowners and, in the case of an Event of Default under (i), (ii) or (iv) above, to the First Mortgage Bond Trustee. Notwithstanding anything in this section to the contrary, no action or failure to act by the Company or the Seabrook Transferee which results in interest on the Bonds becoming includable in gross income of the owners thereof for federal income tax purposes shall constitute a Default 84 or Event of Default under this Agreement so long as (I) the Company shall have delivered the opinion described in clause (i) of Subsection 307(c) or shall have complied with the second sentence of Subsection 307(d) and (II) the redemption provided by Subsection 307(c) occurs. In such event, no Bondowner shall be entitled to any claim for monetary damages hereunder and the redemption of the Bonds as provided under Subsection 307(c) shall be the exclusive recourse of Bondowners. (b) Waiver. At any time before an acceleration pursuant to Section 802, the Trustee may waive a Default (other than a Default in the payment of principal of, premium, if any, or interest on the Bonds) and its consequences, with the written consent of the Bond Insurer, by written notice to the Company, and in the absence of any inconsistent instructions from Bondowners pursuant to Sections 805 or 1101 shall do so, with the written consent of the Bond Insurer, upon written instruction of the owners of at least twenty-five per cent (25%) in principal amount of the Outstanding Bonds. No waiver under this section shall affect the right of the Trustee or the Authority to enforce the payment of any amounts owing to it. Any cure or waiver of any "event of default" under the First Mortgage Bond Indenture and a rescission and annulment of its consequences shall constitute a cure or waiver of the corresponding Event of Default under Paragraph 801(a)(iii) and a rescission and annulment of the consequences thereof, and the Trustee, upon obtaining knowledge thereof, shall give written notice of such cure or waiver, rescission or annulment to the Authority and the Company, and shall give notice thereof by mail to all Bondowners; but no such cure or waiver, rescission and annulment shall extend to or affect any subsequent Event of Default or impair any right or remedy consequent thereon. Section 802. Remedies for Events of Default. If an Event of Default occurs and is continuing: (a) Acceleration. With the written consent of the Bond Insurer the Trustee may, and upon the written request of the Bondowners of at least 25% in principal amount of the Bonds Outstanding, shall, by written notice to the Authority, the Company, the Bond Insurer, the Liquidity Provider, if any, and the Remarketing Agent, if any, declare immediately due and payable the principal amount of the Outstanding Bonds and accrued interest thereon, whereupon the same shall become immediately due and payable without any further action or notice. If at any time after such acceleration and before any judgment or decree for the payment of moneys with respect thereto has been entered all amounts payable hereunder except principal of and interest on the Bonds which are due solely by reason of such acceleration shall have been paid or provided for by deposit with the Trustee and all existing Defaults shall have been cured or waived, then the Bondowners representing a majority in principal amount of the Bonds Outstanding may annul such acceleration and its consequences by written notice to the Authority, the Trustee and the Company. Such annulment shall be binding upon the Authority, the Trustee and all of the Bondowners, but no such annulment shall extend to or affect any subsequent Default or impair any right or remedy consequent thereto. 85 (b) Rights as a Secured Party. The Trustee may with the written consent of the Bond Insurer and shall, at the written direction of the Bond Insurer exercise all of the rights and remedies of a secured party under the UCC, subject to the terms of this Agreement. Notice sent by registered or certified mail, postage prepaid, or delivered during business hours, to the Company at least seven (7) days before an event under UCC Section 9-611(b) or any successor provision of law shall constitute reasonable notification of such event. Section 803. Court Proceedings. The Trustee and the Bond Insurer may enforce the provisions of this Agreement by appropriate legal proceedings for the specific performance of any covenant, obligation or agreement contained herein whether or not a Default or an Event of Default exists, or for the enforcement of any other appropriate legal or equitable remedy, and may recover damages caused by any breach by the Company of the provisions of this Agreement, including (to the extent this Agreement may lawfully provide) court costs, reasonable attorney's fees and other costs and expenses incurred in enforcing the obligations of the Company hereunder. The Authority may likewise enforce obligations owed to it hereunder which it has not assigned to the Trustee. All rights under this Agreement and the Bonds may be enforced by the Trustee without the possession of any Bonds or the production thereof at the trial or other proceedings relative thereto, and any proceeding instituted by the Trustee shall be brought in its name for the ratable benefit of the Bondowners. Section 804. Revenues after Default. After the occurrence of an Event of Default, any funds pledged as security hereunder and any other moneys received by the Trustee (other than amounts irrevocably set aside to pay particular Bonds), after payment or reimbursement of the reasonable expenses of the Trustee and the Authority in connection therewith shall be applied, first, to any other amounts owing to the Trustee; second, to any other amounts owing to the Authority other than the Authority's Service Charge; third, to amounts due under Section 305(a), which amounts shall be applied to the payment of principal of, premium, if any, and interest on the Bonds in the order specified in Section 304; fourth, to the Authority's Service Charge; and fifth, to other obligations of the Company hereunder in such order as determined by the Trustee. Any amounts remaining after the satisfaction of all obligations of the Company hereunder shall be paid to the Company. Section 805. Rights of Bondowners. If an Event of Default occurs and is continuing, and if the Bondowners representing not less than 25% in principal amount of the Bonds Outstanding shall have requested the Trustee in writing to exercise one or more of the rights and remedies provided hereunder and offered it indemnity as provided in Subsection 902(e), the Trustee shall be required to exercise such one or more of the rights and remedies hereunder as the Trustee shall determine to be in the best interest of the Bondowners and not inconsistent with any directions given in accordance with Section 1101. No Bondowner shall have any right to institute an action in law or equity or to pursue any other remedy hereunder with respect to any Bond unless (i) an Event of Default of which the Trustee has been notified has occurred and Bondowners representing not less than 25% in principal amount of the Bonds Outstanding shall have requested the Trustee in writing to exercise its rights and remedies with respect thereto and shall have offered the Trustee reasonable opportunity to do so and indemnity as provided in Subsection 902(e), and (ii) the Trustee shall within a reasonable time thereafter fail to exercise 86 any of such rights or remedies. No Bondowner shall have any right to institute any action or pursue any other remedy if and to the extent that the surrender, impairment, waiver, or loss of the lien of this Agreement would, under applicable law, result. Notwithstanding the foregoing, each Bondowner shall have a right of action to enforce payment of the Bonds at and after the due date thereof at the place, from the sources and in the manner expressed in the Bonds. Section 806. Performance of Company's Obligations. If the Company shall fail to observe or perform any of its agreements or obligations hereunder, the Authority or the Trustee may perform the same in its own name or in the Company's name and each is hereby irrevocably appointed the Company's attorney-in-fact for such purpose. Unless an Event of Default exists, the Authority or the Trustee, as the case may be, shall give at least five (5) days' notice to the Company before taking action under this section, except that in case of emergency as reasonably determined by the acting party, it may act on lesser notice or give the notice promptly after rather than before taking the action. The reasonable cost of any such action performed by the Trustee or the Authority shall be paid or reimbursed by the Company within thirty (30) days after the Trustee or the Authority notify the Company of such cost. Section 807. Remedies Cumulative; No Waiver. The rights and remedies under this Agreement shall be cumulative and shall not exclude any other rights and remedies allowed by law, provided there is no duplication of recovery. Neither the failure to insist upon a strict performance of any of the obligations of the Company, nor the failure to exercise any remedy for any violation thereof, shall be taken as a waiver for the future of the right to insist upon strict performance of the obligation or to exercise any remedy for the violation. Section 808. Rights of Bond Insurer. (a) Anything in this Agreement to the contrary notwithstanding, except as provided in subsection (b), upon the occurrence and continuance of an Event of Default, the Bond Insurer shall be entitled to control and direct the enforcement of all rights and remedies granted to the Bondowners or the Trustee for the benefit of the Bondowners under this Agreement, including, without limitation, acceleration of the principal of the Bonds as described in this Agreement and the right to annul any declaration of acceleration, and the Bond Insurer shall also be entitled to approve all waivers of Events of Default with respect to the Bonds. (b) Anything in this Agreement to the contrary notwithstanding, the provisions contained in this Section 808 and all other rights and remedies granted to the Bond Insurer under this Agreement shall be null and void upon the happening and during the continuance of any of the following (a "Bond Insurer Default"): (1) a Bond Insurer Event of Insolvency, except to the extent of payments made by the Bond Insurer under the Bond Insurance Policy which are not voidable preferences; or (2) failure of the Bond Insurer to pay in accordance with the Bond Insurance Policy, except to the extent of prior payments made by the Bond Insurer under the Bond Insurance Policy which are not voidable preferences. 87 ARTICLE IX. THE TRUSTEE Section 901. Corporate Organization, Authorization and Capacity. The Trustee represents and warrants that it is a trust company duly organized and validly existing under the laws of The Commonwealth of Massachusetts and duly licensed in Massachusetts, with the capacity to exercise the powers and duties of the Trustee hereunder, and that by proper corporate action it has duly authorized the execution and delivery of this Agreement. Section 902. Rights and Duties of the Trustee. (a) Moneys to be Held in Trust. All moneys deposited with the Trustee under this Agreement (other than amounts received for its own use) shall be held by the Trustee in trust and applied subject to the provisions of this Agreement, but need not be segregated from other funds except as required herein or by law. (b) Accounts. The Trustee shall keep proper accounts of its transactions hereunder (separate from its other accounts), which shall be open to inspection at reasonable times and upon reasonable advance written request by the Authority, the Bond Insurer, the Company and the Bondowners and their representatives duly authorized in writing. (c) Performance of the Authority's Obligations. If the Authority shall fail to observe or perform any agreement or obligation contained in this Agreement, the Trustee may take whatever legal proceedings may be required to compel full performance by the Authority of its obligations, and in addition, the Trustee may, to whatever extent it deems appropriate for the protection of the Bondowners, itself or the Company, perform any such obligation in the name of the Authority and on its behalf. (d) Responsibility. The Trustee shall be entitled to the advice of counsel (who may be the Trustee's counsel, counsel for the Authority, the Company or any Bondowner) and shall be wholly protected as to any action taken or omitted to be taken in good faith in reliance on such advice. The Trustee may rely conclusively on any notice, certificate or other document furnished to it hereunder and reasonably believed by it to be genuine. The Trustee shall not be liable for any action taken by it in good faith and reasonably believed by it to be within the discretion or powers conferred upon it, in good faith omitted to be taken by it and reasonably believed to be beyond the discretion or powers conferred upon it, taken by it pursuant to any direction or instruction by which it is governed hereunder, or omitted to be taken by it by reason of the lack of direction or instruction required hereby for such action; nor shall it be responsible for the consequences of any error of judgment reasonably made by it. The duties of the Trustee are those expressly set forth in this Agreement, and no additional duties shall be implied. When any payment, consent or other action by it is called for hereby, it may defer such action pending receipt of such evidence, if any, as it may require in support thereof. The Trustee shall in no event be liable for the application or misapplication of funds, or for other acts or defaults by any person, firm, or Company, except its own directors, officers, and employees. No recourse shall be had by the Company, the Authority or any Bondowner for any claim based on this Agreement or any Bond against any director, officer, employee, or agent of the Trustee alleging personal 88 liability on the part of such person, unless such claim is based upon the bad faith, negligence, fraud or deceit of such person. The Trustee has no responsibility for the validity or sufficiency of this Agreement or the Bonds or any security therefor. (e) Limitations on Actions. The Trustee shall not be required to monitor the financial condition of the Company or the physical condition of the Project Facilities and, unless otherwise expressly provided, shall not have any responsibility with respect to notices, certificates or other documents filed with it hereunder, except to make them available for inspection by the Bondowners. The Trustee shall not be deemed to have knowledge of and shall not be required to take notice of any Default or Event of Default, except for a Default or Event of Default described in Paragraph 801(a)(i) relating to the payment of principal of, premium, if any, and interest on or Purchase Price of the Bonds, unless the Trustee shall be specifically notified in writing by the Company, the Authority or Bondowners representing not less than 25% in principal amount of the Bonds Outstanding , or in the case of a Default or Event of Default described in Paragraph 801(a)(iii), the Trustee shall be notified in writing by the First Mortgage Bond Trustee. The Trustee shall not be required to take any remedial action (other than the giving of notice) unless indemnity reasonably satisfactory to it is furnished for any expense or liability to be incurred therein, other than liability for failure to meet the standards set forth in this section. The Trustee shall be entitled to reimbursement from the Company for its expenses reasonably incurred or advances reasonably made, which reimbursement shall be due and payable thirty (30) days after notifying the Company of such expenses or advances, in the exercise of its rights or the performance of its obligations hereunder, whether or not it acts without previously obtaining indemnity. A permissive right or power to act shall not be construed as a requirement to act. Upon receipt of written notice, direction, instruction, and indemnity as provided above and, after making such investigation, if any, as it deems appropriate to verify the occurrence of any Default of which it is notified by the Bondowners, the Trustee shall pursue such remedies hereunder (not contrary to such direction) as it deems appropriate for the protection of the Bondowners; and in its actions under this provision, the Trustee shall be required to act for the protection of the Bondowners with the same prudence as would be expected of a prudent person in the conduct of such person's affairs. (f) Financial Obligations. Nothing contained in this Agreement shall in any way obligate the Trustee to pay any debt or meet any financial obligations to any person in relation to the Project Facilities except from moneys received under the provisions of this Agreement (including from the exercise of its rights and remedies hereunder) other than moneys received for its own purposes. (g) Registration Books. The Trustee will keep books for the registration of the Bonds and transfers thereof as provided in this Agreement. The Trustee shall furnish a list of the Bondowners to the Authority, the Bond Insurer or Company at any time upon its request, and to Bondowners representing at least 15% in principal amount of the Outstanding Bonds, at any time upon their request. 89 (h) Ownership of Bonds. The Trustee or any affiliate of the Trustee may be or become the owner of Bonds with the same rights as if it were not Trustee. (i) No Surety Bond. The Trustee shall not be required to furnish any bond or surety. (j) Requests by the Company. Upon any request by the Company to the Trustee to take any action under this Agreement (including but not limited to any proposed amendment pursuant to Section 1201) the Trustee shall be entitled to receive from the Company prior to taking such action, and to rely upon, a certificate of a Company Representative and an opinion of counsel reasonably satisfactory to the Trustee (who may be counsel to the Company), and, if applicable in the reasonable judgment of the Trustee, a certificate of an accountant satisfactory to the Company (who may be an employee of the Company), each to the effect that in the signer's opinion all conditions precedent applicable to such action under this Agreement, if any, have been satisfied (and, in the case of the certificate of the Company Representative, including but not limited to the absence of any Default or Event of Default) and such action is permitted by this Agreement. (k) Trustee as Holder of Series J First Mortgage Bonds. So long as no Default has occurred and is continuing, the Trustee may, but shall have no obligation to, take any action in its capacity as the registered holder of the Series J First Mortgage Bonds (other than the duty to exercise reasonable care in the safekeeping thereof and the giving of notices set forth below), unless and except to the extent the Trustee is directed in writing by the Bondowners as provided in Section 1101 of this Agreement. The Trustee shall promptly notify the Bondowners of the receipt of and contents of any notice it receives under the First Mortgage Bond Indenture (other than notices solely of payments being made on the Series J First Mortgage Bonds. Section 903. Fees and Expenses of the Trustee. The Company shall pay to the Trustee reasonable compensation for its services and prepay or reimburse the Trustee for its reasonable expenses and disbursements, including attorney's fees, hereunder. The Company shall indemnify and save the Trustee harmless against any and all (a) claims as set forth in Section 702 above, (b) costs, counsel fees, expenses and liabilities reasonably incurred in connection with such claims, and (c) costs, counsel fees, expenses and liabilities which it may incur in or arising from the administration, performance or exercise of its rights, powers, responsibilities or duties hereunder and which are not due to the bad faith, negligence, fraud or deceit of any director, officer, employee or agent of the Trustee. Any fees, expenses, reimbursements, or other charges which the Trustee may be entitled to receive from the Company hereunder shall be due and payable thirty (30) days after a request for payment has been made by the Trustee, and if not otherwise paid, shall be a first lien upon any funds or other property then or thereafter held hereunder by the Trustee. If any such moneys are so applied, the Company shall be immediately obligated to restore the moneys so applied. Section 904. Resignation or Removal of Trustee. The Trustee may resign on not less than sixty (60) days' notice given in writing to the Authority, the Bondowners, the Bond Insurer and the Company, but such resignation shall not take effect until a successor, approved by the Bond Insurer (which consent shall not be unreasonably withheld), has been appointed and has 90 assumed the duties hereunder. The Trustee will promptly certify to the other parties that it has mailed such notice to all Bondowners and such certificate shall be conclusive evidence that such notice was given in the manner required hereby. The Trustee may be removed by written notice to the parties from the Bondowners representing a majority in principal amount of the Bonds Outstanding, upon not less than (30) days advance written notice (unless such removal is for cause), but no such removal shall take effect until a successor has been appointed and assumed the duties hereunder. A petition in a court of competent jurisdiction for removal of the Trustee and the appointment of a successor may be filed by the Bondowners representing not less than 25% in principal amount of the Bonds Outstanding. Section 905. Successor Trustee. Any Company or association which succeeds to the corporate trust business of the Trustee as a whole, or substantially as a whole, whether by sale, merger, consolidation or otherwise, shall become vested with all the property, rights and powers of the Trustee hereunder, without any further act or conveyance. In case the Trustee resigns or is removed or becomes incapable of acting, or becomes bankrupt or insolvent, or if a receiver, liquidator or conservator of the Trustee or of its property is appointed, or if a public officer takes charge or control of the Trustee, or of its property or affairs, a successor shall be appointed by written notice from the Company to the Authority and the Bond Insurer. The Company shall notify the Bondowners of the appointment in writing within twenty (20) days from the appointment. The Company will promptly certify to the successor Trustee that it has mailed such notice to all Bondowners and such certificate will be conclusive evidence that such notice was given in the manner required hereby. If no appointment of a successor is made within twenty (20) days after the giving of written notice in accordance with Section 904 or after the occurrence of any other event requiring or authorizing such appointment, the outgoing Trustee or any Bondowner may apply to any court of competent jurisdiction for the appointment of such a successor, and such court may thereupon, after such notice, if any, as such court may deem proper, appoint such successor. Any successor Trustee appointed under this section shall be a trust company or a bank having the powers of a trust company that meets the requirements of the Act and has a capital and surplus of not less than $50,000,000. Any such successor Trustee shall notify the Authority and the Company of its acceptance of the appointment and, upon giving such notice, shall become Trustee, vested with all the property, rights and powers of the Trustee hereunder, without any further act or conveyance. Such successor Trustee shall execute, deliver, record and file such instruments as are required to confirm or perfect its succession hereunder and any predecessor Trustee shall from time to time execute, deliver, record and file such instruments as the incumbent Trustee may reasonably require to confirm or perfect any succession hereunder. 91 ARTICLE X. THE AUTHORITY Section 1001. Limited Obligation. Under no circumstances shall the Authority be obligated directly or indirectly to pay Project Costs, principal of or premium, if any, and interest on the Bonds, or expenses of operation, maintenance and upkeep of the Project Facilities except from Bond proceeds or from funds received under this Agreement, exclusive of funds received hereunder by the Authority for its own use. This Agreement does not create any debt of the State of New Hampshire with respect to the Project Facilities other than a special obligation of the Authority acting on behalf of the State of New Hampshire pursuant to the Act. Nothing contained herein shall in any way obligate the State of New Hampshire to raise any money by taxation or use other public funds for any purpose in relation to the Project Facilities. Neither the State of New Hampshire nor the Authority shall pay or promise to pay any debt or meet any financial obligation to any person at any time in relation to the Project Facilities except (i) from moneys received or to be received under the provisions hereof or derived from the exercise of the Authority's right hereunder, other than moneys received for its own purposes, or (ii) as may be required by law other than the provisions of the Act. Nothing contained in this Agreement shall be construed to require or authorize the Authority to operate the Project Facilities itself or to conduct any business enterprise in connection therewith. Section 1002. Rights and Duties of the Authority. (a) Remedies of the Authority. Notwithstanding any contrary provision in this Agreement, the Authority shall have the right to take any action or make any decision with respect to proceedings for indemnity against the liability of the Authority and for collection or reimbursement from sources other than moneys or property held under this Agreement or subject to the lien hereof. The Authority may enforce its rights under this Agreement which have not been assigned to the Trustee by legal proceedings for the specific performance of any obligation contained herein or for the enforcement of any other appropriate legal or equitable remedy, and may recover damages caused by any breach by the Company of its obligations to the Authority under this Agreement, including court costs, reasonable attorney's fees and other costs and expenses incurred in enforcing such obligations. (b) Limitations on Actions. The Authority shall not be required to monitor the financial condition of the Company or the physical condition of the Project Facilities and, unless otherwise expressly provided, shall not have any responsibility with respect to notices, certificates or other documents filed with it hereunder. The Authority shall not be required to take notice of any breach or default except when given notice thereof by the Trustee. The Authority shall not be responsible for the payment of any rebate to the United States of America under IRC ss.148(f). The Authority shall not be required to take any action unless indemnity reasonably satisfactory to it is furnished for expenses or liability to be incurred therein (other than the giving of notice). The Authority, upon written request of the Bondowners or the Trustee, and upon receipt of reasonable indemnity for expenses or liability, shall cooperate to the extent reasonably necessary to enable the Trustee to exercise any power granted to the Trustee by this Agreement. The Authority shall be entitled to reimbursement pursuant to Section 1003 to the 92 extent that it acts without previously obtaining full indemnity. (c) Responsibility. The Authority shall be entitled to the advice of counsel (who may be counsel for any party or for any Bondowner) and shall be wholly protected as to any action taken or omitted to be taken in good faith in reliance on such advice. The Authority may rely conclusively on any notice, certificate or other document furnished to it under this Agreement and reasonably believed by it to be genuine. The Authority shall not be liable for any action taken by it in good faith and reasonably believed by it to be within the discretion or power conferred upon it, or in good faith omitted to be taken by it and reasonably believed to be beyond such discretion or power, or taken by it pursuant to any direction or instruction by which it is governed under this Agreement or omitted to be taken by it by reason of the lack of direction or instruction required for such action under this Agreement, or be responsible for the consequences of any error of judgment reasonably made by it. When any payment, consent or other action by the Authority is called for by this Agreement, the Authority may defer such action pending such investigation or inquiry or receipt of such evidence, if any, as it may require in support thereof. A permissive right or power to act shall not be construed as a requirement to act, and no delay in the exercise of a right or power shall affect the subsequent exercise thereof. The Authority shall in no event be liable for the application or misapplication of funds, or for other acts or defaults by any person or entity except by its own directors, officers and employees. No recourse shall be had by the Company, the Trustee or any Bondowner for any claim based on this Agreement or the Bonds against any director, officer, employee or agent of the Authority unless such claim is based upon the bad faith, fraud or deceit of such person. No covenant, obligation or agreement of the Authority contained in this Agreement shall be deemed to be a covenant, obligation or agreement of any present or future director, officer, employee or agent of the Authority in his individual capacity, and no person executing a Bond shall be liable personally thereon or be subject to any personal liability or accountability by reason of the issuance thereof. Section 1003. Expenses of the Authority. The Company shall pay when due the Authority's Service Charge and shall prepay or reimburse the Authority within thirty (30) days after notice for all expenses (including reasonable attorney's fees) incurred by the Authority in connection with the issuance and carrying of the Bonds and all expenses reasonably incurred or advances reasonably made in the exercise of the Authority's rights or the performance of its obligations hereunder. Any fees, expenses, reimbursements or other charges which the Authority may be entitled to receive from the Company hereunder, if not paid within ten (10) days of when they are due, shall bear a late charge equal to 5% of the amount overdue, and if not paid within sixty (60) days, shall bear interest at 12% per annum. Section 1004. Matters to be Considered by Authority. In approving, concurring in or consenting to action or in exercising any discretion or in making any determination under this Agreement, the Authority may consider the interests of the public, which shall include the anticipated effect of any transaction on tax revenues and employment, as well as the interests of the other parties hereto and the Bondowners; provided, however, nothing herein shall be construed as conferring on any person other than the other parties and the Bondowners any right to notice, hearing or participation in the Authority's consideration, and nothing in this section shall be construed as conferring on any of them any right additional to those conferred elsewhere 93 herein. Subject to the foregoing, the Authority will not unreasonably withhold any approval or consent to be given by it hereunder. Section 1005. Actions by Authority. Any action which may be taken by the Authority hereunder shall be deemed sufficiently taken if taken on its behalf by its Chairman, its Vice Chairman or its Executive Director or by any other director, officer or agent whom it may designate from time to time. ARTICLE XI. THE BONDOWNERS Section 1101. Action by Bondowners. Subject to Subsections 312, 801(b), 802(a), 808 and Section 1201 (as to the waivers and consents granted thereby), Bondowners representing a majority in principal amount of the Bonds Outstanding shall have the right at any time, by written notice to the Trustee and upon offering it indemnity as provided in Subsection 902(e), to direct the Trustee (i) in the granting of any consents, waivers or similar actions pertaining to the Bonds, (ii) in the time, method and place of conducting all proceedings, (iii) in the exercise of any rights or remedies available to the Trustee hereunder, or (iv) in the exercise of any other right or power conferred upon the Trustee for the protection of the Bondowners, provided that such direction shall be in accordance with the provisions of law and this Agreement, and the Trustee may take any other action determined proper by the Trustee which is not inconsistent with such direction. Except with respect to the matters provided below and subject to Section 808, Bondowners representing a majority in principal amount of the Bonds Outstanding shall have the right, at any time, by written notice to the Trustee and the offering of indemnity as provided in Subsection 902(e), to direct the Trustee, as holder of all of the Series J First Mortgage Bonds, to exercise the rights available to it as holder of such bonds under the First Mortgage Bond Indenture, including, without limitation, as to rendering notice to the First Mortgage Bond Trustee of the occurrence of a default thereunder, the institution of any suit, action or proceeding to enforce payments on the Series J First Mortgage Bonds which were not paid when due or other proceeding in respect of the First Mortgage Bond Indenture which the Trustee, as holder of the Series J First Mortgage Bonds, is entitled to institute, and as to the time, place and method of any such proceeding for any remedy available to the Trustee, as holder of the Series J First Mortgage Bonds, subject however to compliance with the applicable provisions of the First Mortgage Bond Indenture. Where the First Mortgage Bond Trustee is required or permitted to take any action under the First Mortgage Bond Indenture upon the direction, authorization, consent, notice or request of the holders of a specified percentage of principal amount of bonds outstanding thereunder or of outstanding bonds thereunder which would be adversely affected by such action, including with respect to acceleration of the maturity of such bonds under Section 10.1 of the First Mortgage Bond Indenture, the time, method and place of proceedings and waivers of events of default, as provided in Section 10.12 of the First Mortgage Bond Indenture and amendments of the First Mortgage Bond Indenture under Article 15 thereof, each Bondowner shall be deemed the holder of its pro-rata portion of the principal amount of Series J First Mortgage Bonds and shall have the right to direct the Trustee whether or not to render such direction, authorization, consent, 94 notice or request under the First Mortgage Bond Indenture in respect of such Bondowner's pro-rata portion, whereupon the Trustee shall notify the First Mortgage Bond Trustee of the action to be taken in respect of the applicable principal amount of Series J First Mortgage Bonds. Any request, authorization, direction, notice, consent, waiver or other action provided by this Agreement to be given or taken by Bondowners may be contained in and evidenced by one or more writings of substantially the same tenor signed by the Bondowners of the requisite percentage of principal amount of Bonds Outstanding or their attorneys duly appointed in writing. Proof of the execution of any such instrument, or of any instrument appointing any such attorney, shall be sufficient for any purpose of this Agreement (except as otherwise herein expressly provided) if made in the following manner, but the Authority or the Trustee may nevertheless in its discretion require further or other proof in cases where it deems the same desirable: The fact and date of the execution by any Bondowner or his or her attorney of such instrument may be proved by the certificate, which need not be acknowledged or verified, of an officer of a bank or trust company satisfactory to the Authority or to the Trustee or of any notary public or other officer authorized to take acknowledgements of the deeds to be recorded in the state in which he purports to act, that the person signing such request or other instrument acknowledged to him or her the execution thereof, or by an affidavit of a witness of such execution, duly sworn to before such notary public or other officer. The authority of the person or persons executing any such instrument on behalf of a corporate Bondowner may be established without further proof if such instrument is signed by a person purporting to be the president or a vice president of such corporation with a corporate seal affixed and attested by a person purporting to be its clerk or secretary or an assistant clerk or assistant secretary. The ownership of Bonds and the amount, numbers and other identification, and date of holding the same shall be proved by the registry books for the Bonds maintained by the Trustee. Any request, consent or vote of the owner of any Bond shall bind all future owners of such Bond. Bonds owned or held by or for the account of the Authority, the Company, or any related person to the Company within the meaning of Section 147(a) of the IRC shall not be deemed Outstanding Bonds for the purpose of any consent or other action by Bondowners. ARTICLE XII. AMENDMENTS AND MISCELLANEOUS Section 1201. Amendments. (a) Without Bondowners' Consent. The parties may from time to time, but with the consent of the Bond Insurer, without the consent of any Bondowner, amend this Agreement in order to (i) cure any ambiguity, defect or omission in the Agreement that does not materially adversely affect the interests of the Bondowners, (ii) grant additional rights or security to the Trustee for the benefit of the Bondowners, (iii) add additional Events of Default as shall not be inconsistent with the provisions of this Agreement and which shall not materially adversely 95 affect the interests of the Bondowners, (iv) qualify this Agreement under the Trust Indenture Act of 1939, as amended, or corresponding provisions of federal laws from time to time in effect, or (v) make such other provisions in regard to matters or questions arising under this Agreement as shall not be inconsistent with the provisions of this Agreement and which shall not materially adversely affect the interests of the Bondowners. Provisions of this Agreement may also be amended by the parties without Bondowner consent in any respect, including the release of the First Mortgage Bonds, on the date of any mandatory tender of the Bonds, provided that notice of any such amendment is included in the notice of mandatory tender for purchase described in Sections 412 and 514. The Company acting alone may amend the Maximum Rate to a higher interest rate without Bondowner consent, provided that, if a Liquidity Facility is then in effect, it entitles the Paying Agent to draw upon or demand and receive in immediately available funds an amount equal to the principal amount of the Bonds then outstanding plus a number of days of accrued interest at such amended Maximum Rate at least equal to the number of days required to be covered under this Agreement. In addition, with the consent of the Broker-Dealer, the provisions of this Agreement concerning the Auction Procedures, including without limitation the mandatory tender provisions and amending the Auction Period, Auction Date and Interest Payment Dates as provided in this Agreement, and the definitions applicable thereto, including without limitation, the definition of Maximum Auction Rate, may be amended (i) by obtaining the consent of the Bond Insurer and the consent of the Trustee if the Trustee determines that such amendment does not materially adversely affect the rights of any Bondowner (it being agreed that in making such determination the Trustee may rely upon a certificate to such effect of the Broker-Dealer) or (ii) by obtaining the consent of the beneficial owners of the Bonds, or (iii) on any Auction Date on which Sufficient Clearing Bids have been made or all of the Auction Rate Securities are subject to Submitted Hold Orders. In the case of clause (iii) above, if on the first Auction Date occurring at least 20 days after the date on which the Trustee mailed notice to the registered owners of the Auction Rate Securities as required by this Agreement, Sufficient Clearing Bids have been received or all of the Auction Rate Securities are subject to Submitted Hold Orders, the proposed amendment shall be deemed to have been consented to by the owners of all Auction Rate Securities. (b) With Bondowners' Consent. Except as set forth in Subsection 1201(a), the parties may from time to time amend this Agreement with the consent of the Bond Insurer and the owners of more than 50% in aggregate principal amount of the Bonds Outstanding; provided, that no amendment shall be made which adversely affects the rights of some but less than all the Bonds Outstanding without the consent of the owners of more than 50% in aggregate principal amount of the Bonds so affected; and provided further, that no amendment of this Agreement shall be effective to (i) change the principal, premium or interest on any Bonds, (ii) change the interest payment dates, maturity dates or redemption provisions of any Bonds, (iii) reduce the percentage of Bondowners whose consent is required for the amendment of this Agreement or (iv) modify the lien upon or pledge of the payments and other revenues assigned and pledged hereunder, without the consent, in each case, of the owner of each Bond which would be affected by the action proposed to be taken. Any amendment of this Agreement made under this or the preceding Subsection shall be accompanied by an opinion of Bond Counsel reasonably 96 satisfactory to the Trustee to the effect that the amendment is permitted by this Agreement and that it will not affect the exclusion of interest on the Bonds from gross income of the owners thereof for federal income tax purposes. When the Trustee determines that the requisite number of consents have been obtained for an amendment which requires Bondowner consent, it shall, within ninety (90) days, file a certificate to that effect in its records and give notice thereof to the Bondowners. No action or proceeding to invalidate the amendment shall be instituted or maintained unless it is commenced within sixty (60) days after such notice. The validity of the amendment shall not be adversely affected by any failure to give notice or any defect in the notice. A consent to an amendment may be revoked by a notice given by the Bondowner and received by the Trustee prior to the Trustee's certification that the requisite consents have been obtained. Section 1202. Notices. All notices to the Authority, the Trustee, the Company, the Bond Insurer or the Bondowners unless otherwise specified shall be in writing and shall be deemed sufficiently given if delivered by registered or certified mail, postage prepaid, or delivered during business hours as follows: (i) to the Authority at 14 Dixon Avenue, Suite 101, Concord, New Hampshire 03301, attention of the Executive Director, (ii) to the Trustee at 225 Asylum Street, 23rd Floor, Hartford, Connecticut 06103, attention of Corporate Trust Department, (iii) to the Company at 1000 Elm Street, Manchester, New Hampshire 03105, attention of Assistant Treasurer -- Finance, with a copy to Northeast Utilities Service Company, P.O. Box 270, Hartford, Connecticut 06141-0270 (if by U.S. Mail) and 107 Selden Street, Berlin, Connecticut 06037 (if by courier), attention of Assistant Treasurer -- Finance, (iv) to the Bond Insurer at 113 King Street, Armonk, New York 10504, attention of IPM-PCF, or, as to all of the foregoing, to such other address as the addressee shall have indicated by prior written notice to the one giving notice. All notices to a Bondowner shall be in writing and shall be deemed sufficiently given if sent by first class mail, postage prepaid, to the Bondowner at the address shown on the registration books for the Bonds maintained by the Trustee. A Bondowner may direct the Trustee to change its address as shown on the registration books by written notice to the Trustee. All notices to Bondowners shall identify the Bonds by name, CUSIP number, date of original issuance, maturity date, and such other descriptive information as may be needed to identify accurately the Bonds. All notices sent to Bondowners by the Trustee shall simultaneously be sent by registered or certified mail, postage prepaid, to all registered securities depositories that are registered owners of the Bonds, provided that the failure to give such notice shall not affect the validity of any notice given to Bondowners. Notice hereunder may be waived prospectively or retroactively by the person entitled to the notice, but no waiver shall affect any notice requirement as to other persons. Section 1203. Agreement Not for the Benefit of Other Parties. This Agreement is not intended for the benefit of and shall not be construed to create rights in parties other than the Authority, the Company, the Trustee, the Bondowners, the Bond Insurer and the respective directors, members, officers, employees and agents of the Authority and the Trustee to the extent 97 specified in Sections 902 and 1002. Section 1204. Severability. In the event that any provision of this Agreement shall be held to be invalid in any circumstance, such invalidity shall not affect any other provisions or circumstances. Section 1205. Counterparts. This Agreement may be executed and delivered in any number of counterparts, each of which shall be deemed to be an original; but such counterparts together shall constitute one and the same instrument. Section 1206. Captions. The captions and table of contents of this Agreement are for convenience only and shall not affect the construction hereof. Section 1207. Governing Law. This Agreement shall be governed by the laws of the State of New Hampshire. Section 1208. Payment Date Not a Business Day. If any payment, redemption or maturity date for principal, premium or interest shall be (i) a Sunday or a legal holiday, or (ii) a day on which banking institutions are authorized pursuant to law to close and on which the corporate trust office of the Trustee or the First Mortgage Bond Trustee is not open for business, then the payment thereof may be made on the next succeeding day not a day specified in (i) or (ii) with the same force and effect as if made on the specified payment date and no interest shall accrue for the period after the specified payment date. 98 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed under seal all as of the date first above written. BUSINESS FINANCE AUTHORITY OF THE STATE OF NEW HAMPSHIRE (Seal) By:________________________________ Jack Donovan Executive Director PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE (Seal) By:________________________________ Randy A. Shoop Assistant Treasurer - Finance STATE STREET BANK AND TRUST COMPANY, as Trustee (Seal) By:________________________________ Name: Title: 99 EXHIBIT A THE PROJECT FACILITIES The Project Facilities to be financed by the Bonds consist of certain air or water pollution control and sewage or solid waste disposal facilities at the Seabrook Station Plant, Unit No. 1, in which Public Service Company of New Hampshire had, at the time of the issue of the 1991 Series C Bonds, a 35.56942 percent ownership interest. The Project Facilities include the following: Waste Water Run-Off System The Waste Water Run-Off System collects and treats yard area drainage to remove pollutants. The System includes catch basins, yard waste water drain pipes, and a site settling pond. Chemical and Oily Waste Treatment System The Chemical and Oily Waste Treatment System collects, stores, processes, treats and disposes of non-radioactive chemical and oily wastes. The wastes result from construction, start-up and operation of the Seabrook Station Plant. The wastes are collected and treated to remove pollutants. The System includes tanks, an acid and caustic handling system, waste lagoons, system flush piping, and oil separator, curbs and drains, pipes, valves, transfer pumps, controls and instrumentation and related support equipment. Sanitary Waste System Sanitary waste is collected, treated and disposed of by the Sanitary Waste System. The System includes sanitary drains, sumps and pumps, a holding tank, a pump station, a sewage treatment plant, piping, transfer pumps and related support equipment. Radioactive Gaseous Waste System The Radioactive Gaseous Waste System collects, processes, stores and treats radioactive gaseous waste produced during normal operations. The System includes the following components: a main gas collection header, a waste gas condenser with associated primary cooling water components, gas chiller compressor units, iodine guard beds, a regeneration subsystem for dryers, waste gas dryers, a waste gas compressor package, ambient carbon delay beds, particulate filters, an after cooler, a hydrogen surge tank, a waste gas radiation monitor, an equipment vent system, a hydrogenated vent header, and associated piping, valves, controls and instrumentation. Exhaust Filtration System The Exhaust Filtration System collects, filters and discharges exhaust containing low level radioactive contamination resulting from normal operations. The System includes exhaust filters, exhaust fans, exhaust ducts, plenums, dampers, piping, flow control valves, and controls and instrumentation. A-1 Liquid Radwaste System The Liquid Radwaste System collects, processes, treats, recycles and disposes of low level radioactive liquid waste resulting from normal operations. The System includes tanks, filters, strainers, pumps, a reboiler, an evaporator, an evaporator distillate condenser, an evaporator distillate accumulator, an evaporator distillate cooler, an evaporator bottoms cooler, a waste demineralizer and filter, equipment drains, chemical drains, a radiation monitor, and associated controls and instrumentation. Boron Recycle System The Boron Recycle System collects, stores, treats, recycles and disposes of reactor coolant letdown during normal operations. This System is required to maintain reactor coolant letdown in accordance with federal pollution control standards as to radioactivity. The System includes the following components: Drain tanks, a degasifier, a preheater, a degasifier regenerative heat exchanger, trim coolers, a degasifier prefilter, cesium removal ion exchangers, recovery filters, waste storage tanks, recovery evaporator packages, recovery test tanks, recovery demineralizers, recovery demineralizer filters, a letdown rehead heat exchanger, a letdown chiller heat exchanger, a letdown moderating heat exchanger, a chiller surge tank, a chiller, thermal regenerative demineralizers, radiation monitors, associated pumps, piping and valves, and controls and instrumentation. Steam Generator Blowdown Treatment System The Steam Generator Blowdown Treatment System collects, processes, stores and treats steam generator blowdown for discharge or recycle during normal operation. This is necessary in compliance with pollution control requirements which limit the discharge of untreated steam generator blowdown. The System includes the following components: Blowdown evaporators, an evaporator distillate condenser, an evaporator condensate accumulator, an evaporator distillate pump, an evaporator condensate cooler, an evaporator bottoms pump, an evaporator bottoms cooler, blowdown demineralizers, acid and caustic systems, blowdown heat exchangers, and associated piping, controls and instrumentation. Solid Radwaste System The Solid Radwaste System collects, stores, packages and prepares solid radioactive waste for disposal. Radioactive solid wastes processed by this System include spent demineralizer resins, expended filter cartridges, evaporator concentrates as well as dry active waste consisting of rags, clothing, paper and other trash. The System includes the following components: A spent resin storage tank, an evaporator bottoms storage tank, associated collection piping, pumps and valves, a dry waste compactor, a filter transfer vehicle, and associated controls and instrumentation. Waste Processing Building A-2 The Waste Processing Building is a reinforced concrete structure which houses equipment used for exempt facilities. The purpose of this building is to house the air and water pollution control facilities and the solid waste disposal facilities. Auxiliary Building The Auxiliary Building is a reinforced concrete structure which houses both pollution control and production related equipment. Pollution control facilities located in the Auxiliary Building include portions of the liquid radwaste and gaseous radwaste systems. The cost of the Auxiliary Building and general support equipment has been allocated to the exempt facilities according to the ratio of space used for qualified equipment to the total space used in the building for all equipment. Spent Nuclear Fuel Facility The Spent Nuclear Fuel Facility is located in a separate building with enclosed fuel handling equipment for production functions and for spent fuel storage. The fuel handling facility includes a Seismic Category 1 structure containing a spent fuel pool with racks, spent fuel cooling and purification systems, a new fuel storage area, a spent fuel cask loading pit, and a cask washdown area. Also included are cranes and equipment supporting the fuel handling operations as well as the transfer canal leading the reactor containment. The cost of the Spent Nuclear Fuel Facility is determined through an allocation of the cost of the overall fuel facility between spent fuel facilities and production facilities. Circulating Water System The Circulating Water System will provide cooling water to the main condensers of Seabrook Station. The Circulating Water System is a once-through system using sea water from the Atlantic Ocean to remove the heat of condensation from the steam cycle and to dispose of that heat in an environmentally acceptable manner. The points of inlet and discharge of the cooling water are offshore, east of Hampton Beach, New Hampshire. The System includes the following structures: Two 19-foot inside diameter tunnels, lined with reinforced concrete, which connect the plant with the offshore inlet and outlet structures; a pumphouse, located at the plant site which encloses traveling screens and pumps for the circulating water and service water systems; and a piping system at the plant site, for the most part underground, interconnecting the tunnels, the pumphouse, and the condensers. The tunnels extend through the underlying rock in an east-west direction at an elevation between 200 and 250 feet below sea level. They end at the plant site with two 19-foot diameter vertical shafts, which reach above grade transforming at the top into two transition boxes open to the atmosphere. At the offshore end, the intake tunnel terminates with three 9-foot inside diameter vertical shafts connecting to three submerged inlet heads. The discharge tunnel terminates with eleven 5-foot inside diameter vertical shafts, each connecting to a submerged bifurcated diffuser head. A-3 Service Water Cooling Tower System The Service Water Cooling Tower System disposes of waste heat from the plant service water system. Waste heat from equipment throughout the plant is collected by the service water cooling system piping. The service water transfers waste heat to the service water cooling tower, which discharges heat to the atmosphere, thereby controlling discharge of waste heat to the natural water resources adjacent to the station. The Service Water Cooling Tower System components include the service water cooling tower, service water piping, pumps and associated electrical service, mechanical equipment, controls and instrumentation. Screen Wash System The Screen Wash System collects, stores and disposes of debris removed from the circulating and service water systems. This debris is solid waste with no market or other value. After removal, the debris is transferred to a landfill for final disposal. The components of the Screen Wash System include the screen wash pumps, trash trough, trash container, piping and valves, associated electrical service, mechanical equipment, controls and instrumentation. A-4 EXHIBIT B SERIES B SEABROOK POLLUTION CONTROL FACILITIES AGREEMENT This Series B Seabrook Pollution Control Facilities Agreement (this "Facilities Agreement") is entered into as of December 19, 2001 by the Business Finance Authority of the State of New Hampshire (with its successors, the "Authority"), a body corporate and politic created under New Hampshire Revised Statutes Annotated 162-A:3; Public Service Company of New Hampshire (with its successors, the "Company"), a New Hampshire corporation; North Atlantic Energy Corporation (with its successors, "NAEC"), a New Hampshire corporation; and State Street Bank and Trust Company, a Massachusetts trust company, as Trustee (with its successors, the "Trustee"), under a Series B Loan and Trust Agreement dated as of October 1, 2001 (the "LTA") among the Authority, the Company and the Trustee, which secures the Authority's $89,250,000 in aggregate principal amount Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - - 2001 Tax-Exempt Series B) (the "Bonds"). Capitalized terms not otherwise defined herein shall have the meaning given them in the LTA. This Facilities Agreement is entered into pursuant to Section 605 of the LTA in connection with the issuance of the Bonds by the Authority on behalf of the Company and the proposed transfer by NAEC of its interest in the Station (including the Project Facilities) to an unaffiliated party. The purpose of this Facilities Agreement is to ensure the continued exclusion of interest on the Bonds from gross income of the owners thereof for federal income tax purposes and to satisfy certain requirements of the Authority with respect to facilities financed under the Act. This Facilities Agreement shall remain in effect so long as NAEC owns the Project Facilities and until no Bonds remain Outstanding. In consideration of the mutual promises contained in this Facilities Agreement, the rights conferred and the obligations assumed hereby, and other good and valuable consideration, the receipt of which is hereby acknowledged, each of the Company, NAEC, the Authority and the Trustee agree, assign, covenant, grant, pledge, promise, represent and warrant as set forth herein for their own benefit and for the benefit of the Bondowners. Section 1. Representations and Covenants of the Company. The Company represents, warrants, covenants and agrees as follows: (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of New Hampshire; is duly qualified to do business and in good standing in each jurisdiction in which the failure so to qualify would have a material adverse affect on its business or properties; and has full corporate power to enter into this Facilities Agreement. (b) This Facilities Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding obligation of the Company enforceable against the Company as provided herein and in the LTA, subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights and to the exercise of judicial discretion in appropriate cases. B-1 (c) No Default or Event of Default exists under the LTA. (d) The Company has obtained all regulatory approvals necessary to enter into this Facilities Agreement and all such approvals have become final. (e) The Company's execution and delivery of this Facilities Agreement does not violate or constitute a default under the Company's charter or by-laws, any applicable law, any order or decree of any court or governmental authority having jurisdiction over the Company, or any agreement or instrument binding on the Company or its properties. Section 2. Representations and Covenants of NAEC. NAEC represents, warrants, covenants and agrees as follows: (a) NAEC is a corporation duly organized, validly existing and in good standing under the laws of the State of New Hampshire; is duly qualified to do business and in good standing in the State of New Hampshire and in each jurisdiction in which the failure so to qualify would have a material adverse affect on its business or properties; and has full corporate power to enter into this Facilities Agreement. (b) This Facilities Agreement has been duly authorized, executed and delivered by NAEC and constitutes a valid and binding obligation of NAEC enforceable against NAEC as provided herein, subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights and to the exercise of judicial discretion in appropriate cases. (c) NAEC has obtained all regulatory approvals necessary to enter into this Facilities Agreement and all such approvals have become final. (d) NAEC's execution and delivery of this Facilities Agreement does not violate or constitute a default under NAEC's charter or by-laws, any applicable law, any order or decree of any court or governmental authority having jurisdiction over NAEC, or any agreement or instrument binding on NAEC or its properties. (e) NAEC will maintain its corporate existence and its qualification to do business and good standing under the laws of the State of New Hampshire and will maintain itself as a foreign corporation duly qualified to do business and in good standing, where applicable, in each jurisdiction in which the failure to so qualify would have a material adverse effect upon its business or properties. NAEC shall not merge or consolidate with or sell all or substantially all of its assets to another entity, except that the NAEC may so merge or consolidate with or sell all or substantially all of its assets to another corporation if (i) the surviving or transferee corporation is qualified to do business in New Hampshire, and (ii) the surviving or transferee corporation (if not NAEC) has assumed in writing all of NAEC's obligations hereunder. Section 3. Use of the Project. (a) Notwithstanding any provision herein or in the LTA to the contrary, NAEC will not operate the Project Facilities in any manner, and will not take or B-2 omit any action or permit any action to be taken or omitted with the result that interest on the Bonds is included in the gross income of the owners thereof for federal income tax purposes. NAEC's use of the Project Facilities (or facilities replacing the same) shall be in furtherance of the purpose of air or water pollution control or sewage or solid waste disposal and in compliance with the Act. (b) Notwithstanding any provision herein or in the LTA to the contrary, NAEC shall not permit the Project Facilities to fail to qualify as (1) "industrial facilities" under the Act, (2) a facility described in Section 1312(a) of the Tax Reform Act of 1986, or (3) "sewage or solid waste disposal facilities" or "air or water pollution control facilities" within the meaning of Section 103(b)(4)(E) or (F) of the 1954 Code. NAEC acknowledges that it is fully familiar with the physical condition of the Project Facilities and that it is not relying on any representation of any kind by the Authority or the Trustee concerning the nature or condition thereof. Neither the Authority nor the Trustee shall be liable to NAEC or any other person for any latent or patent defect in the Project Facilities. (c) In the maintenance, improvement and operation of the Project Facilities, NAEC will comply in all material respects with all applicable building, subdivision, zoning and land use, environmental protection, sanitary and safety and other laws, rules and regulations, and will not permit any nuisance thereat and will, to the extent of its ownership and control, permit no nuisance to be committed thereat by others while NAEC is, or is entitled to be, in possession thereof. It shall not be a breach of this section if NAEC fails to comply with such laws, rules and regulations during any period in which NAEC shall in good faith be diligently contesting the validity thereof. (d) NAEC shall pay in a timely manner all costs of maintaining and operating the Project Facilities, including without limitation all taxes, excises and other governmental charges lawfully levied thereon or with respect to its interests therein or use thereof to the extent of NAEC's interest therein. It shall not be a breach of this section if NAEC fails to pay any such costs, taxes or charges during any period in which NAEC shall in good faith be contesting the validity or amount thereof and no foreclosure proceedings have been commenced, unless the procedures applicable to such contest require payment thereof and proceedings for their refund or abatement. (e) NAEC shall not sell, lease, transfer or otherwise dispose of the Project Facilities (other than the grant of a mortgage pursuant to a financing transaction) unless (i) it obtains the consent of the Authority, which consent shall not be unreasonably withheld, provided, however, that no such consent shall be required if such transaction has been approved by or consented to by the New Hampshire Public Utilities Commission; (ii) it obtains an opinion of Bond Counsel addressed to and reasonably satisfactory to the Trustee and the Authority that such sale, lease, transfer or other disposition will not affect the exclusion of the interest on the Bonds from the gross income of the owners thereof for federal income tax purposes; and (iii) the sale, lease, transfer or other disposition is made pursuant to a written agreement executed and delivered by NAEC and the transferee, under which agreement the transferee agrees to be bound by covenants substantially similar in all material respects to the covenants set forth in Attachment 1 hereto. B-3 NAEC shall not make any material change in the purposes for which the Project Facilities are used without the consent of the Authority, which consent shall not be unreasonably withheld. NAEC at its own expense may alter, remodel or improve the Project Facilities and construct other facilities at the site of the Project Facilities, provided such action shall not result in any substantial change in the Project Facilities or the character of the activities conducted by NAEC at the Project Facilities site without the consent of the Authority, which consent shall not be unreasonably withheld. (f) The Authority and the Trustee and their respective duly authorized agents shall have the right at all reasonable times and upon the furnishing of reasonable notice under the circumstances to examine the books and records of NAEC relating to the Project Facilities. (g) The undertakings of NAEC contained in Subsections 3(b), (c), (d) and (e) are limited to those consistent with NAEC's undivided percentage interest in the facilities of which the Project Facilities are a part. Section 4. Indemnification by NAEC. NAEC, regardless of any agreement to maintain insurance, shall and hereby does indemnify the Authority and the Trustee against (a) any and all claims by any person related to the participation of the Authority or the Trustee in the financing of the Project Facilities, including without limitation claims arising out of any condition of the Project Facilities or Station or the construction, use, occupancy or management thereof; any accident, injury or damage to any person occurring in or about the Station; any breach by NAEC of its obligations under this Facilities Agreement; any act or omission of NAEC or any of its agents, contractors, servants, employees or licensees; and (b) all costs, counsel fees, expenses or liabilities reasonably incurred in connection with any such claim or any action or proceeding brought thereon. In case any action or proceeding is brought against the Authority or the Trustee by reason of any such claim, NAEC will defend the same at its expense upon notice from the Authority or the Trustee, and the Authority or the Trustee, as the case may be, will cooperate with NAEC, at the expense of NAEC, in connection therewith. Section 5. Failure to Comply. NAEC shall immediately notify the Authority, the Company and the Trustee of any failure to observe or perform any of its covenants or agreements contained herein, and thereafter shall keep the Authority, the Company and the Trustee informed with respect to any curative action instituted by NAEC in order to cure such failure. Section 6. Amendment. This Facilities Agreement may be amended by the parties hereto, provided, however, that in connection with any amendment the Company or NAEC shall furnish the Authority and the Trustee with an opinion of Bond Counsel stating that the amendment will not impair the exclusion of interest on the Bonds from gross income of the owners thereof for federal income tax purposes. Section 7. Agreement Not for the Benefit of Other Parties. This Facilities Agreement is not intended for the benefit of and shall not be construed to create rights in parties other than the Authority, the Company, NAEC, the Trustee and the Bondowners. B-4 Section 8. Severability. In the event that any provision of this Facilities Agreement shall be held to be invalid in any circumstance, such invalidity shall not affect any other provisions or circumstances. Section 9. Counterparts. This Facilities Agreement may be executed and delivered in any number of counterparts, each of which shall be deemed to be an original; but such counterparts together shall constitute one and the same instrument. Section 10. Governing Law. This Facilities Agreement shall be governed by the laws of the State of New Hampshire. IN WITNESS WHEREOF, the parties have caused this Facilities Agreement to be duly executed as of the date first above written. BUSINESS FINANCE AUTHORITY OF THE STATE OF NEW HAMPSHIRE By:___________________________________ Jack Donovan Executive Director PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE By:___________________________________ Randy A. Shoop Assistant Treasurer-Finance NORTH ATLANTIC ENERGY CORPORATION By:___________________________________ STATE STREET BANK AND TRUST COMPANY, as Trustee By:___________________________________ B-5 ATTACHMENT 1 TO SERIES B SEABROOK POLLUTION CONTROL FACILITIES AGREEMENT COVENANTS (SUBSTANTIALLY SIMILAR IN ALL MATERIAL RESPECTS) TO BE INCLUDED IN PURCHASE AND SALE AGREEMENT Section 1.1. [Caption] (a) Pollution Control Revenue Bonds. (i) The Buyer acknowledges that: (A) The Pollution Control Facilities have been financed, and refinanced, in whole or in part, with proceeds of the issuance and sale of the Pollution Control Bonds; (B) The Company is the economic obligor and conduit borrower in respect of certain of the Pollution Control Bonds, as specified in Schedule _____; (C) The interest paid or accrued on the Pollution Control Bonds is not included in the gross income of the holders of the Pollution Control Bonds (the "PC Bondholders") for purposes of federal income taxation; (D) Pursuant to the Internal Revenue Code of 1954, as amended, and the Code, the basis for the federal income tax exclusion for interest payable to the PC Bondholders is the use of the Pollution Control Facilities for certain qualified purposes which include (I) the abatement or control of air or atmospheric pollution or contamination, (II) the abatement or control of water pollution or contamination, (III) sewage disposal and/or (IV) the disposal of solid waste; (E) The use of all or part of the Pollution Control Facilities for a purpose other than the qualifying purpose or purposes described in subclause (D) above for which the Pollution Control Bonds that financed or refinanced them were issued may cause (I) the interest payable on all or part of the Pollution Control Bonds to be includable in the federal gross income of the PC Bondholders possibly with retroactive effect, unless remedial action is promptly taken to redeem or defease the Pollution Control Bonds or a portion thereof, and/or (II) the deductibility of the interest payable by the Company on all or part of the Pollution Control Bonds to be disallowed by Section 150(b) of the Code; and (F) Any breach by the Buyer or any subsequent transferee of all or any part of the Pollution Control Facilities of its obligations under this Section 1.1(a) could result in the incurrence by the Company of additional costs and expenses, including, but not limited to, an increase in the rate of interest required to be paid to the PC Bondholders, liability to i some or all of the PC Bondholders for their failure to include interest payable on the Pollution Control Bonds in their respective federal gross income in the event of a final determination of taxability by the IRS, loss of the interest deduction to the Company under Section 150(b) of the Code and transaction costs relating to any refinancing, redemption and/or defeasance of all or part of the Pollution Control Bonds. (ii) In order to avoid any or all of the consequences described in clauses (E) and (F) above, the Buyer agrees that it will not use, or permit the use of, all or part of the Pollution Control Facilities for any purpose except (x) the current use of such Pollution Control Facilities or (y) as "sewage or solid waste disposal facilities" or "air or water pollution control facilities" within the meaning of Section 103(b)(4)(E) or (F) of the Internal Revenue Code of 1954, as amended, as contemplated by the tax compliance documents or non-arbitrage certificates for the Pollution Control Bonds that financed or refinanced such Pollution Control Facilities (copies of which with respect to all of the Pollution Control Facilities have been provided to the Buyer by NAEC or the Company), unless the Buyer shall have obtained at its own expense an opinion of nationally recognized bond counsel reasonably acceptable to NAEC or the Company ("Bond Counsel") addressed to and reasonably satisfactory to NAEC and the Company that such proposed change in use of the Pollution Control Facilities or part thereof will not impair (x) the exclusion from gross income of the interest on any Pollution Control Bonds for federal income tax purposes or (y) the deductibility of the interest payable on any Pollution Control Bonds by the Company under Section 150(b) of the Code. (iii) The provisions of Section 1.1(a)(ii) shall not prohibit the Buyer from ceasing to operate, maintain or repair any element or item of the Pollution Control Facilities, suspending the operation of the Pollution Control Facilities on a temporary basis, or terminating the operation of the Pollution Control Facilities on a permanent basis and shutting down the Pollution Control Facilities; provided, however, that the Pollution Control Facilities, in whole or in part, shall not be maintained in such a manner as to prevent their being reactivated and used for a purpose permitted by Section 1.1(a)(ii), nor be retired and/or decommissioned, dismantled or sold as scrap, unless the Buyer has obtained at its own expense an opinion of Bond Counsel addressed to and reasonably satisfactory to NAEC and the Company that this action will not impair either (x) the exclusion from gross income of the interest on any Pollution Control Bonds for federal income tax purposes or (y) the deductibility of the interest payable with respect to any Pollution Control Bonds by the Company under Section 150(b) of the Code. The Buyer shall provide to NAEC and the Company written notice at least thirty (30) days in advance of any permanent shut-down, retirement, abandonment or decommissioning of Seabrook or the Pollution Control Facilities in whole or in part and shall in good faith by written notice to NAEC and the Company describe the affected property so that NAEC and the Company can determine which issue or issues of Pollution Control Bonds financed or refinanced such affected property. (iv) It is expressly understood and agreed that this Section 1.1(a) shall not prohibit the use by the Buyer of tax-exempt bonds to finance or refinance any improvements to the Pollution Control Facilities made on or after the Closing Date or any assets other than the Pollution Control Facilities, provided that no breach by the Buyer of its covenants in this Section 1.1(a) shall result from such improvements. ii (v) The Buyer shall indemnify NAEC and the Company for any costs and expenses incurred by NAEC or the Company, respectively, solely as a result of any breach by the Buyer of its covenants in this Section 1.1(a). (vi) NAEC shall, or shall cause the Company to, notify the Buyer in writing of the maturity or redemption of any issue of the Pollution Control Bonds. (vii) If NAEC or the Company shall have notified the Buyer that it has refinanced any of the Pollution Control Bonds with new bonds, the provisions of this Section 1.1(a), if applicable, shall apply with respect to such new bonds as though they were the Pollution Control Bonds. (viii) The Buyer and any transferee or subsequent transferee will not sell or otherwise transfer all or part of the Pollution Control Facilities unless its transferee covenants in writing for the benefit of NAEC and the Company to comply with and to satisfy the covenants of this Section 1.1(a) (including without limitation the covenants of this clause (viii)) with respect to its ownership and use of such Pollution Control Facilities. (ix) The covenants of this Section 1.1(a) shall survive Closing and shall continue in effect and bind the Buyer and any transferee or subsequent transferee of all or part of the Pollution Control Facilities so long as any of the Pollution Control Bonds remain outstanding. RELATED DEFINITIONS "Agreement" means this [Purchase and Sale Agreement], together with Schedules and Exhibits hereto, as the same may be amended from time to time. "Bond Counsel" has the meaning set forth in Section 1.1(a)(ii). "Buyer" [define as the buyer under the Purchase and Sale Agreement]. "Closing" means the closing of the transactions contemplated by this Agreement. "Closing Date" means the date on which the Closing takes place. "Code" means the Internal Revenue Code of 1986, as amended. "Company" [define to mean the Company, as defined in the Facilities Agreement]. "Exhibit" means an exhibit to this Agreement. "Facilities Agreement" means the Series B Seabrook Pollution Control Facilities Agreement to which this Attachment 1 is attached. "IRS" means the Internal Revenue Service or any successor agency. iii "LTA" means the LTA, as defined in the Facilities Agreement. "NAEC" [define to mean NAEC, as defined in the Facilities Agreement]. "PC Bondholders" has the meaning set forth in Section 1.1(a)(i)(C). "Pollution Control Bonds" [define to include the Bonds, as defined in the LTA.]. "Pollution Control Facilities" [define to include the Project Facilities, as defined in the LTA.]. "Schedule" means a schedule to this Agreement. "Seabrook" [define to mean the Station, as defined in the LTA]. iv EX-4.3.7 9 y58564d.txt EXHIBIT 4.3.7 EXECUTION COPY SERIES C LOAN AND TRUST AGREEMENT among BUSINESS FINANCE AUTHORITY OF THE STATE OF NEW HAMPSHIRE and PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE and STATE STREET BANK AND TRUST COMPANY, as Trustee Dated as of October 1, 2001 Providing for the Issue of: $108,985,000 Business Finance Authority of the State of New Hampshire 5.45% Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - 2001 Tax-Exempt Series C) TABLE OF CONTENTS ARTICLE I. INTRODUCTION AND DEFINITIONS 1 Section 101. Description of the Agreement and the Parties 1 Section 102. Definitions 2 (a) Words 2 (b) Number and Gender 5 (c) Use of Examples 5 ARTICLE II. LOAN OF BOND PROCEEDS; THE ASSIGNMENT AND PLEDGE 5 Section 201. Loan of Bond Proceeds; Issue of First Mortgage Bonds 5 Section 202. Assignment and Pledge of the Authority 6 Section 203. Further Assurance 6 Section 204. Defeasance 7 ARTICLE III. THE BORROWING 8 Section 301. The Bonds 8 (a) Issue, Authentication and Form of Bonds 8 (b) Details of the Bonds 15 (c) Cancellation and Destruction of Bonds 15 (d) Replacement Bonds 15 (e) Registration of Bonds in the Book-Entry Only System 16 (f) Paying Agent 17 (g) Interest on Overdue Principal 17 Section 302. Application of Bond Proceeds 18 Section 303. Bond Fund 18 Section 304. Application of Moneys 18 Section 305. Payments by the Company 18 (a) Debt Service 19 (b) Additional Payments 19 (c) Unclaimed Moneys 19 (d) Rebate 19 Section 306. Unconditional Obligation 19 Section 307. Redemption of the Bonds 20 (c) Notice to the Trustee 21 (d) Payment of Redemption Price and Accrued Interest 21 (e) Notice of Redemption 21 Section 308. Investments 21 Section 309. Tax Status of Bonds 24 Section 310. Payment Procedure Pursuant to Bond Insurance Policy 24 Section 311. The Bond Insurer 26 ARTICLE IV. THE PROJECT 26 Section 401. Company not to Impair Tax Status; Use of Project Facilities 26 Section 402. Qualification of Project Facilities 26 Section 403. Reserved 26 Section 404. Reserved 26 Section 405. Disposition and Use of Project Facilities 27 ARTICLE V. ADDITIONAL COVENANTS OF THE COMPANY 27
-i- Section 501. Existence and Good Standing; Merger; Consolidation; Notice to Trustee 27 Section 502. Indemnification by the Company 27 Section 503. Continuing Disclosure 28 ARTICLE VI. DEFAULT AND REMEDIES 28 Section 601. Default 28 Section 602. Remedies for Events of Default 29 (a) Acceleration 29 (b) Rights as a Secured Party 29 Section 603. Court Proceedings 30 Section 604. Revenues after Default 30 Section 605. Rights of Bondowners 30 Section 606. Performance of Company's Obligations 31 Section 607. Remedies Cumulative; No Waiver 31 Section 608. Rights of Bond Insurer 31 ARTICLE VII. THE TRUSTEE 31 Section 701. Corporate Organization, Authorization and Capacity 31 Section 702. Rights and Duties of the Trustee 31 (a) Moneys to be Held in Trust 31 (b) Accounts 32 (c) Performance of the Authority's Obligations 32 (d) Responsibility 32 (e) Limitations on Actions 32 (f) Financial Obligations 33 (g) Registration Books 33 (h) Ownership of Bonds 33 (i) No Surety Bond 33 (j) Requests by the Company 33 (k) Trustee as Holder of Series K First Mortgage Bonds 34 Section 703. Fees and Expenses of the Trustee 34 Section 704. Resignation or Removal of Trustee 34 Section 705. Successor Trustee 34 ARTICLE VIII. THE AUTHORITY 35 Section 801. Limited Obligation 35 Section 802. Rights and Duties of the Authority 35 (a) Remedies of the Authority 35 (b) Limitations on Actions 36 (c) Responsibility 36 Section 803. Expenses of the Authority 37 Section 804. Matters to be Considered by Authority 37 Section 805. Actions by Authority 37 ARTICLE IX. THE BONDOWNERS 37 Section 901. Action by Bondowners 37 ARTICLE X. AMENDMENTS AND MISCELLANEOUS 39 Section 1001. Amendments 39
-ii- (a) Without Bondowners' Consent 39 (b) With Bondowners' Consent 39 Section 1002. Notices 40 Section 1003. Agreement Not for the Benefit of Other Parties 40 Section 1004. Severability 40 Section 1005. Counterparts 40 Section 1006. Captions 40 Section 1007. Governing Law 40 Section 1008. Payment Date Not a Business Day 41 EXHIBIT A THE PROJECT FACILITIES A-1 EXHIBIT B SERIES C SEABROOK POLLUTION CONTROL FACILITIES AGREEMENT B-1
-iii- ARTICLE I. INTRODUCTION AND DEFINITIONS Section 101. Description of the Agreement and the Parties. This SERIES C LOAN AND TRUST AGREEMENT (the "Agreement") is entered into as of October 1, 2001 by the Business Finance Authority of the State of New Hampshire (with its successors, the "Authority" and formerly The Industrial Development Authority of the State of New Hampshire), a body corporate and politic created under New Hampshire RSA 162-A:3; Public Service Company of New Hampshire (with its successors, the "Company"), a New Hampshire corporation; and State Street Bank and Trust Company, a Massachusetts trust company, as Trustee (with its successors, the "Trustee"). This Agreement is a financing document combined with a security document as one instrument in accordance with New Hampshire RSA Chapter 162-I (the "Act") and relates to industrial facilities as defined in Paragraphs 2, VII(d) and (e) of the Act and located in the Town of Seabrook, Rockingham County, New Hampshire. This Agreement provides for the following transactions: (a) the Authority's issue of the Bonds; (b) the Authority's loan of the proceeds of the Bonds to the Company to refund the outstanding balance of the Authority's $108,985,000 7 1/2%Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - 1991 Tax-Exempt Series B) (the "1991 Series B Bonds") which in turn were issued to refund a portion of (i) the Authority's $100,000,000 Pollution Control Revenue Bonds 1986 Series A (Public Service Company of New Hampshire Project) (the "1986 Bonds") and (ii) the Authority's $20,000,000 Pollution Control Revenue Bonds, 1983 Series A (Public Service Company of New Hampshire Project) (the "1983 Bonds"), which 1986 Bonds and 1983 Bonds were originally issued for the purpose of financing the acquisition, construction and installation of the Project Facilities; (c) the Company's repayment of the loan of Bond proceeds from the Authority through payment to the Trustee of all amounts necessary to pay the Bonds issued by the Authority; (d) the Company's agreement to evidence and secure its repayment obligations hereunder by the issuance of the Series K First Mortgage Bonds; and (e) the Authority's assignment to the Trustee in trust for the benefit and security of the Bondowners of the Authority's rights in respect of the loan to the Company hereunder, including repayment of the loan to be received from the Company. In consideration of the mutual promises contained in this Agreement, the rights conferred and the obligations assumed hereby, and other good and valuable consideration, the receipt of which is hereby acknowledged, each of the Company, the Authority and the Trustee agree, assign, covenant, grant, pledge, promise, represent and warrant as set forth herein for their own benefit and for the benefit of the Bondowners. 1 Section 102. Definitions. (a) Words. In addition to terms defined elsewhere herein, the following terms have the following meanings in this Agreement, unless the context otherwise requires: (i) "Act" has the meaning set forth in Section 101. (ii) "Authority's Service Charge" means payment to the Authority for its own use of .375% of the principal amount of the Bonds payable on the date of the issue of the Bonds and an additional .375% of the then Outstanding principal balance of the Bonds payable on the date which is three years from the date of the issue of the Bonds. (iii) "Bond Counsel" means Palmer & Dodge LLP or such other nationally recognized bond counsel selected by the Company and reasonably satisfactory to the Trustee and the Bond Insurer. (iv) "Bond Fund" means the fund established under Section 303. (v) "Bond Insurance Agreement" means the Reimbursement and Indemnity Agreement dated as of December 19, 2001, between the Company and the Bond Insurer. (vi) "Bond Insurance Policy" means the financial guaranty insurance policy issued by the Bond Insurer insuring the payment when due of the principal of and interest on the Bonds as provided therein. (vii) "Bond Insurer" means MBIA Insurance Corporation, a New York stock insurance company. (viii) "Bond Insurer Default" has the meaning defined in Section 608(b). (ix) "Bond Insurer Event of Insolvency" means the institution of a proceeding in a court having jurisdiction in the premises seeking an order for relief, rehabilitation, reorganization, conservation, liquidation or dissolution in respect of the Bond Insurer and the continuance of such proceeding for a period of sixty (60) consecutive days or such court enters an order granting the relief sought in such proceeding and such order is not reversed or action thereunder stayed within sixty (60) days of such entry. (x) "Bondowners", "owners" or words of similar import means the registered owners of the Bonds from time to time as shown in the books kept by the Trustee as bond registrar, except that wherever appropriate the term "owners" shall mean the owners of the Bonds for federal income tax purposes. (xi) "Bonds" means the 5.45% $108,985,000 principal amount of the Business Finance Authority of the State of New Hampshire Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - 2001 Tax-Exempt Series C) dated 2 as of December 1, 2001 substantially in the form set forth in Subsection 301(a) and any bond or bonds duly issued in exchange or replacement therefor. (xii) "Book-Entry Only System" means the system of registration of the Bonds described in Subsection 301(e). (xiii) "Company Representative" means the person or persons at the time designated to act on behalf of the Company in a written certificate (or any alternate or alternates at the time so designated) furnished to the Trustee, containing the specimen signature of such person or persons and signed on behalf of the Company by its Chairman, Vice Chairman, President, Chief Financial Officer, Treasurer, any Assistant Treasurer, or any Vice President. (xiv) "Continuing Disclosure Agreement" means the Continuing Disclosure Agreement between the Company and the Trustee dated the date of issuance and delivery of the Bonds as originally executed and as it may be amended from time to time in accordance with its terms. (xv) "Debt Service" means all money payable to the Bondowners in accordance with the terms hereof and of the Bonds including (i) principal, (ii) interest and (iii) any premium. (xvi) "Default" has the meaning given such term in Section 601. (xvii) "Event of Default" has the meaning given such term in Section 601. (xviii) "Facilities Agreement" has the meaning given to it in Section 405. (xix) "Federal Tax Statement" means the Statement as to Tax Exempt Status of Bonds executed by the Company in connection with the original issuance of the Bonds and delivered to the Trustee. (xx) "First Mortgage Bond Indenture" means the First Mortgage Indenture dated as of August 15, 1978, as amended, and the Twelfth Supplemental Indenture thereto dated as of December 1, 2001 between the Company and First Union National Bank, successor to First Fidelity Bank, National Association, New Jersey, as Trustee, as amended and supplemented from time to time. (xxi) "First Mortgage Bond Trustee" means the trustee under the First Mortgage Bond Indenture. (xxii) "IRC" means the Internal Revenue Code of 1986, as it may be amended from time to time. 3 (xxiii) "Loan" has the meaning given such term in Section 201. (xxiv) "MBIA" means MBIA Insurance Corporation, the principal operating subsidiary of MBIA Inc., a New York Stock Exchange listed company, as Bond Insurer. (xxv) "1954 Code" means the Internal Revenue Code of 1954, as amended, as applicable to the Bonds and the Project Facilities. (xxvi) "NAEC" means North Atlantic Energy Corporation, a New Hampshire corporation and an affiliate of the Company. (xxvii) "Outstanding", when used to modify Bonds, refers to Bonds issued, authenticated, and delivered under this Agreement, excluding: (i) Bonds which have been exchanged or replaced; (ii) Bonds which have been paid; (iii) Bonds which have become due and for the payment of which moneys have been duly provided; and (iv) Bonds with respect to which this Agreement has been defeased pursuant to Section 204. (xxviii) "Paying Agent" means State Street Bank and Trust Company, as Paying Agent under this Agreement, and its successors in such capacity. (xxix) "Permitted Investments" has the meaning given such term in Section 308. (xxx) The word "person" means any individual or entity so recognized by law. (xxxi) "Project Costs" means the Company's cost of acquisition or construction and installation of the Project Facilities which are "project costs" within the meaning of Paragraph 2, IX of the Act, including, but not limited to, the cost of issuing the Bonds, obtaining professional and advisory services, and certain interest on the Bonds, which may be paid from Bond proceeds pursuant to the Act. (xxxii) "Project Facilities" means the Company's former ownership share of the sewage or solid waste disposal and air or water pollution control facilities at the Station as of the date of issuance of the Bonds described generally in the attached Exhibit A. (xxxiii) "Refunding Trust Agreement" means the Refunding Trust Agreement among the Authority, the Company and State Street Bank and Trust Company, as trustee for the 1991 Series B Bonds, dated as of October 1, 2001. (xxxiv) "Seabrook Transfer" means each of the transfer by the Company of its interest in the Station (including the Project Facilities) to NAEC as of June 5, 1992, the proposed transfer of such interest to an unaffiliated party pursuant to an order of the New Hampshire Public Utilities Commission and any subsequent transfer of such interest. (xxxv) "Seabrook Transferee" means each of NAEC, any subsequent owner or owners of the Project Facilities pursuant to a Seabrook Transfer, and its or their 4 successors. (xxxvi) "Series K First Mortgage Bonds" means the $108,985,000 in aggregate principal amount 5.45% First Mortgage Bonds, Series K issued by the Company and delivered to the Trustee pursuant to Section 201 of this Agreement and the First Mortgage Bond Indenture to evidence and secure the Company's obligation to repay the Loan. (xxxvii) "Station" means Unit No. 1 of the nuclear electric generating plant located in Seabrook, New Hampshire, of which the Company is a joint owner. (xxxviii) "Trustee" means the State Street Bank and Trust Company, as trustee under this Agreement and its successors in such capacity. (xxxix) "UCC" means the New Hampshire Uniform Commercial Code (New Hampshire Revised Statutes Annotated Chapter 382-A). Except in the Bonds, "here" in such words as "hereby," "herein," "hereof" or "hereunder" means this Agreement as a whole rather than the particular section, subsection, paragraph, subparagraph, clause or subclause in which the word appears; and in the Bonds it refers thereto. (b) Number and Gender. Wherever appropriate (1) the singular and plural forms of words and (2) words of different gender shall, within those respective classifications, be deemed interchangeable. (c) Use of Examples. When a condition, class, category, circumstance or other concept is described in general terms herein and a list of possible examples or components of what has been described generally is associated with that description, and regardless of whether the words "include" or "including" or the like are also used, the listing shall be deemed illustrative only and shall not be construed as excluding other possible examples or components or as otherwise limiting the generality of the description in any way. 5 ARTICLE II. LOAN OF BOND PROCEEDS; THE ASSIGNMENT AND PLEDGE Section 201. Loan of Bond Proceeds; Issue of First Mortgage Bonds. The Authority shall issue the Bonds pursuant to the Act in the amount, in the form, and with the terms provided herein, and shall loan to the Company such amount (the "Loan") to refinance Project Costs as hereinafter provided. The Company agrees to repay the Loan of the aggregate principal amount of the Bonds in the amounts and at the times necessary to pay principal of, premium, if any, and interest on the Bonds by making the payments required under Section 305, and to evidence and secure the Company's obligation to do so, the Company shall issue and deliver to the Trustee a like aggregate principal amount of its Series K First Mortgage Bonds in the form set forth in the First Mortgage Bond Indenture. Upon payment of the principal of and premium, if any, on any of the Bonds and payment of all accrued interest in connection therewith, whether at maturity or prior to maturity by redemption or otherwise, or upon provision for the payment thereof having been made in accordance with Section 204, Series K First Mortgage Bonds in an aggregate principal amount equal to the aggregate principal amount of the Bonds so paid, or for the payment of which such provision has been made, shall be deemed fully paid and the obligations of the Company thereunder terminated as provided in the First Mortgage Indenture and shall be surrendered by the Trustee to the First Mortgage Bond Trustee for cancellation. The Trustee shall promptly notify the First Mortgage Bond Trustee by telephone, confirmed in writing, of any default in the payment of principal of, and premium, if any, and interest on the Bonds, and shall promptly notify the First Mortgage Bond Trustee by telephone, confirmed in writing of any payment of principal of and premium, if any, and interest (other than payment of regularly scheduled interest) on the Bonds, or if the Bonds have been paid or deemed paid, defeased, redeemed, retired, surrendered or canceled. In accordance with the terms thereof, the Series K First Mortgage Bonds shall be issued to and registered in the name of the Trustee and shall not be sold, assigned, pledged or transferred, except to effect transfer to any successor Trustee hereunder. The Series K First Mortgage Bonds shall have a principal amount, an interest rate, a maturity date and redemption provisions corresponding to the Bonds. Payments of principal of and premium, if any, and interest on the Series K First Mortgage Bonds shall upon receipt by the Trustee be deemed to constitute payments of corresponding amounts by the Company in respect of the Bonds pursuant to Subsection 305(a). Section 202. Assignment and Pledge of the Authority. The Authority, for consideration paid as hereinabove acknowledged, hereby irrevocably assigns and pledges to the Trustee in trust for the security of the Bondowners upon the terms hereof all of the Authority's right, title and interest in (i) respect of the Loan and all payments thereon, (ii) all moneys and securities held by the Trustee for deposit in, or deposited in, the Bond Fund and investment earnings thereon, (iii) the Series K First Mortgage Bonds, all bonds issued in replacement thereof or in exchange or substitution therefor and all payments on, and proceeds of, the foregoing, and (iv) any collateral security for, and all proceeds of, any of the foregoing. The Trustee shall hold (a) all the rights, title and interest received under this section and (b) all payments (exclusive of funds to which the Trustee is entitled in its own right as fees, reimbursement, indemnity or otherwise) received from the Company or derived from the exercise of the Authority's powers hereunder (which shall include all payments under Subsection 305(a)) and in respect of the Series K First Mortgage 6 Bonds in trust for the security of the Bondowners in accordance with the provisions hereof. Section 203. Further Assurance. The Company and the Authority shall from time to time execute, deliver and record and file such instruments as may be necessary to perfect or to maintain or continue the perfection of, or as the Trustee may reasonably require to confirm, perfect or maintain, the security created hereby and the assignment and pledge of rights hereunder. Section 204. Defeasance. When there are in the Bond Fund sufficient funds, or non-callable and non-prepayable obligations issued by, or the full and timely payment of which are guaranteed by, the United States, in such principal amount, bearing interest at such rates and with such maturities as will provide, without reinvestment, sufficient amounts to pay principal of, premium, if any, and interest on the Bonds in full as and when such amounts become due, as determined through a verification report or computation, which may be prepared by the Company, and when all the rights hereunder of the Authority and the Trustee have been provided for (1) the Bondowners will cease to be entitled to any right, benefit or security under this Agreement except the right to receive payment of the funds deposited and held for payment and other rights set forth below or which by their nature cannot be satisfied prior to or simultaneously with termination of the lien hereof, (2) the security interests created by this Agreement (except in such funds and investments) shall terminate, and (3) the Authority and the Trustee shall execute and deliver such instruments as may be necessary to discharge the lien and security interests created hereunder; provided, however, that, if within ninety (90) days of such deposit, the Bonds are not to be redeemed in full prior to maturity or paid in full at maturity, the Trustee and the Bond Insurer shall have received on the date of the deposit an opinion of Bond Counsel to the effect that such deposit and the investment thereof will not affect the exclusion of interest on the Bonds from gross income of the owners thereof for federal income tax purposes; and provided further that if any Bonds are to be redeemed prior to the maturity thereof, such Bonds shall have been duly called for redemption or irrevocable instructions for such a call shall have been given to the Trustee. Upon such defeasance, the funds and investments required to pay or redeem the Bonds in full shall be irrevocably set aside for such purpose. The Trustee shall cause to be mailed to all Bondowners within fifteen (15) days of the conditions of this section being met in the manner herein specified for redemption of Bonds a notice stating that such conditions have been met and that the lien of this Agreement has been discharged, and, if the Bonds are to be redeemed prior to maturity, specifying the date of redemption and the redemption price. Any funds or property held by the Trustee for payment of the Bonds under this section and not required for such payment shall (unless there is an Event of Default hereunder, in which case they shall be applied as provided in Section 604), after satisfaction of all the rights of the Authority and the Trustee, and payment of the rebate, if any, due to the United States under IRC ss.148(f), and upon such indemnification, if any, as the Authority or the Trustee may reasonably require, be distributed to the Company. If Bonds are not presented for final payment when due and moneys are available in the hands of the Trustee therefor, the Trustee shall, without liability for interest thereon, continue to hold the moneys held for that purpose subject to Subsection 305(c), and interest shall cease to accrue on the principal amount represented thereby. When there are in the Bond Fund funds or securities as described in the preceding 7 paragraph as are sufficient to pay principal of, premium, if any, and interest on, some but not all of the Bonds in full as and when such amounts become due and all of the other conditions in the preceding paragraph have been met with respect to such Bonds, the particular Bonds (or portions thereof) for which such provision for payment shall have been considered made shall be selected by lot by the Trustee (or, if the Bonds are then registered to CEDE & CO. and the Book-Entry Only System is then in effect, by The Depository Trust Company) and thereupon the Trustee and the Authority shall take similar action to release the security interests created by this Agreement in respect of such Bonds (except in such funds or securities and investments thereon), subject however to compliance with the applicable conditions set forth in the provisos above. Notwithstanding the foregoing, those provisions relating to the maturity of Bonds, interest payments and dates thereof and the Trustee's remedies with respect thereto, and provisions relating to exchange, transfer and registration of Bonds, replacement and cancellation of Bonds, the holding of moneys in trust and the duties of the Trustee in connection with all of the foregoing and the fees, expenses and indemnities of the Trustee and the Authority, shall remain in full force and effect and shall be binding upon the Trustee, the Authority, the Company and the Bondowners notwithstanding the release and discharge of this Agreement and the lien on the Series K First Mortgage Bonds until the Bonds have been actually paid in full. Notwithstanding anything herein to the contrary, if moneys or governmental obligations have been deposited or set aside with the Trustee pursuant to the provisions of this Section 204 and the principal of, premium, if any, and interest on the Bonds shall not, in fact, have been actually paid in full, no amendment to the provisions of this Section 204 will be made without the consent of the owner of each of the Bonds affected thereby. Subject to Subsection 608(b), the prior written consent of the Bond Insurer, which consent shall not be unreasonably withheld, shall be required for defeasance of the Bonds. Notwithstanding anything herein to the contrary, in the event that the principal and/or interest due on the Bonds shall be paid by the Bond Insurer pursuant to the Bond Insurance Policy, the Bonds shall remain Outstanding for all purposes, not be defeased or otherwise satisfied and not be considered paid by the Company, and the assignment and pledge hereunder and all covenants, agreements and other obligations of the Company to the registered owners of the Bonds shall continue to exist and shall run to the benefit of the Bond Insurer, and the Bond Insurer shall be subrogated to the rights of such Bondowners. ARTICLE III. THE BORROWING Section 301. The Bonds. (a) Issue, Authentication and Form of Bonds. Upon written direction of the Authority, the Trustee will authenticate and deliver the Bonds in substantially the following form: $ No. R- 8 United States of America State of New Hampshire BUSINESS FINANCE AUTHORITY OF THE STATE OF NEW HAMPSHIRE 5.45% Pollution Control Revenue Bond (Public Service Company of New Hampshire Project 2001 Tax-Exempt Series C) DATE OF THIS BOND: December 1, 2001 (date as of which bonds of this series were initially issued) REGISTERED OWNER: CEDE & CO. INTEREST RATE: 5.45% per annum MATURITY DATE: May 1, 2021 PRINCIPAL AMOUNT: DOLLARS INTEREST PAYMENT DATES: (May 1 and November 1 commencing May 1, 2002) CUSIP: 64468C AV 6 THIS BOND DOES NOT CONSTITUTE AN INDEBTEDNESS OF THE STATE OF NEW HAMPSHIRE OR OF THE AUTHORITY EXCEPT TO THE EXTENT PERMITTED BY NEW HAMPSHIRE RSA CHAPTER 162-I. ALL AMOUNTS OWED HEREUNDER ARE PAYABLE ONLY FROM THE SOURCES PROVIDED IN THE LOAN AND TRUST AGREEMENT DESCRIBED BELOW, AND NO PUBLIC FUNDS MAY BE USED FOR THAT PURPOSE. The Business Finance Authority of the State of New Hampshire (the "Authority"), for value received, promises to pay to the REGISTERED OWNER, or registered assigns, but solely from the moneys to be provided under the Agreement mentioned below, upon presentation and surrender hereof, in lawful money of the United States of America, the PRINCIPAL AMOUNT on the MATURITY DATE, unless paid earlier as provided below, with interest (computed on the basis of a 360-day year consisting of twelve 30-day months) from the most recent INTEREST PAYMENT DATE to which interest has been paid or duly provided for or, if no interest has been paid, from the DATE OF THIS BOND, at the INTEREST RATE per annum, payable semiannually on the INTEREST PAYMENT DATES, until the date on which this bond becomes due, whether at maturity, upon redemption, by acceleration or otherwise. From and after that date, any unpaid principal will bear interest at the same rate until paid or duly provided for. The 9 principal of and premium, if any, on this bond are payable upon presentation and surrender of this bond at the corporate trust office of State Street Bank and Trust Company, as Trustee (with its successors, the "Trustee") in Boston, Massachusetts, or such other address as the Trustee may designate in writing to the REGISTERED OWNER, unless this bond is in the Book-Entry Only System (as defined in the Agreement) in which case payment shall be by wire or bank transfer of immediately available funds within the continental United States. Interest is payable by check or draft mailed on the INTEREST PAYMENT DATE by the Trustee to the REGISTERED OWNER of this bond, determined as of the close of business on the applicable record date, at its address as shown on the registration books kept by the Trustee unless this bond is in the Book-Entry Only System, in which case interest is payable by wire or bank transfer of immediately available funds within the continental United States. If any payment, redemption or maturity date for principal, premium or interest shall be (i) a Sunday or a legal holiday, or (ii) a day on which banking institutions are authorized pursuant to law to close and on which the corporate trust office of the Trustee or the First Mortgage Bond Trustee is not open for business, then the payment thereof may be made on the next succeeding day not a day specified in (i) or (ii) with the same force and effect as if made on the specified payment date and no interest shall accrue for the period after the specified payment date. The record date for payment of interest is the fifteenth day of the month preceding the date on which the interest is to be paid, provided that, with respect to payment of overdue interest or interest payable on redemption of this bond other than on an INTEREST PAYMENT DATE or interest on any overdue amount, the Trustee may establish a special record date. The special record date may be not more than thirty (30) days before the date set for payment. The Trustee will mail notice of a special record date to the registered owners of the Bonds at least ten (10) days before the special record date. A certificate of the Trustee shall conclusively establish the mailing of such notice for all purposes. This bond is one of a series of 5.45% Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - 2001 Tax-Exempt Series C) (the "Bonds") in the aggregate principal amount of $108,985,000 issued under New Hampshire Chapter RSA 162-I (the "Act"). The proceeds of the Bonds are being loaned to Public Service Company of New Hampshire (the "Company"), a New Hampshire corporation, pursuant to a Series C Loan and Trust Agreement (the "Agreement") dated as of October 1, 2001 among the Company, the Authority and the Trustee to refinance certain costs associated with the Company's prior ownership interest in air or water pollution control and sewage or solid waste disposal facilities installed for use by Unit No. 1 at the nuclear electric generating station (the "Station") in Seabrook, New Hampshire (the "Project Facilities"). Pursuant to the Agreement, the Company has unconditionally agreed to repay such loan in the amounts and at the times necessary to pay the principal of, premium, if any, and interest on the Bonds when due. To evidence and secure such loan the Company has issued and delivered to the Trustee its First Mortgage Bonds, Series K (the "Series K First Mortgage Bonds") issued under the First Mortgage Indenture dated as of August 15, 1978, as amended, and the Twelfth Supplemental Indenture thereto dated as of December 1, 2001 between the Company and First Union National Bank, successor to First Fidelity Bank, National Association, New Jersey, as Trustee (as amended and supplemented from time to time, the "First Mortgage Bond Indenture") in an aggregate principal amount and with an 10 interest rate, maturity date and redemption provisions corresponding to those of the Bonds. As provided in the Agreement, payments of principal of, and premium, if any, and interest on the Series K First Mortgage Bonds shall, upon receipt by the Trustee, be deemed to constitute payments in corresponding amounts by the Company in respect of the Bonds. Reference is hereby made to the Agreement for the provisions thereof with respect to the rights, limitations of rights, duties, obligations and immunities of the Company, the Authority, the Trustee and the Bondowners, including the order of payments in the event of insufficient funds, the disposition of unclaimed moneys held by the Trustee and restrictions on the rights of owners of the Bonds to bring suit. The Agreement may be amended to the extent and in the manner provided therein. Copies of the Agreement are available for inspection at the corporate trust office of the Trustee. Unless otherwise defined herein, capitalized terms shall have the meanings given them in the Agreement. If an Event of Default (as defined in the Agreement) occurs and is continuing, the Trustee may, and upon the written request of Bondowners of at least 25% in principal amount of the Bonds outstanding shall, declare the principal of all Bonds then outstanding and the interest accrued thereon immediately due and payable in accordance with the Agreement. The Bondowners shall have no right to institute any proceeding or pursue any other remedy to enforce the Bonds or the covenants of the Company under the Agreement except as provided therein. The Bonds are subject to optional redemption prior to maturity on or after May 1, 2012 at the option of the Company, as a whole or in part at any time, at the following prices expressed as percentages of their principal amounts, plus accrued interest to the redemption date:
Period During Which Redeemed Redemption Price ---------------------------- ---------------- May 1, 2012 through April 30, 2013 101% May 1, 2013 and thereafter 100
The Bonds are subject to mandatory redemption at any time at a redemption price of 100% of the principal amount of the Bonds so redeemed plus accrued interest to the redemption date in the event (i) the Company delivers to the Trustee an opinion of nationally recognized bond counsel selected by the Company and reasonably satisfactory to the Trustee ("Bond Counsel") stating that interest on the Bonds is or will become includable in gross income of the owners thereof for federal income tax purposes, or (ii) it is finally determined by the Internal Revenue Service or a court of competent jurisdiction, as a result of (A) a proceeding in which the Company has participated or been given notice and an opportunity to participate, and (B) either a failure by the Company or the Seabrook Transferee (as defined in the Agreement) to observe any covenant or agreement undertaken in or pursuant to the Agreement or a Seabrook Transfer (as defined in the Agreement), or the inaccuracy of any representation made by the Company or the Seabrook Transferee in or pursuant to the Agreement or a Seabrook Transfer, that interest payable on the Bonds is includable for federal income tax purposes in the gross income of any owner thereof (other than an owner which is a "substantial user" or a "related person" within the meaning of Section 147(a) of the Internal Revenue Code of 1986). Any determination under 11 clause (ii) above will not be considered final for this purpose until the earliest of the conclusion of any appellate review, the denial of appellate review or the expiration of the period for seeking appellate review. Redemption under this paragraph shall be in whole unless not later than forty-five (45) days prior to the redemption date the Company delivers to the Trustee an opinion of Bond Counsel reasonably satisfactory to the Trustee to the effect that a redemption of less than all of the Bonds will preserve the tax-exempt status of interest on the remaining Bonds outstanding subsequent to such redemption. Any such redemption shall be made on the 60th day after the date on which the opinion described in clause (i) is delivered or the determination described in clause (ii) becomes final or on such earlier date as the Company may designate by notice given to the Trustee at least forty-five (45) days prior to such designated date. If such redemption shall occur in accordance with the terms of the Agreement, then such failure by the Company or the Seabrook Transferee to observe such covenant or agreement, or the inaccuracy of any such representation will not, in and of itself, constitute a default thereunder. If the Trustee receives written notice from any Bondowner stating that (i) such Bondowner has been notified in writing by the Internal Revenue Service that it proposes to include the interest on the Bonds in the gross income of such owner for federal income tax purposes, or any other proceeding has been instituted against such owner which may lead to a like determination, and (ii) such owner will afford the Company the opportunity to participate at its own expense in the proceeding, either directly or in the name of such owner, until the conclusion of any appellate review, and the Trustee has examined such written notice and it appears to be accurate on its face, then the Trustee shall promptly give notice thereof to the Company, the Authority, and each Bondowner whose Bonds may be affected. The Trustee shall thereafter keep itself reasonably informed of the progress of any administrative proceedings or litigation relating to such notice. Under the Agreement the Company is required to give the Trustee written notice of such a final determination within forty-five (45) days of such final determination. If less than all of the outstanding Bonds are to be called for redemption, the Bonds or portions thereof to be redeemed will be selected by the Trustee by lot or in any customary manner as determined by the Trustee in units of $5,000, provided that for so long as CEDE & CO., as nominee of the Depository Trust Company ("DTC"), is the REGISTERED OWNER and the Book-Entry Only System (as defined in the Agreement) is in effect, the particular Bonds or portions thereof to be redeemed shall be selected by DTC, in such manner as DTC may determine. Notice of redemption of this bond will be given by first class mail, postage prepaid, not more than forty-five (45) nor less than thirty (30) days prior to the redemption date to the REGISTERED OWNER at its registered address. Failure to mail notice to the owner of any other Bond or any defect in the notice to such other owner shall not affect the redemption of this bond. If the denomination of this bond exceeds five thousand dollars ($5,000), portions of the principal sum in the amount of five thousand dollars ($5,000) or any multiple thereof may be redeemed. If less than all of the principal amount is to be redeemed, upon surrender of this bond 12 to the Trustee, there will be issued to the REGISTERED OWNER, without charge, a new bond or bonds, at the option of the owner, for the unredeemed principal amount. Notice of redemption having been duly mailed, this bond, or the portion called for redemption, will become due and payable on the redemption date at the applicable redemption price and, moneys for the redemption having been deposited with the Trustee, from and after the date fixed for redemption interest on this bond (or such portion) will no longer accrue. This bond is transferable by the REGISTERED OWNER, in person or by its attorney duly authorized in writing, at the corporate trust office of the Trustee upon surrender of this bond to the Trustee for cancellation. Upon transfer, a new bond or bonds of the same aggregate principal amount will be issued to the transferee at the same office. This bond may also be exchanged at the corporate trust office of the Trustee for a new bond or bonds in authorized denominations of the same aggregate principal amount. Exchanges and transfers will be without expense to the owner except for applicable taxes or other governmental charges, if any. The Trustee will not be required to make an exchange or transfer of this bond during the fifteen (15) days preceding any date fixed for selection for redemption if this bond (or any part thereof) is eligible to be selected or has been selected for such redemption. The Bonds are issuable only in fully registered form in the denomination of five thousand dollars ($5,000) or any multiple thereof. The Authority, the Trustee and the Company may treat the REGISTERED OWNER as the absolute owner of this bond for all purposes, notwithstanding any notice to the contrary. No director, officer, employee or agent of the Authority nor any person executing this bond (by facsimile signature or otherwise) shall be personally liable, either jointly or severally, hereon or be subject to any personal liability or accountability by reason of the issuance hereof. This bond shall not be valid until the Certificate of Authentication has been signed by the Trustee. BUSINESS FINANCE AUTHORITY OF THE STATE OF NEW HAMPSHIRE By: Chairman (Seal) By: Executive Director 13 Certificate Of Authentication This bond is one of the Bonds described in the Agreement. STATE STREET BANK AND TRUST COMPANY, as Trustee By: ____________________________________ Authorized Signer STATEMENT OF INSURANCE MBIA Insurance Corporation (the "Insurer") has issued a policy containing the following provisions, such policy being on file at the principal corporate trust office of the Trustee (which on the date of this Bond is State Street Bank and Trust Company, Boston, Massachusetts). The Insurer, in consideration of the payment of the premium and subject to the terms of this policy, hereby unconditionally and irrevocably guarantees to any owner, as hereinafter defined, of the following described obligations, the full and complete payment required to be made by or on behalf of the Issuer to State Street Bank and Trust Company, or its successor, as Paying Agent for the Bonds (the "Paying Agent") of an amount equal to (i) the principal of (either at the stated maturity or by any advancement of maturity pursuant to a mandatory sinking fund payment) and interest on, the Obligations (as that term is defined below) as such payments shall become due but shall not be so paid (except that in the event of any acceleration of the due date of such principal by reason of mandatory or optional redemption or acceleration resulting from default or otherwise, other than any advancement of maturity pursuant to a mandatory sinking fund payment, the payments guaranteed hereby shall be made in such amounts and at such times as such payments of principal would have been due had there not been any such acceleration); and (ii) the reimbursement of any such payment which is subsequently recovered from any owner pursuant to a final judgment by a court of competent jurisdiction that such payment constitutes an avoidable preference to such owner within the meaning of any applicable bankruptcy law. The amounts referred to in clauses (i) and (ii) of the preceding sentence shall be referred to herein collectively as the "Insured Amounts." "Obligations" shall mean: $108,985,000 Business Finance Authority of the State of New Hampshire 5.45% Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - 2001 Tax-Exempt Series C) Upon receipt of telephonic notice, such notice subsequently confirmed in writing by registered or certified mail, or upon receipt of written notice by registered or certified mail, by the Insurer from the Paying Agent or any owner of an Obligation the payment of an Insured Amount 14 for which is then due, that such required payment has not been made, the Insurer on the due date of such payment or within one business day after receipt of notice of such nonpayment, whichever is later, will make a deposit of funds, in an account with State Street Bank and Trust Company, N.A., in New York, New York, or its successor, sufficient for the payment of any such Insured Amounts which are then due. Upon presentment and surrender of such Obligations or presentment of such other proof of ownership of the Obligations, together with any appropriate instruments of assignment to evidence the assignment of the Insured Amounts due on the Obligations as are paid by the Insurer, and appropriate instruments to effect the appointment of the Insurer as agent for such owners of the Obligations in any legal proceeding related to payment of Insured Amounts on the Obligations, such instruments being in a form satisfactory to State Street Bank and Trust Company, N.A., State Street Bank and Trust Company, N.A. shall disburse to such owners or the Paying Agent payment of the Insured Amounts due on such Obligations, less any amount held by the Paying Agent for the payment of such Insured Amounts and legally available therefor. This policy does not insure against loss of any prepayment premium which may at any time be payable with respect to any Obligation. As used herein, the term "owner" shall mean the registered owner of any Obligation as indicated in the books maintained by the Paying Agent, the Issuer, or any designee of the Authority for such purpose. The term owner shall not include the Issuer or any party whose agreement with the Issuer constitutes the underlying security for the Obligations. Any service of process on the Insurer may be made to the Insurer at its offices located at 113 King Street, Armonk, New York 10504 and such service of process shall be valid and binding. This policy is non-cancelable for any reason. The premium on this policy is not refundable for any reason including the payment prior to maturity of the Obligations. This policy has been endorsed as follows: It is further understood that this policy shall guarantee to the owner or holder, as defined in the policy, the full and complete payments required to be made by or on behalf of the Issuer if there occurs pursuant to the terms of the Obligations an event which results in the loss of the tax exempt status of the interest on the Obligations, including any principal, interest or premium payments payable thereon, if any, as and when thereby required. This endorsement forms a part of the policy to which it is attached, effective on the inception date of the policy. MBIA INSURANCE CORPORATION 15 Assignment For value received the undersigned sells, assigns and transfers this bond to (Name and Address of Assignee) Social Security or Other Identifying Number of Assignee and irrevocably appoints attorney-in-fact to transfer it on the books kept for registration of the bond, with full power of substitution. NOTE: The signature to this assignment must correspond with the name as written on the face of the bond without alteration or enlargement or other change and must be guaranteed by a Participant in a Recognized Signature Guaranty Medallion Program. Dated: Signature Guaranteed: Participant in a Recognized Signature Guaranty Medallion Program By: Authorized Signature (b) Details of the Bonds. The Bonds shall mature on May 1, 2021 in the principal amount of $108,985,000 and shall bear interest at 5.45% per annum. The Bonds shall be issued in fully registered form and shall be numbered from R-1 upwards in the order of their issuance, or in any other manner determined by the Trustee. Each Bond shall be in the denomination of five thousand dollars ($5,000) or any multiple thereof. The Bonds shall be dated as of December 1, 2001. The interest on the Bonds shall be payable on May 1 and November 1 of each year commencing on May 1, 2002. Interest payments shall be calculated on the basis of a 360-day year consisting of twelve 30-day months. No Bond shall be issued except in compliance with this Section 301. 16 Bonds shall be signed on behalf of the Authority by the manual or facsimile signatures of any two of the Chairman, Vice Chairman, Treasurer, and Executive Director and the corporate seal of the Authority or a facsimile thereof shall be engraved or otherwise reproduced thereon. The Certificate of Authentication of the Trustee shall be manually signed on behalf of the Trustee. No bonds shall be issued under this Agreement other than the Bonds. In case any officer whose signature or facsimile signature shall appear on any Bond shall cease to be such officer before the delivery thereof, such manual or facsimile signature shall nevertheless be valid and sufficient for all purposes as if he or she had remained in office to the date of such delivery, and any Bond may be signed by the persons who at the time of the execution thereof shall be the proper officers to sign such Bond although at the date of such Bond such persons may not have been such officers. (c) Cancellation and Destruction of Bonds. All Bonds paid or redeemed in full, either at or before maturity, shall be delivered to the Trustee when such payment or redemption is made, and such Bonds, and all Bonds surrendered in any exchanges or transfers, shall thereupon be promptly canceled. All Bonds acquired and owned by the Company and delivered to the Trustee for cancellation shall be deemed paid and shall be promptly canceled. Bonds so canceled may at any time be cremated or otherwise destroyed by the Trustee, which shall execute a certificate of cremation or destruction in duplicate by the signature of one of its authorized officers describing the Bonds so cremated or otherwise destroyed, and one executed certificate shall be filed with the Authority and the other executed certificate shall be retained by the Trustee. (d) Replacement Bonds. Replacement Bonds shall be issued pursuant to applicable law as a result of the destruction, loss, wrongful taking or mutilation of the Bonds. The costs of a replacement bond shall be paid or reimbursed by the applicant, who shall indemnify the Authority, the Trustee and the Company in such manner as they may require against all liability and expense in connection therewith. (e) Registration of Bonds in the Book-Entry Only System. (i) Notwithstanding any provision herein to the contrary, the provisions of this Subsection 301(e) and the Representation Letter (as defined below) shall apply with respect to any Bond registered to CEDE & CO. or any other nominee of The Depository Trust Company ("DTC") while the Book-Entry Only System (meaning the system of registration described in paragraph (ii) of this Subsection 301(e)) is in effect. (ii) The Bonds shall be issued in the form of a separate single authenticated fully registered Bond for each stated maturity in substantially the form set forth in Subsection 301(a). Any legend required to be on the Bonds by DTC may be added by the Trustee. On the date of original delivery thereof, the Bonds shall be registered in the registration books of the Trustee in the name of CEDE & CO., as nominee of DTC as agent for the Authority in maintaining the 17 Book-Entry Only System. With respect to Bonds registered in the registration books kept by the Trustee in the name of CEDE & CO., as nominee of DTC, the Authority, the Company and the Trustee shall have no responsibility or obligation to any Participant (which means securities brokers and dealers, banks, trust companies, clearing corporations and various other entities, some of whom or their representatives own DTC) or to any Beneficial Owner (which means, when used with reference to the Book-Entry Only System, the person who is considered the beneficial owner of the Bonds pursuant to the arrangements for book entry determination of ownership applicable to DTC) with respect to the following: (A) the accuracy of the records of DTC, CEDE & CO. or any Participant with respect to any ownership interest in the Bonds, (B) the delivery to or from any Participant, any Beneficial Owner or any other person, other than DTC, of any notice with respect to the Bonds, including any notice of redemption, or (C) the payment to any Participant, any Beneficial Owner or any other person, other than DTC, of any amount with respect to the principal of or premium, if any, or interest on the Bonds. The Trustee shall pay all principal of and premium, if any, and interest on the Bonds only to or upon the order of DTC, and all such payments shall be valid and effective fully to satisfy and discharge the Authority's obligations with respect to the principal of and premium, if any, and interest on such Bonds to the extent of the sum or sums so paid. No person other than DTC shall receive an authenticated Bond evidencing the obligation of the Authority to make payments of principal of and premium, if any, and interest pursuant to this Agreement. Upon delivery by DTC to the Trustee of written notice to the effect that DTC has determined to substitute a new nominee in place of CEDE & CO., the words "CEDE & CO." in this Agreement shall refer to such new nominee of DTC. (iii) Upon receipt by the Trustee of written notice from DTC to the effect that DTC is unable or unwilling to discharge its responsibilities, the Trustee shall issue, transfer and exchange Bond certificates as requested by DTC in appropriate amounts and in authorized denominations, and whenever DTC requests the Authority and the Trustee to do so, the Trustee and the Authority will cooperate with DTC in taking appropriate action after reasonable notice (A) to arrange for a substitute bond depository willing and able upon reasonable and customary terms to maintain custody of the Bonds or, if no such substitute bond depository is available, (B) to make available Bond certificates registered in whatever name or names DTC shall designate. (iv) In the event the Company desires to permit Beneficial Owners to be able to obtain Bond certificates, the Company may so notify DTC, the Authority and the Trustee, whereupon the Trustee shall issue, transfer and exchange Bond certificates as requested by DTC in appropriate amounts and in authorized denominations and DTC will notify the Participants of the availability through DTC of Bond certificates. Following such notice, the Company, the Trustee and the Authority will cooperate with DTC in taking appropriate action after reasonable notice to make available Bonds registered in whatever name or 18 names DTC shall designate. (v) Notwithstanding any other provision of this Agreement to the contrary, so long as any Bond is registered in the name of CEDE & CO., as nominee of DTC, all payments with respect to the principal of and premium, if any, and interest on such Bond and all notices with respect to such Bond shall be made and given, respectively, to DTC as provided in the Letter of Representation (the "Representation Letter"), from the Authority to DTC as in effect from time to time. (vi) Notwithstanding any provision in Section 307 to the contrary, so long as all of the Bonds Outstanding are held in the Book-Entry Only System, if less than all of such Bonds are to be redeemed upon any redemption of Bonds hereunder, the particular Bonds or portions of Bonds to be redeemed shall be selected by DTC in such manner as DTC may determine. (f) Paying Agent. At the direction of the Company, the Authority may appoint one or more paying agents, each of which will execute and deliver to the Trustee an instrument in which such paying agent shall agree with the Trustee that such paying agent shall hold in trust, for the benefit of the Bondowners, all sums held by such paying agent for the payment of the principal of, premium, if any, and interest on the Bonds. (g) Interest on Overdue Principal. Any overdue principal of any Bond shall bear interest after its maturity or acceleration at the interest rate of the Bonds. Section 302. Application of Bond Proceeds. The Authority shall loan the proceeds of the Bonds to the Company by promptly causing (A) the accrued interest, if any, to be deposited in the Bond Fund and (B) $108,985,000 to State Street Bank and Trust Company, as trustee under the Refunding Trust Agreement, to refund the 1991 Series B Bonds on a current basis. The Company represents and warrants that (i) substantially all of the proceeds (within the meaning of the 1954 Code) of the 1983 Bonds and the 1986 Bonds were spent to pay directly or to reimburse the Company for Project Costs; (ii) such Project Costs were incurred by and were chargeable to the capital account of the Company; (iii) such Project Costs are costs of "sewage or solid waste disposal facilities" or "air or water pollution control facilities" within the meaning of Section 103(b)(4)(E) or (F) of the 1954 Code incurred and paid after January 14, 1976; and (iv) such Project Costs were for an "industrial facility" within the meaning of Paragraphs 2, VII (d) and (e) of the Act. The Company shall pay expenses and costs of issuance of the Bonds from its own funds. Section 303. Bond Fund. A Bond Fund is hereby established with the Trustee for the account of the Company, and moneys shall be deposited therein as provided in this Agreement. The Company hereby grants to the Trustee for the benefit of the Bondowners a lien on and security interest in all deposits in the Bond Fund. The moneys in the Bond Fund and any investments held as part of such Fund shall be held in trust and, except as otherwise provided in Sections 304, 604 and 703, shall be applied by the Trustee solely to the payment of principal of, 19 premium, if any, and interest on the Bonds. If at any time the amount in the Bond Fund exceeds the amount necessary to pay or redeem the Bonds in full, and all amounts owing or to be owing under this Agreement to the Authority and the Trustee have been paid or provided for to the reasonable satisfaction of the Trustee and the Authority, then the excess shall be paid to the Company except as otherwise may be required by applicable law. When moneys in the Bond Fund are to be applied to the payment of the Bonds, such moneys shall be transferred by the Trustee to itself for the account of the Authority and shall then be so applied. The Trustee shall pay out of the Bond Fund on each payment date the amount required for the payment of principal of, premium, if any, and interest on the Bonds payable on such date (whether at maturity, upon redemption, by acceleration or otherwise). Section 304. Application of Moneys. If available moneys in the Bond Fund are not sufficient on any day to pay all principal of, premium, if any, and interest on the Outstanding Bonds then due or overdue, such moneys shall, after payment of all amounts owing to the Trustee and the Authority under this Agreement, be applied first to the payment of interest, including interest on overdue principal, in the order in which the same became due (pro rata with respect to interest which became due at the same time) and second to the pro rata payment of principal and premium, if any, without regard to the order in which the same became due, in each case pro rata among Bondowners. For this purpose interest on overdue principal shall be treated as coming due on the first day of each month. Whenever moneys are applied pursuant to this section, such moneys shall be applied by the Trustee at such times, and from time to time, as the Trustee in its discretion shall determine, having due regard to the amount of such moneys available and the likelihood of additional moneys becoming available for such application in the future. Whenever the Trustee shall exercise such discretion it shall fix the date (which shall be the first day of a month unless the Trustee shall deem another date more suitable) upon which such application is to be made, and upon such date interest on the amounts of principal paid on such date shall cease to accrue. The Trustee shall give such notice as it may deem appropriate of the fixing of any such date. When interest or a portion of the principal is to be paid on an overdue Bond, the Trustee may require presentation of the Bond for endorsement of the payment. Section 305. Payments by the Company. (a) Debt Service. The Company shall pay to the Trustee for deposit in the Bond Fund not later than 12:00 noon, New York City time, on the second Business Day preceding each date on which payment of Debt Service shall become due on any interest payment date, at maturity, upon redemption, by acceleration or otherwise, an amount in immediately available funds on such date equal to the payment then coming due less the amount, if any, then in the Bond Fund and available to pay Debt Service. At any time when any principal of the Bonds is overdue, the Company shall also have a continuing obligation to pay to the Trustee for deposit in the Bond Fund an amount equal to interest on the overdue principal, but the payments required under this section shall not otherwise bear interest. The Company may make payments to the Bond Fund earlier than required by this section, but such payments shall not affect the accrual of interest. If any moneys are invested in accordance with this Agreement and a loss results therefrom so that there are insufficient funds to pay principal of, premium, if any, and interest on the Bonds when 20 due, the Company shall supply the deficiency. (b) Additional Payments. (i) The Company shall pay when due the Authority's Service Charge and other expenses as provided in Section 803. (ii) Within thirty (30) days after notice from the Trustee, the Company shall pay to the Trustee the reasonable fees and expenses of the Trustee as set forth in Section 703 and other indemnified or reimbursable amounts. (c) Unclaimed Moneys. Except as may otherwise be required by applicable law, in case any moneys deposited with the Trustee for the payment of the principal of, premium, if any, or interest on any Bond remain unclaimed for three years after such principal, premium, if any, or interest has become due and payable, the Trustee may, and upon receipt of a written request of the Company Representative shall, pay over to the Company the amount so deposited and thereupon the Trustee and the Authority shall be released from any further liability with respect to the payment of such principal, premium or interest, and the owner of such Bond shall be entitled (subject to any applicable statute of limitations) to look only to the Company as an unsecured creditor for the payment thereof. (d) Rebate. The Company shall pay to the United States when due any rebate with respect to the Bonds pursuant to IRC ss.148(f). Section 306. Unconditional Obligation. The obligation of the Company to make payments under this Agreement shall be absolute and unconditional, shall be binding and enforceable in all circumstances whatsoever as provided in the Act and shall not be subject to set-off, recoupment or counterclaim, and shall be a general obligation of the Company to which the full faith and credit of the Company are pledged. The Company shall be obligated to make such payments whether or not the Project Facilities have ceased to exist or be functional to any extent from any cause whatsoever. The Company shall be obligated to make such payments regardless of whether it is in possession or entitled to be in possession of the Project Facilities. Section 307. Redemption of the Bonds. The Bonds shall be subject to redemption prior to maturity under the circumstances, in the manner and subject to the conditions provided in this section and in the form of Bonds. Whenever Bonds are called for redemption, the accrued interest thereon shall become due on the redemption date. Transfers and payments for the purpose of redeeming Bonds under this Agreement shall be made on behalf of the Authority, and the Authority hereby consents to any redemption of Bonds in accordance herewith. Except as otherwise provided in Subsection 301(e), if less than all of the Bonds are to be redeemed, the Bonds to be redeemed shall be selected by the Trustee by lot or in any customary manner as determined by the Trustee. For this purpose each $5,000 portion of a Bond shall be treated as a separate Bond. (a) Optional Redemption. The Outstanding Bonds are subject to redemption prior to 21 maturity on or after May 1, 2012, at the option of the Company, as a whole or in part at any time, at the following prices expressed as percentages of their principal amount, plus accrued interest to the redemption date:
Period During Which Redeemed Redemption Price ---------------------------- ---------------- May 1, 2012 through April 30, 2013 101% May 1, 2013 and thereafter 100
(b) Mandatory Taxability Redemption. The Outstanding Bonds are subject to mandatory redemption at any time at a redemption price of 100% of the principal amount of the Bonds so redeemed plus accrued interest to the date of redemption in the event (i) the Company delivers to the Trustee and the Bond Insurer an opinion of Bond Counsel stating that interest on the Bonds is or will become includable in gross income of the owners thereof for federal income tax purposes, or (ii) it is finally determined by the Internal Revenue Service or a court of competent jurisdiction, as a result of (A) a proceeding in which the Company has participated or been given notice and an opportunity to participate, and (B) either a failure by the Company or the Seabrook Transferee to observe any covenant or agreement undertaken in or pursuant to this Agreement or a Seabrook Transfer, or the inaccuracy of any representation made by the Company or the Seabrook Transferee in or pursuant to this Agreement or a Seabrook Transfer, that interest payable on the Bonds is includable for federal income tax purposes in the gross income of any owner thereof (other than an owner which is a "substantial user" or a "related person" within the meaning of IRC Section 147(a)). Any determination under clause (ii) above will not be considered final for this purpose until the earliest of the conclusion of any appellate review, the denial of appellate review or the expiration of the period for seeking appellate review. Redemption under this Subsection 307(b) shall be in whole unless, not later than forty-five (45) days prior to the redemption date, the Company delivers to the Trustee an opinion of Bond Counsel to the effect that a redemption of less than all of the Bonds will preserve the tax-exempt status of interest on the remaining Bonds outstanding subsequent to such redemption. Any redemption under this Subsection 307(b) shall be made on the 60th day after the date on which the opinion described in clause (i) is delivered or the determination described in clause (ii) becomes final or on such earlier date as the Company may designate by notice given to the Trustee at least forty-five (45) days prior to such designated date. If such redemption shall occur in accordance with the terms of this Agreement, then such failure by the Company or the Seabrook Transferee to observe such covenant or agreement, or the inaccuracy of any such representations will not, in and of itself, constitute a Default hereunder. If the Trustee receives written notice from any Bondowner stating that (I) such Bondowner has been notified in writing by the Internal Revenue Service that it proposes to include the interest on the Bonds in the gross income of such owner for federal income tax purposes, or any other proceeding has been instituted against such owner which may lead to a like determination, and (II) such owner will afford the Company the opportunity to participate at its own expense in the proceeding, either directly or in the name of such owner, until the conclusion of any appellate review, and the Trustee has examined such written notice and it 22 appears to be accurate on its face, then the Trustee shall promptly give notice thereof to the Company, the Authority, and each Bondowner whose Bonds may be affected. The Trustee shall thereafter keep itself reasonably informed of the progress of any administrative proceedings or litigation relating to such notice. (c) Notice to the Trustee. The Company shall exercise its option to have Bonds redeemed under Subsection 307(a) by giving written notice to the Trustee at least forty-five (45) days before the redemption date. The Company shall keep the Trustee informed of the progress of any proceeding referred to in Subclause 307(b)(ii)(A) and shall give written notice to the Trustee within forty-five (45) days after it has actual knowledge of a final determination as described in Clause 307(b)(ii). (d) Payment of Redemption Price and Accrued Interest. Whenever Bonds are called for redemption, the accrued interest thereon shall become due on the redemption date and shall be paid from the Bond Fund to the extent available therein. To the extent not otherwise provided, the Company shall deposit with the Trustee on the second Business Day preceding the redemption date a sufficient sum to pay the redemption price and accrued interest. (e) Notice of Redemption. When Bonds are to be redeemed, the Trustee shall give notice to Bondowners in the name of the Authority as provided in the form of Bond and this Subsection 307(e), which notice shall identify the Bonds or portions thereof to be redeemed and state the date fixed for redemption and the place or places of payment of the redemption price. The notice shall further state that on such date there shall become due and payable upon each Bond or portion thereof to be redeemed the redemption price thereof, together with interest accrued to the redemption date, that money available therefor having been deposited with the Trustee, from and after such date, interest thereon shall cease to accrue and that the Bonds or portions thereof called for redemption shall cease to be entitled to any benefit under this Agreement except the right to receive payment of the redemption price. Failure to mail notice to a particular Bondowner, or any defect in the notice to such Bondowner, shall not affect the redemption of any other Bond. 23 Section 308. Investments. (a) Pending their use under this Agreement, moneys in the Bond Fund may be invested or reinvested by the Trustee at the written direction of the Company Representative (upon which the Trustee may conclusively rely) in Permitted Investments, as defined below, with maturities at or before the time when such moneys are required to be available and shall be so invested upon and pursuant to written direction of the Company if no Default known to the Trustee then exists under this Agreement; provided that the Company shall not request, authorize or permit any investment which would cause any of the Bonds to be classified as "arbitrage bonds" as defined in IRC ss.148(a). Any investments and proceeds thereof shall be held by the Trustee as part of the Bond Fund and shall be sold or redeemed at the direction of the Company to the extent necessary to make payments or transfers or anticipated payments or transfers from such Fund. (b) Any interest or dividends realized from an investment and any profit realized upon the sale or disposition thereof shall be credited to the Bond Fund and any loss shall be charged thereto. (c) (1) The term "Permitted Investments" means (A) Direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury, and CATS and TIGRS) or obligations the principal of and interest on which are unconditionally guaranteed by the United States of America; (B) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following federal agencies and provided such obligations are backed by the full faith and credit of the United States of America (stripped securities are only permitted if they have been stripped by the agency itself): (i) U.S. Export-Import Bank (Eximbank) - Direct obligations or fully guaranteed certificates of beneficial ownership; (ii) Farmers Home Administration (FmHA) - Certificates of beneficial ownership; (iii) Federal Financing Bank (iv) Federal Housing Administration Debentures (FHA) (v) General Services Administration - Participation certificates (vi) Government National Mortgage Association (GNMA or "Ginnie Mae") - GNMA - guaranteed mortgage-backed bonds and GNMA - guaranteed pass-through obligations (vii) U.S. Maritime Administration - Guaranteed Title XI financing 24 (viii) U.S. Department of Housing and Urban Development (HUD) - Project Notes, Local Authority Bonds, New Communities Debentures - U.S. government guaranteed debentures, U.S. Public Housing Notes and Bonds - U.S. government guaranteed public housing notes and bonds; (C) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following non-full faith and credit U.S. government agencies (stripped securities are only permitted if they have been stripped by the agency itself): (i) Federal Home Loan Bank System - Senior debt obligations (ix) Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac") - Participation Certificates and Senior debt obligations (x) Federal National Mortgage Association (FNMA or "Fannie Mae") - Mortgage-backed securities and senior debt obligations (xi) Student Loan Marketing Association (SLMA or "Sallie Mae") - Senior debt obligations (xii) Resolution Funding Corp. (REFCORP) obligations, and (xiii) Farm Credit System - Consolidated systemwide bonds and notes; (D) Money market funds registered under the Federal Investment Company Act of 1940, whose shares are registered under the Federal Securities Act of 1933, and having a rating by S&P of AAAm-G; AAAm; or Aam; (E) Certificates of deposit secured at all times by collateral described in (A) and/or (B) above. Such certificates must be issued by commercial banks, savings and loan associations or mutual savings banks. The collateral must be held by a third party and the bondholders must have a perfected first security interest in the collateral; (F) Certificates of deposit, savings accounts, deposit accounts or money market deposits which are fully insured by FDIC, including BIF and SAIF; (G) Investment Agreements, including GIC's, acceptable to the Bond Insurer; (H) Commercial paper rated, at the time of purchase, "Prime - 1" by Moody's and "A-1" or better by S&P; (I) Bonds or notes issued by any state or municipality which are rated by Moody's and S&P in one of the two highest rating categories assigned by such agencies; (J) Federal funds or bankers acceptances with a maximum term of one year of any bank which has an unsecured, uninsured and unguaranteed obligation rating of "Prime - 1" or "A3" or better by Moody's and "A-1" or "A" or better by S&P; and (K) Repurchase agreements acceptable to the Bond Insurer. (2) Notwithstanding the immediately preceding paragraph Permitted Investments shall not include the following: (i) obligations the principal of and interest on which are unconditionally guaranteed by the United States of America, certificates of 25 deposit and bankers' acceptances, in each case with yields lower than the yield available on comparable obligations of the United States Treasury; or (xiv) any demand deposit or similar account with a bank, trust company or broker, unless the account is used for holding funds for a short period of time until such funds are reinvested or spent. Any of the requirements of this paragraph (2) shall not apply to moneys as to which the Trustee and the Authority shall have received an opinion of nationally recognized bond counsel to the effect that such requirements are not necessary to preserve the exclusion of interest on Bonds from the gross income of the owner thereof for federal income tax purposes. Any such Permitted Investments obtained from or through or issued by the Trustee in its commercial banking capacity, or from or by any of its affiliates, shall be permitted (provided that such investment otherwise qualifies in accordance with the definition of "Permitted Investments"). Section 309. Tax Status of Bonds. The Company will perform its obligations and agreements contained in the Federal Tax Statement as if they were set forth herein. All representations of the Company in the Federal Tax Statement shall be treated as if they were set forth herein. Any covenants, agreements or representations made by the Company or any transferee of the Project Facilities (or any successor to such a transferee) in connection with such a transfer shall be performed and treated as if set forth herein. The Authority will cooperate with the Bondowners and the Company to the extent deemed necessary or permitted by law in the opinion of bond counsel to the Authority in order to preserve the exclusion of interest on the Bonds from the gross income of the owners thereof for federal income tax purposes. Section 310. Payment Procedure Pursuant to Bond Insurance Policy. In the event that, on the second Business Day, and again on the Business Day, prior to the payment date on the Bonds, the Trustee has not received sufficient moneys to pay all principal of and interest on the Bonds due on the second following or following, as the case may be, Business Day, the Trustee shall immediately notify the Bond Insurer or its designee on the same Business Day by telephone, facsimile or telegraph, confirmed in writing by registered or certified mail, of the amount of the deficiency. (a) If the deficiency is made up in whole or in part prior to or on the payment date, the Trustee shall so notify the Bond Insurer or its designee. (b) In addition, if the Trustee has actual notice that any Bondowner has been required to disgorge payments of principal or interest on the Bond to a trustee in bankruptcy or creditors or others pursuant to a final judgment by a court of competent jurisdiction that such payment constitutes an avoidable preference to such Bondowner within the meaning of any applicable bankruptcy laws, then the Trustee shall notify the Bond Insurer or its designee of such fact by telephone, facsimile or telegraphic notice, confirmed in writing by registered or certified mail. (c) The Trustee is hereby irrevocably designated, appointed, directed and authorized 26 to act as attorney-in-fact for Bondowners as follows: (i) If and to the extent there is a deficiency in amounts required to pay interest on the Bonds, the Trustee shall (a) execute and deliver to State Street Bank and Trust Company, N.A., or its successors under the Bond Insurance Policy (the "Insurance Paying Agent"), in form reasonably satisfactory to the Insurance Paying Agent, an instrument appointing the Bond Insurer as agent for such Bondowners in any legal proceeding related to the payment of such interest and an assignment to the Bond Insurer of the claims for interest to which such deficiency relates and which are paid by the Bond Insurer, (b) receive as designee of the respective Bondowners (and not as Trustee) in accordance with the tenor of the Bond Insurance Policy payment from the Insurance Paying Agent with respect to the claims for interest so assigned, and (c) disburse the same to such respective Bondowners ; and (ii) If and to the extent of a deficiency in amounts required to pay principal of the Bonds, the Trustee shall (a) execute and deliver to the Insurance Paying Agent in form reasonably satisfactory to the Insurance Paying Agent an instrument appointing the Bond Insurer as agent for such Bondowners in any legal proceeding relating to the payment of such principal and an assignment to the Bond Insurer of any of the Bonds surrendered to the Insurance Paying Agent of so much of the principal amount thereof as has not previously been paid or for which moneys are not held by the Trustee and available for such payment (but such assignment shall be delivered only if payment from the Insurance Paying Agent is received), (b) receive as designee of the respective Bondowners (and not as Trustee) in accordance with the tenor of the Bond Insurance Policy payment therefor from the Insurance Paying Agent, and (c) disburse the same to such Bondowners. (d) Payments with respect to claims for interest on and principal of Bonds disbursed by the Trustee from proceeds of the Bond Insurance Policy shall not be considered to discharge the obligation of the Authority with respect to such Bonds, and the Bond Insurer shall become the owner of such unpaid Bonds and claims for the interest in accordance with the tenor of the assignment made to it under the provisions of this section or otherwise. (e) Irrespective of whether any such assignment is executed and delivered, the Authority and the Trustee hereby agree for the benefit of the Bond Insurer that: (i) They recognize that to the extent the Bond Insurer makes payments, directly or indirectly (as by paying through the Trustee), on account of principal of or interest on the Bonds, the Bond Insurer will be subrogated to the rights of such Owners to receive the amount of such principal and interest from the Authority, with interest thereon as provided and solely from the sources stated in this Agreement and the Bonds; and (ii) They will accordingly pay to the Bond Insurer the amount of such principal 27 and interest (including principal and interest recovered under subparagraph (ii) of the first paragraph of the Bond Insurance Policy, which principal and interest shall be deemed past due and not to have been paid), with interest thereon as provided in this Agreement and the Bonds, but only from the sources and in the manner provided herein for the payment of principal of and interest on the Bonds to Bondowners, and will otherwise treat the Bond Insurer as the owner of such rights to the amount of such principal and interest. (f) Copies of any amendments made to the documents executed in connection with the issuance of the Bonds which are consented to by the Bond Insurer shall be sent to S&P. (g) The Bond Insurer shall receive notice of the resignation or removal of the Trustee and the appointment of a successor thereto. (h) The Bond Insurer shall receive copies of all notices required to be delivered to Bondowners and, on an annual basis, the Company shall provide to the Bond Insurer copies of the Company's audited financial statements and annual budget. (i) Any notice that is required to be given to an owner of the Bonds or to the Trustee or by any party pursuant to this Agreement shall also be provided to the Bond Insurer. All notices required to be given to the Bond Insurer under this Agreement shall be in writing and shall be sent by registered or certified mail addressed to MBIA Insurance Corporation, 113 King Street, Armonk, NY 10504, Attention: Surveillance. Section 311. The Bond Insurer. Except as provided in Subsection 608(b), anything in this Agreement to the contrary notwithstanding, the Bond Insurer shall be deemed to be the owner of the Bonds for purposes of giving consents (including consent to amendments to this Agreement other than those requiring unanimous consent of the affected Bondowners), notices, directions and waivers to the Company, the Authority and the Trustee under this Agreement. (j) Except as provided in Subsection 608(b), the Bond Insurer, acting alone, shall have the right to direct all remedies pursuant to Section 602(b) in an Event of Default, subject to the terms of the Agreement. 28 ARTICLE IV. THE PROJECT Section 401. Company not to Impair Tax Status; Use of Project Facilities. Notwithstanding any provision herein to the contrary, the Company did not and will not use any of the proceeds of the 1983 Bonds, the 1986 Bonds, the 1991 Series B Bonds or the Loan (or the income earned through the investment thereof, if any) and did not take or omit any action or permit any action to be taken or omitted with the result that interest on the Bonds is included in the gross income of the owners thereof for federal income tax purposes. The use of the Project Facilities (or facilities replacing the same) is in furtherance of the purpose of air or water pollution control or sewage or solid waste disposal and in compliance with the Act. Section 402. Qualification of Project Facilities. Notwithstanding any provision herein to the contrary, the Company did not permit the Project Facilities to fail to qualify as (a) "industrial facilities" under the Act, and (b) a facility described in Section 1312(a) of the Tax Reform Act of 1986, or (c) "sewage or solid waste disposal facilities" or "air or water pollution control facilities" within the meaning of Section 103(b)(4)(E) or (F) of the 1954 Code. No funds of the Authority, other than the proceeds of the Bonds, shall be available to pay Project Costs. The Company acknowledges that it is not relying on any representation of any kind by the Authority or the Trustee concerning the nature or condition of the Project Facilities. Neither the Authority nor the Trustee shall be liable to the Company or any other person for any latent or patent defect in the Project Facilities. Section 403. Reserved . Section 404. Reserved. Section 405. Disposition and Use of Project Facilities. The Company has transferred its interest in the Project Facilities to NAEC. NAEC is expected to transfer the Project Facilities to an unaffiliated party pursuant to an order of the New Hampshire Public Utilities Commission. No Bonds shall be issued under this Agreement until the Authority, the Company, the Trustee and NAEC have executed and delivered a Series C Seabrook Pollution Control Facilities Agreement substantially in the form attached hereto as Exhibit B (such Agreement and each subsequent agreement providing for a Seabrook Transfer, a "Facilities Agreement"). No sale, lease, transfer or other disposition of the Project Facilities or the Station shall relieve the Company of any of its obligations under this Agreement. 29 ARTICLE V. ADDITIONAL COVENANTS OF THE COMPANY Section 501. Existence and Good Standing; Merger; Consolidation; Notice to Trustee. The Company will maintain its corporate existence, qualification to do business and good standing under the laws of the State of New Hampshire and will maintain itself as a foreign corporation duly qualified to do business and in good standing, where applicable, in each jurisdiction in which the failure to so qualify would have a material adverse effect upon its business or properties. The Company shall not merge or consolidate with or sell all or substantially all of its assets to another entity, except that the Company may so merge or consolidate with or sell all or substantially all of its assets to another corporation if (i) the surviving or transferee corporation is qualified to do business in New Hampshire, (ii) the surviving or transferee corporation (if not the Company) has assumed in writing all of the Company's obligations hereunder and under the Series K First Mortgage Bonds, and (iii) upon such assumption there will not be a Default hereunder or under the First Mortgage Indenture (disregarding any required passage of time or giving of notice thereunder). The Company shall not change its name or reorganize or change its legal structure, or merge or consolidate with or sell all or substantially all its assets to another entity, without at least thirty (30) days prior written notice to the Trustee (unless the Trustee agrees to a shorter period). Section 502. Indemnification by the Company. The Company, regardless of any agreement to maintain insurance, shall and does hereby indemnify the Authority and the Trustee against (a) any and all claims by any person related to the participation of the Authority or the Trustee in the transactions contemplated by this Agreement, including without limitation claims arising out of any condition of the Project Facilities or Station or the construction, use, occupancy or management thereof; any accident, injury or damage to any person occurring in or about the Station; any breach by the Company of its obligations under this Agreement; any act or omission of the Company or any of its agents, contractors, servants, employees or licensees; or the offering, issuance, sale or any resale of the Bonds to the extent permitted by law, and (b) all costs, counsel fees, expenses or liabilities reasonably incurred in connection with any such claim or any action or proceeding brought thereon. In case any action or proceeding is brought against the Authority or the Trustee by reason of any such claim, the Company will defend the same at its expense upon notice from the Authority or the Trustee, and the Authority or the Trustee, as the case may be, will cooperate with the Company, at the expense of the Company, in connection therewith. Section 503. Continuing Disclosure. The Company and the Trustee hereby covenant and agree that each will comply with and carry out all of the provisions of the Continuing Disclosure Agreement applicable to it and this Section 503 of this Agreement. The Authority shall have no liability to the owners of the Bonds or any other person with respect to such disclosure matters. Notwithstanding any other provision of this Agreement, failure of the Company or the Trustee to comply with the Continuing Disclosure Agreement shall not be considered an Event of Default; however, the Trustee may (and, at the request of the owners of at least 25% aggregate principal amount of Outstanding Bonds, shall) or any owner (including a beneficial owner) of Bonds may seek specific performance of the Company's or the Trustee's obligations to comply with the Continuing Disclosure Agreement or this Section 503 and not for 30 money damages in any amount. ARTICLE VI. DEFAULT AND REMEDIES Section 601. Default. (a) Events of Default; Default. "Event of Default" in this Agreement means any one of the events set forth below and "Default" means any Event of Default without regard to any lapse of time or notice. (i) Debt Service on Bonds. Any payment of interest, principal or premium on the Bonds shall not be paid when the same becomes due and payable. (ii) Other Obligations. The Company shall fail to observe or perform any of its other covenants or agreements contained herein, or the Seabrook Transferee shall fail to observe or perform any of its covenants or agreements related to the Project Facilities contained in the Facilities Agreement, and such failure shall continue for a period of sixty (60) days after written notice given to the Company by the Trustee, the Bond Insurer or the Bondowners of at least 25% in principal amount of the Bonds Outstanding; provided, however, that if such Default cannot be cured by the Company or the Seabrook Transferee within such sixty-day period, it shall not constitute an Event of Default if, with the written consent of the Bond Insurer (which shall not be unreasonably withheld), curative action is instituted by the Company or the Seabrook Transferee within such sixty-day period and thereafter is diligently pursued until such Default is cured. (iii) First Mortgage Bond Default. The occurrence of any "event of default" as defined in the First Mortgage Bond Indenture. (iv) Bond Insurance Agreement Default. The Trustee shall have received written notice from the Bond Insurer of the occurrence of any "Event of Default" as defined in the Bond Insurance Agreement. The Company agrees to notify the Authority, the Trustee and the Bond Insurer promptly in writing of the occurrence of any Default or Event of Default of which it has knowledge. Immediately after becoming aware of an Event of Default under (i) above, or within five (5) days or the next Business Day if such fifth day is not a Business Day after becoming aware of a Default or an Event of Default under (ii), (iii), or (iv) above, the Trustee will give notice to the Bondowners and, in the case of an Event of Default under (i), (ii) or (iv) above, to the First Mortgage Bond Trustee. Notwithstanding anything in this section to the contrary, no action or failure to act by the Company or the Seabrook Transferee which results in interest on the Bonds becoming includable in gross income of the owners thereof for federal income tax purposes shall constitute a Default or Event of Default under this Agreement so long as (I) the Company shall have delivered the 31 opinion described in clause (i) of Subsection 307(b) or shall have complied with the second sentence of Subsection 307(c) and (II) the redemption provided by Subsection 307(b) occurs. In such event, no Bondowner shall be entitled to any claim for monetary damages hereunder and the redemption of the Bonds as provided under Subsection 307(b) shall be the exclusive recourse of Bondowners. (b) Waiver. At any time before an acceleration pursuant to Section 602, the Trustee may waive a Default (other than a Default in the payment of principal of, premium, if any, or interest on the Bonds) and its consequences, with the written consent of the Bond Insurer, by written notice to the Company, and in the absence of any inconsistent instructions from Bondowners pursuant to Sections 605 or 901 shall do so, with the written consent of the Bond Insurer, upon written instruction of the owners of at least twenty-five per cent (25%) in principal amount of the Outstanding Bonds. No waiver under this section shall affect the right of the Trustee or the Authority to enforce the payment of any amounts owing to it. Any cure or waiver of any "event of default" under the First Mortgage Bond Indenture and a rescission and annulment of its consequences shall constitute a cure or waiver of the corresponding Event of Default under Paragraph 601(a)(iii) and a rescission and annulment of the consequences thereof, and the Trustee, upon obtaining knowledge thereof, shall give written notice of such cure or waiver, rescission or annulment to the Authority and the Company, and shall give notice thereof by mail to all Bondowners; but no such cure or waiver, rescission and annulment shall extend to or affect any subsequent Event of Default or impair any right or remedy consequent thereon. Section 602. Remedies for Events of Default. If an Event of Default occurs and is continuing: (a) Acceleration. With the written consent of the Bond Insurer, the Trustee may, and upon the written request of the Bondowners of at least 25% in principal amount of the Bonds Outstanding shall, by written notice to the Authority and the Company, declare immediately due and payable the principal amount of the Outstanding Bonds and accrued interest thereon, whereupon the same shall become immediately due and payable without any further action or notice. If at any time after such acceleration and before any judgment or decree for the payment of moneys with respect thereto has been entered all amounts payable hereunder except principal of and interest on the Bonds which are due solely by reason of such acceleration shall have been paid or provided for by deposit with the Trustee and all existing Defaults shall have been cured or waived, then the Bondowners representing a majority in principal amount of the Bonds Outstanding may annul such acceleration and its consequences by written notice to the Authority, the Trustee and the Company. Such annulment shall be binding upon the Authority, the Trustee and all of the Bondowners, but no such annulment shall extend to or affect any subsequent Default or impair any right or remedy consequent thereto. (b) Rights as a Secured Party. The Trustee may, with the written consent of the Bond 32 Insurer and shall at the written direction of the Bond Insurer, exercise all of the rights and remedies of a secured party under the UCC, subject to the terms of this Agreement. Notice sent by registered or certified mail, postage prepaid, or delivered during business hours, to the Company at least seven (7) days before an event under UCC Section 9-611(b) or any successor provision of law shall constitute reasonable notification of such event. Section 603. Court Proceedings. The Trustee and the Bond Insurer may enforce the provisions of this Agreement by appropriate legal proceedings for the specific performance of any covenant, obligation or agreement contained herein whether or not a Default or an Event of Default exists, or for the enforcement of any other appropriate legal or equitable remedy, and may recover damages caused by any breach by the Company of the provisions of this Agreement, including (to the extent this Agreement may lawfully provide) court costs, reasonable attorney's fees and other costs and expenses incurred in enforcing the obligations of the Company hereunder. The Authority may likewise enforce obligations owed to it hereunder which it has not assigned to the Trustee. All rights under this Agreement and the Bonds may be enforced by the Trustee without the possession of any Bonds or the production thereof at the trial or other proceedings relative thereto, and any proceeding instituted by the Trustee shall be brought in its name for the ratable benefit of the Bondowners. Section 604. Revenues after Default. After the occurrence of an Event of Default, any funds pledged as security hereunder and any other moneys received by the Trustee (other than amounts irrevocably set aside to pay particular Bonds), after payment or reimbursement of the reasonable expenses of the Trustee and the Authority in connection therewith shall be applied, first, to any other amounts owing to the Trustee; second, to any other amounts owing to the Authority other than the Authority's Service Charge; third, to amounts due under Section 305(a), which amounts shall be applied to the payment of principal of, premium, if any, and interest on the Bonds in the order specified in Section 304; fourth, to the Authority's Service Charge; and fifth, to other obligations of the Company hereunder in such order as determined by the Trustee. Any amounts remaining after the satisfaction of all obligations of the Company hereunder shall be paid to the Company. Section 605. Rights of Bondowners. If an Event of Default occurs and is continuing, and if the Bondowners representing not less than 25% in principal amount of the Bonds Outstanding shall have requested the Trustee in writing to exercise one or more of the rights and remedies provided hereunder and offered it indemnity as provided in Subsection 702(e), the Trustee shall be required to exercise such one or more of the rights and remedies hereunder as the Trustee shall determine to be in the best interest of the Bondowners and not inconsistent with any directions given in accordance with Section 901. No Bondowner shall have any right to institute an action in law or equity or to pursue any other remedy hereunder with respect to any Bond unless (i) an Event of Default of which the Trustee has been notified has occurred and Bondowners representing not less than 25% in principal amount of the Bonds Outstanding shall have requested the Trustee in writing to exercise its rights and remedies with respect thereto and shall have offered the Trustee reasonable opportunity to do so and indemnity as provided in Subsection 702(e), and (ii) the Trustee shall within a reasonable time thereafter fail to exercise any of such rights or remedies. No Bondowner shall have any right to institute any action or 33 pursue any other remedy if and to the extent that the surrender, impairment, waiver, or loss of the lien of this Agreement would, under applicable law, result. Notwithstanding the foregoing, each Bondowner shall have a right of action to enforce payment of the Bonds at and after the due date thereof at the place, from the sources and in the manner expressed in the Bonds. Section 606. Performance of Company's Obligations. If the Company shall fail to observe or perform any of its agreements or obligations hereunder, the Authority or the Trustee may perform the same in its own name or in the Company's name and each is hereby irrevocably appointed the Company's attorney-in-fact for such purpose. Unless an Event of Default exists, the Authority or the Trustee, as the case may be, shall give at least five (5) days notice to the Company before taking action under this section, except that in case of emergency as reasonably determined by the acting party, it may act on lesser notice or give the notice promptly after rather than before taking the action. The reasonable cost of any such action performed by the Trustee or the Authority shall be paid or reimbursed by the Company within thirty (30) days after the Trustee or the Authority notify the Company of such cost. Section 607. Remedies Cumulative; No Waiver. The rights and remedies under this Agreement shall be cumulative and shall not exclude any other rights and remedies allowed by law, provided there is no duplication of recovery. Neither the failure to insist upon a strict performance of any of the obligations of the Company, nor the failure to exercise any remedy for any violation thereof, shall be taken as a waiver for the future of the right to insist upon strict performance of the obligation or to exercise any remedy for the violation. Section 608. Rights of Bond Insurer. (a) Anything in this Agreement to the contrary notwithstanding, except as provided in subsection (b), upon the occurrence and continuance of an Event of Default, the Bond Insurer shall be entitled to control and direct the enforcement of all rights and remedies granted to the Bondowners or the Trustee for the benefit of the Bondowners under this Agreement, including, without limitation, acceleration of the principal of the Bonds as described in this Agreement and the right to annul any declaration of acceleration, and the Bond Insurer shall also be entitled to approve all waivers of Events of Default with respect to the Bonds. (b) Anything in this Agreement to the contrary notwithstanding, the provisions contained in this Section 608 and all other rights and remedies granted to the Bond Insurer under this Agreement shall be null and void upon the happening and during the continuance of any of the following (a "Bond Insurer Default"): (1) a Bond Insurer Event of Insolvency, except to the extent of payments made by the Bond Insurer under the Bond Insurance Policy which are not voidable preferences; or (2) failure of the Bond Insurer to pay in accordance with the Bond Insurance Policy, except to the extent of prior payments made by the Bond Insurer under the Bond Insurance Policy which are not voidable preferences. 34 ARTICLE VII. THE TRUSTEE Section 701. Corporate Organization, Authorization and Capacity. The Trustee represents and warrants that it is a trust company duly organized and validly existing under the laws of The Commonwealth of Massachusetts and duly licensed in Massachusetts, with the capacity to exercise the powers and duties of the Trustee hereunder, and that by proper corporate action it has duly authorized the execution and delivery of this Agreement. Section 702. Rights and Duties of the Trustee. (a) Moneys to be Held in Trust. All moneys deposited with the Trustee under this Agreement (other than amounts received for its own use) shall be held by the Trustee in trust and applied subject to the provisions of this Agreement, but need not be segregated from other funds except as required herein or by law. (b) Accounts. The Trustee shall keep proper accounts of its transactions hereunder (separate from its other accounts), which shall be open to inspection at reasonable times and upon reasonable advance written request by the Authority, the Company, the Bond Insurer and the Bondowners and their representatives duly authorized in writing. (c) Performance of the Authority's Obligations. If the Authority shall fail to observe or perform any agreement or obligation contained in this Agreement, the Trustee may take whatever legal proceedings may be required to compel full performance by the Authority of its obligations, and in addition, the Trustee may, to whatever extent it deems appropriate for the protection of the Bondowners, itself or the Company, perform any such obligation in the name of the Authority and on its behalf. (d) Responsibility. The Trustee shall be entitled to the advice of counsel (who may be the Trustee's counsel, counsel for the Authority, the Company or any Bondowner) and shall be wholly protected as to any action taken or omitted to be taken in good faith in reliance on such advice. The Trustee may rely conclusively on any notice, certificate or other document furnished to it hereunder and reasonably believed by it to be genuine. The Trustee shall not be liable for any action taken by it in good faith and reasonably believed by it to be within the discretion or powers conferred upon it, in good faith omitted to be taken by it and reasonably believed to be beyond the discretion or powers conferred upon it, taken by it pursuant to any direction or instruction by which it is governed hereunder, or omitted to be taken by it by reason of the lack of direction or instruction required hereby for such action; nor shall it be responsible for the consequences of any error of judgment reasonably made by it. The duties of the Trustee are those expressly set forth in this Agreement, and no additional duties shall be implied. When any payment, consent or other action by it is called for hereby, it may defer such action pending receipt of such evidence, if any, as it may require in support thereof. The Trustee shall in no event be liable for the application or misapplication of funds, or for other acts or defaults by any person, firm, or corporation, except its own directors, officers, and employees. No recourse shall be had by the Company, the Authority or any Bondowner for any claim based on this Agreement or any Bond against any director, officer, employee, or agent of the Trustee alleging personal 35 liability on the part of such person, unless such claim is based upon the bad faith, negligence, fraud or deceit of such person. The Trustee has no responsibility for the validity or sufficiency of this Agreement or the Bonds or any security therefor. (e) Limitations on Actions. The Trustee shall not be required to monitor the financial condition of the Company or the physical condition of the Project Facilities and, unless otherwise expressly provided, shall not have any responsibility with respect to notices, certificates or other documents filed with it hereunder, except to make them available for inspection by the Bondowners. The Trustee shall not be deemed to have knowledge of and shall not be required to take notice of any Default or Event of Default, except for a Default or Event of Default described in Paragraph 601(a)(i) relating to the payment of principal of, premium, if any, and interest on the Bonds, unless the Trustee shall be specifically notified in writing by the Company, the Authority or Bondowners representing not less than 25% in principal amount of the Bonds Outstanding, or in the case of a Default or Event of Default described in Paragraph 601(a)(iii), the Trustee shall be notified in writing by the First Mortgage Bond Trustee. The Trustee shall not be required to take any remedial action (other than the giving of notice) unless indemnity reasonably satisfactory to it is furnished for any expense or liability to be incurred therein, other than liability for failure to meet the standards set forth in this section. The Trustee shall be entitled to reimbursement from the Company for its expenses reasonably incurred or advances reasonably made, which reimbursement shall be due and payable thirty (30) days after notifying the Company of such expenses or advances, in the exercise of its rights or the performance of its obligations hereunder, whether or not it acts without previously obtaining indemnity. A permissive right or power to act shall not be construed as a requirement to act. Upon receipt of written notice, direction, instruction, and indemnity as provided above and, after making such investigation, if any, as it deems appropriate to verify the occurrence of any Default of which it is notified by the Bondowners, the Trustee shall pursue such remedies hereunder (not contrary to such direction) as it deems appropriate for the protection of the Bondowners; and in its actions under this provision, the Trustee shall be required to act for the protection of the Bondowners with the same prudence as would be expected of a prudent person in the conduct of such person's affairs. (f) Financial Obligations. Nothing contained in this Agreement shall in any way obligate the Trustee to pay any debt or meet any financial obligations to any person in relation to the Project Facilities except from moneys received under the provisions of this Agreement (including from the exercise of its rights and remedies hereunder) other than moneys received for its own purposes. (g) Registration Books. The Trustee will keep books for the registration of the Bonds and transfers thereof as provided in this Agreement. The Trustee shall furnish a list of the Bondowners to the Authority, the Bond Insurer or Company at any time upon its request, and to Bondowners representing at least 15% in principal amount of the Outstanding Bonds, at any time upon their request. (h) Ownership of Bonds. The Trustee or any affiliate of the Trustee may be or 36 become the owner of Bonds with the same rights as if it were not Trustee. (i) No Surety Bond. The Trustee shall not be required to furnish any bond or surety. (j) Requests by the Company. Upon any request by the Company to the Trustee to take any action under this Agreement (including but not limited to any proposed amendment pursuant to Section 1001) the Trustee shall be entitled to receive from the Company prior to taking such action, and to rely upon, a certificate of a Company Representative and an opinion of counsel reasonably satisfactory to the Trustee (who may be counsel to the Company), and, if applicable in the reasonable judgment of the Trustee, a certificate of an accountant satisfactory to the Company (who may be an employee of the Company), each to the effect that in the signer's opinion all conditions precedent applicable to such action under this Agreement, if any, have been satisfied (and, in the case of the certificate of the Company Representative, including but not limited to the absence of any Default or Event of Default) and such action is permitted by this Agreement. (k) Trustee as Holder of Series K First Mortgage Bonds. So long as no Default has occurred and is continuing, the Trustee may, but shall have no obligation to, take any action in its capacity as the registered holder of the Series K First Mortgage Bonds (other than the duty to exercise reasonable care in the safekeeping thereof and the giving of notices set forth below), unless and except to the extent the Trustee is directed in writing by the Bondowners as provided in Section 901 of this Agreement. The Trustee shall promptly notify the Bondowners of the receipt of and contents of any notice it receives under the First Mortgage Bond Indenture (other than notices solely of payments being made on the Series K First Mortgage Bonds). Section 703. Fees and Expenses of the Trustee. The Company shall pay to the Trustee reasonable compensation for its services and prepay or reimburse the Trustee for its reasonable expenses and disbursements, including attorney's fees, hereunder. The Company shall indemnify and save the Trustee harmless against any and all (a) claims as set forth in Section 502 above, (b) costs, counsel fees, expenses and liabilities reasonably incurred in connection with such claims, and (c) costs, counsel fees, expenses and liabilities which it may incur in or arising from the administration, performance or exercise of its duties, rights, powers or responsibilities hereunder and which are not due to the bad faith, negligence, fraud or deceit of any director, officer, employee or agent of the Trustee. Any fees, expenses, reimbursements, or other charges which the Trustee may be entitled to receive from the Company hereunder shall be due and payable thirty (30) days after a request for payment has been made by the Trustee, and if not otherwise paid, shall be a first lien upon any funds or other property then or thereafter held hereunder by the Trustee. If any such moneys are so applied, the Company shall be immediately obligated to restore the moneys so applied. Section 704. Resignation or Removal of Trustee. The Trustee may resign on not less than sixty (60) days' notice given in writing to the Authority, the Bondowners, the Bond Insurer and the Company, but such resignation shall not take effect until a successor, approved by the Bond Insurer (which approval shall not be unreasonably withheld), has been appointed and has assumed the duties hereunder. The Trustee will promptly certify to the other parties that it has 37 mailed such notice to all Bondowners and such certificate shall be conclusive evidence that such notice was given in the manner required hereby. The Trustee may be removed by written notice to the parties from the Bondowners representing a majority in principal amount of the Bonds Outstanding (upon not less than thirty (30) days written notice unless such removal is for cause), but no such removal shall take effect until a successor has been appointed and assumed the duties hereunder. A petition in a court of competent jurisdiction for removal of the Trustee and the appointment of a successor may be filed by the Bondowners representing not less than 25% in principal amount of the Bonds Outstanding. Section 705. Successor Trustee. Any corporation or association which succeeds to the corporate trust business of the Trustee as a whole, or substantially as a whole, whether by sale, merger, consolidation or otherwise, shall become vested with all the property, rights and powers of the Trustee hereunder, without any further act or conveyance. In case the Trustee resigns or is removed or becomes incapable of acting, or becomes bankrupt or insolvent, or if a receiver, liquidator or conservator of the Trustee or of its property is appointed, or if a public officer takes charge or control of the Trustee, or of its property or affairs, a successor shall be appointed by written notice from the Company to the Bond Insurer and the Authority. The Company shall notify the Bondowners of the appointment in writing within twenty (20) days from the appointment. The Company will promptly certify to the successor Trustee that it has mailed such notice to all Bondowners and such certificate will be conclusive evidence that such notice was given in the manner required hereby. If no appointment of a successor is made within twenty (20) days after the giving of written notice in accordance with Section 704 or after the occurrence of any other event requiring or authorizing such appointment, the outgoing Trustee or any Bondowner may apply to any court of competent jurisdiction for the appointment of such a successor, and such court may thereupon, after such notice, if any, as such court may deem proper, appoint such successor. Any successor Trustee appointed under this section shall be a trust company or a bank having the powers of a trust company that meets the requirements of the Act and has a capital and surplus of not less than $50,000,000. Any such successor Trustee shall notify the Authority and the Company of its acceptance of the appointment and, upon giving such notice, shall become Trustee, vested with all the property, rights and powers of the Trustee hereunder, without any further act or conveyance. Such successor Trustee shall execute, deliver, record and file such instruments as are required to confirm or perfect its succession hereunder and any predecessor Trustee shall from time to time execute, deliver, record and file such instruments as the incumbent Trustee may reasonably require to confirm or perfect any succession hereunder. 38 ARTICLE VIII. THE AUTHORITY Section 801. Limited Obligation. Under no circumstances shall the Authority be obligated directly or indirectly to pay Project Costs, principal of or premium, if any, and interest on the Bonds, or expenses of operation, maintenance and upkeep of the Project Facilities except from Bond proceeds or from funds received under this Agreement, exclusive of funds received hereunder by the Authority for its own use. This Agreement does not create any debt of the State of New Hampshire with respect to the Project Facilities other than a special obligation of the Authority acting on behalf of the State of New Hampshire pursuant to the Act. Nothing contained herein shall in any way obligate the State of New Hampshire to raise any money by taxation or use other public funds for any purpose in relation to the Project Facilities. Neither the State of New Hampshire nor the Authority shall pay or promise to pay any debt or meet any financial obligation to any person at any time in relation to the Project Facilities except (i) from moneys received or to be received under the provisions hereof or derived from the exercise of the Authority's right hereunder, other than moneys received for its own purposes, or (ii) as may be required by law other than the provisions of the Act. Nothing contained in this Agreement shall be construed to require or authorize the Authority to operate the Project Facilities itself or to conduct any business enterprise in connection therewith. Section 802. Rights and Duties of the Authority. (a) Remedies of the Authority. Notwithstanding any contrary provision in this Agreement, the Authority shall have the right to take any action or make any decision with respect to proceedings for indemnity against the liability of the Authority and for collection or reimbursement from sources other than moneys or property held under this Agreement or subject to the lien hereof. The Authority may enforce its rights under this Agreement which have not been assigned to the Trustee by legal proceedings for the specific performance of any obligation contained herein or for the enforcement of any other appropriate legal or equitable remedy, and may recover damages caused by any breach by the Company of its obligations to the Authority under this Agreement, including court costs, reasonable attorney's fees and other costs and expenses incurred in enforcing such obligations. (b) Limitations on Actions. The Authority shall not be required to monitor the financial condition of the Company or the physical condition of the Project Facilities and, unless otherwise expressly provided, shall not have any responsibility with respect to notices, certificates or other documents filed with it hereunder. The Authority shall not be required to take notice of any breach or default except when given notice thereof by the Trustee. The Authority shall not be responsible for the payment of any rebate to the United States under IRC ss.148(f). The Authority shall not be required to take any action unless indemnity reasonably satisfactory to it is furnished for expenses or liability to be incurred therein (other than the giving of notice). The Authority, upon written request of the Bondowners or the Trustee, and upon receipt of reasonable indemnity for expenses or liability, shall cooperate to the extent reasonably necessary to enable the Trustee to exercise any power granted to the Trustee by this Agreement. The Authority shall be entitled to reimbursement pursuant to Section 803 to the extent that it acts 39 without previously obtaining full indemnity. (c) Responsibility. The Authority shall be entitled to the advice of counsel (who may be counsel for any party or for any Bondowner) and shall be wholly protected as to any action taken or omitted to be taken in good faith in reliance on such advice. The Authority may rely conclusively on any notice, certificate or other document furnished to it under this Agreement and reasonably believed by it to be genuine. The Authority shall not be liable for any action taken by it in good faith and reasonably believed by it to be within the discretion or power conferred upon it, or in good faith omitted to be taken by it and reasonably believed to be beyond such discretion or power, or taken by it pursuant to any direction or instruction by which it is governed under this Agreement or omitted to be taken by it by reason of the lack of direction or instruction required for such action under this Agreement, or be responsible for the consequences of any error of judgment reasonably made by it. When any payment, consent or other action by the Authority is called for by this Agreement, the Authority may defer such action pending such investigation or inquiry or receipt of such evidence, if any, as it may require in support thereof. A permissive right or power to act shall not be construed as a requirement to act, and no delay in the exercise of a right or power shall affect the subsequent exercise thereof. The Authority shall in no event be liable for the application or misapplication of funds, or for other acts or defaults by any person or entity except by its own directors, officers and employees. No recourse shall be had by the Company, the Trustee or any Bondowner for any claim based on this Agreement or the Bonds against any director, officer, employee or agent of the Authority unless such claim is based upon the bad faith, fraud or deceit of such person. No covenant, obligation or agreement of the Authority contained in this Agreement shall be deemed to be a covenant, obligation or agreement of any present or future director, officer, employee or agent of the Authority in his individual capacity, and no person executing a Bond shall be liable personally thereon or be subject to any personal liability or accountability by reason of the issuance thereof. Section 803. Expenses of the Authority. The Company shall pay when due the Authority's Service Charge and shall prepay or reimburse the Authority within thirty (30) days after notice for all expenses (including reasonable attorney's fees) incurred by the Authority in connection with the issuance and carrying of the Bonds and all expenses reasonably incurred or advances reasonably made in the exercise of the Authority's rights or the performance of its obligations hereunder. Any fees, expenses, reimbursements or other charges which the Authority may be entitled to receive from the Company hereunder, if not paid within ten (10) days of when they are due, shall bear a late charge equal to 5% of the amount overdue, and if not paid within sixty (60) days, shall bear interest at 12% per annum. Section 804. Matters to be Considered by Authority. In approving, concurring in or consenting to action or in exercising any discretion or in making any determination under this Agreement, the Authority may consider the interests of the public, which shall include the anticipated effect of any transaction on tax revenues and employment, as well as the interests of the other parties hereto and the Bondowners; provided, however, nothing herein shall be construed as conferring on any person other than the other parties and the Bondowners any right to notice, hearing or participation in the Authority's consideration, and nothing in this section shall be construed as conferring on any of them any right additional to those conferred elsewhere 40 herein. Subject to the foregoing, the Authority will not unreasonably withhold any approval or consent to be given by it hereunder. Section 805. Actions by Authority. Any action which may be taken by the Authority hereunder shall be deemed sufficiently taken if taken on its behalf by its Chairman, its Vice Chairman or its Executive Director or by any other director, officer or agent whom it may designate from time to time. ARTICLE IX. THE BONDOWNERS Section 901. Action by Bondowners. Subject to Subsections 311, 601(b), 602(a) and Section 1001 (as to the waivers and consents granted thereby), Bondowners representing a majority in principal amount of the Bonds Outstanding shall have the right at any time, by written notice to the Trustee and upon offering it indemnity as provided in Subsection 702(e), to direct the Trustee (i) in the granting of any consents, waivers or similar actions pertaining to the Bonds, (ii) in the time, method and place of conducting all proceedings, (iii) in the exercise of any rights or remedies available to the Trustee hereunder, or (iv) in the exercise of any other right or power conferred upon the Trustee for the protection of the Bondowners, provided that such direction shall be in accordance with the provisions of law and this Agreement, and the Trustee may take any other action determined proper by the Trustee which is not inconsistent with such direction. Except with respect to the matters provided below, Bondowners representing a majority in principal amount of the Bonds Outstanding shall have the right, at any time, by written notice to the Trustee and the offering of indemnity as provided in Subsection 702(e), to direct the Trustee, as holder of all of the Series K First Mortgage Bonds, to exercise the rights available to it as holder of such bonds under the First Mortgage Bond Indenture, including, without limitation, as to rendering notice to the First Mortgage Bond Trustee of the occurrence of a default thereunder, the institution of any suit, action or proceeding to enforce payments on the Series K First Mortgage Bonds which were not paid when due or other proceeding in respect of the First Mortgage Bond Indenture which the Trustee, as holder of the Series K First Mortgage Bonds, is entitled to institute, and as to the time, place and method of any such proceeding for any remedy available to the Trustee, as holder of the Series K First Mortgage Bonds, subject however to compliance with the applicable provisions of the First Mortgage Bond Indenture. Where the First Mortgage Bond Trustee is required or permitted to take any action under the First Mortgage Bond Indenture upon the direction, authorization, consent, notice or request of the holders of a specified percentage of principal amount of bonds outstanding thereunder or of outstanding bonds thereunder which would be adversely affected by such action, including with respect to acceleration of the maturity of such bonds under Section 10.1 of the First Mortgage Bond Indenture, the time, method and place of proceedings and waivers of events of default, as provided in Section 10.12 of the First Mortgage Bond Indenture and amendments of the First Mortgage Bond Indenture under Article 15 thereof, each Bondowner shall be deemed the holder of its pro-rata portion of the principal amount of Series K First Mortgage Bonds and shall have the right to direct the Trustee whether or not to render such direction, authorization, consent, notice or request under the First Mortgage Bond Indenture in respect of such Bondowner's 41 pro-rata portion, whereupon the Trustee shall notify the First Mortgage Bond Trustee of the action to be taken in respect of the applicable principal amount of Series K First Mortgage Bonds. Any request, authorization, direction, notice, consent, waiver or other action provided by this Agreement to be given or taken by Bondowners may be contained in and evidenced by one or more writings of substantially the same tenor signed by the Bondowners of the requisite percentage of principal amount of Bonds Outstanding or their attorneys duly appointed in writing. Proof of the execution of any such instrument, or of any instrument appointing any such attorney, shall be sufficient for any purpose of this Agreement (except as otherwise herein expressly provided) if made in the following manner, but the Authority or the Trustee may nevertheless in its discretion require further or other proof in cases where it deems the same desirable: The fact and date of the execution by any Bondowner or his or her attorney of such instrument may be proved by the certificate, which need not be acknowledged or verified, of an officer of a bank or trust company satisfactory to the Authority or to the Trustee or of any notary public or other officer authorized to take acknowledgements of the deeds to be recorded in the state in which he purports to act, that the person signing such request or other instrument acknowledged to him or her the execution thereof, or by an affidavit of a witness of such execution, duly sworn to before such notary public or other officer. The authority of the person or persons executing any such instrument on behalf of a corporate Bondowner may be established without further proof if such instrument is signed by a person purporting to be the president or a vice president of such corporation with a corporate seal affixed and attested by a person purporting to be its clerk or secretary or an assistant clerk or assistant secretary. The ownership of Bonds and the amount, numbers and other identification, and date of holding the same shall be proved by the registry books for the Bonds maintained by the Trustee. Any request, consent or vote of the owner of any Bond shall bind all future owners of such Bond. Bonds owned or held by or for the account of the Authority, the Company, or any related person to the Company within the meaning of Section 147(a) of the IRC shall not be deemed Outstanding Bonds for the purpose of any consent or other action by Bondowners. 42 ARTICLE X. AMENDMENTS AND MISCELLANEOUS Section 1001. Amendments. (a) Without Bondowners' Consent. The parties may from time to time, with the consent of the Bond Insurer but without the consent of any Bondowner, amend this Agreement in order to (i) cure any ambiguity, defect or omission in the Agreement that does not materially adversely affect the interests of the Bondowners, (ii) grant additional rights or security to the Trustee for the benefit of the Bondowners, (iii) add additional Events of Default as shall not be inconsistent with the provisions of this Agreement and which shall not materially adversely affect the interests of the Bondowners, (iv) qualify this Agreement under the Trust Indenture Act of 1939, as amended, or corresponding provisions of federal laws from time to time in effect, or (v) make such other provisions in regard to matters or questions arising under this Agreement as shall not be inconsistent with the provisions of this Agreement and which shall not materially adversely affect the interests of the Bondowners. (b) With Bondowners' Consent. Except as set forth in Subsection 1001(a), the parties may from time to time amend this Agreement with the consent of the Bond Insurer and the owners of more than 50% in aggregate principal amount of the Bonds Outstanding; provided, that no amendment shall be made which adversely affects the rights of some but less than all the Bonds Outstanding without the consent of the owners of more than 50% in aggregate principal amount of the Bonds so affected; and provided further, that no amendment of this Agreement shall be effective to (i) change the principal, premium or interest on any Bonds, (ii) change the interest payment dates, maturity dates or redemption provisions of any Bonds, (iii) reduce the percentage of Bondowners whose consent is required for the amendment of this Agreement or (iv) modify the lien upon or pledge of the payments and other revenues assigned and pledged hereunder, without the consent, in each case, of the owner of each Bond which would be affected by the action proposed to be taken. Any amendment of this Agreement made under this or the preceding Subsection shall be accompanied by an opinion of Bond Counsel reasonably satisfactory to the Trustee to the effect that the amendment is permitted by this Agreement and that it will not affect the exclusion of interest on the Bonds from gross income of the owners thereof for federal income tax purposes. When the Trustee determines that the requisite number of consents have been obtained for an amendment which requires Bondowner consent, it shall, within ninety (90) days, file a certificate to that effect in its records and give notice thereof to the Bondowners. No action or proceeding to invalidate the amendment shall be instituted or maintained unless it is commenced within sixty (60) days after such notice. The validity of the amendment shall not be adversely affected by any failure to give notice or any defect in the notice. A consent to an amendment may be revoked by a notice given by the Bondowner and received by the Trustee prior to the Trustee's certification that the requisite consents have been obtained. Section 1002. Notices. All notices to the Authority, the Trustee, the Bond Insurer, the Company, or the Bondowners unless otherwise specified shall be in writing and shall be deemed sufficiently given if delivered by registered or certified mail, postage prepaid, or delivered during business hours as follows: (i) to the Authority at 14 Dixon Avenue, Suite 101, Concord, New 43 Hampshire 03301, attention of the Executive Director, (ii) to the Trustee at 225 Asylum Street, 23rd Floor, Hartford, Connecticut 06103, attention of Corporate Trust Department, (iii) to the Company at 1000 Elm Street, Manchester, New Hampshire 03105, attention of Assistant Treasurer - Finance, with a copy to Northeast Utilities Service Company, P.O. Box 270, Hartford, Connecticut 06141-0270 (if by U.S. Mail) and 107 Selden Street, Berlin, Connecticut 06037 (if by courier), attention of Assistant Treasurer - Finance, (iv) to the Bond Insurer at 113 King Street, Arrmonk, New York 10504, Attention: IPM-PCF, or, as to all of the foregoing, to such other address as the addressee shall have indicated by prior written notice to the one giving notice. All notices to a Bondowner shall be in writing and shall be deemed sufficiently given if sent by first class mail, postage prepaid, to the Bondowner at the address shown on the registration books for the Bonds maintained by the Trustee. A Bondowner may direct the Trustee to change its address as shown on the registration books by written notice to the Trustee. All notices to Bondowners shall identify the Bonds by name, CUSIP number, date of original issuance, maturity date, and such other descriptive information as may be needed to identify accurately the Bonds. All notices sent to Bondowners by the Trustee shall simultaneously be sent by registered or certified mail, postage prepaid, to all registered securities depositories that are registered owners of the Bonds, provided that the failure to give such notice shall not affect the validity of any notice given to Bondowners. Notice hereunder may be waived prospectively or retroactively by the person entitled to the notice, but no waiver shall affect any notice requirement as to other persons. Section 1003. Agreement Not for the Benefit of Other Parties. This Agreement is not intended for the benefit of and shall not be construed to create rights in parties other than the Authority, the Company, the Trustee, the Bond Insurer, the Bondowners and the respective directors, members, officers, employees and agents of the Authority and the Trustee to the extent specified in Sections 702 and 802. Section 1004. Severability. In the event that any provision of this Agreement shall be held to be invalid in any circumstance, such invalidity shall not affect any other provisions or circumstances. Section 1005. Counterparts. This Agreement may be executed and delivered in any number of counterparts, each of which shall be deemed to be an original; but such counterparts together shall constitute one and the same instrument. Section 1006. Captions. The captions and table of contents of this Agreement are for convenience only and shall not affect the construction hereof. Section 1007. Governing Law. This Agreement shall be governed by the laws of the State of New Hampshire. Section 1008. Payment Date Not a Business Day. If any payment, redemption or maturity 44 date for principal, premium or interest shall be (i) a Sunday or a legal holiday, or (ii) a day on which banking institutions are authorized pursuant to law to close and on which the corporate trust office of the Trustee or the First Mortgage Bond Trustee is not open for business, then the payment thereof may be made on the next succeeding day not a day specified in (i) or (ii) with the same force and effect as if made on the specified payment date and no interest shall accrue for the period after the specified payment date. 45 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed under seal all as of the date first above written. BUSINESS FINANCE AUTHORITY OF THE STATE OF NEW HAMPSHIRE (Seal) By:_____________________________________ Jack Donovan Executive Director PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE (Seal) By:_____________________________________ Name: Randy A. Shoop Title: Assistant Treasurer - Finance STATE STREET BANK AND TRUST COMPANY, as Trustee (Seal) By:_____________________________________ Name: Title: 46 EXHIBIT A THE PROJECT FACILITIES The Project Facilities to be refinanced by the Bonds consist of certain air or water pollution control and sewage or solid waste disposal facilities at the Seabrook Station Plant, Unit No. 1, in which Public Service Company of New Hampshire had, at the time of issue of the 1991 Series B Bonds, a 35.56942 percent ownership interest. The Project Facilities include the following: Waste Water Run-Off System The Waste Water Run-Off System collects and treats yard area drainage to remove pollutants. The System includes catch basins, yard waste water drain pipes, and a site settling pond. Chemical and Oily Waste Treatment System The Chemical and Oily Waste Treatment System collects, stores, processes, treats and disposes of non-radioactive chemical and oily wastes. The wastes result from construction, start-up and operation of the Seabrook Station Plant. The wastes are collected and treated to remove pollutants. The System includes tanks, an acid and caustic handling system, waste lagoons, system flush piping, and oil separator, curbs and drains, pipes, valves, transfer pumps, controls and instrumentation and related support equipment. Sanitary Waste System Sanitary waste is collected, treated and disposed of by the Sanitary Waste System. The System includes sanitary drains, sumps and pumps, a holding tank, a pump station, a sewage treatment plant, piping, transfer pumps and related support equipment. Radioactive Gaseous Waste System The Radioactive Gaseous Waste System collects, processes, stores and treats radioactive gaseous waste produced during normal operations. The System includes the following components: a main gas collection header, a waste gas condenser with associated primary cooling water components, gas chiller compressor units, iodine guard beds, a regeneration subsystem for dryers, waste gas dryers, a waste gas compressor package, ambient carbon delay beds, particulate filters, an after cooler, a hydrogen surge tank, a waste gas radiation monitor, an equipment vent system, a hydrogenated vent header, and associated piping, valves, controls and instrumentation. Exhaust Filtration System The Exhaust Filtration System collects, filters and discharges exhaust containing low level radioactive contamination resulting from normal operations. The System includes exhaust filters, exhaust fans, exhaust ducts, plenums, dampers, piping, flow control valves, and controls and instrumentation. A-1 Liquid Radwaste System The Liquid Radwaste System collects, processes, treats, recycles and disposes of low level radioactive liquid waste resulting from normal operations. The System includes tanks, filters, strainers, pumps, a reboiler, an evaporator, an evaporator distillate condenser, an evaporator distillate accumulator, an evaporator distillate cooler, an evaporator bottoms cooler, a waste demineralizer and filter, equipment drains, chemical drains, a radiation monitor, and associated controls and instrumentation. Boron Recycle System The Boron Recycle System collects, stores, treats, recycles and disposes of reactor coolant letdown during normal operations. This System is required to maintain reactor coolant letdown in accordance with federal pollution control standards as to radioactivity. The System includes the following components: Drain tanks, a degasifier, a preheater, a degasifier regenerative heat exchanger, trim coolers, a degasifier prefilter, cesium removal ion exchangers, recovery filters, waste storage tanks, recovery evaporator packages, recovery test tanks, recovery demineralizers, recovery demineralizer filters, a letdown rehead heat exchanger, a letdown chiller heat exchanger, a letdown moderating heat exchanger, a chiller surge tank, a chiller, thermal regenerative demineralizers, radiation monitors, associated pumps, piping and valves, and controls and instrumentation. Steam Generator Blowdown Treatment System The Steam Generator Blowdown Treatment System collects, processes, stores and treats steam generator blowdown for discharge or recycle during normal operation. This is necessary in compliance with pollution control requirements which limit the discharge of untreated steam generator blowdown. The System includes the following components: Blowdown evaporators, an evaporator distillate condenser, an evaporator condensate accumulator, an evaporator distillate pump, an evaporator condensate cooler, an evaporator bottoms pump, an evaporator bottoms cooler, blowdown demineralizers, acid and caustic systems, blowdown heat exchangers, and associated piping, controls and instrumentation. Solid Radwaste System The Solid Radwaste System collects, stores, packages and prepares solid radioactive waste for disposal. Radioactive solid wastes processed by this System include spent demineralizer resins, expended filter cartridges, evaporator concentrates as well as dry active waste consisting of rags, clothing, paper and other trash. The System includes the following components: A spent resin storage tank, an evaporator bottoms storage tank, associated collection piping, pumps and valves, a dry waste compactor, a filter transfer vehicle, and associated controls and instrumentation. A-2 Waste Processing Building The Waste Processing Building is a reinforced concrete structure which houses equipment used for exempt facilities. The purpose of this building is to house the air and water pollution control facilities and the solid waste disposal facilities. Auxiliary Building The Auxiliary Building is a reinforced concrete structure which houses both pollution control and production related equipment. Pollution control facilities located in the Auxiliary Building include portions of the liquid radwaste and gaseous radwaste systems. The cost of the Auxiliary Building and general support equipment has been allocated to the exempt facilities according to the ratio of space used for qualified equipment to the total space used in the building for all equipment. Spent Nuclear Fuel Facility The Spent Nuclear Fuel Facility is located in a separate building with enclosed fuel handling equipment for production functions and for spent fuel storage. The fuel handling facility includes a Seismic Category 1 structure containing a spent fuel pool with racks, spent fuel cooling and purification systems, a new fuel storage area, a spent fuel cask loading pit, and a cask washdown area. Also included are cranes and equipment supporting the fuel handling operations as well as the transfer canal leading the reactor containment. The cost of the Spent Nuclear Fuel Facility is determined through an allocation of the cost of the overall fuel facility between spent fuel facilities and production facilities. Circulating Water System The Circulating Water System will provide cooling water to the main condensers of Seabrook Station. The Circulating Water System is a once-through system using sea water from the Atlantic Ocean to remove the heat of condensation from the steam cycle and to dispose of that heat in an environmentally acceptable manner. The points of inlet and discharge of the cooling water are offshore, east of Hampton Beach, New Hampshire. The System includes the following structures: Two 19-foot inside diameter tunnels, lined with reinforced concrete, which connect the plant with the offshore inlet and outlet structures; a pumphouse, located at the plant site which encloses traveling screens and pumps for the circulating water and service water systems; and a piping system at the plant site, for the most part underground, interconnecting the tunnels, the pumphouse, and the condensers. The tunnels extend through the underlying rock in an east-west direction at an elevation between 200 and 250 feet below sea level. They end at the plant site with two 19-foot diameter vertical shafts, which reach above grade transforming at the top into two transition boxes open to the atmosphere. At the offshore end, the intake tunnel terminates with three 9-foot inside diameter vertical shafts connecting to three submerged inlet heads. The discharge tunnel A-3 terminates with eleven 5-foot inside diameter vertical shafts, each connecting to a submerged bifurcated diffuser head. Service Water Cooling Tower System The Service Water Cooling Tower System disposes of waste heat from the plant service water system. Waste heat from equipment throughout the plant is collected by the service water cooling system piping. The service water transfers waste heat to the service water cooling tower, which discharges heat to the atmosphere, thereby controlling discharge of waste heat to the natural water resources adjacent to the station. The Service Water Cooling Tower System components include the service water cooling tower, service water piping, pumps and associated electrical service, mechanical equipment, controls and instrumentation. Screen Wash System The Screen Wash System collects, stores and disposes of debris removed from the circulating and service water systems. This debris is solid waste with no market or other value. After removal, the debris is transferred to a landfill for final disposal. The components of the Screen Wash System include the screen wash pumps, trash trough, trash container, piping and valves, associated electrical service, mechanical equipment, controls and instrumentation A-4 EXHIBIT B SERIES C SEABROOK POLLUTION CONTROL FACILITIES AGREEMENT This Series C Seabrook Pollution Control Facilities Agreement (this "Facilities Agreement") is entered into as of December 19, 2001 by the Business Finance Authority of the State of New Hampshire (with its successors, the "Authority"), a body corporate and politic created under New Hampshire Revised Statutes Annotated 162-A:3; Public Service Company of New Hampshire (with its successors, the "Company"), a New Hampshire corporation; North Atlantic Energy Corporation (with its successors, "NAEC"), a New Hampshire corporation; and State Street Bank and Trust Company, a Massachusetts trust company, as Trustee (with its successors, the "Trustee"), under a Series C Loan and Trust Agreement dated as of October 1, 2001 (the "LTA") among the Authority, the Company and the Trustee, which secures the Authority's 5.45% $108,985,000 in aggregate principal amount Pollution Control Revenue Bonds (Public Service Company of New Hampshire Project - 2001 Tax-Exempt Series C) (the "Bonds"). Capitalized terms not otherwise defined herein shall have the meaning given them in the LTA. This Facilities Agreement is entered into pursuant to Section 405 of the LTA in connection with the issuance of the Bonds by the Authority on behalf of the Company and the proposed transfer by NAEC of its interest in the Station (including the Project Facilities) to an unaffiliated party. The purpose of this Facilities Agreement is to ensure the continued exclusion of interest on the Bonds from gross income of the owners thereof for federal income tax purposes and to satisfy certain requirements of the Authority with respect to facilities financed under the Act. This Facilities Agreement shall remain in effect so long as NAEC owns the Project Facilities and until no Bonds remain Outstanding. In consideration of the mutual promises contained in this Facilities Agreement, the rights conferred and the obligations assumed hereby, and other good and valuable consideration, the receipt of which is hereby acknowledged, each of the Company, NAEC, the Authority and the Trustee agree, assign, covenant, grant, pledge, promise, represent and warrant as set forth herein for their own benefit and for the benefit of the Bondowners. Section 1. Representations and Covenants of the Company. The Company represents, warrants, covenants and agrees as follows: (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of New Hampshire; is duly qualified to do business and in good standing in each jurisdiction in which the failure so to qualify would have a material adverse affect on its business or properties; and has full corporate power to enter into this Facilities Agreement. (b) This Facilities Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding obligation of the Company enforceable against the Company as provided herein and in the LTA, subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights and to the exercise of judicial discretion in appropriate cases. B-1 (c) No Default or Event of Default exists under the LTA. (d) The Company has obtained all regulatory approvals necessary to enter into this Facilities Agreement and all such approvals have become final. (e) The Company's execution and delivery of this Facilities Agreement does not violate or constitute a default under the Company's charter or by-laws, any applicable law, any order or decree of any court or governmental authority having jurisdiction over the Company, or any agreement or instrument binding on the Company or its properties. Section 2. Representations and Covenants of NAEC. NAEC represents, warrants, covenants and agrees as follows: (a) NAEC is a corporation duly organized, validly existing and in good standing under the laws of the State of New Hampshire; is duly qualified to do business and in good standing in the State of New Hampshire and in each jurisdiction in which the failure so to qualify would have a material adverse affect on its business or properties; and has full corporate power to enter into this Facilities Agreement. (b) This Facilities Agreement has been duly authorized, executed and delivered by NAEC and constitutes a valid and binding obligation of NAEC enforceable against NAEC as provided herein, subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights and to the exercise of judicial discretion in appropriate cases. (c) NAEC has obtained all regulatory approvals necessary to enter into this Facilities Agreement and all such approvals have become final. (d) NAEC's execution and delivery of this Facilities Agreement does not violate or constitute a default under NAEC's charter or by-laws, any applicable law, any order or decree of any court or governmental authority having jurisdiction over NAEC, or any agreement or instrument binding on NAEC or its properties. (e) NAEC will maintain its corporate existence and its qualification to do business and good standing under the laws of the State of New Hampshire and will maintain itself as a foreign corporation duly qualified to do business and in good standing, where applicable, in each jurisdiction in which the failure to so qualify would have a material adverse effect upon its business or properties. NAEC shall not merge or consolidate with or sell all or substantially all of its assets to another entity, except that the NAEC may so merge or consolidate with or sell all or substantially all of its assets to another corporation if (i) the surviving or transferee corporation is qualified to do business in New Hampshire, and (ii) the surviving or transferee corporation (if not NAEC) has assumed in writing all of NAEC's obligations hereunder. Section 3. Use of the Project. (a) Notwithstanding any provision herein or in the LTA to the contrary, NAEC will not operate the Project Facilities in any manner, and will not take or omit any action or permit any action to be taken or omitted with the result that interest on the B-2 Bonds is included in the gross income of the owners thereof for federal income tax purposes. NAEC's use of the Project Facilities (or facilities replacing the same) shall be in furtherance of the purpose of air or water pollution control or sewage or solid waste disposal and in compliance with the Act. (b) Notwithstanding any provision herein or in the LTA to the contrary, NAEC shall not permit the Project Facilities to fail to qualify as (1) "industrial facilities" under the Act, (2) a facility described in Section 1312(a) of the Tax Reform Act of 1986, or (3) "sewage or solid waste disposal facilities" or "air or water pollution control facilities" within the meaning of Section 103(b)(4)(E) or (F) of the 1954 Code. NAEC acknowledges that it is fully familiar with the physical condition of the Project Facilities and that it is not relying on any representation of any kind by the Authority or the Trustee concerning the nature or condition thereof. Neither the Authority nor the Trustee shall be liable to NAEC or any other person for any latent or patent defect in the Project Facilities. (c) In the maintenance, improvement and operation of the Project Facilities, NAEC will comply in all material respects with all applicable building, subdivision, zoning and land use, environmental protection, sanitary and safety and other laws, rules and regulations, and will not permit any nuisance thereat and will, to the extent of its ownership and control, permit no nuisance to be committed thereat by others while NAEC is, or is entitled to be, in possession thereof. It shall not be a breach of this section if NAEC fails to comply with such laws, rules and regulations during any period in which NAEC shall in good faith be diligently contesting the validity thereof. (d) NAEC shall pay in a timely manner all costs of maintaining and operating the Project Facilities, including without limitation all taxes, excises and other governmental charges lawfully levied thereon or with respect to its interests therein or use thereof to the extent of NAEC's interest therein. It shall not be a breach of this section if NAEC fails to pay any such costs, taxes or charges during any period in which NAEC shall in good faith be contesting the validity or amount thereof and no foreclosure proceedings have been commenced, unless the procedures applicable to such contest require payment thereof and proceedings for their refund or abatement. (e) NAEC shall not sell, lease, transfer or otherwise dispose of the Project Facilities (other than the grant of a mortgage pursuant to a financing transaction) unless (i) it obtains the consent of the Authority, which consent shall not be unreasonably withheld, provided, however, that no such consent shall be required if such transaction has been approved by or consented to by the New Hampshire Public Utilities Commission; (ii) it obtains an opinion of Bond Counsel addressed to and reasonably satisfactory to the Trustee and the Authority that such sale, lease, transfer or other disposition will not affect the exclusion of the interest on the Bonds from the gross income of the owners thereof for federal income tax purposes; and (iii) the sale, lease, transfer or other disposition is made pursuant to a written agreement executed and delivered by NAEC and the transferee, under which agreement the transferee agrees to be bound by covenants substantially similar in all material respects to the covenants set forth in Attachment 1 hereto. NAEC shall not make any material change in the purposes for which the Project Facilities B-3 are used without the consent of the Authority, which consent shall not be unreasonably withheld. NAEC at its own expense may alter, remodel or improve the Project Facilities and construct other facilities at the site of the Project Facilities, provided such action shall not result in any substantial change in the Project Facilities or the character of the activities conducted by NAEC at the Project Facilities site without the consent of the Authority, which consent shall not be unreasonably withheld. (f) The Authority and the Trustee and their respective duly authorized agents shall have the right at all reasonable times and upon the furnishing of reasonable notice under the circumstances to examine the books and records of NAEC relating to the Project Facilities. (g) The undertakings of NAEC contained in Subsections 3(b), (c), (d) and (e) are limited to those consistent with NAEC's undivided percentage interest in the facilities of which the Project Facilities are a part. Section 4. Indemnification by NAEC. NAEC, regardless of any agreement to maintain insurance, shall and does hereby indemnify the Authority and the Trustee against (a) any and all claims by any person related to the participation of the Authority or the Trustee in the financing of the Project Facilities, including without limitation claims arising out of any condition of the Project Facilities or Station or the construction, use, occupancy or management thereof; any accident, injury or damage to any person occurring in or about the Station; any breach by NAEC of its obligations under this Facilities Agreement; any act or omission of NAEC or any of its agents, contractors, servants, employees or licensees; and (b) all costs, counsel fees, expenses or liabilities reasonably incurred in connection with any such claim or any action or proceeding brought thereon. In case any action or proceeding is brought against the Authority or the Trustee by reason of any such claim, NAEC will defend the same at its expense upon notice from the Authority or the Trustee, and the Authority or the Trustee, as the case may be, will cooperate with NAEC, at the expense of NAEC, in connection therewith. Section 5. Failure to Comply. NAEC shall immediately notify the Authority, the Company and the Trustee of any failure to observe or perform any of its covenants or agreements contained herein, and thereafter shall keep the Authority, the Company and the Trustee informed with respect to any curative action instituted by NAEC in order to cure such failure. Section 6. Amendment. This Facilities Agreement may be amended by the parties hereto, provided, however, that in connection with any amendment the Company or NAEC shall furnish the Authority and the Trustee with an opinion of Bond Counsel stating that the amendment will not impair the exclusion of interest on the Bonds from gross income of the owners thereof for federal income tax purposes. Section 7. Agreement Not for the Benefit of Other Parties. This Facilities Agreement is not intended for the benefit of and shall not be construed to create rights in parties other than the Authority, the Company, NAEC, the Trustee and the Bondowners. Section 8. Severability. In the event that any provision of this Facilities Agreement shall B-4 be held to be invalid in any circumstance, such invalidity shall not affect any other provisions or circumstances. Section 9. Counterparts. This Facilities Agreement may be executed and delivered in any number of counterparts, each of which shall be deemed to be an original; but such counterparts together shall constitute one and the same instrument. Section 10. Governing Law. This Facilities Agreement shall be governed by the laws of the State of New Hampshire. IN WITNESS WHEREOF, the parties have caused this Facilities Agreement to be duly executed as of the date first above written. BUSINESS FINANCE AUTHORITY OF THE STATE OF NEW HAMPSHIRE By:_____________________________________ Jack Donovan Executive Director PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE By:_____________________________________ Randy A. Shoop Assistant Treasurer-Finance NORTH ATLANTIC ENERGY CORPORATION By:_____________________________________ STATE STREET BANK AND TRUST COMPANY, as Trustee By:_____________________________________ B-5 ATTACHMENT 1 TO SERIES C SEABROOK POLLUTION CONTROL FACILITIES AGREEMENT COVENANTS (SUBSTANTIALLY SIMILAR IN ALL MATERIAL RESPECTS) TO BE INCLUDED IN PURCHASE AND SALE AGREEMENT Section 1.1. [Caption] (a) Pollution Control Revenue Bonds. (i) The Buyer acknowledges that: (A) The Pollution Control Facilities have been financed, and refinanced, in whole or in part, with proceeds of the issuance and sale of the Pollution Control Bonds; (B) The Company is the economic obligor and conduit borrower in respect of certain of the Pollution Control Bonds, as specified in Schedule _____; (C) The interest paid or accrued on the Pollution Control Bonds is not included in the gross income of the holders of the Pollution Control Bonds (the "PC Bondholders") for purposes of federal income taxation; (D) Pursuant to the Internal Revenue Code of 1954, as amended, and the Code, the basis for the federal income tax exclusion for interest payable to the PC Bondholders is the use of the Pollution Control Facilities for certain qualified purposes which include (I) the abatement or control of air or atmospheric pollution or contamination, (II) the abatement or control of water pollution or contamination, (III) sewage disposal and/or (IV) the disposal of solid waste; (E) The use of all or part of the Pollution Control Facilities for a purpose other than the qualifying purpose or purposes described in subclause (D) above for which the Pollution Control Bonds that financed or refinanced them were issued may cause (I) the interest payable on all or part of the Pollution Control Bonds to be includable in the federal gross income of the PC Bondholders possibly with retroactive effect, unless remedial action is promptly taken to redeem or defease the Pollution Control Bonds or a portion thereof, and/or (II) the deductibility of the interest payable by the Company on all or part of the Pollution Control Bonds to be disallowed by Section 150(b) of the Code; and (F) Any breach by the Buyer or any subsequent transferee of all or any part of the Pollution Control Facilities of its obligations under this Section 1.1(a) could result in the incurrence by the Company of additional costs and expenses, including, but not limited to, an increase in the rate of interest required to be paid to the PC Bondholders, liability to B-6 some or all of the PC Bondholders for their failure to include interest payable on the Pollution Control Bonds in their respective federal gross income in the event of a final determination of taxability by the IRS, loss of the interest deduction to the Company under Section 150(b) of the Code and transaction costs relating to any refinancing, redemption and/or defeasance of all or part of the Pollution Control Bonds. (ii) In order to avoid any or all of the consequences described in clauses (E) and (F) above, the Buyer agrees that it will not use, or permit the use of, all or part of the Pollution Control Facilities for any purpose except (x) the current use of such Pollution Control Facilities or (y) as sewage or solid waste disposal facilities or air or water pollution control facilities within the meaning of Section 103(b)(4)(E) or (F) of the Internal Revenue Code of 1954, as amended, as contemplated by the tax compliance documents or non-arbitrage certificates for the Pollution Control Bonds that financed or refinanced such Pollution Control Facilities (copies of which with respect to all of the Pollution Control Facilities have been provided to the Buyer by NAEC or the Company), unless the Buyer shall have obtained at its own expense an opinion of nationally recognized bond counsel reasonably acceptable to NAEC or the Company ("Bond Counsel") addressed to and reasonably satisfactory to NAEC and the Company that such proposed change in use of the Pollution Control Facilities or part thereof will not impair (x) the exclusion from gross income of the interest on any Pollution Control Bonds for federal income tax purposes or (y) the deductibility of the interest payable on any Pollution Control Bonds by the Company under Section 150(b) of the Code. (iii) The provisions of Section 1.1(a)(ii) shall not prohibit the Buyer from ceasing to operate, maintain or repair any element or item of the Pollution Control Facilities, suspending the operation of the Pollution Control Facilities on a temporary basis, or terminating the operation of the Pollution Control Facilities on a permanent basis and shutting down the Pollution Control Facilities; provided, however, that the Pollution Control Facilities, in whole or in part, shall not be maintained in such a manner as to prevent their being reactivated and used for a purpose permitted by Section 1.1(a)(ii), nor be retired and/or decommissioned, dismantled or sold as scrap, unless the Buyer has obtained at its own expense an opinion of Bond Counsel addressed to and reasonably satisfactory to NAEC and the Company that this action will not impair either (x) the exclusion from gross income of the interest on any Pollution Control Bonds for federal income tax purposes or (y) the deductibility of the interest payable with respect to any Pollution Control Bonds by the Company under Section 150(b) of the Code. The Buyer shall provide to NAEC and the Company written notice at least thirty (30) days in advance of any permanent shut-down, retirement, abandonment or decommissioning of Seabrook or the Pollution Control Facilities in whole or in part and shall in good faith by written notice to NAEC and the Company describe the affected property so that NAEC and the Company can determine which issue or issues of Pollution Control Bonds financed or refinanced such affected property. (iv) It is expressly understood and agreed that this Section 1.1(a) shall not prohibit the use by the Buyer of tax-exempt bonds to finance or refinance any improvements to the Pollution Control Facilities made on or after the Closing Date or any assets other than the Pollution Control Facilities, provided that no breach by the Buyer of its covenants in this Section 1.1(a) shall result from such improvements. B-7 (v) The Buyer shall indemnify NAEC and the Company for any costs and expenses incurred by NAEC or the Company, respectively, solely as a result of any breach by the Buyer of its covenants in this Section 1.1(a). (vi) NAEC shall, or shall cause the Company to, notify the Buyer in writing of the maturity or redemption of any issue of the Pollution Control Bonds. (vii) If NAEC or the Company to shall have notified the Buyer that it has refinanced any of the Pollution Control Bonds with new bonds, the provisions of this Section 1.1(a), if applicable, shall apply with respect to such new bonds as though they were the Pollution Control Bonds. (viii) The Buyer and any transferee or subsequent transferee will not sell or otherwise transfer all or part of the Pollution Control Facilities unless its transferee covenants in writing for the benefit of NAEC and the Company to comply with and to satisfy the covenants of this Section 1.1(a) (including without limitation the covenants of this clause (viii)) with respect to its ownership and use of such Pollution Control Facilities. (ix) The covenants of this Section 1.1(a) shall survive Closing and shall continue in effect and bind the Buyer and any transferee or subsequent transferee of all or part of the Pollution Control Facilities so long as any of the Pollution Control Bonds remain outstanding. RELATED DEFINITIONS "Agreement" means this [Purchase and Sale Agreement], together with Schedules and Exhibits hereto, as the same may be amended from time to time. "Bond Counsel" has the meaning set forth in Section 1.1(a)(ii). "Buyer" [define as the buyer under the Purchase and Sale Agreement]. "Closing" means the closing of the transactions contemplated by this Agreement. "Closing Date" means the date on which the Closing takes place. "Company" [define to mean the Company, as defined in the Facilities Agreement]. "Code" means the Internal Revenue Code of 1986, as amended. "Exhibit" means an exhibit to this Agreement. "Facilities Agreement" means the Series C Seabrook Pollution Control Facilities Agreement to which this Attachment 1 is attached. "IRS" means the Internal Revenue Service or any successor agency. B-8 "LTA" means the LTA, as defined in the Facilities Agreement. "NAEC" [define to mean NAEC, as defined in the Facilities Agreement]. "PC Bondholders" has the meaning set forth in Section 1.1(a)(i)(C). "Pollution Control Bonds" [define to include the Bonds, as defined in the LTA.]. "Pollution Control Facilities" [define to include the Project Facilities, as defined in the LTA.]. "Schedule" means a schedule to this Agreement. "Seabrook" [define to mean the Station, as defined in the LTA]. B-9 Table of Contents (continued) - -------------------------------------------------------------------------------- | -i- | - -------------------------------------------------------------------------------- EX-10.15.1 10 y58564e.txt Exhibit 10.15.1 STATE OF NEW HAMPSHIRE BEFORE THE PUBLIC UTILITIES COMMISSION AGREEMENT TO SETTLE PSNH RESTRUCTURING August 2, 1999 Revised and Conformed in Compliance with Order No. 23,549 AGREEMENT TO SETTLE PSNH RESTRUCTURING I. INTRODUCTION This Settlement Agreement is entered into this 2nd day of August, 1999, (and conformed as of June 23, 2000, to reflect changes and corrections made during hearings before the New Hampshire Public Utilities Commission in Docket No. DE 99-099, the requirements of Chapter 249 of the Session Laws of 2000 and Order No. 23,443 of the New Hampshire Public Utilities Commission) between the Governor of New Hampshire, the Governor's Office of Energy and Community Services, the Office of the Attorney General, Staff of the New Hampshire Public Utilities Commission, Public Service Company of New Hampshire ("PSNH") and Northeast Utilities ("NU") (collectively, the "Parties"). This Agreement is designed to provide a resolution of all major issues pertaining to PSNH in the electric industry restructuring proceeding of the New Hampshire Public Utilities Commission ("PUC") Docket No. DR 96-150, as well as in the other dockets and pending litigation described in Section XV of this Agreement. Implementation of this Agreement requires the approval of the PUC, as well as passage of securitization legislation by the New Hampshire Legislature. The enactment of Chapter 249 of the Session Laws of 2000 meets this latter requirement. When implemented, this Agreement will result in the restructuring of PSNH in compliance with the competitive market structure objectives of both the Legislature, as set forth in RSA Chapter 374-F, and the PUC, as set forth in Docket No. DR 96-150, as well Page 1 as the legislation relative to electric rate reduction financing contained in Chapter 289 of the Session Laws of 1999 and Chapter 249 of the Session Laws of 2000. The key components of this Agreement include: - An initial 15.3% average rate reduction for PSNH's customers, followed by subsequent decreases through the life of this Agreement. - Substantial burden sharing by PSNH in the form of a $225 million after-tax write-off that will reduce Stranded Costs by approximately $367 million. - Sharing of the risks of Stranded Cost recovery. - Retail choice for all of PSNH's customers. - Resolution of all issues pertaining to the Rate Agreement in a manner that is balanced and equitable. - Resolution of the Fuel and Purchased Power Adjustment Clause ("FPPAC") under-recovery that will exist as of Competition Day, and elimination of FPPAC in the future. - Rate relief that is sustainable over the long-term. - Refinancing that benefits customers through the issuance of low-cost Rate Reduction Bonds in an amount consistent with RSA Chapter 369-B ("securitization"). - Provision for low-income assistance and energy conservation programs for PSNH's customers. - Transition Service that provides stable and predictable prices for all customers during the transition to competition. - Divestiture of PSNH's generating assets and purchased power obligations, including its entitlement to power generated at the Seabrook Nuclear Plant under its contract with North Atlantic Energy Corporation ("NAEC"). This Agreement is designed to be implemented on Competition Day, which is the first day of the month following the month in which the conditions contained in Section XVI are satisfied. Until the earlier of Competition Day or October 1, 2000, PSNH's existing temporary rates for bundled service, the existing FPPAC rate of 0.383 cents/kWh, and the FPPAC BA amount of 6.281 cents/kWh will remain in Page 2 effect, subject only to adjustment for future changes in Nuclear Decommissioning Charges and new levels of public policy expenditures ordered by the PUC after August 2, 1999. If Competition Day has not occurred by October 1, 2000, then effective October 1, 2000 PSNH shall temporarily reduce its current effective total rates (base rates plus FPPAC rates) by 5 percent across the board in the same manner as was used to implement the temporary rate reduction ordered in Docket No. DR 97-059 until either Competition Day or April 1, 2001, whichever occurs earlier. On Competition Day, PSNH's rates will be unbundled and retail customers will have the opportunity to choose an energy supplier. During the first year following Competition Day, this Agreement will result in an average retail rate of 10.985 cents per kWh for a customer taking Transition Service, broken down as follows: Transition Service Energy Charge 4.400 cents Delivery Charge 2.800 Hydro-Quebec Support Payments 0.130 Stranded Cost Recovery Charge 3.400 System Benefits Charge 0.200 Consumption Tax 0.055 cents Total 10.985 cents/kWh
Customers may be able to obtain even lower overall electricity costs by choosing a Competitive Supplier for energy. The Parties recognize and understand that their mutual undertakings, as expressed in this Agreement, reflect their efforts to settle the issues raised in Docket No. DR 96-150, settle all outstanding federal and state proceedings involving PSNH restructuring, and lay to rest various other areas of dispute between the Parties as provided herein. The Parties agree that their understandings regarding securitization will require enactment of legislation by the New Hampshire Legislature, in addition to the approval of the PUC. Chapter 249 of the Session Laws of 2000 meets the requirement for a legislative enactment. The Parties believe the terms of this Agreement reflect a fair resolution of all outstanding disputes that is in the public interest. More specifically, this Agreement is substantially consistent with the restructuring goals set forth in RSA Chapter 374-F and Chapter 289 of the Session Laws of 1999, including, but not limited to, near-term rate relief, retail choice; non-discriminatory open access to the electric system; unbundling of rates; equitable benefits for all customer classes; electricity prices that narrow the rate gap for New Hampshire customers; universal service and energy efficiency commitments; risk sharing by PSNH; a substantial write-off of Stranded Costs; limited Stranded Cost recovery that is appropriate, equitable and balanced; and, issuance of Rate Reduction Bonds that are not an Page 3 obligation of the State, and that will provide equitable and extraordinary benefits to PSNH's customers in the form of significant rate reductions. In compliance with the requirements of RSA 369-A: 1,X(h), PSNH and the New Hampshire Electric Cooperative, Inc. ("NHEC"), have entered into a FERC-approved settlement of all issues. II. DEFINITIONS Acquisition Premium: The Acquisition Premium referred to in paragraph 2(b) of the Rate Agreement. Agreement: This Settlement Agreement signed by the Parties on August 2, 1999, including all appendices, and conformed as of June 23, 2000, to reflect changes and corrections made during hearings before the New Hampshire Public Utilities Commission in Docket No. DE 99-099, the requirements of Chapter 249 of the Session Laws of 2000 and Order No. 23,443 of the New Hampshire Public Utilities Commission. All-In Cost: The cost of the RRBs, including the coupon rate, any discounts or premiums, ongoing fees, the overcollateralization account, SPSE expenses, any letter of credit costs, but excluding servicing fees. California Code: The Code of Conduct adopted by the California Public Utilities Commission, as set out in Appendix I and referred to in New Hampshire PUC Order No 22,875 issued in Docket No. DR 96-150 dated March 20, 1998. Capacity Transfer Agreements: The Capacity Transfer Agreements between PSNH and the NU initial system referred to in paragraph 3 of the Rate Agreement. Capital Subaccount: An account that will belong to the Special Purpose Securitization Entity, and will hold the initial capital contribution to the Special Purpose Securitization Entity and certain related amounts as described in Section XIII(D) of this Agreement. Competition Day: The date upon which all PSNH retail customers will be able to choose a Competitive Supplier of energy. More specifically, Competition Day is the first day of the month following the month in which the conditions contained in Section XVI are satisfied and shall not be later than October 1, 2000, unless the PUC finds due to circumstances beyond its control that further delay is in the public interest. Competitive Supplier: An "Electricity Supplier" as defined in RSA 374-F:2,II, who meets all PUC requirements to sell energy to PSNH's customers. Page 4 Default Service: The source of electric energy for customers who are not eligible for Transition Service and who are not receiving energy from a Competitive Supplier. Default service is designed to provide a temporary safety net for customers and to assure universal access and system integrity as set forth in RSA 374-F:3,V(c). Delivery Charge: The delivery portion of the unbundled retail distribution bill. Demand-Side Management ("DSM"): Programs traditionally designed to reduce or manage customer electricity usage as specified in Section V(E)(2). Distribution: The portion of PSNH's delivery system subject to the regulatory jurisdiction of the PUC. Energy Consumption Tax: The tax specified in RSA 83-E:2. Energy Efficiency Programs: Programs designed to improve the efficiency of, and thus reduce, customer electricity usage as specified in Section V(E)(2). Energy Efficiency Working Group ("EEWG"): A collaborative of interested parties in PUC Docket No. DR 96-150 developing energy efficiency recommendations. Environmental Remediation Expenditures: Costs of remediating the environmental issues at the sites identified in Appendix B. Environmental Reserve ("ER"): A reserve account established by PSNH on its books to provide for environmental remediation expenditures, as provided in Section V(A). Exempt Wholesale Generator: Any entity who qualifies for Exempt Wholesale Generator status under Section 32 of the Public Utility Holding Company Act of 1935. Failed Auction: An asset auction that results in some or all of the assets either not being bid upon at auction, or being bid at prices less than the minimum prices established or approved by the PUC. FERC: The Federal Energy Regulatory Commission. Final Order: An order issued by the PUC pursuant to RSA-363: 17-b on the merits of the Agreement, effective at the expiration of the rehearing period set forth in RSA 541:3, or, if the order is subject to one or more motions for rehearing, effective the date that the PUC acts on the last pending motion for rehearing pursuant to RSA 54 1:5. Page 5 Fuel and Purchased Power Adjustment Clause ("FPPAC"): The Fuel and Purchased Power Adjustment Clause referred to in paragraph 7 of the Rate Agreement. Independent Power Producer ("IPP") costs: The costs to PSNH of purchasing energy and/or capacity from PURPA qualifying facilities or LEEPA facilities. Initial Delivery Charge Period: The first thirty-three months following Competition Day during which delivery rates are set at 2.80 cents per kilowatt-hour, exclusive of Hydro Quebec transmission support payments. Initial Transition Service End Day: The date occurring nine months after Competition Day. LEEPA: The Limited Electrical Energy Producers Act, RSA Chapter 362-A. Legislature: The General Court of the State of New Hampshire. Low-Income Electric Assistance Program: A statewide payment assistance program designed to enable low-income residential customers to manage and afford essential electricity requirements, as provided in Section V(E)(1). Major Storm Cost Reserve: An account to be established by PSNH to fund the costs identified in Section V(A). New Hampshire Code of Conduct: The Code of Conduct to be adopted by the PUC pursuant to Order No. 22,875 issued in Docket No. DR 96-150 dated March 20, 1998, as provided in Section XI of this Agreement. Non-Securitized Stranded Costs: The Stranded Costs for which recovery is allowed under Part 3 of the Stranded Cost Recovery Charge as provided in Section V(B)(3) of this Agreement. Nuclear Decommissioning Charge: The ongoing expenses for nuclear decommissioning for Seabrook, Millstone Unit 3 and Vermont Yankee. Overcollateralization Subaccount: An account that will belong to the Special Purpose Securitization Entity and will hold the Overcollateralization amount on the RRBs as described in Section XIII(D) of this Agreement. Parties: The Governor of New Hampshire, the Governor's Office of Energy and Community Services, the Office of the Attorney General, Staff of the New Hampshire Public Utilities Commission, Public Service Company of New Page 6 Hampshire and Northeast Utilities. Present Value: Unless otherwise specified, the net present value that results from applying the Stipulated Rate of Return. Prudence: The standard of care which qualified utility management would be expected to exercise under the circumstances that existed at the time the decision in question had to be made. In determining whether a decision was prudently made, only those facts known or knowable at the time of the decision can be considered. PSNH: Public Service Company of New Hampshire. PUC: The New Hampshire Public Utilities Commission. Purchased Power Obligation: A commitment created by contract, order or law for PSNH to purchase power from a third party. PURPA: The Public Utility Regulatory Policies Act of 1978. Generally, 16 U.S. Code 2601, et seq. Rate Agreement: The agreement dated November 22, 1989, as amended, executed by and between the Governor and Attorney General of the State of New Hampshire, acting on behalf of the State of New Hampshire, and Northeast Utilities Service Company, acting on behalf of its parent Northeast Utilities. See RSA 362-C:2,I. Rate Reduction Bonds ("RRBs"): Bonds, notes, certificates of participation or beneficial interest, or other evidences of indebtedness or ownership, issued pursuant to an executed indenture or other agreement of a financing entity, in accordance with New Hampshire law, the proceeds of which are used, directly or indirectly, to recover, finance, or refinance Stranded Costs, and which, directly or indirectly, are secured by evidence of ownership interests in, or are payable from, RRB property. Recovery End Date: The risk sharing date established in Section V(C) at which recovery by PSNH of its Non- Securitized Stranded Costs ends, even if all such costs have not been recovered. The Recovery End Date may be different for various customer classes. Reserve Subaccount: An account of the Special Purpose Securitization Entity that will hold any excess collections of RRB Charges beyond the amount needed to make periodic allocations with respect to RRB Costs as described in Section XIII(D) of this Agreement. Retail Choice: The ability of retail electric customers to Page 7 choose a Competitive Supplier on or after Competition Day. RRB Charge: Part 1 of the SCRC, which is dedicated to the payment of the RRBs. RRB Costs: Principal, interest, credit enhancement costs, fees and expenses with respect to RRBs. RRB Property: An irrevocable property right to bill and collect nonbypassable RRB Charges in amounts sufficient to recover the RRB Costs. Seabrook Power Contract: The agreement between PSNH and North Atlantic Energy Corporation referred to in paragraph 2 of the Rate Agreement. Service Territory: The geographic area established by the PUC as the retail electric service territory of PSNH, as such territory is depicted on the "Electric Utilities Franchise Areas" map issued by the PUC, dated July 1, 1993, together with any other geographic area in which PSNH actually provided retail electric service on such date. Sharing Agreement: The agreement referred to in paragraph 4 of the Rate Agreement. Special Purpose Securitization Entity ("SPSE"): Any special purpose trust, limited liability company, or other entity that is authorized in accordance with the terms of a finance order to issue Rate Reduction Bonds, acquire RRB Property, or both. Stipulated Rate of Return: A rate of return calculated assuming a return on equity of 8% after tax, an equity ratio of 40%, and the weighted cost of PSNH's non-securitized long-term debt. The Stipulated Rate of Return will be computed as of two dates. The first calculation will occur on Competition Day, and will take into account the reduction in long-term debt costs occasioned by the issuance of the RRBs. The second calculation will occur as of the date of the closing of the sale of all of PSNH's fossil and hydro assets, and will take into account any additional reduction in long-term debt costs occasioned by the proceeds from the sales of those assets. Stranded Costs: Costs, liabilities, and investments that PSNH would reasonably expect to recover if the existing regulatory structure with retail rates for the bundled provision of electric service continued, but which would likely not be recovered as a result of restructuring of the electric industry that allows retail choice of electricity suppliers unless a specific mechanism for such cost recovery is provided. See RSA 374-F:2,IV. Page 8 Stranded Cost Recovery Charge ("SCRC"): The portion of the unbundled retail delivery service bill that is a non-bypassable charge as provided in RSA Chapter 374-F:3 to recover the portion of PSNH's Stranded Costs that are allowed by this Agreement. The SCRC includes the RRB Charge, nuclear decommissioning and IPP costs, Non-Securitized Stranded Costs, and other costs and expenses allowed by this Agreement. System Benefits Charge: A nonbypassable charge authorized by RSA 374:F:3,VI, which is designed to recover the costs of PUC-approved public benefits related to the provision of electricity, including the Low-Income Electric Assistance Program and Energy Efficiency Programs specified in this Agreement. Tariff: The Electric Delivery Service Tariff pursuant to which PSNH will provide service beginning on Competition Day. In the event of any conflicts between the Tariff and this Agreement, the terms of this Agreement shall control. Transition Service: Electricity supply to be made available for the time periods set forth in RSA 369-B:3,IV,b,1 to all customers who have not chosen a Competitive Supplier, or who in certain circumstances have left such a supplier. Transition Service is designed to afford customers the option of stable and predictable ceiling prices in accordance with RSA 374-F:3,V(b). Transmission: The portion of PSNH's delivery system that is subject to the regulatory jurisdiction of the Federal Energy Regulatory Commission. Triple-A Rating: A determination by a majority of (a) Duff & Phelps Credit Rating Co., Fitch Investors Service, L.P., Moody's Investors Service, and Standard & Poor's Ratings Services, or (b) the ratings agencies in (a) that actually rate the RRBs at issuance, that the RRBs are entitled to their highest rating. True-Up Mechanism: A periodic adjustment to the RRB Charge, which accounts for any over or under-collections of the RRB Charge. III. WRITE-OFF Subsequent to receipt of a Final Order from the PUC approving this Settlement Agreement as submitted by the Parties and upon satisfaction of the conditions contained in Section XVI, PSNH will write off $225 million after-tax (approximately $367 million pre-tax as of January 1, 2000). Such write-off shall take place on or before Competition Page 9 Day. The write-off will be first taken against the Seabrook Deferred Return and the Acquisition Premium in a manner that will maximize benefits for customers. In addition to the write-off described above, PSNH will take an additional pre- tax write-off of $6,200,000 on or before Competition Day resulting from the settlement of issues pertaining to New Hampshire Electric Cooperative, Inc. and will also reduce its Stranded Costs by an additional $10 million upon the transfer of the following market-based wholesale contracts to an affiliate: Braintree Littleton Electric Light & Water Dept. Burlington Electric Dept. Littleton, NH Central Maine Power Mansfield Citizens Lehman Middleton Citizens System Reading Commonwealth Electric Select Energy Danvers Sterling Fitchburg Gas & Electric UNITIL Holyoke Gas & Electric VT. Marble IV. RATE DESIGN The rate design principles to which the Parties have agreed are as described below. All classes of customers are to be charged an equal cents per kilowatt-hour amount for the System Benefits Charge and the Energy Consumption Tax (unless modified by a revision to the legislation). Other than the specific items referenced above, PSNH will recover its costs through customer, demand, meter, and usage (kWh) charges, subject to the constraint that any change to rate design will not result in a shifting of costs between the residential class and all other classes. All rate design changes will be performed on a revenue neutral basis. The average rate reduction for each class will be determined in accordance with PUC Order No. 23,443 and Chapter 249 of the Session Laws of 2000. The average reduction for the limited number of optional rates that are already discounted may be less than the average reduction for the class, or there may be no reduction. If the percent decrease to certain optional rates is lower or if there is no decrease, the decrease to the other rates within the class will be higher in order to ensure that the class receives the overall average percentage decrease as set forth in Appendix A. Because economic development ("ED") and business retention ("BR") rates are already discounted, the average rate reduction for ED and BR customers will be less than the average reduction for the class into which ED and BR customers would ordinarily fall. Page 10 The rate design will not result in a higher bill for any customer, when comparing the customer's bill calculated as of the date of this Agreement to that bill calculated as of Competition Day, assuming that customer receives Transition Service. Having committed in this Agreement to address low-income assistance and energy conservation in a more appropriately targeted fashion, PSNH has eliminated the current "humped" design of the standard residential rate, and it has also redesigned its general service rates (Rates G, GV and LG) to provide for a smooth transition for customers who switch from one rate class to another as a result of load changes. A table incorporating the foregoing Rate Design principles is contained in Appendix A. PSNH is filing a proposed Tariff implementing these rates with its supporting testimony. The other Parties reserve the right to file testimony supporting or opposing PSNH's proposed rate design and Tariff filing. D. INDIVIDUAL RATE COMPONENTS a. Delivery Charge In order to insure that customers will enjoy stable and predictable prices through the transition to competition, PSNH will set the Delivery Charge at an overall average level of 2.80 cents per kilowatt-hour for the first thirty- three months following Competition Day (the "Initial Delivery Charge Period"), exclusive of Hydro Quebec transmission support payments, unless adjusted as provided herein. As discussed in Section IV of this Agreement, ("Rate Design"), the Delivery Charge includes customer, demand, meter and usage (kWh) charges. The average Delivery Charge reflects the amount necessary for that class to receive the rate reduction provided by this Agreement, once all other rate design changes have been incorporated and after taking into account all other charges provided for by this Agreement, including the Stranded Cost Recovery Charge. No later than thirty-two months following Competition Day, PSNH will file with the PUC proposed new delivery rates, including supporting cost and rate information and pro forma adjustments based on the four most recent calendar quarters for which data are available, for effect after the end of the Initial Delivery Charge Period. The new delivery rates shall take into account any revenues received by PSNH for servicing of outstanding RRBs subsequent to the Initial Delivery Charge Period. During the Initial Delivery Charge Period the revenues received from servicing the RRBs will be reserved in a liability account Page 11 on PSNH's books and refunded with a return at the Stipulated Rate of Return when new delivery rates are determined, over such period as may be ordered by the PUC. The new delivery rates will become effective after investigation and hearings. If the new delivery rates are suspended by the PUC, any final rates determined by the PUC will be calculated retrospectively on an aggregate basis beginning as of the end of the Initial Delivery Charge Period, with an appropriate refund or recoupment of costs made prospectively from the effective date of the PUC's order. The 2.800 delivery rates proposed for the Initial Delivery Charge Period (exclusive of Hydro Quebec transmission support payments) shall not be considered a precedent for the establishment of the level of rates subsequent to the Initial Delivery Charge Period. During the Initial Delivery Charge Period, a Major Storm Cost Reserve ("MSCR") shall be established by PSNH, and shall be funded at a rate of $3 million per year. Major storm costs shall be charged to the MSCR during that period. A "major storm" shall be defined as any time that either: (a) 10% or more of PSNH's retail customers lose power and there are more than 200 reported troubles, or (b) there are 300 or more reported troubles. As part of the filing for new delivery rates described above, PSNH will report the difference, if any, between the actual costs charged to the MSCR and the funding of the MSCR. During the Initial Delivery Charge Period, PSNH will defer any major storm costs which exceed the funding of the MSCR, and PSNH will recover or refund (with a return or interest at the Stipulated Rate of Return) during the subsequent twelve months (or such other period ordered by the PUC) any difference between the prudent costs properly charged to the MSCR and the amount of funding of the MSCR. PSNH has established an Environmental Reserve ("ER") on its books of account. The ER is for expenditures associated with the sites specified in Appendix B and is expected to amount to $11.5 million as of January 1, 2000, with the amount to be adjusted as may be necessary to reflect any reasonable and prudent adjustments made to such books of account between the filing date of this Agreement and Competition Day. During the Initial Delivery Charge Period, PSNH will charge its actual environmental remediation expenditures for the specifically identified sites to the ER. Subsequent to the Initial Delivery Charge Period, PSNH will recover or refund (with a return or interest at the Stipulated Rate of Return) any difference over a period not to exceed three years, subject to a prudence finding for the costs charged thereto. Because the average Delivery Charge of 2.80 cents per Page 12 kilowatt-hour does not recover any Environmental Remediation Expenditures, during the Initial Delivery Charge Period PSNH will defer for future recovery environmental expenses for any new site that is identified or for any increase to estimated remediation costs for any existing sites. As part of the filing for new delivery rates, PSNH will propose recovery of any such deferrals. The PUC shall grant recovery of such costs that it determines to be prudent. If the PUC grants recovery, such deferrals shall be amortized as they are recovered through the new Delivery Charge. Any actual Environmental Remediation Expenditures will decrease the ER. During the Initial Delivery Charge Period, the Delivery Charge shall, upon request by PSNH or on a motion by the PUC, be adjusted to fully recover any changes in PSNH's costs that the PUC determines have resulted from the imposition or modification of any tax, program, service, or accounting change resulting from an order by any regulatory agency or by the enactment or revision of any law, or in the case of accounting changes, by the Financial Accounting Standards Board ("FASB") or the Emerging Issues Task Force ("EITF"). Any such adjustment of the Delivery Charge during the first 24 months following Competition Day shall be applied as an equal change in the cost per kWh for all rate classes to which such adjustment applies. The Delivery Charge of 2.80 cents per kilowatt-hour during the Initial Delivery Charge Period (exclusive of Hydro Quebec transmission support payments) will only apply to PSNH's customer, demand, meter, and usage (kWh) charges. Changes to other fees and service charges (e.g., late payment charges, service connection charges, line extension charges, and fees for services provided to energy suppliers) will continue to be subject to PUC approval. In order to achieve the Delivery Charge specified above, the Parties agree that a ten-year extension for depreciation lives is appropriate for PSNH's Transmission and Distribution assets. The Parties hereby support PSNH's request to make such an adjustment to the depreciation lives. When and if approved by the PUC, PSNH will make corresponding adjustments to the book lives of the affected assets. PSNH will fund PUC expenses during the Initial Delivery Charge Period that are necessary to monitor Agreement compliance, to assure that Transmission and Distribution system quality and reliability are maintained, to assure that PSNH has prudently sold the output of its generating assets and entitlements prior to divestiture, to assure that allocators utilized to assess charges among affiliates are proper and timely, and for other matters deemed necessary by the PUC. If the cost to PSNH of such funding exceeds the historical special assessment of $350,000 per year, PSNH may Page 13 recover the incremental amount through an increase to the Delivery Charge during the Initial Delivery Charge Period, pursuant to the provisions of this Section allowing the Delivery Charge to be adjusted for changes in costs resulting from the imposition or modification of any tax, program, service or accounting change. Revenue received by PSNH from the provision of wheeling service across PSNH's Transmission system or the Transmission system of its affiliates (except for revenues received for usage of the Hydro Quebec line) will continue to be credited on a pro-rata basis against Delivery Charge revenue requirements. Revenue received by PSNH from the provision of wheeling service across PSNH's Distribution facilities will also be credited against Delivery Charge revenue requirements. Such credit shall not affect the level of the Delivery Charge during the Initial Delivery Charge Period. In addition to the 2.80/kwh Delivery Charge, PSNH will be allowed to recover Hydro Quebec transmission support payments. The cost of such transmission support payments shall be included on customer bills as an increase of 0.130/kWh in the Delivery Charge above the otherwise effective 2.80/kWh rate during the Initial Delivery Charge Period. The offsetting credits for all revenues received for usage of the line shall be credited to Part 3 Stranded Costs pursuant to Section V.B.3 of this Agreement. Subsequent to the Initial Delivery Charge Period, the level of Hydro Quebec transmission support payment charges and related revenues included in rates shall be determined by the PUC as part of the normal ratemaking process. B. Stranded Cost Recovery Charge The Stranded Cost Recovery Charge ("SCRC") will be a non-bypassable charge as provided in RSA 374-F:3 and RSA 369-B:4, IV to recover the portion of PSNH's Stranded Costs as well as other specified costs and expenses that are allowed by this Agreement. Stranded costs to be recovered through the SCRC will consist of securitized assets and Non-Securitized Stranded Costs, and the net of ongoing expenses and/or revenue requirements (including decommissioning costs) for any generating unit, entitlement or obligation that has not been sold or otherwise divested as of Competition Day. The SCRC will recover the amortization of the assets and the ongoing expenses, and will be reconciled with a return applied at the Stipulated Rate of Return to any overrecoveries or underrecoveries of costs, subject to the provisions of Section V(C), ("Risk Sharing"), except with respect to the RRB Charge, for which reconciliations shall be calculated in accordance with the True-Up Mechanism described in Section XIII. Appendix C shows the estimated balance of the assets as of July 1, 2000, and Appendix D Page 14 provides an illustrative amortization schedule for the assets. Appendices C and D will be updated as required to reflect additional amortization of and/or prudent capital additions to the listed assets as of Competition Day. For the purpose of establishing the SCRC, Stranded Costs will be divided into three parts, as described below. Part 1 will be the RRB Charge, and is the source of payment for Rate Reduction Bonds. Therefore, the right to receive all collections in respect of the Part 1 charge will be sold to the Special Purpose Securitization Entity (see Section XIII). Part 1 is expected to be billed until the expected maturity date, which is 12 years from the date of issuance of RRBs, but, in certain circumstances described herein, may be billed until the legal maturity date of the RRBs as described more fully below. Part 2 will continue for as long as there are Stranded Cost expense components in that part for which PSNH is responsible for payment. Part 3 contains other miscellaneous Stranded Costs, and recovery of Part 3 Stranded Costs by PSNH is time bounded and full recovery of such costs is not guaranteed to PSNH. The SCRC shall be a non-bypassable charge pursuant to RSA 374-F:3 and RSA Chapter 369-B. All currently existing opportunities shall be continued for retail customers to generate or acquire electricity for their own use, other than through retail electric service, without an exit fee. The SCRC contained in Delivery Service Rate B of PSNH's tariff is just and reasonable, and does not create a charge similar to or have the same effect as an exit fee. In the event of the municipalization of a portion of PSNH's Service Territory, the PUC shall, in matters over which the Federal Energy Regulatory Commission does not have jurisdiction, or has jurisdiction but chooses to grant jurisdiction to the state, determine, to a just and reasonable extent, the consequential damages such as stranded investment in generation, storage, or supply arrangements resulting from the purchase of plant and property from PSNH and RRB costs, and shall establish an appropriate recovery mechanism for such damages. Any such damages shall be established, and shall be allocated between the RRB charge and other rates and charges, in a just and reasonable manner. Any municipality shall be allowed to initiate or continue the process of establishment, acquisition and expansion of plants according to RSA Chapter 38 as it exists upon the date of this Agreement, as well as the provisions of Chapter 249 of the Session Laws of 2000. 1. Part 1 - Securitized Assets E. Part 1 of the SCRC (the "RRB Charge") consists of the amounts required to recover RRB Costs as more fully described in Section XIII. The proceeds from securitization Page 15 may be applied to the following assets: The difference between North Atlantic Energy Corporation's book value of Seabrook, determined as of Competition Day, and $100 million. This amount will be paid by PSNH to NAEC on or before Competition Day to buy down the value of the Seabrook Power Contract. This contract buy-down is subject to all required regulatory and lender approvals. - The book value of Millstone Unit 3 as of the date that PSNH begins to separately account for its ownership of that unit pursuant to Section VIII(I) of this Agreement. - Necessary and prudent costs associated with issuance of and closing on the securitization financing and any premiums associated with the retirement of debt and preferred stock from these proceeds up to a maximum of $15 million, such amount to include the first $700,000 of the costs of the office of the State Treasurer related to reviewing and issuing the RRBs. - A portion of the Acquisition Premium and FAS 109 costs related thereto, which shall be measured as the difference between the proceeds of the RRBs and the total of the preceding Part 1 costs. The net book value of the assets that comprise Stranded Costs as of Competition Day shall form the basis of the amounts to be recovered. Those values as of the end of each month for calendar years 2000 and 2001, will be agreed to by the Parties and expeditiously filed with the PUC. The values shall be used to determine the levels of Part 1 and Part 3, with the exception that any prudent capital additions or retirements at Seabrook and Millstone Unit 3 shall be added or subtracted from the stated amount. The Part 1 charge will be a discrete and segregated charge in order to meet the requirements for the targeted Triple-A Rated securitization. Therefore, all Part 1 collections will be allocated and remitted to the Special Purpose Securitization Entity (described below in Section XIII). Cash collections of Part 2 and Part 3 will not be made available to make payments on Rate Reduction Bonds. Section XIII(D) of this Agreement discusses the relationship between Part 1 collections and Parts 2 and 3 of the SCRC. 2. Part 2 - Nuclear Decommissioning Costs, IPP Costs and Going Forward Costs Part 2 of the SCRC will initially recover ongoing expenses for nuclear decommissioning (for Seabrook, Millstone Unit 3 and Vermont Yankee) and for IPP costs. After the earlier of the Recovery End Date or the date that Page 16 Non-Securitized Stranded Costs are fully amortized, Part 2 will also be credited with a return on the accumulated deferred income taxes at the Stipulated Rate of Return to the extent that PSNH is unable to divest any asset, entitlement, or obligation, and the PUC has not exercised its authority to divest under Section VIII(L), after the earlier of the Recovery End Date or the date that the Non- Securitized Stranded Costs are fully amortized, such going forward costs related to those assets, entitlements, or obligations shall thereafter become Part 2 costs with continued recovery. Such costs shall exclude any previously deferred amounts. The Part 2 amount to be recovered through the SCRC each month will be the expenses incurred by PSNH for the items listed above, less associated revenues and the revenue from the sale of the IPP power on the wholesale market, adjusted by the prudent costs incurred by PSNH to mitigate these IPP costs via buyouts, buydowns, or other methods. Pursuant to Chapter 249 of the Session Laws of 2000, PSNH shall be allowed to retain up to 20 percent of the savings resulting from such buyouts, buydowns, or other methods of mitigating IPP costs, subject to order of the PUC. In the event that there is insufficient SCRC revenue to meet both Part 1 and Part 2 SCRC requirements, the unrecovered Part 2 amounts will be deferred for future Part 2 recovery with a return at the Stipulated Rate of Return. 3. Part 3 - Non-Securitized Stranded Costs Part 3 of the SCRC will be Non-Securitized Stranded Costs not otherwise included in Parts 1 or 2, above, offset by a return on related accumulated deferred income taxes. Non-Securitized Stranded Costs will be recovered through the SCRC in accordance with the time frame specified in the Risk Sharing provision set forth below. Non-Securitized Stranded Costs to be recovered will be the following: - Any remaining amount of the Acquisition Premium on PSNH's books as of Competition Day that has not been securitized. - FAS 109 costs on PSNH's books as of Competition Day related to the non-securitized portion of the Acquisition Premium. - The value of unrecovered obligations for retired nuclear power plants (Connecticut Yankee, Maine Yankee and Yankee Rowe) on PSNH's books as of Competition Day. - The balance on PSNH's books as of Competition Day of deferred costs associated with Independent Power Producers. Page 17 - The balance on PSNH's books as of Competition Day of deferred retail FPPAC costs. - The value of the Vermont Yankee contract buyout payment. - Necessary and prudent unamortized loss on reacquired debt and other costs associated with the accelerated payoff of PSNH and/or NAEC debt, exclusive of any amounts included in Part 1. The balance of the Non-Securitized Stranded Costs will be reduced by the following amounts: - The net proceeds (sale price less book value less prudent sales expenses and all associated taxes not otherwise provided for in this Agreement) from the sales of PSNH's fossil and hydro assets as of the date that each sale closes. (If the sale price is less than the book value, the balance of the Non-Securitized Stranded Costs will be increased by the residual balance of the fossil and hydro assets after subtracting the net proceeds received from the sales of the assets.) - The net proceeds from the sale of NAEC's ownership interest in the Seabrook Nuclear Plant. (If the sale price is less than the book value, the balance of the Non-Securitized Stranded Costs will be increased by the residual balance after subtracting the net proceeds received from the sale of NAEC's ownership interest.) - $10 million upon transfer of PSNH's market-based wholesale contracts to an affiliate as described in Section III, the "Write-Off' section of this Agreement. - Any net payment received by PSNH resulting from the termination of any wholesale requirements contract other than the Amended Partial Requirements Agreement with the New Hampshire Electric Cooperative, Inc. - The present value of the incremental payments for the All-In Cost of Rate Reduction Bonds if that cost exceeds the interest rate guarantee made by PSNH (i.e., 6.25% if the Rate Reduction Bonds are issued on or before December 31, 1999; 7.25% if the Rate Reduction Bonds are issued during the time period of January 1, 2000 through and including June 30, 2000). If the Rate Reduction Bonds are issued on or after July 1, 2000, or if such Bonds do not achieve a Triple-A Rating, this provision does not apply. Page 18 - During the Initial Delivery Charge Period, all proceeds received from PSNH's entitlement to the Hydro Quebec transmission line. The Part 3 amount recovered through the SCRC each month for Non-Securitized Stranded Costs will be equal to the amount of Non-Securitized Stranded Costs amortized each month (assuming a seven year amortization schedule), plus a return on the balance (net of related accumulated deferred income taxes) of the Non-Securitized Stranded Costs, plus any underrecovery or any accelerated amortization as described in Section V(B)(4), the Rate Calculation and Reconciliation section below, subject to the provisions of Section V(C) (Risk Sharing). The return applied to the balance of the Non-Securitized Stranded Costs will be the Stipulated Rate of Return. Other expenses and obligations recovered through or credited to Part 3 of the SCRC will be the following: - The revenue requirement associated with any generating asset, entitlement, and purchased power obligation (other than Part 2 costs related to nuclear decommissioning or IPP's) prior to the divestiture of such asset, entitlement or obligation. - The difference between the expense incurred for the purchase of power to supply Transition Service and the revenue received from customers for Transition Service. However, PSNH shall absorb the first $7,000,000 of any such difference during the 12 months following the Initial Transition Service End Day. - Any positive difference between the expense incurred for the purchase of power to supply Default Service and the revenue received from customers for such service. - Return on the accumulated deferred income taxes associated with the securitized assets at a rate equal to the Stipulated Rate of Return. Other expenses and obligations will be reduced by the revenue from the sale of power from any generating asset, entitlement or purchased power obligation (other than IPP's) prior to the divestiture of such asset, entitlement or obligation. Part 3 of the SCRC will cease as of the earlier of (a) the Recovery End Date described in Section V(C), the Risk Sharing section of this Agreement, or (b) the date that the Non-Securitized Stranded Costs are fully amortized. However, to Page 19 the extent that PSNH is unable to divest any asset, entitlement or obligation and the PUC has not exercised its authority to divest under Section VIII(L), after the earlier of (a) or (b) above any such going forward costs related to those assets, entitlements, or obligations shall thereafter become Part 2 costs with continued recovery. Such costs shall exclude any previously deferred amounts. In addition, at the earlier of (a) or (b) above, the accumulated deferred income taxes associated with the securitized assets and a return thereon, will become Part 2 credits. 4. Rate Calculation and Reconciliation a. Prior to Recovery End Date The overall average level of the SCRC will be 3.40 cents per kilowatt-hour for the period from Competition Day until the earlier of the date that the Non-Securitized Stranded Costs are fully amortized or the Recovery End Date described in Section V(C), the Risk Sharing section of this Agreement. During that time, PSNH will compare the amount to be recovered through Parts 1, 2 and 3 of the SCRC during each six-month period with the revenue received from the billing of the SCRC. If the Part 3 amounts to be recovered exceed the amount of revenue received through the billing of the SCRC, the difference will be deferred with a return for possible future recovery as a Part 3 amount during the next six-month period. The return will equal the Stipulated Rate of Return. In no event shall such Part 3 deferral extend beyond the Recovery End Date. If the Part 3 amounts to be recovered are less than the amount of revenue received through the billing of the SCRC, the difference will be used to accelerate the amortization of the Non-Securitized Stranded Costs, thereby shortening the recovery period for such assets. Nothing described in this paragraph will affect the RRB Charge or its True-Up Mechanism. As described in Section XIII, "Securitization of Stranded Costs," the RRB Charge may be increased or decreased pursuant to its True-Up Mechanism; however, the total average SCRC will be 3.40 cents/kWh prior to the earlier of the Recovery End Date or the date when the Non-Securitized Stranded Costs have been fully amortized. Thus, prior to such date, any increase in the RRB Charge will result in a decrease in recovery of Part 3. To the extent such increase in the RRB Charge is greater than the amount to be collected via Part 3, recovery of Part 2 will also be reduced, such that the total average SCRC remains 3.40 cents/kWh. To the extent recovery of Part 1 is decreased pursuant to the True-Up Mechanism prior to the Recovery End Date, recovery of Part 3 will increase such that the total average SCRC remains 3.40 cents/kWh. b. Upon Recovery End Date Page 20 Upon the Recovery End Date any remaining Part 3 Non-Securitized Stranded Cost balances shall be written off. c. After the Recovery End Date After the earlier of the Recovery End Date or the date that the Non-Securitized Stranded Costs are fully amortized, the SCRC will no longer be capped at 3.400/kWh, but is expected to drop significantly, thus providing additional customer savings. Thereafter, any increases or decreases in Part 1 pursuant to the True-Up Mechanism will result in corresponding increases or decreases in the SCRC charged to customers. After the earlier of the Recovery End Date or the date that the Non-Securitized Stranded Costs are fully amortized, PSNH will calculate Part 2 to be billed upon PUC approval during each prospective six-month period. Any difference between the amounts to be recovered through Part 2 during any six-month period and the revenue received through the application of Part 2 during that period will be refunded or recovered with a return during the subsequent six-month period by reducing or increasing Part 2 for the subsequent six-month period. The return will be the Stipulated Rate of Return. C. Risk Sharing The recovery of Non-Securitized Stranded Costs in Part 3 of the SCRC described above shall be subject to the following risk sharing provision. Specifically, PSNH shall forego the right to recover all such Non-Securitized Stranded Costs that remain unrecovered as of the Recovery End Date. The Recovery End Date will initially be October 31, 2007, but shall be revised within 30 days following the closing on the sale of all fossil/hydro assets described in Section VIII ("Divestiture") by the following durations: 1) The Recovery End Date shall be 20 days earlier for each month beyond July 1, 2000 that Competition Day occurs. 2) For purposes of computing the Stranded Cost Recovery Charge in this Agreement, the Parties have assumed that $360 million will be the net proceeds realized from the sale of the fossil and hydro assets at auction. After the latter of the fossil or hydro asset sales, the Recovery End Date shall be adjusted to be 30 days earlier for every $10 million by which the net sale proceeds of the fossil and hydro assets exceeds $360 million, or made later by 30 days for every $10 million by which the net sale proceeds of the fossil/hydro assets is less than $360 million. An adjustment of less than 30 days will be made on a pro-rata basis for Page 21 residual increments, or decrements, less than $10 million. 3) For purposes of computing the Stranded Cost Recovery Charge, the Parties have assigned a 7.25% All-In Cost to the RRBs. If the Rate Reduction Bonds are issued prior to July 1, 2000, and achieve a Triple-A Rating, the Recovery End Date shall be 20 days earlier for each 25 basis points (0.25 percentage points) by which the All-In Cost of the Rate Reduction Bonds is less than 7.25%. 4) The Recovery End Date shall be adjusted for Transition Service pricing in two groups: one for residential, General Delivery Service Rate G and outdoor lighting customers and the second for all other customers, as follows: a) During the period from Competition Day through the Initial Transition Service End Day, the Recovery End Date for the two customer groups shall be adjusted separately, based upon each group's kWh consumption of Transition Service. The residential, General Delivery Service Rate G and outdoor lighting customers' Recovery End Date shall be 30 days earlier for every $5.5 million of incremental revenue received from that group, such incremental revenue to be determined by multiplying that group's total kWh of Transition Service consumption for the period by 0.4 cents/kWh. The Recovery End Date for all other customers shall be 30 days earlier for every $4.5 million of incremental revenue received from that group, such incremental revenue to be determined by multiplying that group's total kWh of Transition Service consumption for the period by 0.4 cents/kWh. For each group, an adjustment of less than 30 days will be made on a pro-rata basis for residual increments of less than the amounts specified above. b) During the first twelve-month period following the Initial Transition Service End Day, the Recovery End Date applicable to residential, General Delivery Service Rate G and outdoor lighting customers shall be 20 days later for every 0.1 cents/kWh that the actual weighted average cost of Transition Service exceeds the price of Transition Service for these customers by more than 0.2 cents/kWh. During the second twelve-month period following the Initial Transition Service End Day, the Recovery End Date applicable to residential, General Delivery Service Rate G and outdoor lighting customers shall be 20 days later for every 0.1 cents/kWh that the actual weighted average cost of Transition Service exceeds the price of Transition Service for these customers. 5) The provisions of this paragraph shall only apply after the Initial Transition Service End Day. In the case of the output of nuclear and IPP entitlements, the Recovery End Page 22 Date shall be adjusted for the difference between the wholesale market prices estimated for purposes of this Agreement and (a) the actual wholesale price for the sale of output of such entitlements prior to the closing of the sale of all fossil/hydro assets that are intended to be sold at auction and (b) a proxy for the actual wholesale price for the sale of the output of such entitlements after the closing of the sale of the fossil/hydro assets. For nuclear and IPP entitlements, the proxy wholesale price shall be determined based on the average price realized from the sale (under the RFP process approved by the Connecticut Department of Public Utility Control) of the output of The Connecticut Light and Power Company's and Western Massachusetts Electric Company's shares of Millstone 2, Millstone 3 and Seabrook, adjusted for differences in capacity factors. After the Initial Delivery Charge Period, the proxy prices will be escalated by 3% per year. The Recovery End Date will be adjusted for these factors as follows: a) The Recovery End Date shall be 30 days earlier for every $10 million by which the sum of the (a) actual revenue obtained for the period following the Initial Transition Service End Day and before the closing of both the fossil and hydro asset sales and (b) projected revenue, after such closing and as defined below, received from the sale of power from PSNH's Independent Power Producer ("IPP") entitlements for the period following the Initial Transition Service End Day and ending on October 31, 2007 exceeds the estimated revenue, or made later by 30 days for every $10 million by which the sum of such actual and projected revenue is less than the estimated revenue. The estimated revenue shall be computed as $171,272,000 plus the product of $98,700 times the number of days following the Initial Transition Service End Day and ending on December 31, 2002. An adjustment of less than 30 days will be made on a pro-rata basis for residual increments of less than $10 million. The projected revenue from the sale of power from IPP entitlements shall be computed using the proxy wholesale market prices described above, and, in order to translate the proxy wholesale price into a cents per kilowatt-hour number, an annual IPP capacity factor of 95%, and the yearly megawatt-hour values listed below. The values for the years 2001 or 2002, as applicable, shall be pro-rated for the actual period following the Initial Transition Service End Day through the end of that calendar year.
Year MWh 2001 1,126,000 2002 1,126,000 2003 1,119,000 2004 1,122,000 2005 1,095,000 2006 964,000 2007 608,300 Through Oct. 31, 2007
Page 23 b) The Recovery End Date shall be 30 days earlier for every $10 million by which the sum of the (a) actual revenue obtained following the Initial Transition Service End Day and before the closing of both the fossil and hydro asset sales and (b) projected revenue received from the sale of power from PSNH's Seabrook Power Contract entitlement for the period following the Initial Transition Service End Day and ending on December 31, 2003 exceeds the estimated revenue, or made later by 30 days for every $10 million by which the sum of such actual and projected revenue is less than the estimated revenue. The estimated revenue shall be computed as $107,488,000 plus the product of $263,400 times the number of days beginning after the Initial Transition Service End Day and ending on December 31, 2002. An adjustment of less than 30 days will be made on a pro-rata basis for residual increments of less than $10 million. The projected revenue from the sale of power from PSNH's Seabrook entitlement shall be computed using the proxy wholesale market prices described above, an annual Seabrook capacity factor of 82%, and the yearly megawatt-hour values listed below. The value for the years 2001 or 2002, as applicable, shall be pro-rated for the actual period following the Initial Transition Service End Day through the end of that calendar year.
Year MWh 2001 2,851,000 2002 2,852,000 2003 3,154,000
6) The Recovery End Date shall be 30 days earlier (or later) for each $50 million by which the amount of RRBs issued by PSNH pursuant hereto exceeds (or is less than) $575 million. D. Energy Charges On and after Competition Day, except for Transition Service and Default Service obligations established by this Agreement and obligations to purchase power from IPPs, PSNH will no longer have any obligation to build, provide, plan for, or buy energy, capacity, or other generation related services for its retail customers. Following Competition Day, three options will be available to customers for energy service: a Competitive Supplier of the customer's choice, Transition Service, or Default Service. Transition Service will be available for the time periods set forth in RSA Chapter 369-B for those customers who have not chosen a Competitive Supplier, or as otherwise provided below, thus providing stable and predictable prices during the transition to a fully competitive market. Default Service will provide a safety net and assure universal access for Page 24 customers who are not receiving energy from a Competitive Supplier and who are not eligible for Transition Service. 1. Competitive Energy Service On and after Competition Day, customers may be able to obtain even greater rate reductions by choosing from among authorized Competitive Suppliers. 2. Transition Service Transition Service will be available for the time periods set forth in RSA Chapter 369-B for those customers who have not chosen a Competitive Supplier, or as otherwise provided below, thus providing stable and predictable prices during the transition to a fully competitive market. Transition Service will be secured in accordance with the requirements of RSA 369-B, with the costs of administering such acquisition to be considered an administrative cost of Transition Service. Provisions under this Agreement regarding the sale of output into the market from PSNH's generating plants, power purchase obligations and entitlements are subject to the use of such power to provide Transition and Default Service in accordance with the provisions of RSA Chapter 369-B. All authorized energy suppliers, as limited by RSA Chapter 369-B, will be permitted to bid to provide Transition Service. The possibility of dividing the Transition Service market among the energy suppliers with the lowest bids will be considered after bid receipt and analysis, in which case a subsequent round of bidding, at the discretion of the PUC, may be used to assess its benefits. Transition Service shall be procured in such time blocks as shall prove efficient and effective after analysis of the bids is made. PSNH will offer branding to the successful bidder(s), including use of name identification on bills or bill inserts. The retail price of Transition Service will be as set forth in RSA Chapter 369-B. If the price obtained through competitive bids is higher than the Transition Service price, the excess will be deferred and collected through the non-securitized portion of the SCRC, subject to the limitation on recovery of any such deferral as set forth in RSA Chapter 369-B, and the Recovery End Date shall be adjusted pursuant to Section V(C)(4). Customers will be free to terminate Transition Service as of the end of any billing cycle to purchase from a Competitive Supplier in the market, without cost or penalty. PSNH shall be notified of such change by the Competitive Supplier pursuant to the terms of PSNH's Tariff PSNH will make customers aware of their right to terminate Transition Service by prominently displaying a message to that effect on each customer's bill. Page 25 An election to terminate Transition Service by customers served under Tariff rates GV, LG or B will be final. After an election to terminate, such customers will qualify for Default Service, but not Transition Service. Remaining customers who choose to terminate Transition Service will be allowed to return to Transition Service at any time during the first year following Competition Day. Low-Income customers (as defined in Section V(E)(1), the Low- Income Electric Assistance Program section of this Agreement) will be allowed to return to Transition Service at any time during the Transition Service period. At the end of the Transition Service period at least 75 percent of customers who have not selected a Competitive Supplier will be assigned to one of the entities that have provided transition power and that qualifies as a Competitive Supplier. These assignments will be based on the ratio of transition power provided by each such supplier who is a Competitive Supplier during the period. Any Transition Service customer subject to such assignment shall be notified in advance of the assignment in a form and manner determined by the PUC. Any customers not so assigned to such an entity that has provided transition power shall be randomly assigned to other Competitive Suppliers pursuant to RSA 369-B:3, IV,b,(1),(B),(ii). The administrative cost of acquiring, billing and managing Transition Service will be recovered through the Delivery Charge for all customers. 3. Default Service Electricity is an essential service, and there is a risk in a competitive market that some customers will find themselves unable to secure a Competitive Supplier or they may temporarily be between suppliers. To assure universal service and system integrity, Default Service will be available to customers who are not receiving energy from a Competitive Supplier and who are not eligible for Transition Service. Default Service shall be acquired in accordance with RSA Chapter 369-B for the period of time that Transition Service is available to any customer class; thereafter, auctions to procure service for subsequent periods will be conducted at such times and on such terms and conditions as the PUC may require. Default Service shall be provided pursuant to terms and conditions established by the PUC. The administrative cost to acquire, bill and manage Default Service will be recovered as provided by statute. The price of Default Service shall be the weighted average of all successful bids. However, during the period when Transition Service is available, in no event shall the price of Default Service to the customer be less than the Transition Service prices, unless otherwise ordered by the PUC, and any differential will be used to defray Non-Securitized Stranded Costs as provided in Part 3 of the SCRC. Page 26 E. System Benefits and Energy Consumption Tax The System Benefits Charge will be a cents per kilowatt-hour charge designed to fund PUC-approved public benefit programs, including but not necessarily limited to the Low-Income Electric Assistance Program and the Energy Efficiency Programs specified below. The initial System Benefits Charge will be 0.20/kWh as required by RSA Chapter 369-B. The accounting for the System Benefits Charge by PSNH shall be subject to the approval of the PUC and RSA 374-F:3,VI and 374-F:4,VIII(b), as applicable. The System Benefits Charge shall be applied equally to all classes of customers and to all kilowatt-hours billed to customers taking delivery service from PSNH. The Energy Consumption Tax shall be the amount specified by RSA 83-E:2. 1. The Low-Income Electric Assistance Program The Parties recognize that electric service is essential, and that programs and mechanisms that enable low-income residential customers to manage and afford essential electricity requirements will be necessary, in accordance with RSA 374-F:3,V(a). To accomplish this, PSNH agrees to implement a "percentage of income" payment program on Competition Day, consistent with the statewide low-income Electric Assistance Program proposed by the Low-Income Working Group and approved by the PUC during oral deliberations on May 10, 1999, as part of Docket No. DR 96-150. The Low-Income Electric Assistance Program shall provide service to low-income residential customers on the basis of an affordable percentage of the customer's income. Individuals or families whose annual income is less than 150% of the federal poverty level shall be eligible for the low-income program, subject to funding limitations and such eligibility requirements as may be established under the PUC-approved guidelines of the Low-Income Working Group. This program will be funded by a charge assessed uniformly on all kilowatt-hours billed by PSNH as part of the System Benefits Charge. If it appears that the statewide Low-Income Electric Assistance Program will not be ready for implementation by Competition Day, PSNH shall file with the PUC, and seek approval for an interim low-income program or discount rate to be in place from Competition Day until the implementation of the statewide program. The interim low-income program or rate will take effect on Competition Day or upon such other date as may be specified by the PUC. This interim low-income program or rate shall provide aggregate rate relief to low-income customers that is reasonably equivalent to the percentage of income payment Page 27 program described above. 2. Energy Efficiency Programs The Parties recognize that cost-effective energy conservation measures are an important means to reduce energy usage and, in conjunction with lower rates, to reduce customers' energy bills. Consistent with the legislative directive at RSA 374-F:3,X that restructuring should include utility-sponsored energy efficiency programs targeting cost-effective opportunities which may otherwise be lost due to market barriers, the Parties understand that the PUC will decide the appropriate level of future funding for energy efficiency, informed by recommendations of the Energy Efficiency Working Group ("EEWG"). PSNH agrees to support increased energy efficiency program budgets in the EEWG and before the PUC, consistent with the System Benefits Charge. Prior to Competition Day, PSNH will spend amounts ordered by the PUC for energy efficiency and DSM programs, as established in Docket No. DR 98-174 (the 1999 PSNH Conservation and Load Management proceeding) and in any subsequent proceeding. If, prior to Competition Day, the PUC has rendered a decision on the recommendations of the EEWG, the Energy Efficiency Program portion of the System Benefits Charge implemented on Competition Day shall reflect the results of that decision. Any changes in the authorized expenditures covered by this paragraph shall be subject to the rate adjustment provisions for public policy changes set forth in Section V(F)(1) of this Agreement. H. Other Rate Issues 1. Changes in Nuclear Decommissioning and Public Policy Charges Prior to Competition Day, any interested person may petition the PUC to adjust PSNH's bundled rates to reflect changes in the Nuclear Decommissioning Charge made after August 2, 1999 and/or any new level of public policy expenditures ordered by the PUC after August 2, 1999. The other Parties to this Agreement agree to support any such substantiated petition for an increase or decrease by PSNH. 2. Fuel and Purchased Power Adjustment Clause ("FPPAC") The FPPAC rate will be frozen at the currently effective amount of 0.3830/kWh and an FPPAC BA amount of 6.281 0/kWh until Competition Day, except as provided for special contracts in Section VII. On Competition Day, the FPPAC will be eliminated. Any unrecovered FPPAC balances as determined by the PUC (including deferred FPPAC charges) will be eligible for recovery as allowed under Part 3 of the SCRC. Inasmuch as the write-off that PSNH has taken under this Agreement reflects adjustments to historical FPPAC Page 28 balances, the recovery of PSNH's FPPAC balance as of August 2, 1999 shall not be subject to a prudence determination. However, the recovery of any FPPAC accruals that occur after August 2, 1999 shall be subject to the prudence standard of this Agreement. 3. Sharing Agreement. The Sharing Agreement and the Capacity Transfer Agreements between PSNH and the NU initial system will be terminated, effective as of December 31, 1999, with no financial compensation due either party, except for capacity and transmission payments for November and December, 1999, which are estimated to be $8.4 million, and final reconciliation as determined pursuant to FERC contract requirements for amounts due with respect to entitlements or transactions occurring before this termination date. 4. The Rate Agreement and the Seabrook Power Contract. As a condition precedent to Competition Day, NU must have obtained the consent of the New Hampshire Attorney General, and all other necessary regulatory and lender approvals, to cancel the November 22, 1989 Rate Agreement between NU and the State and the November 22, 1989 Seabrook Power Contract between PSNH and NAEC. The Attorney General hereby consents to such cancellations, contingent on implementation of this Agreement. G. Avoided Costs for IPPs PSNH's responsibilities and avoided cost rates on and after Competition Day for short-term purchases of IPP power pursuant to the federal Public Utility Regulatory Policies Act and the New Hampshire Limited Electrical Energy Producers Act shall be equal to the market price for sales into the ISO-New England power exchange, adjusted for line losses, wheeling costs, and administrative costs. This Agreement is not intended to impair existing rate orders or contracts. H. Termination of Pilot Program To allow PSNH to prepare for the implementation of this Agreement, PSNH's participation in the New Hampshire Retail Competition Pilot Program (Docket No. DR 95-250) shall terminate as of pilot customer meter readings during the month following receipt of a Final Order. I. TRANSMISSION AND DISTRIBUTION ISSUES A. Classification of transmission and distribution facilities Page 29 PSNH has functionally classified its Transmission and Distribution using a similar method to that proposed by PSNH in PUC Docket No. DR97-059. The proposed allocations are subject to PUC approval. The Parties agree that the allocations satisfy the FERC 7 Factor Test. The line of demarcation between Transmission and Distribution is at the high side of the facilities that interconnect with facilities rated 69 kV and above and that step-down to facilities rated at or below 34.5 kV. Following PUC approval, PSNH shall file and the Parties shall support a notification of such reclassification with FERC. To the maximum extent allowed by federal law, non-discriminatory, open access to PSNH's transmission system shall be available to customers, electricity suppliers, marketers, aggregators, and municipal electric utilities, with charges based only on rates set by federal regulations, plus the actual cost of service for any services not subject to federal price regulation plus, for retail customers, applicable stranded cost recovery charges, RRB charges, systems benefit charges, and taxes. B. White Lake Power Plant Pursuant to RSA 374-F:3,III, the White Lake Combustion Turbine plant will be retained by PSNH, and run as needed to maintain reliability and stability on PSNH's electrical delivery system. Any energy produced by this plant and the capacity represented by this plant will be sold on the wholesale market or sold to the New England Independent System Operator ("ISO") at the ISO market clearing prices in a prudent manner designed to maximize net revenues. The cost and revenue associated with this plant shall be reflected in the determination of PSNH's Delivery Charge. In the event the White Lake power plant is rendered inoperable, the Parties agree that PSNH shall have the right, subject to PUC approval, to either repair or replace the unit with another unit of similar capabilities or seek to modify, upgrade or construct new facilities on the PSNH Transmission and Distribution system in order to maintain system integrity, if prudent and consistent with least-cost planning principles. PSNH may, at its discretion, initiate a request for the siting of a new merchant generator in this geographical area to support the reliability needs of the PSNH's electrical system. VII. SPECIAL CONTRACT, ECONOMIC DEVELOPMENT AND BUSINESS RETENTION CUSTOMERS As of Competition Day, PSNH will no longer be a retail Page 30 energy supplier. Accordingly, it will be necessary as of that date to modify the special contracts it has with certain customers for the supply of electric energy. To accomplish this end, all customers served under special contracts in existence as of Competition Day may elect one of the following three options. Customers will be informed by PSNH of their option rights at least 60 days prior to Competition Day. To the extent practicable, Economic Development and Business Retention customers shall have the same options. Option 1. The customer may retain the special contract. The prices will be dictated by the special contract, and the customer will receive energy under Transition Service and thereafter Default Service with no additional payments for energy. If the customer's special contract refers to the terms "FPPAC" and "FPPAC BA," those terms will equal the values established in Order No 23,139 in Docket No. DR 98-139 of 0.383 cents per kilowatt-hour for FPPAC and 4.955 cents per kilowatt-hour for FPPAC BA. All electrical power must be delivered through the PSNH meter except for any self-generation or co-generation currently permitted under terms of the customer's special contract; or Option 2. The customer may have the special contract partially unbundled. The energy charges under the contract will be reduced by 4.4 cents per kilowatt-hour. The customer may contract with and receive power from any Competitive Supplier for the remaining term of the special contract. All other provisions of the special contract shall remain in effect except for the provision for PSNH as sole supplier. All electrical power must be delivered through the PSNH meter except for any self-generation or co-generation currently permitted under the terms of the customer's special contract. Once this Option 2 is elected, the customer may not return to Option 1; or Option 3. Provided there is a termination or cancellation clause in the special contract, the customer may at any time cancel the remainder of the special contract and pay whatever termination charges are provided in the contract. Upon termination the customer will receive market energy and take other services under tariffed rates, as any other similarly situated customer. The proceeds of all termination charge payments will be used to offset Stranded Costs. If a special contract customer makes no election on or before Competition Day, Option 1, above, will be the terms under which the customer will be served. Upon termination by the expiration of the special contract term or by the exercise of any termination provision of the special contract, the customer will receive market energy and take other services under Tariff rates. Page 31 A portion of the revenue received from special contract, ED and BR customers will contribute to the payment of Rate Reduction Bonds. Such portion shall be calculated in a manner similar to the determination of RRB cost recovery for Tariff customers. Any revenue from those customers in excess of the sum of the RRB Charge, the System Benefits Charge, the Energy Consumption Tax, the overall average Delivery Charge, and the Transition Service charge (if applicable) shall be applied to the recovery of Parts 2 and 3 of the SCRC. J. DIVESTITURE A. General PSNH will divest itself of its power generation assets and power purchase agreements as a result of this Agreement. This divestiture will take place through several processes including the sale of its existing power generation facilities at auction. This is in keeping with other divestitures that have been accomplished throughout New England as restructuring has taken place. The goals of the asset auctions are to maximize the net proceeds realized from the sale in order to mitigate Stranded Costs, to provide a market-based determination of Stranded Costs, and to help establish a competitive energy market, while at the same time providing certain employee protections as set forth herein. It is likely that a time lag will exist between Competition Day, when customers are free to choose their own Competitive Supplier, and the actual closing on the sale of any or all of the power generation assets and power purchase agreements. During this period, the power produced by these assets and obtained from the power purchase agreements will be used to provide Transition Service and/or Default Service pursuant to RSA Chapter 369-B or sold in the marketplace in accordance with Section IX, the "Marketing of Energy" section of this Agreement. The sale of generating assets will be administered by the PUC pursuant to RSA Chapter 369-B. B. Timing and Details of the Fossil/Hydro Auctions Unless otherwise directed by the PUC, the fossil and hydro auction processes will consist of an initial non-binding bid phase ("First Round") during which time interested parties may bid for the entire portfolio or specified subsets. In the First Round, interested parties will be given access to the data room, invited to ask preliminary questions, and conduct initial due diligence. Following the First Round, a group of the most qualified Page 32 bidders will be selected and offered the opportunity to participate in the Second Round of bidding. During the Second Round, these bidders will be given the opportunity to conduct detailed due diligence, ask detailed questions, participate in management interviews, visit the principal sites and submit binding bids. At the time of the initiation of the Second Round of bidding, the selected participants will be advised as to any mandatory groupings of the assets, on which they will be required to bid. The decision to group assets for final bidding will be based upon the results of the First Round of bids and other information that is known immediately prior to the Second Round. As described in Section VIII(E) of this Agreement, municipalities which have expressed interest in purchasing hydroelectric generating assets, and which have not reached satisfactory terms with PSNH to purchase such assets in private sales outside the auction process, will be included in the Second Round bidding process. Following receipt of the binding Second Round bids, PSNH may, with PUC oversight, elect to conduct an additional round of bidding, in real-time, including selected finalists, to further improve the prices that will be realized by PSNH and to improve the terms and conditions of the sale. Pursuant to RSA Chapter 369-B, affiliates or subsidiaries of NU and Consolidated Edison, Inc. may not bid on PSNH's generating assets. A secure internet web site will be used to provide data room information and transaction documents related to the sale to interested parties and a designated financial advisor will serve as the intermediary for all communications between bidders and PSNH throughout the bidding process. The divestiture of PSNH's fossil assets shall be separated from the sale of its hydro assets. The divestiture of the fossil assets shall occur first and the sale of the hydro assets shall occur between six months and one year following Competition Day to accommodate the special timing needs of municipalities. PSNH acknowledges that the conduct of the auction is subject to administration by the PUC, and that the personnel designated by the PUC to assist in such administration will have the right and opportunity to inquire and consult with PSNH on any aspect of the auction process, on a timely basis. C. Facility Descriptions The PSNH fossil/hydro generating assets to be divested via auction are described in Appendix G. Page 33 D. Approvals The following approvals have been identified as being required prior to the closing of any sale resulting from the fossil and hydro auctions or other sale process: 1. Federal Federal approvals will be required from FERC for the transfer to the buyer of any jurisdictional facilities, the jurisdictional hydroelectric projects and FERC licenses, and the Interconnection and Operation Agreement. Securities and Exchange Commission ("SEC") approval will be required because PSNH is a wholly-owned subsidiary of Northeast Utilities, a registered holding company under the Public Utility Company Holding Company Act of 1935. The pre-merger notification requirements of the Hart-Scott-Rodino Act will require PSNH and the buyer to file notification regarding the intended sale. 2. State In addition to approvals required from the PUC, the following State approvals will also be required: Approval will be required by the Connecticut Department of Public Utility Control under Conn. Gen. Stat. Section 16-43 for the sale of any utility asset by PSNH. Approval will be required by the Vermont Public Service Board under Vt. Stat. tit. 30, Section 109 for the sale of PSNH's generating plant located in Canaan, Vermont. Approval may be required from the Maine Public Utilities Commission under Me. Rev. Stat. tit. 35-A, Section 1101 for the sale of PSNH's minority interest in the Wyman 4 generating station located in Maine. Approvals and appropriate findings from New Hampshire, Massachusetts and Connecticut regulators under Section 32(c) of the Public Utility Holding Company Act of 1935 will be required. 3. Other The asset sales may require prior consent of certain lenders under PSNH's existing credit agreements. In addition, the sales may require additional regulatory approvals that will be based on the identity and regulatory requirements applicable to the selected buyer(s) of the divested assets. PSNH will diligently seek to obtain all necessary approvals. Page 34 E. Municipal Interest in Purchasing Hydroelectric Generating Assets Prior to the commencement of the hydro asset auction, PSNH may enter into agreements for the sale of hydroelectric generating assets to any interested municipality, subject to PUC administration and approval. Any such assets sold in this manner will be excluded from the hydro auction. If no such agreements are reached, all interested municipalities will be able to participate in the auction process, subject to the same confidentiality, financial qualification and other requirements that will be imposed on non-municipal participants in the auction. A municipality may also petition the PUC for a valuation of a hydroelectric generating asset pursuant to Chapter 249, Section 5 of the Session Laws of 2000. It will be necessary that any arrangements with municipalities for purchase of a hydroelectric asset satisfy the following requirements: 1. In order to be considered, the proposal from the municipality must conform to the following offer criteria: (a) the offer must be for a specific purchase price, not subject to qualification (except ratification under the provisions of RSA 38:13), and payable in full at closing. (b) the offer must clearly demonstrate the existence of adequate funding in place, or binding commitment to provide such funding at closing, sufficient to pay the price in full at closing. (c) the offer must be to purchase the same hydroelectric generating asset, adjacent lands, grant the same employment protections and benefits and other requirements as PSNH is proposing to establish in the fossil and hydro auctions. (d) the offer must not contain any major contingencies other than (i) approval of the price term by the PUC, and (ii) for FERC licensed facilities, approval by FERC of the transfer of the hydro license to the buyer. 2. PSNH will have the absolute right to reject any offer which does not promise to meet or exceed the price which PSNH could reasonably anticipate receiving for the asset if the asset were to be sold as part of the auction process. F. Hydro Quebec Page 35 The purchase and sale of electricity from Hydro-Quebec ("HQ") is part of a series of agreements among HQ and certain New England utilities (collectively, the "HQ Participants") governing the interconnection and sale of energy between NEPOOL and the HQ power systems. PSNH is a HQ Participant. The purchase and sale between the HQ Participants and HQ is governed by the following agreements: 1. HQ Phase II Energy Contract or Firm Energy Contract This contract, dated October 14, 1985, requires NEPOOL members to purchase 7,000 GWh of energy from HQ each year through August 2000. In the event that this allotment has not been fulfilled, the contract may be extended until August 2004 to allow NEPOOL members to meet their energy purchase obligation. This contract enables PSNH to buy firm energy utilizing its entitlement in the transmission facility through August 2000. Based on PSNH's firm transmission facility entitlements, its purchase entitlement under this agreement is on average 140 MW. Purchases of energy through this entitlement are based on the Average Fossil Fuel Cost index, which has reflected regional energy market values. 2. HQ Energy Banking Agreement This agreement, executed on March 21, 1983, allows NEPOOL participants to deliver energy to HQ in periods of low NEPOOL incremental cost and receive it back (less any losses) in periods of high incremental cost. The energy banking agreement expires in October 2001. 3. HQ Support Agreements The participating New England utilities, including PSNH, also share in the cost of service associated with the New England HQ transmission facilities, as specified in the HQ support agreements. The agreements to which PSNH is a party include: (1) Terminal Facility Support Agreement; (2) Vermont Transmission Line Support Agreement; (3) New Hampshire DC Facilities Support Agreement; (4) Massachusetts DC Facilities Support Agreement; and (5) New England Power AC Facilities Support Agreements. The first two agreements were executed on December 1981 and are scheduled to terminate on the same date as Phase II support agreements. The remaining three agreements were executed on June 1, 1985, extend 30 years from the date of initial payments, and are scheduled to terminate on October 31, 2019. These agreements may be extended for an additional 20 years beyond the scheduled termination date. The annual cost of these support payments is approximately $10 million for PSNH. Because Page 36 support payments are based on cost of service, they may fluctuate from year to year. G. Wyman Unit 4 PSNH may sell its ownership interest in Wyman Unit 4, located in Yarmouth, Maine, outside of the auction process. Should there not be an executed purchase and sales agreement for the sale of PSNH's ownership interest in Wyman Unit 4 prior to there being a Final Order approving this Agreement, then that ownership interest will be included in the fossil asset auction. H. Other Potential Generation Sites PSNH has identified three parcels of land that may have significant potential for use as generation sites. These sites have been previously disclosed within PSNH's 1996 Long-Range Plans for Bulk Power Supply Facilities filings. These sites are the Rollins Farm site in Newington, NH; the "Ball Field" adjacent to Merrimack Station in Bow, NH; and the Garvins Falls Road site in Concord, NH. PSNH will develop a sales strategy for soliciting interest and selling these properties no later than 30 days following the selection of a winning bidder or bidders in the later of the fossil and hydro asset auctions. The sales strategy will include a determination of the highest and best use for the properties, which will determine the maximized values and identify the appropriate target markets for these properties. The City of Concord shall be able to provide input in the development of the auction criteria for the Garvins Falls Road site. At the time that the sales process begins, PSNH will identify prospective purchasers, including all potential bidders in the initial solicitation of interest in the fossil and hydro auctions, as well as other parties who indicate an interest in these properties. For parcels of land that are accounted for below-the-line as of April 19, 2000, PSNH shall apply 50% of the amount by which the net proceeds exceed the net book value as a credit against Stranded Costs and may retain the balance of such amount for the benefit of its shareholder. For any parcels of land that are accounted for above-the-line, 100% of the net proceeds shall be used as a credit against Stranded Costs. I. Millstone 3 On or before Competition Day PSNH will separately account for its 2.8475% ownership share of Millstone 3 such that the costs and revenues of such ownership do not impact PSNH's retail customers. The amount of PSNH's net book investment in Millstone 3 immediately prior to such separate Page 37 accounting will be eligible for securitization, the cost of which will be recoverable from PSNH's customers via Part 1 of the SCRC. If PSNH's share of Millstone 3 is sold or auctioned after such separate accounting, any net proceeds may be paid as a dividend to PSNH's shareholder and PSNH's customers shall have no claim to any such proceeds. Subsequent to such separate accounting, PSNH shall continue to be responsible for funding its pro rata share of the site-specific decommissioning cost estimate, calculated on the basis of fully funding the decommissioning trust by December 31, 2026. PSNH may enter into a contract to provide for the payment of these nuclear decommissioning costs, with full recovery of the costs of that contract being provided from PSNH's customers via Part 2 of the SCRC. PSNH's obligation thereunder may be assignable to any future owner of such share of Millstone 3. PSNH's customers shall have no responsibility for increases in decommissioning funding above the amount calculated based upon the foregoing payment schedule at Competition Day. If for any reason the separate accounting for PSNH's share of Millstone 3 is delayed beyond Competition Day, beginning on Competition Day and continuing until such time as PSNH's ownership share of Millstone 3 is so transferred, its output will be sold into the market pursuant to Section IX and all net proceeds will be applied to Stranded Costs. J. Vermont Yankee PSNH is a 4.0% shareholder and sponsor company of the Vermont Yankee Nuclear Power Corporation ("Vermont Yankee"), a Vermont corporation that owns and operates a nuclear generating unit ("Unit") having a net capability of approximately 510 megawatts electric, at a site in Vernon, Vermont. Pursuant to a Power Contract dated as of February 1, 1968, as amended, and an Additional Power Contract, dated as of February 1, 1984, each of which have been approved by the Federal Energy Regulatory Commission, PSNH is entitled to its pro rata share of the net capacity and electrical output during the Unit's operating life and is obligated to pay its respective entitlement percentage of Vermont Yankee's cost of service, including future decommissioning costs. PSNH, in conjunction with the other sponsor companies, is seeking to cause Vermont Yankee to sell via private negotiations the Unit and related assets, including the decommissioning trust. The terms of any such sale will be set forth in a definitive agreement that provides for a closing that is subject to receipt of all required regulatory approvals, including that of the PUC. In such a transaction, PSNH may be obligated to prefund or fund its share of the future decommissioning costs of the Unit, with Page 38 full recovery of such decommissioning costs from PSNH's customers via Part 2 of the SCRC. PSNH agrees to exercise reasonable efforts to negotiate the buyout or buydown of any contractual obligations that survive the sale of the Unit. If approved by the PUC, PSNH shall be entitled to full recovery of such buyout or buydown payments (exclusive of the decommissioning costs recoverable under Part 2 of the SCRC) from PSNH's customers via Part 3 of the SCRC. Further, PSNH agrees to pursue sales terms that limit its responsibility to no more than its pro-rata share of the site-specific decommissioning cost estimate that exists at the time of closing and that make any future changes to the estimate the express responsibility of the buyer. Unless otherwise ordered by the PUC, if the above transaction does not close, PSNH will offer for sale through a public auction process its interest in Vermont Yankee, including its associated contractual interests and obligations. Any sale pursuant to such auction process shall be subject to a confidential minimum price condition in an amount that will be established, in advance, by the PUC and designed to stimulate participation in the auction and to maximize proceeds. The PUC shall administer the process and approve any resulting transaction prior to the closing. Such transaction shall also be subject to the receipt of any other necessary regulatory and lender approvals. If for any reason PSNH continues to have power entitlements from Vermont Yankee, beginning on Competition Day and continuing until such time as PSNH's entitlements to power from Vermont Yankee end, such entitlements will be sold in the marketplace in accordance with Section IX, the "Marketing of Energy" section of this Agreement. K. Seabrook PSNH's overmarket obligations under the Seabrook Power Contract with North Atlantic Energy Corporation ("NAEC") will be securitized and the costs thereof recovered from PSNH's customers under Part 1 of the SCRC. PSNH will use such proceeds of securitization to restructure the Seabrook Power Contract effective as of Competition Day, subject to necessary regulatory approvals, to provide for the buydown of the value of the Seabrook asset to $100 million, thereby reducing PSNH's monthly charges under the contract. NAEC may, subject to PUC approval, apply the restructuring payments it receives from PSNH to repay capital in a manner designed to most efficiently reduce its costs. Subsequent to Competition Day, NAEC will seek PUC approval of a definitive plan to sell via public auction its share of Seabrook, with such sale to occur no later than December 31, 2003. The public auction shall be subject to PUC administration and to the requirements, if any, of the Page 39 Seabrook Joint Owners Agreement. NAEC will submit a plan for the sale to the PUC. The PUC shall determine prior to the auction a confidential minimum bid for this sale, designed to stimulate participation in the auction and to maximize proceeds. NAEC shall make all reasonable efforts to include minority ownership shares (including that of The Connecticut Light and Power Company) in the sale of Seabrook, so that a controlling interest may be offered. Concurrent auctions, including ones that may be subject to regulatory oversight other than by the PUC, may be required to aggregate a controlling shares. Subject to approval of FERC, on Competition Day NAEC will lower its overall ROE to 7%, but in the event that the PUC either rejects a proposed sale of Seabrook, or fails to act on such application within 180 days after NAEC's proposed sale application is filed with the PUC, NAEC's return on equity shall be increased from 7 percent to 150 basis points more than the average 10-year Treasury bond yield for the preceding 6 months, but not less than 7 percent nor more than 11 percent, and then readjusted accordingly at the end of every 6 month period. The increase in ROE is only applicable if the failure of the sale is through no fault of NU or PSNH. Upon a successful sale of NAEC's share of Seabrook, the existing Seabrook Power Contract between PSNH and NAEC shall be terminated. However, subsequent to such sale, PSNH shall continue to be responsible for funding NAEC's former ownership share of decommissioning liability, calculated on the basis of full funding by December 31, 2015, using an estimated decommissioning date of 2015 or as otherwise determined by the Nuclear Decommissioning Finance Committee. PSNH may enter into a new contract to provide for the payment of Seabrook nuclear decommissioning costs, with full recovery of the costs of that contract to be recoverable from PSNH's customers via Part 2 of the SCRC. Under no circumstances will PSNH's customers have any responsibility for increases in decommissioning funding above the amount calculated based upon the foregoing payment schedule as of the sale date. Beginning on Competition Day and continuing until such time as NAEC's ownership share of Seabrook is sold and the closing on such sale occurs, its output will be sold into the market pursuant to Section IX and all net proceeds will be applied to Stranded Costs. L. Failed Auction PSNH will make every reasonable effort to assure that a "failed auction" does not occur, resulting in some or all of its fossil/hydro generating stations, Seabrook, or Vermont Yankee not being sold. Steps to minimize the risk of a Page 40 failed auction include the bundling of various assets as "must bid" groupings at the commencement of the Second Round of the auction process, and dedicated marketing of the assets throughout the auction process. Should assets be left unsold as a result of the auction process, the PUC shall have the authority to order the divestiture of the asset or obligation. This may be accomplished by awarding the asset, entitlement, or obligation to the highest bidder; requiring a PSNH affiliate to pay the minimum auction price in the case of Seabrook or Vermont Yankee; requiring a PSNH affiliate to pay the net book value for fossil/hydro generating stations; conducting an absolute auction; or by such other means as the PUC deems appropriate. If there is no final sale, PSNH will retain the assets, entitlements, or obligations and bid their output into the market with the net of costs and revenues included in Part 2 of the SCRC after the earlier of the Recovery End Date or the date that the Non-Securitized Stranded Costs are fully amortized. IX. MARKETING OF ENERGY A. Prudent Operation of PSNH Generating Assets Notwithstanding any other provisions of this Agreement, PSNH will be responsible for prudently operating its fossil/hydro generating assets, and for prudently managing the generation-related entitlements and purchase obligations in which it retains an interest until such time as they are sold or transferred to another entity, or a purchase obligation terminates. B. Marketing of PSNH Power 1. Fossil Steam, Hydroelectric, Internal Combustion and Nuclear Ownership, Entitlements or Purchase Obligations Notwithstanding any other provision of this Agreement, PSNH will be responsible for the prudent marketing of the output of any generating assets, entitlements, or purchase obligations which it owns or in which it retains an interest. Revenues from these sales will include the full capacity and energy revenue and the revenue from ancillary services related to PSNH's generating stations and entitlements, and the revenues from the resale of power purchased under purchase obligations shall include the full revenue derived from the sale of energy, capacity or other products. All revenue from these sales shall be used to reduce Non-Securitized Stranded Costs in the order and manner prescribed in the Stranded Cost Recovery Charge section of this Agreement. Page 41 2. Purchases from Qualifying Facilities ("IPPs") at Short Term Avoided Cost Rates For so long as PSNH is required to purchase the output from IPPs under short term avoided cost rates, it shall be deemed prudent for PSNH to sell or bid IPP power into the pool at the ISO New England market clearing price. 3. Purchases from Qualifying Facilities ("IPPs") under Long-Term Contracts or PUC-Approved, Long-Term Rate Orders PSNH will auction its power obtained from IPPs under long-term contracts or under PUC approved long-term rate orders. Said auctions will be conducted under PUC oversight and will occur no more often than once every six months. The auctions may include all IPPs under long-term contracts and long-term rate orders or the auctions may include combinations thereof. PSNH may establish reasonable minimum bids for said auctions. If the actual bids submitted in these auctions do not meet or exceed PSNH's minimum bids or, for good reason, some IPPs are not included in the auction, PSNH may sell the output from these IPPs into the pool at a price no less than the ISO New England market clearing price until the next semiannual auction. The PUC retains jurisdiction to determine whether the minimum bid and/or the decision to exclude certain IPPs from the auction was prudent. Revenues derived from the marketing of power purchased from IPPs under long-term avoided cost rate orders and long-term contracts shall be included as a credit to Part 2 of the SCRC. C. Procedure for Review of Plant Operation and Marketing of Power PSNH shall annually file a report and such other information as the PUC shall require for review by the PUC supporting PSNH's plant operations and the results of the sale of the output from PSNH's plants, entitlements and purchase obligations. Such filings shall be made on a time schedule to be determined by the PUC. X. EMPLOYEE PROTECTION As part of the plan to divest generating assets, certain commitments have been made to represented and non-represented employees. PSNH believes that those commitments are comparable to commitments made by other New England utilities that have divested their generation. Such commitments have been made to PSNH's fossil/hydro employees and to North Atlantic Energy Service Corporation's ("NAESCO") nuclear employees. Page 42 A. PSNH Fossil/Hydro Represented Employees PSNH is a party to a Collective Bargaining Agreement ("CBA") with the International Brotherhood of Electrical Workers ("IBEW"), Local 1837 in New Hampshire. The purchaser will be required to assume PSNH's obligations under the IBEW-PSNH Fossil/Hydro CBA at the closing of the asset sale. PSNH has also agreed to provide certain employment protections for non-represented employees, which the purchaser will also be obligated to assume at the closing. In each case, the employee commitments to be undertaken by the purchaser will also be binding upon any successor or assigns or any other entity acquirer of the purchaser. Costs associated with subsequent workforce restructuring activities will be borne solely by the purchaser. IBEW Local No. 1837 represents the bargaining unit employees serving fossil/hydro, including PSNH Fossil/Hydro Engineering and Operations ("FHEO") Stores and Production Maintenance. The purchaser will be required to assume and perform the CBA in the form in place on the closing date. The current agreement with the IBEW local was effective as of March 21, 1999 and is expected to expire on May 31, 2002. Key provisions of the CBA include a 3 year wage and benefits package, a memorandum of understanding dated March 12, 1999 regarding the separation of the FHEO agreement from the larger PSNH-wide Retail Business Group agreement, and an addendum to the agreement covering issues related to the sale and subsequent transfer of fossil/hydro assets to a purchaser. B. NAESCO Represented Employees NAEC will require that any purchaser of a controlling interest in the facility provide certain assurances to employees at the time of closing. Specifically, the buyer will commit to become a party to and honor the collective bargaining agreement with Local Union Number 555 of the Utility Workers Union of America that is in effect at the time of closing. Further, NAEC will propose to require that the buyer offer continued employment for a period of twelve months (except as describe below) following the closing to persons who were employed in represented positions during the three months prior to the closing. In addition, NAEC will work with union leadership on other negotiable benefits similar to those offered to non-represented employees. C. PSNH and NAESCO Non-Represented Employees The purchaser will be required to offer all non-represented fossil/hydro and nuclear employees a minimum of Page 43 twelve months of employment (except as describe below) following the closing at a level of wages and benefits in the aggregate not less than such employees are receiving immediately prior to the closing. The purchaser will also be required to provide out-placement assistance workshops and tuition reimbursement of up to $3,000 per employee for job-related education courses or training to non-represented employees whose employment is involuntarily terminated during the six months following the twelve month employment period. If the employment of non-represented employees is terminated during the first twelve months of employment with the purchaser, for reasons other than cause, those employees shall be entitled to a severance benefit from the purchaser. The severance benefit shall include but not be limited to; out-placement assistance workshops, a lump sum $3,000 payment for retraining assistance; a one-time payment equal to six months of company contributions for health care for the employee and the employee's family members covered under the Northeast Utilities Service Company group insurance plan at the time of termination; access to an Employee Assistance Program equivalent to that offered to PSNHINAESCO employees, for a period consistent with the term of the health benefits. Additionally, the purchaser shall provide a cash severance benefit which is the greater of either a) the remainder of pay and benefits due the employee as a result of the minimum one-year employment clause or b) a severance payment calculated at two weeks of straight time pay for each full year of continuous credited service up to a maximum of 52 weeks of pay, with a minimum of 4 weeks pay. D. Retirement Benefits for Represented and Non-Represented Employees of PSNH or NAESCO 1. Pension The purchaser will be obligated to provide a defined benefit plan that provides at least a minimum level of pension benefits to any of the PSNH/NAESCO employees who are employed by the purchaser as of the closing and subsequently leave employment with the purchaser or subsequent purchasers. The minimum level of pension benefits that the purchaser will be obligated to provide will be calculated using the pension benefit formula applicable to the employee under the PSNH/NAESCO plans as of the closing. The purchaser's obligation with regards to this pension benefit will be calculated as the difference between (a) the employee's total pension benefit as calculated utilizing the pension benefit under PSNH's/NAESCO's plan applicable to the employee as of the closing, the employee's final average earnings (as so defined in such plan) with purchaser, and the employee's total years of service with PSNH and/or Page 44 NAESCO and the purchaser and, (b) the pension benefit the employee receives from PSNH or NAESCO, (or any successor or assign). The PSNH/NAESCO portion of the employee's pension benefit will be calculated by PSNH/NAESCO as of the closing, based upon the pension benefit formula, years of credited service and final average earnings applicable to the employee as of the closing. 2. Pension Rule 85 Effective January 1, 2000, PSNH and NAESCO employees are eligible to receive full pension benefits beginning at age 55 if they have combined age and years of service totaling at least 85 (the "Rule of 85"). 3. Pension Plan Modification Any employee who is age 50 to 54 on the date of the announcement of the winning bidder(s) and whose age plus credited years of service equals or exceeds 65 years and who is subsequently involuntarily separated from employment by the purchaser, will be eligible for the following additional retirement benefits: 1) retiree life insurance equivalent to that provided to NU system retirees, beginning at separation; 2) continuation of health care benefits at COBRA rates until age 55, after which retiree health care benefits and contributions apply; and 3) the option to begin pension payments before age 55. An employee eligible to begin receiving pension benefits before age 55 will be entitled to receive the following percentages of the total pension benefit to which the employee would be entitled at or after age 55:
Employee Benefits Eligibility Age when benefits begin Percent of accrued age 65 benefit 55 75% 54 71% 53 67% 52 63% 51 59% 50 55%
4. Pension Benefits - General The pension benefit must be guaranteed and protected from forfeiture to the same extent as any ERISA retirement plan benefit. If such benefit should be subject to Social Security or Medicare taxes that do not apply to ERISA retirement plan benefits, such benefits will be grossed up to offset any additional tax liability to the employee. 5. Vesting and Years of Credited Service Page 45 The purchaser will apply each employee's prior service with the NU system companies and service recognition/credited service which was recognized by NU towards any eligibility, vesting or other waiting period requirements under the purchaser's employee benefit plans (including, but not limited to, pension benefits, life insurance, health care benefits, and vacation and sick time), will waive any pre-existing medical condition provisions under the purchaser's health care plans in which the employees participate, and will give the employees credit for any moneys paid toward the annual deductible under such plans as of the closing. All employees who are vested in the NU plans as of the closing shall be vested as of the closing in the purchaser's plans. E. Fossil/Hydro and Nuclear Employees generally PSNH and NAESCO will consider offering an early retirement program to all eligible fossil/hydro and nuclear personnel. The cost of this program will be the responsibility of PSNH. F. PSNH Retail Business Group (T&D Company) commitments to Union Workers PSNH will honor all existing collective bargaining agreements for non-fossil/hydro employees, including T&D employees. XI. CODE OF CONDUCT In PUC Order No 22,875 issued in Docket No. DR 96-150 dated March 20, 1998, the PUC permitted retail-marketing companies affiliated with jurisdictional utilities to compete for retail customers in their affiliated distribution utility's Service Territory, subject to an appropriate Code of Conduct to protect against anti-competitive behavior. In that same order, the PUC stated that, prior to the final implementation of a Code of Conduct, the equivalent Code of Conduct enacted in California should govern. The California Code is set out in Appendix I. PSNH agrees to abide by the California Code, as interpreted by the "New Hampshire Affiliate Transaction Rules Applicable to PSNH and NU" attached hereto as Appendix H until such time as the PUC adopts a New Hampshire Code of Conduct. The Parties will recommend that the Code of Conduct to be adopted by the PUC address issues such as, but not limited to, physical separation, restrictions on common management or directors, contractual or financial relationships and preferential treatment. Regardless of the final PUC order implementing a New Hampshire Code of Conduct, PSNH agrees: that it will not use Page 46 its utility status to favor any affiliated companies, that any customer and/or marketing data provided to any affiliated company will be simultaneously provided to all other Competitive Suppliers, that its generating and marketing affiliates will not share office space or personnel, that its marketing affiliates will not use the name Public Service of New Hampshire or any similar name, that its affiliates may not otherwise trade on the name or status of PSNH in marketing efforts, that its affiliates' books and accounts will be open to inspection by the PUC in accordance with the provisions of paragraph 11 of Appendix H of this Agreement, and that it and NU will cooperate to establish market power measurements and benchmarks that will be effective to monitor how the ISO-NE power marketplace is operating. The Parties agree to recommend that resolution of disputes under any market power provisions adopted by the PUC should be performed in a manner consistent with the arbitration procedures now in place under the Telecommunications Act of 1996. XII. EXEMPT WHOLESALE GENERATOR STATUS Should any entity to whom PSNH sells its generating assets be qualified to seek Exempt Wholesale Generator status under Section 32 of the Public Utility Holding Company Act of 1935 and other federal law, rules and regulations, the Parties agree that they will support the purchaser's efforts to obtain any necessary approvals and findings from the PUC. XIII. SECURITIZATION OF STRANDED COSTS A. Role of Securitization in Settlement The Parties recognize that securitization is a useful tool for lowering customers' bills and maximizing customer benefits. The issuance of RRBs will allow PSNH to reduce its cost of capital, thereby significantly reducing rates for customers. Securitization is expected to account for a material portion of the 15.3% average rate reduction that will be achieved when this Agreement is implemented. The Parties acknowledge that securitization of Stranded Costs is a pivotal element of the settlement, and that passage of acceptable legislation and the successful completion of the proposed bond issue are conditions to implementing this Agreement. B. Legislation Securitization of Stranded Costs may be considered by the PUC under Chapter 289 of the Session Laws of 1999, Page 47 Section 3 and Chapter 249 of the Session Laws of 2000. The Parties hereby commit to make all reasonable efforts to issue the RRBs as expeditiously as possible. Such legislation authorizes, among other things, the creation by the PUC of an irrevocable property right to bill and collect nonbypassable RRB Charges in amounts sufficient to recover RRB Costs associated with the RRBs. Such irrevocable property right will be referred to as "RRB Property." Pursuant to RSA Chapter 369-B, the State of New Hampshire has pledged, contracted, and agreed that neither the State nor any agency thereof, including the PUC, will limit or alter the RRB Charge, securitized Stranded Costs, RRB Property, or the finance order and all rights thereunder, until the RRBs and any interest, fees and expenses associated therewith are fully discharged, unless adequate provision is made for the protection of the owners or holders. The legislation also provides that RRB Property may be sold in a true sale transaction to a SPSE in order to facilitate the issuance of RRBs and directs the PUC to adjust the RRB Charges periodically in order to ensure the timely recovery of RRB Costs (see the description of the True-Up Mechanism herein). The RRB Charges will be non-bypassable pursuant to RSA 374-F:3 and RSA Chapter 369-B, and as provided in Section V(B). C. PUC Order Securitization will require the prior approval by the PUC in the form of a finance order which includes the transaction description, certain findings, orders and approvals. PSNH will request findings that will maximize the likelihood of achieving a Triple-A Rating on the RRBs and the marketability of the RRB issuance. The PUC will be requested, among other things, to: (i) approve the issuance of RRBs in an amount consistent with RSA Chapter 369-B, (ii) approve the organization and capitalization of the SPSE to which the RRB Property will be sold, (iii) establish the RRB Property and the RRB Charge, (iv) provide for the periodic adjustment of the RRB Charge via the True-Up Mechanism described herein, (v) approve the general structure and terms of the RRBs (as summarized below), (vi) approve the servicing of the RRB Charge by PSNH, as provided in Section XIII.D.3, as the initial servicer for the RRB Property (the "Servicer"), or any successor Servicer, under a servicing agreement (the "Servicing Agreement") and (vii) declare the finance order irrevocable pursuant to the legislation. Page 48 D. RRB Transaction Overview The finance order sought by PSNH will, among other things, require approval of the following aspects of the RRB transaction, finding that they are consistent with achieving the highest rating and therefore the lowest cost on the RRBs. 1. Sale of RRB Property a. PSNH will form a bankruptcy-remote, wholly owned SPSE. b. PSNH will capitalize the SPSE in an amount anticipated to be at least 0.50% of the initial principal balance of RRBs. These funds will be deposited in the Capital Subaccount (see Section XIII(D)(5)(b)). This capitalization is required in order that PSNH may treat the RRB issuance by the SPSE as debt for tax purposes. c. An overcollateralization subaccount will be established up to the level required to achieve the highest credit rating. The amount will be finalized prior to the issuance of the RRBs and will depend primarily on rating agency requirements and tax considerations. Collections of RRB Charges with respect to overcollateralization will be deposited in the Overcollateralization Subaccount such that the amount therein will accumulate over time in accordance with a schedule set forth at issuance (see Section XIII(D)(5)(c)). d. PSNH will sell the RRB Property to the SPSE in a transaction which will be intended and treated as a legal true sale and absolute transfer to the SPSE. A true sale of RRB Property to a bankruptcy-remote SPSE provides that, in the event of a PSNH bankruptcy, the RRB Property owned by the SPSE will not become a part of the PSNH bankruptcy estate and PSNH creditors will have no recourse to the RRB Property or RRB Charges. 2. Issuance of RRBs a. The SPSE will issue RRBs in one or more series, each of which may be offered in one or more classes having a different principal amount, term, interest rate and amortization schedule, and reasonably consistent with the forecast amortization schedule contained in Appendix D. To the extent allowed by the PUC in the financing order, the form, term, interest rate (whether fixed or variable), repayment schedule, classes, number and determination of credit ratings and other characteristics of RRBs will be determined at the time of pricing based on then-current market conditions, in order to achieve the all-in lowest cost financing possible. Under certain circumstances, the RRBs may be subject to call provisions and may be refinanced Page 49 through a subsequent issuance of RRBs to the extent such refinancing would result in a lower interest cost associated with the RRBs refinanced. At least 3 business days in advance of RRB issuance, PSNH will make an informational filing with the PUC consisting of an "Issuance Advice Letter" setting forth the final terms of the RRBs. b. RRBs will be non-recourse to PSNH and its assets and will not be secured by a pledge of the general credit, full faith or taxing power of the State of New Hampshire or any agency or subdivision of the State of New Hampshire. c. The targeted rating on the RRBs will be Triple-A. d. The RRB Charge is anticipated to be billed until the expected maturity date of the RRBs, which is 12 years from their date of issuance. However, to the extent the RRBs have not been fully amortized by such date, the RRB Charge may continue to be billed until the RRBs are fully amortized and all costs related thereto have been paid; provided, however, that in no event will the RRB Charge be billed beyond the legal maturity date of the RRBs which will not be longer than 14 years from their date of issuance. e. RRBs will be secured by all of the assets of the SPSE, including without limitation (i) the RRB Property, (ii) the rights of the SPSE under all transaction documents such as the purchase agreement by which the SPSE acquires all rights in the RRB Property (and including any swap agreements in place with respect to floating rate RRBs), (iii) the Servicing Agreement by which PSNH, or any successor servicer, acts as Servicer for the RRB Property, (iv) the Collection Account (as summarized below), (v) certain investment earnings on amounts held by the SPSE and (vi) the capital of the SPSE. f. RRBs will be repaid through the collection of the RRB Charge as described in Section V(B). g. The RRB Charges will be non-bypassable as provided in Section V(B). 3. Servicing of RRBs a. On behalf of the SPSE, PSNH will initially act as the Servicer for the RRB Property, and PSNH, or any successor Servicer, will be responsible for calculating, billing, collecting, and remitting the RRB Charge. b. In consideration for its servicing responsibilities, PSNH or any successor Servicer will receive a periodic servicing fee which will be recovered through the RRB Charge. In the event of a failure of any customer to pay the RRB Charge, PSNH, as Servicer, or any Page 50 utility successor to PSNH, is authorized to disconnect service to such customer to the same extent that a public utility may, under applicable law and regulations, disconnect service to a customer who fails to pay any charge. If PSNH is replaced as Servicer due to its imprudence, the PUC may consider such lost periodic servicing fees when determining new delivery rates. c. In the event that the PUC decides to allow billing, collection, and remittance of RRB Charges by a third party supplier within the PSNH Service Territory, such authorization must be consistent with the rating agencies' requirements necessary for the RRBs to receive and maintain the targeted Triple-A Rating. d. PSNH or any successor Servicer will periodically remit (as frequently as required by the rating agencies) collections of RRB Charges to the SPSE. The SPSE will use the RRB Charge remittances to make payments of interest, principal, fees and expenses on the RRBs and to fund certain credit enhancement reserves (the application of such remittances is described further herein). PSNH may be required to obtain a letter of credit or other credit enhancement to protect against any cash collection losses resulting from the temporary commingling of funds. e. Depending upon the capability of PSNH's systems at the time of issuance, PSNH may utilize some type of estimation methodology to determine the amount of RRB Charges to remit to the SPSE; provided, however, that PSNH will remain liable to remit the amount of RRB Charges that it actually collects. 4. RRB Charge a. The RRB Charge will be established at levels intended to provide for the full recovery of RRB Costs, based upon assumptions including sales forecasts, payment and charge-off patterns, and lags between SCRC billing and collection by the Servicer. b. So that the RRB Charge may recover interest payments on the RRBs, it will be calculated to reflect the coupon on the RRBs as determined by market conditions at the time of issuance. If the RRBs are Triple-A Rated and are issued prior to December 31, 1999, the coupon rate on the RRBs will be determined by market conditions at the time of pricing, but PSNH guarantees an All-In Cost of 6.25%. If the RRBs are Triple-A Rated and are issued between January 1, 2000 and July 1, 2000, the coupon rate on the RRBs will be determined by market conditions at the time of pricing but PSNH guarantees an All-In Cost of 7.25%, (see Section V(B)(3) above). Page 51 c. The RRB Charge will be billed so long as RRBs are outstanding, but in no event after the legal final maturity. 5. Credit Enhancement; Overcollateralization and True-Up Mechanism a. In order for the RRBs to receive a Triple-A rating, the exposure to losses due to, among other things, shortfalls in projected sales of energy, longer-than-expected delays in bill collections, and higher-than-estimated uncollectable accounts must be minimized. This will be accomplished with various forms of credit enhancement described in the finance order, including the various components of the Collection Account and the True-Up Mechanism described below. b. The RRB Charge collections will be deposited into an interest bearing Collection Account, which will consist of a General Subaccount (which will hold the collections with respect to principal, interest, fees, and expenses) and at least three other interest bearing subaccounts: the Overcollateralization Subaccount (which will hold collections with respect to Overcollateralization (see Section XIII(D)( 1 )(c)), the Capital Subaccount (which will hold PSNH's initial capital contribution to the SPSE) and the Reserve Subaccount (which will hold any excess collections of RRB Charge as described below). RRB Charge collections in excess of scheduled payments of interest, principal, fees and expenses on RRBs will be allocated to: (i) the Capital Subaccount to the extent the amount therein has been reduced to below the initial capital contribution, (ii) the Overcollateralization Subaccount up to the required level set forth for such date at issuance by the rating agencies and (iii) the Reserve Subaccount any remaining amounts. To the extent that RRB Charges are insufficient to make scheduled payments of interest, principal, fees and expenses on RRBs during any period, the accounts will be drawn upon in the following order (i) the Reserve Subaccount, (ii) the Overcollateralization Subaccount and (iii) the Capital Subaccount. c. The RRB Charge will be calculated (both initially and as a result of the True-Up Mechanism) to recover an amount in excess of the amounts needed to make payments of principal, interest, fees and expenses on RRBs (such excess, "Overcollateralization"). The actual amount of Overcollateralization required to achieve the highest credit rating will be finalized prior to the issuance of the RRBs and will depend primarily on rating agency requirements and tax considerations. The Overcollateralization will be collected over time and deposited to the Overcollateralization Subaccount such that the amount therein will accumulate over time in accordance with a schedule set forth at issuance. Page 52 d. The RRB Charge will be adjusted up or down pursuant to the True-Up Mechanism in accordance with the specific methodology described in the finance order. At the times specified in the order and as approved by the PUC, an RRB Charge adjustment will be requested such that, during the period for which that RRB Charge will be billed, RRB Charge collections will be sufficient to: (i) pay principal and interest on the RRBs in accordance with the expected amortization schedule, (ii) pay fees and expenses related to RRBs, (iii) maintain the Overcollateralization Subaccount balance at the required levels and (iv) restore the capital contribution to the Capital Subaccount to the extent it has been drawn upon to make payments on RRBs, and (v) reduce the balance in the Reserve Subaccount to zero. When PSNH anticipates that the Recovery End Date will occur in six months, it may, at its option, initiate monthly True-Up Mechanism reconciliations. Similarly, during the twelve months prior to the expected maturity date and thereafter until the legal maturity date, PSNH may, at its option, initiate quarterly or monthly True-Up Mechanism reconciliations. When the RRBs are paid off, any balances in the Overcollateralization and Reserve will be used to reduce the Part 2 Stranded Costs. E. Use of Proceeds The SPSE will transfer the proceeds it received from the issuance of the RRBs to PSNH as consideration for the RRB Property. PSNH may use the proceeds of securitization in such manner as the PUC shall approve in the finance order. F. State Oversight The New Hampshire State Treasurer, or other State official designated by the State Treasurer, shall have oversight over the terms and conditions of the RRB issue, including but not limited to tax aspects and such other arrangements to which the Parties may mutually agree, to assure that PSNH exercises fiscal prudence, and achieves the lowest overall cost for the RRBs. XIV. OTHER PSNH COMMITMENTS A. Bankruptcy of NU or Other Affiliates PSNH and NU agree to take all possible steps to insure that the State, acting on behalf of PSNH's customers, will be entitled to participate as a party in any bankruptcy of NU, PSNH or any current or future affiliate during the term in which any Rate Reduction Bonds remain outstanding. B. Dividend Page 53 Except for the issuance of a dividend pursuant to 2000 N.H. Laws 249:8, PSNH agrees that it will not make dividend payments to its parent, NU, until the earliest of the date that the write-off associated with this Agreement has been taken; or the date that this Agreement is either terminated pursuant to Section XVI or disapproved by the PUC. C. Sale of PSNH or NU If PSNH's T&D assets are sold within five years of Competition Day, for a premium above 1.5 times the net book value of those assets, less liabilities and obligations assumed by the purchaser ("Excess Premium"), 1/3 of the Excess Premium will be credited to Non-Securitized Stranded Costs. If NU itself is acquired or otherwise sold or merged during that same time period, it agrees that notwithstanding any contrary provision of law, the merger, acquisition or sale shall be subject to the jurisdiction of the PUC under RSA Chapters 369, 374, 378 or other relevant provisions, and that the merger, acquisition or sale shall be approved only if it be shown to be in the public interest. A merger of NU that is subject to this section shall not include acquisitions by NU of other entities. XV. PROCEEDINGS TO BE TERMINATED UPON IMPLEMENTATION OF SETTLEMENT A. Federal Court Litigation On Competition Day, PSNH agrees to dismiss with prejudice the suit it brought in Federal District Court on the issuance by the PUC of its February 28, 1997 Final Plan for restructuring (D.N.H. 97-97/ D.R.I. 97-121). Due to the fact that there are other utility plaintiffs involved in the litigation, the Parties understand that the case may not be dismissed in its entirety. B. Public Utilities Commission Proceedings PSNH has sought to stay the following proceedings during the pendency of the approval process for this Agreement, and those proceedings shall be dismissed with prejudice upon PUC approval and adoption of legislation authorizing implementation of the Agreement. 1. DR 96-148 This proceeding was brought by the PUC to determine whether PSNH had used its `best efforts' to negotiate with IPPs. 2. DR 96-149 Page 54 This proceeding was brought by the PUC to investigate whether FERC's "light loading" rules applied to PSNH's purchases from IPPs. 3. DR 96-424 This proceeding was brought to explore whether a commercial customer should be able to self generate without any obligation to support system costs. 4. DR 97-014 and DR 98-014 These proceedings were brought to consider PSNH's recovery of fuel and purchased power expenses. 5. DR 97-059 This proceeding was brought to determine new base rates for PSNH. 6. DE 97-167 This proceeding was brought to investigate whether PSNH should have joined the suit brought by other utilities against NU to recover losses alleged to have resulted from NU's management of Millstone 3. 7. DF 97-185 This proceeding was brought to allow the PUC to conduct a management audit of PSNH in relation to the ongoing rate case. 8. DR 98-006 and DR 98-071 These proceedings were brought to evaluate the Least Cost Integrated Resource Plan ("LCIRP") filing by PSNH. 9. DSF 99-066 and DE 00-092 These proceedings were brought to complete the annual reviews of PSNH's proposed bulk power projects. XVI. CONDITIONS FOR IMPLEMENTING THE SETTLEMENT All conditions set forth in this section must be met to the satisfaction of all Parties as a condition precedent to implementation of this Agreement, and the Parties hereby agree to take all reasonable measures to ensure fulfillment of these conditions. The failure of any of these conditions to be fulfilled will result in termination of the Agreement, subject to the provisions of Section XVII(D). Page 55 A. The PUC must approve this Agreement by a Final Order, without condition or modification, unless otherwise agreed to by the Parties as provided in Section XVII(D). B. PSNH and NAEC must receive approval from the appropriate lenders pursuant to existing credit agreements. C. Legislation must be enacted allowing the securitization of assets and the issuance of Rate Reduction Bonds in a manner fully consistent with the terms of this Agreement. This condition has been met by the enactment of Chapter 249 of the Session Laws of 2000. D. PSNH must close on the issuance of the Rate Reduction Bonds. E. PSNH must have entered into agreements to sell power from any remaining entitlements; or there must be an arrangement in place for PSNH to sell such entitlements into the wholesale market. F. All necessary final approvals, without condition or modification, for other jurisdictional matters must be obtained, as required, from the Federal Energy Regulatory Commission, the Securities and Exchange Commission, the Nuclear Regulatory Commission, and the Connecticut Department of Public Utility Control. XVII. MISCELLANEOUS A. Applicable Law This Agreement shall be governed by the laws of the State of New Hampshire. The Parties agree that any disputes regarding this Agreement will be subject to the jurisdiction of the PUC and the appellate jurisdiction of the New Hampshire Supreme Court. B. Successors and Assigns The rights conferred and obligations imposed on the Parties to this Agreement shall be binding on or inure to the benefit of their successors in interest or assignees as if such successor or assignee was itself a Signatory hereto. C. Entire Agreement This Agreement contains the entire agreement among the Parties respecting the subject matter herein and supersedes all prior agreements and understandings between them, including the Memorandum of Understanding among the Parties dated June 14, 1999. The agreements contained herein are Page 56 interdependent and not severable, and they shall not be binding upon, or deemed to represent positions of, the Parties if they are not approved in full and without modification or condition by the Commission subject to subsection D of this section, below. D. General Provisions If the PUC does not approve this Agreement in its entirety and without modification or condition, the Parties shall have an opportunity to amend or terminate this Agreement. If terminated, this Agreement shall be deemed withdrawn and shall not constitute a part of the record in any proceeding or be used for any purpose. This Agreement is the product of settlement negotiations. The content of those negotiations shall be privileged and all offers of settlement shall be without prejudice to the position of any party or participant presenting such offer. Acceptance of this Agreement by the PUC shall not be deemed to restrain the PUC's exercise of its authority to promulgate future orders, regulations or rules which resolve similar matters affecting other parties in a different fashion. The PUC's approval of this Agreement shall endure so long as necessary to fulfill the express objectives of this Agreement to the extent indicated in Chapter 249 of the Laws of 2000. The approvals contemplated by this Agreement shall not be construed as requiring the PUC to relinquish its authority to develop new policies and issue orders or to initiate investigations when it deems such actions are in the public good. As described below, this Settlement Agreement does not affect the jurisdiction of the PUC. To the extent that there is a dispute among parties in Docket No. DR 96-150 regarding the jurisdiction of the PUC and the FERC over the determination and recovery of Stranded Costs caused by state-mandated retail access policies, the Parties intend that nothing in this Settlement Agreement should resolve that dispute, affect the authority of either regulatory body over this issue, or limit the ability of the Parties to raise arguments or defenses relating to this jurisdictional issue. Notwithstanding any other provision of this Agreement, no provision herein shall be deemed to determine this jurisdictional issue. Accordingly, the Parties view this Agreement as a negotiated resolution of the issues presented by the restructuring of PSNH in the context of the PUC's electric utility restructuring proceeding. Page 57 The Parties agree to support this Agreement before the PUC and in any related legal proceedings or legislative inquiries or hearings, and to take all such action as is necessary to secure approval and implementation of the provisions of this Agreement. Signed this 22nd day of September, 2000 /s/ Jeanne Shaheen /s/ Michael G. Morris Jeanne Shaheen Michael G. Morris Governor of the State of New Hampshire Chairman, President and Chief State House Executive Officer Concord, NH 03301 Northeast Utilities 107 Selden Street Berlin, CT 06037 /s/ Philip T. McLaughlin /s/ Gary A. Long Philip T. McLaughlin Gary A. Long Attorney General President and Chief of the State of New Hampshire Operating Officer 33 Capitol Street Public Service Company of New Concord, NH 03301 Hampshire 1000 Elm Street P.O. Box 330 Manchester, NH 03105 /s/ Thomas B. Getz Thomas B. Getz Executive Director and Secretary New Hampshire Public Utilities Commission 8 Old Suncook Road Concord, NH 03301 /s/ Deborah J. Schachter Deborah J. Schachter Director Governor's Office of Energy and Community Services 57 Regional Drive Concord, NH 03301 Page 58 APPENDIX A - SUMMARY OF PROPOSED RATES APPENDIX A - SUMMARY OF PROPOSED RATES Public Service Company of New Hampshire Current and Target Revenue by Class
Total Revenue Revenue, cents/kWh Billed Rate Class KWH Current Current Percentage Sales (1) Rate (2) Target (3) Rates Target Decrease Residential Service 2,294,071,493 $ 333,425,361 $276,917,370 $ 14.534 12.071 16.9% General Service 1,421,780,341 182,776,854 156,452,709 12.855 11.004 14.4% Primary General Service 1,219,154,700 133,906,224 115,563,674 10.984 9.479 13.7% Large General Service 559,072,437 57,205,610 50,299,747 10.232 8.997 12.1% Outdoor Lighting Service 40,858,107 10,553,509 8,780,816 25.830 21.491 16.8% Total Retail 5,534,937,078 $ 717,867,558 $608,014,316 $ 12.970 10.985 15.3%
Note: all amounts are based on the 9/98 test year as proformed, excluding special pricing. (1) Sales for the Outdoor Lighting class have been recalculated based on the new kWh amounts shown in the Delivery Service Tariff. (2) Represents revenues for the 9/98 test year, proformed to the level of Tariff 38 temporary) base rates with an FPPAC rate of 0.383 cents/kWh. (3) Includes a Transition Service energy charge of 4.400 cents/kWh. Page 59 APPENDIX B - ENVIRONMENTAL RESERVE FUND IDENTIFIED SITES Messer Street former Manufactured Gas Plant ("MGP")(Laconia, NH) Keene former MGP (Keene, NH) Nashua former MGP (Nashua, NH) Dover former MGP(Dover, NH) Franklin former MGP (Franklin, NH) Calcutt Landfill (Dover, NH) Coakley Landfill Superfund Site (Greenland & North Hampton, NH) Port Refinery Superfund Site (Ryebrook, NY) Portland - Bangor Disposal Site(Portland, ME) Manchester Steam former Generating Plant (Manchester, NH) Cocheco former Generating Plant (Dover, NH) Seabrook Station former Landfill (Hampton, NH) Page 60 APPENDIX C - ESTIMATED BALANCE OF THE ASSETS AS OF JUNE 30, 2000 APPENDIX C - ESTIMATED BALANCE OF THE STRANDABLE ASSETS AS OF JUNE 30, 2000 (Millions of Dollars)
06/30/00 06/30/00 06/30/00 Book Market Strandable 2000 6/30/00 Amort. Balance Value Assets Written-Off Securitized Amortized Years Seabrook Over-Market Generation Assets $ 594 $ 100 $ 494 $ - $ 494 $ - $ 12 MP3 Over-Market Generation assets 82 - 82 - 64 18 12 Fossil Over-Market Generation assets (12/00) 178 290 (112) - - (112) 11.5 Hydro Over-Market Generation assets (12/01) 24 70 (46) - - (46) 10.5 Seabrook Deferred Return - NAEC 90 - 90 90 - - Seabrook Deferred Return - PSNH 15 - 15 15 - - Acquisition Premiums 310 - 310 162 - 148 12 Acquisition Premiums - F109 185 - 185 97 - 88 12 Unrecovered Obligation - YAEC, CY, MY 50 - 50 - - 50 8 Deferred SPP Costs 102 - 102 - - 102 12 Deferred FPPAC Costs 107 - 107 - - 107 12 Deferred VY Contract Termination Payments - (9) 9 - - 9 12 Market Value of Wholesale Power Contracts - 10 (10) - - (10) 12 Reserves for NHEC Settlement (24) - (24) - - (24) 12 Deferred NOx Allowance Credits (12/00) (5) - (5) - - (5) 11.25 Unamortized Loss on Reacq. Debt (6/00) 3 - 23 3 15 5 12 Unamortized Loss on Reacq. Debt (12/00) - - 11 - - 11 11.5 Unamortized Loss on Reacq. Debt (12/01) - - 3 - - 3 10.5 Total Assets $ 1,711 $ 461 $1,284 $ 366 $ 573 $ 345
Page 61 APPENDIX D - FORECAST AMORTIZATION SCHEDULE FOR STRANDABLE ASSETS
(Thousands of Dollars) Year Ending 12/31: 7/00 - 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 6/30/00 12/00 Seabrook Over-Market Generation Assets Securitized -- 13,170 27,813 29,897 2,138 34,547 37,137 39,920 42,913 46,130 49,588 53,305 MP-3 Over-Market Generation Assets Securitized -- 1,703 3,597 3,867 4,156 4,468 4,803 5,163 5,550 5,966 6,413 6,894 Amortized -- 762 1,524 1,524 1,524 1,524 1,524 1,524 1,524 1,524 1,524 1,524 Fossil Over-Market Generation Assets (12/00) -- -- (9,781) (9,781) (9,781) (9,781) (9,781) (9,781) (9,781) (9,781) (9,781) (9,781) Hydro Over-Market Generation Assets (12/01) -- (4,401) (4,401) (4,401) (4,401) (4,401) (4,401) (4,401) (4,401) (4,401) (4,401) (4,401) Seabrook Deferred Return-NAEC Written-off 89,892 -- -- -- -- -- -- -- -- -- -- -- Seabrook Deferred Return - PSNH Written-off 15,169 -- -- -- -- -- -- -- -- -- -- -- Acquisition Premiums Written-off 161,963 -- -- -- -- -- -- -- -- -- -- -- Amortized 6,178 12,356 12,356 12,356 12,356 12,356 12,356 12,356 12,356 12,356 12,356 12,356 Acquisition Premiums - F109 Written-off 96,788 -- -- -- -- -- -- -- -- -- -- -- Amortized 3,692 7,384 7,384 7,384 7,384 7,384 7,384 7,384 7,384 7,384 7,384 7,384 Unrecovered Obligation - YAEC, CY, MY -- 3,538 7,048 6,901 6,718 6,700 6,229 5,992 4,850 2,440 -- -- Deferred DOE Assessment -- 9 18 18 18 18 18 18 18 18 18 18 Deferred SPP Costs -- 4,240 8,481 8,481 8,481 8,481 8,481 8,481 8,481 8,481 8,481 8,481 Deferred FPPAC Costs -- 4,458 8,917 8,917 8,917 8,917 8,917 8,917 8,917 8,917 8,917 8,917 VY Contract Termination Payment -- 392 783 783 783 783 783 783 783 783 783 783 Market Value of Wholesale Power Contracts -- (417) (833) (833) (833) (833) (833) (833) (833) (833) (833) (833) Reserves for NHEC Settlement -- (1,008) (2,017) (2,017) (2,017) (2,017) (2,017) (2,017) (2,017) (2,017) (2,017) (2,017) Deferred NOx Allowance Credits -- -- (391) (391) (391) (391) (391) (391) (391) (391) (391) (391) Unamort. Loss on Reacq Debt - Exist -- 124 249 249 249 249 249 249 249 249 249 249 Unamort. Loss on Reacq Debt - 6/00 -- 90 181 181 181 181 181 181 181 181 181 181 Unamort. Loss on Reacq Debt - 12/00 -- -- 953 953 953 953 953 953 953 953 953 953 Unamort. Loss on Reacq Debt - 12/01 -- -- 248 248 248 248 248 248 248 248 248 248 Financing Costs - 6/00 Written-off 2,599 -- -- -- -- -- -- -- -- -- -- -- Securitized -- 400 844 908 976 1,049 1,127 1,212 1,303 1,400 1,505 1,618 Total 366,411 37,332 67,123 65,240 67,656 70,432 72,964 75,955 78,284 79,604 81,174 85,485
APPENDIX D - FORECAST AMORTIZATION SCHEDULE FOR STRANDABLE ASSETS
(Thousands of Dollars) 2011 2012 Total Seabrook Over-Market Generation Assets Securitized 57,300 30,242 494,099 MP-3 Over-Market Generation Assets Securitized 7,411 3,911 63,901 Amortized 1,524 762 18,285 Fossil Over-Market Generation Assets (12/00) (9,781) (4,891) (112,487) Hydro Over-Market Generation Assets (12/01) (4,401) (2,200) (46,209) Seabrook Deferred Return-NAEC Written-off -- -- 89,892 Seabrook Deferred Return - PSNH Written-off -- -- 15,169 Acquisition Premiums Written-off -- -- 161,963 Amortized 12,356 6,178 148,269 Acquisition Premiums - F109 Written-off -- -- 96,788 Amortized 7,384 3,692 88,603 Unrecovered Obligation - YAEC, CY, MY -- -- 50,416 Deferred DOE Assessment 18 9 215 Deferred SPP Costs 8,481 4,240 101,771 Deferred FPPAC Costs 8,917 4,458 107,000 VY Contract Termination Payment 783 392 9,400 Market Value of Wholesale Power Contracts (833) (417) (10,000) Reserves for NHEC Settlement (2,017) (1,008) (24,200) Deferred NOx Allowance Credits (391) (196) (4,500) Unamort. Loss on Reacq Debt - Exist 249 124 2,982 Unamort. Loss on Reacq Debt - 6/00 181 90 2,167 Unamort. Loss on Reacq Debt - 12/00 953 476 10,955 Unamort. Loss on Reacq Debt - 12/01 248 124 2,604 Financing Costs - 6/00 Written-off -- -- 2,599 Securitized 1,740 918 15,000 Total 90,118 46,905 1,284,682
Page 62
(Thousands of Dollars) Year Ending 12/31: 12/00 7/00 - 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 6/30/00 12/00 Total Write-Off 366,411 -- -- -- -- -- -- -- -- -- -- -- Total Securitized -- 15,273 32,254 34,671 37,270 40,064 43,067 46,295 49,766 53,496 57,506 61,817 Total Amortization -- 22,059 34,869 30,569 30,386 30,368 29,897 29,660 28,518 26,108 23,668 23,668 Total 366,411 37,332 67,123 65,240 67,656 70,432 72,964 75,955 78,284 79,604 81,174 85,485 Balance of Total Stranded Assets 918,271 880,940 813,817 748,577 680,921 610,489 537,525 461,570 383,286 303,682 222,508 137,023
Securitization: 6/30/00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total Payment 35,816 71,631 71,631 71,631 71,631 71,631 71,631 71,631 71,631 71,631 71,631 Interest Payment (at 7.25%) 20,543 39,377 36,960 34,361 31,567 28,564 25,336 21,865 18,135 14,125 9,814 Principal Payment 15,273 32,254 34,671 37,270 40,064 43,067 46,295 49,766 53,496 57,506 61,817 Principal Balance 573,000 557,727 490,802 453,532 413,468 370,401 324,106 274,340 220,844 163,338 101,521 EOY
(Thousands of Dollars) Year Ending 12/31: 2011 2012 Total Total Write-Off - - 366,411 Total Securitized 66,450 35,071 573,000 Total Amortization 23,668 11,834 345,271 Total 90,118 46,905 1,284,682 Balance of Total Stranded Assets 46,905
Securitization: 2010 2011 2012 Total Payment 71,631 71,631 35,816 Interest Payment 9,814 5,181 745 Principal Payment 61,817 66,450 35,071 Principal Balance 101,521 35,071 - EOY
Page 63 APPENDIX E - TRANSITION SERVICE / DEFAULT SERVICE PROTOCOL Transition Service and Default Service shall be procured in accordance with the provisions of RSA Chapter 369-B. Page 64 APPENDIX F - FOSSIL/HYDRO ASSET AUCTION ILLUSTRATIVE TIMELINE AND SEQUENCE OF EVENTS FOR FOSSIL/HYDRO ASSET AUCTION:
Week Beginning Action 4-Jan-00 Receive PUC approval of Agreement E. Revise Descriptive Memorandum (DM) to conform to PUC approval 17 F. Finalize revisions to DM 3-Feb-00 PUC Appeal Period concludes 7-Feb-00 14 Launch Auction with press release, invitations to bid - Round 1 begins 21 G. Distribution of DM's complete 6-Mar-00 Schedule Data Room visits (if needed), respond to bidder questions 13 Schedule Data Room visits (if needed), respond to bidder questions H. Schedule Data Room visits (if needed), respond to bidder questions 27 Respond to Bidder Questions 3-Apr-00 Indicative bids due 10 Evaluate bids and select Round 2 participants I. Round 2 Bidders notified and scheduled 24 Site visits and management presentations 1-May-00 Site visits and management presentations
Page 65 8 Site visits and management presentations 15 Site visits and management presentations 22 Site visits and management presentations 29 Site visits and management presentations 5-Jun-00 Site visits and management presentations 12 19 26 Final bids due 3-Jul-00 Bids reviewed and winners selected 10 Asset Purchase Negotiations conducted 17 Winners announced 24 31 Start state and federal regulatory approval process Prior to 12/31/2000 Complete Financial Closing on all transactions
PSNH reserves the right after consultation with the Commission, to alter or modify this schedule as necessary, before or during the auction process to best satisfy the goals of the auction. Page 66 APPENDIX G - DESCRIPTION OF PSNH FOSSIL/HYDRO ASSETS TO BE DIVESTED VIA AUCTION 1. Thermal Facilities: a. Merrimack Station Merrimack Station is located south of the Garvins Falls Hydroelectric Project, along the Merrimack River in Bow, New Hampshire. Merrimack Station Generating Facilities:
Seasonal claimed Year Unit Load role Fuel capability(winter)(MW) Installed Unit 1 Base load Coal 122.3 1960 Unit 2 Base load Coal 353.5 1968 CT-1 Peaking Jet 21.1 1968 CT-2 Peaking Jet 21.1 1969 Total 518.0
Merrimack Station is PSNH's prime base load facility with combined generating capacity from the two coal-fired steam units and two jet fuel-fired Combustion Turbine units of 518.0 MW. The two coal-fired units are operated by personnel onsite 24 hours a day, seven days a week. While the units operate in the base load role most of the time, they can be reduced in load during off-peak hours. With this capability, these units can provide capacity, energy and reserve products transacted at the ISO New England power markets. The two combustion turbine units mainly serve a peaking role, operating during periods of highest seasonal peak demand or when generation is needed quickly to maintain electrical system stability. These units typically serve the capacity and reserve markets, and not the energy market. In addition to these units, the Merrimack site includes numerous outbuildings, including the Coal Unloading System and Coal Crusher House, office and storage facilities, as well as a fly ash disposal area. b. Newington Station Newington Station is located on a site of more that 50 acres Thermal Facility, along the banks of the Piscataqua River in Newington, New Hampshire. The Newington and the Schiller Station are within a quarter mile of each other, separated by a public road that ends at the Schiller plant. The marine terminal and the bulk fuel oil storage, and oil transfer lines for Newington Station are located on the Schiller site. Page 67 Newington Station Generating Facilities
Seasonal claimed Year Unit Load role Fuel capability (winter)(MW) Installed Unit 1 Intermediate Oil and gas 415.0 1974
Newington Station is PSNH's prime intermediate load facility, operating as required by the ISO to meet base, intermediate or peaking demand requirements. It is the largest single unit in the fossil/hydro system with capability of 415.0 maximum net MW. Newington Station can burn a variety of fossil fuels including oil and natural gas making it adaptable to changing fuel markets. c. Schiller Station The Schiller Station Thermal Plant is located east of the Newington Thermal Facility, on the southerly shore of the Piscataqua River in Portsmouth, New Hampshire. All of the #6 oil and coal for Schiller Station, all of the #6 oil for Newington Station, and ocean transported Page 68 coal for Merrimack Station is received by ship or barge at the main dock at Schiller Station. Schiller Station Generating Facilities
Seasonal claimed Unit capability Installed Load role Fuel (winter)(MW) Year Unit 4 Base/intermediate Coal or oil 48.0 1952 Unit 5 Base/intermediate Coal or oil 49.6 1955 Unit 6 Base/intermediate Coal or oil 49.0 1957 CT-1 Peaking Jet or gas 18.0 1970 Total 164.6
Schiller' s steam units have historically served a base load or intermediate load role for NEPOOL. The units have the capability of starting up and shutting down daily if needed, but as experienced in 1997, can also effectively serve in the base load role. Schiller's low cost of fuel and deep water docks make it an attractive site for generation. Completed in 1949, Schiller Station is PSNH's third largest generating plant. The four generating units combine for a total output of 164.6 net MW. Units 4 and 5 were originally designed to burn coal, and did so for the first six months of their operation. Both were then converted to burn oil as the primary fuel. Unit 6 was designed to burn oil originally. In 1984, Units 4,5 and 6 were converted to coal. Now all three units can burn coal and/or oil as boiler fuel, making them adaptable to changing fuel markets. In addition to the steam units, Schiller also has a separate combustion turbine (CT-1) capable of producing 18 net MW. CT-1 is a jet engine capable of burning either A V Jet Kero II or natural gas. 2. Hydro Facilities: a. Smith Station Smith Station is located on the Androscoggin River in Berlin, Coos County, New Hampshire near the confluence of the Dead River and the Androscoggin River. The Station operates one unit with a rated capacity of 14.2 MW. Page 69 Smith Station Generating Facilities
Seasonal claimed capability Year Unit Load role Fuel (winter) (MW) Installed Smith Run-of-river 14.2 1 1948
The project operates in a run-of-river mode. High capacity factors are achieved at Smith Station due to large upstream reservoirs which maintain consistent water flows to the station throughout the year. Pond level is maintained within a narrow band by using a float control mechanism to control generator output. b. Gorham Station Gorham Station is located on the Androscoggin River in the Town of Gorham, Coos County, New Hampshire, near the confluence of the Peabody River and the Androscoggin River. The unmanned Station operates four units with an aggregate rated capacity of 2.1 MW. Gorham Station Generating Facilities
Seasonal claimed capability Year Unit Load role Fuel (winter) (MW) Installed Gorham Run-of-river 2.1 4 1923
This run-of-river plant operates automatically as a base load station generating power from any combination of its units to match river flows. Gorham benefits from the same reservoir system that supplies water to the upstream Smith Station. Gorham Station consists of a dam and adjacent canal gatehouse, a power canal and a four-unit powerhouse. Limited ponding capability exists. Gorham Station employs an automatic pond level control system to maximize generator output and maintain pond level within a narrow band. c. Androscoggin Reservoir Company (ARCO) Smith and Gorham Stations on the Androscoggin River receive headwater benefits from the Union Water Power Company (UWPCO) and ARCO. PSNH is a 12.5 percent owner in ARCO and PSNH's ownership share in ARCO will be transferred to the Buyer with the purchase of the Upper Hydro Group Hydroelectric Facilities. PSNH has no ownership share in UWPCO, which has been transferred in ownership to FPL Group as a result of FPL's purchase of assets from Central Maine Power. ARCO was created in order to develop an additional Page 70 storage reservoir for the Androscoggin Reservoir system, the Aziscohos Lake in Maine. UWPCO serves as operator for ARCO as well as the Union Water Power storage sites, managing river flows to maximize utilization of the water for electrical generation downstream. Through this managed operation of headwater, PSNH facilities at Smith and Gorham are targeted to receive a minimum flow of 1,550 cfs throughout the year, except in rare circumstances during exceptionally dry weather. d. Canaan Station Canaan Station is located on the northern Connecticut River in the towns of Canaan, Vermont and Stewartstown, (West Stewartstown Village) New Hampshire. It is located 10 miles below the large Murphy Dam at Lake Francis and 82 miles above Moore Dam, at river mile 370. The plant was built in 1927 and operates one unit with a rated capacity of 1.1 MW. Canaan Station Generating Facilities
Seasonal claimed capability Year Unit Load role Fuel (winter) (MW) Installed Canaan Run-of-river 1.1 1 1927
The unmanned Station is operated as a run-of-river plant and is operated automatically as a base load unit. The original unit is still in service. Pond level is maintained within a narrow band by using a float control mechanism to control generation. e. Ayers Island Station Ayers Island Station is located on the Pemigewasset River approximately 12 miles upstream from the U.S. Army Corps of Engineers' Franklin Falls Flood Control Dam in the Towns of Bristol, Bridgewater, Ashland and New Hampton, New Hampshire. Small land rights associated with the station are in the towns of Ashland and Bridgewater. The station operates three units with an aggregate rated capacity of 9.08 MW. The plant was originally constructed in 1924 and redeveloped in 1931. Ayers Island Station Generating Facilities
Seasonal claimed Year capability Last Unit Station Load role (winter) (MW) Units Installed Ayers Island Run-of-river 9.1 3 1931
Page 71 Ayers Island Station operates as a run-of-river facility with a daily ponding capability. Pond level is maintained within a narrow band by using a float control mechanism to control generator output, automatically. f. Eastman Falls Station Eastman Falls Station is on the Pemigewasett River in Franklin, New Hampshire. The station operates two units with an aggregate rated capacity of 6.5 MW. The project was originally constructed in 1901 and redeveloped in 1937 and 1983. Eastman Falls Stations Generating Facilities
Seasonal claimed Year capability Last Unit Station Load role (winter) (MW) Units Installed Eastman Falls Run-of-river 6.5 2 1983
Eastman Falls Station is operated as an unmanned run-of-the-river plant in times of higher water flow and as a daily peaking facility at other times taking advantage of upstream storage capability at Ayers Island. Pond level is maintained within a narrow band by using a float control mechanism to control generator output. g. Amoskeag Station Amoskeag Station is the southernmost of the three sites comprising the Merrimack River Project. The station is located on the Merrimack River in Manchester, New Hampshire, downstream from Hooksett Station. Amoskeag operates three units with an aggregate rated capacity of 17.5 MW. Amoskeag Station Generating Facilities
Seasonal claimed Year capability Last Unit Station Load role (winter) (MW) Units Installed Amoskeag Run-of-river 17.5 3 1924
Amoskeag Station is operated as a run-of-the river plant in times of higher water flow and as a daily peaking facility at other times. Pond level is maintained automatically within a narrow band by using a float control mechanism to control generator output. Page 72 h. Hooksett Station Hooksett Station is located on the east side of the Merrimack River in Hooksett, New Hampshire, downstream from the Garvins Falls Station and Merrimack Station, and upstream from Amoskeag Station. The Station operates one unit with a rated capacity of 1.9 MW. Hooksett Station Generating Facilities
Seasonal claimed Year capability Last Unit Station Load role (winter) (MW) Units Installed Hooksett Run-of-river 1.9 1 1927
The Hooksett Station is an automated site and is operated as a run-of the-river facility. In addition to providing power to the NEPOOL transmission grid, Hooksett provides a reservoir from which water is taken for condenser cooling at Merrimack Station located a few miles upstream. i. Garvins Falls Station Garvins Falls is located on the Merrimack River in Bow, New Hampshire. The Station operates four units with an aggregate rated capacity of 12.1 MW. Garvins Falls Station Generating Facilities
Seasonal claimed Year capability Last Unit Station Load role (winter) (MW) Units Installed Garvins Falls Run-of-river 12.1 4 1981
The discharge capability of the headgate structure is sufficient to operate all four units at full load. For high flows, the units are operated so as to utilize as much of the available water as possible. During times of moderate and low flows, operation is scheduled to obtain the maximum on-peak energy based on available head and relative overall unit efficiency. The newly installed Units 1 and 2 are operated for as long as possible to take advantage of their greater efficiency, while Units 3 and 4 are operated at times of higher flow. j. Jackman Station Jackman Station consists of a dam, located on Franklin Pierce Lake, and a penstock, surge tank and powerhouse, located in Hillsborough, New Hampshire. The lake and project are fed from the North Branch of the Contoocook River. This Page 73 project is not subject to FERC jurisdiction because it is not classified as a navigable waterway. The Station was constructed in 1926 and operates one turbine with a rated capacity of 3.6 MW. Jackman Station Generating Facilities
Seasonal claimed Year capability Last Unit Station Load role (winter) (MW) Units Installed Jackman Run-of-river 3.6 1 1926
Jackman Station is operated in an essentially run-of-river mode, automatically by a float or pond level control mechanism at the dam. The Station operates as a base load unit whenever adequate water flows are available. 3. Remote Combustion Turbines: Lost Nation Combustion Turbine The Lost Nation Combustion Turbine is located in the town of Northumberland, in northern New Hampshire. Lost Nation serves primarily as a peaking unit, operating during the periods of highest seasonal peak demand. Additionally this unit is called upon when a quick response is needed for additional generation to maintain electrical system stability. While capable of providing several NEPOOL products, the unit typically serves the capacity and reserve markets, but not the energy market. Lost Nation CT Generating Facilities
Seasonal claimed Year capability Last Unit Station Load role Fuel (winter) (MW) Units Installed Lost Nation Peaking Oil 19.1 1 1969
Page 74 APPENDIX H -New Hampshire Affiliate Transaction Rules Applicable to PSNH and NU Introduction: Northeast Utilities ("NU") is a registered holding company system which provides centralized services to its affiliated companies. NU believes that these integrated, centralized services increase efficiency through economies of scale which translate to lower prices to all customers and are particularly significant for NU because of the relative size of the NU system. The Commission has not yet undertaken a rulemaking to establish final rules regarding affiliate separation and codes of conduct for New Hampshire utility companies. However, the Commission indicated in Order No. 22,875 in Docket No. DR 96-150, that utilities should operate in the interim period prior to adoption of final rules in accordance with the California Affiliate Transaction Rules. The California Affiliate Transaction Rules are attached as Appendix I hereto. Based upon an analysis of these rules and the interpretation provided below, the Parties, as an element of the settlement of which this document is a part, agree that NU will comply with the California rules in this interim period. The Parties agree to the interpretation provided below as an integral element of this Settlement Agreement. Specific Provisions: PSNH and NU's unregulated competitive marketing affiliates agree to abide by the following provisions regarding separation of activities and services in accordance with the California Affiliate Transaction Rules. 1. NU will maintain distinct corporations with separate books and records, for its distribution operations and its competitive marketing activities. PSNH shall not share employees, facilities, space or services with NU's unregulated competitive marketing affiliates, except as allowed herein. PSNH will not provide services to NU's unregulated competitive marketing affiliates unless it also provides the same on a comparable basis to all competitors pursuant to a tariff on file with the Commission. 2. NU will continue to maintain its management services company, Northeast Utilities Service Company ("NUSCO") providing shared services to its various affiliates as they require and in accordance with the regulations of the Securities and Exchange Commission ("SEC") pursuant to the Public Utility Holding Company Act of 1935. SEC regulations require NUSCO to charge affiliates for services at cost in accordance with SEC approved allocation procedures. Resulting costs charged to the distribution companies by NUSCO will continue to be subject to review and verification by the Commission in accordance with its authority over regulated retail utility rates and operations. 3. NUSCO will continue to provide corporate services on a shared basis in the areas of accounting, billing, financial, administrative, regulatory, legal, information technology, communication and executive services. Page 75 4. NU's unregulated competitive marketing affiliates will hire its own employees to conduct competitive sales and marketing, including customer service, and will not utilize employees of NUSCO for such activities. 5. NU's unregulated competitive marketing affiliates staff may utilize shared corporate facilities of NUSCO along with other NUSCO personnel, but will be physically separated from PSNH and NUSCO staff engaged in customer service, customer account management and similar functions for PSNH. (For purposes of these provisions, physically separate shall be defined as being located on a separate floor of NU's facilities.) 6. NU's unregulated competitive marketing affiliates staff may use the same computer and telephone networks as other NUSCO and distribution company staff; but will not have access to the proprietary customer information of NU's distribution companies, such as customer databases or other competitively sensitive information, unless such information has been made available previously to nonaffiliated suppliers. Password protection for sensitive information will be maintained to ensure confidentiality. 7. Power procurement functions for the distribution company are limited to the selection of suppliers and administration of Transition and Default Service in accordance with the provisions of the Settlement Agreement and the requirements of the Commission. In addition, NU has in place a code of conduct approved by the Federal Energy Regulatory Commission ("FERC") governing the restrictions on sharing of information between affiliates involved in wholesale power transactions. This FERC-approved code of conduct, and the filing of open access wholesale transmission tariffs, were prerequisites to FERC's approval of tariffs for market-based wholesale rates filed by the NU companies. 8. NUSCO will ensure that its provision of services in accordance with the above provisions does not allow for any preferences to be given to NU's unregulated competitive marketing affiliates or to allow other activities proscribed under the rules to occur. 9. NU will conduct formal training for all employees relative to the need for internal barriers to information sharing in advance of Competition Day. 10. None of NU's unregulated competitive marketing affiliates will use the name "Public Service of New Hampshire" or any similar name, nor may such affiliates otherwise trade on the name or status of PSNH in marketing efforts. 11. The books and accounts of NU's unregulated competitive marketing affiliates which conduct business in the New Hampshire competitive electric market will be open to inspection by the Commission. The NU affiliate providing such books and accounts may seek to have them declared "Trade Secrets" pursuant to RSA Chapter 350B and "confidential, commercial, or financial information" pursuant to RSA Chapter 91A, and thus be accorded confidential treatment by the Commission and exempted from disclosure pursuant to these laws and Rule PUC 204.04(a)(4). The decision to provide confidential treatment will be subject to the ongoing jurisdiction of the PUC. Page 76 APPENDIX I - THE CALIFORNIA AFFILIATE TRANSACTION RULES California Affiliate Transaction Rules I. Definitions Unless the context otherwise requires, the following definitions govern the construction of these Rules: A. "Affiliate" means any person, corporation, utility, partnership, or other entity 5 per cent or more of whose outstanding securities are owned, controlled, or held with power to vote, directly or indirectly either by a utility or any of its subsidiaries, or by that utility's controlling corporation and/or any of its subsidiaries as well as any company in which the utility, its controlling corporation, or any of the utility's affiliates exert substantial control over the operation of the company and/or indirectly have substantial financial interests in the company exercised through means other than ownership. For purposes of these Rules, "substantial control" includes, but is not limited to, the possession, directly or indirectly and whether acting alone or in conjunction with others, of the authority to direct or cause the direction of the management or policies of a company. A direct or indirect voting interest of 5% or more by the utility in an entity's company creates a rebuttable presumption of control. For purposes of this Rule, "affiliate" shall include the utility's parent or holding company, or any company which directly or indirectly owns, controls, or holds the power to vote 10% or more of the outstanding voting securities of a utility (holding company), to the extent the holding Page 77 company is engaged in the provision of products or services as set out in Rule II B. However, in its compliance plan filed pursuant to Rule VI, the utility shall demonstrate both the specific mechanism and procedures that the utility and holding company have in place to assure that the utility is not utilizing the holding company or any of its affiliates not covered by these Rules as a conduit to circumvent any of these Rules. Examples include but are not limited to specific mechanisms and procedures to assure the Commission that the utility will not use the holding company or another utility affiliate not covered by these Rules as a vehicle to (1) disseminate information transferred to them by the utility to an affiliate covered by these Rules in contravention of these Rules, (2) provide services to its affiliates covered by these Rules in contravention of these Rules or (3) to transfer employees to its affiliates covered by these Rules in contravention of these Rules. In the compliance plan, a corporate officer from the utility and holding company shall verify the adequacy of these specific mechanisms and procedures to ensure that the utility is not utilizing the holding company or any of its affiliates not covered by these Rules as a conduit to circumvent any of these Rules. Regulated subsidiaries of a utility, defined as subsidiaries of a utility, the revenues and expenses of which are subject to regulation by the Commission and are included by the Commission in establishing rates for the utility, are not included within the definition of affiliate. However, these Rules apply to all interactions any regulated subsidiary has with other affiliated entities covered by these rules. B. "Commission" means the California Public Utilities Commission or its succeeding state regulatory body. C. "Customer" means any person or corporation, as defined in Sections 204, 205 and 206 of the California Public Utilities Code, that is the ultimate consumer of goods and services. D. "Customer Information" means non-public information and data specific to a utility customer which the utility acquired or developed in the course of its provision of utility services. Page 78 E. "FERC" means the Federal Energy Regulatory Commission. F. "Fully Loaded Cost" means the direct cost of good or service plus all applicable indirect charges and overheads. G. "Utility" means any public utility subject to the jurisdiction of the Commission as an Electrical Corporation or Gas Corporation, as defined in California Public Utilities Code Sections 218 and 222. II. Applicability A. These Rules shall apply to California public utility gas corporations and California public utility electrical corporations, subject to regulation by the California Public Utilities Commission. B. For purposes of a combined gas and electric utility, these Rules apply to all utility transactions with affiliates engaging in the provision of a product that uses gas or electricity or the provision of services that relate to the use of gas or electricity, unless specifically exempted below. For purposes of an electric utility, these Rules apply to all utility transactions with affiliates engaging in the provision of a product that uses electricity or the provision of services that relate to the use of electricity. For purposes of a gas utility, these Rules apply to all utility transactions with affiliates engaging in the provision of a product that uses gas or the provision of services that relate to the use of gas. C. These Rules apply to transactions between a Commission-regulated utility and another affiliated utility, unless specifically modified by the Commission in addressing a separate application to merge or otherwise conduct joint ventures related to regulated services. D. These rules do not apply to the exchange of operating information, including the disclosure of customer information to its FERC-regulated affiliate to the extent such information is required by the affiliate to schedule and confirm nominations for the interstate transportation of natural gas, between a utility and its FERC-regulated affiliate, to the extent that the affiliate operates an interstate natural gas Page 79 pipeline. E. Existing Rules: Existing Commission rules for each utility and its parent holding company shall continue to apply except to the extent they conflict with these Rules. In such cases, these Rules shall supersede prior rules and guidelines, provided that nothing herein shall preclude (1) the Commission from adopting other utility- specific guidelines; or (2) a utility or its parent holding company from adopting other utility-specific guidelines, with advance Commission approval. F. Civil Relief: These Rules shall not preclude or stay any form of civil relief, or rights or defenses thereto, that may be available under state or federal law. G. Exemption (Advice Letter): A Commission-jurisdictional utility may be exempted from these Rules if it files an advice letter with the Commission requesting exemption. The utility shall file the advice letter within 30 days after the effective date of this decision adopting these Rules and shall serve it on all parties to this proceeding. In the advice letter filing, the utility shall: 1. Attest that no affiliate of the utility provides services as defined by Rule II B above; and 2. Attest that if an affiliate is subsequently created which provides services as defined by Rule II B above, then the utility shall: a. Notify the Commission, at least 30 days before the affiliate begins to provide services as defined by Rule II B above, that such an affiliate has been created; notification shall be accomplished by means of a letter to the Executive Director, served on all parties to this proceeding; and b. Agree in this notice to comply with the Rules in their entirety. H. Limited Exemption (Application): A California utility which is also a multi-state utility and subject to the jurisdiction of other state regulatory commissions, may file an application, served on all parties to this proceeding, Page 80 requesting a limited exemption from these Rules or a part thereof, for transactions between the utility solely in its capacity serving its jurisdictional areas wholly outside of California, and its affiliates. The applicant has the burden of proof I. These Rules should be interpreted broadly, to effectuate our stated objectives of fostering competition and protecting consumer interests. If any provision of these Rules, or the application thereof to any person, company, or circumstance, is held invalid, the remainder of the Rules, or the application of such provision to other persons, companies, or circumstances, shall not be affected thereby. III. Nondiscrimination A. No Preferential Treatment Regarding Services Provided by the Utility: Unless otherwise authorized by the Commission or the FERC, or permitted by these Rules, a utility shall not: 1. represent that, as a result of the affiliation with the utility, its affiliates or customers of its affiliates will receive any different treatment by the utility than the treatment the utility provides to other, unaffiliated companies or their customers; or 2. provide its affiliates, or customers of its affiliates, any preference (including but not limited to terms and conditions, pricing, or timing) over non-affiliated suppliers or their customers in the provision of services provided by the utility. B. Affiliate Transactions: Transactions between a utility and its affiliates shall be limited to tariffed products and services, the sale or purchase of goods, property, products or services made generally available by the utility or affiliate to all market participants through an open, competitive bidding process, or as provided for in Sections V D and V E (joint purchases and corporate support) and Section VII (new products and services) below, provided the transactions provided for in Section VII comply with all of the other adopted Rules. C. Provision of Supply, Capacity, Services or Information: Except as provided for in Sections V Page 81 D, V E, and VII, provided the transactions provided for in Section VII comply with all of the other adopted Rules, a utility shall provide access to utility information, services, and unused capacity or supply on the same terms for all similarly situated market participants. If a utility provides supply, capacity, services, or information to its affiliate(s), it shall contemporaneously make the offering available to all similarly situated market participants, which include all competitors serving the same market as the utility's affiliates. 1. Offering of Discounts: Except when made generally available by the utility through an open, competitive bidding process, if a utility offers a discount or waives all or any part of any other charge or fee to its affiliates, or offers a discount or waiver for a transaction in which its affiliates are involved, the utility shall contemporaneously make such discount or waiver available to all similarly situated market participants. The utilities should not use the "similarly situated" qualification to create such a unique discount arrangement with their affiliates such that no competitor could be considered similarly situated. All competitors serving the same market as the utility's affiliates should be offered the same discount as the discount received by the affiliates. A utility shall document the cost differential underlying the discount to its affiliates in the affiliate discount report described in Rule III F 7 below. 2. Tariff Discretion: If a tariff provision allows for discretion in its application, a utility shall apply that tariff provision in the same manner to its affiliates and other market participants and their respective customers. 3. No Tariff Discretion: If a utility has no discretion in the application of a tariff provision, the utility shall strictly enforce that tariff provision. 4. Processing Requests for Services Provided by the Utility: A utility shall process requests for similar services provided by the utility in the same manner and within the same time for its affiliates and for all other market participants and their respective customers. Page 82 D. Tying of Services Provided by a Utility Prohibited: A utility shall not condition or otherwise tie the provision of any services provided by the utility, nor the availability of discounts of rates or other charges or fees, rebates, or waivers of terms and conditions of any services provided by the utility, to the taking of any goods or services from its affiliates. E. No Assignment of Customers: A utility shall not assign customers to which it currently provides services to any of its affiliates, whether by default, direct assignment, option or by any other means, unless that means is equally available to all competitors. F. Business Development and Customer Relations: Except as otherwise provided by these Rules, a utility shall not: 1. provide leads to its affiliates; 2. solicit business on behalf of its affiliates; 3. acquire information on behalf of or to provide to its affiliates; 4. share market analysis reports or any other types of proprietary or non-publicly available reports, including but not limited to market, forecast, planning or strategic reports, with its affiliates; 5. request authorization from its customers to pass on customer information exclusively to its affiliates; 6. give the appearance that the utility speaks on behalf of its affiliates or that the customer will receive preferential treatment as a consequence of conducting business with the affiliates; or 7. give any appearance that the affiliate speaks on behalf of the utility. G. Affiliate Discount Reports: If a utility provides its affiliates a discount, rebate, or other waiver of any charge or fee associated with services provided by the utility, the utility shall, within 24 hours of the time at which the service provided by the utility is so provided, post a notice on its electronic bulletin board providing the Page 83 following information: 1. the name of the affiliate involved in the transaction; 2. the rate charged; 3. the maximum rate; 4. the time period for which the discount or waiver applies; 5. the quantities involved in the transaction; 6. the delivery points involved in the transaction; 7. any conditions or requirements applicable to the discount or waiver, and a documentation of the cost differential underlying the discount as required in Rule III B 2 above; and 8. procedures by which a nonaffiliated entity may request a comparable offer. A utility that provides an affiliate a discounted rate, rebate, or other waiver of a charge or fee associated with services provided by the utility shall maintain, for each billing period, the following information: 9. the name of the entity being provided services provided by the utility in the transaction; 10. the affiliate's role in the transaction (i.e., shipper, marketer, supplier, seller); 11. the duration of the discount or waiver; 12. the maximum rate; 13. the rate or fee actually charged during the billing period; and 14. the quantity of products or services scheduled at the discounted rate during the billing period for each delivery point. All records maintained pursuant to this provision shall also conform to FERC rules where applicable. IV. Disclosure and Information A. Customer Information: A utility shall provide Page 84 customer information to its affiliates and unaffiliated entities on a strictly non-discriminatory basis, and only with prior affirmative customer written consent. B. Non-Customer Specific Non-Public Information: A utility shall make non-customer specific non-public information, including but not limited to information about a utility's natural gas or electricity purchases, sales, or operations or about the utility's gas-related goods or services, electricity-related goods or services, available to the utility's affiliates only if the utility makes that information contemporaneously available to all other service providers on the same terms and conditions, and keeps the information open to public inspection. Unless otherwise provided by these Rules, a utility continues to be bound by all Commission-adopted pricing and reporting guidelines for such transactions. Utilities are also permitted to exchange proprietary information on an exclusive basis with their affiliates, provided the utility follows all Commission-adopted pricing and reporting guidelines for such transactions, and it is necessary to exchange this information in the provision of the corporate support services permitted by Rule V E below. The affiliate's use of such proprietary information is limited to use in conjunction with the permitted corporate support services, and is not permitted for any other use. Nothing in this Rule precludes the exchange of information pursuant to D.97-10-031. C. Service Provider Information: 1. Except upon request by a customer or as otherwise authorized by the Commission, a utility shall not provide its customers with any list of service providers, which includes or identifies the utility's affiliates, regardless of whether such list also includes or identifies the names of unaffiliated entities. 2. If a customer requests information about any affiliated service provider, the utility shall provide a list of all providers of gas-related, electricity-related, or other utility-related goods and services operating in its service territory, including its affiliates. The Commission shall authorize, Page 85 by semi-annual utility advice letter filing, and either the utility, the Commission, or a Commission-authorized third party provider shall maintain on file with the Commission a copy of the most updated lists of service providers which have been created to disseminate to a customer upon a customer's request. Any service provider may request that it be included on such list, and, barring Commission direction, the utility shall honor such request. Where maintenance of such list would be unduly burdensome due to the number of service providers, subject to Commission approval by advice letter filing, the utility shall direct the customer to a generally available listing of service providers (e.g., the Yellow Pages). In such cases, no list shall be provided. The list of service providers should make clear that the Commission does not guarantee the financial stability or service quality of the service providers listed by the act of approving this list. D. Supplier Information: A utility may provide non-public information and data which has been received from unaffiliated suppliers to its affiliates or non-affiliated entities only if the utility first obtains written affirmative authorization to do so from the supplier. A utility shall not actively solicit the release of such information exclusively to its own affiliate in an effort to keep such information from other unaffiliated entities. E. Affiliate-Related Advice or Assistance: Except as otherwise provided in these Rules, a utility shall not offer or provide customers advice or assistance with regard to its affiliates or other service providers. F. Record-Keeping: A utility shall maintain contemporaneous records documenting all tariffed and nontariffed transactions with its affiliates, including but not limited to, all waivers of tariff or contract provisions and all discounts. A utility shall maintain such records for a minimum of three years and longer if this Commission or another government agency so requires. The utility shall make such records available for third party review upon 72 hours' notice, or at a time mutually agreeable to the utility and Page 86 third party. If D.97-06-110 is applicable to the information the utility seeks to protect, the utility should follow the procedure set forth in D.97-06-110, except that the utility should serve the third party making the request in a manner that the third party receives the utility's D.97-06-110 request for confidentiality within 24 hours of service. G. Maintenance of Affiliate Contracts and Related Bids: A utility shall maintain a record of all contracts and related bids for the provision of work, products or services to and from the utility to its affiliates for no less than a period of three years, and longer if this Commission or another government agency so requires. H. FERC Reporting Requirements: To the extent that reporting rules imposed by the FERC require more detailed information or more expeditious reporting, nothing in these Rules shall be construed as modifying the FERC rules. V. Separation A. Corporate Entities: A utility and its affiliates shall be separate corporate entities. B. Books and Records: A utility and its affiliates shall keep separate books and records. 1. Utility books and records shall be kept in accordance with applicable Uniform System of Accounts (USOA) and Generally Accepted Accounting Procedures (GAAP). 2. The books and records of affiliates shall be open for examination by the Commission and its staff consistent with the provisions of Public Utilities Code Section 314. C. Sharing of Plant, Facilities, Equipment or Costs: A utility shall not share office space, office equipment, services, and systems with its affiliates, nor shall a utility access the computer or information systems of its affiliates or allow its affiliates to access its computer or information systems, except to the extent appropriate to perform shared corporate support Page 87 functions permitted under Section V E of these Rules. Physical separation required by this rule shall be accomplished preferably by having office space in a separate building, or, in the alternative, through the use of separate elevator banks and/or security-controlled access. This provision does not preclude a utility from offering a joint service provided this service is authorized by the Commission and is available to all non-affiliated service providers on the same terms and conditions (e.g., joint billing services pursuant to D.97-05-039). D. Joint Purchases: To the extent not precluded by any other Rule, the utilities and their affiliates may make joint purchases of good and services, but not those associated with the traditional utility merchant function. For purpose of these Rules, to the extent that a utility is engaged in the marketing of the commodity of electricity or natural gas to customers, as opposed to the marketing of transmission and distribution services, it is engaging in merchant functions. Examples of permissible joint purchases include joint purchases of office supplies and telephone services. Examples of joint purchases not permitted include gas and electric purchasing for resale, purchasing of gas transportation and storage capacity, purchasing of electric transmission, systems operations, and marketing. The utility must insure that all joint purchases are priced, reported, and conducted in a manner that permits clear identification of the utility and affiliate portions of such purchases, and in accordance with applicable Commission allocation and reporting rules. E. Corporate Support: As a general principle, a utility, its parent holding company, or a separate affiliate created solely to perform corporate support services may share with its affiliates joint corporate oversight, governance, support systems and personnel. Any shared support shall be priced, reported and conducted in accordance with the Separation and Information Standards set forth herein, as well as other applicable Commission pricing and reporting requirements. As a general principle, such joint utilization shall not allow or provide a means for the transfer of confidential information from the utility to the affiliate, create the opportunity for preferential treatment or unfair competitive advantage, lead to customer confusion, or create Page 88 significant opportunities for cross-subsidization of affiliates. In the compliance plan, a corporate officer from the utility and holding company shall verify the adequacy of the specific mechanisms and procedures in place to ensure the utility follows the mandates of this paragraph, and to ensure the utility is not utilizing joint corporate support services as a conduit to circumvent these Rules. Examples of services that may be shared include: payroll, taxes, shareholder services, insurance, financial reporting, financial planning and analysis, corporate accounting, corporate security, human resources (compensation, benefits, employment policies), employee records, regulatory affairs, lobbying, legal, and pension management. Examples of services that may not be shared include: employee recruiting, engineering, hedging and financial derivatives and arbitrage services, gas and electric purchasing for resale, purchasing of gas transportation and storage capacity, purchasing of electric transmission, system operations, and marketing. F. Corporate Identification and Advertising: 1. A utility shall not trade upon, promote, or advertise its affiliate's affiliation with the utility, nor allow the utility name or logo to be used by the affiliate or in any material circulated by the affiliate, unless it discloses in plain legible or audible language, on the first page or at the first point where the utility name or logo appears that: a. the affiliate "is not the same company as [i.e. PG&E, Edison, the Gas Company, etc.], the utility,"; b. the affiliate is not regulated by the California Public Utilities Commission; and c. "you do not have to buy [the affiliate's] products in order to continue to receive quality regulated services from the utility." The application of the name/logo disclaimer is limited to the use of the name or logo in California. Page 89 2. A utility, through action or words, shall not represent that, as a result of the affiliate's affiliation with the utility, its affiliates will receive any different treatment than other service providers. 3. A utility shall not offer or provide to its affiliates advertising space in utility billing envelopes or any other form of utility customer written communication unless it provides access to all other unaffiliated service providers on the same terms and conditions. 4. A utility shall not participate in joint advertising or joint marketing with its affiliates. This prohibition means that utilities may not engage in activities which include, but are not limited to the following: a. A utility shall not participate with its affiliates in joint sales calls, through joint call centers or otherwise, or joint proposals (including responses to requests for proposals (RFPs)) to existing or potential customers. At a customer's unsolicited request, a utility may participate, on a nondiscriminatory basis, in non-sales meetings with its affiliates or any other market participant to discuss technical or operational subjects regarding the utility's provision of transportation service to the customer; b. Except as otherwise provided for by these Rules, a utility shall not participate in any joint activity with its affiliates. The term "joint activities" includes, but is not limited to, advertising, sales, marketing, communications and correspondence with any existing or potential customer; c. A utility shall not participate with its affiliates in trade shows, conferences, or other information or marketing events held in California. 5. A utility shall not share or subsidize costs, fees, or payments with its affiliates associated with research and development Page 90 activities or investment in advanced technology research. G. Employees: 1. Except as permitted in Section V E (corporate support), a utility and its affiliates shall not jointly employ the same employees. This Rule prohibiting joint employees also applies to Board Directors and corporate officers, except for the following circumstances: In instances when this Rule is applicable to holding companies, any board member or corporate officer may serve on the holding company and with either the utility or affiliate (but not both). Where the utility is a multi-state utility, is not a member of a holding company structure, and assumes the corporate governance functions for the affiliates, the prohibition against any board member or corporate officer of the utility also serving as a board member or corporate officer of an affiliate shall only apply to affiliates that operate within California. In the case of shared directors and officers, a corporate officer from the utility and holding company shall verify in the utility's compliance plan the adequacy of the specific mechanisms and procedures in place to ensure that the utility is not utilizing shared officers and directors as a conduit to circumvent any of these Rules. 2. All employee movement between a utility and its affiliates shall be consistent with the following provisions: a. A utility shall track and report to the Commission all employee movement between the utility and affiliates. The utility shall report this information annually pursuant to our Affiliate Transaction Reporting Decision, D.93-02-016, 48 CPUC2d 163, 171-172 and 180 (Appendix A, Section I and Section II H.). b. Once an employee of a utility becomes an employee of an affiliate, the employee may not return to the utility for a period of one year. This Rule is inapplicable if the affiliate to which the employee transfers goes out of business during the one-year period. In the event that such an employee returns Page 91 to the utility, such employee cannot be retransferred, reassigned, or otherwise employed by the affiliate for a period of two years. Employees transferring from the utility to the affiliate are expressly prohibited from using information gained from the utility in a discriminatory or exclusive fashion, to the benefit of the affiliate or to the detriment of other unaffiliated service providers. c. When an employee of a utility is transferred, assigned, or otherwise employed by the affiliate, the affiliate shall make a one-time payment to the utility in an amount equivalent to 25% of the employee's base annual compensation, unless the utility can demonstrate that some lesser percentage (equal to at least 15%) is appropriate for the class of employee included. All such fees paid to the utility shall be accounted for in a separate memorandum account to track them for future ratemaking treatment (i.e. credited to the Electric Revenue Adjustment Account or the Core and Non-core Gas Fixed Cost Accounts, or other ratemaking treatment, as appropriate), on an annual basis, or as otherwise necessary to ensure that the utility's ratepayers receive the fees. This transfer payment provision will not apply to clerical workers. Nor will it apply to the initial transfer of employees to the utility's holding company to perform corporate support functions or to a separate affiliate performing corporate support functions, provided that that transfer is made during the initial implementation period of these rules or pursuant to a Section 851 application or other Commission proceeding. However, the rule will apply to any subsequent transfers or assignments between a utility and its affiliates of all covered employees at a later time. d. Any utility employee hired by an affiliate shall not remove or otherwise provide information to the affiliate which the affiliate would otherwise be precluded from having pursuant to these Page 92 Rules. e. A utility shall not make temporary or intermittent assignments, or rotations to its affiliates. H. Transfer of Goods and Services: To the extent that these Rules do not prohibit transfers of goods and services between a utility and its affiliates, all such transfers shall be subject to the following pricing provisions: 1. Transfers from the utility to its affiliates of goods and services produced, purchased or developed for sale on the open market by the utility will be priced at fair market value. Transfers from an affiliate to the utility of goods and services produced, purchased or developed for sale on the open market by the affiliate shall be priced at no more than fair market value. 2. For goods or services for which the price is regulated by a state or federal agency, that price shall be deemed to be the fair market value, except that in cases where more than one state commission regulates the price of goods or services, this Commission's pricing provisions govern. 3. Goods and services produced, purchased or developed for sale on the open market by the utility will be provided to its affiliates and unaffiliated companies on a nondiscriminatory basis, except as otherwise required or permitted by these Rules or applicable law. 4. Transfers from the utility to its affiliates of goods and services not produced, purchased or developed for sale by the utility will be priced at fully loaded cost plus 5% of direct labor cost. 5. Transfers from an affiliate to the utility of goods and services not produced, purchased or developed for sale by the affiliate will be priced at the lower of fully loaded cost or fair Page 93 market value. VI. Regulatory Oversight A. Compliance Plans: No later than December 31, 1997, each utility shall file a compliance plan demonstrating to the Commission that there are adequate procedures in place that will preclude the sharing of information with its affiliates that is prohibited by these Rules. The utility should file its compliance plan as an advice letter with the Commission's Energy Division and serve it on the parties to this proceeding. The utility's compliance plan shall be in effect between the filing and a Commission determination of the advice letter. A utility shall file a compliance plan annually thereafter by advice letter served on all parties to this proceeding where there is some change in the compliance plan (i.e., when a new affiliate has been created, or the utility has changed the compliance plan for any other reason). B. New Affiliate Compliance Plans: Upon the creation of a new affiliate which is addressed by these Rules, the utility shall immediately notify the Commission of the creation of the new affiliate, as well as posting notice on its electronic bulletin board. No later than 60 days after the creation of this affiliate, the utility shall file an advice letter with the Energy Division of the Commission, served on the parties to this proceeding. The advice letter shall demonstrate how the utility will implement these Rules with respect to the new affiliate. C. Affiliate Audit: No later than December 31, 1998, and every year thereafter, the utility shall have audits prepared by independent auditors that verify that the utility is in compliance with the Rules set forth herein. The utilities shall file this audit with the Commission's Energy Division beginning no later than December 31, 1998, and serve it on all parties to this proceeding. The audits shall be at shareholder expense. D. Witness Availability: Affiliate officers and employees shall be made available to testify before the Commission as necessary or required, without subpoena, consistent with the provisions of Public Utilities Code Section 314. VII. Utility Products and Services Page 94 A. General Rule: Except as provided for in these Rules, new products and services shall be offered through affiliates. B. Definitions: The following definitions apply for the purposes of this section (Section VII) of these Rules: 1. "Category" refers to a factually similar group of products and services that use the same type of utility assets or capacity. For example, "leases of land under utility transmission lines" or "use of a utility repair shop for third party equipment repair" would each constitute a separate product or service category. 2. "Existing" products and services are those which a utility is offering on the effective date of these Rules. 3. "Products" include use of property, both real and intellectual, other than those uses authorized under General Order 69-C. 4. "Tariff" or "tariffed" refers to rates, terms and conditions of services as approved by this Commission or the Federal Energy Regulatory Commission (FERC), whether by traditional tariff, approved contract or other such approval process as the Commission or the FERC may deem appropriate. C. Utility Products and Services: Except as provided in these Rules, a utility shall not offer nontariffed products and services. In no event shall a utility offer natural gas or electricity commodity service on a nontariffed basis. A utility may only offer for sale the following products and services: 1. Existing products and services offered by the utility pursuant to tariff; 2. Unbundled versions of existing utility products and services, with the unbundled versions being offered on a tariffed basis; 3. New products and services that are offered on a tariffed basis; and 4. Products and services which are offered on a nontariffed basis and which meet the Page 95 following conditions: a. The nontariffed product or service utilizes a portion of a utility asset or capacity; b. such asset or capacity has been acquired for the purpose of and is necessary and useful in providing tariffed utility services; c. the involved portion of such asset or capacity may be used to offer the product or service on a nontariffed basis without adversely affecting the cost, quality or reliability of tariffed utility products and services; d. the products and services can be marketed with minimal or no incremental capital, minimal or no new forms of liability or business risk being incurred by the utility, and minimal or no direct management control; and e. the utility offering is restricted to less than 1% of the number of customers in its customer base. D. Conditions Precedent to Offering New Products and Services: This Rule does not represent an endorsement by the Commission of any particular nontariffed utility product or service. A utility may offer new nontariffed products and services only if the Commission has adopted and the utility has established: 1. A mechanism or accounting standard for allocating costs to each new product or service to prevent cross-subsidization between services a utility would continue to provide on a tariffed basis and those it would provide on a nontariffed basis; 2. A reasonable mechanism for treatment of benefits and revenues derived from offering such products and services, except that in the event the Commission has already approved a performance-based ratemaking mechanism for the utility and the utility seeks a different sharing mechanism, the utility should petition to modify the performance-based ratemaking decision if it wishes to alter the Page 96 sharing mechanism, or clearly justify why this procedure is inappropriate, rather than doing so by application or other vehicle. 3. Periodic reporting requirements regarding pertinent information related to nontariffed products and services; and 4. Periodic auditing of the costs allocated to and the revenues derived from nontariffed products and services. E. Requirement to File an Advice Letter: Prior to offering a new category of nontariffed products or services as set forth in Section VII C above, a utility shall file an advice letter in compliance with the following provisions of this paragraph. 1. The advice letter shall: a. demonstrate compliance with these rules; b. address the amount of utility assets dedicated to the non-utility venture, in order to ensure that a given product or service does not threaten the provision of utility service, and show that the new product or service will not result in a degradation of cost, quality, or reliability of tariffed goods and services; c. demonstrate that the utility has not received recovery in the Transition Cost Proceeding, A.96-08-001, or other applicable Commission proceeding, for the portion of the utility asset dedicated to the non-utility venture; and d. address the potential impact of the new product or service on competition in the relevant market. 2. In the absence of a protest alleging non-compliance with these Rules or any law, regulation, decision, or Commission policy, or allegations of harm, the utility may commence offering the product or service 30 days after submission of the advice letter. 3. A protest of an advice letter filed in accordance with this paragraph shall include: Page 97 a. An explanation of the specific Rules, or any law, regulation, decision, or Commission policy the utility will allegedly violate by offering the proposed product or service, with reasonable factual detail; or b. An explanation of the specific harm the protestant will allegedly suffer. 4. If such a protest is filed, the utility may file a motion to dismiss the protest within 5 working days if it believes the protestant has failed to provide the minimum grounds for protest required above. The protestant has 5 working days to respond to the motion. 5. The intention of the Commission is to make its best reasonable efforts to rule on such a motion to dismiss promptly. Absent a ruling granting a motion to dismiss, the utility shall begin offering that category of products and services only after Commission approval through the normal advice letter process. F. Existing Offerings: Unless and until further Commission order to the contrary as a result of the advice letter filing or otherwise, a utility that is offering tariffed or nontariffed products and services, as of the effective date of this decision, may continue to offer such products and services, provided that the utility complies with the cost allocation and reporting requirements in this rule. No later than January 30, 1998, each utility shall submit an advice letter describing the existing products and services (both tariffed and nontariffed) currently being offered by the utility and the number of the Commission decision or advice letter approving this offering, if any, and requesting authorization or continuing authorization for the utility's continued provision of this product or service in compliance with the criteria set forth in Rule VII. This requirement applies to both existing products and services explicitly approved and not explicitly approved by the Commission. G. Section 851 Application: A utility must continue to comply fully with the provisions of Public Utilities Code Section 851 when necessary or useful utility property is sold, leased, assigned, mortgaged, disposed of, or otherwise encumbered as Page 98 part of a nontariffed product or service offering by the utility. If an application pursuant to Section 851 is submitted, the utility need not file a separate advice letter, but shall include in the application those items which would otherwise appear in the advice letter as required in this Rule. H. Periodic Reporting of Nontariffed Products and Services: Any utility offering nontariffed products and services shall file periodic reports with the Commission's Energy Division twice annually for the first two years following the effective date of these Rules, then annually thereafter unless otherwise directed by the Commission. The utility shall serve periodic reports on the service list of this proceeding. The periodic reports shall contain the following information: 1. A description of each existing or new category of nontariffed products and services and the authority under which it is offered; 2. A description of the types and quantities of products and services contained within each category (so that, for example, "leases for agricultural nurseries at 15 sites" might be listed under the category "leases of land under utility transmission lines," although the utility would not be required to provide the details regarding each individual lease); 3. The costs allocated to and revenues derived from each category; and 4. Current information on the proportion of relevant utility assets used to offer each category of product and service. I. Offering of Nontariffed Products and Services to Affiliates: Nontariffed products and services which are allowed by this Rule may be offered to utility affiliates only in compliance with all other provisions of these Affiliate Rules. Similarly, this Rule does not prohibit affiliate transactions which are otherwise allowed by all other provisions of these Affiliate Rules. Page 99 EX-10.23.2 11 y58564f.txt Exhibit 10.23.2 SEVENTIETH AGREEMENT AMENDING NEW ENGLAND POWER POOL AGREEMENT (ISO CAPITAL FUNDING TARIFF) THIS SEVENTIETH AGREEMENT AMENDING NEW ENGLAND POWER POOL AGREEMENT, dated as of February 2, 2001 ("Seventieth Agreement"), amends the New England Power Pool Agreement (the "NEPOOL Agreement"), as amended. WHEREAS, the NEPOOL Agreement as in effect on December 1, 1996 was amended and restated by the Thirty-Third Agreement Amending New England Power Pool Agreement dated as of December 1, 1996 (the "Thirty-Third Agreement") in the form of the Restated New England Power Pool Agreement ("Restated NEPOOL Agreement") attached to the Thirty-Third Agreement as Exhibit A thereto, and the Thirty-Third Agreement also provided for the NEPOOL Open Access Transmission Tariff (the "NEPOOL Tariff") which is Attachment B to the Restated NEPOOL Agreement; and WHEREAS, the Restated NEPOOL Agreement and the NEPOOL Tariff have subsequently been amended numerous times, with such amendments most recently consolidated, respectively, in FERC Electric Third Revised Rate Schedule No. 5, submitted in Docket No. ER00-2894-000, and FERC Electric Tariff, Fourth Revised Volume No. 1, submitted in Docket Nos. EL00-62-000, et al.; and WHEREAS, the Participants desire to amend the NEPOOL Agreement as heretofore amended, to reflect the revisions detailed herein. NOW, THEREFORE, upon approval of this Seventieth Agreement by the NEPOOL Participants Committee in accordance with the procedures set forth in the NEPOOL Agreement, the Participants agree as follows: SECTION 1 AMENDMENTS TO NEPOOL AGREEMENT 1.1 The following sentence is inserted at the end of the first paragraph of Section 19.2 of the NEPOOL Agreement: Commencing with the effectiveness of the ISO's Tariff for Capital Funding (the "ISO Capital Funding Tariff"), the ISO's capital expenses and capitalized project costs are paid by the ISO using either funds provided through third party financing of those expenses or funds provided by the Participants under the ISO Capital Funding Tariff and have ceased to be NEPOOL expenses. 1.2 Section 19.3(d) of the NEPOOL Agreement is amended to read as follows: (d) The Restructuring Expense incurred on or after January 1, 2000 (the "Late Restructuring Expense") shall be funded for each month, on an as incurred basis, by the Participants to the extent that the ISO does not obtain an alternative source of funds for certain portions of the Late Restructuring Expense. In 2000, such Late Restructuring Expense shall initially be funded for each month by the Participants in proportion to their charges under the ISO Tariff for the prior month. In 2001 and thereafter, on an as-incurred basis, the ISO shall allocate the incrementally incurred Late Restructuring Expense among the various schedules to the ISO Tariff that is in effect at that time in a manner that best matches the elements comprising the incrementally incurred Late Restructuring Costs to the types of service to be covered by each schedule to the ISO Tariff, and the portion of the Late Restructuring Expense to be funded by the Participants that has been allocated to each such schedule to the ISO Tariff for such year shall be funded in each month by the Participants in proportion to their charges under such schedule for the prior month; provided, however, that in the event that the Commission accepts (i) an amendment to the ISO Agreement (as defined in Section 20(a) hereof) providing that in the event of a termination or resignation of the ISO, all assets purchased by the ISO with funds provided by the Participants for which the Participants have not been reimbursed shall be transferred without further consideration (to the extent permitted by applicable tax and other laws) to the Participants or their designee (which amendment shall be mutually acceptable to the ISO and the Participants Committee) and (ii) the ISO Capital Funding Tariff, an amendment to the ISO Tariff or a separate tariff for the ISO pursuant to which the ISO collects thereunder certain expenses that would otherwise be considered to be portions of the Late Restructuring Expense, such expenses shall be funded directly under the ISO Capital Funding Tariff, the ISO Tariff or such separate tariff for the ISO, as appropriate, shall not be considered part of the Late Restructuring Expense and shall not be initially collected hereunder. Each item of the Late Restructuring Expense funded by the Participants in each calendar year shall be amortized in equal monthly amounts and repaid to the Participants and/or other Entities which previously funded an unreimbursed portion of such item of the Late Restructuring Expense over a period of time determined by the ISO in accordance with generally accepted accounting principles in effect at the time of determination and taking into consideration the depreciation period, if any, of the particular asset giving rise to such item of the Late Restructuring Expense, such repayment to include interest thereon from the date of payment at the rate of 10.78% per annum. For each item of the Late Restructuring Expense funded by the Participants (regardless of whether it was incurred before, on or after January 1, 2001) and during the time in which amounts are being amortized and repaid for such item, the ISO shall determine to which schedule or schedules of the then effective ISO Tariff such item relates, and the ISO, acting as agent for the Participants and/or other Entities initially providing the funding for such item, shall recover the amounts being repaid that are associated with such item plus accrued interest from the Participants using the allocation -2- methodology set forth in such schedule or schedules to the ISO Tariff. The ISO shall provide the amounts recovered to the applicable Participants and/or other Entities according to which Participants and/or other Entities initially funded the item of the Late Restructuring Expense for which the subject amounts have been recovered. 1.3 Section 19.3(f) is inserted in the NEPOOL Agreement, directly after Section 19.3(e) of the NEPOOL Agreement, reading as follows: (f) Each capital expenditure or capitalized project cost of the ISO that is funded by the Participants under the ISO Capital Funding Tariff, the ISO Tariff or a separate tariff of the ISO, including without limitation any capital expenditure or capitalized project cost that was originally paid through a third party financing facility and is subsequently being funded by the Participants due to a termination or acceleration of such facility (including interest and fees related thereto) (each an "ISO Capital Expense"), shall be amortized in equal monthly amounts and repaid to the Participants and/or other Entities which previously funded an unreimbursed portion of such ISO Capital Expense over a period of time determined by the ISO in accordance with generally accepted accounting principles in effect at the time of determination and taking into consideration the depreciation period, if any, of the particular asset giving rise to such item of the Late Restructuring Expense. With respect to ISO Capital Expenses that are funded by the Participants as a result of the termination or acceleration of a financing facility, such amortization and repayment period shall take into account, to the extent appropriate, the date the applicable asset or assets were originally put into service and the remaining depreciation period thereof. Repayment under this Section 19.3(f) shall include interest on the amounts being repaid from the date of the original payment at the rate of 10.78% per annum. For each ISO Capital Expense, and during the time in which amounts are being amortized and repaid for such item, the ISO shall determine to which schedule or schedules of the then effective ISO Tariff such ISO Capital Expense relates, and the ISO, acting as agent for the Participants and/or other Entities initially providing the funding for such ISO Capital Expense, shall recover the amounts being repaid that are associated with such ISO Capital Expense plus accrued interest from the Participants using the allocation methodology set forth in such schedule or schedules to the ISO Tariff. The ISO shall provide the amounts recovered to the applicable Participants and/or other Entities according to which Participants and/or other Entities initially funded the ISO Capital Expense for which the subject amounts have been recovered. 1.4 Section 20(b) of the NEPOOL Agreement is amended to read as follows: The fees and charges of the ISO (other than those recovered under the ISO Tariff, the ISO Capital Funding Tariff, any other tariff of the ISO, and fees -3- and charges for services which are separately billed), and any indemnification payable under the ISO Agreement, shall be shared by the Participants in accordance with Section 19. 1.5 The fourth sentence of Section 20(d) of the NEPOOL Agreement is amended to read as follows: Unless otherwise agreed by the Participants, any funding by the Participants of the acquisition, or lease, of land, structures, fixtures, equipment and facilities, and other capital and/or capitalized project related expenditures, or the acquisition of other assets, and the ownership thereof, or the obligations of Participants as lessees, shall be in accordance with Section 19.3 of this Agreement, the ISO Tariff, the ISO Capital Funding Tariff or a separate tariff for the ISO. 1.6 The following is added at the end of Section 20(d) of the NEPOOL Agreement: Without limiting the generality of the foregoing in the event of the termination, removal or resignation of the ISO, the ISO shall transfer to the Participants or their designee, subject to any necessary landlord or other consents being obtained and subject to PUHCA approval to the extent such transfer requires PUHCA approval, all of its right, title and interest in and to all land, structures, fixtures, equipment and facilities, and other capital assets, and all software and other intellectual property or rights to intellectual property or other assets that have been acquired or developed by the ISO using funds provided by the Participants (whether initially or upon a termination or acceleration of a third party financing and whether provided under this Agreement, the ISO Capital Funding Tariff, the ISO Tariff or a separate tariff of the ISO) for which the Participants have not been fully reimbursed (such right, title and interest being referred to as the "Transferred Interest"). If the transferee of the Transferred Interest is a tax-exempt Section 501(c)(3) or Section 501(c)(4) organization for federal income taxation purposes, such transfer will be without consideration to the ISO; if such transferee is NEPOOL, NEPOOL shall purchase such Transferred Interest at a price equal to (x) the fair market value of the portion of the Transferred Interest that is owned or leased by the ISO (but not the portion of the Transferred Interest that is owned or leased by the Participants ), as determined by an independent MAI appraiser with the requisite background and experience in the field (the "FMV") minus (y) the amount of funds previously provided by the Participants for such portion of the Transferred Interest that is owned or leased by the ISO Assets for which the NEPOOL Participants have not been reimbursed; and if such transferee is neither NEPOOL nor a tax-exempt Section 501(c)(3) or Section 501(c)(4) organization, such transferee shall purchase the Transferred Interest at a -4- price equal to the FMV; provided, however, that in no event shall the purchase price for the Transferred Interest be less than zero. SECTION 2 AMENDMENTS TO NEPOOL TARIFF 2.1 In the second paragraph of the Financial Assurance Policy for NEPOOL Members included as Attachment L to the NEPOOL Tariff (the "Member Financial Assurance Policy"), a footnote is inserted at the end of the phrase "including amounts owed to ISO New England Inc. under its tariff," and the text of that footnote reads as follows: For purposes of this Policy, including all attachments hereto, the "tariff" of ISO New England Inc. includes any and all tariffs of ISO New England Inc., including without limitation its Tariff for Transmission Dispatch and Power Administration Services and its Tariff for Capital Funding. 2.2 In Attachment 2 (Sample Performance Bond) to the Member Financial Assurance Policy, the second paragraph is amended to read as follows: WHEREAS, the Principal has entered into agreements for the purchase and sale of electric services and the payment of amounts owed to ISO New England Inc. and its share of the expenses of the New England Power Pool under the Restated NEPOOL Agreement, the Restated NEPOOL Open Access Transmission Tariff, ISO New England Inc.'s Tariff for Transmission Dispatch and Power Administration Services and ISO New England Inc.'s Tariff for Capital Funding, each as amended from time to time (collectively referred to as the "Agreements"), and in strict accordance with their respective terms. 2.3 The first sentence of Section 1.1 of the New England Power Pool Billing Policy included as Attachment N to the NEPOOL Tariff (the "Billing Policy") is amended to read as follows: The objective of this Policy is to define the billing and payment procedures to be utilized in administering charges and payments due under the NEPOOL Agreement, the NEPOOL Tariff, the Interim Independent System Operator Agreement (the "ISO Agreement") between NEPOOL and ISO New England Inc. (the "ISO"), the ISO's Tariff for Capital Funding (the "ISO Capital Funding Tariff"), and the ISO"s Tariff for Transmission Dispatch and Power Administration Services (the "ISO Tariff"), in each case as amended, modified, supplemented and restated from time to time (collectively, the "Documents"). 2.4 Section 2.3(c) of the Billing Policy is amended to read as follows: -5- c) ISO Tariff Charges. The Charges owed by the Participant or Non-Participant Transmission Customer under the ISO Tariff and/or the ISO Capital Funding Tariff, categorized by the tariff and section or schedule under which such Charges arise. 2.5 Section 3.3(a) of the Billing Policy is amended to read as follows: a) ISO Charges Paid First. The ISO shall use monies received by it from Participants and Non-Participant Transmission Customers to pay all amounts due to the ISO under the ISO Tariff, the ISO Capital Funding Tariff and the ISO Agreement before making any payments to any Participants or Non-Participant Transmission Customers. SECTION 3 MISCELLANEOUS 3.1 This Seventieth Agreement shall become effective on May 5, 2001 or on such other date as the Commission shall provide that the amendments reflected herein shall become effective. 3.2 Terms used in this Seventieth Agreement that are not defined herein shall have the meanings ascribed to them in the NEPOOL Agreement. -6- EX-10.23.3 12 y58564g.txt Exhibit 10.23.3 SEVENTY-FIRST AGREEMENT AMENDING NEW ENGLAND POWER POOL AGREEMENT (LATE PAYMENT FEES) THIS SEVENTY-FIRST AGREEMENT AMENDING NEW ENGLAND POWER POOL AGREEMENT, dated as of February 2, 2001 ("Seventy-First Agreement"), amends the New England Power Pool Agreement (the "NEPOOL Agreement"), as amended. WHEREAS, the NEPOOL Agreement as in effect on December 1, 1996 was amended and restated by the Thirty-Third Agreement Amending New England Power Pool Agreement dated as of December 1, 1996 (the "Thirty-Third Agreement") in the form of the Restated New England Power Pool Agreement ("Restated NEPOOL Agreement") attached to the Thirty-Third Agreement as Exhibit A thereto, and the Thirty-Third Agreement also provided for the NEPOOL Open Access Transmission Tariff (the "NEPOOL Tariff") which is Attachment B to the Restated NEPOOL Agreement; and WHEREAS, the Restated NEPOOL Agreement and the NEPOOL Tariff have subsequently been amended numerous times, with such amendments most recently consolidated, respectively, in FERC Electric Third Revised Rate Schedule No. 5, submitted in Docket No. ER00-2894-000, and FERC Electric Tariff, Fourth Revised Volume No. 1, submitted in Docket Nos. EL00-62-000, et al.; and WHEREAS, the Participants desire to amend the NEPOOL Agreement as heretofore amended, to reflect the revisions detailed herein. NOW, THEREFORE, upon approval of this Seventy-First Agreement by the NEPOOL Participants Committee in accordance with the procedures set forth in the NEPOOL Agreement, the Participants agree as follows: SECTION 1 AMENDMENTS TO FINANCIAL ASSURANCE POLICY FOR NEPOOL MEMBERS 1.1 In the Financial Assurance Policy for NEPOOL Members included as Attachment L to the NEPOOL Tariff, the following is added at the end of the text under the heading "Non-payment of Amounts Due": Interest collected on late payments shall be allocated and paid to the Participants to whom such late payments are due, pro rata in accordance with the amount due to each such Participant. Late payment charges that are collected and not distributed to the Participants under the NEPOOL Billing Policy shall be deposited by the ISO into a segregated interest-bearing account (the "Late Payment Account") for disbursement in accordance with the NEPOOL Billing Policy as in effect from time to time; provided, however, that in no event shall the amount in the Late Payment Account, including interest accrued thereon, at any time exceed $500,000 or other amount determined from time to time by the Participants Committee (the "Late Payment Account Limit"). Any late payment fees and interest thereon in excess of the Late Payment Account Limit shall be distributed to the Participants pro rata based on their charges under the ISO's Tariff for Transmission Dispatch and Power Administration Services in the month preceding the month in which such distribution is to be made. SECTION 2 AMENDMENTS TO NEPOOL BILLING POLICY 2.1 The references in Sections 3.1(d) and 5.6(c) of the New England Power Pool Billing Policy included as Attachment N to the NEPOOL Tariff (the "Billing Policy") to "Section 3.3(e)" are each changed to "Section 3.3(f)." 2.2 The following new subsection is inserted immediately after Section 3.3(d) of the Billing Policy: e) Disbursements from Late Payment Fund. If and to the extent that the procedures described in clauses (b), (c) and (d) above are insufficient to effect payment of the Default Amount (but not interest accrued thereon and late charges assessed under the Documents and the Financial Assurance Policies), the ISO shall withdraw from the account funded with late payment charges under the Financial Assurance Policy for NEPOOL Members (the "Late Payment Account") an amount equal to such unpaid Default Amount, to the extent that such amount is available in the Late Payment Account, and shall apply such amount to any shortfall in Payments resulting from the Default Amount not being paid. If and to the extent that such Default Amount, interest thereon and/or late charges with respect thereto are subsequently collected (including as a result of the use of a financial assurance under the Financial Assurance Policies or through actions or proceedings against the defaulting Participant or Non-Participant Transmission Customer), such amounts shall first be used to pay Participants for the amount of such Default Amount allocated to them under clause (f) below, with interest thereon, and then, after all such amounts have been paid to the Participants, such Default Amount, interest and/or late charges shall be deposited into the Late Payment Account in accordance with the provisions of the Financial Assurance Policy for NEPOOL Members that are applicable to late payment charges. 2.3 Clauses (e), (f), (g), (h) and (i) of the Billing Policy are redesignated as clauses (f), (g), (h), (i) and (j) of the Billing Policy, respectively. 2.4 Section 3.3(f)(i) (formerly Section 3.3(e)(i)) of the Billing Policy is amended to read as follows: -2- f) Reduction of Payments and Increases in Charges. (i) If and to the extent that the procedures described in clauses (b), (c), (d) and (e) above do not yield sufficient funds to pay all Remittance Advice amounts in full (after payment of amounts due to the ISO in accordance with clause (a) above) on the date such Payments are due, the ISO shall reduce Payments to those Participants owed monies for that billing period (the "Default Period"), pro rata based on the amounts owed to such Participants, to the extent necessary to clear its accounts by the close of banking business on the date such Payments are due. As funds attributable to a Default Amount are received by the ISO (including amounts received through financial assurances provided under the Financial Assurance Policies or through actions or proceedings commenced against the defaulting Participant or Non-Participant Transmission Customer) prior to the next billing period's Statements being distributed, such funds, together with any interest and late charges collected on the applicable Default Amount, shall be distributed pro rata to the Participants that did not receive the full amount of their Payments as a result of such Default Amount not being paid, up to the full amount that such Participants did not receive as a result of such Default Amount not being paid, with interest thereon. 2.5 In Section 3.3(f)(ii) (formerly Section 3.3(e)(ii)) of the Billing Policy, the references to "(e)(ii)" are changed to "(f)(ii)," and the last sentence thereof is amended to read as follows: As funds attributable to a Default Amount are received by the ISO (including amounts received through financial assurances provided under the Financial Assurance Policies or through actions or proceedings commenced against the defaulting Participant or Non-Participant Transmission Customer) after such adjusted Statements are distributed, such funds, together with any interest and late charges collected on the applicable Default Amount, shall be distributed to the Participants pro rata based on their allocation of the Default Amount under this clause (f)(ii), up to the full amount of such Default Amount allocated to each such Participant, with interest thereon. SECTION 3 MISCELLANEOUS 3.1 This Seventy-First Agreement shall become effective on May 5, 2001 or on such other date as the Commission shall provide that the amendments reflected herein shall become effective. 3.2 Terms used in this Seventy-First Agreement that are not defined herein shall have the meanings ascribed to them in the NEPOOL Agreement. -3- ATTACHMENT 3 AMENDMENT NO. 1 TO INTERIM INDEPENDENT SYSTEM OPERATOR AGREEMENT This Amendment No. 1 to Interim Independent System Operator Agreement (this "Amendment") is made and entered into as of this 20th day of March, 2001 by and between the entities which are the participants in the New England Power Pool pursuant to the Restated New England Power Pool Agreement dated as of September 1, 1971, as amended and restated to date, acting herein by and through the NEPOOL Participants Committee, as successor to the NEPOOL Management Committee (collectively, the "NEPOOL Participants" or "NEPOOL"), on the one hand, and ISO New England Inc. (the "ISO"), on the other. WHEREAS, the NEPOOL Participants and the ISO are parties to that certain Interim Independent System Operator Agreement dated as of July 1, 1997 (the "ISO Agreement"); and WHEREAS, the NEPOOL Participants and the ISO wish to amend the ISO Agreement to reflect a change in the collection of the ISO's capital expenditures and capitalized project costs; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the NEPOOL Participants and the ISO agree as follows: 1. AMENDMENT OF SECTION 6.5(a). The last sentence of Section 6.5(a) of the ISO Agreement is amended to read as follows: If the ISO determines a need for additional facilities or equipment to carry out its responsibilities under this Agreement (such as, for purposes of illustration, computer equipment, but not including transmission facilities or generating units) and the ISO has not obtained funding for such additional facilities or equipment through third party financing or through its Tariff for Capital Funding, its Tariff for Transmission Dispatch and Power Administration Services or a separate tariff, the ISO may request funding for such facilities or equipment in accordance with the terms of the NEPOOL Agreement. 2. AMENDMENT OF SECTION 6.5(b). The first sentence of Section 6.5(b) of the ISO Agreement is amended to read as follows: All land, structures, fixtures, equipment and facilities, and other capital assets, and all software or other intellectual property or rights to intellectual property or other assets acquired or developed by the ISO with funding provided by the NEPOOL Participants pursuant to the NEPOOL Agreement in order to carry out its responsibilities under this Agreement (the "NEPOOL Assets") shall be the property of the NEPOOL Participants or shall be acquired by the NEPOOL Participants under lease in accordance with arrangements approved by the NEPOOL Participants Committee; provided that for those NEPOOL Participants subject to the Public Utility Holding Company Act of 1935 ("PUHCA"), any such acquisition by those NEPOOL Participants shall be subject to PUHCA approval to the extent such acquisition requires approval under PUHCA. 3. ADDITION OF SECTION 6.5(c). Section 6.5(c) is added to the ISO Agreement, immediately after Section 6.5(b) thereof, reading as follows: (c) Any additional land, structures, fixtures, equipment and facilities, and other capital assets, and all software and other intellectual property or rights to intellectual property or other assets needed for the ISO to carry out its responsibilities under this Agreement not covered by subsection (b) of this Section shall be acquired or developed by the ISO in its own name and shall be the property of the ISO (the "ISO Assets"), and the costs associated with such acquisition shall be paid by the ISO with funding obtained through a third party financing arrangement or under the ISO's Tariff for Capital Funding, the ISO's Tariff for Transmission Dispatch and Power Administration Services or a separate tariff for the ISO. In the event of a termination, removal or resignation of the ISO under this Agreement or the termination of this Agreement, the ISO shall transfer to NEPOOL or its designee, subject to any necessary landlord or other consents being obtained and subject to PUHCA approval to the extent such transfer requires PUHCA approval, all of its right, title and interest in and to the NEPOOL Assets and in and to the ISO Assets that have been acquired or developed using funds provided by the NEPOOL Participants (whether initially or upon a termination or acceleration of a third party financing and whether provided under the NEPOOL Agreement, the ISO's Tariff for Capital Funding, the ISO's Tariff for Transmission Dispatch and Power Administration Services or a separate tariff of the ISO) for which the NEPOOL Participants have not been fully reimbursed. If the transferee of such right, title and interest in and to the NEPOOL Assets and ISO Assets is a tax-exempt Section 501(c)(3) or Section 501(c)(4) organization for federal income taxation purposes, such transfer will be without consideration to the ISO; if such transferee is NEPOOL, NEPOOL shall purchase such right, title and interest in and to the NEPOOL Assets and ISO Assets at a price equal to (x) the fair market value of such right, title and interest in and to the ISO Assets (but not such right, title and interest in and to the NEPOOL Assets), as determined by an independent MAI appraiser with the requisite background and experience in the field (the "FMV") minus (y) the amount of funds previously provided by the NEPOOL Participants for such right, title and interest in and to the ISO Assets for which the NEPOOL Participants have not been reimbursed; and if such transferee is neither NEPOOL nor a tax-exempt Section 501(c)(3) or Section 501(c)(4) organization, such transferee shall purchase such right, title and interest in and to the NEPOOL Assets and ISO Assets at a price equal to the FMV; provided, however, that in no event shall the purchase price for such right, title and interest in and to the NEPOOL Assets and ISO Assets be less than zero. 4. CONTINUING EFFECT. Except as specifically amended hereby, all terms and provisions contained in the ISO Agreement shall remain unchanged and in full force and effect. 5. COUNTERPARTS. Two or more counterparts of this Amendment may be signed by the parties, each of which shall be an original but all of which together shall constitute one and the same instrument. -2- 6. GOVERNING LAW. This Amendment shall be governed by and enforced in accordance with the laws of the State of Connecticut. -3- IN WITNESS WHEREOF, the NEPOOL Participants and the ISO have caused this Amendment to be executed by their duly authorized representatives as of the date first written above. NEPOOL PARTICIPANTS ISO NEW ENGLAND INC. By:____________________________ By:______________________________ Name: Name: Title: Title: -4- EX-10.23.4 13 y58564h.txt Exhibit 10.23.4 SEVENTY-SECOND AGREEMENT AMENDING NEW ENGLAND POWER POOL AGREEMENT (NCPC AMENDMENT) THIS SEVENTY-SECOND AGREEMENT AMENDING NEW ENGLAND POWER POOL AGREEMENT, dated as of April 6, 2001 ("Seventy-Second Agreement"), amends the New England Power Pool Agreement (the "NEPOOL Agreement"), as amended. WHEREAS, the NEPOOL Agreement as in effect on December 1, 1996 was amended and restated by the Thirty-Third Agreement Amending New England Power Pool Agreement dated as of December 1, 1996 (the "Thirty-Third Agreement") in the form of the Restated New England Power Pool Agreement ("Restated NEPOOL Agreement") attached to the Thirty-Third Agreement as Exhibit A thereto, and the Thirty-Third Agreement also provided for the NEPOOL Open Access Transmission Tariff (the "NEPOOL Tariff") which is Attachment B to the Restated NEPOOL Agreement; and WHEREAS, the Restated NEPOOL Agreement and the NEPOOL Tariff have subsequently been amended numerous times, with such amendments most recently consolidated, respectively, in FERC Electric Third Revised Rate Schedule No. 5, submitted in Docket No. ER00-2894-000, and FERC Electric Tariff, Fourth Revised Volume No. 1, submitted in Docket Nos. EL00-62-000, et al.; and WHEREAS, the Participants desire to amend the NEPOOL Agreement, including the NEPOOL Tariff, as heretofore amended, to reflect the revisions detailed herein. NOW, THEREFORE, upon approval of this Seventy-Second Agreement by the NEPOOL Participants Committee in accordance with the procedures set forth in the NEPOOL Agreement, the Participants agree as follows: SECTION 1 AMENDMENTS TO THE NEPOOL TARIFF 1.1 The first sentence of the first paragraph of Section 24(a) is amended so that it reads: (a) Until the earlier of the CMS/MSS Effective Date or the implementation effective date of an order issued by the Commission directing a different allocation of Congestion Costs, if limitations in available transmission capacity over any interface within the NEPOOL Control Area in any hour require that the System Operator dispatch resources out-of-merit, the System Operator shall determine for the affected area or areas the aggregate of the Congestion Costs for the hour. 1.2 The last paragraph in Section 24(a) is amended so that it reads: As used in this Section 24(a), "Congestion Costs" for an hour shall equal the aggregate of the portions of the uplift paid to resources for a Scheduled Dispatch Period that are attributable to that hour for those resources which were run out-of-merit because of limitations in transmission capacity, as such portions are calculated in accordance with the applicable Market Rules. SECTION 2 MISCELLANEOUS 2.1 This Seventy-Second Agreement shall become effective on July 1, 2001 or on such other date as the Commission shall provide that the amendments reflected herein shall become effective. 2.2 Terms used in this Seventy-Second Agreement that are not defined herein shall have the meanings ascribed to them in the NEPOOL Agreement and NEPOOL Tariff. -2- EX-10.23.5 14 y58564i.txt Exhibit 10.23.5 SEVENTY-THIRD AGREEMENT AMENDING NEW ENGLAND POWER POOL AGREEMENT (SCHEDULE 2 CHANGES) THIS SEVENTY-THIRD AGREEMENT AMENDING NEW ENGLAND POWER POOL AGREEMENT, dated as of May 9, 2001 ("Seventy-Third Agreement"), amends the New England Power Pool Agreement (the "NEPOOL Agreement"), as amended. WHEREAS, the NEPOOL Agreement as in effect on December 1, 1996 was amended and restated by the Thirty-Third Agreement Amending New England Power Pool Agreement dated as of December 1, 1996 (the "Thirty-Third Agreement") in the form of the Restated New England Power Pool Agreement ("Restated NEPOOL Agreement") attached to the Thirty-Third Agreement as Exhibit A thereto, and the Thirty-Third Agreement also provided for the NEPOOL Open Access Transmission Tariff (the "NEPOOL Tariff") which is Attachment B to the Restated NEPOOL Agreement; and WHEREAS, the Restated NEPOOL Agreement and the NEPOOL Tariff have subsequently been amended numerous times, with such amendments most recently consolidated, respectively, in FERC Electric Third Revised Rate Schedule No. 5, submitted in Docket No. ER00-2894-000, and FERC Electric Tariff, Fourth Revised Volume No. 1, submitted in Docket Nos. EL00-62-000, et al.; and WHEREAS, the Participants desire to amend the NEPOOL Tariff as heretofore amended, to reflect the revisions detailed herein. NOW, THEREFORE, upon approval of this Seventy-Third Agreement by the NEPOOL Participants Committee in accordance with the procedures set forth in the NEPOOL Agreement, the Participants agree as follows: SECTION 1 AMENDMENTS TO ANCILLARY SERVICE SCHEDULE 2 1.1 NEPOOL Tariff Ancillary Service Schedule 2 is amended to read as set forth in Attachment A hereto. SECTION 2 AMENDMENT OF THE ANCILLARY SERVICE SCHEDULE 2 IMPLEMENTATION RULE 2.1 The Ancillary Service Schedule 2 Implementation Rule, which is a supplement to the NEPOOL Tariff, is deleted in its entirety. SECTION 3 MISCELLANEOUS 3.1 This Seventy-Third Agreement shall become effective on August 1, 2001 or on such other date as the Commission shall provide that the amendments reflected herein shall become effective. 3.2 Terms used in this Seventy-Third Agreement that are not defined herein shall have the meanings ascribed to them in the NEPOOL Agreement. -2- ATTACHMENT A SEVENTY-THIRD AGREEMENT SCHEDULE 2 REACTIVE SUPPLY AND VOLTAGE CONTROL FROM GENERATION SOURCES SERVICE In order to maintain transmission voltages on the NEPOOL Transmission System within acceptable limits, generation facilities are operated to produce (or absorb) reactive power. Thus, Reactive Supply and Voltage Control from Generation Sources Service must be provided for each transaction on the NEPOOL Transmission System. The amount of Reactive Supply and Voltage Control from Generation Sources Service that must be supplied with respect to a Transmission Customer's transaction will be determined based on the reactive power support necessary to maintain transmission voltages within limits that are generally accepted in the region and consistently adhered to by the Participants. Additional information regarding the processes used to collect data and calculate amounts due or payable under this Schedule 2 can be found in the Ancillary Service Schedule 2 Business Procedure posted on the ISO website. I. DETERMINING THE AMOUNT TO BE PAID FOR SERVICE UNDER THIS SCHEDULE Reactive Supply and Voltage Control from Generation Sources Service is to be provided through the System Operator and the Transmission Customer must purchase through the System Operator service for voltage support capability provided by Qualified Generators and service when the System Operator (or applicable satellite dispatching center) determines, in the exercise of its discretion, that it is necessary to direct a generating unit to alter its operations in an hour in order to provide such service. The charge for such service shall be paid by each Participant or Non-Participant which receives either Regional Network Service or Internal Point-to-Point Service or Through or Out Service and shall be determined in accordance with the following formula: CH = (CC + LOC + SCL + PC) (HL1 + RC1) divided by (HL + RC) in which CH = the amount to be paid by the Participant or Non-Participant for the hour; CC = the capacity costs for the hour shall be the VAR Revenue Requirement determined as set forth herein divided by the number of hours in the month; LOC = the lost opportunity costs for the hour to be paid to Participants who provide VAR support; -3- ATTACHMENT A SEVENTY-THIRD AGREEMENT PC = the portion of the amount paid to Participants for the hour for Energy produced by a generating unit that is considered under this Schedule 2 to be paid for VAR support; SCL = the cost of energy used in the hour by generating facilities, synchronous condensers or static controlled VAR regulators in order to provide VAR support to the transmission system; HL1 = the Network Load of the Participant or Non-Participant for the hour; HL = the aggregate of the Network Loads of all Participants and Non-Participants for the hour; RC1 = the Reserved Capacity for Internal Point-to-Point Service and/or Through or Out Service of the Participant or Non-Participant for the hour; and RC = the aggregate Reserved Capacity for Internal Point-to-Point Service and/or Through or Out Service of all Participants and Non-Participants for the hour. II. DETERMINING A GENERATOR'S COMPENSATION FOR PROVIDING SERVICE UNDER THIS SCHEDULE The compensation to be paid to generators providing Schedule 2 service shall be based on the four components set forth below. 1. CAPACITY COST (CC) 1.1. A Qualified Generator shall be eligible to receive compensation for the capability to deliver VARs to the system (a "VAR Payment") under the Capacity Cost component of Schedule 2 as provided herein. A Qualified Generator is any generator that is in the market system and provides measurable voltage support, as determined from time to time by the Reliability Committee or such other Committee as the Participants Committee may designate, to the control area. 1.2. The VAR Payment is not intended to compensate a Qualified Generator for losses associated with station use and energizing the generator leads and generator step-up transformer. 1.3. The "VAR Rate" will be established each year as of January 1 on a prospective basis for that calendar year and shall be the Base VAR Rate * Min (1, (1.2*Forecast Peak Adjusted Reference Load for the year/SUM (Qualified Generator's Seasonal Claimed -4- ATTACHMENT A SEVENTY-THIRD AGREEMENT Capability))). 1.4. The "Base VAR Rate" shall be $0.90/kVAR-yr in 2001; $0.95/kVAR-yr in 2002; $1.00/kVAR-yr in 2003 and $1.05/kVAR-yr in 2004 and thereafter. 1.5. The "Forecast Peak Adjustment Reference Load" shall be the value published in the then-most recently published CELT report at the time the VAR Rate is established for a year. 1.6. A "Qualified Generator's Seasonal Claimed Capability" shall be the Seasonal Claimed Capability of each Qualified Generator applicable for the season in which the NEPOOL Forecast Peak Adjusted Load is forecast to occur. 1.7. The "VAR Revenue Requirement" shall be the SUM (Qualified Generator's VAR Payment). 1.8. A Qualified Generator's VAR Payment shall equal the (VAR Rate*Qualified VARs). 1.8.1. The VAR Rate is determined pursuant to paragraph 1.3 above. 1.8.2. Qualified Generators will be paid their VAR Rate under this Section for each month of a calendar year starting with the month in which this Section becomes effective. 1.9. "Qualified VARs" shall be: 1.9.1. Qualified VARs of an untested unit shall be equal to the Lagging VAR capability at Seasonal Claimed Capability for the season of forecasted peak as indicated on the Qualified Generator's NX-12D form that is then in effect adjusted for losses to station service and energizing the generator leads and generator step-up transformer. 1.9.2. As soon as practicable, but in no event longer than two years from the effective date of this Section, the Qualified VARs of a Qualified Generator shall be determined at its point of delivery to the system, in accordance with the then-applicable Operating Procedures. At least every 5 years after that test, a test of the VAR capability of a Qualified Generator across its full operating range shall be conducted. 2. LOST OPPORTUNITY COST (LOC) 2.1. The Lost Opportunity Cost for hydro, pumped storage and thermal generating units that are dispatched down by ISO-NE, a NEPOOL satellite or a NEPOOL Participant dispatch center for the purpose of providing reactive supply and voltage control will be calculated in a manner that is consistent with the rules established in Market Rule and Procedure No. 6-A - Compensation For Resources Postured For OP-4 Conditions (MRP 6-A). The -5- ATTACHMENT A SEVENTY-THIRD AGREEMENT LOC calculation shall consist of the "Revenue Shortfall Adjustment" and the "Emergency Purchase Adjustment," as those terms are defined in the Schedule 2 Business Procedure. The Revenue Shortfall Adjustment and the Emergency Purchase Adjustment are calculated on an hourly basis and then totaled for the entire day in which the posturing occurred. The value of the Revenue Shortfall Adjustment and the Emergency Purchase Adjustment are summed for each Participant to create the LOC adjustment total. 3. COST OF ENERGY CONSUMED (SCL) 3.1. MOTORING HYDRO OR PUMPED STORAGE GENERATING UNITS. The SCL associated with hydro and pumped storage generating units that are motoring at the request of ISO-NE, a NEPOOL satellite or a NEPOOL Participant dispatch center for the purpose of providing reactive supply and voltage control will equal the cost of energy to motor and will be calculated in each hour as follows: SCL = (MWhUnit * (ECP or Actual energy cost), where the MwhUnit are calculated pursuant to the Schedule 2 Business Procedure. Actual energy cost applies only if motoring energy is purchased through a bilateral contract. Documentation of actual energy cost is to be provided to ISO-NE. The UpliftSched2 component of the SCL no longer applies since the option of reporting the energy required by a hydro or pumped storage generating unit that is motoring for the purpose of providing reactive supply and voltage control under a distinct and unique Load Asset in the Market System is now available. 3.2. SYNCHRONOUS CONDENSERS AND STATIC CONTROLLED VAR REGULATORS (SC/SCV). The SCL will be set to zero ($0), and the cost of energy to supply reactive supply and voltage control from the Chester SCV will be treated as losses on the NEPOOL bulk transmission system. This treatment will be revisited by the Markets Committee and Tariff Committee on an as needed basis (e.g., upon the addition of a new SC or SCV within the NEPOOL Control Area). 4. COST OF ENERGY PRODUCED (PC) 4.1. THERMAL GENERATING UNITS. The PC associated with thermal generating units brought on-line by the ISO, a NEPOOL satellite or a NEPOOL Participant dispatch center for the purpose of providing reactive supply and voltage control shall equal the portion of the total uplift to be paid that resource for a day that is attributed to the hour(s) during which the resource is run to provide this service in accordance with applicable Market Rules. 4.2. HYDRO AND PUMPED STORAGE GENERATING UNITS. The PC associated with hydro or pumped storage generating units that are producing real power and that have also been brought on-line by the ISO, a NEPOOL satellite or a NEPOOL Participant dispatch center to provide reactive supply and voltage control shall equal the portion of the total uplift to be paid that resource for a day that is attributed to the hour(s) during which the resource is run to provide this service in accordance with applicable Market Rules. -6- EX-10.23.6 15 y58564j.txt Exhibit 10.23.6 SEVENTY-FOURTH AGREEMENT AMENDING NEW ENGLAND POWER POOL AGREEMENT (REVIEW BOARD AMENDMENT) THIS SEVENTY-FOURTH AGREEMENT AMENDING NEW ENGLAND POWER POOL AGREEMENT, dated as of May 9, 2001 ("Seventy-Fourth Agreement"), amends the New England Power Pool Agreement (the "NEPOOL Agreement"), as amended. WHEREAS, the NEPOOL Agreement as in effect on December 1, 1996 was amended and restated by the Thirty-Third Agreement Amending New England Power Pool Agreement dated as of December 1, 1996 (the "Thirty-Third Agreement") in the form of the Restated New England Power Pool Agreement ("Restated NEPOOL Agreement") attached to the Thirty-Third Agreement as Exhibit A thereto, and the Thirty-Third Agreement also provided for the NEPOOL Open Access Transmission Tariff (the "NEPOOL Tariff") which is Attachment B to the Restated NEPOOL Agreement; and WHEREAS, the Restated NEPOOL Agreement and the NEPOOL Tariff have subsequently been amended numerous times, with such amendments most recently consolidated, respectively, in FERC Electric Third Revised Rate Schedule No. 5, submitted in Docket No. ER00-2894-000, and FERC Electric Tariff, Fourth Revised Volume No. 1, submitted in Docket Nos. EL00-62-000, et al.; and WHEREAS, the Participants desire to amend the NEPOOL Agreement as heretofore amended, to reflect the revisions detailed herein. NOW, THEREFORE, upon approval of this Seventy-Fourth Agreement by the NEPOOL Participants Committee in accordance with the procedures set forth in the NEPOOL Agreement, the Participants agree as follows: SECTION 1 AMENDMENTS TO RESTATED NEPOOL AGREEMENT 1.1 The last sentence of Section 11A.3 is amended so that it reads: Except as otherwise provided in the Code of Conduct and Ethics Policy of the Review Board adopted by the Participants Committee, while serving on the Review Board, a Review Board Member (a) shall not have a material ongoing business or professional relationship or other affiliation with any Participant or its Related Persons and (b) shall otherwise be subject to the same independence requirements imposed on Directors of the System Operator Board of Directors. 1.2 Section 11A.7(b) is amended so that it reads as follows: (b) Intervenors and Time Limits: Any other Participant that wishes to participate in the appeal proceeding hereunder shall give signed written notice to the Secretary of the Participants Committee no later than seven (7) business days after the Appealing Party has given notice of appeal or such other time as permitted by the Review Board and shall upon the approval of the Review Board be permitted to participate in the appeal. 1.3 Section 11A.7(d) is amended so that it reads as follows: (d) Pre-hearing Submissions: Each Appealing Party shall provide the Review Board, within fifteen (15) business days of the giving of its notice of appeal or such other time as permitted by the Review Board, a brief written statement of its complaint and a statement of the remedy or remedies it seeks, accompanied by copies of any documents or other materials it wishes the Review Board to review. The Participants Committee and, as appropriate, any other Participant participating in the appeal will provide the Review Board, within seven (7) business days of the Appealing Party's submission or such other time as permitted by the Review Board, copies of the minutes of all NEPOOL committee meetings at which the matter was discussed and if deemed appropriate by the Participants Committee or otherwise requested by the Review Board a brief description of the action (or failure to act) being appealed and a brief statement explaining why the Participants Committee believes its action (or failure to act) should be upheld by the Review Board, together with copies of documents or other materials referenced in such submission for the Review Board to review and materials, if any, which interested Participants provide to the Secretary of the Participants Committee and reasonably request be submitted to the Review Board. SECTION 2 MISCELLANEOUS 2.1 This Seventy-Fourth Agreement shall become effective on June 1, 2001 or on such other date as the Commission shall provide that the amendments reflected herein shall become effective. 2.2 Terms used in this Seventy-Fourth Agreement that are not defined herein shall have the meanings ascribed to them in the NEPOOL Agreement. -2- EX-10.23.7 16 y58564k.txt Exhibit 10.23.7 New England Power Pool 2nd Rev Sheet No. 1 FERC Electric Third Revised Rate Schedule No. 5 Restated NEPOOL Agreement - -------------------------------------------------------------------------------- SEVENTY-SIXTH AGREEMENT AMENDING NEW ENGLAND POWER POOL AGREEMENT (Compliance with June 13, 2001 Orders) THIS SEVENTY-SIXTH AGREEMENT AMENDING NEW ENGLAND POWER POOL AGREEMENT, dated as of June 29, 2001 (the "Seventy-Sixth Agreement"), amends the New England Power Pool Agreement (the "NEPOOL Agreement"), as amended. WHEREAS, the NEPOOL Agreement as in effect on December 1, 1996 was amended and restated by the Thirty-Third Agreement Amending New England Power Pool Agreement dated as of December 1, 1996 (the "Thirty-Third Agreement") in the form of the Restated New England Power Pool Agreement ("Restated NEPOOL Agreement") attached to the Thirty-Third Agreement as Exhibit A thereto, and the Thirty-Third Agreement also provided for the NEPOOL Open Access Transmission Tariff (the "NEPOOL Tariff") which is Attachment B to the Restated NEPOOL Agreement; WHEREAS, the Restated NEPOOL Agreement and the NEPOOL Tariff have subsequently been amended numerous times, with such amendments most recently consolidated, respectively, in FERC Electric Third Revised Rate Schedule No. 5, submitted in Docket No. ER00-2894-000, and FERC Electric Tariff, Fourth Revised Volume No. 1, submitted in Docket Nos. EL00-62-000 et al.; WHEREAS, on June 13, 2001, the Commission issued two orders (collectively, the "Orders"), one in Docket Nos. EL00-62-004 [et al., ISO New England Inc.,] 95 FERC P. 61,384 (2001), wherein it directed NEPOOL to file certain amendments to the NEPOOL Agreement within 30 days of that order, and the other in Docket No. ER98-3853-005, [New England Power Pool,] 95 FERC P. 61,383 (2001), wherein the Commission granted rehearings and clarifications that require NEPOOL to file certain amendments to the NEPOOL Agreement within 30 days of that order; and WHEREAS, in order to effect compliance with the Orders, the NEPOOL Participants desire to amend the NEPOOL Agreement, as heretofore amended, to reflect the revisions detailed herein. NOW, THEREFORE, upon approval of this Seventy-Sixth Agreement by the NEPOOL Participants Committee in accordance with the procedures set forth in the NEPOOL Agreement, the Participants agree as follows: - -------------------------------------------------------------------------------- Issued by: David T. Doot, Secretary Effective: June 13, 2001 Issued on: July 13, 2001 PENDING Filed to comply with order of Federal Energy Regulatory Commission, Docket No. EL00-62-004 et al. issued June 13, 2001, 95 FERC P. 61,384 (2001). SECTION 1 AMENDMENTS TO NEPOOL AGREEMENT 1.1 Amendment to Section 7.5(n). Section 7.5(n) of the Restated NEPOOL Agreement is amended to read as follows: (n) Subject to Section 20(h), the Participants Committee shall have such further powers and duties as are conferred or imposed upon it by other sections of this Agreement. 1.2 Clarification of Technical Committee Responsibilities. Insert the following language at the end of the introductory clause of Sections 8.4, 9.4 and 10.4 of the Restated NEPOOL Agreement, after the word "functions" and before the comma: "as necessary and appropriate in light of Section 20(h)". 1.3 Amendment to Section 20(h). Section 20(h) of the Restated NEPOOL Agreement is amended by adding the following provisions to the end of that subsection: Up until the date on which a Commission-approved regional transmission organization for the NEPOOL Control Area (other than the ISO) is activated, the ISO shall have responsibility for the long-range system assessment and transmission expansion plans based on its judgment of the system's needs. The ISO shall have sole responsibility to develop such new NEPOOL System Rules as may be necessary to allow the ISO to carry out its obligations under the ISO Agreement. SECTION 2 AMENDMENTS TO NEPOOL TARIFF 2.1 Amendments to Section 51.1. The first sentence of the first paragraph of Section 51.1 of the NEPOOL Tariff is amended by deleting the following clause: "and subject to the final outcome of rehearing requests and any appeals with respect to the Commission's June 28, 2000 CMS/MSS Order issued in Docket Nos. EL00-62-000 et al.,". The second paragraph of Section 51.1 of the NEPOOL Tariff shall be amended to read as follows: The NEPOOL Transmission Plan and transmission enhancement and expansion studies shall be completed by the System Operator. In completing the Plan, the System Operator may consult with the Transmission Expansion Advisory Committee. The Transmission Expansion Advisory Committee shall be established in accordance with the provisions of Section 51.2, and shall be responsible for the functions identified in that Section. 2.2 Amendment to Section Heading in Section 51.2. The section heading of Section 51.2 of the NEPOOL Tariff shall be amended to read "Establishment of Transmission Expansion Advisory Committee:". 2.3 Amendment to Section 51.2(b). The first sentence of Section 51.2(b) of the NEPOOL Tariff is amended to read as follows: Upon request of the System Operator, the Transmission Expansion Advisory Committee may provide input and feedback to the System Operator concerning the development of the NEPOOL Transmission Plan and the conduct of enhancement and expansion studies. 2.4 Amendments to Sections 51.2(c), 51.2(d) and 51.2(e). Sections 51.2(c), 51.2(d) and 51.2(e) of the NEPOOL Tariff shall be deleted. 2.5 Amendment to Section 51.4(c). Section 51.4(c) of the NEPOOL Tariff is amended to read as follows: (c) An Upgrade may be added to the NEPOOL Transmission Plan by the System Operator at any time in a given year and in doing so the System Operator may consult with and consider input from the Transmission Expansion Advisory Committee, within the scope of its respective functions as specified in subsection (b) of Section 51.2. Similarly, an Upgrade may be removed from the NEPOOL Transmission Plan by the System Operator if the market responds by proposing alternative generation projects, Merchant Transmission Facilities in accordance with Section 51.8, or demand-side projects, or other circumstances arise such that the need for the Upgrade no longer exists, and in doing so the System Operator may consult with and consider input from the Transmission Expansion Advisory Committee, within the scope of its functions as specified in subsection (b) of Section 51.2; provided that the entity responsible for the construction of the Upgrade is reimbursed for any costs prudently incurred or prudently committed to be incurred in connection with the planning, preparation for construction, and/or construction of the Upgrades proposed for removal from the Plan. All Upgrades proposed to be added or removed during this planning process must meet the requirements of subsection (a) of Section 51.3. 2.6 Amendment to Section 51.4(f). The first and second sentences of Section 51.4(f) of the NEPOOL Tariff shall be amended as follows: At the initiation of an effort to update a Plan or develop a new Plan, the System Operator may solicit input for the updated or new Plan from members of the Transmission Expansion Advisory Committee. The Transmission Expansion Advisory Committee shall meet to perform its respective functions in connection with the preparation of the NEPOOL Transmission Plan, as specified in subsection (b) of Section 51.2. 2.7 Amendment to Section 51.5(b). Section 51.5(b) of the NEPOOL Tariff shall be amended as follows: (b) Written notice of the initiation of a transmission enhancement and expansion study shall be provided to all members of the Transmission Expansion Advisory Committee. That notice shall identify the needs supporting the initiation of the study. Meetings of the Transmission Expansion Advisory Committee shall be convened thereafter to identify additional considerations relating to such a transmission enhancement and expansion study that were not identified in support of initiating the study, and to provide input on the study's scope, assumptions and procedures, consistent with the responsibilities of the Transmission Expansion Advisory Committee as set forth in Section 51.2. 2.8 Amendment to Section 51.6(a). Section 51.6(a) of the NEPOOL Tariff is amended to read as follows: (a) Except as otherwise provided in subsections (e) or (f) of this Section 51.6 below, the System Operator shall circulate a request for proposals ("RFP") inviting any entity or entities, including without limitation Transmission Owners, to build an Upgrade included in the NEPOOL Transmission Plan. The RFP shall be prepared by the System Operator which may, to the extent desired, consult with the Transmission Owner(s) to obtain necessary data, information and technical specifications that the System Operator requires to prepare the RFP. The RFP shall include appropriate requirements to safeguard the confidential nature of information provided to the System Operator in accordance with applicable commercial practices, the requirements of the NEPOOL Information Policy and the requirements of any applicable Commission order. Each such RFP shall require that respondents meet specified technical and financial qualifications and submit proposals (i) that conform with all the requirements of subsection (a) of Section 51.3 and reasonable Transmission Owner requirements and specifications identified in the RFP which are not inconsistent with Commission policy, (ii) that are consistent with other applicable accepted engineering practices, governmental, technical, and financial requirements, and (iii) that do not use a Transmission Owner's facilities, rights-of-way or other property, provided that the affected Transmission Owner may voluntarily agree, in its own discretion, to the use of its property in connection with a proposal. 2.9 Amendment to Section 51.6(b). The first sentence of Section 51.6(b) of the NEPOOL Tariff is amended to read as follows: The System Operator shall develop selection criteria and in doing so may consult with the Transmission Expansion Advisory Committee and post the criteria on the System Operator's website before it issues the RFP. 2.10 Amendment to Section 51.6(d). Section 51.6(d) of the NEPOOL Tariff is amended to read as follows: (d) Any entity whose proposal is accepted by the System Operator in accordance with subsection (b) shall be compensated in accordance with the terms of its accepted proposal, without regard to whether the actual project cost for the Upgrade was less than or greater than the costs reflected in the accepted proposal. 2.11 Amendment to Section 51.6 (e). Section 51.6(e) of the NEPOOL Tariff is amended to read as follows: (e) The System Operator in its discretion may exempt certain Upgrades from the RFP requirements of this Section 51.6 pursuant to standards established by the System Operator. In such circumstances, the Transmission Owner or Owners on whose system(s) the proposed Upgrade in the Plan is located, or its/their designee(s), shall be designated as the appropriate entity responsible for completion of that Upgrade, in accordance with the requirements of Section 51.7. 2.12 Amendments to Section 1 of Schedule 11. Section 1(a) of Schedule 11 of the NEPOOL Tariff is amended to insert "on or after October 1, 1998 and" between the words "costs" and "prior" in the first clause of the first sentence. The first sentence in Section 1(a) of Schedule 11 of the NEPOOL Tariff is further amended to insert the following at the end of that sentence: ", as evidenced either by the filing of an executed service agreement or by the filing of an unexecuted service agreement." Section 1(a) is further amended to delete the second sentence and the list of potential Category A projects. Section 1(b) of Schedule 11 of the NEPOOL Tariff is amended in its entirety to read as follows: (b) A Category B Project is any one whose Generator Owner committed to pay for upgrade costs on or after October 29, 1998 and prior to June 22, 1999, as evidenced either by the filing of an executed service agreement or by the filing of an unexecuted service agreement. To the extent not otherwise covered by the preceding sentence, a Category B Project includes any one (other than a Category A Project) on which the Generator Owner had expended at least $5,000,000, including amounts due under irrevocable commitments, as of June 22, 1999. Category B Projects are those projects listed as Category A Projects in Section 1(a) of this Schedule 11, as filed with the Fifty-Eighth Agreement Amending the Restated NEPOOL Agreement, but no longer qualify as Category A Projects, that had expended at least $5,000,000 (including amounts due under irrevocable commitments) as of June 22, 1999, as reasonably determined by the System Operator, as well as the following projects: Sithe, Mystic Station Expansion Sithe Edgar Station Expansion, Fore River Sithe, West Medway PG&E, Generating Lake Road Generating PDC, Milford Power PDC, Meriden Power Reliant Energy, Hope Rhode Island IDC FPL, Bellingham Constellation, Merrimack (Nickel Hill) Energy Project SEI, Canal Re-powering ANP, Bellingham ANP, Blackstone Cabot, Island End Calpine, Westbrook Power HQ, Bucksport AES, Londonderry ConEd, Newington 2.13 Amendment to Section 3(b) of Schedule 11. Section 3(b) of Schedule 11 of the NEPOOL Tariff is amended to change the words "Participants Committee" which appear in both the first and second sentences to the words "System Operator". 2.14 Amendment to Section (4) of Schedule 11. Section (4) of Schedule 11 of the NEPOOL Tariff is amended in its entirety to read as follows: The costs of Generator Interconnection Related Upgrades in connection with a Category B Project shall be allocated in the same way as Generator Interconnection Related Upgrades for Category A projects. 2.15 Amendment to Section (5) of Schedule 11. The first sentence in Section (5) of Schedule 11 of the NEPOOL Tariff is amended to read as follows: If a Generator Interconnection Related Upgrade is required in order to satisfy the Minimum Interconnection Standard in connection with a Category C Project, the Generator Owner shall be obligated to pay all of the cost of such upgrade, including all Direct Interconnection Transmission Costs and any applicable tax gross-up amounts, to the extent such costs would not have been incurred but for the interconnection; provided that, if the System Operator determines that a particular Generator Interconnection Related Upgrade provides benefits to the system as a whole as well as to particular parties, then the cost of such Upgrade shall be allocated in the same way as Reliability Upgrades. 2.16 Amendment of Section (1) of Schedule 12. Section (1) of Schedule 12 of the NEPOOL Tariff is amended to read as follows: (1) Allocation and Recovery of Costs for Reliability Upgrades and Economic Upgrades Associated with the NEPOOL Transmission Plan. All costs of Merchant Transmission Facilities shall be recovered in accordance with the recovery mechanism for those facilities that is filed with and accepted by the Commission. All costs associated with Upgrades for the interconnection of Merchant Transmission Facilities shall be treated in the same fashion and subject to the same rights and obligations as Generator Interconnection Related Upgrade Costs for Category C Projects under Schedule 11 of this Tariff, including the provisions of Sections (5), (6) and (7) of that Schedule, but excluding the provisional clause at the end of the first sentence in Section (5) of Schedule 11. To the extent not otherwise covered above or by Part III or Schedule 11 of the Tariff or Sections (2) or (3) of this Schedule 12 below, the costs of a Reliability Upgrade and Economic Upgrade shall be allocated as follows: (a) If entities have agreed to bear some or all of the cost responsibility for an Upgrade, the Upgrade costs shall be allocated to such entities in accordance with that agreement. (b) To the extent there are Reliability Upgrade or Economic Upgrade costs that are not allocated in accordance with other arrangements as identified in the introductory language of this Section (1) or subparagraph (a) above, such costs shall be treated as Pool-Supported PTF costs recoverable under Attachment F to this Tariff. 2.17 Amendment to Attachment F. The introductory paragraph of Attachment F to the NEPOOL Tariff is amended to read as follows: The Transmission Revenue Requirements for each Participant will reflect the Participant's costs with respect to Pool-Supported PTF. The Transmission Revenue Requirements will be an annual calculation based on the previous year's calendar data as shown, in the case of Transmission Providers which are subject to the Commission's jurisdiction, in the Participants' FERC Form 1 report for that year, and shall be based on actual data in lieu of allocated data if specifically identified in the Form 1 report in accordance with the following formula, except to the extent PTF costs relate to a Transmission Provider proposal which has been accepted by the System Operator in accordance with subsection (b) of section 51.6 of the NEPOOL Tariff, in which case that Transmission Provider may include as PTF costs in its Transmission Revenue Requirements for such PTF only the payments made to it in accordance with the terms of its accepted proposal, without regard to whether the actual project cost for the Upgrade was less than or greater than the costs reflected in the accepted proposal: SECTION 3 MISCELLANEOUS 3.1 This Seventy-Sixth Agreement shall become effective on June 13, 2001, or such later date as shall be ordered by the Commission. 3.2 Terms used in this Seventy-Sixth Agreement that are not defined herein shall have the meanings ascribed to them in the NEPOOL Agreement. EX-10.23.8 17 y58564l.txt Exhibit 10.23.8 SEVENTY-EIGHTH AGREEMENT AMENDING NEW ENGLAND POWER POOL AGREEMENT (REVISED SECTIONS 18.4 AND 18.5) THIS SEVENTY-EIGHTH AGREEMENT AMENDING NEW ENGLAND POWER POOL AGREEMENT, dated as of September 24, 2001 ("Seventy-Eighth Agreement"), amends the New England Power Pool Agreement (the "NEPOOL Agreement"), as amended. WHEREAS, the NEPOOL Agreement as in effect on December 1, 1996 was amended and restated by the Thirty-Third Agreement Amending New England Power Pool Agreement dated as of December 1, 1996 (the "Thirty-Third Agreement") in the form of the Restated New England Power Pool Agreement ("Restated NEPOOL Agreement") attached to the Thirty-Third Agreement as Exhibit A thereto, and the Thirty-Third Agreement also provided for the NEPOOL Open Access Transmission Tariff (the "NEPOOL Tariff") which is Attachment B to the Restated NEPOOL Agreement; and WHEREAS, the Restated NEPOOL Agreement and the NEPOOL Tariff have subsequently been amended numerous times, the most recent amendment dated as of July 13, 2001; and WHEREAS, this agreement amends the Restated NEPOOL Agreement to comply with the directives of the Federal Energy Regulatory Commission in its order issued August 27, 2001 in Docket Nos. ER98-3853-008 and ER00-62-030, New England Power Pool and ISO New England Inc., et al., 96 FERC Paragraph 61,228 (2001) (the "August 27 Order"); and WHEREAS, the Participants desire to amend the Restated NEPOOL Agreement as heretofore amended, to reflect the revisions detailed herein. NOW, THEREFORE, upon approval of this Seventy-Eighth Agreement by the NEPOOL Participants Committee in accordance with the procedures set forth in the Restated NEPOOL Agreement, the Participants agree as follows: SECTION 1 AMENDMENTS TO RESTATED NEPOOL AGREEMENT 1.1 Section 18.4 is amended so that it reads as follows: 18.4 Review of Participant's Proposed Plans. Each Participant shall submit to the System Operator, for review by the Participants Committee, the Reliability Committee, and the Markets Committee or the Tariff Committee, as appropriate, in such form, manner and detail as the System Operator may reasonably prescribe, (i) any new or materially changed plan for additions to, retirements of, or changes in the capacity of any supply and demand-side resources or transmission facilities rated 69 kV or above subject to control of such Participant, and (ii) any new or materially changed plan for any other action to be taken by the Participant which may have a significant effect on the stability, reliability or operating characteristics of its system or the system of any other Participant. No significant action (other than preliminary engineering action) leading toward implementation of any such new or changed plan shall be taken earlier than sixty days (or ninety days, if the System Operator determines that it requires additional time to consider the plan and so notifies the Participant in writing within the sixty days) after the plan has been submitted to the System Operator. Unless prior to the expiration of the sixty or ninety days, whichever is applicable, the System Operator notifies the Participant in writing that it has determined that implementation of the plan will have a significant adverse effect upon the reliability or operating characteristics of its system or of the systems of one or more other Participants, the Participant shall be free to proceed. The System Operator shall maintain on its website a list of Section 18.4 applications that are currently under review and the status of each such application. The System Operator shall provide notice of any action taken with respect to any Section 18.4 applications, including an explanation of its reasons for such action, to each Participant as soon as reasonably practicable after such action is taken. The time limits provided by this Section 18.4 may be changed with respect to any such submission by agreement between the System Operator and the Participant required to submit the plan. 1.2 Section 18.5 is amended so that it reads as follows: 18.5 Participant to Avoid Adverse Effect. If the System Operator notifies a Participant pursuant to Section 18.4 that implementation of the Participant's plan has been determined to have a significant adverse effect upon the reliability or operating characteristics of its system or the systems of one or more other Participants, the Participant shall not proceed to implement such plan unless the Participant or the Non-Participant on whose behalf the Participant has submitted its plan takes such action or constructs at its expense such facilities as the System Operator determines to be reasonably necessary to avoid such adverse effect; provided that if the plan is for the retirement of a supply or demand-side resource, the Participant may proceed with its plan only if, after engaging in good faith negotiations with persons designated by the System Operator to address the adverse effects on reliability or operating characteristics, the negotiations either address the adverse effects to the satisfaction of the System Operator, or no satisfactory resolution can be achieved on terms acceptable to the parties within 90 days of the Participant's receipt of the System Operator's notice. Any agreement resulting from such negotiations shall be in writing and shall be filed in accordance with the Commission's filing requirements if it requires any payment. -2- SECTION 2 MISCELLANEOUS 2.1 This Seventy-Eighth Agreement shall become effective as of September 1, 2001 or on such other date as the Commission shall provide that the amendments reflected herein shall become effective. 2.2 Terms used in this Seventy-Eighth Agreement that are not defined herein shall have the meanings ascribed to them in the Restated NEPOOL Agreement. 2.3 A vote by or on behalf of a Participant in favor of this Seventy-Eighth Agreement evidences an agreement that changes reflected herein effect compliance with directives of the August 27 Order. Such agreement is not, and is not to be construed as, a voluntary agreement to the substance of the changes reflected herein and is without prejudice to the voting Participant's right to challenge the August 27 Order. -3- EX-10.23.9 18 y58564m.txt Exhibit 10.23.9 SEVENTY-NINTH AGREEMENT AMENDING NEW ENGLAND POWER POOL AGREEMENT (ICAP COMPLIANCE AMENDMENT) THIS SEVENTY-NINTH AGREEMENT AMENDING NEW ENGLAND POWER POOL AGREEMENT, dated as of September 24, 2001 ("Seventy-Eighth Agreement"), amends the New England Power Pool Agreement (the "NEPOOL Agreement"), as amended. WHEREAS, the NEPOOL Agreement as in effect on December 1, 1996 was amended and restated by the Thirty-Third Agreement Amending New England Power Pool Agreement dated as of December 1, 1996 (the "Thirty-Third Agreement") in the form of the Restated New England Power Pool Agreement ("Restated NEPOOL Agreement") attached to the Thirty-Third Agreement as Exhibit A thereto, and the Thirty-Third Agreement also provided for the NEPOOL Open Access Transmission Tariff (the "NEPOOL Tariff") which is Attachment B to the Restated NEPOOL Agreement; and WHEREAS, the Restated NEPOOL Agreement and the NEPOOL Tariff have subsequently been amended numerous times, the most recent amendment dated as of July 13, 2001; and WHEREAS, this agreement amends the Restated NEPOOL Agreement to comply with the directives of the Federal Energy Regulatory Commission in its order issued August 28, 2001 in Docket Nos. EL00-62-026 and EL00-62-029, ISO New England Inc., 96 FERC Paragraph 61,234 (2001) (the "August 28 Order"); and WHEREAS, the Participants desire to amend the Restated NEPOOL Agreement as heretofore amended, to reflect the revisions detailed herein. NOW, THEREFORE, upon approval of this Seventy-Ninth Agreement by the NEPOOL Participants Committee in accordance with the procedures set forth in the Restated NEPOOL Agreement, the Participants agree as follows: SECTION 1 AMENDMENT TO RESTATED NEPOOL AGREEMENT 1.1 Section 12.5(d) is amended so that it reads as follows: (d) The revenues from the Installed Capability Responsibility deficiency charge payments for each month shall be allocated among those Participants whose minimum monthly Installed System Capabilities are equal to or greater than their Installed Capability Responsibilities. The allocation to each such Participant shall be in the same proportion as that Participant's minimum monthly Installed System Capability for the month is to the aggregate minimum monthly Installed System Capabilities of all Participants entitled for the month to such revenues. SECTION 2 MISCELLANEOUS 2.1 This Seventy-Ninth Agreement shall become effective as of September 1, 2001 or on such other date as the Commission shall provide that the amendment reflected herein shall become effective. 2.2 Terms used in this Seventy-Ninth Agreement that are not defined herein shall have the meanings ascribed to them in the Restated NEPOOL Agreement. 2.3 A vote by or on behalf of a Participant in favor of this Seventy-Ninth Agreement evidences an agreement that changes reflected herein effect compliance with directives of the August 28 Order. Such agreement is not, and is not to be construed as, a voluntary agreement to the substance of the changes reflected herein and is without prejudice to the voting Participant's right to challenge the August 28 Order. -2- EX-10.23.10 19 y58564n.txt Exhibit 10.23.10 EIGHTIETH AGREEMENT AMENDING NEW ENGLAND POWER POOL AGREEMENT (GIS AGREEMENT) THIS EIGHTIETH AGREEMENT AMENDING NEW ENGLAND POWER POOL AGREEMENT, dated as of October 12, 2001 ("Eightieth Agreement"), amends the New England Power Pool Agreement (the "NEPOOL Agreement"), as amended. WHEREAS, the NEPOOL Agreement as in effect on December 1, 1996 was amended and restated by the Thirty-Third Agreement Amending New England Power Pool Agreement dated as of December 1, 1996 (the "Thirty-Third Agreement") in the form of the Restated New England Power Pool Agreement ("Restated NEPOOL Agreement") attached to the Thirty-Third Agreement as Exhibit A thereto, and the Thirty-Third Agreement also provided for the NEPOOL Open Access Transmission Tariff (the "NEPOOL Tariff") which is Attachment B to the Restated NEPOOL Agreement; and WHEREAS, the Restated NEPOOL Agreement and the NEPOOL Tariff have subsequently been amended numerous times, the most recent amendment dated as of September 24, 2001; and WHEREAS, the Participants desire to amend the NEPOOL Agreement, including the NEPOOL Tariff, to reflect the revisions detailed herein. NOW, THEREFORE, upon approval of this Eightieth Agreement by the NEPOOL Participants Committee in accordance with the procedures set forth in the NEPOOL Agreement, the Participants agree as follows: SECTION 1 AMENDMENT TO NEPOOL AGREEMENT 1.1 Amendment to Section 19.3(a) of the NEPOOL Agreement. The following is added at the end of Section 19.3(a) of the NEPOOL Agreement: Without limiting the generality of the foregoing, the Restructuring Expense shall also include all expenses incurred by NEPOOL in connection with its generation information system (the "GIS"), including without limitation all amounts payable by NEPOOL to the entity or entities that develop, administer, operate and maintain the GIS for those services; provided, however, that such amounts will be allocated to and paid by the Participants that, with respect to their retail loads, are subject from time to time to any statutes, regulations or orders or decisions of courts and governmental agencies in effect in New England requiring (a) the disclosure of the fuel source, emissions and/or other attributes of the generation used in providing electric service to retail customers, (b) the inclusion of specified amounts of generation with particular attributes in the generation used in providing electric service to retail customers, and/or (c) that generation falling within specified emission limits be used to serve retail customers, with such allocation and payment to be made according to the direction of the Participants Committee from time to time. SECTION 2 AMENDMENT TO NEPOOL TARIFF 2.1 Amendment to Section 3.3(a) of the NEPOOL Billing Policy. Section 3.3(a) of the NEPOOL Billing Policy included as Attachment N to the NEPOOL Tariff shall be amended as follows: Priority of Payments. The ISO shall use moneys received by it from Participants and Non-Participant Transmission Customers to pay all amounts due to the ISO under the ISO Tariff, the ISO Capital Funding Tariff and the ISO Agreement and all amounts due to the ISO for acting as Project Manager for NEPOOL's generation information system (the "GIS") before making any payments to any Participants or Non-Participant Transmission Customers. After paying all amounts due to the ISO but prior to making any payments to any Participants or Non-participant Transmission Customers, the ISO shall use moneys received by it from Participants and Non-Participant Transmission Customers to pay all amounts due from NEPOOL to the entity or entities that develop, administer, operate and maintain the GIS for those services. 2.2 Amendment to Section 3.3(f)(i) of the NEPOOL Billing Policy. The first sentence of Section 3.3(f)(i) of the NEPOOL Billing Policy included as Attachment N to the NEPOOL Tariff shall be amended to read as follows: If and to the extent that the procedures described in clauses (b), (c), (d) and (e) above do not yield sufficient funds to pay all Remittance Advice amounts in full (after payment of amounts due to the ISO and to the entity or entities that develop, administer, operate and maintain the GIS for those services, in accordance with clause (a) above) or the date such Payments are due, the ISO shall reduce Payments to those Participants owed monies for that billing period (the "Default Period"), pro rata based on the amounts owed to such Participants, to the extent necessary to clear its accounts by the close of banking business on the date such Payments are due. SECTION 3 MISCELLANEOUS 3.1 This Eightieth Agreement shall become effective on January 1, 2002, or on such other date as the Commission shall provide that the amendments reflected herein shall become effective. 3.2 Terms used in this Eightieth Agreement that are not defined herein shall have the meanings ascribed to them in the NEPOOL Agreement. -2- EX-10.23.11 20 y58564o.txt Exhibit 10.23.11 EIGHTY-FIRST AGREEMENT AMENDING NEW ENGLAND POWER POOL AGREEMENT (RESTATEMENT OF FINANCIAL ASSURANCE POLICIES) THIS EIGHTY-FIRST AGREEMENT AMENDING NEW ENGLAND POWER POOL AGREEMENT, dated as of December 7, 2001 (the "Eighty-First Agreement"), amends the New England Power Pool Agreement (the "NEPOOL Agreement"), as amended. WHEREAS, the NEPOOL Agreement as in effect on December 1, 1996 was amended and restated by the Thirty-Third Agreement Amending New England Power Pool Agreement dated as of December 1, 1996 (the "Thirty-Third Agreement") in the form of the Restated New England Power Pool Agreement ("Restated NEPOOL Agreement") attached to the Thirty-Third Agreement as Exhibit A thereto, and the Thirty-Third Agreement also provided for the NEPOOL Open Access Transmission Tariff (the "NEPOOL Tariff") which is Attachment B to the Restated NEPOOL Agreement; and WHEREAS, the Restated NEPOOL Agreement and the NEPOOL Tariff have subsequently been amended numerous times, the most recent amendment dated as of October 12, 2001; and WHEREAS, the Participants desire to amend the NEPOOL Agreement, including the NEPOOL Tariff, as heretofore amended, to reflect the revisions detailed herein. NOW, THEREFORE, upon approval of this Eighty-First Agreement by the NEPOOL Participants Committee in accordance with the procedures set forth in the NEPOOL Agreement, the Participants agree as follows: SECTION 1 AMENDMENTS TO NEPOOL AGREEMENT 1.1 Amendment to Section 21.2(d). The following sentence is added at the end of Section 21.2(d) of the Restated NEPOOL Agreement: Nothing set forth in this Section 21.2 is intended to limit the additional provisions of the Member Financial Assurance Policy relating to notices and suspensions thereunder. SECTION 2 AMENDMENTS TO NEPOOL TARIFF 2.1 Amendment to Attachment L to NEPOOL Tariff. The Financial Assurance Policy for NEPOOL Members included as Attachment L to the NEPOOL Tariff is deleted in its entirety and replaced with Attachment 1 hereto. -1- 2.2 Amendment to Attachment M to NEPOOL Tariff. The Financial Assurance Policy for NEPOOL Non-Participant Transmission Customers included as Attachment M to the NEPOOL Tariff is deleted in its entirety and replaced with Attachment 2 hereto. SECTION 3 MISCELLANEOUS 3.1 The Eighty-First Agreement shall become effective on the Policy Effective Date (as defined in Attachments 1 and 2 to the Eighty-First Agreement) or on such other date as the Commission shall provide that the amendments reflected herein shall become effective. 3.2 Terms used in this Eighty-First Agreement that are not defined herein shall have the meanings ascribed to them in the NEPOOL Agreement. -2- ATTACHMENT L FINANCIAL ASSURANCE POLICY FOR NEPOOL MEMBERS In accordance with Sections 3.5 and 7.5 of the Restated NEPOOL Agreement, the procedures and requirements set forth in this NEPOOL Financial Assurance Policy (this "Policy") shall govern all applicants for membership in NEPOOL ("Applicants") and NEPOOL Participants.(1) This Policy shall become effective and shall supersede existing Attachment L to the Tariff in its entirety on the Policy Effective Date (as hereinafter defined). The "Policy Effective Date" shall be 10 days after the date on which the NEPOOL Participants Committee receives a notice from the System Operator stating that the System Operator is able to fully implement the provisions of this Policy. The purpose of this Policy is (i) to establish a financial assurance policy for Participants that includes commercially reasonable credit review procedures to assess the financial ability of an Applicant or of a Participant to pay for service transactions under the Restated NEPOOL Agreement and the Tariff and to pay its share of NEPOOL expenses, including amounts owed to the System Operator under its tariff;(2) (ii) to set forth the requirements for alternative forms of security that will be deemed acceptable to NEPOOL and consistent with commercial practices - ------------------- 1 Capitalized terms used but not defined in this Policy are intended to have the meanings given to such terms in Section 1 of the Restated NEPOOL Agreement or Section 1 of the Restated NEPOOL Open Access Transmission Tariff (the "Tariff"). 2 For purposes of this Policy, including all attachments hereto, the "tariff" of the System Operator includes any and all tariffs of ISO New England Inc., including without limitation its Tariff for Transmission Dispatch and Power Administration Services and its Tariff for Capital Funding. -3- established by the Uniform Commercial Code that protect the Participants against the risk of non-payment by other, defaulting Participants; (iii) to set forth the conditions under which NEPOOL will conduct business so as to avoid the possibility of failure of payment for services rendered under the Tariff, the Restated NEPOOL Agreement and the System Operator's tariff; and (iv) to collect amounts past due, collect amounts payable upon billing adjustments, make up shortfalls in payments, and terminate membership of defaulting Participants.(3) I. LIABILITY AND TREATMENT OF GROUPS REGARDED AS SINGLE PARTICIPANTS In the case of a group of members that are treated as a single Participant pursuant to Section 4.1 of the Restated NEPOOL Agreement, the group members shall be deemed to have elected to be jointly and severally liable for all debts to NEPOOL of any of the group members unless: (i) charges of an individual member can be tracked and allocated to the member incurring such charges by the System Operator utilizing all information available to the System Operator determined by it to be reliable, including information from Participants or from a single Participant's representative; (ii) an alternate form of financial assurance is provided as set forth below; (iii) the group members agree to allocate amongst themselves responsibility for payment of group member charges on a percentage basis in a manner acceptable to NEPOOL, with each member providing the financial assurance, if any, required to be provided by it hereunder when treated separately from the remainder of the group; or (iv) the group members when evaluated as - ------------------ (3) The System Operator will act as NEPOOL's agent in managing and enforcing this Policy with the exception of termination of membership issues, which are specifically reserved to the NEPOOL Participants and will be addressed by the NEPOOL Participants Committee Membership Subcommittee. Accordingly, all financial information required pursuant to this Policy is to be provided to the System Operator, which will keep all such information confidential in accordance with the provisions of the NEPOOL Information Policy. -4- a whole (at their expense) achieve the requirements applicable to such members in order to avoid providing additional financial assurance and, in addition, provide a corporate guaranty from a parent or other responsible affiliate satisfying all of the requirements hereof for such guaranties. For the fourth type of consolidated Participant identified in subsection (iv) of the immediately preceding sentence, the System Operator shall conduct a financial assurances review based on only the rated members of the group. For the purposes of this Policy, the term "Participant" shall, in the case of a group of members that are treated as a single Participant pursuant to Section 4.1 of the Restated NEPOOL Agreement, be deemed to refer to the group of members as a whole unless the group members have affirmatively indicated to NEPOOL, and NEPOOL has agreed, that they are to be treated pursuant to subsections (i) or (iii) of the immediately preceding paragraph, in which case the term "Participant" shall be deemed to refer to each individual group member and not to the aggregate of such group; and the terms "charges" and "fees" shall, likewise, be deemed to refer to the charges and fees allocable to the individual group member as opposed to the aggregate of such group. II. FINANCIAL ASSURANCE PROVISIONS FOR NON-MUNICIPAL APPLICANTS AND NON-MUNICIPAL PARTICIPANTS Section II of the Policy contains the requirements and procedures governing Applicants and Participants that are not Publicly Owned Entities other than electric cooperatives or organizations including electric cooperatives (such Publicly Owned Entities being referred to herein as "Municipal Applicants" or "Municipal Participants"). For purposes of this Policy, such Participants and Applicants that are not Municipal Participants or Municipal Applicants are referred to as "Non-Municipal Participants" and "Non-Municipal Applicants." A Non- -5- Municipal Participant's failure to meet the requirements of this section may result in termination proceedings by NEPOOL. A. PROOF OF FINANCIAL VIABILITY. 1. PROCESS FOR INVESTIGATING CREDITWORTHINESS OF A NON-MUNICIPAL APPLICANT. Each Non-Municipal Applicant must, with its membership application and at its own expense, submit proof of financial viability, as described below, satisfying NEPOOL requirements to demonstrate the Non-Municipal Applicant's ability to meet its obligations. Each Non-Municipal Applicant must submit to the System Operator: (i) all current rating agency reports from Standard and Poors ("S&P"), Moody's, Duff & Phelps, and/or Fitch (collectively, the "Rating Agencies"); (ii) audited financial statements for at least the immediately preceding three (3) years, or the period of its existence, if shorter, including, but not limited to, the following information: balance sheets, income statements, statements of cash flows and notes to financial statements, annual and quarterly reports, and 10-K, 10-Q and 8-K Reports;(4) (iii) at least one bank reference and three (3) utility company credit references, or in those cases where a Non-Municipal Applicant does not have three (3) utility company credit references, three (3) trade payable vendor references may be substituted; (iv) relevant information as to any known or anticipated material lawsuits, as well as any prior bankruptcy declarations by the Non-Municipal Applicant, or by its predecessor(s), if any; and (v) a list of the officers and principal management of the Non-Municipal Applicant. In the case of certain Non-Municipal Applicants, some of the - ------------- (4) If any of the above-mentioned financial statements are available on the Internet, the Non-Municipal Applicant may provide instead a letter to NEPOOL stating where such statements may be located and retrieved by NEPOOL or its designee. -6- information and documentation described in the immediately preceding sentence may not be applicable or available, and alternate requirements may be specified by NEPOOL or its designee in its sole discretion. The System Operator shall prepare a report, or cause a report to be prepared, concerning the financial viability of such Non-Municipal Applicant. In its review of each Non-Municipal Applicant, the System Operator or its designee shall consider all of the information and documentation described in subsections (i) through (v) of the immediately preceding paragraph as well as a lien search for such Non-Municipal Applicant. All costs incurred by the System Operator in its review of the financial viability of a Non-Municipal Applicant shall be borne by such Non-Municipal Applicant and paid at the time that such Non-Municipal Applicant is required to pay its first annual fee under Section 19.1 of the Restated NEPOOL Agreement. The report for each Non-Municipal Applicant shall be completed within three (3) weeks of the System Operator's receipt of that Non-Municipal Applicant's completed application and shall be provided to the Membership Subcommittee of the Participants Committee and the affected Non-Municipal Applicant. 2. PROCESS FOR INVESTIGATING FINANCIAL VIABILITY OF A NON-MUNICIPAL PARTICIPANT. Each Non-Municipal Participant shall provide the System Operator with all current Rating Agency reports for it, if available, and a list of its officers and principal management upon the effective date of this Policy. Using this information, the System Operator shall initiate a limited investigation concerning the financial viability of all Non-Municipal Participants. With respect to each Non-Municipal Participant, the System Operator shall investigate: (i) the background of the Non-Municipal Participant's officers and principal management; and (ii) -7- whether any judgments, fines, liens, assessments or other encumbrances have been imposed or levied on the Non-Municipal Participant within 12 months prior to the date of such investigation. All costs incurred by the System Operator in its review of the financial viability of the Non-Municipal Participants shall be borne by NEPOOL under Section 19.2 of the Restated NEPOOL Agreement. The System Operator shall complete its investigation of all Non-Municipal Participants and issue a report thereon to NEPOOL no later than 60 days after the effective date of this Policy. B. ONGOING FINANCIAL REVIEW. 1. PROVISION OF FINANCIAL ASSURANCES. A Non-Municipal Participant or Non-Municipal Applicant that receives a credit rating from one or more of the Rating Agencies, or, if such Non-Municipal Participant or Non-Municipal Applicant itself is not rated by one of the Rating Agencies, then a Non-Municipal Participant or Non-Municipal Applicant that has outstanding debt rated by one or more of the Rating Agencies, is referred to herein as a "Rated Non-Municipal Participant" or a "Rated Non-Municipal Applicant," as appropriate. A Non-Municipal Participant or Non-Municipal Applicant that is not a Rated Non-Municipal Participant or a Rated Non-Municipal Applicant is referred to herein as an "Unrated Non-Municipal Participant" or an "Unrated Non-Municipal Applicant," as appropriate. a. RATED NON-MUNICIPAL APPLICANTS AND RATED NON-MUNICIPAL PARTICIPANTS. Any Rated Non-Municipal Participant or Rated Non-Municipal Applicant that does not have an investment grade rating by one of the Rating Agencies (either for itself or, if it is not rated by one of the Rating Agencies, then for its outstanding debt) must provide an appropriate -8- cash deposit, letter of credit, payment bond or guaranty as described in this Policy. For all purposes of this Policy, if ratings from two or more of the Rating Agencies are available then: (i) if there are two such ratings available, the lower rating shall govern; (ii) if there are three or more such ratings available and two of such ratings are at a comparable level and only one other such rating is lower than those two ratings, the two comparable ratings shall govern; (iii) if there are three such ratings available and none are at comparable levels, the rating that is higher than one and lower than another shall govern; and (iv) if there are four such ratings available and none are at a comparable level or two are at a comparable level and two are at a lower level (either comparable or not), then the third highest such rating shall govern. b. UNRATED NON-MUNICIPAL PARTICIPANTS. Any Unrated Non-Municipal Participant that (i) has not been a Participant in NEPOOL for at least the immediately preceding 12 months; or (ii) has defaulted on any of its obligations under the Restated NEPOOL Agreement, the Tariff or the System Operator's tariff (including without limitation its obligations hereunder and under the NEPOOL Billing Policy) during such 12-month period; or (iii) does not have a Current Ratio (as hereinafter defined) of at least 1.0, a Debt-to-Total Capitalization Ratio (as hereinafter defined) of 0.6 or less, and an EBITDA-to-Interest Expense Ratio (as hereinafter defined) of at least 2.0 must provide an appropriate cash deposit, letter of credit, payment bond or guaranty as described in this Policy. For purposes of this Policy, "Current Ratio" on any date is all of a Non-Municipal Participant's current assets divided by all of its current liabilities, in each case as shown on the most recent financial statements provided by such Non-Municipal Participant to the System Operator; "Debt-to-Total Capitalization Ratio" on any date is a Non-Municipal Participant's total debt (including all current borrowings) divided by its total shareholders' equity plus total debt, in each case as shown on the most recent financial statements provided by such Non-Municipal -9- Participant to the System Operator; and "EBITDA-to-Interest Expense Ratio" on any date is a Non-Municipal Participant's earnings before interest, taxes, depreciation and amortization in the most recent fiscal quarter divided by that Non-Municipal Participant's expense for interest in that fiscal quarter, in each case as shown on the most recent financial statements provided by such Non-Municipal Participant to the System Operator. Each of the ratios described in this paragraph shall be determined in accordance with generally accepted accounting principles in the United States at the time of determination consistently applied. Achieving each of the Current Ratio, Debt-to-Total Capitalization Ratio and EBITDA-to-Interest Expense Ratio tests described in this subsection is referred to herein as satisfying the "Credit Threshold." c. GOVERNANCE ONLY MEMBERS AND NON-MUNICIPAL PARTICIPANTS WITH AVERAGE INDIVIDUAL MONTHLY NEPOOL CHARGES OF $15,000 OR LESS. Notwithstanding any provision of this Policy to the contrary, Governance Only Members and Non-Municipal Participants with average individual monthly NEPOOL Charges (as hereinafter defined) of $15,000 or less shall not be required to provide a cash deposit, letter of credit, payment bond or guaranty under this Policy. 2. CREDIT LIMIT FOR NON-MUNICIPAL PARTICIPANTS. A credit limit ("Credit Limit") shall be established for each Rated Non-Municipal Participant in accordance with subsection (a) below, and a Credit Limit shall be established for each Unrated Non-Municipal Participant in accordance with subsection (b) below. a. CREDIT LIMIT FOR RATED NON-MUNICIPAL PARTICIPANTS. As reflected in the following table, the Credit Limit of each Rated Non-Municipal Participant shall at any time be equal to the lesser of: (i) the applicable percentage of such Rated -10- Non-Municipal Participant's Tangible Net Worth (as hereinafter defined) as listed in the following table, (ii) $125 million, or (iii) 20 percent (20%) of the total amount due and owing at such time to the System Operator, the Participants and the Non-Participant Transmission Customers by all Participants and Non-Participant Transmission Customers.
INVESTMENT RATING PERCENTAGE OF TANGIBLE (COMPARABLE RATINGS TO BE USED FOR DUFF & PHELPS AND NET WORTH FOR PURPOSES FITCH) OF CREDIT LIMIT S&P MOODY'S AAA Aaa 5.50% AA+ Aa1 5.50% AA Aa2 4.50% AA- Aa3 4.00% A+ A1 3.05% A A2 2.85% A- A3 2.60% BBB+ Baa1 2.30% BBB Baa2 1.90% BBB- Baa3 1.20% Below BBB- Below Baa3 0.00%
For purposes of this Policy, an entity's "Tangible Net Worth" on any date is the value, determined in accordance with generally accepted accounting principles in the United States, of all of that entity's assets less both (i) the amount at which the liabilities of the entity would be shown on a balance sheet in accordance with generally accepted accounting principles in the United States and (ii) all of that entity's intangible assets (e.g., patents, trademarks, franchises, intellectual property, goodwill and any other assets not having a physical existence), in each case as shown on the most recent financial statements provided by such entity to the System Operator. -11- The System Operator shall update and monitor the Credit Limit for each Rated Non-Municipal Participant on a daily basis. b. CREDIT LIMIT FOR UNRATED NON-MUNICIPAL PARTICIPANTS. The Credit Limit of each Unrated Non-Municipal Participant that satisfies the Credit Threshold shall at any time be equal to the lesser of: (i) 0.50 percent (0.50%) of such Unrated Non-Municipal Participant's Tangible Net Worth, (ii) $125 million, or (iii) 20 percent (20%) of the total amount due and owing at such time to the System Operator, the Participants and the Non-Participant Transmission Customers by all Participants and Non-Participant Transmission Customers. The System Operator shall update and monitor the Credit Limit for each Unrated Non-Municipal Participant that satisfies the Credit Threshold on a quarterly basis. The Credit Limit of each Unrated Non-Municipal Participant that does not satisfy the Credit Threshold shall be $0. 3. INFORMATION REPORTING OBLIGATIONS FOR NON-MUNICIPAL PARTICIPANTS. In order for the System Operator to update and monitor the Credit Limit of each Rated Non-Municipal Participant that has an investment grade rating by one of the Rating Agencies (either for itself or, if it is not rated by one of the Rating Agencies, then for its outstanding debt) and each Unrated Non-Municipal Participant that satisfies the Credit Threshold, (i) each such Rated Non-Municipal Participant shall submit to the System Operator, on a quarterly basis within 10 days of its becoming available and within 55 days after the end of the applicable fiscal quarter of such Rated Non-Municipal Participant, its balance sheet, which shall have been compiled by certified public accountants showing sufficient detail for the System Operator to calculate its Tangible Net Worth; and (ii) each such Unrated Non-Municipal Participant shall -12- submit to the System Operator, on a quarterly basis, within 10 days of their becoming available and within 55 days after the end of the applicable fiscal quarter of such Unrated Non-Municipal Participant, its balance sheet and additional financial statements, which shall have been compiled by certified public accountants showing sufficient detail for the System Operator to calculate such Unrated Non-Municipal Participant's Current Ratio, Debt-to-Total Capitalization Ratio and EBITDA-to-Interest Expense Ratio. In addition, each such Rated Non-Municipal Participant and Unrated Non-Municipal Participant shall submit to the System Operator, annually within 10 days of their becoming available and within 100 days after the end of the fiscal year of such Non-Municipal Participant, the following audited financial statements: balance sheets, income statements, statements of cash flows, and notes to financial statements, as well as copies of that Non-Municipal Participant's annual report. Each such Non-Municipal Participant shall also provide to the System Operator, within 10 days of their filing with the Securities and Exchange Commission ("SEC"), a copy of each Form 10-K Report, Form 10-Q Report and Form 8-K Report for that Non-Municipal Participant.(5) Each Rated Non-Municipal Participant that does not have an investment grade rating by one of the Rating Agencies (either for itself or, if it is not rated by one of the Rating Agencies, then for its outstanding debt) and each Unrated Non-Municipal Participant that does not satisfy the Credit Threshold must submit the annual and quarterly financial statements and SEC filings described in this subsection if and as requested by the System Operator within 10 days of such request. - --------------- (5) Where any of the above financial information is available on the Internet, the Non-Municipal Participant may instead provide the System Operator with a letter stating where such information may be located and retrieved. -13- 4. CONSEQUENCES UPON REACHING 80%, 90% AND 100% OF CREDIT TEST AMOUNT. When a Non-Municipal Participant's aggregate outstanding obligations to NEPOOL and the System Operator equal 80 percent (80%) of the sum of (i) that Non-Municipal Participant's then-effective Credit Limit or (ii) the available amount of the additional financial assurance provided by that Non-Municipal Participant divided by three and one-half (3.5) (the sum of item (i) and item (ii) being referred to herein as the "Credit Test Amount"), the System Operator shall issue notice thereof to such Non-Municipal Participant, such notice to be given in the manner provided in Section 21 of the Restated NEPOOL Agreement. When a Non-Municipal Participant's aggregate outstanding obligations to NEPOOL and the System Operator equal 90 percent (90%) of that Non-Municipal Participant's Credit Test Amount, (i) the System Operator shall issue notice thereof to such Non-Municipal Participant, such notice to be given in the manner provided in Section 21 of the Restated NEPOOL Agreement; and (ii) if such condition continues to exist 10 Business Days after the date of such notice, the System Operator shall issue notice thereof to all members and alternates of the NEPOOL Participants Committee. When a Non-Municipal Participant's aggregate outstanding obligations to NEPOOL and the System Operator equal 100 percent (100%) of that Non-Municipal Participant's Credit Test Amount, (i) the System Operator shall issue notice thereof to such Non-Municipal Participant, all members and alternates of the NEPOOL Participants Committee and the New England governors and utility regulatory agencies, such notice to be given in the manner provided in Section 21 of the Restated NEPOOL Agreement, and (ii) such Non-Municipal Participant shall be suspended from (a) making any purchases of Market Products in the NEPOOL Market; (b) scheduling any future transmission service under the Tariff; and (c) voting on matters before the Participants -14- Committee or any Technical Committee, in each case until either (x) in the case of purchases of Market Products and the scheduling of transmission service, such Non-Municipal Participant's outstanding obligations to NEPOOL and the System Operator fall below 100 percent (100%) of its Credit Test Amount and, in the case of voting on matters before the Participants Committee or any Technical Committee, such Non-Municipal Participant's outstanding obligations to NEPOOL and the System Operator fall and remain below 100 percent (100%) of its Credit Test Amount at least three (3) Business Days prior to any such vote, or (y) in the case of purchases of Market Products and the scheduling of transmission service, such Non-Municipal Participant has provided additional financial assurance (in addition to any other financial assurance required of such Non-Municipal Participant hereunder) equal to three and one-half (3.5) times the amount by which such Non-Municipal Participant's outstanding obligations to NEPOOL and the System Operator exceed 100 percent (100%) of its Credit Test Amount (the "Excess Financial Assurance") and, in the case of voting on matters before the Participants Committee or any Technical Committee, such Non-Municipal Participant has provided Excess Financial Assurance at least three (3) Business Days prior to any such vote; provided, however, (i) any suspension of a Non-Municipal Participant's authority to vote on matters before the Participants Committee or any Technical Committee hereunder shall not be effective while an appeal of such suspension is pending; (ii) if any Non-Municipal Participant reaches 100 percent (100%) of its Credit Test Amount solely because its rating, the rating of its outstanding debt or the rating of its Guarantor (as hereinafter defined) or its Guarantor's outstanding debt is downgraded by one grade, then (x) for 10 Business Days after such downgrade, such Non-Municipal Participant's Credit Test Amount shall remain the same as it was immediately preceding such downgrade and (y) no notice shall be sent and no suspension shall occur with respect to such downgrade if such Non- -15- Municipal Participant cures such default within such 10 Business Day period; and (iii) if any Non-Municipal Participant reaches 100 percent (100%) of its Credit Test Amount solely because the rating of the bank issuing a letter of credit on its behalf hereunder is downgraded below the requisite corporate debt rating, then (x) for 10 Business Days after such downgrade, such Non-Municipal Participant's Credit Test Amount shall remain the same as it was immediately preceding such downgrade, and (y) no notice shall be sent and no suspension shall occur with respect to such downgrade if such Non-Municipal Participant cures such default within such 10 Business Day period. The suspension of a Non-Municipal Participant's ability to purchase Market Products in the NEPOOL Market shall not limit, in any way, NEPOOL's or the System Operator's right to invoice or collect payment for any amounts owed (whether such amounts are due or becoming due) by such suspended Non-Municipal Participant under the Agreement, the Tariff or the System Operator's tariff. Each notice issued by the System Operator when a Non-Municipal Participant's aggregate outstanding obligations to NEPOOL and the System Operator equal 90 percent (90%) and 100 percent (100%) of that Non-Municipal Participant's Credit Test Amount shall indicate whether such Non-Municipal Participant has a registered load asset. If the System Operator has issued a notice that a Non-Municipal Participant's aggregate outstanding obligations to NEPOOL and the System Operator equal 90 percent (90%) or 100 percent (100%) of that Non-Municipal Participant's Credit Test Amount and subsequently such Non-Municipal Participant's aggregate outstanding obligations fall below the applicable percentage of its Credit Test Amount, such Non-Municipal Participant may request the System Operator to issue a notice stating such fact; provided, however, that the System Operator shall not be obligated to issue such notice unless, in its sole discretion, the System Operator concludes that such Non-Municipal -16- Participant's aggregate outstanding obligations have in fact fallen below the applicable percentage of its Credit Test Amount. C. THIRD-PARTY CREDIT PROTECTION POLICY. The System Operator shall obtain third-party credit protection, in the form of credit insurance coverage, a performance or surety bond, or a combination thereof ("Non-Municipal Credit Coverage"), on terms acceptable to the System Operator in its reasonable discretion covering the group of Rated Non-Municipal Participants with an investment grade rating from the Rating Agencies and the group of Unrated Non-Municipal Participants that satisfy the Credit Threshold (collectively, the "Qualifying Non-Municipal Participants"). The Non-Municipal Credit Coverage shall be equal to three and one-half (3.5) times the average NEPOOL Charges (as hereinafter defined) of the Qualifying Non-Municipal Participant with the greatest NEPOOL Charges from time-to-time. The Non-Municipal Credit Coverage shall be provided by an insurance company rated "A-" or better by A.M. Best & Co. or "AA" or better by S&P. The cost of the Non-Municipal Credit Coverage obtained for each calendar year shall be allocated to all Participants pro rata based, for each Participant, on (a) the sum of all charges under the Agreement, Tariff and System Operator's tariff owed in the preceding calendar year by such Participant and (b) all amounts owed to such Participant under the Agreement, Tariff and System Operator's tariff in the preceding calendar year. Each Qualifying Non-Municipal Participant shall provide the System Operator with such information as may be reasonably necessary for the System Operator to obtain the Credit Coverage at the lowest possible cost. -17- D. FINANCIAL ASSURANCES. All Non-Municipal Applicants and Non-Municipal Participants that must provide (or choose to provide) additional financial assurance pursuant to this Section II, must provide NEPOOL with financial assurance in the form and in the amount described in Sections II and IV hereof. Each financial assurance for monthly charges, unless replaced in accordance with the terms hereof or no longer required pursuant to the terms hereof, shall remain in effect for 120 days after termination of the Non-Municipal Participant's membership; provided, however that financial assurances required by this Policy related to potential billing adjustments chargeable to a terminated Non-Municipal Participant shall remain in effect until such billing adjustment request is finally resolved in accordance with the provisions of the NEPOOL Billing Policy. A Non-Municipal Participant or a Non-Municipal Applicant's additional financial assurance hereunder shall be in an amount (the "Non-Municipal Financial Assurance Requirement") at least equal to its Excess Financial Assurance Requirement or three and one-half (3.5) times the average or expected average net monthly charges of such Non-Municipal Participant or Non-Municipal Applicant under the Tariff, any effective tariff of the System Operator and the Restated NEPOOL Agreement (which would include Energy and other services received through NEPOOL), averaged over the most recent three-month period (collectively, such charges are referred to herein as "NEPOOL Charges"), as appropriate.(6) The three and one-half month period is based on the time required for a Commission filing made by NEPOOL to terminate service to a Participant to become effective. For example, a Rated Non-Municipal - ----------------- 6 In the case of new Non-Municipal Participants, the Non-Municipal Financial Assurance Requirement will be based on estimated monthly NEPOOL Charges, which estimate NEPOOL has the right to adjust in light of subsequent experience as to actual monthly NEPOOL Charges. -18- Participant with $32,000 in monthly NEPOOL Charges that does not have an investment grade credit rating must provide NEPOOL with additional financial assurance hereunder in the amount of $112,000. Similarly, an Unrated Non-Municipal Participant with $32,000 in monthly NEPOOL Charges that does not satisfy the Credit Threshold must provide NEPOOL with additional financial assurance hereunder in the amount of $112,000. Furthermore and without limiting the generality of the foregoing, if a Non-Municipal Participant that has received from one or more other Participants or Non-Participant Transmission Customers an amount the payment of which is the subject of a dispute, an amount equal to 100% of such amount in dispute shall be added to that Non-Municipal Participant's overall Non-Municipal Financial Assurance Requirement. Any additional financial assurance provided under this paragraph shall not be terminated or returned prior to the resolution of the dispute requiring such additional financial assurance, even if the Non-Municipal Participant providing such additional financial assurance is terminated or withdraws from NEPOOL and otherwise satisfies all of its obligations to NEPOOL. The term "Non-Municipal Financial Assurance Requirement" shall include 100% of such amount in dispute. In addition, and without limiting the generality of the foregoing, (i) any Non-Municipal Participant that is required hereunder to provide NEPOOL with additional financial assurance (other than a Non-Municipal Participant that is providing only Excess Financial Assurance) shall not at any time have NEPOOL Charges (regardless of whether such charges have actually become due and owing or not) in excess of the amount of the additional financial assurance provided by such Non-Municipal Participant; and (ii) any Non-Municipal Participant without an investment grade rating that is exempt from providing additional financial assurance hereunder -19- by virtue of having monthly NEPOOL charges of $15,000 or less or by virtue of being a Governance Only Member shall not at any time have net NEPOOL Charges (regardless of whether such charges have actually become due and owing or not) in excess of $15,000 unless such Non-Municipal Participant provides the additional financial assurance described herein. If a Non-Municipal Participant that is required hereunder to provide additional financial assurance exceeds the limit for net NEPOOL Charges set forth above, NEPOOL may initiate termination proceedings. A Non-Municipal Participant that is required hereunder to provide additional financial assurance and knows or reasonably should know that it has exceeded the limits for NEPOOL Charges set forth for it in this paragraph or 80 percent (80%) of its Credit Test Amount shall notify the System Operator immediately that it has exceeded such limits. III. FINANCIAL ASSURANCE PROVISIONS FOR MUNICIPAL APPLICANTS AND MUNICIPAL PARTICIPANTS Section III of this Policy contains the requirements and procedures governing Municipal Applicants and Municipal Participants. A Municipal Applicant or Municipal Participant that does not have an investment grade rating by one of the Rating Agencies (or in the case of Municipal Applicants or Municipal Participants that are not rated themselves, any Municipal Applicant or Municipal Participant that does not have outstanding debt with such a rating) shall be required to provide additional financial assurance in the form and amount described below. A Municipal Participant's failure to meet the requirements of this section may result in termination proceedings by NEPOOL. -20- A. PROOF OF FINANCIAL VIABILITY. 1. MUNICIPAL APPLICANTS. Each Municipal Applicant must with its application submit proof of financial viability, as described below, satisfying NEPOOL requirements to demonstrate the Municipal Applicant's ability to meet its obligations, or must provide prior to its membership becoming effective financial assurance in the form of a cash deposit, letter of credit, payment bond or guaranty as set forth in this Policy. A Municipal Applicant that chooses to provide a cash deposit, letter of credit, payment bond or guaranty will not be required to provide financial information to NEPOOL. Generally, each Municipal Applicant must submit to the System Operator all current reports from the Rating Agencies and each report from the Rating Agencies must indicate an investment grade rating for the Municipal Applicant or, if the Municipal Applicant itself is not rated, for the Municipal Applicant's outstanding rated debt, in order for the Municipal Applicant to be considered as a candidate for NEPOOL membership without furnishing additional financial assurances as described below. 2. MUNICIPAL PARTICIPANTS. All Municipal Participants must provide the financial statements and information set forth below if and as requested by NEPOOL within 10 days of such request. If a Municipal Participant does not receive an investment grade rating by one of the Rating Agencies, it must provide financial assurance in the form and amount required by this Policy. -21- B. FINANCIAL STATEMENTS. Each Municipal Applicant must submit, if and as requested by the System Operator and within 10 days of such request, audited financial statements for at least the immediately preceding three (3) years, or the period of its existence, if shorter, including, but not limited to, the following information: balance sheets, income statements, statements of cash flows and notes to financial statements. Additionally, annual and quarterly reports for at least the immediately preceding three (3) years, if available, must be submitted if and as requested by the System Operator and within 10 days of such request.(7) Each Municipal Applicant shall also be required to provide at least one bank reference and three (3) utility credit references. In those cases where a Municipal Applicant does not have three (3) utility credit references, three (3) trade payable vendor references shall be substituted. Each Municipal Applicant shall also be required to include information as to any known or anticipated material lawsuits, as well as any prior bankruptcy declarations by the Municipal Applicant, or by its predecessor(s), if any. In the case of certain Municipal Applicants, some of the above financial submittals may not be applicable, and alternate requirements shall be specified by NEPOOL. C. ONGOING FINANCIAL REVIEW. Each Municipal Participant that has not provided a cash deposit, letter of credit, payment bond or guaranty as described herein must submit all of its current Rating Agency reports - ------------------- 7 Where the above financial statements are available on the Internet, the Municipal Applicant may provide instead a letter to the System Operator stating where such statements may be located and retrieved by the System Operator. -22- promptly upon the request of NEPOOL. Any Municipal Participant that has not provided a cash deposit, letter of credit, payment bond or guaranty as described herein shall not undertake any transaction involving transmission or Market Products that such Municipal Participant is not authorized to undertake pursuant to its organizational documents. D. OTHER FINANCIAL ASSURANCES. Municipal Applicants or Municipal Participants that do not satisfy the rating requirement must provide financial assurance in the form and amount required by this Policy. Each financial assurance for NEPOOL Charges, unless replaced in accordance with the terms hereof or no longer required pursuant to the terms hereof, shall remain in effect for 120 days after termination of the Municipal Participant's membership; provided, however that financial assurances required by this Policy related to potential billing adjustments chargeable to a terminated Municipal Participant shall remain in effect until such billing adjustment request is finally resolved in accordance with the provisions of the NEPOOL Billing Policy. In general, Municipal Participants must provide additional financial assurance in the following amounts (the "Municipal Financial Assurance Requirement"):(8) - --------------- 8 In the case of new Municipal Participants, the Municipal Financial Assurance Requirement will be based on estimated monthly NEPOOL Charges, which estimate the System Operator has the right to adjust in light of subsequent experience as to actual monthly NEPOOL Charges. -23-
Monthly NEPOOL Expenses Required Financial Assurance ----------------------- ---------------------------- $0 - $15,000 0 months' NEPOOL Charges $15,001 - $30,000 1 month's NEPOOL Charges $30,001 - $50,000 2 months' NEPOOL Charges $50,001 or more 3-1/2 months' NEPOOL Charges
The three and one-half months is based on the time required for a Commission filing made by NEPOOL to suspend service to a Municipal Participant to become effective. Therefore, a Municipal Participant with $32,000 in monthly NEPOOL Charges that does not satisfy the rating requirement must provide additional financial assurances in the amount of $64,000 to NEPOOL. Furthermore and without limiting the generality of the foregoing, if a Municipal Participant that has received from one or more other Participants or Non-Participant Transmission Customers an amount the payment of which is the subject of a dispute, an amount equal to 100 percent (100%) of such amount in dispute shall be included in determining that Municipal Participant's overall Municipal Financial Assurance Requirement. Any additional financial assurance provided under this paragraph shall not be terminated or returned prior to the resolution of the dispute requiring such additional financial assurance, even if the Municipal Participant providing such additional financial assurance is terminated or withdraws from NEPOOL and otherwise satisfies all of its obligations to NEPOOL. The term "Municipal Financial Assurance Requirement" for each Municipal Participant shall include 100 percent (100%) of such amount in dispute applicable to such Municipal Participant. (The Non-Municipal Financial Assurance Requirement and the Municipal Financial Assurance Requirement are collectively referred to herein as the "Financial Assurance Requirement.") In -24- addition, and without limiting the generality of the foregoing, any Municipal Participant that is required hereunder to provide additional financial assurance (determined as set forth above) shall not at any time have NEPOOL Charges (regardless of whether such charges have actually become due and owing or not) in excess of the amount of the additional financial assurance provided by such Municipal Participant. Any Municipal Participant that does not satisfy the rating requirement but is exempt from providing additional financial assurance hereunder by virtue of having monthly NEPOOL charges of $15,000 or less shall not at any time have net NEPOOL Charges (regardless of whether such charges have actually become due and owing or not) in excess of $15,000 unless such Municipal Participant provides the additional financial assurance described herein. Any Municipal Participant that is not required to provide additional financial assurance hereunder because it has an investment grade rating (or in the case of a Municipal Participant that is not rated itself, any Municipal Participant that has outstanding debt with such a rating) (a "Qualifying Municipal Participant") shall not at any time have net NEPOOL Charges (regardless of whether such charges have actually become due and owing or not) in excess of the lesser of (i) $125 million or (ii) 20 percent (20%) of the total amount due and owing at such time to the System Operator, the Participants and Non-Participant Transmission Customers by all Participants and Non-Participant Transmission Customers. A Municipal Participant that knows or reasonably should know that it has exceeded the limits for NEPOOL Charges set forth for it in this paragraph shall notify the System Operator immediately that it has exceeded such limits. -25- E. THIRD-PARTY CREDIT PROTECTION POLICY. The System Operator shall obtain third-party credit protection, in the form of credit insurance coverage, a performance or surety bond, or a combination thereof (" Municipal Credit Coverage"), on terms acceptable to the System Operator in its reasonable discretion covering the group of Qualifying Municipal Participants. The Municipal Credit Coverage shall be equal to three and one-half (3.5) times the average NEPOOL Charges of the Qualifying Municipal Participant with the greatest NEPOOL Charges from time-to-time. The Municipal Credit Coverage shall be provided by an insurance company rated "A-" or better by A.M. Best & Co. or "AA" or better by S&P. The cost of the Municipal Credit Coverage obtained for each calendar year shall be allocated to all Participants pro rata based, for each Participant, on (a) the sum of all charges under the Agreement, Tariff and System Operator's tariff owed in the preceding calendar year by such Participant and (b) all amounts owed to such Participant under the Agreement, Tariff and System Operator's tariff in the preceding calendar year. Each Qualifying Municipal Participant shall provide the System Operator with such information as may be reasonably necessary for the System Operator to obtain the Municipal Credit Coverage at the lowest possible cost. IV. ACCEPTABLE FORMS OF ADDITIONAL FINANCIAL ASSURANCE A. CASH DEPOSIT. A cash deposit for the full value of the Financial Assurance Requirement, as determined by NEPOOL, provides an acceptable form of financial assurance to NEPOOL. If the amount of the deposit is below the required level, the Participant shall immediately replenish or increase the deposit to the required level; otherwise, NEPOOL may initiate termination proceedings. In the -26- event that actual NEPOOL Charges exceed those anticipated, the anticipated charges will be increased accordingly and the Participant must augment its cash deposit to reach the required level. The cash deposit will be invested by the System Operator in direct obligations of the United States or its agencies and interest earned will be paid to the Participant. The System Operator may sell or otherwise liquidate such investments at its discretion to meet the Participant's obligations to NEPOOL. B. LETTER OF CREDIT. An irrevocable standby letter of credit for the full value of the Financial Assurance Requirement, as determined by NEPOOL, provides an acceptable form of financial assurance to NEPOOL. The letter of credit shall be valued as zero dollars ($0.00) 30 days prior to the termination of such letter of credit. If the letter of credit amount is below the required level, the Participant shall immediately replenish or increase the letter of credit amount; otherwise, NEPOOL may initiate termination proceedings. If actual NEPOOL Charges exceed those anticipated, the Participant must obtain a substitute letter of credit in the required amount based on the actual NEPOOL Charges. The form, substance and provider of the letter of credit must all be acceptable to NEPOOL. The letter of credit should clearly state the full names of the "Issuer," "Account Party" and "Beneficiary," the dollar amount available for drawings, and should include a statement required on the drawing certificate and other terms and conditions that should apply. It should also specify that funds will be disbursed, in accordance with the instructions, within one -27- Business Day after due presentation of the drawing certificate. The bank issuing the letter of credit must (i) have a minimum corporate debt rating of an "A-" by S&P, or "A3" by Moody's, or "A-" by Duff & Phelps, or "A-" by Fitch, or an equivalent short-term debt rating by one of these agencies, and (ii) be organized under the laws of the United States or any state thereof or be the United States branch of a foreign bank. The System Operator will confirm no less frequently than quarterly that each bank providing a letter of credit hereunder satisfies the preceding sentence. Attachment 1 provides a generally acceptable sample "clean" letter of credit, and all letters of credit provided by Participants and Applicants shall be in this form (with only minor, non-material changes), unless a variation therefrom is approved by the Budget and Finance Subcommittee of the Participants Committee. All costs associated with obtaining financial security and meeting the provisions of this Policy are the responsibility of the Applicant or Participant. C. PAYMENT BOND. A payment bond complying with the requirements set forth herein provides an acceptable form of financial assurance to NEPOOL. The penal sum of such payment bond shall be in an amount equal to the full value of the Financial Assurance Requirement, as determined by NEPOOL. The bond shall permit suit thereunder until two (2) years after the date that all of the Applicant's or Participant's obligations to NEPOOL expire. If the amount of the penal sum of the payment bond available to NEPOOL is below the required level, the Participant shall immediately replenish or increase the amount of the penal -28- sum; otherwise, NEPOOL may initiate termination proceedings. If actual NEPOOL Charges exceed those anticipated, the Participant must either cause the penal sum of such payment bond to be increased accordingly or must obtain a substitute payment bond in the appropriate amount. The form, substance and provider of the payment bond must be acceptable to NEPOOL. The payment bond should clearly state the full names of the "Principal," the "Surety" and the "Obligee" (NEPOOL) and the penal sum and should include a clear statement that the surety will promptly and faithfully pay the Participant's obligations to NEPOOL if the Participant fails to do so. The insurance company issuing the payment bond must be rated "A" or better by A.M. Best & Co. Attachment 2 provides an example of a generally acceptable sample payment bond. All costs associated with obtaining financial security and meeting the Policy provisions, including without limitation the cost of the premiums for such payment bond, are the responsibility of the Applicant or Participant. If, prior to the effective date of this Policy, a Participant or Applicant has obtained a performance bond and NEPOOL or the System Operator has determined that the form, substance and provider of such performance bond were acceptable at the time such performance bond was obtained, such performance bond shall be deemed to be in compliance with this Policy until such performance bond terminates or is to be renewed by its own terms; provided, however, that no performance bond that does not otherwise satisfy the terms of the Policy without giving effect to this paragraph shall be acceptable one year after the effective date of this Policy. -29- D. CORPORATE GUARANTY. A corporate guaranty obtained from a Participant's affiliated company ("Guarantor") for the full value of the Financial Assurance Requirement, as determined by NEPOOL (a "Corporate Guaranty"), may provide an acceptable form of financial assurance to NEPOOL. If a Guarantor is not itself a Participant (a "Non-Participant Guarantor"), the aggregate obligations such Guarantor may guarantee hereunder at any time shall not exceed the lesser of (i) $125 million, (ii) 20 percent (20%) of the total amount due and owing at such time to the System Operator, the Participants and the Non-Participant Transmission Customers by all Participants and Non-Participant Transmission Customers, or (iii) if the Participant for whom such Corporate Guaranty is provided is a Non-Municipal Participant, the applicable percentage of such Guarantor's Tangible Net Worth as listed in the following table (the "Guaranty Limit"), and such Guaranty Limit shall be deemed to be the available amount of additional financial assurance under such Guarantor's Corporate Guaranty.
CREDIT RATING(9) PERCENTAGE OF TANGIBLE (COMPARABLE RATINGS TO BE USED FOR DUFF & PHELPS AND NET WORTH FOR PURPOSES FITCH) OF NON-PARTICIPANT GUARANTOR'S GUARANTY LIMIT S&P MOODY'S AAA Aaa 5.00% AA+ Aa1 5.00% AA Aa2 4.00% AA- Aa3 3.50% A+ A1 2.55%
- ------------------- 9 This is the credit rating for the Non-Participant Guarantor from one or more of the Rating Agencies or, if such Non-Participant Guarantor itself is not rated by one of the Rating Agencies, then this is the credit rating for the Non-Participant Guarantor's long-term debt from one or more of the Rating Agencies. -30- A A2 2.35% A- A3 2.10% BBB+ Baa1 1.80% BBB Baa2 1.20% BBB- Baa3 0.70% Below BBB- Below Baa3 0.00%
The System Operator shall update and monitor the Guaranty Limit for each Non-Participant Guarantor on a daily basis. In order for the System Operator to update and monitor the Guaranty Limit of each Non-Participant Guarantor, each such Non-Participant Guarantor that is providing a Corporate Guaranty for a Non-Municipal Participant shall submit to the System Operator, on a quarterly basis within 10 days of its becoming available and within 55 days after the end of the applicable fiscal quarter of such Non-Participant Guarantor, its balance sheet, which shall have been compiled by certified public accountants showing sufficient detail for the System Operator to calculate its Tangible Net Worth. In addition, each Non-Participant Guarantor shall submit to the System Operator, annually within 10 days of their becoming available and within 100 days after the end of the fiscal year of such Non-Participant Guarantor, the following audited financial statements: balance sheets, income statements, statements of cash flows, and notes to financial statements, as well as copies of that Non-Participant Guarantor's annual report. Each such Non-Participant Guarantor shall also provide to the System Operator, within 10 days of their filing with the SEC, a copy of each Form 10-K Report, Form 10-Q Report and Form 8-K Report for that Non-Participant Guarantor.(10) - --------------------- 10 Where any of the above financial information is available on the Internet, the Non- Participant Guarantor may instead provide the System Operator with a letter stating where such information may be located and retrieved. -31- The amount guaranteed from time to time under such a Corporate Guaranty, regardless of whether such amount is past due, shall be included in the NEPOOL Charges of both such Participant and its affiliated Guarantor for all purposes of this Policy if the Guarantor is itself a Participant. The following conditions must be met for a Corporate Guaranty to be accepted as an acceptable form of Financial Assurance: 1. NEPOOL determines that each of the Participant and the Guarantor has satisfactorily met its payment obligations in NEPOOL for at least six (6) months, which six-month period may in whole or in part pre-date the effective date of this Policy; 2. NEPOOL determines that the financial condition of the Guarantor meets the requirements of this Policy; 3. The Corporate Guaranty shall authorize the System Operator to recover sums owed by the Participant obligor directly from the Guarantor; and 4. The form and substance of the Corporate Guaranty shall be otherwise acceptable to NEPOOL. Upon NEPOOL's written authorization, the Participant may substitute a Corporate Guaranty that is issued by the Guarantor for a cash deposit, letter of credit or payment bond when the Participant has satisfied each of the four (4) conditions stipulated above. The Corporate Guaranty is considered to be a lesser form of financial assurance than a cash deposit, letter of credit or payment bond, and therefore is allowed as an acceptable form of financial -32- assurance only to those Participants and Guarantors that have satisfied each of the four (4) conditions stipulated above. The Corporate Guaranty should clearly state the identities of the "Guarantor," "Beneficiary" and "Obligor," and the relationship between the Guarantor and the Participant Obligor. The Corporate Guaranty must be duly authorized by the Guarantor, must be signed by an officer of the Guarantor, and must be furnished with either an opinion satisfactory to the System Operator of the Guarantor's counsel with respect to the enforceability of the Corporate Guaranty or accompanied by a certificate of corporate guarantee that includes a seal of the corporation with the signature of the corporate secretary. Additionally, adequate documentation regarding the signature authority of the person signing the Corporate Guaranty must be provided with the Corporate Guaranty. A Guarantor's failure to timely disclose a Material Change (as hereinafter defined) in its financial status may result in proceedings by NEPOOL to terminate the Participant Obligor. If there is an adverse Material Change in the financial condition of the Guarantor, NEPOOL may require the Participant Obligor to provide another form of financial assurance, either a cash deposit, letter of credit or payment bond. Attachment 3 provides a generally acceptable sample of a Corporate Guaranty, and all Corporate Guaranties provided by Participants shall be in this form (with only minor, non-material changes), unless a variation therefrom is approved by the Budget and Finance Subcommittee of the Participants Committee. -33- V. MISCELLANEOUS PROVISIONS A. OBLIGATION TO REPORT MATERIAL CHANGES. Each Participant and each Guarantor is responsible for informing NEPOOL in writing within 10 Business Days of any Material Change (as hereinafter defined) in its financial status. A "Material Change" in financial status includes, but is not limited to, the following: a downgrade to a below investment grade rating of senior long-term debt by a major rating agency, being placed on credit watch with negative implication by a major rating agency if senior long- term debt does not have an investment grade rating, a bankruptcy filing, insolvency, a report of a significant quarterly loss or decline of earnings, the resignation of key officer(s), or the filing of a material lawsuit that could materially adversely impact current or future financial results. A Participant's or Guarantor's failure to timely disclose a Material Change in its financial status may result in termination proceedings by NEPOOL. If there is a Material Change in the financial condition of the Participant or the Participant's Guarantor, NEPOOL may require the Participant to provide one of the forms of financial assurance described in this Policy. If the Participant fails to do so, NEPOOL may initiate termination proceedings in accordance with the procedure set forth in Section 21.2(d) of the Restated NEPOOL Agreement. B. WEEKLY PAYMENTS. A Participant that does not satisfy the rating requirement or, if such Participant is an Unrated Non-Municipal Participant, the Credit Threshold may request that, in lieu of providing one of the additional financial assurances set forth above, a weekly billing schedule be implemented for it. NEPOOL may, in its discretion, agree to such a request; provided, however, that any weekly billing arrangement will terminate no more than six (6) months after the date on -34- which such arrangement begins unless the Participant requests an extension of such arrangement and demonstrates to NEPOOL's satisfaction in its sole discretion that the termination of such arrangement and compliance with the other provisions of this Policy (including providing another form of financial assurance, if required) will impose a substantial hardship on the Participant. Such demonstration of a substantial hardship shall be made every six (6) months after the initial demonstration, and a Participant's weekly billing arrangement will be terminated if it fails to demonstrate to NEPOOL's satisfaction in its sole discretion at any such six (6) month interval that compliance with the other provisions of this Policy will impose a substantial hardship on it. If NEPOOL agrees to implement a weekly billing schedule for a Participant, the Participant shall be billed weekly in arrears on an estimated basis for all amounts owed to NEPOOL and the System Operator for the week, with an adjustment for each month as part of the regular NEPOOL monthly billing to reflect any under or over collection for the month. The Participant shall be obligated to pay each such weekly bill within five (5) Business Days after it is received. The Participant shall pay with respect to each weekly bill an administrative fee, determined by the System Operator, to reimburse the System Operator for the costs it incurs as a result of that Participant's weekly billing arrangement. If a weekly billing schedule is implemented for a Participant in lieu of requiring the Participant to provide an additional financial assurance hereunder, the Participant may be required to provide an additional financial assurance in the form and in the amount required hereunder at any time if the Participant fails to pay when due any weekly bill. In addition, upon the termination of a Participant's weekly billing arrangement, the Participant shall either satisfy -35- the applicable rating requirements set forth herein, satisfy the Credit Threshold (if such Participant is an Unrated Non-Municipal Participant), or provide one of the other forms of financial assurance set forth herein. C. USE OF TRANSACTION SETOFFS. Under certain conditions, NEPOOL or the System Operator may be obligated to make payments to a Participant. In this event, the amount of the cash deposit, letter of credit, payment bond or Corporate Guaranty required for financial assurance for the contemplated transactions will be reduced ("setoff") by an amount equal to NEPOOL's or the System Operator's unpaid balance or expected billing under the other transactions. The terms and the amount of the setoff must be approved by NEPOOL. D. NON-PAYMENT OF AMOUNTS DUE. If a Participant does not pay amounts billed when due and as a result a letter of credit or cash deposit is drawn down or a payment bond or Corporate Guaranty is paid on, then the Participant must immediately replenish the letter of credit or cash deposit or cause the payment bond or Corporate Guaranty to be restored, in each case to the required amount. If a Participant fails to do so, NEPOOL may initiate termination proceedings against the Participant in accordance with the procedure set forth in Section 21.2(d) of the Restated NEPOOL Agreement. In order to encourage prompt payment by Participants of amounts owed to NEPOOL, if a Participant is delinquent two (2) or more times within any period of 12 months in paying on time its NEPOOL Charges, the Participant shall pay, in addition to interest on each late payment, a late payment charge for its second failure to pay on time, and for each subsequent failure to pay -36- on time within the same 12 month period (a "Late Payment Charge") in an amount equal to the greater of (i) two percent (2%) of the total amount of such late payment or (ii) $250.00. In addition, if a Participant fails to pay any NEPOOL Charges within 10 days of the date such payment is due, such Participant shall not be entitled to vote on matters before the Participants Committee or any Technical Committee unless the full amount of such late payment (including interest thereon and the Late Payment Charge) is submitted to the System Operator at least three (3) Business Days prior to any such vote. In the case of a former Participant that applies again for membership in NEPOOL, a determination of delinquency shall be based on the Participant's history of payment of its NEPOOL Charges in its last 12 months of membership. Interest collected on late payments shall be allocated and paid to the Participants to whom such late payments are due, pro rata in accordance with the amount due to each such Participant. Late Payment Charges that are collected and not distributed to the Participants under the NEPOOL Billing Policy shall be deposited by the System Operator into a segregated interest-bearing account (the "Late Payment Account") for disbursement in accordance with the NEPOOL Billing Policy as in effect from time to time; provided, however, that in no event shall the amount in the Late Payment Account, including interest accrued thereon, at any time exceed $500,000 or other amount determined from time to time by the Participants Committee (the "Late Payment Account Limit"). Any Late Payment Charges and interest thereon in excess of the Late Payment Account Limit shall be distributed to the Participants pro rata based on their charges under the System Operator's Tariff for Transmission Dispatch and Power -37- Administration Services in the month preceding the month in which such distribution is to be made. E. FINANCIAL ASSURANCE UPON TERMINATION OF MEMBERSHIP. Upon termination of membership in NEPOOL, a Participant must provide financial assurance in the amount of all potential billing adjustments chargeable to such Participant for all unresolved billing disputes in existence on the date of termination of such Participant's membership. Such financial assurance must be in the form of a cash deposit, letter of credit, payment bond or Corporate Guaranty meeting the requirements of this Policy. The amount of such financial assurance shall be reduced to the extent any billing dispute is resolved and the former Participant pays the billing adjustments or no billing adjustment is chargeable to the former Participant. F. NOTIFICATION OF DEFAULT. In the event that a Participant fails to comply with this Policy (a "Financial Assurance Default") and such failure continues for at least 10 days, NEPOOL may (but shall not be required to) notify such Participant in writing, electronically and by first class mail sent in each case to such Participant's member or alternate on the NEPOOL Participants Committee or billing contact (it being understood that NEPOOL will use reasonable efforts to contact all three), of such Financial Assurance Default. Either simultaneously with the giving of the notice described in the preceding sentence or within 10 days thereafter (unless the Financial Assurance Default is cured during such period), NEPOOL shall notify each other member and alternate on the NEPOOL Participants Committee and each Participant's billing contact of the identity of the -38- Participant receiving such notice, whether such notice relates to a Financial Assurance Default, and the actions NEPOOL plans to take and/or has taken in response to such Financial Assurance Default. No remedy for a Financial Assurance Default is or shall be deemed to be exclusive of any other available remedy or remedies. Each such remedy shall be distinct, separate and cumulative, shall not be deemed inconsistent with or in exclusion of any other available remedy, and shall be in addition to and separate and distinct from every other remedy. G. ENFORCEMENT OF PAYMENT OBLIGATIONS AGAINST DEFAULTING PARTICIPANTS. Each Participant that shares in any shortfall in payments under the NEPOOL Billing Policy shall have an independent right to seek and obtain payment and recovery of the amount of its share of such shortfall (the "Allocated Assessment") from the defaulting Participant. Any Participant that recovers any portion of its Allocated Assessment from a defaulting Participant shall promptly so notify the System Operator, and the Participant's Allocated Assessment shall be reduced by the amount of such recovery. In addition to any amounts in default, the defaulting Participant shall be liable to NEPOOL and each other Participant for all reasonable costs incurred in enforcing the defaulting Participant's obligations. -39- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT ATTACHMENT 1 SAMPLE LETTER OF CREDIT [DATE PROVIDED] IRREVOCABLE STANDBY LETTER OF CREDIT NO. [EXPIRATION DATE] AT OUR COUNTERS WE DO HEREBY ISSUE AN IRREVOCABLE NON-TRANSFERABLE STANDBY LETTER OF CREDIT BY ORDER OF AND FOR THE ACCOUNT OF ON BEHALF OF [PARTICIPANT] ("ACCOUNT PARTY") IN FAVOR OF THE PARTICIPANTS IN THE NEW ENGLAND POWER POOL ("NEPOOL") IN AN AMOUNT NOT EXCEEDING US$ ______.00 (UNITED STATES DOLLARS ____________ AND 00/100) AGAINST PRESENTATION TO US OF A DRAWING CERTIFICATE SIGNED BY A PURPORTED OFFICER OR AUTHORIZED AGENT OF NEPOOL AND DATED THE DATE OF PRESENTATION CONTAINING THE FOLLOWING STATEMENT: "THE UNDERSIGNED HEREBY CERTIFIES TO [BANK] ("BANK"), WITH REFERENCE TO IRREVOCABLE NON-TRANSFERABLE STANDBY LETTER OF CREDIT NO. ISSUED BY [BANK] IN FAVOR OF THE PARTICIPANTS IN THE NEW ENGLAND POWER POOL ("NEPOOL"), THAT [PARTICIPANT] HAS FAILED TO PAY NEPOOL AND/OR ISO NEW ENGLAND IN ACCORDANCE WITH THE TERMS AND PROVISIONS OF THE RESTATED NEPOOL AGREEMENT BETWEEN [PARTICIPANT] AND THE OTHER NEPOOL MEMBERS, AND THUS NEPOOL IS DRAWING -1- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT UPON THE LETTER OF CREDIT IN AN AMOUNT EQUAL TO $_______________." IF PRESENTATION OF ANY DRAWING CERTIFICATE IS MADE ON A BUSINESS DAY AND SUCH PRESENTATION IS MADE AT OUR COUNTERS ON OR BEFORE 10:00 A.M. _________TIME, WE SHALL SATISFY SUCH DRAWING REQUEST ON THE SAME BUSINESS DAY. IF THE DRAWING CERTIFICATE IS RECEIVED AT OUR COUNTERS AFTER 10:00 A.M. ___________ TIME, WE WILL SATISFY SUCH DRAWING REQUEST ON THE NEXT BUSINESS DAY, FOR THE PURPOSES OF THIS SECTION, A BUSINESS DAY MEANS A DAY, OTHER THAN A SATURDAY OR SUNDAY, ON WHICH COMMERCIAL BANKS ARE NOT AUTHORIZED OR REQUIRED TO BE CLOSED IN NEW YORK, NEW YORK. DISBURSEMENTS SHALL BE IN ACCORDANCE WITH THE INSTRUCTIONS OF NEPOOL. THE FOLLOWING TERMS AND CONDITIONS APPLY: THIS LETTER OF CREDIT SHALL EXPIRE AT THE CLOSE OF BUSINESS [DATE]. THE AMOUNT WHICH MAY BE DRAWN BY YOU UNDER THIS LETTER OF CREDIT SHALL BE AUTOMATICALLY REDUCED BY THE AMOUNT OF ANY UNREIMBURSED DRAWINGS HEREUNDER AT OUR COUNTERS. ANY NUMBER OF PARTIAL DRAWINGS ARE PERMITTED FROM TIME TO TIME HEREUNDER. ALL COMMISSIONS AND CHARGES WILL BE BORNE BY THE ACCOUNT PARTY. -2- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT THIS LETTER OF CREDIT IS NOT TRANSFERABLE OR ASSIGNABLE. THIS LETTER OF CREDIT DOES NOT INCORPORATE AND SHALL NOT BE DEEMED MODIFIED, AMENDED OR AMPLIFIED BY REFERENCE TO ANY DOCUMENT, INSTRUMENT OR AGREEMENT (A) THAT IS REFERRED TO HEREIN (EXCEPT FOR THE UCP, AS DEFINED BELOW) OR (B) IN WHICH THIS LETTER OF CREDIT IS REFERRED TO OR TO WHICH THIS LETTER OF CREDIT RELATES. THIS LETTER OF CREDIT SHALL BE GOVERNED BY THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS, 1993 REVISION, INTERNATIONAL CHAMBER OF COMMERCE PUBLICATION NO. 500 (THE "UCP"), EXCEPT TO THE EXTENT THAT TERMS HEREOF ARE INCONSISTENT WITH THE PROVISIONS OF THE UCP, INCLUDING BUT NOT LIMITED TO ARTICLES 13(b) AND 17 OF THE UCP, IN WHICH CASE THE TERMS OF THE LETTER OF CREDIT SHALL GOVERN. THIS LETTER OF CREDIT MAY NOT BE AMENDED, CHANGED OR MODIFIED WITHOUT THE EXPRESS WRITTEN CONSENT OF NEPOOL AND US. WE HEREBY ENGAGE WITH YOU THAT DOCUMENTS DRAWN UNDER AND IN COMPLIANCE WITH THE TERMS OF THIS LETTER OF CREDIT SHALL BE DULY HONORED UPON PRESENTATION AS SPECIFIED. PRESENTATION OF ANY DRAWING CERTIFICATE UNDER THIS STANDBY LETTER OF CREDIT MAY BE SENT TO US BY COURIER, CERTIFIED MAIL, REGISTERED MAIL, TELEGRAM, TELEX TO THE ADDRESS SET FORTH -3- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT BELOW, OR SUCH OTHER ADDRESS AS MAY HEREAFTER BE FURNISHED BY US. OTHER NOTICES CONCERNING THIS STANDBY LETTER OF CREDIT MAY BE SENT BY FACSIMILE OR SIMILAR COMMUNICATIONS FACILITY TO THE RESPECTIVE ADDRESSES SET FORTH BELOW. ALL SUCH NOTICES AND COMMUNICATIONS SHALL BE EFFECTIVE WHEN ACTUALLY RECEIVED BY THE INTENDED RECIPIENT PARTY. IF TO THE BENEFICIARY OF THIS LETTER OF CREDIT: IF TO THE ACCOUNT PARTY: IF TO US: - ----------------------------------- ---------------------------------------- [signature] [signature] -4- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT ATTACHMENT 2 SAMPLE PAYMENT BOND [INSURANCE COMPANY] Bond No. KNOW ALL MEN BY THESE PRESENTS, That the undersigned [participant], of [participant's address] hereinafter referred to as the Principal, and [insurance company], a corporation organized and existing under the laws of the State of [insurance company's state of incorporation], as Surety, are held and firmly bound unto the Participants in the New England Power Pool as obligees, hereinafter referred to collectively as the Obligee, in the sum of __________________, lawful money of the United States of America for the payment of which sum, well and truly to be made, we bind ourselves, our executors, administrators, successors, and assigns, jointly and severally, firmly by these presents. WHEREAS, the Principal has entered into agreements for the purchase and sale of electric services and the payment of amounts owed to ISO New England Inc. and its share of the expenses of the New England Power Pool under the Restated NEPOOL Agreement, the Restated NEPOOL Open Access Transmission Tariff, ISO New England Inc.'s Tariff for Transmission Dispatch and Power Administration Services and ISO New England Inc.'s Tariff for Capital Funding, each as amended from time to time (collectively referred to as the "Agreements"), and in strict accordance with their respective terms. NOW, THEREFORE, the condition of this obligation is such, that if the Principal shall promptly and faithfully make the payments required by, and comply with terms of, the -5- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT Agreements which have been or may hereafter be in force and shall save and keep harmless the Obligee from all loss or damage which it may sustain or for which it may become liable on account of the issuance of said Agreements to the Principal, then this obligation shall be void; otherwise, it shall remain in full force and effect. Upon notice from ISO New England Inc. of nonpayment by the Principal, Surety shall immediately pay to ISO New England Inc., as agent for the Obligee, the amounts owed by the Principal under the Agreements. Surety shall also be responsible for all reasonable fees and costs, including but not limited to reasonable attorneys' fees, incurred by ISO New England Inc. or Obligee to enforce this instrument and collect any amounts owed to Obligee hereunder. The Surety hereby waives notice of any alteration or extension of time made by the Obligee. This instrument shall be a continuing, absolute, unconditional and irrevocable obligation of Surety. Any suit on this bond must be instituted before the expiration of two (2) years from the date on which the Principal's obligations under the Agreements expire. This instrument shall be effective upon execution and shall continue in effect until terminated by the Obligee or Surety upon thirty (30) days prior written notice to the non-terminating party. SIGNED, SEALED AND DATED this day of , 20__. -6- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT [Participant] Principal [Seal] By:_____________________________________ [Insurance Company] Surety [Seal] By:_____________________________________ -7- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT ATTACHMENT 3 CORPORATE GUARANTY For and in consideration of the credit advance or sale of products on open account by the New England Power Pool Participants from time to time ("Participants") to [Participant] ("Company"), the undersigned guarantor ("Guarantor"), the [parent/subsidiary/affiliate] of Company, hereby unconditionally and irrevocably guarantees the prompt and complete payment of all amounts that Company now or hereafter owes to Participants and ISO New England, Inc. (the "System Operator") under the Restated NEPOOL Agreement, Restated NEPOOL Open Access Transmission Tariff and the System Operator's tariffs that are in effect from time to time (collectively referred to as the "Agreements"), in strict accordance with their respective terms. 1. If Company does not perform its obligations in strict accordance with the Agreements, Guarantor shall immediately pay all amounts now or hereafter owed thereunder (including, without limitation, all principal, interest, and fees) by Company under the Agreements. This Guaranty may be satisfied by Guarantor paying Company's obligations or by Guarantor causing Company's obligations to be paid; provided, however, that Guarantor shall at all times remain fully responsible and liable for its obligations hereunder notwithstanding any such payment (or failure thereof) by any third party. Participants will undertake commercially reasonable efforts to notify Guarantor of a failure by Company to make a payment under the Agreements; provided, however, that failure by Participants to so notify Guarantor shall not defeat, limit or otherwise affect the rights and obligations of Participants, Company or Guarantor. Subject to the -8- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT terms and conditions set forth herein, Guarantor's obligations hereunder shall not exceed the complete payment of all amounts that Company now or hereafter owes to Participants and the System Operator under the Agreements in strict accordance with their respective terms. [Notwithstanding anything to the contrary in this Guaranty, the aggregate liability of Guarantor hereunder shall not exceed U.S. $________.] 2. This Guaranty is an absolute, unconditional and continuing guaranty of the full and punctual payment by Company of each of its obligations under the Agreements, and not of collectibility only, and is in no way conditioned upon any requirement that Participants or the System Operator first attempt to collect payment from Company or any other guarantor or surety or resort to any security or other means of obtaining payment of all or any part of Company's obligations or upon any other contingency. This is a continuing guaranty and, subject to the terms and conditions hereof, shall be binding upon Guarantor until the full, final and irrevocable payment of all of Company's obligations under the Agreements, regardless of (i) how long after the date hereof any part of the obligations under the Agreements is incurred by Company and (ii) the amount of the obligations under the Agreements at any time outstanding. This Guaranty may be enforced by Participants or the System Operator from time to time and as often as occasion for such enforcement may arise. 3. The obligations hereunder are independent of the obligations of Company, and a separate action or actions may be brought and prosecuted against Guarantor -9- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT whether action is brought against Company or whether Company be joined in any such action or actions. Guarantor's liability under this Guaranty is not conditioned or contingent upon genuineness, validity, regularity or enforceability of the Agreements. 4. Guarantor authorizes Participants and the System Operator without notice or demand and without affecting its liability hereunder, from time to time to (a) renew, extend, or otherwise change the terms of the Agreements or any part thereof; (b) take and hold security for the payment of the Agreements, and exchange, enforce, waive and release any such security; and (c) apply such security and direct the order or manner of sale thereof as Participants and the System Operator in their sole discretion may determine. The obligations and liabilities of Guarantor hereunder shall be absolute and unconditional, shall not be subject to any counterclaim, setoff, deduction or defense based upon any claim Guarantor may have against Company, any other guarantor, or any other person or entity, and shall remain in full force and effect until all of the obligations hereunder have been fully satisfied, without regard to, or release or discharge by, any event, circumstance or condition (whether or not Guarantor shall have knowledge or notice thereof) which but for the provisions of this Section might constitute a legal or equitable defense or discharge of a guarantor or surety or which might in any way limit recourse against Guarantor, including without limitation: (a) any amendment or modification of, or supplement to, the terms of the Agreements; (b) any waiver, consent or indulgence by Participants or the System Operator, or any exercise or non-exercise by Participants or the System -10- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT Operator of any right, power or remedy, under or in respect of this Guaranty or the Agreements (whether or not Guarantor or Company has or have notice or knowledge of any such action or inaction); (c) the invalidity or unenforceability, in whole or in part, of the Agreements, or the termination (except pursuant to its terms or by written agreement between Participants and Company), cancellation or frustration of any thereof, or any limitation or cessation of Company's liability under any thereof (other than any limitation or cessation expressly provided for therein), including without limitation any invalidity, unenforceability or impaired liability resulting from Company's lack of capacity, power and/or authority to enter into the Agreements and/or to incur any or all of the obligations thereunder, or from the execution and delivery of any Agreement by any person acting for Company without or in excess of authority (except to the extent the same would limit or cease Company's liability under the Agreements); (d) any actual, purported or attempted sale, assignment or other transfer by Participants or the System Operator of any Agreement or of any of its rights, interests or obligations thereunder; (e) the taking or holding by Participants or the System Operator of a security interest, lien or other encumbrance in or on any property as security for any or all of the obligations of Company under the Agreements or any exchange, release, non-perfection, loss or alteration of, or any other dealing with, any such security; (f) the addition of any party as a guarantor or surety of all or any part of the obligations of Company under the Agreements; (g) any merger, amalgamation or consolidation of Company into or with any other entity, or any sale, lease, transfer or other disposition of any or all of Company's assets or any sale, transfer -11- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT or other disposition of any or all of the shares of capital stock or other securities of Company to any other person or entity; (h) any change in the financial condition of Company or (as applicable) of any subsidiary, affiliate, partner or controlling shareholder thereof, or Company's entry into an assignment for the benefit of creditors, an arrangement or any other agreement or procedure for the restructuring of its liabilities, or Company's insolvency, bankruptcy, reorganization, dissolution, liquidation or any similar action by or occurrence with respect to Company. 5. Guarantor unconditionally waives, to the fullest extent permitted by law: (a) notice of any of the matters referred to in Section 4 hereof; (b) any right to the enforcement, assertion or exercise by Participants or the System Operator of any of their rights, powers or remedies under, against or with respect to (i) any of the Agreements, (ii) any other guarantor or surety, or (iii) any security for all or any part of the obligations of Company under the Agreements or obligations of Guarantor hereunder; (c) any requirement of diligence and any defense based on a claim of laches; (d) all defenses which may now or hereafter exist by virtue of any statute of limitations, or of any stay, valuation, exemption, moratorium or similar law, except the sole defense of full and indefeasible payment; (e) any requirement that Guarantor be joined as a party in any action or proceeding against Company to enforce any of the provisions of the Agreements; (f) any requirement that Participants or the System Operator mitigate or attempt to mitigate damages resulting from a default by Guarantor hereunder or from a default by Company under any of the Agreements; (g) acceptance of this Guaranty by Participants and -12- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT the System Operator; and (h) all presentments, protests, notices of dishonor, demands for payment and any and all other demands upon and notices to Company, and any and all other formalities of any kind, the omission of or delay in performance of which might but for the provisions of this section constitute legal or equitable grounds for relieving or discharging Guarantor in whole or in part from its irrevocable, absolute and continuing obligations hereunder, it being the intention of Guarantor that its obligations hereunder shall not be discharged except by payment and then only to the extent thereof. 6. Guarantor waives any right to require Participants or the System Operator to (a) proceed against Company; (b) proceed against or exhaust any security held from Company; or (c) pursue any other remedy in Participants' or the System Operator's power whatsoever. So long as any obligations remain outstanding under this Guaranty, Guarantor shall not exercise any rights against Company arising as a result of payment by Guarantor hereunder, by way of subrogation or otherwise, and will not prove any claim in competition with Participants or the System Operator or their affiliates in respect of any payment under the Agreements in bankruptcy or insolvency proceedings of any nature; Guarantor will not claim any setoff or counterclaim against Company in respect of any liability of Guarantor to Company and Guarantor waives any benefit of any right to participate in any collateral which may be held by Participants or the System Operator or any of their affiliates. Guarantor shall have no right of subrogation or reimbursement, contribution or other rights against Company. -13- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT 7. If after receipt of any payment of, or the proceeds of any collateral for, all or any part of the obligations of Company under the Agreements, Participants or the System Operator are compelled to surrender or voluntarily surrender such payment or proceeds to any person because such payment or application of proceeds is or may be avoided, invalidated, recaptured, or set aside as a preference, fraudulent conveyance, impermissible setoff or for any other reason, whether or not such surrender is the result of (i) any judgment, decree or order of any court or administrative body having jurisdiction over Participants or the System Operator, or (ii) any settlement or compromise by Participants or the System Operator of any claim as to any of the foregoing with any person (including Company), then the obligations of Company under the Agreements, or part thereof affected, shall be reinstated and continue and this Guaranty shall be reinstated and continue in full force as to such obligations or part thereof as if such payment or proceeds had not been received, notwithstanding any previous cancellation of any instrument evidencing any such obligation or any previous instrument delivered to evidence the satisfaction thereof. The provisions of this Section shall survive the termination of this Guaranty and any satisfaction and discharge of Company by virtue of any payment, court order or any federal or state law until the full, final and irrevocable satisfaction of all of Company's obligations under the Agreements. 8. Any indebtedness of Company now or hereafter held by Guarantor (including indebtedness, if any, related to Guarantor's status as a Participant) is hereby subordinated to any indebtedness of Company to Participants and the System -14- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT Operator; and such indebtedness of Company to Guarantor shall be collected, enforced and received by Guarantor as trustee for Participants and the System Operator and be paid over to Participants or the System Operator on account of the indebtedness of Company due and owing at any time to Participants and the System Operator but without reducing or affecting in any manner the liability of Guarantor under the other provisions of this Guaranty. 9. Guarantor represents and warrants to Participants and the System Operator, as an inducement to Participants and the System Operator to make the credit advances or sales of products on open account to Company, that: a. the execution, delivery and performance by Guarantor of this Guaranty (i) are within Guarantor's powers and have been duly authorized by all necessary action; (ii) do not contravene Guarantor's charter documents or any law or any material contractual restrictions binding on or affecting Guarantor or by which Guarantor's property may be affected; and (iii) do not require any authorization or approval or other action by, or any notice to or filing with, any public authority or any other person except such as have been obtained or made; b. this Guaranty constitutes the legal, valid and binding obligation of Guarantor, enforceable in accordance with its terms, except as the enforceability thereof may be subject to or limited by bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws -15- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT relating to or affecting the rights of creditors generally and by general principles of equity; and c. there is no action, suit or proceeding affecting Guarantor pending or threatened before any court, arbitrator, or public authority that may materially adversely affect Guarantor's ability to perform its obligations under this Guaranty, except as set forth in writing to the Participants and the System Operator prior to Participants' written authorization of this Guaranty. 10. Guarantor agrees to pay on demand all reasonable attorneys' fees and all other reasonable costs and expenses which may be incurred by Participants and the System Operator in the enforcement of this Guaranty, and the obligation to pay such fees, costs and expenses shall be in addition to Guarantor's other payment obligations hereunder. No terms or provisions of this Guaranty may be changed, waived, revoked or amended without Participants' prior written consent. Should any provision of this Guaranty be determined by a court of competent jurisdiction to be unenforceable, all of the other provisions shall remain effective. This Guaranty embodies the entire agreement among the parties hereto with respect to the matters set forth herein, and supersedes all prior agreements among the parties with respect to the matters set forth herein. No course of prior dealing among the parties, no usage of trade, and no parol or extrinsic evidence of any nature shall be used to supplement, modify or vary any of the terms hereof. There are no conditions to the full effectiveness of this Guaranty. Participants and the System Operator may assign this Guaranty without in any way affecting Guarantor's -16- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT liability under it, except that Guarantor shall be provided reasonable notice of any such assignment. This Guaranty shall inure to the benefit of Participants, the System Operator and their successors and assigns. This Guaranty is in addition to the guaranties of any other guarantors and any and all other guaranties of Company's indebtedness or liabilities to Participants and the System Operator. 11. This Guaranty shall terminate on [___________], but Guarantor may terminate it earlier by providing 30 days prior written notice thereof to the Participants and System Operator. In either event, this Guaranty shall remain in effect after its termination until Company has satisfied all of its obligations under the Agreements arising prior to the date of such termination. 12. This Guaranty shall be governed by the laws of the State of Connecticut, without regard to conflicts of laws principles. Guarantor hereby irrevocably submits to the jurisdiction of any Connecticut State or United States Federal court sitting in Connecticut over any action or proceeding arising out of or relating to this Guaranty or any of the Agreements, and Guarantor hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such Connecticut State or Federal court. Guarantor irrevocably consents to the service of any and all process in any such action or proceeding by the mailing of copies of such process to Guarantor at its address set forth below its signature. Guarantor agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Guarantor further waives any objection to -17- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT venue in such State and any objection to an action or proceeding in such State on the basis of forum non conveniens. Guarantor further agrees that any action or proceeding brought against Participants or the System Operator shall be brought only in Connecticut State or United States Federal courts sitting in Connecticut. Nothing herein shall affect the right of Participants or the System Operator to bring any action or proceeding against the Guarantor or its property in the courts of any other jurisdictions. 13. GUARANTOR ACKNOWLEDGES THAT IT HAS BEEN ADVISED BY COUNSEL OF ITS CHOICE WITH RESPECT TO THIS GUARANTY AND THAT IT MAKES THE FOLLOWING WAIVERS KNOWINGLY AND VOLUNTARILY: a. GUARANTOR IRREVOCABLY WAIVES TRIAL BY JURY IN ANY COURT AND IN ANY SUIT, ACTION OR PROCEEDING OR ANY MATTER ARISING IN CONNECTION WITH OR IN ANY WAY RELATED TO THE TRANSACTIONS CONTEMPLATED BY THIS GUARANTY, THE AGREEMENTS OR ANY DOCUMENTS RELATED THERETO (INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS) AND THE ENFORCEMENT OF ANY OF PARTICIPANTS' OR THE SYSTEM OPERATOR'S RIGHTS AND REMEDIES; AND -18- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT b. GUARANTOR EXPRESSLY ACKNOWLEDGES THAT THE OBLIGATIONS GUARANTEED HEREBY ARE PART OF A COMMERCIAL TRANSACTION AS SUCH TERM IS USED AND DEFINED IN CHAPTER 903a OF THE CONNECTICUT GENERAL STATUTES AND VOLUNTARILY AND KNOWINGLY WAIVES ANY AND ALL RIGHTS WHICH ARE OR MAY BE CONFERRED UPON IT UNDER CHAPTER 903a OF SAID STATUTES (OR ANY OTHER STATUTE AFFECTING PREJUDGMENT REMEDIES) TO ANY NOTICE OR HEARING OR PRIOR COURT ORDER OR THE POSTING OF ANY BOND PRIOR TO ANY PREJUDGMENT REMEDY WHICH PARTICIPANTS MAY USE. 14. Any demand, notice, request, instruction or other communication to be given hereunder by any party to another party shall be in writing and delivered personally, by nationally recognized overnight courier, by certified mail, postage prepaid and return receipt requested, by telegram, or by telecopier, as follows: If to Guarantor, at: If to Participants or the System Operator, at: Communications given by personal delivery or mail shall be effective upon actual receipt. Communications given by telegram or telecopier shall be effective upon actual receipt during the recipient's normal business hours, or at the beginning of the next business day after receipt if not received during the recipient's normal business hours. All communications by telegram or telecopier shall be confirmed -19- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT promptly in writing by certified mail or personal delivery. Any party may change any address to which communications are to be given by giving notice as provided above of such change of address. -20- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT IN WITNESS WHEREOF, the undersigned Guarantor has executed this Guaranty as of this ____ day of [month], 200_. [GUARANTOR] By:_____________________________________ Title:__________________________________ Corporate Officer Address:________________________________ ________________________________________ ________________________________________ -21- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT ATTACHMENT M FINANCIAL ASSURANCE POLICY FOR NEPOOL NON-PARTICIPANT TRANSMISSION CUSTOMERS In accordance with Section 11 of the Restated NEPOOL Open Access Transmission Tariff (the "Tariff"), the procedures and requirements set forth in this NEPOOL Financial Assurance Policy (this "Policy") shall govern all Non-Participant(11) applicants for transmission service under the Tariff and/or the System Operator's tariff(12) ("Non-Participant Applicants") and Non-Participant Transmission Customers. This Policy shall become effective and shall supersede existing Attachment M to the Tariff in its entirety on the Policy Effective Date (as hereinafter defined). The "Policy Effective Date" shall be 10 days after the date on which the NEPOOL Participants Committee receives a notice from the System Operator stating that the System Operator is able to fully implement the provisions of this Policy. The purpose of this Policy is (i) to establish a financial assurance policy for Non-Participant Applicants and Non-Participant Transmission Customers that includes commercially reasonable credit review procedures to assess the financial ability of a Non-Participant Applicant or of a Non-Participant Transmission Customer to pay for service transactions under the Tariff and the System Operator's tariff; (ii) to set forth the requirements for alternative forms of security that will be deemed acceptable to NEPOOL and consistent with commercial practices - ------ 11 Capitalized terms used but not defined in this Policy are intended to have the meanings given to such terms in Section 1 of the Tariff. 12 For purposes of this Policy, including all attachments hereto, the "tariff" of the System Operator includes any and all tariffs of ISO New England Inc., including without limitation its Tariff for Transmission Dispatch and Power Administration Services and its Tariff for Capital Funding. -22- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT established by the Uniform Commercial Code that protect NEPOOL and the System Operator against the risk of non-payment by defaulting Non-Participant Transmission Customers; (iii) to set forth the conditions under which NEPOOL will conduct business so as to avoid the possibility of failure of payment for services rendered under the Tariff and the System Operator's tariff; and (iv) to collect amounts past due and make up shortfalls in payments and terminate service to defaulting Non-Participant Transmission Customers.(13) A Non-Participant Transmission Customer's failure to meet the requirements of this Policy may result in termination of service by NEPOOL in accordance with Section 8.4 of the Tariff. VI. FINANCIAL ASSURANCE PROVISIONS FOR NON-PARTICIPANT APPLICANTS AND NON-PARTICIPANT TRANSMISSION CUSTOMERS F. PROOF OF FINANCIAL VIABILITY. 3. PROCESS FOR INVESTIGATING CREDITWORTHINESS OF A NON-PARTICIPANT APPLICANT. Each Non-Participant Applicant must, with its application for transmission service and at its own expense, submit proof of financial viability, as described below, satisfying NEPOOL requirements to demonstrate the Non-Participant Applicant's ability to meet its obligations. Each Non-Participant Applicant must submit to the System Operator: (i) all current rating agency reports from Standard and Poors ("S&P"), Moody's, Duff & Phelps, and/or Fitch (collectively, the "Rating Agencies"); (ii) audited financial statements for at least the immediately preceding - ------ 13 The System Operator will act as NEPOOL's agent in managing and enforcing this Policy with the exception of termination of service issues, which are specifically reserved to the NEPOOL Participants and will be addressed by the NEPOOL Participants Committee. Accordingly, all financial information required pursuant to this Policy is to be provided to the System Operator, which will keep all such information confidential in accordance with the provisions of the NEPOOL Information Policy. -23- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT three (3) years, or the period of its existence, if shorter, including, but not limited to, the following information: balance sheets, income statements, statements of cash flows and notes to financial statements, annual and quarterly reports, and 10-K, 10-Q and 8-K Reports;(14) (iii) at least one bank reference and three (3) utility company credit references, or in those cases where a Non-Participant Applicant does not have three (3) utility company credit references, three (3) trade payable vendor references may be substituted; (iv) relevant information as to any known or anticipated material lawsuits, as well as any prior bankruptcy declarations by the Non-Participant Applicant, or by its predecessor(s), if any; and (v) a list of the officers and principal management of the Non-Participant Applicant. In the case of certain Non-Participant Applicants, some of the information and documentation described in the immediately preceding sentence may not be applicable or available, and alternate requirements may be specified by NEPOOL or its designee in its sole discretion. The System Operator shall prepare a report, or cause a report to be prepared, concerning the financial viability of such Non-Participant Applicant. In its review of each Non-Participant Applicant, the System Operator or its designee shall consider all of the information and documentation described in subsections (i) through (v) of the immediately preceding paragraph as well as a lien search for such Non-Participant Applicant. All costs incurred by the System Operator in its review of the financial viability of a Non-Participant Applicant shall be borne by such Non-Participant Applicant and paid prior to NEPOOL's filing of a Service Agreement for the Non-Participant Applicant. The report for each Non-Participant Applicant shall be - ------ 14 If any of the above-mentioned financial statements are available on the Internet, the Non-Participant Applicant may provide instead a letter to NEPOOL stating where such statements may be located and retrieved by NEPOOL or its designee. -24- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT completed within three (3) weeks of the System Operator's receipt of that Non-Participant Applicant's completed application and shall be provided to the Budget and Finance Subcommittee of the Participants Committee and the affected Non-Participant Applicant. 4. PROCESS FOR INVESTIGATING FINANCIAL VIABILITY OF NON-PARTICIPANT TRANSMISSION CUSTOMERS. Each Non-Participant Transmission Customer shall provide the System Operator with all current Rating Agency reports for it, if available, and a list of its officers and principal management upon the effective date of this Policy. Using this information, the System Operator shall initiate a limited investigation concerning the financial viability of all Non-Participant Transmission Customers receiving service on such date. With respect to each Non-Participant Transmission Customer, the System Operator shall investigate: (i) the background of the Non-Participant Transmission Customer's officers and principal management; and (ii) whether any judgments, fines, liens, assessments or other encumbrances have been imposed or levied on the Non-Participant Transmission Customer within 12 months prior to the date of such investigation. All costs incurred by the System Operator in its review of the financial viability of a Non-Participant Transmission Customer shall be borne by such Non-Participant Transmission Customer. The System Operator shall complete its investigation of all Non-Participant Transmission Customers and issue a report thereon to NEPOOL no later than 60 days after the effective date of this Policy. G. ONGOING FINANCIAL REVIEW. A Non-Participant Transmission Customer or Non-Participant Applicant that receives a credit rating from one or more of the Rating Agencies, or, if such Non-Participant Transmission -25- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT Customer or Non-Participant Applicant itself is not rated by one of the Rating Agencies, then a Non-Participant Transmission Customer or Non-Participant Applicant that has outstanding debt rated by one or more of the Rating Agencies, is referred to herein as a "Rated Non-Participant Transmission Customer" or a "Rated Non-Participant Applicant," as appropriate. A Non-Participant Transmission Customer or Non-Participant Applicant that is not a Rated Non-Participant Transmission Customer or a Rated Non-Participant Applicant is referred to herein as an "Unrated Non-Participant Transmission Customer" or an "Unrated Non-Participant Applicant," as appropriate. 1. RATED NON-PARTICIPANT APPLICANTS AND RATED NON-PARTICIPANT TRANSMISSION CUSTOMERS. Any Rated Non-Participant Transmission Customer or Rated Non-Participant Applicant that does not have an investment grade rating by one of the Rating Agencies (either for itself or, if it is not rated by one of the Rating Agencies, then for its outstanding debt) must provide an appropriate cash deposit, letter of credit, payment bond or guaranty as described in this Policy. For all purposes of this Policy, if ratings from two or more of the Rating Agencies are available then: (i) if there are two such ratings available, the lower rating shall govern; (ii) if there are three or more such ratings available and two of such ratings are at a comparable level and only one other such rating is lower than those two ratings, the two comparable ratings shall govern; (iii) if there are three such ratings available and none are at comparable levels, the rating that is higher than one and lower than another shall govern; and (iv) if there are four such ratings available and none are at a comparable level or two are at a comparable level and two are at a lower level (either comparable or not), then the third highest such rating shall govern. -26- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT 2. UNRATED NON-PARTICIPANT TRANSMISSION CUSTOMERS. Any Unrated Non-Participant Transmission Customer that (i) has defaulted on any of its obligations under the Tariff or the System Operator's tariff (including without limitation its obligations hereunder and under the NEPOOL Billing Policy) during the immediately preceding 12 month period; or (ii) does not have a Current Ratio (as hereinafter defined) of at least 1.0, a Debt-to-Total Capitalization Ratio (as hereinafter defined) of 0.6 or less, and an EBITDA-to-Interest Expense Ratio (as hereinafter defined) of at least 2.0 must provide an appropriate cash deposit, letter of credit, payment bond or guaranty as described in this Policy. For purposes of this Policy, "Current Ratio" on any date is all of a Non-Participant Transmission Customer's current assets divided by all of its current liabilities, in each case as shown on the most recent financial statements provided by such Non-Participant Transmission Customer to the System Operator; "Debt-to-Total Capitalization Ratio" on any date is a Non-Participant Transmission Customer's total debt (including all current borrowings) divided by its total shareholders' equity plus total debt, in each case as shown on the most recent financial statements provided by such Non-Participant Transmission Customer to the System Operator; and "EBITDA-to-Interest Expense Ratio" on any date is a Non-Participant Transmission Customer's earnings before interest, taxes, depreciation and amortization in the most recent fiscal quarter divided by that Non-Participant Transmission Customer's expense for interest in that fiscal quarter, in each case as shown on the most recent financial statements provided by such Non-Participant Transmission Customer to the System Operator. Each of the ratios described in this paragraph shall be determined in accordance with generally accepted accounting principles in the United States at the time of determination consistently applied. Achieving each of the Current Ratio, Debt-to-Total Capitalization Ratio and EBITDA-to-Interest -27- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT Expense Ratio tests described in this subsection is referred to herein as satisfying the "Credit Threshold." 3. NON-PARTICIPANT TRANSMISSION CUSTOMERS WITH AVERAGE INDIVIDUAL MONTHLY NEPOOL CHARGES OF $15,000 OR LESS. Notwithstanding any provision of this Policy to the contrary, Non-Participant Transmission Customers with average individual monthly NEPOOL Charges (as hereinafter defined) of $15,000 or less shall not be required to provide a cash deposit, letter of credit, payment bond or guaranty under this Policy. H. INFORMATION REPORTING OBLIGATIONS. In order for the System Operator to update and monitor the status of each Unrated Non-Participant Transmission Customer that satisfies the Credit Threshold, each such Unrated Non-Participant Transmission Customer shall submit to the System Operator, on a quarterly basis, within 10 days of their becoming available and within 55 days after the end of the applicable fiscal quarter of such Unrated Non-Participant Transmission Customer, its balance sheet and additional financial statements, which shall have been compiled by certified public accountants showing sufficient detail for the System Operator to calculate such Unrated Non-Participant Transmission Customer's Current Ratio, Debt-to-Total Capitalization Ratio and EBITDA-to-Interest Expense Ratio. In addition, each such Unrated Non-Participant Transmission Customer shall submit to the System Operator, annually within 10 days of their becoming available and within 100 days after the end of the fiscal year of such Unrated Non-Participant Transmission Customer, the following audited financial statements: balance sheets, income statements, -28- statements of cash flows, and notes to financial statements, as well as copies of that Non-Participant Transmission Customer's annual report.(15) Each Rated Non-Participant Transmission Customer and each Unrated Non-Participant Transmission Customer that does not satisfy the Credit Threshold must submit the annual and quarterly financial statements and SEC filings described in this subsection if and as requested by the System Operator within 10 days of such request. I. FINANCIAL ASSURANCES. All Non-Participant Applicants and Non-Participant Transmission Customers that must provide additional financial assurance pursuant to this Policy, must provide NEPOOL with financial assurance in the form and in the amount described in this Policy. A Non-Participant Transmission Customer or a Non-Participant Applicant's additional financial assurance hereunder shall be in an amount (the "Financial Assurance Requirement") at least equal to three and one-half (3.5) times the average or expected average net monthly charges of such Non-Participant Transmission Customer or Non-Participant Applicant under the Tariff and the System Operator's tariff, averaged over the most recent three-month period (collectively, such charges are referred to herein as "NEPOOL Charges").(16) The three and one-half month period is based on the time required for a Commission filing made by NEPOOL to terminate - ------ 15 Where any of the above financial information is available on the Internet, the Non-Participant Transmission Customer may instead provide the System Operator with a letter stating where such information may be located and retrieved. 16 In the case of new Non-Participant Transmission Customers, the Financial Assurance Requirement will be based on estimated monthly NEPOOL Charges, which estimate NEPOOL has the right to adjust in light of subsequent experience as to actual monthly NEPOOL Charges. -29- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT service to become effective. For example, a Rated Non-Participant Transmission Customer with $32,000 in monthly NEPOOL Charges that does not have an investment grade rating must provide NEPOOL with additional financial assurance hereunder in the amount of $112,000. Similarly, an Unrated Non-Participant Transmission Customer with $32,000 in monthly NEPOOL Charges that does not satisfy the Credit Threshold must provide NEPOOL with additional financial assurance hereunder in the amount of $112,000. VII. ACCEPTABLE FORMS OF ADDITIONAL FINANCIAL ASSURANCE E. CASH DEPOSIT. A cash deposit for the full value of the Financial Assurance Requirement, as determined by NEPOOL, provides an acceptable form of financial assurance to NEPOOL. A cash deposit greater than or equal to one month's NEPOOL Charges of a Non-Participant Transmission Customer shall also serve as that Non-Participant Transmission Customer's deposit under Sections 31.3 and 41.2 of the Tariff. If the amount of the deposit is below the required level, the Non-Participant Transmission Customer shall immediately replenish or increase the deposit to the required level; otherwise, NEPOOL may initiate proceedings to terminate service to such Non-Participant Transmission Customer in accordance with Section 8.4 of the Tariff. In the event that actual NEPOOL Charges exceed those anticipated, the anticipated charges will be increased accordingly and the Non-Participant Transmission Customer must augment its cash deposit to reach the required level. The cash deposit will be invested by the System Operator in direct obligations of the United States or its agencies and interest earned will be paid to the Non-Participant Transmission -30- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT Customer. The System Operator may sell or otherwise liquidate such investments at its discretion to meet the Non-Participant Transmission Customer's obligations to NEPOOL. F. LETTER OF CREDIT. An irrevocable standby letter of credit for the full value of the Financial Assurance Requirement, as determined by NEPOOL, provides an acceptable form of financial assurance to NEPOOL. The letter of credit shall be valued as zero dollars ($0.00) 30 days prior to the termination of such letter of credit. If the letter of credit amount is below the required level, the Non-Participant Transmission Customer shall immediately replenish or increase the letter of credit amount; otherwise, NEPOOL may initiate proceedings to terminate service to such Non-Participant Transmission Customer. If actual NEPOOL Charges exceed those anticipated, the Non-Participant Transmission Customer must obtain a substitute letter of credit in the required amount based on the actual NEPOOL Charges. The form, substance and provider of the letter of credit must all be acceptable to NEPOOL. The letter of credit should clearly state the full names of the "Issuer," "Account Party" and "Beneficiary," the dollar amount available for drawings, and should include a statement required on the drawing certificate and other terms and conditions that should apply. It should also specify that funds will be disbursed, in accordance with the instructions, within one Business Day after due presentation of the drawing certificate. The bank issuing the letter of credit must (i) have a minimum corporate debt rating of an "A-" by S&P, or "A3" by Moody's, or "A-" by Duff & Phelps, or "A-" by Fitch, or an equivalent short-term debt rating by one of -31- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT these agencies, and (ii) be organized under the laws of the United States or any state thereof or be the United States branch of a foreign bank. The System Operator will confirm no less frequently than quarterly that each bank providing a letter of credit hereunder satisfies the preceding sentence. Attachment 1 provides a generally acceptable sample "clean" letter of credit, and all letters of credit provided by Non-Participant Transmission Customers and Non-Participant Applicants shall be in this form (with only minor, non-material changes), unless a variation therefrom is approved by the Budget and Finance Subcommittee of the Participants Committee. All costs associated with obtaining financial security and meeting the provisions of this Policy are the responsibility of the Non-Participant Applicant or Non-Participant Transmission Customer. G. PAYMENT BOND. A payment bond complying with the requirements set forth herein provides an acceptable form of financial assurance to NEPOOL. The penal sum of such payment bond shall be in an amount equal to the full value of the Financial Assurance Requirement, as determined by NEPOOL. The bond shall permit suit thereunder until two (2) years after the date that all of the Non-Participant Transmission Customer's obligations to NEPOOL expire. If the amount of the penal sum of the payment bond available to NEPOOL is below the required level, the Non-Participant Transmission Customer shall immediately replenish or increase the amount of the penal sum; otherwise, NEPOOL may initiate termination proceedings. If actual NEPOOL Charges exceed those anticipated, the Non-Participant Transmission -32- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT Customer must either cause the penal sum of such payment bond to be increased accordingly or must obtain a substitute payment bond in the appropriate amount. The form, substance and provider of the payment bond must be acceptable to NEPOOL. The payment bond should clearly state the full names of the "Principal," the "Surety" and the "Obligee" (NEPOOL) and the penal sum and should include a clear statement that the surety will promptly and faithfully pay the Non-Participant Applicant's or Non-Participant Transmission Customer's obligations to NEPOOL if the Non-Participant Applicant or Non-Participant Transmission Customer fails to do so. The insurance company issuing the payment bond must be rated "A" or better by A.M. Best & Co. Attachment 2 provides an example of a generally acceptable sample payment bond. All costs associated with obtaining financial security and meeting the Policy provisions, including without limitation the cost of the premiums for such payment bond, are the responsibility of the Non-Participant Applicant or Non-Participant Transmission Customer. If, prior to the effective date of this Policy, a Non-Participant Applicant or Non-Participant Transmission Customer has obtained a performance bond and NEPOOL or the System Operator has determined that the form, substance and provider of such performance bond were acceptable at the time such performance bond was obtained, such performance bond shall be deemed to be in compliance with this Policy until such performance bond terminates or is to be renewed by its own terms; provided, however, that no performance bond that does not otherwise satisfy the terms of the Policy without giving effect to this paragraph shall be acceptable one year after the effective date of this Policy. -33- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT H. CORPORATE GUARANTY. A corporate guaranty obtained from a Non-Participant Applicant's or Non-Participant Transmission Customer's affiliated company ("Guarantor") for the full value of the Financial Assurance Requirement, as determined by NEPOOL (a "Corporate Guaranty"), may provide an acceptable form of financial assurance to NEPOOL. If a Guarantor is not itself a Participant (a "Non-Participant Guarantor"), the aggregate obligations such Guarantor may guarantee hereunder at any time shall not exceed the lesser of (i) the applicable percentage of such Guarantor's Tangible Net Worth(17) as listed in the following table, (ii) $125 million, or (iii) 20 percent (20%) of the total amount due and owing at such time to the System Operator, the Participants and the Non-Participant Transmission Customers by all Participants and Non-Participant Transmission Customers (the "Guaranty Limit"), and such Guaranty Limit shall be deemed to be the available amount of additional financial assurance under such Guarantor's Corporate Guaranty. - ------ 17 For purposes of this Policy, an entity's "Tangible Net Worth" on any date is the value, determined in accordance with generally accepted accounting principles in the United States, of all of that entity's assets less both (i) the amount at which the liabilities of the entity would be shown on a balance sheet in accordance with generally accepted accounting principles in the United States and (ii) all of that entity's intangible assets (e.g., patents, trademarks, franchises, intellectual property, goodwill and any other assets not having a physical existence), in each case as shown on the most recent financial statements provided by such entity to the System Operator. -34- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT
CREDIT RATING(18) PERCENTAGE OF TANGIBLE (COMPARABLE RATINGS TO BE USED FOR DUFF & PHELPS AND NET WORTH FOR PURPOSES FITCH) OF NON-PARTICIPANT GUARANTOR'S GUARANTY LIMIT S&P MOODY'S AAA Aaa 5.00% AA+ Aa1 5.00% AA Aa2 4.00% AA- Aa3 3.50% A+ A1 2.55% A A2 2.35% A- A3 2.10% BBB+ Baa1 1.80% BBB Baa2 1.20% BBB- Baa3 0.70% Below BBB- Below Baa3 0.00%
The System Operator shall update and monitor the Guaranty Limit for each Non-Participant Guarantor on a daily basis. In order for the System Operator to update and monitor the Guaranty Limit of each Non-Participant Guarantor, each such Non-Participant Guarantor shall submit to the System Operator, on a quarterly basis within 10 days of its becoming available and within 55 days after the end of the applicable fiscal quarter of such Non-Participant Guarantor, its balance sheet, which shall have been compiled by certified public accountants showing sufficient detail for the System Operator to calculate its Tangible Net Worth. In addition, each such Non-Participant Guarantor shall submit to the System Operator, annually - ------ 18 This is the credit rating for the Guarantor from one or more of the Rating Agencies or, if such Guarantor itself is not rated by one of the Rating Agencies, then this is the credit rating for the Non-Participant Guarantor's long-term debt from one or more of the Rating Agencies. -35- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT within 10 days of their becoming available and within 100 days after the end of the fiscal year of such Non-Participant Guarantor, the following audited financial statements: balance sheets, income statements, statements of cash flows, and notes to financial statements, as well as copies of that Non-Participant Guarantor's annual report. Each such Non-Participant Guarantor shall also provide to the System Operator, within 10 days of their filing with the SEC, a copy of each Form 10-K Report, Form 10-Q Report and Form 8-K Report for that Non-Participant Guarantor.(19) The amount guaranteed from time to time under such a Corporate Guaranty, regardless of whether such amount is past due, shall be included in the NEPOOL Charges of both such Non-Participant Transmission Customer and its affiliated Guarantor for all purposes of this Policy if a Guarantor is itself a Participant. If a Guarantor is itself a Participant, the maximum amount available under its Corporate Guaranty shall be determined in accordance with the Financial Assurance Policy for NEPOOL Members as applied to such Guarantor. The following conditions must be met for a Corporate Guaranty to be accepted as an acceptable form of Financial Assurance: 5. NEPOOL determines that each of the Non-Participant Transmission Customer and Guarantor has satisfactorily met its payment obligations in NEPOOL for at least six (6) months, which six-month period may in whole or in part pre-date the effective date of this Policy; - ------ 19 Where any of the above financial information is available on the Internet, the Non- Participant Guarantor may instead provide the System Operator with a letter stating where such information may be located and retrieved. -36- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT 6. NEPOOL determines that the financial condition of the Guarantor meets the requirements of this Policy; 7. The Corporate Guaranty shall authorize the System Operator to recover sums owed by the Non-Participant Transmission Customer obligor directly from the Guarantor; and 8. The form and substance of the Corporate Guaranty shall be otherwise acceptable to NEPOOL. Upon NEPOOL's written authorization, the Non-Participant Transmission Customer may substitute a Corporate Guaranty that is issued by the Guarantor for a cash deposit, letter of credit or payment bond when the Non-Participant Transmission Customer has satisfied each of the four (4) conditions stipulated above. The Corporate Guaranty is considered to be a lesser form of financial assurance than a cash deposit, letter of credit or payment bond, and therefore is allowed as an acceptable form of financial assurance only to those Non-Participant Transmission Customers and Guarantors that have satisfied each of the four (4) conditions stipulated above. The Corporate Guaranty should clearly state the identities of the "Guarantor," "Beneficiary" and "Obligor," and the relationship between the Guarantor and the Non-Participant Transmission Customer Obligor. The Corporate Guaranty must be duly authorized by the Guarantor, must be signed by an officer of the Guarantor, and must be furnished with either an opinion satisfactory to the System Operator of the Guarantor's counsel with respect to the enforceability of the Corporate Guaranty or accompanied by a certificate of corporate guarantee that includes a seal of the corporation with the signature of the corporate secretary. Additionally, adequate documentation regarding the signature authority of the person signing the Corporate Guaranty must be provided with the Corporate Guaranty. -37- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT A Guarantor's failure to timely disclose a Material Change (as hereinafter defined) in its financial status may result in proceedings by NEPOOL to terminate service to the Non-Participant Transmission Customer Obligor. If there is an adverse Material Change in the financial condition of the Guarantor, NEPOOL may require the Non-Participant Transmission Customer Obligor to provide another form of financial assurance, either a cash deposit, letter of credit or payment bond. Attachment 3 provides a generally acceptable sample of a Corporate Guaranty, and all Corporate Guaranties provided by Non-Participant Transmission Customers shall be in this form (with only minor, non-material changes), unless a variation therefrom is approved by the Budget and Finance Subcommittee of the Participants Committee. VIII. MISCELLANEOUS PROVISIONS H. OBLIGATION TO REPORT MATERIAL ADVERSE CHANGES. Each Non-Participant Transmission Customer and each Guarantor is responsible for informing NEPOOL in writing within 10 Business Days of any Material Change (as hereinafter defined) in its financial status. A "Material Change" in financial status includes, but is not limited to, the following: a downgrade to a below investment grade rating of senior long-term debt by a major rating agency, being placed on credit watch with negative implication by a major rating agency if senior long-term debt does not have an investment grade rating, a bankruptcy filing, insolvency, a report of a significant quarterly loss or decline of earnings, the resignation of key officer(s), or the filing of a material lawsuit that could materially adversely impact current or future financial results. A Non-Participant Transmission Customer's or Guarantor's failure to -38- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT timely disclose a Material Change in its financial status may result in termination of service proceedings by NEPOOL in accordance with Section 8.4 of the Tariff. If there is a Material Change in the financial condition of the Non-Participant Transmission Customer or the Non-Participant Transmission Customer's Guarantor, NEPOOL may require the Non-Participant Transmission Customer to provide one of the forms of financial assurance described in this Policy. If the Non-Participant Transmission Customer fails to do so, NEPOOL may initiate proceedings to terminate service in accordance with Section 8.4 of the Tariff. I. WEEKLY PAYMENTS. A Non-Participant Transmission Customer that does not satisfy the rating requirement or, if such Non-Participant Transmission Customer is an Unrated Non-Participant Transmission Customer, the Credit Threshold may request that, in lieu of providing one of the additional financial assurances set forth above, a weekly billing schedule be implemented for it. NEPOOL may, in its discretion, agree to such a request; provided, however, that any weekly billing arrangement will terminate no more than six (6) months after the date on which such arrangement begins unless the Non-Participant Transmission Customer requests an extension of such arrangement and demonstrates to NEPOOL's satisfaction in its sole discretion that the termination of such arrangement and compliance with the other provisions of this Policy (including providing another form of financial assurance, if required) will impose a substantial hardship on the Non-Participant Transmission Customer. Such demonstration of a substantial hardship shall be made every six (6) months after the initial demonstration, and a Non-Participant Transmission Customer's weekly billing arrangement will be terminated if it fails to -39- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT demonstrate to NEPOOL's satisfaction in its sole discretion at any such six (6) month interval that compliance with the other provisions of this Policy will impose a substantial hardship on it. If NEPOOL agrees to implement a weekly billing schedule for a Non-Participant Transmission Customer, the Non-Participant Transmission Customer shall be billed weekly in arrears on an estimated basis for all amounts owed to NEPOOL and the System Operator for the week, with an adjustment for each month as part of the regular NEPOOL monthly billing to reflect any under or over collection for the month. The Non-Participant Transmission Customer shall be obligated to pay each such weekly bill within five (5) Business Days after it is received. The Non-Participant Transmission Customer shall pay with respect to each weekly bill an administrative fee, determined by the System Operator, to reimburse the System Operator for the costs it incurs as a result of that Non-Participant Transmission Customer's weekly billing arrangement. If a weekly billing schedule is implemented for a Non-Participant Transmission Customer in lieu of requiring the Non-Participant Transmission Customer to provide an additional financial assurance hereunder, the Non-Participant Transmission Customer may be required to provide an additional financial assurance in the form and in the amount required hereunder at any time if the Non-Participant Transmission Customer fails to pay when due any weekly bill or, in its sole discretion, NEPOOL may initiate proceedings to terminate service in accordance with Section 8.4 of the Tariff. In addition, upon the termination of a Non-Participant Transmission Customer's weekly billing arrangement, the Non-Participant Transmission Customer shall either satisfy the applicable rating requirements set forth herein, satisfy the Credit Threshold (if such Non-Participant Transmission Customer is an Unrated Non-Participant -40- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT Transmission Customer), or provide one of the other forms of financial assurance set forth herein. J. USE OF TRANSACTION SETOFFS. Under certain conditions, NEPOOL or the System Operator may be involved in other transactions with a Non-Participant Transmission Customer in which NEPOOL is the buyer. In this event, the amount of the cash deposit, letter of credit, payment bond or Corporate Guaranty required for financial assurance for the contemplated transactions will be reduced ("setoff") by an amount equal to NEPOOL's or the System Operator's unpaid balance or expected billing under the other transactions. The terms and the amount of the setoff must be approved by the System Operator. The System Operator is responsible for monitoring the status of the setoff and ensuring that an adequate financial assurance balance is maintained at all times until the transaction is settled. K. NON-PAYMENT OF AMOUNTS DUE. If a Non-Participant Transmission Customer does not pay amounts billed when due and as a result a letter of credit or cash deposit is drawn down or a payment bond or Corporate Guaranty is paid on, then the Non-Participant Transmission Customer must immediately replenish the letter of credit or cash deposit or cause the payment bond or Corporate Guaranty to be restored, in each case to the required amount. If a Non-Participant Transmission Customer fails to do so, NEPOOL may initiate proceedings to terminate service to the Non-Participant Transmission Customer in accordance with Section 8.4 of the Tariff. In order to encourage prompt payment of NEPOOL Charges by Non-Participant Transmission Customers, the Non- -41- ATTACHMENT 1 TO THE EIGHTY-FIRST AGREEMENT Participant Transmission Customer shall pay interest on any unpaid amount as provided in Section 8.3 of the Tariff. L. ENFORCEMENT OF PAYMENT OBLIGATIONS AGAINST DEFAULTING NON-PARTICIPANT TRANSMISSION CUSTOMERS. Each Participant that shares in any shortfall in payments under the New England Power Pool Billing Policy shall have an independent right to seek and obtain payment and recovery of the amount of its share of such shortfall (the "Allocated Assessment") from the defaulting Non-Participant Transmission Customer. Any Participant that recovers any portion of its Allocated Assessment from a defaulting Non-Participant Transmission Customer shall promptly so notify the System Operator, and the Participant's Allocated Assessment shall be reduced by the amount of such recovery. In addition to any amounts in default, the defaulting Non-Participant Transmission Customer shall be liable to NEPOOL and each Participant for all reasonable costs incurred in enforcing the defaulting Non-Participant Transmission Customer's obligations. -42- ATTACHMENT 1 SAMPLE LETTER OF CREDIT [DATE PROVIDED] IRREVOCABLE STANDBY LETTER OF CREDIT NO. [EXPIRATION DATE] AT OUR COUNTERS WE DO HEREBY ISSUE AN IRREVOCABLE NON-TRANSFERABLE STANDBY LETTER OF CREDIT BY ORDER OF AND FOR THE ACCOUNT OF ON BEHALF OF [NON-PARTICIPANT TRANSMISSION CUSTOMER] ("ACCOUNT PARTY") IN FAVOR OF THE PARTICIPANTS IN THE NEW ENGLAND POWER POOL ("NEPOOL") IN AN AMOUNT NOT EXCEEDING US$ ______.00 (UNITED STATES DOLLARS ____________ AND 00/100) AGAINST PRESENTATION TO US OF A DRAWING CERTIFICATE SIGNED BY A PURPORTED OFFICER OR AUTHORIZED AGENT OF NEPOOL AND DATED THE DATE OF PRESENTATION CONTAINING THE FOLLOWING STATEMENT: "THE UNDERSIGNED HEREBY CERTIFIES TO [BANK] ("BANK"), WITH REFERENCE TO IRREVOCABLE NON-TRANSFERABLE STANDBY LETTER OF CREDIT NO. ISSUED BY [BANK] IN FAVOR OF THE PARTICIPANTS IN THE NEW ENGLAND POWER POOL ("NEPOOL"), THAT [NON-PARTICIPANT TRANSMISSION CUSTOMER] HAS FAILED TO PAY AMOUNTS DUE UNDER THE RESTATED NEPOOL OPEN ACCESS TRANSMISSION TARIFF OR THE ISO NEW ENGLAND INC. TARIFF FOR TRANSMISSION DISPATCH AND POWER ADMINISTRATION SERVICES, AND THUS NEPOOL IS DRAWING UPON THE LETTER OF CREDIT IN AN AMOUNT EQUAL TO $_______________." IF PRESENTATION OF ANY DRAWING CERTIFICATE IS MADE ON A BUSINESS DAY AND SUCH PRESENTATION IS MADE AT OUR COUNTERS ON OR BEFORE 10:00 A.M. _________TIME, WE SHALL SATISFY SUCH DRAWING REQUEST ON THE SAME BUSINESS DAY. IF THE DRAWING CERTIFICATE IS RECEIVED AT OUR COUNTERS AFTER 10:00 A.M. ___________ TIME, WE WILL SATISFY SUCH DRAWING REQUEST ON THE NEXT BUSINESS DAY, FOR THE PURPOSES OF THIS SECTION, A BUSINESS DAY MEANS A DAY, OTHER THAN A SATURDAY OR SUNDAY, ON WHICH COMMERCIAL BANKS ARE NOT AUTHORIZED OR REQUIRED TO BE CLOSED IN NEW YORK, NEW YORK. DISBURSEMENTS SHALL BE IN ACCORDANCE WITH THE INSTRUCTIONS OF NEPOOL. THE FOLLOWING TERMS AND CONDITIONS APPLY: THIS LETTER OF CREDIT SHALL EXPIRE AT THE CLOSE OF BUSINESS [DATE]. THE AMOUNT WHICH MAY BE DRAWN BY YOU UNDER THIS LETTER OF CREDIT SHALL BE AUTOMATICALLY REDUCED BY THE AMOUNT OF ANY UNREIMBURSED DRAWINGS HEREUNDER AT OUR COUNTERS. ANY NUMBER OF PARTIAL DRAWINGS ARE PERMITTED FROM TIME TO TIME HEREUNDER. -44- ALL COMMISSIONS AND CHARGES WILL BE BORNE BY THE ACCOUNT PARTY. THIS LETTER OF CREDIT IS NOT TRANSFERABLE OR ASSIGNABLE. THIS LETTER OF CREDIT DOES NOT INCORPORATE AND SHALL NOT BE DEEMED MODIFIED, AMENDED OR AMPLIFIED BY REFERENCE TO ANY DOCUMENT, INSTRUMENT OR AGREEMENT (A) THAT IS REFERRED TO HEREIN (EXCEPT FOR THE UCP, AS DEFINED BELOW) OR (B) IN WHICH THIS LETTER OF CREDIT IS REFERRED TO OR TO WHICH THIS LETTER OF CREDIT RELATES. THIS LETTER OF CREDIT SHALL BE GOVERNED BY THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS, 1993 REVISION, INTERNATIONAL CHAMBER OF COMMERCE PUBLICATION NO.500 (THE "UCP"), EXCEPT TO THE EXTENT THAT TERMS HEREOF ARE INCONSISTENT WITH THE PROVISIONS OF THE UCP, INCLUDING BUT NOT LIMITED TO ARTICLES 13(b) AND 17 OF THE UCP, IN WHICH CASE THE TERMS OF THE LETTER OF CREDIT SHALL GOVERN. THIS LETTER OF CREDIT MAY NOT BE AMENDED, CHANGED OR MODIFIED WITHOUT THE EXPRESS WRITTEN CONSENT OF NEPOOL AND US. WE HEREBY ENGAGE WITH YOU THAT DOCUMENTS DRAWN UNDER AND IN COMPLIANCE WITH THE TERMS OF THIS LETTER OF CREDIT SHALL BE DULY HONORED UPON PRESENTATION AS SPECIFIED. -45- PRESENTATION OF ANY DRAWING CERTIFICATE UNDER THIS STANDBY LETTER OF CREDIT MAY BE SENT TO US BY COURIER, CERTIFIED MAIL, REGISTERED MAIL, TELEGRAM, TELEX TO THE ADDRESS SET FORTH BELOW, OR SUCH OTHER ADDRESS AS MAY HEREAFTER BE FURNISHED BY US. OTHER NOTICES CONCERNING THIS STANDBY LETTER OF CREDIT MAY BE SENT BY FACSIMILE OR SIMILAR COMMUNICATIONS FACILITY TO THE RESPECTIVE ADDRESSES SET FORTH BELOW. ALL SUCH NOTICES AND COMMUNICATIONS SHALL BE EFFECTIVE WHEN ACTUALLY RECEIVED BY THE INTENDED RECIPIENT PARTY. IF TO THE BENEFICIARY OF THIS LETTER OF CREDIT: IF TO THE ACCOUNT PARTY: IF TO US: - ------------------------------------- ------------------------------------- [signature] [signature] -46- ATTACHMENT 2 SAMPLE PAYMENT BOND [INSURANCE COMPANY] Bond No. KNOW ALL MEN BY THESE PRESENTS, That the undersigned [Non-Participant Transmission Customer], of [Non-Participant Transmission Customer's address] hereinafter referred to as the Principal, and [insurance company], a corporation organized and existing under the laws of the State of [insurance company's state of incorporation], as Surety, are held and firmly bound unto the Participants in the New England Power Pool as obligees, hereinafter referred to collectively as the Obligee, in the sum of __________________, lawful money of the United States of America for the payment of which sum, well and truly to be made, we bind ourselves, our executors, administrators, successors, and assigns, jointly and severally, firmly by these presents. WHEREAS, the Principal has entered into agreements for the purchase and sale of electric services and the payment of amounts owed to ISO New England Inc. under the Restated NEPOOL Open Access Transmission Tariff and ISO New England Inc.'s Tariff for Transmission Dispatch and Power Administration Services, each as amended from time to time (collectively referred to as the "Agreements"), and in strict accordance with their respective terms. NOW, THEREFORE, the condition of this obligation is such, that if the Principal shall promptly and faithfully make the payments required by, and comply with terms of, the -47- Agreements which have been or may hereafter be in force and shall save and keep harmless the Obligee from all loss or damage which it may sustain or for which it may become liable on account of the issuance of said Agreements to the Principal, then this obligation shall be void; otherwise, it shall remain in full force and effect. Upon notice from ISO New England Inc. of nonpayment by the Principal, Surety shall immediately pay to ISO New England Inc., as agent for the Obligee, the amounts owed by the Principal under the Agreements. Surety shall also be responsible for all reasonable fees and costs, including but not limited to reasonable attorneys' fees, incurred by ISO New England Inc. or Obligee to enforce this instrument and collect any amounts owed to Obligee hereunder. The Surety hereby waives notice of any alteration or extension of time made by the Obligee. This instrument shall be a continuing, absolute, unconditional and irrevocable obligation of Surety. Any suit on this bond must be instituted before the expiration of two (2) years from the date on which the Principal's obligations under the Agreements expire. This instrument shall be effective upon execution and shall continue in effect until terminated by the Obligee or Surety upon thirty (30) days prior written notice to the non-terminating party. SIGNED, SEALED AND DATED this day of , 20__. -48- [Non-Participant Transmission Customer] Principal [Seal] By:___________________________________ [Insurance Company] Surety [Seal] By:___________________________________ -49- ATTACHMENT 3 CORPORATE GUARANTY For and in consideration of the credit advance or sale of products on open account by the New England Power Pool Participants from time to time ("Participants") to [Non-Participant Transmission Customer] ("Company"), the undersigned guarantor ("Guarantor"), the [parent/subsidiary/affiliate] of Company, hereby unconditionally and irrevocably guarantees the prompt and complete payment of all amounts that Company now or hereafter owes to Participants and ISO New England, Inc. (the "System Operator") under the Restated NEPOOL Open Access Transmission Tariff and the System Operator's tariffs that are in effect from time to time (collectively referred to as the "Agreements"), in strict accordance with their respective terms. 1. If Company does not perform its obligations in strict accordance with the Agreements, Guarantor shall immediately pay all amounts now or hereafter owed (including, without limitation, all principal, interest, and fees) by Company under the Agreements. This Guaranty may be satisfied by Guarantor paying Company's obligations or by Guarantor causing Company's obligations to be paid; provided, however, that Guarantor shall at all times remain fully responsible and liable for its obligations hereunder notwithstanding any such payment (or failure thereof) by any third party. Participants will undertake commercially reasonable efforts to notify Guarantor of a failure by Company to make a payment under the Agreements; provided, however, that failure by Participants to so notify Guarantor shall not defeat, limit or otherwise affect the rights and obligations of Participants, Company or Guarantor. Subject to the terms and conditions set forth -50- herein, Guarantor's obligations hereunder shall not exceed the complete payment of all amounts that Company now or hereafter owes to Participants and the System Operator under the Agreements in strict accordance with their respective terms. [Notwithstanding anything to the contrary in this Guaranty, the aggregate liability of Guarantor hereunder shall not exceed U.S. $________.] 2. This Guaranty is an absolute, unconditional and continuing guaranty of the full and punctual payment by Company of each of its obligations under the Agreements, and not of collectibility only, and is in no way conditioned upon any requirement that Participants or the System Operator first attempt to collect payment from Company or any other guarantor or surety or resort to any security or other means of obtaining payment of all or any part of Company's obligations or upon any other contingency. This is a continuing guaranty and, subject to the terms and conditions hereof, shall be binding upon Guarantor until the full, final and irrevocable payment of all of Company's obligations under the Agreements, regardless of (i) how long after the date hereof any part of the obligations under the Agreements is incurred by Company and (ii) the amount of the obligations under the Agreements at any time outstanding. This Guaranty may be enforced by Participants or the System Operator from time to time and as often as occasion for such enforcement may arise. 3. The obligations hereunder are independent of the obligations of Company, and a separate action or actions may be brought and prosecuted against Guarantor whether action is brought against Company or whether Company be joined in any such action or actions. Guarantor's liability under this Guaranty is not -51- conditioned or contingent upon genuineness, validity, regularity or enforceability of the Agreements. 4. Guarantor authorizes Participants and the System Operator, without notice or demand and without affecting its liability hereunder, from time to time to (a) renew, extend, or otherwise change the terms of the Agreements or any part thereof; (b) take and hold security for the payment of the Agreements, and exchange, enforce, waive and release any such security; and (c) apply such security and direct the order or manner of sale thereof as Participants and the System Operator in their sole discretion may determine. The obligations and liabilities of Guarantor hereunder shall be absolute and unconditional, shall not be subject to any counterclaim, setoff, deduction or defense based upon any claim Guarantor may have against Company, any other guarantor, or any other person or entity, and shall remain in full force and effect until all of the obligations hereunder have been fully satisfied, without regard to, or release or discharge by, any event, circumstance or condition (whether or not Guarantor shall have knowledge or notice thereof) which but for the provisions of this Section might constitute a legal or equitable defense or discharge of a guarantor or surety or which might in any way limit recourse against Guarantor, including without limitation: (a) any amendment or modification of, or supplement to, the terms of the Agreements; (b) any waiver, consent or indulgence by Participants or the System Operator, or any exercise or non-exercise by Participants or the System Operator of any right, power or remedy, under or in respect of this Guaranty or the Agreements (whether or not Guarantor or Company has or have notice or -52- knowledge of any such action or inaction); (c) the invalidity or unenforceability, in whole or in part, of the Agreements, or the termination (except pursuant to its terms or by written agreement between Participants and Company), cancellation or frustration of any thereof, or any limitation or cessation of Company's liability under any thereof (other than any limitation or cessation expressly provided for therein), including without limitation any invalidity, unenforceability or impaired liability resulting from Company's lack of capacity, power and/or authority to enter into the Agreements and/or to incur any or all of the obligations thereunder, or from the execution and delivery of any Agreement by any person acting for Company without or in excess of authority (except to the extent the same would limit or cease Company's liability under the Agreements); (d) any actual, purported or attempted sale, assignment or other transfer by Participants or the System Operator of any Agreement or of any of its rights, interests or obligations thereunder; (e) the taking or holding by Participants or the System Operator of a security interest, lien or other encumbrance in or on any property as security for any or all of the obligations of Company under the Agreements or any exchange, release, non-perfection, loss or alteration of, or any other dealing with, any such security; (f) the addition of any party as a guarantor or surety of all or any part of the obligations of Company under the Agreements; (g) any merger, amalgamation or consolidation of Company into or with any other entity, or any sale, lease, transfer or other disposition of any or all of Company's assets or any sale, transfer or other disposition of any or all of the shares of capital stock or other securities of Company to any other person or entity; (h) any change in the financial -53- condition of Company or (as applicable) of any subsidiary, affiliate, partner or controlling shareholder thereof, or Company's entry into an assignment for the benefit of creditors, an arrangement or any other agreement or procedure for the restructuring of its liabilities, or Company's insolvency, bankruptcy, reorganization, dissolution, liquidation or any similar action by or occurrence with respect to Company. 5. Guarantor unconditionally waives, to the fullest extent permitted by law: (a) notice of any of the matters referred to in Section 4 hereof; (b) any right to the enforcement, assertion or exercise by Participants or the System Operator of any of their rights, powers or remedies under, against or with respect to (i) any of the Agreements, (ii) any other guarantor or surety, or (iii) any security for all or any part of the obligations of Company under the Agreements or obligations of Guarantor hereunder; (c) any requirement of diligence and any defense based on a claim of laches; (d) all defenses which may now or hereafter exist by virtue of any statute of limitations, or of any stay, valuation, exemption, moratorium or similar law, except the sole defense of full and indefeasible payment; (e) any requirement that Guarantor be joined as a party in any action or proceeding against Company to enforce any of the provisions of the Agreements; (f) any requirement that Participants or the System Operator mitigate or attempt to mitigate damages resulting from a default by Guarantor hereunder or from a default by Company under any of the Agreements; (g) acceptance of this Guaranty by Participants and the System Operator; and (h) all presentments, protests, notices of dishonor, demands for payment and any and all other demands upon and notices to -54- Company, and any and all other formalities of any kind, the omission of or delay in performance of which might but for the provisions of this section constitute legal or equitable grounds for relieving or discharging Guarantor in whole or in part from its irrevocable, absolute and continuing obligations hereunder, it being the intention of Guarantor that its obligations hereunder shall not be discharged except by payment and then only to the extent thereof. 6. Guarantor waives any right to require Participants or the System Operator to (a) proceed against Company; (b) proceed against or exhaust any security held from Company; or (c) pursue any other remedy in Participants' or the System Operator's power whatsoever. So long as any obligations remain outstanding under this Guaranty, Guarantor shall not exercise any rights against Company arising as a result of payment by Guarantor hereunder, by way of subrogation or otherwise, and will not prove any claim in competition with Participants or the System Operator or their affiliates in respect of any payment under the Agreements in bankruptcy or insolvency proceedings of any nature; Guarantor will not claim any setoff or counterclaim against Company in respect of any liability of Guarantor to Company and Guarantor waives any benefit of any right to participate in any collateral which may be held by Participants or the System Operator or any of their affiliates. Guarantor shall have no right of subrogation or reimbursement, contribution or other rights against Company. 7. If after receipt of any payment of, or the proceeds of any collateral for, all or any part of the obligations of Company under the Agreements, Participants or the System Operator are compelled to surrender or voluntarily surrender such -55- payment or proceeds to any person because such payment or application of proceeds is or may be avoided, invalidated, recaptured, or set aside as a preference, fraudulent conveyance, impermissible setoff or for any other reason, whether or not such surrender is the result of (i) any judgment, decree or order of any court or administrative body having jurisdiction over Participants or the System Operator, or (ii) any settlement or compromise by Participants or the System Operator of any claim as to any of the foregoing with any person (including Company), then the obligations of Company under the Agreements, or part thereof affected, shall be reinstated and continue and this Guaranty shall be reinstated and continue in full force as to such obligations or part thereof as if such payment or proceeds had not been received, notwithstanding any previous cancellation of any instrument evidencing any such obligation or any previous instrument delivered to evidence the satisfaction thereof. The provisions of this Section shall survive the termination of this Guaranty and any satisfaction and discharge of Company by virtue of any payment, court order or any federal or state law until the full, final and irrevocable satisfaction of all of Company's obligations under the Agreements. 8. Any indebtedness of Company now or hereafter held by Guarantor (including indebtedness, if any, related to Guarantor's status as a Participant) is hereby subordinated to any indebtedness of Company to Participants and the System Operator; and such indebtedness of Company to Guarantor shall be collected, enforced and received by Guarantor as trustee for Participants and the System Operator and be paid over to Participants or the System Operator on account of -56- the indebtedness of Company due and owing at any time to Participants and the System Operator but without reducing or affecting in any manner the liability of Guarantor under the other provisions of this Guaranty. 9. Guarantor represents and warrants to Participants and the System Operator, as an inducement to Participants and the System Operator to make the credit advances or sales of products on open account to Company, that: a. the execution, delivery and performance by Guarantor of this Guaranty (i) are within Guarantor's powers and have been duly authorized by all necessary action; (ii) do not contravene Guarantor's charter documents or any law or any material contractual restrictions binding on or affecting Guarantor or by which Guarantor's property may be affected; and (iii) do not require any authorization or approval or other action by, or any notice to or filing with, any public authority or any other person except such as have been obtained or made; b. this Guaranty constitutes the legal, valid and binding obligation of Guarantor, enforceable in accordance with its terms, except as the enforceability thereof may be subject to or limited by bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws relating to or affecting the rights of creditors generally and by general principles of equity; and c. there is no action, suit or proceeding affecting Guarantor pending or threatened before any court, arbitrator, or public authority that may materially adversely affect Guarantor's ability to perform its obligations -57- under this Guaranty, except as set forth in writing to the Participants and the System Operator prior to Participants' written authorization of this Guaranty. 10. Guarantor agrees to pay on demand all reasonable attorneys' fees and all other reasonable costs and expenses which may be incurred by Participants and the System Operator in the enforcement of this Guaranty, and the obligation to pay such fees, costs and expenses shall be in addition to Guarantor's other payment obligations hereunder. No terms or provisions of this Guaranty may be changed, waived, revoked or amended without Participants' prior written consent. Should any provision of this Guaranty be determined by a court of competent jurisdiction to be unenforceable, all of the other provisions shall remain effective. This Guaranty embodies the entire agreement among the parties hereto with respect to the matters set forth herein, and supersedes all prior agreements among the parties with respect to the matters set forth herein. No course of prior dealing among the parties, no usage of trade, and no parol or extrinsic evidence of any nature shall be used to supplement, modify or vary any of the terms hereof. There are no conditions to the full effectiveness of this Guaranty. Participants and the System Operator may assign this Guaranty without in any way affecting Guarantor's liability under it, except that Guarantor shall be provided reasonable notice of any such assignment. This Guaranty shall inure to the benefit of Participants, the System Operator and their successors and assigns. This Guaranty is in addition to the guaranties of any other guarantors and any and all other guaranties of Company's indebtedness or liabilities to Participants and the System Operator. -58- 11. This Guaranty shall terminate on [___________], but Guarantor may terminate it earlier by providing 30 days prior written notice thereof to the Participants and System Operator. In either event, this Guaranty shall remain in effect after its termination until Company has satisfied all of its obligations under the Agreements arising prior to the date of such termination. 12. This Guaranty shall be governed by the laws of the State of Connecticut, without regard to conflicts of laws principles. Guarantor hereby irrevocably submits to the jurisdiction of any Connecticut State or United States Federal court sitting in Connecticut over any action or proceeding arising out of or relating to this Guaranty or any of the Agreements, and Guarantor hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such Connecticut State or Federal court. Guarantor irrevocably consents to the service of any and all process in any such action or proceeding by the mailing of copies of such process to Guarantor at its address set forth below its signature. Guarantor agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Guarantor further waives any objection to venue in such State and any objection to an action or proceeding in such State on the basis of forum non conveniens. Guarantor further agrees that any action or proceeding brought against Participants or the System Operator shall be brought only in Connecticut State or United States Federal courts sitting in Connecticut. Nothing herein shall affect the right of Participants or the System Operator to -59- bring any action or proceeding against the Guarantor or its property in the courts of any other jurisdictions. 13. GUARANTOR ACKNOWLEDGES THAT IT HAS BEEN ADVISED BY COUNSEL OF ITS CHOICE WITH RESPECT TO THIS GUARANTY AND THAT IT MAKES THE FOLLOWING WAIVERS KNOWINGLY AND VOLUNTARILY: a. GUARANTOR IRREVOCABLY WAIVES TRIAL BY JURY IN ANY COURT AND IN ANY SUIT, ACTION OR PROCEEDING OR ANY MATTER ARISING IN CONNECTION WITH OR IN ANY WAY RELATED TO THE TRANSACTIONS CONTEMPLATED BY THIS GUARANTY, THE AGREEMENTS OR ANY DOCUMENTS RELATED THERETO (INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS) AND THE ENFORCEMENT OF ANY OF PARTICIPANTS' OR THE SYSTEM OPERATOR'S RIGHTS AND REMEDIES; AND b. GUARANTOR EXPRESSLY ACKNOWLEDGES THAT THE OBLIGATIONS GUARANTEED HEREBY ARE PART OF A COMMERCIAL TRANSACTION AS SUCH TERM IS USED AND DEFINED IN CHAPTER 903a OF THE CONNECTICUT GENERAL STATUTES AND VOLUNTARILY AND KNOWINGLY WAIVES ANY AND ALL RIGHTS WHICH ARE OR MAY BE CONFERRED UPON IT UNDER CHAPTER 903a OF SAID STATUTES (OR ANY -60- OTHER STATUTE AFFECTING PREJUDGMENT REMEDIES) TO ANY NOTICE OR HEARING OR PRIOR COURT ORDER OR THE POSTING OF ANY BOND PRIOR TO ANY PREJUDGMENT REMEDY WHICH PARTICIPANTS MAY USE. 14. Any demand, notice, request, instruction or other communication to be given hereunder by any party to another party shall be in writing and delivered personally, by nationally recognized overnight courier, by certified mail, postage prepaid and return receipt requested, by telegram, or by telecopier, as follows: If to Guarantor, at: If to Participants or the System Operator, at: Communications given by personal delivery or mail shall be effective upon actual receipt. Communications given by telegram or telecopier shall be effective upon actual receipt during the recipient's normal business hours, or at the beginning of the next business day after receipt if not received during the recipient's normal business hours. All communications by telegram or telecopier shall be confirmed promptly in writing by certified mail or personal delivery. Any party may change any address to which communications are to be given by giving notice as provided above of such change of address. IN WITNESS WHEREOF, the undersigned Guarantor has executed this Guaranty as of this day of [month], 200_. -61- [GUARANTOR] By:_____________________________________ Title:__________________________________ Corporate Officer Address:________________________________ ________________________________________ ________________________________________ -62- EX-10.35.4 21 y58564p.txt Exhibit 10.35.4 AMENDMENT NO. 4 TO SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN FOR OFFICERS OF NORTHEAST UTILITIES SYSTEM COMPANIES The Supplemental Executive Retirement Plan for Officers of Northeast Utilities System Companies, as amended, is further amended, effective February 25, 2002, as follows: A. Section 15.1 of the Plan is amended to read in its entirety as follows: Amendment or Termination. The Board or the Committee may amend or discontinue the Plan at any time; provided, however, that no amendment or discontinuation shall diminish the Employer's obligation to provide any benefits accrued to the date of such amendment or discontinuation. For purposes of the foregoing, "benefits accrued" shall mean the value of a Participant's benefit under the Plan, as of the date of amendment or discontinuation of the Plan, (i) with respect to the Make-Whole Benefit, based upon the Participant's Compensation, Final Average Compensation, Credited Service and Retirement Plan benefit as of such date, and (ii) with respect to the Target Benefit, based upon the Participant's Final Average Compensation, Credited Service, Retirement Plan benefit and Make-Whole Benefit as of such date. A Participant with an accrued but unvested benefit under the Plan as of the date of amendment or discontinuation of the Plan shall become vested with respect to such benefit upon such Participant's satisfaction of the requirements of Article IV or V, as the case may be. Page 1 EX-10.35.5 22 y58564q.txt Exhibit 10.35.5 AMENDMENT NO. 5 TO SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN FOR OFFICERS OF NORTHEAST UTILITIES SYSTEM COMPANIES The Supplemental Executive Retirement Plan for Officers of Northeast Utilities System Companies, as amended, is further amended, effective November 1, 2001, as follows: A. Article I is amended to read in its entirety as follows: The purpose of this Supplemental Executive Retirement Plan for Officers of Northeast Utilities System Companies (the "Plan") is to provide certain executives with (i) the benefits that would have been provided to them under the Northeast Utilities Service Company Retirement Plan (the "Retirement Plan") if compensation and benefits were not subject to the limitations imposed by Sections 401(a)(17)and 415 of the Code and if certain awards to Participants under the Northeast Utilities' executive incentive plans (including the Northeast Utilities Executive Incentive Compensation Program (the "EICP"), and the Northeast Utilities Executive Incentive Plan (the "EIP Incentive Plan"), and the Northeast Utilities Incentive Plan (the "IP") and other similar plans which may be adopted from time to time, each an "Incentive Plan" and in the aggregate, "Incentive Plans") were included in the benefit calculations under the Retirement Plan, and (ii) a supplemental retirement benefit in addition to the retirement benefit provided under the Retirement Plan and the benefits described in clause (i) above. The Plan is not intended to meet the qualification requirements of Section 401 of the Code. B. The definition of "Committee" is amended to read in its entirety as follows: "Committee" shall mean the Compensation Committee that has been established by the Board, or any subsequent committee of the Board that has primary responsibility for compensation policies. In the absence of such a committee, "Committee" shall mean the Board or any committee of the Board designated by the Board to perform the functions of the Committee under the Plan. C. The definition of Compensation is amended to read in its entirety as follows: "Compensation" shall have the same meaning as provided in the Retirement Plan, but shall also include amounts disregarded pursuant to Section 401(a)(17) of the Code, amounts (included in Compensation as earned) receipt of which is deferred by a Participant pursuant to a plan or agreement which is not qualified under the Code, and, for any period in question, awards under the EICP and the Incentive Plans to Page 1 the extent made with respect to performance during such period, each such award to be allocated on a pro rata basis to each of the calendar months in the period to which it relates. Effective November 1, 2001, Long-Term Incentive Compensation Awards made under Incentive Plans after November 1, 2001 shall not be included in Compensation for purposes of this Plan, except that each individual who was a Participant prior to November 1, 2001 shall have credited to his or her Compensation in February each year while a Participant, in the same manner as such amount was credited in 2001, the "target" value of the stock option grants made to such Participant in February, 2001. For purposes of computing the value of a Participant's awards under the EICP and the Incentive Plans, awards made in common shares of Northeast Utilities shall be valued by multiplying the per share New York Stock Exchange closing price on the date the award is approved by the Board by the number of shares awarded to such Participant. Notwithstanding the foregoing, if a Participant may become entitled to receive an award or awards under the EICP or the Incentive Plans, and if the amount of such award(s), if any, will be determined after the date on which the Participant's Credited Service ends, then a provisional calculation of the Participant's Compensation during the period to which such award(s) relates (hereinafter the "Provisional Calculation") shall be made on or before the date the Participant's Credited Service ends, and benefits payable to the Participant under this Plan shall be based upon the Participant's Compensation as determined under the Provisional Calculation until such calculation is replaced as hereinafter provided. A Participant's Compensation shall be determined under the Provisional Calculation by including the entire target amount of any award to the Participant under the EICP and the Incentive Plans as Compensation in the manner described in the first two sentences of this definition in the calendar month in which such award is paid to the Participant. The Provisional Calculation shall be replaced by a permanent calculation of Compensation (hereinafter the "Permanent Calculation") at the earliest possible date at which the amount of all awards that the Participant may become entitled to receive under the EICP and the Incentive Plans has been determined, and as of such date the Participant's benefit under this Plan shall be recalculated and thereafter paid based upon the Participant's Compensation as determined under the Permanent Calculation. The Permanent Calculation of a Participant's Compensation shall be determined by including as Compensation the amount of awards, if any, to the Participant under the EICP and the Incentive Plans that are determined after the date on which the Participant's Credited Service ends in the manner described in the first two sentences of this definition. If the amount of the Participant's benefit under this Plan as determined under the Permanent Calculation is greater than the amount of such benefit as determined under the Provisional Calculation, then the Employer shall make a lump sum payment to the Participant within 30 days following the date on which the Permanent Calculation is determined equal to the difference between (i) the sum of the benefit payment(s) that would have been made to the Participant hereunder from the date such payment(s) commenced until the date on which the Permanent Calculation was determined if such benefit(s) had been calculated based on the Participant's Compensation as determined under the Permanent Calculation, and (ii) the actual benefit payment(s) made to the Participant hereunder for such period. If the amount of the Page 2 Participant's benefit under this Plan as determined under the Permanent Calculation is less than the amount of such benefit as determined under the Provisional Calculation, then each of the Participant's benefit payments after the date on which the Permanent Calculation is determined shall be reduced by the amount that each benefit payment determined under the Provisional Calculation exceeded the benefit payment that would have been made under the Permanent Calculation until such time as the total amount of said reductions equals the difference between (i) the actual benefit payment(s) made to the Participant hereunder from the date such payment(s) commenced until the date on which the Permanent Calculation was determined, and (ii) the sum of such benefit payment(s) that the Participant would have received hereunder for such period if such benefit had been calculated based on the Participant's Compensation as determined under the Permanent Calculation. D. New definitions are added to Article II to read as follows: "Incentive Plan" or "Incentive Plans" shall have the meaning given such terms in Article I. "Long Term Incentive Compensation Awards" shall mean those awards under Incentive Plans which are intended to reward performance over a performance period of more than one year, including (a) performance units, restricted stock and similar awards, whether in cash or shares, which by their terms do not vest within a year from the grant date and (b) stock options and stock appreciation rights. Annual bonus amounts payable in forms other than cash shall not be considered Long Term Incentive Compensation Awards for purposes of this Plan. Page 3 EX-10.45 23 y58564r.txt Exhibit 10.45 March 16, 1998 Mr. Gary D. Simon 615 Georgetown Place Davis, California 95616 Dear Gary, We are delighted that you are interested in taking on the Senior Vice President - - Strategy and Development role here at Northeast Utilities. Let me take this opportunity to formally describe our proposed offer to you, as revised pursuant to our earlier conversation today. TITLE - Senior Vice President - Strategy and Development (reporting to John Forsgren) BASE SALARY - $225,000 SHORT-TERM INCENTIVE This is an annual incentive plan whose current target payout is 35 percent of your base salary and whose current maximum payout is 70 percent of your salary. Payouts under the short-term incentive plan are made in cash and are expected to be made during the first quarter of the year following the performance year. The short-term incentive plan is heavily influenced by the performance of the company against EPS goals. For 1998, the Company will guarantee you a payout under the short-term plan of $75,000. LONG-TERM INCENTIVE This is a stock-based plan whose current target grant level is 40 percent of base salary. The 1998 plan works by making annual grants of non-qualified stock options and restricted stock in a ratio of four stock options to each share of restricted stock. The options and restricted stock vest one-third per year, commencing on the date of grant. You would be Page 1 eligible to begin participating in this plan in 1999, and grants are anticipated to be made in January of that year. SIGNING BONUS/INITIAL OPTION AWARD In addition to the above compensation, you will be paid a cash signing bonus of $25,000 within 30 days after you join the company. Also, as a senior executive at NU, we would like to see you have a substantial equity position in the company. Therefore, we will award you non-qualified stock options to purchase 75,000 shares of common stock of NU, for a term expiring 10 years after your hire date, at a purchase price equivalent to the closing price of NU shares on the date you are hired. Your right to exercise these options will vest in increments equal to 37,500 shares on the second anniversary of your hire date, 18,750 shares on the third anniversary of your hire date, and 18,750 on the fourth anniversary of your hire date. This option grant is subject to the approval of the Compensation Committee of the NU Board of Trustees, which approval will be requested at its next regularly scheduled meeting to be held on April 14. The terms of the option grant to you, to the extent not inconsistent with the above provisions will be subject to the terms of the stock option plan being submitted to the company's shareholders for approval in May, 1998. RELOCATION You will be provided with our executive relocation package as necessary, along with up to 90 days of temporary accommodations expense coverage and reimbursement for six round-trip coach air fares between Hartford, Connecticut and Davis, California during the next year. To the extent that our relocation policy does not cover your reasonable relocation expenses, we will discuss and consider further reimbursement. OTHER In addition to the above, we offer a full range of employee benefits (vacation, holidays, medical and dental benefits, disability coverage, life insurance, etc.) You will be entitled to four weeks vacation per year, commencing in 1998. All of our employment offers are subject to background checks and proof of U.S. citizenship, and you must take a pre-placement medical examination before you begin work. We also require all executives to sign non-compete and confidentiality agreements (copy attached), and we provide change of control protection as well (copy also attached). Gary, I'm sure that this brief letter may not answer all of your questions. You should feel free to call Peter Kindler, John Forsgren or me to discuss any aspect of this offer. If this offer is acceptable, please so indicate by signing and returning a copy of the letter to me. Page 2 Sincerely, /s/ Cheryl W. Grise /s/ Gary D. Simon Gary D. Simon Date CWG:dsf Enclosures Page 3 EX-10.46.1 24 y58564s.txt Exhibit 10.46.1 Amendment No. 1 to Northeast Utilities Deferred Compensation Plan for Trustees The Northeast Utilities Deferred Compensation Plan for Trustees (the "Plan") is hereby amended, pursuant to Section 8 thereof, by adding a new Section 10 to read as follows: 10. Upon the request of a Trustee in order to meet legal or regulatory requirements applicable to such Trustee, NU and the Trustee may agree to value the Trustee's Deferred Stock Compensation Account, including all deposits and accretions thereto, for some period of time utilizing an investment benchmark other than NU common shares, and to pay such Account, including accretions, in cash at the time or times of distribution in accordance with the Trustee's original deferral election, so long as such agreement does not have the effect of accelerating payment of such account. Said agreement shall be in writing and be maintained with the records of the Company relating to the Trustee's compensation. EX-10.55 25 y58564t.txt EXHIBIT 10.55 TRANSITION PROPERTY PURCHASE AND SALE AGREEMENT between CL&P FUNDING LLC Note Issuer and THE CONNECTICUT LIGHT AND POWER COMPANY Seller Dated as of March 30, 2001 This TRANSITION PROPERTY PURCHASE and SALE AGREEMENT, dated as of March 30, 2001, is between CL and P Funding LLC, a Delaware limited liability company (the "Note Issuer"), and The Connecticut Light and Power Company, a Connecticut corporation (together with its successors in interest to the extent permitted hereunder, the "Seller"). RECITALS WHEREAS, the Note Issuer desires to purchase the Transition Property (as defined herein) created pursuant to the Statute and the Financing Order (each as defined herein); and WHEREAS, the Seller is willing to sell the Transition Property to the Note Issuer. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: Article 1 DEFINITIONS Section 1.01. Definitions. Whenever used in this Agreement, the following words and phrases shall have the following meanings: "Administration Agreement" means the Administration Agreement dated as of March 30, 2001 between The Connecticut Light and Power Company, as Administrator, and the Note Issuer, as amended and supplemented from time to time. "Agreement" means this Transition Property Purchase and Sale Agreement, as amended and supplemented from time to time. "Authorized Officer" means an officer of the Seller listed on the list of Authorized Officers delivered by the Seller to the Note Trustee and the Certificate Trustee on the date of issuance of the Certificates (as such list may be modified or supplemented by the Seller from time to time). "Back-Up Security Interest" has the meaning specified in Section 2.01. "Basic Documents" means, collectively, this Agreement, the Note Indenture, the Declaration of Trust, the Certificate Indenture, the Servicing Agreement, the Administration Agreement, the Note Purchase Agreement, the Underwriting Agreement, the Fee and Indemnity Agreement, the Inter-Creditor Agreement and the Swap Agreement. "Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions or trust companies in New York, New York, Hartford, Connecticut or Wilmington, Delaware are authorized or obligated by law, regulation or executive order to remain closed. "Certificate Indenture" means the Certificate Indenture dated as of March 30, 2001, between the Certificate Issuer and the Certificate Trustee, as amended and supplemented from time to time. "Certificate Trustee" means the Person acting as trustee under the Certificate Indenture. "Certificateholders" has the meaning specified in Section 1.01(a) of the Certificate Indenture. "Certificates" means the Connecticut RRB Special Purpose Trust CL and P- 1 Rate Reduction Certificates issued under the Certificate Indenture. "Class A-4 Swap Agreement" has the meaning specified in Section 1.01 of the Certificate Indenture. "Class A-4 Swap Counterparty" has the meaning specified in Section 1.01 of the Certificate Indenture. "Closing Date" means March 30, 2001. "Collection Account" has the meaning specified in Section 8.02(a) of the Note Indenture. "Corporate Trust Office" has the meaning specified in Section 1.01(a) of the Note Indenture. "CTA" means the "competitive transition assessment" as defined in the Statute. "Date of Breach" means, with respect to the repurchase obligation specified in Section 5.01(b), the date of a breach of a representation or warranty that triggers such repurchase obligation. "Declaration of Trust" means the Declaration of Trust dated as of March 23, 2001, among the Finance Authority and the Delaware Trustee, as amended and supplemented from time to time. "Delaware Trustee" means the Person acting as trustee under the Declaration of Trust. "DPUC" means the Connecticut Department of Public Utility Control and any successor thereto. "DPUC Regulations" has the meaning specified in Section 1.01 of the Servicing Agreement. "Fee and Indemnity Agreement" means the Fee and Indemnity Agreement dated as of March 30, 2001 among the Note Issuer, the Delaware Trustee, the Certificate Trustee, the Trust and the Finance Authority, as amended and supplemented from time to time. "Finance Authority" means, the State of Connecticut, acting through the office of the State Treasurer. "Financing Order" means the order of the DPUC, issued on November 8, 2000 and supplemented on December 12, 2000 and March 12, 2001 in DPUC-00- 05-01. "Fitch" means Fitch, Inc. or its successor. "Indemnified Person" has the meaning specified in Section 5.01(c), Section 5.01(d), Section 5.01(e) or in Section 5.01(h), for the purposes set forth therein. "Inter-Creditor Agreement" means the Inter-Creditor Agreement dated as of March 30, 2001 among Citicorp North America, Inc., Citibank, N.A., the Seller, the Note Trustee, the Note Issuer and CL and P Receivables Corporation, as amended, supplemented or modified from time to time. "Issuance Advice Letter" means the initial Issuance Advice Letter, dated March 28, 2001, filed with the DPUC by the Seller pursuant to the Financing Order. "Lien" means a security interest, lien, charge, pledge or encumbrance of any kind. "Losses" has the meaning specified in Section 5.01(e). "Moody's" means Moody's Investors Service, Inc. or its successor. "Note Indenture" means the Note Indenture dated as of March 30, 2001, between the Note Issuer and the Note Trustee, as amended and supplemented from time to time. "Note Issuer" has the meaning set forth in the preamble of this Agreement. "Note Purchase Agreement" means the Note Purchase Agreement dated as of March 30, 2001 between the Note Issuer and the Trust, as amended and supplemented from time to time. "Note Register" has the meaning specified in Section 2.05 of the Note Indenture. "Note Trustee" means the Person acting as trustee under the Note Indenture. "Noteholder" or "Holder" means the Person in whose name a Note is registered on the Note Register. "Notes" means the CL and P Funding LLC Notes issued under the Note Indenture. "Officer's Certificate" means a certificate signed by the chairman of the board, the chief executive officer, the president, the vice chairman of the board, any vice president, the treasurer, any assistant treasurer, the secretary, any assistant secretary, the controller or the finance manager of the Seller. "Operating Expense" has the meaning specified in Section 1.01(a) of the Note Indenture. "Opinion of Counsel" means one or more written opinions of counsel who may be an employee of or counsel to the party providing such opinion of counsel, which counsel shall be reasonably acceptable to the party receiving such opinion of counsel. "Outstanding Amount" has the meaning specified in Section 1.01(a) of the Note Indenture. "Overcollateralization Subaccount" has the meaning specified in Section 8.02(a) of the Note Indenture. "Person" means any individual, corporation, limited liability company, estate, partnership, joint venture, association, joint stock company, trust (including any beneficiary thereof), unincorporated organization or government or any agency or political subdivision thereof. "Rating Agencies" means, collectively, S and P, Moody's and Fitch. "Repurchase Date" means the date that is five Business Days after the date that is (i) if the terms of Section 5.01(b)(i)(A) and Section 5.01(b)(i)(B)(2) are applicable, two Business Days after the Date of Breach if the Seller fails to make the deposit required by Section 5.01(b)(i)(B)(2) or 90 days after the Date of Breach if the Seller makes the deposit required by Section 5.01(b)(i)(B)(2); (ii) if the terms of Section 5.01(b)(ii) are applicable, 90 days after the Date of Breach; and (iii) if the terms of Section 5.01(b)(i)(A) and Section 5.01(b)(i)(B)(1) are applicable, 90 days after the Date of Breach. "Repurchase Price" has the meaning specified in Section 5.01(b)(i). "Required Overcollateralization Level" has the meaning specified in Section 1.01(a) of the Note Indenture. "RRB Charge" means the portion (which may become all) of the Seller's CTA designated pursuant to the Financing Order as the RRB Charge, as the same may be adjusted from time to time as provided in the Financing Order, and may in the future include a pro rata component of any exit fee collected pursuant to Section 16-245w of the Connecticut General Statutes. "RRB Charge Collections" has the meaning specified in Section 1.01 of the Servicing Agreement. "Seller" has the meaning set forth in the preamble of this Agreement. "Servicer Default" means an event specified in Section 7.01 of the Servicing Agreement. "Servicing Agreement" means the Transition Property Servicing Agreement dated as of March 30, 2001 between The Connecticut Light and Power Company, as Servicer, and the Note Issuer, as amended and supplemented from time to time. "S and P" means Standard and Poor's Ratings Services, a division of The McGraw Hill Companies, Inc. or its successor. "State Treasurer" means the Treasurer of the State of Connecticut. "Statute" means Connecticut General Statutes 16-245e through and including 16-245k. "Swap Agreement" means any interest rate swap agreement entered into by the Certificate Issuer with respect to any class of Certificates, including, without limitation, the ISDA Master Agreement and the related Schedule and Confirmation between the Certificate Issuer and a swap counterparty, as same may be amended or supplemented from time to time. "Swap Counterparty" has the meaning specified in Section 1.01 of the Certificate Indenture. "Transition Property" means the transition property that exists under Order 6 of Exhibit C to the Financing Order, including, without limitation, and as provided therein, the RRB Charge included in special contract customer rates. "Trust" or "Certificate Issuer" means Connecticut RRB Special Purpose Trust CL and P-1, a Delaware business trust. "Underwriting Agreement" means the Underwriting Agreement dated as of March 27, 2001 among The Connecticut Light and Power Company, the Note Issuer and the underwriters named therein. Section 1.02. Other Definitional Provisions. (a) All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (b) The words "hereof," "herein," "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement; Section, Schedule and Exhibit references contained in this Agreement are references to Sections, Schedules and Exhibits in or to this Agreement unless otherwise specified; and the term "including" shall mean "including without limitation". (c) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms. Article 2 CONVEYANCE OF TRANSITION PROPERTY Section 2.01. Conveyance of Transition Property. In consideration of the Note Issuer's delivery to or upon the order of the Seller of 1,431,369,048.94 dollars net of underwriting discounts and commissions, original issue discount, if any, and other fees and expenses, the Seller does hereby irrevocably sell, transfer, assign, set over and otherwise convey to the Note Issuer, WITHOUT RECOURSE OR WARRANTY, except as specifically set forth herein, all right, title and interest of the Seller in and to the Transition Property (such sale, transfer, assignment, setting over and conveyance of the Transition Property includes, to the fullest extent permitted by the Statute, the assignment of all revenues, collections, claims, payments, money or proceeds of or arising from the RRB Charge pursuant to the Financing Order) and copies of all books and records related thereto. Such sale, transfer, assignment, setting over and conveyance is hereby expressly stated to be a sale and , pursuant to Section 16-245k(h) of the Statute, shall be treated as an absolute transfer of all of the Seller's right, title and interest in (as in a true sale), and not as a pledge or other financing of, the Transition Property. If such sale, transfer, assignment, setting over and conveyance is held by any court of competent jurisdiction not to be a true sale as provided in Section 16- 245k(h) of the Statute, then such sale, transfer, assignment, setting over and conveyance shall be treated as the creation of a security interest in the Transition Property and , without prejudice to its position that it has absolutely transferred all of its rights in the Transition Property (including, to the fullest extent permitted by the Statute, the assignment of all revenues, collections, claims, payments, money or proceeds of or arising from the RRB Charge pursuant to the Financing Order) to the Note Issuer, the Seller hereby grants a security interest in the Transition Property to the Note Issuer (the "Back-Up Security Interest"). Such sale, transfer, assignment, setting over and conveyance of the Transition Property includes the right to use the Seller's computer software system to access and create copies of all books and records related to the Transition Property. Article 3 REPRESENTATIONS and WARRANTIES OF SELLER Subject to Section 3.09 hereof, the Seller makes the following representations and warranties, as of the Closing Date, on which the Note Issuer has relied in acquiring the Transition Property. Section 3.01. Organization and Good Standing. The Seller is duly organized and validly existing as a corporation in good standing under the laws of the State of Connecticut, with the requisite corporate power and authority to own its properties as such properties are currently owned and to conduct its business as such business is now conducted by it, and has the requisite corporate power and authority to own the Transition Property. Section 3.02. Due Qualification. The Seller is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of property or the conduct of its business shall require such qualifications, licenses or approvals (except where the failure to so qualify or obtain such licenses and approvals would not be reasonably likely to have a material adverse effect on the Seller's business, operations, assets, revenues or properties). Section 3.03. Power and Authority. The Seller has the requisite corporate power and authority to execute and deliver this Agreement and to carry out its terms; and the execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action on the part of the Seller. Section 3.04. Binding Obligation. This Agreement constitutes a legal, valid and binding obligation of the Seller enforceable against it in accordance with its terms, subject to applicable insolvency, reorganization, moratorium, fraudulent transfer and other laws relating to or affecting creditors' or secured parties' rights generally from time to time in effect and to general principles of equity (including concepts of materiality, reasonableness, good faith and fair dealing), regardless of whether considered in a proceeding in equity or at law. Section 3.05. No Violation. The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof do not: (i) conflict with or result in any breach of any of the terms and provisions of, nor constitute (with or without notice or lapse of time) a default under, the articles of organization or by-laws of the Seller, or any material indenture, agreement or other instrument to which the Seller is a party or by which it is bound; (ii) result in the creation or imposition of any Lien upon any of the Seller's properties pursuant to the terms of any such indenture, agreement or other instrument (other than any Lien that may be granted under the Basic Documents or any Lien created pursuant to Section 245k(g) of the Statute); or (iii) violate any existing law or any existing order, rule or regulation applicable to the Seller of any court or of any federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Seller or its properties. Section 3.06. No Proceedings. There are no proceedings pending and , to the Seller's knowledge, there are no proceedings threatened and , to the Seller's knowledge, there are no investigations pending or threatened, before any court, federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Seller or its properties involving or relating to the Seller or the Note Issuer or, to the Seller's knowledge, any other Person: (i) asserting the invalidity of this Agreement, any of the other Basic Documents, the Notes, the Certificates, the Statute or the Financing Order, (ii) seeking to prevent the issuance of the Notes or the Certificates or the consummation of any of the transactions contemplated by this Agreement or any of the other Basic Documents, (iii) seeking any determination or ruling that might materially and adversely affect the performance by the Seller of its obligations under, or the validity or enforceability of, this Agreement, any of the other Basic Documents, the Notes or the Certificates or (iv) seeking to adversely affect the federal or state income tax classification of the Notes or the Certificates as debt. Section 3.07. Approvals. No approval, authorization, consent, order or other action of, or filing with, any court, federal or state regulatory body, administrative agency or other governmental instrumentality is required in connection with the execution and delivery by the Seller of this Agreement, the performance by the Seller of the transactions contemplated hereby or the fulfillment by the Seller of the terms hereof, except those that have been obtained or made and those that the Seller, in its capacity as Servicer under the Servicing Agreement, is required to make in the future pursuant to the Servicing Agreement and post closing filings required in connection therewith. Section 3.08. The Transition Property. (a) Title. It is the intention of the parties hereto that the transfer and assignment herein contemplated constitute a sale of the Transition Property from the Seller to the Note Issuer and that no interest in, or title to, the Transition Property shall be part of the Seller's estate in the event of the filing of a bankruptcy petition by or against the Seller under any bankruptcy law. No portion of the Transition Property has been sold, transferred, assigned or pledged by the Seller to any Person other than the Note Issuer. On the Closing Date, immediately upon the sale hereunder, the Seller has transferred, sold and conveyed the Transition Property to the Note Issuer, free and clear of all Liens, except for any Lien created pursuant to Section 16-245k(g) of the Statute and any Lien that may be granted under the Basic Documents, and pursuant to Section 16-245k(h) of the Statute such transfer shall be treated as an absolute transfer of all of the Seller's right, title and interest (as in a true sale), and not as a pledge or other financing of, the Transition Property. (b) Transfer Filings. On the Closing Date, immediately upon the sale hereunder, the Transition Property has been validly transferred and sold to the Note Issuer, the Note Issuer shall own all such Transition Property free and clear of all Liens (including the Lien of the Seller's first mortgage indenture but excluding any Lien created pursuant to Section 16-245k(g) of the Statute and any Lien that may be granted under the Basic Documents) and all filings to be made by the Seller (including filings with the DPUC under the Statute) necessary in any jurisdiction to give the Note Issuer an ownership interest (subject to any Lien created pursuant to Section 16- 245k(g) of the Statute and any Lien that may be granted under the Basic Documents) in the Transition Property have been made. No further action is required to maintain such ownership interest (subject to any Lien created pursuant to Section 16-245k(g) of the Statute and any Lien that may be granted under the Basic Documents). Filings have also been made to the extent required by Connecticut General Statutes Section 42a-9-204, 42a-9-205, 42a-9-401, 42a-9-402 and 42a-9-403 to perfect the Back-Up Security Interest granted by the Seller to the Note Issuer (subject to any Lien created pursuant to Section 16-245k(g) of the Statute and any Lien that may be granted under the Basic Documents). (c) Financing Order and Issuance Advice Letter; Other Approvals. On the Closing Date, under the laws of the State of Connecticut and the United States in effect on the Closing Date, (i) the Financing Order pursuant to which the Transition Property has been created is in full force and effect; (ii) the Certificateholders are entitled to the protections of the Statute and , accordingly, the Financing Order is not revocable by the DPUC; (iii) the State of Connecticut may neither limit nor alter the CTA, the Transition Property, or the Financing Order and all rights thereunder until the Certificates, together with interest thereon, are fully met and discharged, absent a demonstration that an impairment is narrowly-tailored and is necessary to advance an important public interest, such as responding to a "great public calamity;" provided that the State of Connecticut is not precluded from such limitation or alteration if and when adequate provision shall be made by law for the protection of the owners of the Transition Property and Certificateholders; (iv) except for periodic adjustments to the RRB Charge required under the Statute, the DPUC shall not have authority either by rescinding, altering, or amending the Financing Order or otherwise, to revalue or revise for ratemaking purposes the stranded costs, or the costs of providing, recovering, financing, or refinancing the stranded costs, determine that the CTA is unjust or unreasonable, or in any way reduce or impair the value of Transition Property either directly or indirectly by taking the CTA into account when setting other rates for the Seller; nor shall the amount of revenues arising with respect thereto be subject to reduction, impairment, postponement, or termination; (v) the process by which the Financing Order was adopted and approved, and the Financing Order and Issuance Advice Letter themselves, comply with all applicable laws, rules and regulations; (vi) the Issuance Advice Letter has been filed in accordance with the Financing Order; (vii) no other approval, authorization, consent, order or other action of, or filing with, any court, Federal or state regulatory body, administrative agency or other governmental instrumentality is required in connection with the creation or sale of the Transition Property, except those that have been obtained or made and post closing filings required in connection therewith and those that the Seller, in its capacity as Servicer under the Servicing Agreement, is required to make in the future pursuant to the Servicing Agreement; (vii) under the Statute, the limit contained in Section 16-244c(a)(2) of the Connecticut General Statutes on standard offer service rates may be exceeded if necessary to establish, fix or revise the CTA (including the RRB Charge) at a level sufficient to pay principal of and interest on the Certificates and related expenses, to pay stranded costs that are not recovered through the issuance of rate reduction bonds, and to pay capital costs specified in the Statute; and (viii) the State of Connecticut, in the exercise of its executive or legislative powers, may not repeal or amend the Statute or the Financing Order, or take any action in contravention of the pledge by the State of Connecticut in Section 16-245j(b) of the Statute without paying just compensation to the Certificateholders, as determined by a court of competent jurisdiction, if this action would constitute a permanent appropriation of a substantial property interest of Certificateholders in the Transition Property and deprive the Certificateholders of their reasonable expectations arising from their investments in the Certificates. (d) Assumptions. On the Closing Date, based upon the information available to the Seller on the Closing Date, the assumptions used in calculating the initial RRB Charge are reasonable and are made in good faith. Notwithstanding the foregoing, the Seller makes no representation or warranty that the assumptions used in calculating such RRB Charge will in fact be realized. (e) Creation of Transition Property. Upon the effectiveness of the Financing Order and the Issuance Advice Letter: (i) all of the Transition Property constitutes an existing property right; (ii) the Transition Property includes the right, title and interest in and to all revenues, collections, claims, payments, money, or proceeds of or arising from the RRB Charge (including, without limitation, the RRB Charge included in special contract customer rates), as adjusted from time to time pursuant to the Financing Order, and all rights to obtain adjustments to the RRB Charge pursuant to the Financing Order; and (iii) the owner of the Transition Property is legally entitled to collect payments in respect of the RRB Charge in the aggregate sufficient to pay the interest on and principal of the Notes, to pay the fees and expenses of servicing the Notes and the Certificates, to replenish the Capital Subaccount to the Required Capital Level and to fund the Overcollateralization Subaccount to the Required Overcollateralization Level until the Notes and the Certificates are paid in full. Notwithstanding the foregoing, the Seller makes no representation or warranty that any amounts actually collected in respect of the RRB Charge will in fact be sufficient to meet payment obligations with respect to the Notes and the Certificates. (f) Prospectus. As of the date hereof, the information describing the Seller in "The Seller and Servicer" section of the prospectus dated March 27, 2001 offering the Notes and the Certificates is correct in all material respects. Section 3.09. Limitations on Representations and Warranties. Notwithstanding any other provisions of this Agreement, the Seller will not be in breach of any representation or warranty as a result of a change in law by means of a legislative enactment or constitutional amendment or (if such means become available in the future) referendum or initiative petition. Notwithstanding anything to the contrary in this Agreement, the Seller makes no representation or warranty that any amounts actually collected in respect of the RRB Charge will in fact be sufficient to meet payment obligations with respect to the Notes and the Certificates or that the assumptions used in calculating the RRB Charge will in fact be realized nor shall the Seller be obligated to reduce, or accept a reduction of, any rates or charges to which it would otherwise be entitled in respect of services rendered or to be rendered to customers in order to permit the payment of the RRB Charge. Article 4 COVENANTS OF THE SELLER Section 4.01. Corporate Existence. So long as any of the Notes are outstanding, the Seller (a) will keep in full force and effect its existence, rights and franchises as a corporation under the laws of the jurisdiction of its organization and (b) will obtain and preserve its qualification to do business, in each case to the extent that in each such jurisdiction such existence or qualification is or shall be necessary to protect the validity and enforceability of this Agreement, the other Basic Documents to which the Seller is a party and each other instrument or agreement necessary or appropriate to the proper administration of this Agreement and the transactions contemplated hereby. Section 4.02. No Liens. Except for the conveyances hereunder or any Lien under Section 16-245k(g) of the Statute or for the benefit of the Note Issuer, the Seller will not sell, pledge, assign or transfer, or grant, create, or incur any Lien on, any of the Transition Property, or any interest therein, and the Seller shall defend the right, title and interest of the Note Issuer and the Note Trustee in, to and under the Transition Property against all claims of third parties claiming through or under the Seller. The Connecticut Light and Power Company, in its capacity as Seller, will not at any time assert any Lien against, or with respect to, any of the Transition Property. Section 4.03. Delivery of Collections. If the Seller receives any payments in respect of the RRB Charge or the proceeds thereof when it is not acting as the Servicer, the Seller agrees to pay to the Servicer all payments received by it in respect thereof as soon as practicable after receipt thereof by it. Section 4.04. Notice of Liens. The Seller shall notify the Note Issuer and the Note Trustee promptly after becoming aware of any Lien on any of the Transition Property, other than the conveyances hereunder, any Lien under the Basic Documents or any Lien under Section 16-245k(g) of the Statute or for the benefit of the Note Issuer. Section 4.05. Compliance with Law. The Seller hereby agrees to comply with its organizational and governing documents and all laws, treaties, rules, regulations and determinations of any governmental instrumentality applicable to it, except to the extent that failure to so comply would not adversely affect the Note Issuer's or the Note Trustee's interests in the Transition Property or under any of the other Basic Documents to which the Seller is party or the Seller's performance of its obligations hereunder or under any of the other Basic Documents to which it is party. Section 4.06. Covenants Related to Notes and Transition Property. (a) So long as any of the Notes are outstanding, the Seller shall treat the Notes as debt of the Note Issuer and not of the Seller, except for financial accounting or tax reporting purposes. (b) So long as any of the Notes are outstanding, the Seller shall indicate in its financial statements that it is not the owner of the Transition Property and that the assets of the Note Issuer are not available to pay creditors of the Seller or any of its Affiliates (other than the Note Issuer). (c) So long as any of the Notes are outstanding, the Seller shall disclose the effects of all transactions between the Seller and the Note Issuer in accordance with generally accepted accounting principles. (d) So long as any of the Notes or Certificates are outstanding, the Seller shall not own or purchase any Notes or Certificates. (e) The Seller agrees that, upon the sale by the Seller of the Transition Property to the Note Issuer pursuant to this Agreement, (i) to the fullest extent permitted by law, including the Statute and applicable DPUC Regulations, the Note Issuer shall have all of the rights originally held by the Seller with respect to the Transition Property, including the right (subject to the terms of the Servicing Agreement) to exercise any and all rights and remedies to collect any amounts payable by any customer or third party supplier in respect of the Transition Property, notwithstanding any objection or direction to the contrary by the Seller and (ii) any payment by any customer or third party supplier to the Note Issuer shall discharge such customer's or third party supplier's obligations in respect of the Transition Property to the extent of such payment, notwithstanding any objection or direction to the contrary by the Seller. (f) So long as any of the Notes are outstanding, (i) (A) the Seller shall affirmatively certify and confirm that it has sold the Transition Property to the Note Issuer (other than for financial accounting or tax reporting purposes), and (B) the Seller shall not make any statement or reference in respect of the Transition Property that is inconsistent with the ownership thereof by the Note Issuer (other than for financial accounting or tax reporting purposes), and (ii) the Seller shall not take any action in respect of the Transition Property except solely in its capacity as the Servicer thereof pursuant to the Servicing Agreement or as otherwise contemplated by the Basic Documents. Section 4.07. Protection of Title. The Seller shall execute and file such filings, including filings with the DPUC pursuant to the Statute and Uniform Commercial Code continuation statements, and cause to be executed and filed such filings, all in such manner and in such places as may be required by law fully to preserve, maintain and protect the ownership interest of the Note Issuer in the Transition Property, including all filings required under the Statute relating to the transfer of the ownership interest in the Transition Property by the Seller to the Note Issuer and the continued perfection of such ownership interest. The Seller shall deliver (or cause to be delivered) to the Note Issuer file-stamped copies of, or filing receipts for, any document filed as provided above, as soon as available following such filing. The Seller shall institute any action or proceeding necessary to compel performance by the DPUC or the State of Connecticut of any of their obligations or duties under the Statute or the Financing Order, and the Seller agrees to take such legal or administrative actions, including defending against or instituting and pursuing legal actions and appearing or testifying at hearings or similar proceedings, as may be reasonably necessary (i) to protect the Note Issuer, the Noteholders, the Certificateholders, the Note Trustee, the Delaware Trustee, the Certificate Trustee, the Certificate Issuer, the State of Connecticut, the Finance Authority, the State Treasurer, agencies of the State of Connecticut and any of their respective affiliates, officials, officers, directors, employees, consultants, counsel and agents from claims, state actions or other actions or proceedings of third parties which, if successfully pursued, would result in a breach of any representation set forth in Article III or (ii) to block or overturn any attempts to cause a repeal of, modification of or supplement to the Statute, the Financing Order, any Advice Letter or the rights of Noteholders by legislative enactment or constitutional amendment that would be adverse to the Note Issuer, the Note Trustee or the Noteholders. If the Servicer performs its obligations under Section 5.02(d) of the Servicing Agreement in all respects, such performance shall be deemed to constitute performance of the Seller's obligations pursuant to the immediately preceding sentence. In such event, the Seller agrees to assist the Servicer as reasonably necessary to perform its obligations under Section 5.02(d) of the Servicing Agreement in all respects. The costs of any such actions or proceedings shall be payable from RRB Charge Collections as an Operating Expense in accordance with the priorities set forth in Section 8.02(d) of the Note Indenture. The Seller's obligations pursuant to this Section 4.07 shall survive and continue notwithstanding the fact that the payment of Operating Expenses pursuant to Section 8.02(d) of the Note Indenture may be delayed (it being understood that the Seller may be required to advance its own funds to satisfy its obligations hereunder). Section 4.08. Nonpetition Covenants. Notwithstanding any prior termination of this Agreement or the Note Indenture, but subject to the DPUC's right to order the sequestration and payment of revenues arising with respect to the Transition Property notwithstanding any bankruptcy, reorganization or other insolvency proceedings with respect to the Seller pursuant to Section 16-245k(e) or Section 16-245k(g) of the Statute, the Seller shall not, prior to the date which is one year and one day after the termination of the Note Indenture, petition or otherwise invoke or cause the Note Issuer to invoke the process of any court or government authority for the purpose of commencing or sustaining a case against the Note Issuer under any Federal or state bankruptcy, insolvency or similar law, appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Note Issuer or any substantial part of the property of the Note Issuer, or ordering the winding up or liquidation of the affairs of the Note Issuer. Section 4.09. Taxes. So long as any of the Notes are outstanding, the Seller shall, and shall cause each of its subsidiaries to, pay all material taxes, assessments and governmental charges imposed upon it or any of its properties or assets or with respect to any of its franchises, business, income or property before any penalty accrues thereon if the failure to pay any such taxes, assessments and governmental charges would, after any applicable grace periods, notices or other similar requirements, result in a lien on the Transition Property; provided that no such tax need be paid if the Seller or one of its subsidiaries is contesting the same in good faith by appropriate proceedings promptly instituted and diligently conducted and if the Seller or such subsidiary has established appropriate reserves as shall be required in conformity with generally accepted accounting principles. Section 4.10. Additional Sales of Transition Property. So long as any of the Notes are outstanding, the Seller shall not sell any transition property (as defined in the Statute) to secure another issuance of rate reduction bonds (as defined in the Statute) if it would cause the then existing ratings on any class of Certificates from the Rating Agencies to be withdrawn or downgraded. Section 4.11. Issuance Advice Letter. The Seller hereby agrees not to withdraw the filing of the Issuance Advice Letter with the DPUC. Section 4.12. Maintenance of Working Papers. So long as any of the Notes are outstanding, the Seller shall keep and maintain any and all working papers, reports and other documents used by the firm of Independent certified public accountants in the preparation of its letter letters delivered on the Issuance Date to the Note Issuer and the Note Trustee pursuant to Section 2.10(g) of the Note Indenture and Section 6(k) of the Underwriting Agreement. Article 5 THE SELLER Section 5.01. Liability of Seller; Indemnities. (a) The Seller shall be liable in accordance herewith only to the extent of the obligations specifically undertaken by the Seller under this Agreement. (b) In the event of a breach by the Seller of any representation and warranty specified in Sections 3.08(c) or 3.08(e) that has a material adverse effect on the Certificateholders, the Seller shall repurchase the Transition Property from the Note Issuer at a purchase price equal to the then outstanding principal amount of the Notes and all accrued and unpaid interest thereon, excluding any premium or penalty of any kind (the "Repurchase Price"), as of the Repurchase Date; provided, however, that the Seller shall not be obligated to repurchase the Transition Property if (A) within 90 days after the Date of Breach such breach is cured or the Seller takes remedial action such that there is not and will not be a material adverse effect on the Certificateholders as a result of such breach and (B) either (1) if the Seller had, immediately prior to the Date of Breach, a long term debt rating of at least "A3" by Moody's and "BBB" or the equivalent by S and P or Fitch, and the Seller enters into a binding agreement with the Note Issuer to pay any amounts necessary so that all interest payments due on the Notes during such 90-day period will be paid in full, or (2) if the Seller does not have such long term debt ratings, the Seller deposits, within two Business Days after the Date of Breach, an amount in escrow with the Note Trustee sufficient, taking into account amounts on deposit in the Collection Account which will be available for such purpose, to pay all interest payments which will become due on the Notes during such 90-day period. (i) In the event of a breach by the Seller of any representation and warranty specified in Sections 3.01, 3.03, 3.04, 3.05, 3.06, 3.08(a) or 3.08(b) that has a material adverse effect on the Certificateholders, if within 90 days after the Date of Breach such breach has not been cured or the Seller has not taken remedial action such that there is not and will not be a material adverse effect on the Certificateholders as a result of such breach, then the Seller shall repurchase the Transition Property from the Note Issuer for the Repurchase Price on the Repurchase Date. (ii) Notwithstanding any other provision of this Agreement, upon the payment by the Seller of the Repurchase Price pursuant to this Section 5.01(b), neither the Note Issuer nor any other Person shall have any other claims, rights or remedies against the Seller under, arising from or with respect to this Agreement, except as set forth in Sections 5.01(b)(iv), 5.01(c), 5.01(d) and 5.01(h). (iii) The Seller acknowledges that, upon the repurchase of the Transition Property pursuant to this Section 5.01(b), the Class A-4 Swap Agreement (as defined in the Certificate Indenture) will terminate. The Seller will indemnify, defend and hold harmless the Class A-4 Swap Counterparty for any Losses that may be imposed on, incurred by or asserted against the Class A-4 Swap Counterparty as a result of such termination. (c) Subject to Section 5.01(i), the Seller shall indemnify the Note Issuer, the Note Trustee, the Certificate Trustee, the Delaware Trustee, the State of Connecticut, the Finance Authority, the State Treasurer, agencies of the State of Connecticut, the Certificate Issuer, the Noteholders, the Certificateholders and any Swap Counterparty (each an "Indemnified Person" for purposes of this Section 5.01(c) and Section 5.01(i)) for, and defend and hold harmless each such Indemnified Person from and against, any and all taxes (other than taxes imposed on Noteholders or Certificateholders solely as a result of their ownership of Notes or Certificates, respectively) that may at any time be imposed on or asserted against any such Person under existing law as of the Closing Date as a result of the sale of the Transition Property to the Note Issuer, including any sales, gross receipts, general corporation, tangible personal property, privilege or license taxes; provided, however, that the Noteholders, the Certificateholders and any Swap Counterparty shall be entitled to enforce their rights against the Seller under this Section 5.01(c) solely through a cause of action brought for their benefit by the Note Trustee or the Certificate Trustee, as the case may be. (d) Subject to Section 5.01(i), the Seller shall indemnify the Note Issuer, the Note Trustee, the Certificate Trustee, the Delaware Trustee, the State of Connecticut, the Finance Authority, the State Treasurer, agencies of the State of Connecticut, the Certificate Issuer, the Noteholders, the Certificateholders and any Swap Counterparty (each an "Indemnified Person" for purposes of this Section 5.01(d) and Section 5.01(i)) for, and defend and hold harmless each such Indemnified Person from and against, any and all taxes that may be imposed on or asserted against any such Indemnified Person under existing law as of the Closing Date as a result of the issuance and sale by the Note Issuer of the Notes, the issuance and sale by the Trust of the Certificates or the other transactions contemplated herein, including any sales, gross receipts, general corporation, tangible personal property, privilege or license taxes; provided, however, that the Noteholders, the Certificateholders and any Swap Counterparty shall be entitled to enforce their rights against the Seller under this Section 5.01(d) solely through a cause of action brought for their benefit by the Note Trustee or the Certificate Trustee, as the case may be. The Seller shall be reimbursed for any payments under this Section 5.01(d) from RRB Charge Collections as an Operating Expense in accordance with the priorities set forth in Section 8.02(d) of the Note Indenture. (e) Subject to Section 5.01(i), the Seller shall indemnify the Note Issuer, the Noteholders and the Certificateholders (each an "Indemnified Person" for purposes of this Section 5.01(e) and Section 5.01(i)) for, and defend and hold harmless each such Person from and against, any and all liabilities, obligations, losses, actions, suits, claims, damages, payments, costs or expenses of any kind whatsoever (collectively, "Losses") that may be imposed on, incurred by or asserted against each such Indemnified Person as a result of (i) the Seller's willful misconduct or negligence in the performance of its duties or observance of its covenants under this Agreement, or (i) the Seller's breach in any material respect of any of its representations and warranties contained in this Agreement (other than the representations and warranties specified in Sections 3.01, 3.03, 3.04, 3.05, 3.06, 3.08(a), 3.08(b), 3.08(c) or 3.08(e), the breach of which are subject to the repurchase obligation set forth in Section 5.01(b)), except in the case of both clauses (i) and (ii) to the extent of Losses either resulting from the willful misconduct or gross negligence of such Indemnified Person or resulting from a breach of a representation and warranty made by such Indemnified Person in any of the Basic Documents that gives rise to the Seller's breach; provided, however, that the Noteholders and the Certificateholders shall be entitled to enforce their rights against the Seller under this indemnification solely through a cause of action brought for their benefit by the Note Trustee or the Certificate Trustee, as the case may be; provided, further, that the Seller may, at its election and in full satisfaction of its obligations under this Section 5.01(e), repurchase the Transition Property at the Repurchase Price, in which case neither the Note Issuer nor any other Person shall have any other claims, rights or remedies against the Seller under, arising from or with respect to this Agreement, except as set forth in Section Sections 5.01(b)(iv), 5.01(c), 5.01(d) and 5.01(h). (f) Indemnification under Sections 5.01(c), 5.01(d), 5.01(e) and 5.01(h) shall include reasonable fees and out-of-pocket expenses of investigation and litigation (including reasonable attorneys' fees and expenses), except as otherwise provided in this Agreement. (g) Without prejudice to any of the other rights of the parties, the Seller will not be in breach of any representation or warranty as a result of a change in law by means of a legislative enactment or constitutional amendment or (if such means become available in the future) referendum or initiative petition. Notwithstanding anything to the contrary in this Agreement, the Seller makes no representation or warranty that any amounts actually collected in respect of the RRB Charge will in fact be sufficient to meet payment obligations with respect to the Notes and the Certificates or that the assumptions used in calculating the RRB Charge will in fact be realized nor shall the Seller be obligated to reduce, or accept a reduction of, any rates or charges to which it would otherwise be entitled in respect of services rendered or to be rendered to customers in order to permit the payment of the RRB Charge (other than deferrals for future recovery). (h) Subject to Section 5.01(i), the Seller shall indemnify and hold harmless the Note Trustee, the Delaware Trustee, the Certificate Trustee, the Certificate Issuer, any Swap Counterparty, the State of Connecticut, the Finance Authority, the State Treasurer, agencies of the State of Connecticut and any of their respective affiliates, officials, officers, directors, employees, consultants, counsel and agents (each an "Indemnified Person" for purposes of this Section 5.01(h) and Section 5.01(i)) against any and all Losses incurred by any of such Indemnified Persons as a result of (i) the Seller's willful misconduct or negligence in the performance of its duties or observance of its covenants under this Agreement or (ii) the Seller's breach in any material respect of any of its representations and warranties contained in this Agreement, except in the case of both clauses (i) and (ii) to the extent of Losses either resulting from the willful misconduct or gross negligence of such Indemnified Person or resulting from a breach of a representation or warranty made by such Indemnified Person in any of the Basic Documents that gives rise to the Seller's breach. The indemnities contained in this Section 5.01(h) shall survive the resignation or termination of the Note Trustee, the Certificate Trustee or the Delaware Trustee or the termination of this Agreement or any Swap Agreement. (i) The Seller shall not be required to indemnify any Indemnified Person under Sections 5.01(c), 5.01(d), 5.01(e) or 5.01(h) for any amount paid or payable by such Indemnified Person in the settlement of any action, proceeding or investigation without the written consent of the Seller, which consent shall not be unreasonably withheld. Promptly after receipt by an Indemnified Person of notice of its involvement in any action, proceeding or investigation, such Indemnified Person shall, if a claim for indemnification in respect thereof is to be made against the Seller under this Section 5.01, notify the Seller in writing of such involvement. Failure by an Indemnified Person to so notify the Seller shall relieve the Seller from the obligation to indemnify and hold harmless such Indemnified Person under this Section 5.01 only to the extent that the Seller suffers actual prejudice as a result of such failure. With respect to any action, proceeding or investigation brought by a third party for which indemnification may be sought under this Section 5.01, the Seller shall be entitled to assume the defense of any such action, proceeding or investigation. Upon assumption by the Seller of the defense of any such action, proceeding or investigation, the Indemnified Person shall have the right to participate in such action or proceeding and to retain its own counsel. The Seller shall be entitled to appoint counsel of the Seller's choice at the Seller's expense to represent the Indemnified Person in any action, proceeding or investigation for which a claim of indemnification is made against the Seller under this Section 5.01 (in which case the Seller shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the Indemnified Person except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the Indemnified Person. Notwithstanding the Seller's election to appoint counsel to represent the Indemnified Person in an action, proceeding or investigation, the Indemnified Person shall have the right to employ separate counsel (including local counsel), and the Seller shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of counsel chosen by the Seller to represent the Indemnified Person would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the Indemnified Person and the Seller and the Indemnified Person shall have reasonably concluded that there may be legal defenses available to it that are different from or additional to those available to the Seller, (iii) the Seller shall not have employed counsel reasonably satisfactory to the Indemnified Person to represent the Indemnified Person within a reasonable time after notice of the institution of such action or (iv) the Seller shall authorize the Indemnified Person to employ separate counsel at the expense of the Seller. Notwithstanding the foregoing, the Seller shall not be obligated to pay for the fees, costs and expenses of more than one separate counsel for the Indemnified Persons (in addition to local counsel). The Seller will not, without the prior written consent of the Indemnified Person, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought under this Section 5.01 (whether or not the Indemnified Person is an actual or potential party to such claim or action) unless such settlement, compromise or consent includes an unconditional release of the Indemnified Person from all liability arising out of such claim, action, suit or proceeding. (j) The remedies of the Note Issuer, the Noteholders, the Certificateholders and any Swap Counterparty provided in this Agreement are each such Person's sole and exclusive remedies against the Seller for breach of its representations and warranties in this Agreement. Section 5.02. Merger or Consolidation of, or Assumption of the Obligations of, Seller. Any Person (a) into which the Seller may be merged or consolidated, (b) that may result from any merger or consolidation to which the Seller shall be a party or (c) that may succeed to the properties and assets of the Seller substantially as a whole, which Person in any case described in the foregoing clause (c) executes an agreement of assumption to perform every obligation of the Seller hereunder, shall be the successor to the Seller under this Agreement without further act on the part of any of the parties to this Agreement; provided, however, that (i) if the Seller is the Servicer, no Servicer Default, and no event which, after notice or lapse of time, or both, would become a Servicer Default shall have occurred and be continuing, (ii) the Seller shall have delivered to the Note Issuer and the Note Trustee an Officer's Certificate stating that such consolidation, merger or succession and such agreement of assumption comply with this Section and that all conditions precedent, if any, provided for in this Agreement relating to such transaction have been complied with, (iii) the Seller shall have delivered to the Note Issuer and the Note Trustee an Opinion of Counsel either (A) stating that, in the opinion of such counsel, all filings to be made by the Seller, including filings with the DPUC pursuant to the Statute, have been executed and filed that are necessary to fully preserve and protect the interest of the Note Issuer in the Transition Property and reciting the details of such filings, or (B) stating that, in the opinion of such counsel, no such action shall be necessary to preserve and protect such interests and (iv) the Rating Agencies shall have received prior written notice of such transaction. When any Person acquires the properties and assets of the Seller substantially as a whole and becomes the successor to the Seller in accordance with the terms of this Section 5.02 and execution by such successor of an agreement of assumption to perform every obligation of the Seller hereunder, then upon satisfaction of all of the other conditions of this Section 5.02, the Seller shall automatically and without further notice be released from all of its obligations hereunder, except with respect to any acts or omissions of the Seller that occurred prior to such assumption. Section 5.03. Limitation on Liability of Seller and Others. The Seller and any director, officer, employee or agent of the Seller may rely in good faith on the advice of counsel or on any document of any kind, prima facie properly executed and submitted by any Person, respecting any matters arising hereunder. Article 6 MISCELLANEOUS PROVISIONS Section 6.01. Amendment. This Agreement may be amended by the Seller and the Note Issuer, with ten Business Days' prior written notice given to the Rating Agencies and the prior written consent of the Note Trustee, but without the consent of any of the Noteholders, to cure any ambiguity, to correct or supplement any provisions in this Agreement or for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions in this Agreement or of modifying in any manner the rights of the Noteholders; provided, however, that such action shall not, as evidenced by an Officer's Certificate delivered to the Note Issuer, the Note Trustee and any Swap Counterparty, adversely affect in any material respect the interests of any Noteholder or adversely affect the interests of any Swap Counterparty. This Agreement may also be amended from time to time by the Seller and the Note Issuer, with ten Business Days' prior written notice given to the Rating Agencies and the prior written consent of the Note Trustee and the prior written consent of the Holders of Notes evidencing not less than a majority of the Outstanding Amount of the Notes affected thereby, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of modifying in any manner the rights of the Noteholders. It shall not be necessary for the consent of Noteholders pursuant to this Section to approve the particular form of any proposed amendment or consent, but it shall be sufficient if such consent shall approve the substance thereof. Prior to the execution of any amendment to this Agreement, the Note Trustee shall be entitled to receive and rely upon an Opinion of Counsel stating that the execution of such amendment is authorized or permitted by this Agreement. The Note Trustee may, but shall not be obligated to, enter into any such amendment which affects the Note Trustee's own rights, duties or immunities under this Agreement or otherwise. No amendment may be made to this Agreement that would adversely affect any Swap Counterparty without its prior written consent. Section 6.02. Notices. Unless otherwise specifically provided herein, all notices, directions, consents and waivers required under the terms and provisions of this Agreement shall be in English and in writing, and any such notice, direction, consent or waiver may be given by United States mail, courier service, facsimile transmission or electronic mail (confirmed by telephone, United States mail or courier service in the case of notice by facsimile transmission or electronic mail) or any other customary means of communication, and any such notice, direction, consent or waiver shall be effective when delivered, or if mailed, three days after deposit in the United States mail with proper postage for ordinary mail prepaid: (a) if to the Seller, to The Connecticut Light and Power Company if by U.S. Mail: P.O. Box 270 Hartford, CT 02141-0270 if by courier: 107 Selden Street Berlin, CT 06037 Attention: Treasurer Facsimile: (860) 665-5457 Telephone: (860) 665-3258 Email: shoopra@nu.com (b) if to the Note Issuer, to CL and P Funding LLC c/o The Connecticut Light and Power Company if by U.S. Mail: P.O. Box 270 Hartford, CT 06141-0270 if by courier: 107 Selden Street Berlin, CT 06037 Attention: Treasurer Facsimile: (860) 665-5457 Telephone: (860) 665-3258 Email: shoopra@nu.com (c) if to the Note Trustee, to First Union Trust Company, National Association One Rodney Square 920 King Street, 1st Floor Wilmington, DE 19801-7475 Attention: Corporate Trust Administration Facsimile: (302) 888-7544 Telephone: (302) 888-7500 (d) if to Moody's, to Moody's Investors Service, Inc. 99 Church Street New York, NY 10007 Attention: ABS Monitoring Department Facsimile: (212) 553-0573 Telephone: (212) 553-3686 (e) if to S and P, to Standard and Poor's 55 Water Street, 40th Floor New York, NY 10041 Attention: Asset Backed Surveillance Department Facsimile: (212) 438-2655 Telephone: (212) 438-2000 (f) if to Fitch, to Fitch, Inc. One State Street Plaza New York, NY 10004 Attention: ABS Surveillance Facsimile: (212) 514-9879 Telephone: (212) 908-0500 Email: surv@fitchratings.com (g) if to the Finance Authority, to: Office of the State Treasurer 55 Elm Street Hartford, CT 06106 Attention: Assistant Treasurer - Debt Management Facsimile: (860) 702-3127 Telephone: (860) 702-3034 (h) if to the Certificate Issuer, to: Connecticut RRB Special Purpose Trust CL and P-1 c/o First Union Trust Company, National Association One Rodney Square 920 King Street, 1st Floor Wilmington, DE 19801-7475 Attention: Corporate Trust Administration Facsimile: (302) 888-7544 Telephone: (302) 888-7500 (with copies to the Finance Authority at the addresses listed herein) (i) if to any Swap Counterparty, to the address and in the manner set forth in any Swap Agreement (a copy of which will be provided by the Certificate Trustee, upon request); and (j) as to each of the foregoing, at such other address as shall be designated by written notice to the other parties. Section 6.03. Assignment. Notwithstanding anything to the contrary contained herein, except as provided in Section 5.02, this Agreement may not be assigned by the Seller. Section 6.04. Limitations on Rights of Third Parties. The provisions of this Agreement are solely for the benefit of the Seller, the Note Issuer, the Noteholders, the Certificateholders, any Swap Counterparty, the Note Trustee, the Certificate Trustee, the Delaware Trustee, the Finance Authority, the Certificate Issuer and the other Persons expressly referred to herein, and such Persons shall have the right to enforce the relevant provisions of this Agreement, except that the Noteholders and the Certificateholders shall be entitled to enforce their rights against the Seller under this Agreement solely through a cause of action brought for their benefit by the Note Trustee or the Certificate Trustee, as the case may be. Nothing in this Agreement, whether express or implied, shall be construed to give to any other Person any legal or equitable right, remedy or claim in the Transition Property or under or in respect of this Agreement or any covenants, conditions or provisions contained herein. Section 6.05. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Section 6.06. Separate Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. Section 6.07. Headings. The headings of the various Articles and Sections herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Section 6.08. Governing Law. This Agreement shall be construed in accordance with the laws of the State of Connecticut, without reference to its conflict of law provisions, and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws. Section 6.09. Assignment to Note Trustee. The Seller hereby acknowledges and consents to any mortgage, pledge, assignment and grant of a security interest by the Note Issuer to the Note Trustee pursuant to the Note Indenture for the benefit of the Noteholders of all right, title and interest of the Note Issuer in, to and under the Transition Property and the proceeds thereof and the assignment of any or all of the Note Issuer's rights and obligations hereunder to the Note Trustee. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties hereto have caused this Transition Property Purchase and Sale Agreement to be duly executed by their respective officers as of the day and year first above written. CL&P FUNDING LLC, Note Issuer By: /S/ RANDY A. SHOOP ---------------------------- Name: Randy A. Shoop Title: President THE CONNECTICUT LIGHT AND POWER COMPANY, Seller By: /S/ RANDY A. SHOOP ---------------------------- Name: Randy A. Shoop Title: Treasurer EX-10.56 26 y58564u.txt EXHIBIT 10.56 CL&P FUNDING LLC, as Note Issuer and THE CONNECTICUT LIGHT AND POWER COMPANY, as Servicer TRANSITION PROPERTY SERVICING AGREEMENT Dated as of March 30, 2001 ARTICLE 1 DEFINITIONS Section 1.01. Definitions Section 1.02. Other Definitional Provisions ARTICLE 2 APPOINTMENT AND AUTHORIZATION Section 2.01. Appointment of Servicer; Acceptance of Appointment Section 2.02. Authorization Section 2.03. Dominion and Control Over the Transition Property ARTICLE 3 BILLING SERVICES Section 3.01. Duties of Servicer Section 3.02. Servicing and Maintenance Standards Section 3.03. Certificate of Compliance Section 3.04. Annual Report by Independent Public Accountants ARTICLE 4 SERVICES RELATED TO PERIODIC ADJUSTMENTS; REMITTANCES Section 4.01. Periodic Adjustments Section 4.02. Limitation of Liability Section 4.03. Remittances ARTICLE 5 THE TRANSITION PROPERTY Section 5.01. Custody of Transition Property Records Section 5.02. Duties of Servicer as Custodian Section 5.03. Instructions; Authority to Act Section 5.04. Effective Period and Termination Section 5.05. Monitoring of Third-Party Suppliers Section 5.06. Monitoring and Collecting Exit Charges ARTICLE 6 THE SERVICER Section 6.01. Representations and Warranties of Servicer Section 6.02. Indemnities of Servicer Section 6.03. Limitation on Liability of Servicer and Others Section 6.04. Merger or Consolidation of, or Assumption of the Obligations of, Servicer Section 6.05. The Connecticut Light and Power Company Not to Resign as Servicer Section 6.06. Servicing Compensation Section 6.07. Compliance with Applicable Law Section 6.08. Access to Certain Records and Information Regarding Transition Property Section 6.09. Appointments Section 6.10. No Servicer Advances Section 6.11. Maintenance of Operations ARTICLE 7 DEFAULT Section 7.01. Servicer Default Section 7.02. Appointment of Successor Section 7.03. Waiver of Past Defaults Section 7.04. Notice of Servicer Default Section 7.05. Inter-Creditor Agreement ARTICLE 8 MISCELLANEOUS PROVISIONS Section 8.01. Amendment Section 8.02. Maintenance of Accounts and Records Section 8.03. Notices Section 8.04. Assignment Section 8.05. Limitations on Rights of Third Parties Section 8.06. Severability Section 8.07. Separate Counterparts Section 8.08. Headings Section 8.09. Governing Law Section 8.10. Assignment to Note Trustee Section 8.11. Nonpetition Covenants This TRANSITION PROPERTY SERVICING AGREEMENT, dated as of March 30, 2001, is between CL&P Funding LLC, a Delaware limited liability company (together with any successor thereto permitted under the Note Indenture, as hereinafter defined, the "Note Issuer"), and The Connecticut Light and Power Company, a Connecticut corporation. RECITALS WHEREAS, pursuant to the Statute and the Financing Order, the Seller and the Note Issuer are concurrently entering into the Sale Agreement pursuant to which the Seller is selling to the Note Issuer the Transition Property created pursuant to the Statute and the Financing Order. WHEREAS, in connection with its ownership of the Transition Property and in order to collect the RRB Charge, the Note Issuer desires to engage the Servicer to carry out the functions described herein. The Servicer currently performs similar functions for itself with respect to its own charges to its customers and for others. In addition, the Note Issuer desires to engage the Servicer to act on its behalf in obtaining Periodic Adjustments from the DPUC. The Servicer desires to perform all of these activities on behalf of the Note Issuer. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS Section 1.01. Definitions. Whenever used in this Agreement, the following words and phrases shall have the following meanings: "Advice Letter" means any filing made with the DPUC by the Servicer on behalf of the Note Issuer to set or adjust the RRB Charge, including the Issuance Advice Letter, a Routine Annual True-Up Letter, a Routine True-Up Letter or a Non-Routine True-Up Letter. "Agreement" means this Transition Property Servicing Agreement, together with all Exhibits, Schedules and Annexes hereto, as the same may be amended and supplemented from time to time. "Annual Accountant's Report" has the meaning set forth in Section 3.04. "Applicable TPS" means, with respect to each customer, the TPS, if any, billing the RRB Charge to that customer. "Bills" means each of the regular monthly bills, summary bills and other bills issued to customers or TPSs by The Connecticut Light and Power Company on its own behalf and in its capacity as Servicer. "Certificate of Compliance" has the meaning set forth in Section 3.03. "Closing Date" means March 30, 2001. "CTA" means the "competitive transition assessment" as defined in the Statute. "Declaration of Trust" means the Declaration of Trust dated as of March 23, 2001 by First Union Trust Company, National Association, a national banking association, as Delaware Trustee, and the Finance Authority, as the same may be amended and supplemented from time to time. "DPUC" means the Connecticut Department of Public Utility Control and any successor thereto. "DPUC Regulations" means all regulations, rules, tariffs and laws applicable to public utilities or TPSs, as the case may be, and promulgated by, enforced by or otherwise within the jurisdiction of the DPUC. "Expected Amortization Schedule" means Schedule 4.01(a) hereto. "Finance Authority" means the State of Connecticut, acting through the office of the State Treasurer. "Financing Order" means the order of the DPUC, issued on November 8, 2000 and supplemented on December 12, 2000 and March 12, 2001 in DPUC-00-05-01. "Indemnified Person" has the meaning assigned to such term in Section 6.02. "Insolvency Event" means, with respect to a specified Person, (a) the filing of a decree or order for relief by a court having jurisdiction in the premises in respect of such Person or any substantial part of its property in an involuntary case under any applicable Federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or ordering the winding-up or liquidation of such Person's affairs, and such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (b) the commencement by such Person of a voluntary case under any applicable Federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or the consent by such Person to the entry of an order for relief in an involuntary case under any such law, or the consent by such Person to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or the making by such Person of any general assignment for the benefit of creditors, or the failure by such Person generally to pay its debts as such debts become due. "Inter-Creditor Agreement" means the Inter-Creditor Agreement dated as of March 30, 2001 among Citicorp North America, Inc., Citibank, N.A., the Servicer, the Note Trustee, the Note Issuer and CL&P Receivables Corporation, as amended, supplemented or modified from time to time. "Issuance Advice Letter" means the initial Issuance Advice Letter, dated March 28, 2001, filed with the DPUC pursuant to the Financing Order. "Lien" means a security interest, lien, charge, pledge or encumbrance of any kind. "Losses" has the meaning assigned to that term in Section 6.02(b). "Monthly Servicer Certificate" has the meaning assigned to that term in Section 4.01(d)(2). "Non-Routine Periodic Adjustment" has the meaning set forth in Section 4.01(c)(1). "Non-Routine True-Up Letter" means a letter filed with the DPUC in accordance with the Financing Order with respect to any Non-Routine Periodic Adjustment, pursuant to which the related Non-Routine Periodic Adjustment will become effective within 60 days after filing of the Non-Routine True-Up Letter, subject to the review and approval of the DPUC. "Note Indenture" means the Note Indenture dated as of March 30, 2001, between the Note Issuer and the Note Trustee, as the same may be amended and supplemented from time to time. "Note Issuer" has the meaning set forth in the preamble to this Agreement. "Officer's Certificate" means a certificate of the Servicer signed by a Responsible Officer. "Opinion of Counsel" means one or more written opinions of counsel who may be an employee of or counsel to the party providing such opinion(s) of counsel, which counsel shall be reasonably acceptable to the party receiving such opinion(s) of counsel. "Periodic Adjustment" means each adjustment to the RRB Charge made pursuant to the terms of the Financing Order and in accordance with Section 4.01 hereof. "Principal Balance" means, as of any Payment Date, the sum of the outstanding principal amount of the Notes. "Projected Principal Balance" means, as of any Payment Date, the sum of the projected outstanding principal amount of the Notes for such Payment Date set forth in the Expected Amortization Schedule. "Quarterly Servicer Certificate" has the meaning assigned to that term in Section 4.01(d)(3). "Remittance" means each remittance pursuant to Section 4.03 of RRB Charge Payments by the Servicer to the Note Trustee. "Remittance Date" means each Servicer Business Day on which a Remittance is to be made by the Servicer pursuant to Section 4.03. "Remittance Period" means the twelve-month period commencing on January 1 of each year and ending on the last day of December of each year; provided, however, that the initial Remittance Period shall commence on the Closing Date and end on December 31, 2001. "Required Debt Service" means, for any Remittance Period, the total dollar amount calculated by the Servicer in accordance with Section 4.01(b)(1) as necessary to be remitted to the Collection Account during such Remittance Period (after giving effect to (a) the allocation and distribution of amounts on deposit in the Reserve Subaccount at the time of calculation and which are available for payments on the Notes, (b) any shortfalls in Required Debt Service for any prior Remittance Period and (c) any Remittances based upon the RRB Charge in effect in the prior Remittance Period that are expected to be realized in such Remittance Period) in order to ensure that, as of the Payment Date immediately following the end of such period, (i) all accrued and unpaid interest on the Notes then due shall have been paid in full, (ii) the Principal Balance of the Notes is equal to the Projected Principal Balance of the Notes for that Payment Date, (iii) the balance on deposit in the Capital Subaccount equals the aggregate Required Capital Level, (iv) the balance on deposit in the Overcollateralization Subaccount equals the aggregate Required Overcollateralization Level and (v) all other fees, expenses and indemnities due and owing and required or allowed to be paid under Section 8.02 of the Note Indenture as of such date shall have been paid in full; provided, however, that, with respect to any Periodic Adjustment occurring after the last Scheduled Maturity Date for any Notes, the Required Debt Service shall be calculated to ensure that sufficient amounts will be collected to retire such Notes in full as of the earlier of (x) the next Payment Date and (y) the Final Maturity Date for such Notes. "Responsible Officer" means the chief executive officer, the president, the chairman or vice chairman of the board, any vice president, the treasurer, any assistant treasurer, the secretary, any assistant secretary, the controller or the finance manager of the Servicer. "Retirement of the Notes" means the day on which the final payment is made to the Note Trustee in respect of the last outstanding Note. "Routine Annual True-Up Letter" means a letter filed with the DPUC, substantially in the form of Exhibit B hereto, at least 15 days prior to January 1 each year in respect of an annual Periodic Adjustment. The Routine Annual True-Up Letter will become effective on January 1 each year, or such other date as may be specified in such Routine Annual True-Up Letter, so long as such effective date is at least 15 days after the filing of such Routine Annual True-Up Letter. "Routine True-Up Letter" means a letter filed with the DPUC, substantially in the form of Exhibit B hereto, in respect of a Periodic Adjustment. The Routine True-Up Letter will become effective 15 days after the filing thereof. "RRB Charge" means the portion (which may become all) of the Seller's CTA designated pursuant to the Financing Order as the RRB Charge (including, without limitation, the RRB Charge included in special contract customer rates), as the same may be adjusted from time to time as provided in the Financing Order, and may in the future include a pro rata component of any exit fee collected pursuant to Section 16-245w of the Connecticut General Statutes. "RRB Charge Collections" means the RRB Charge Payments remitted to the Collection Account. "RRB Charge Payments" means the actual payments received by the Servicer, directly or indirectly (including through a TPS), from or on behalf of customers (including, without limitation, the RRB Charge included in special contract customer rates), multiplied by the percentage of such collections which is calculated in accordance with Annex II hereto to have been received in respect of the RRB Charge. "Sale Agreement" means the Transition Property Purchase and Sale Agreement dated as of March 30, 2001, between The Connecticut Light and Power Company, as Seller, and the Note Issuer, as the same may be amended and supplemented from time to time. "Seller" means The Connecticut Light and Power Company, a Connecticut corporation, and its permitted successors and assigns under the Sale Agreement. "Seller's Receivables Purchase and Sale Agreement" means the Receivables Purchase and Sale Agreement dated as of September 30, 1997, as amended and restated as of March 30, 2001, among CL&P Receivables Corporation, the Servicer, Corporate Asset Funding Company, Inc., and Citibank, N.A. and Citicorp North America, Inc, as the same may be amended, supplemented, restated and renewed from time to time. "Servicer" means The Connecticut Light and Power Company, as the servicer of the Transition Property, or each successor (in the same capacity) pursuant to Sections 6.04 or 7.02. "Servicer Business Day" means any Business Day on which the Servicer's offices in the State of Connecticut are open for business. "Servicer Default" means an event specified in Section 7.01. "Servicing Fee" has the meaning set forth in Section 6.06(a). "Statute" means Sections 16-245e through and including 16-245k of the Connecticut General Statutes. "Termination Notice" has the meaning assigned to that term in Section 7.01(e). "TPS" means a third party supplier of energy who has entered into a TPS Service Agreement with the Servicer. "TPS Service Agreement" means an agreement between a third party supplier of energy and the Servicer pursuant to which such third party supplier of energy bills and collects the RRB Charge to and from customers in accordance with DPUC Regulations, the Financing Order and the guidelines described in Schedule A to Annex I. "Transition Property" means the transition property that exists under Order 6 of the Financing Order (including, without limitation, the RRB Charge included in special contract customer rates) and is sold by the Seller to the Note Issuer under the Sale Agreement. "Transition Property Records" has the meaning assigned to that term in Section 5.01. Section 1.02. Other Definitional Provisions. (a) Capitalized terms used herein and not otherwise defined herein have the meanings assigned to them in the Note Indenture. (b) All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (c) The words "hereof," "herein," "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement; Section, Schedule, Exhibit and Annex references contained in this Agreement are references to Sections, Schedules, Exhibits and Annexes in or to this Agreement unless otherwise specified; and the term "including" shall mean "including without limitation." (d) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter forms of such terms. ARTICLE 2 APPOINTMENT AND AUTHORIZATION Section 2.01. Appointment of Servicer; Acceptance of Appointment. Subject to Section 6.05 and Article 7, the Note Issuer hereby appoints the Servicer, and the Servicer hereby accepts such appointment, to perform the Servicer's obligations pursuant to this Agreement on behalf of and for the benefit of the Note Issuer or any assignee thereof in accordance with the terms of this Agreement and applicable law. This appointment and the Servicer's acceptance thereof may not be revoked except in accordance with the express terms of this Agreement. Section 2.02. Authorization. With respect to all or any portion of the Transition Property, the Servicer shall be, and hereby is, authorized and empowered by the Note Issuer to (a) execute and deliver, on behalf of itself and/or the Note Issuer, as the case may be, any and all instruments, documents or notices, and (b) on behalf of itself and/or the Note Issuer, as the case may be, make any filing and participate in proceedings of any kind with any governmental authorities, including with the DPUC. The Note Issuer shall execute and/or furnish the Servicer with such documents as have been prepared by the Servicer for execution by the Note Issuer, and with such other documents as may be in the Note Issuer's possession, as the Servicer may determine to be necessary or appropriate to enable it to carry out its servicing and administrative duties hereunder. Upon the Servicer's written request, the Note Issuer shall furnish the Servicer with any powers of attorney or other documents necessary or appropriate to enable the Servicer to carry out its duties hereunder. Section 2.03. Dominion and Control Over the Transition Property. Notwithstanding any other provision herein, the Note Issuer shall have dominion and control over the Transition Property, and the Servicer, in accordance with the terms hereof, is acting solely as the servicing agent and custodian for the Note Issuer with respect to the Transition Property and the Transition Property Records. The Servicer shall not take any action that is not authorized by this Agreement or that shall impair the rights of the Note Issuer in the Transition Property, in each case unless such action is required by applicable law. ARTICLE 3 BILLING SERVICES Section 3.01. Duties of Servicer. The Servicer, as agent for the Note Issuer, shall have the following duties: (a) Duties of Servicer Generally. (1) General Duties. The Servicer's duties in general shall include management, servicing and administration of the Transition Property; obtaining meter reads, calculating electricity usage (including usage by customers of any TPS), billing, collection and posting of all payments in respect of the Transition Property; responding to inquiries by customers, the DPUC, or any federal, local or other state governmental authorities with respect to the Transition Property; delivering Bills to customers and TPSs, investigating and handling delinquencies, processing and depositing collections and making periodic remittances; furnishing periodic reports to the Note Issuer, the Note Trustee, the Certificate Trustee and the Rating Agencies; and taking all necessary action in connection with Periodic Adjustments as set forth herein. Certain of the duties set forth above may be performed by TPSs pursuant to TPS Service Agreements. Without limiting the generality of this Section 3.01(a)(1), in furtherance of the foregoing, the Servicer hereby agrees that it shall also have, and shall comply with, the duties and responsibilities relating to data acquisition, usage and bill calculation, billing, customer service functions, collection, payment processing and remittance set forth in Annex I hereto. (2) DPUC Regulations Control. Notwithstanding anything to the contrary in this Agreement, the duties of the Servicer set forth in this Agreement shall be qualified in their entirety by any DPUC Regulations as in effect at the time such duties are to be performed. (3) Allocation of Special Contracts. The Servicer shall allocate revenues from special contract customers who are receiving services under special contracts which were in effect on July 1, 1998, until such contracts expire, on the same cents/kWh basis as the rest of the rate class in which the special contract customer resides. The Servicer shall calculate and include an unbundled breakdown at the bottom of each such special contract customer's bill. The Servicer shall allocate the total revenues from each such special contract customer to each of the unbundled rate components (including the unbundled CTA component and its RRB Charge subcomponent) on an equivalent cents/kWh basis times the actual kilowatt-hours. After the first six unbundled rate components (including the unbundled CTA component and its RRB Charge subcomponent) are fully satisfied with the proper revenue allocation, the Servicer shall allocate any remaining revenue to the unbundled distribution rate component. If more dollars are allocated to the first six rate components than were billed, the Servicer shall allocate a negative revenue amount to the unbundled distribution component. (b) Reporting Functions. (1) Notification of Laws and Regulations. The Servicer shall promptly notify the Note Issuer, the Note Trustee, the Certificate Trustee and the Rating Agencies in writing of any laws or DPUC Regulations hereafter promulgated that have a material adverse effect on the Servicer's ability to perform its duties under this Agreement. (2) Other Information. Upon the reasonable request of the Note Issuer, the Note Trustee, the Certificate Trustee, or any Rating Agency, the Servicer shall provide to such Note Issuer, Note Trustee, Certificate Trustee, or the Rating Agencies, as the case may be, any public financial information in respect of the Servicer, or any material information regarding the Transition Property to the extent it is reasonably available to the Servicer, as may be reasonably necessary and permitted by law for the Note Issuer, the Note Trustee, the Certificate Trustee, or the Rating Agencies to monitor the Servicer's performance hereunder. (3) Preparation of Reports to be Filed with the SEC. The Servicer shall prepare or cause to be prepared any reports required to be filed by the Note Issuer or the Certificate Issuer under the securities laws, including a copy of each Quarterly Servicer Certificate described in Section 4.01(d)(3), the annual Certificate of Compliance described in Section 3.03 and the Annual Accountant's Report described in Section 3.04. Section 3.02. Servicing and Maintenance Standards. On behalf of the Note Issuer, the Servicer shall (a) manage, service, administer and make collections in respect of the Transition Property with reasonable care and in accordance with applicable law, including all applicable DPUC Regulations and guidelines, using the same degree of care and diligence that the Servicer exercises with respect to similar assets for its own account and, if applicable, for others; (b) follow customary standards, policies and procedures for the industry in performing its duties as Servicer; (c) use all reasonable efforts, consistent with its customary servicing procedures, to bill and collect the RRB Charge; (d) file all filings under the applicable Uniform Commercial Code or the Statute necessary or desirable to maintain the perfected ownership or security interest of the Note Issuer and the Note Trustee in the Transition Property; and (e) comply in all material respects with all laws and regulations applicable to and binding on it relating to the Transition Property. The Servicer shall follow such customary and usual practices and procedures as it shall deem necessary or advisable in its servicing of all or any portion of the Transition Property, which, in the Servicer's judgment, may include the taking of legal action, at the Note Issuer's expense. Section 3.03. Certificate of Compliance. The Servicer shall deliver to the Note Issuer, the Note Trustee, the Certificate Trustee and the Rating Agencies on or before March 31 of each year, commencing March 31, 2002 to and including the March 31 succeeding the Retirement of the Notes, an Officer's Certificate substantially in the form of Exhibit A hereto (a "Certificate of Compliance"), stating that: (i) a review of the activities of the Servicer during the twelve months ended the preceding December 31 (or, in the case of the first Certificate of Compliance to be delivered on or before March 31, 2002, the period of time from the date of this Agreement until December 31, 2001) and of its performance under this Agreement has been made under such Responsible Officer's supervision, and (ii) to such Responsible Officer's knowledge, based on such review, the Servicer has fulfilled all of its obligations in all material respects under this Agreement throughout such twelve months (or, in the case of the Certificate of Compliance to be delivered on or before March 31, 2002, the period of time from the date of this Agreement until December 31, 2001), or, if there has been a default in the fulfillment of any such material obligation, specifying each such material default known to such Responsible Officer and the nature and status thereof. Section 3.04. Annual Report by Independent Public Accountants. (a) The Servicer, at the Note Issuer's expense, shall cause a firm of independent certified public accountants (which may provide other services to the Servicer) to prepare, and the Servicer shall deliver to the Note Issuer, the Note Trustee, the Certificate Trustee and the Rating Agencies, a report addressed to the Servicer (the "Annual Accountant's Report"), which may be included as part of the Servicer's customary auditing activities, for the information and use of the Note Issuer, the Note Trustee, the Certificate Trustee and the Rating Agencies, on or before March 31 each year, beginning March 31, 2002 to and including the March 31 succeeding the Retirement of the Notes, to the effect that such firm has performed certain procedures, agreed between the Servicer and such accountants, in connection with the Servicer's compliance with its obligations under this Agreement during the preceding twelve months ended December 31 (or, in the case of the first Annual Accountant's Report to be delivered on or before March 31, 2002, the period of time from the date of this Agreement until December 31, 2001), identifying the results of such procedures and including any exceptions noted. (b) The Annual Accountant's Report shall also indicate that the accounting firm providing such report is independent of the Servicer within the meaning of the Code of Professional Ethics of the American Institute of Certified Public Accountants. ARTICLE 4 SERVICES RELATED TO PERIODIC ADJUSTMENTS; REMITTANCES Section 4.01. Periodic Adjustments. From time to time, until the Retirement of the Notes, the Servicer shall identify the need for Periodic Adjustments and shall take all reasonable action to obtain and implement such Periodic Adjustments, all in accordance with the following: (a) Expected Amortization Schedule. The Expected Amortization Schedule is attached hereto as Schedule 4.01(a). (b) Routine Periodic Adjustments and Yearly Filings. (1) Routine Annual Periodic Adjustments and Filings. For the purpose of preparing a Routine Annual True-Up Letter, the Servicer shall: (A) update the assumptions underlying the calculation of the RRB Charge, including energy usage volume, the rate of charge-offs and estimated expenses and fees of the Note Issuer and the Certificate Issuer to the extent not fixed, in each case for the Remittance Period beginning on January 1 of each year; (B) determine the Required Debt Service for such Remittance Period based upon such updated assumptions; and (C) determine the RRB Charge to be charged during such Remittance Period based upon such Required Debt Service. The Servicer shall file a Routine Annual True-Up Letter with the DPUC no later than fifteen days prior to January 1 of each year. (2) Routine Periodic Adjustments. Beginning in the last year the Notes are scheduled to be outstanding, the Servicer shall file a Routine True-Up Letter at least 15 days before the end of each calendar quarter. In addition, the Servicer shall file a Routine True-Up Letter at least 15 days before the end of any calendar quarter or, beginning in the last year the Notes are scheduled to be outstanding, at least 15 days before the end of any calendar month, at each such time as the Servicer may reasonably determine is necessary to meet the Required Debt Service for the then current Remittance Period. (3) The Servicer shall take all reasonable actions and make all reasonable efforts to secure any Periodic Adjustments. (c) Non-Routine Periodic Adjustments. (1) Whenever the Servicer determines that the existing model for calculating the RRB Charge should be amended or revised, subject to the consent of the Note Issuer under the conditions set forth in Section 3.18 of the Note Indenture, the Servicer shall file a Non-Routine True-Up Letter with the DPUC designating the adjustments to such model and any corresponding adjustments to the RRB Charge (collectively, a "Non-Routine Periodic Adjustment"), subject to the review and approval of the DPUC pursuant to the Financing Order. (2) The Servicer shall take all reasonable actions and make all reasonable efforts to secure any Non-Routine Periodic Adjustments. (3) The Servicer shall implement any resulting adjustments to the model and any resulting revised RRB Charge as of the effective date of the Non-Routine True-Up Letter. (d) Reports. (1) Notification of Advice Letter Filings and Periodic Adjustments. Whenever the Servicer files an Advice Letter with the DPUC, the Servicer shall send a copy of such filing to the Note Issuer, the Note Trustee, the Certificate Trustee and the Rating Agencies concurrently therewith. If any Periodic Adjustment requested in any such Advice Letter filing does not become effective on the applicable date as provided by the Financing Order, the Servicer shall notify the Note Issuer, the Note Trustee, the Certificate Trustee and the Rating Agencies by the end of the second Servicer Business Day after such applicable date. (2) Monthly Servicer Certificate. So long as any Notes are outstanding, not later than fifteen (15) days after the end of each month after the Certificates are issued (excluding March, 2001), or if such day is not a Servicer Business Day, the next succeeding Servicer Business Day, the Servicer shall deliver a written report substantially in the form of Exhibit C hereto (the "Monthly Servicer Certificate") to the Note Issuer, the Note Trustee, the Certificate Trustee and the Rating Agencies. (3) Quarterly Servicer Certificate. So long as any Notes are outstanding, not later than 11:00 a.m. (New York City time) on the Servicer Business Day immediately preceding each Payment Date, the Servicer shall deliver a written report substantially in the form of Exhibit D hereto (the "Quarterly Servicer Certificate") to the Note Issuer, the Note Trustee, the Certificate Trustee and the Rating Agencies. (4) TPS Reports. The Servicer shall provide to the Rating Agencies, upon request, any publicly available reports filed by the Servicer with the DPUC (or otherwise made publicly available by the Servicer) relating to TPSs and any other non-confidential and non-proprietary information relating to TPSs reasonably requested by the Rating Agencies. Section 4.02. Limitation of Liability. (a) The Note Issuer and the Servicer expressly agree and acknowledge that: (1) In connection with any Periodic Adjustment, the Servicer is acting solely in its capacity as the servicing agent hereunder. (2) Neither the Servicer nor the Note Issuer shall be responsible in any manner for, and shall have no liability whatsoever as a result of, any action, decision, ruling or other determination made or not made, or any delay (other than any delay resulting from the Servicer's failure to file for Periodic Adjustments or Non-Routine Periodic Adjustments required by Section 4.01 in a timely and correct manner or other material breach by the Servicer of its duties under this Agreement that materially and adversely affects any Periodic Adjustments or Non-Routine Periodic Adjustments), by the DPUC (or, in connection with any Non-Routine Periodic Adjustment, by the Rating Agencies) in any way related to the Transition Property or in connection with any Periodic Adjustment or Non-Routine Periodic Adjustment, the subject of any filings under Section 4.01, any proposed Periodic Adjustment or Non-Routine Periodic Adjustment, or the approval of the RRB Charge and the adjustments thereto. (3) The Servicer shall have no liability whatsoever relating to the calculation of the RRB Charge and the adjustments thereto (including any Non-Routine Periodic Adjustment), including as a result of any inaccuracy of any of the assumptions made in such calculation regarding expected energy usage volume, the rate of charge-offs, estimated expenses and fees of the Note Issuer and the Certificate Issuer, so long as the Servicer has not acted in a negligent manner in connection therewith, nor shall the Servicer have any liability whatsoever as a result of any Person, including the Noteholders or the Certificateholders, not receiving any payment, amount or return anticipated or expected in respect of any Note or Certificate generally, except only to the extent that the Servicer is liable under Section 6.02 of this Agreement. (b) Notwithstanding the foregoing, this Section 4.02 shall not relieve the Servicer of any liability under Section 6.02 for any misrepresentation by the Servicer under Section 6.01 or for any breach by the Servicer of its obligations under this Agreement. Section 4.03. Remittances. (a) Pursuant to the remittance methodology more fully described in Annex II hereto, starting with collections that are received on the first Servicer Business Day that is at least 45 days after the first day on which The Connecticut Light & Power Company imposes the RRB Charge, the Servicer will remit to the Note Trustee, within two Servicer Business Days after receipt, by wire transfer of immediately available funds to the General Subaccount of the Collection Account, an amount equal to the RRB Charge Payments (as calculated in accordance with Annex II hereto) received on such day and on any prior day that was not a Servicer Business Day for which a Remittance has not previously been made. Prior to or simultaneous with each Remittance to the General Subaccount of the Collection Account pursuant to this Section, the Servicer shall provide written notice to the Note Trustee of each such Remittance (including the exact dollar amount to be remitted). In accordance with to Section 16-245g(e) of the Statute, amounts collected from customers shall be allocated on a pro rata basis among (i) the RRB Charge, (ii) any remaining portion of the CTA not the subject of the Financing Order, and (iii) the Servicer's other charges. (b) The Servicer may elect to make Remittances less frequently than on a daily basis, and shall be permitted to do so, but in any event shall make Remittances within one calendar month of collection thereof, provided that the Servicer shall send written notice of such election to the Note Issuer, the Note Trustee and the Certificate Trustee, together with (i) an Officer's Certificate stating that no Servicer Default has occurred and is continuing under this Servicing Agreement, (ii) evidence that the Rating Agency Condition has been satisfied, (iii) evidence of the delivery by the Servicer to the Note Issuer or the Note Trustee, as applicable, of any credit enhancement which may be required by the Rating Agencies in connection therewith in form and substance satisfactory to the Note Issuer and the Note Trustee, as applicable, the cost of which credit enhancement shall be borne solely by the Servicer, and (iv) an executed copy of any appropriate amendment hereto or to the Note Indenture or any other Basic Agreement as reasonably requested by the Servicer, the Note Issuer or the Note Trustee in connection therewith. (c) The Servicer agrees and acknowledges that it will remit RRB Charge Payments in accordance with this Section 4.03 without any surcharge, fee, offset, charge or other deduction except for late fees permitted by Section 6.06. ARTICLE 5 THE TRANSITION PROPERTY Section 5.01. Custody of Transition Property Records. To assure uniform quality in servicing the Transition Property and to reduce administrative costs, the Note Issuer hereby revocably appoints the Servicer, and the Servicer hereby accepts such appointment, to act as the agent of the Note Issuer and the Note Trustee as custodian of any and all documents and records that the Servicer shall keep on file, in accordance with its customary procedures, relating to the Transition Property, including copies of the Financing Order and Advice Letters relating thereto and all documents filed with the DPUC in connection with any Periodic Adjustment or Non-Routine Periodic Adjustment and computational records relating thereto (collectively, the "Transition Property Records"), which are hereby constructively delivered to the Note Trustee, as pledgee of the Note Issuer with respect to all Transition Property. Section 5.02. Duties of Servicer as Custodian. (a) Safekeeping. The Servicer shall hold the Transition Property Records on behalf of the Note Issuer and maintain such accurate and complete accounts, records and computer systems pertaining to the Transition Property Records on behalf of the Note Issuer and the Note Trustee as shall enable the Note Issuer to comply with this Agreement and the Note Indenture. In performing its duties as custodian the Servicer shall act with reasonable care, using that degree of care and diligence that the Servicer exercises with respect to comparable assets that the Servicer services for itself or, if applicable, for others. The Servicer shall promptly report to the Note Issuer and the Note Trustee any failure on its part to hold the Transition Property Records and maintain its accounts, records and computer systems as herein provided and promptly take appropriate action to remedy any such failure. Nothing herein shall be deemed to require an initial review or any periodic review by the Note Issuer or the Note Trustee of the Transition Property Records. The Servicer's duties to hold the Transition Property Records on behalf of the Note Issuer set forth in this Section 5.02, to the extent such Transition Property Records have not been previously transferred to a successor Servicer pursuant to Article 7, shall terminate one year and one day after the earlier of the date on which (i) the Servicer is succeeded by a successor Servicer in accordance with Article 7 and (ii) no Notes are outstanding. (b) Maintenance of and Access to Records. The Servicer shall maintain at all times records and accounts that permit the Servicer to identify RRB Charges billed. The Servicer shall maintain the Transition Property Records in Berlin, Connecticut or at such other office in the United States as shall be specified to the Note Issuer and the Note Trustee by written notice at least 30 days prior to any change in location. The Servicer shall make available for inspection to the Note Issuer and the Note Trustee or their respective duly authorized representatives, attorneys or auditors the Transition Property Records at such times during normal business hours as the Note Issuer or the Note Trustee shall reasonably request and which do not unreasonably interfere with the Servicer's normal operations. Nothing in this Section 5.02(b) shall affect the obligation of the Servicer to observe any applicable law (including any DPUC Regulations) prohibiting disclosure of information regarding the customers, and the failure of the Servicer to provide access to such information as a result of such obligation shall not constitute a breach of this Section 5.02(b). (c) Release of Documents. Upon instruction from the Note Trustee in accordance with the Note Indenture, the Servicer shall release any Transition Property Records to the Note Trustee, the Note Trustee's agent or the Note Trustee's designee, as the case may be, at such place or places as the Note Trustee may designate, as soon as practicable. (d) Defending Transition Property Against Claims. The Servicer, on behalf of the Noteholders and the Certificateholders, shall institute any action or proceeding necessary to compel performance by the DPUC or the State of Connecticut of any of their obligations or duties under the Statute, the Financing Order or any Advice Letter, and the Servicer agrees to take such legal or administrative actions, including defending against or instituting and pursuing legal actions and appearing or testifying at hearings or similar proceedings, as may be reasonably necessary to block or overturn any attempts to cause a repeal of, modification of or supplement to the Statute or the Financing Order or the rights of holders of Transition Property by executive action, legislative enactment or constitutional amendment or (if such means become available in the future) referendum or initiative petition that would be adverse to Certificateholders. The costs of any such action shall be payable from RRB Charge Collections as an Operating Expense in accordance with the priorities set forth in Section 8.02(d) of the Note Indenture. The Servicer's obligations pursuant to this Section 5.02 shall survive and continue notwithstanding the fact that the payment of Operating Expenses pursuant to Section 8.02(d) of the Note Indenture may be delayed (it being understood that the Servicer may be required to advance its own funds to satisfy its obligations hereunder). Section 5.03. Instructions; Authority to Act. For so long as any Notes remain outstanding, the Servicer shall be deemed to have received proper instructions with respect to the Transition Property Records upon its receipt of written instructions signed by a Responsible Officer (as defined in the Note Indenture) of the Note Trustee. Section 5.04. Effective Period and Termination. The Servicer's appointment as custodian shall become effective as of the Closing Date and shall continue in full force and effect until terminated pursuant to this Section 5.04. If any Servicer shall resign as Servicer in accordance with the provisions of this Agreement or if all of the rights and obligations of any Servicer shall have been terminated under Section 7.01, the appointment of such Servicer as custodian shall terminate upon appointment of a successor Servicer, subject to the approval of the DPUC, and acceptance by such successor Servicer of such appointment. Section 5.05. Monitoring of Third-Party Suppliers. From time to time, until the Retirement of the Notes, the Servicer shall, using the same degree of care and diligence that it exercises with respect to payments owed to it for its own account, implement such procedures and policies as are necessary to properly enforce the obligations of each TPS to remit RRB Charges, in accordance with the terms and provisions of the Financing Order, the TPS Service Agreement and Schedule A to Annex I hereto. Section 5.06. Monitoring and Collecting Exit Charges. The Servicer shall, using the same degree of care and diligence that it exercises with respect to payments owed to it for its own account, bill and collect any exit charges to which it may be entitled pursuant to Section 16-245w of the Connecticut General Statutes, and shall remit that portion of the exit charges representing (or allocable to) the RRB Charge together with the RRB Charge Payments for a particular billing date. ARTICLE 6 THE SERVICER Section 6.01. Representations and Warranties of Servicer. The Servicer makes the following representations and warranties, as of the Closing Date, on which the Note Issuer is deemed to have relied in entering into this Agreement relating to the servicing of the Transition Property. (a) Organization and Good Standing. The Servicer is duly organized and validly existing as a corporation in good standing under the laws of the State of Connecticut, with the requisite corporate power and authority to own its properties as such properties are currently owned and to conduct its business as such business is now conducted by it, and has the requisite corporate power and authority to service the Transition Property and to hold the Transition Property Records as custodian. (b) Due Qualification. The Servicer is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of property or the conduct of its business (including the servicing of the Transition Property as required by this Agreement) shall require such qualifications, licenses or approvals (except where the failure to so qualify or obtain such licenses and approvals would not be reasonably likely to have a material adverse effect on the Servicer's business, operations, assets, revenues or properties or adversely affect the servicing of the Transition Property). (c) Power and Authority. The Servicer has the requisite corporate power and authority to execute and deliver this Agreement and to carry out its terms; and the execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action on the part of the Servicer. (d) Binding Obligation. This Agreement constitutes a legal, valid and binding obligation of the Servicer enforceable against it in accordance with its terms, subject to applicable insolvency, reorganization, moratorium, fraudulent transfer and other laws relating to or affecting creditors' rights generally from time to time in effect and to general principles of equity (including concepts of materiality, reasonableness, good faith and fair dealing), regardless of whether considered in a proceeding in equity or at law. (e) No Violation. The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof do not: (i) conflict with or result in any breach of any of the terms and provisions of, nor constitute (with or without notice or lapse of time) a default under, the articles of organization or by-laws of the Servicer, or any material indenture, agreement or other instrument to which the Servicer is a party or by which it is bound; (ii) result in the creation or imposition of any Lien upon any of the Servicer's properties pursuant to the terms of any such indenture, agreement or other instrument; nor violate any existing law or any existing order, rule or regulation applicable to the Servicer of any court or of any federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Servicer or its properties, so as to adversely affect the Servicer, the Noteholders or the Certificateholders. (f) No Proceedings. There are no proceedings pending and, to the Servicer's knowledge, there are no proceedings threatened and, to the Servicer's knowledge, there are no investigations pending or threatened, before any court, federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Servicer or its properties involving or relating to the Servicer or the Note Issuer or, to the Servicer's knowledge, any other Person: (i) asserting the invalidity of this Agreement; (ii) seeking to prevent the consummation of any of the transactions contemplated by this Agreement; or (iii) seeking any determination or ruling that might materially and adversely affect the performance by the Servicer of its obligations under, or the validity or enforceability of, this Agreement. (g) Approvals. No approval, authorization, consent, order or other action of, or filing with, any court, federal or state regulatory body, administrative agency or other governmental instrumentality is required in connection with the execution and delivery by the Servicer of this Agreement, the performance by the Servicer of the transactions contemplated hereby or the fulfillment by the Servicer of the terms hereof, except those that have been obtained or made and those that the Servicer is required to make in the future pursuant to Article 3 or 4 and post-closing filings in connection therewith. Section 6.02. Indemnities of Servicer. (a) The Servicer shall be liable in accordance herewith only to the extent of the obligations specifically undertaken by the Servicer and as expressly provided under this Section 6.02. (b) The Servicer shall indemnify the Note Issuer, the Noteholders, and the Certificateholders and any Swap Counterparty(each an "Indemnified Person" for purposes of Section 6.02 (b) and (d)) for, and defend and hold harmless each such Person from and against, any and all liabilities, obligations, losses, damages, payments, claims, costs or expenses of any kind whatsoever (collectively, "Losses") that may be imposed on, incurred by or asserted against any such Person as a result of (i) the Servicer's willful misconduct or negligence in the performance of its duties or observance of its covenants under this Agreement (including the Servicer's willful misconduct or negligence relating to the maintenance and custody by the Servicer, as custodian, of the Transition Property Records) or (ii) the Servicer's breach in any material respect of any of its representations or warranties in this Agreement; provided, however, that the Servicer shall not be liable for any Losses resulting from the willful misconduct or gross negligence of any such Indemnified Person; and, provided, further, that the Noteholders, and the Certificateholders and any Swap Counterparty shall be entitled to enforce their rights and remedies against the Servicer under this Section 6.02(b) solely through a cause of action brought for their benefit by the Note Trustee or the Certificate Trustee, as the case may be; and, provided, further, that the Servicer shall not be liable for any Losses, regardless of when incurred, after the Notes and the Certificates have been paid in full and any Losses are fully paid to any Swap Counterparty, except as provided in Section 6.02(c). (c) The Servicer shall indemnify and hold harmless the Note Trustee, the Delaware Trustee, any Swap Counterparty, the Certificate Trustee, the Certificate Issuer, the State of Connecticut, the Finance Authority, the State Treasurer, agencies of the State of Connecticut and any of their respective affiliates, officials, officers, directors, employees, consultants, counsel and agents (each an "Indemnified Person" for purposes of Section 6.02(c) and (d)) for, and defend and hold harmless each such Person from and against, any and all Losses imposed on, incurred by or asserted against any of such Indemnified Persons as a result of: (i) the Servicer's willful misconduct or negligence in the performance of its duties or observance of its covenants under this Agreement (including the Servicer's willful misconduct or negligence relating to the maintenance and custody by the Servicer, as custodian, of the Transition Property Records) or (ii) the Servicer's breach in any material respect of any of its representations or warranties in this Agreement; provided, however, that the Servicer shall not be liable for any Losses resulting from the willful misconduct or gross negligence of such Indemnified Person or resulting from a breach of a representation or warranty made by such Indemnified Person in any of the Basic Documents that gives rise to the Servicer's breach. (d) The Servicer shall not be required to indemnify an Indemnified Person for any amount paid or payable by such Indemnified Person pursuant to Section 6.02(b) or (c) in the settlement of any action, proceeding or investigation without the written consent of the Servicer, which consent shall not be unreasonably withheld. Promptly after receipt by an Indemnified Person of notice of its involvement in any action, proceeding or investigation, such Indemnified Person shall, if a claim for indemnification in respect thereof is to be made against the Servicer under Section 6.02 (b) or (c), notify the Servicer in writing of such involvement. Failure by an Indemnified Person to so notify the Servicer shall relieve the Servicer from the obligation to indemnify and hold harmless such Indemnified Person under Section 6.02(b) or (c), as applicable, only to the extent that the Servicer suffers actual prejudice as a result of such failure. With respect to any action, proceeding or investigation brought by a third party for which indemnification may be sought under Section 6.02(b) or (c), the Servicer shall be entitled to assume the defense of any such action, proceeding or investigation. Upon assumption by the Servicer of the defense of any such action, proceeding or investigation, the Indemnified Person shall have the right to participate in such action or proceeding and to retain its own counsel. The Servicer shall be entitled to appoint counsel of the Servicer's choice at the Servicer's expense to represent the Indemnified Person in any action, proceeding or investigation for which a claim of indemnification is made against the Servicer under Section 6.02(b) or (c) (in which case the Servicer shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the Indemnified Person except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the Indemnified Person. Notwithstanding the Servicer's election to appoint counsel to represent the Indemnified Person in an action, proceeding or investigation, the Indemnified Person shall have the right to employ separate counsel (including local counsel), and the Servicer shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of counsel chosen by the Servicer to represent the Indemnified Person would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the Indemnified Person and the Servicer and the Indemnified Person shall have reasonably concluded that there may be legal defenses available to it that are different from or additional to those available to the Servicer, (iii) the Servicer shall not have employed counsel reasonably satisfactory to the Indemnified Person to represent the Indemnified Person within a reasonable time after notice of the institution of such action or (iv) the Servicer shall authorize the Indemnified Person to employ separate counsel at the expense of the Servicer. Notwithstanding the foregoing, the Servicer shall not be obligated to pay for the fees, costs and expenses of more than one separate counsel for the Indemnified Persons (in addition to local counsel). The Servicer will not, without the prior written consent of the Indemnified Person, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought under Section 6.02(b) or (c), as applicable (whether or not the Indemnified Person is an actual or potential party to such claim or action) unless such settlement, compromise or consent includes an unconditional release of the Indemnified Person from all liability arising out of such claim, action, suit or proceeding. (e) Indemnification under Section 6.02(b) and 6.02(c) shall include reasonable fees and out-of-pocket expenses of investigation and litigation (including reasonable attorneys' fees and expenses), except as otherwise provided in this Agreement. (f) For purposes of Section 6.02(b) and 6.02(c), in the event of the termination of the rights and obligations of The Connecticut Light and Power Company (or any successor thereto pursuant to Section 6.04) as Servicer pursuant to Section 7.01, or a resignation by such Servicer pursuant to this Agreement, such Servicer shall be deemed to be the Servicer pending appointment of a successor Servicer pursuant to Section 7.02. (g) The indemnities contained in this Section 6.02 survive the resignation or termination of the Note Trustee, the Certificate Trustee or the Delaware Trustee or the termination of this Agreement or any Swap Agreement. Section 6.03. Limitation on Liability of Servicer and Others. Except as otherwise provided under this Agreement, neither the Servicer nor any of the directors, officers, employees or agents of the Servicer shall be liable to the Note Issuer or any other Person for any action taken or for refraining from the taking of any action pursuant to this Agreement or for errors in judgment; provided, however, that this provision shall not protect the Servicer or any director, officer, employee or agent of the Servicer against any liability that would otherwise be imposed by reason of willful misconduct or negligence in the performance of duties under this Agreement. The Servicer and any director, officer, employee or agent of the Servicer may rely in good faith on the advice of counsel reasonably acceptable to the Note Trustee or on any document of any kind, prima facie properly executed and submitted by any Person, respecting any matters arising under this Agreement. Except as provided in this Agreement, the Servicer shall not be under any obligation to appear in, prosecute or defend any legal action relating to the Transition Property. Section 6.04. Merger or Consolidation of, or Assumption of the Obligations of, Servicer. Any Person (a) into which the Servicer may be merged or consolidated, (b) which may result from any merger or consolidation to which the Servicer shall be a party or (c) which may succeed to the properties and assets of the Servicer substantially as a whole, which Person in any of the foregoing cases executes an agreement of assumption to perform every obligation of the Servicer hereunder, shall be the successor to the Servicer under this Agreement without further act on the part of any of the parties to this Agreement; provided, however, that (i) immediately after giving effect to such transaction, no Servicer Default and no event which, after notice or lapse of time, or both, would become a Servicer Default shall have occurred and be continuing, (ii) the Servicer shall have delivered to the Note Issuer and the Note Trustee an Officers' Certificate stating that such consolidation, merger or succession and such agreement of assumption comply with this Section and that all conditions precedent provided for in this Agreement relating to such transaction have been complied with, (iii) the Servicer shall have delivered to the Note Issuer and the Note Trustee an Opinion of Counsel either (A) stating that, in the opinion of such counsel, all statutory filings to be made by the Servicer, including filings with the DPUC pursuant to the Statute, have been executed and filed that are necessary to preserve and protect fully the interests of the Note Issuer in the Transition Property and reciting the details of such filings or (B) stating that, in the opinion of such counsel, no such action shall be necessary to preserve and protect such interests and (iv) the Rating Agencies shall have received prior written notice of such transaction. When any Person acquires the properties and assets of the Servicer substantially as a whole and becomes the successor to the Servicer in accordance with the terms of this Section 6.04, then upon satisfaction of all of the other conditions of this Section 6.04, the Servicer shall automatically and without further notice be released from all its obligations hereunder. Section 6.05. The Connecticut Light and Power Company Not to Resign as Servicer. Subject to the provisions of Section 6.04, The Connecticut Light and Power Company shall not resign from the obligations and duties hereby imposed on it as Servicer under this Agreement except upon either (a) a determination that the performance of its duties under this Agreement shall no longer be permissible under applicable law or (b) satisfaction of the following: (i) the Rating Agency Condition shall have been satisfied (except that with respect to Moody's it shall be sufficient to provide ten days prior notice) and (ii) the DPUC shall have approved such resignation. Notice of any such determination permitting the resignation of The Connecticut Light and Power Company shall be communicated to the Note Issuer, the Note Trustee, the Certificate Trustee and the Rating Agencies at the earliest practicable time (and, if such communication is not in writing, shall be confirmed in writing at the earliest practicable time) and any such determination that the performance of The Connecticut Light and Power Company's duties under this Agreement shall no longer be permissible under applicable law shall be evidenced by an Opinion of Counsel to such effect delivered by The Connecticut Light and Power Company to the Note Issuer, the Note Trustee and the Certificate Trustee concurrently with or promptly after such notice. No such resignation shall become effective until a successor Servicer shall have assumed the responsibilities and obligations of The Connecticut Light and Power Company in accordance with Section 7.02. Section 6.06. Servicing Compensation. (a) In consideration for its services hereunder, until the Retirement of the Notes, the Servicer shall receive an annual fee (the "Servicing Fee") in an amount equal to (i) five one-hundredth of one percent (0.05%) of the initial principal balance of the Notes for so long as the Servicer is The Connecticut Light and Power Company or any successor Servicer that bills the RRB Charge concurrently with other charges for services or (ii) up to one and one-quarter percent (1.25%) of the initial principal balance of the Notes for so long as the Servicer is a successor Servicer that bills the RRB Charge separately to customers (which amount shall be determined by a separate agreement between the Note Issuer and the Servicer). The Servicing Fee shall be payable in quarterly installments on each Payment Date. The Servicer also shall be entitled to retain as additional compensation (i) any interest earnings on RRB Charge Payments received by the Servicer and invested by the Servicer pursuant to Section 6(c) of Annex I hereto prior to remittance to the Collection Account and (ii) all late payment charges, if any, collected from customers or TPSs. (b) The Servicing Fee set forth in Section 6.06(a) and expenses provided for in Section 6.06(c) shall be paid to the Servicer by the Note Trustee, on each Payment Date in accordance with the priorities set forth in Section 8.02(d) of the Note Indenture, by wire transfer of immediately available funds from the Collection Account to an account designated by the Servicer. Any portion of the Servicing Fee not paid on such date shall be added to the Servicing Fee payable on the subsequent Payment Date. (c) The Note Issuer shall pay all expenses incurred by the Servicer in connection with its activities hereunder (including any reasonable fees to and disbursements by accountants, counsel, or any other Person, any taxes imposed on the Servicer (other than taxes based on the Servicer's net income) and any expenses incurred in connection with reports to Noteholders and Certificateholders, subject to the priorities set forth in Section 8.02(d) of the Note Indenture). Section 6.07. Compliance with Applicable Law. The Servicer covenants and agrees, in servicing the Transition Property, to comply in all material respects with all laws applicable to, and binding upon, the Servicer and relating to such Transition Property the noncompliance with which would have a material adverse effect on the value of the Transition Property; provided, however, that the foregoing is not intended to, and shall not, impose any liability on the Servicer for noncompliance with any law that the Servicer is contesting in good faith in accordance with its customary standards and procedures. Section 6.08. Access to Certain Records and Information Regarding Transition Property. The Servicer shall provide to the Noteholders, the Note Trustee and the Certificate Trustee access to the Transition Property Records in such cases where the Noteholders, the Note Trustee and the Certificate Trustee shall be required by applicable law to be provided access to such records. Access shall be afforded without charge, but only upon reasonable request and during normal business hours at the respective offices of the Servicer. Nothing in this Section shall affect the obligation of the Servicer to observe any applicable law (including any DPUC Regulation) prohibiting disclosure of information regarding the customers, and the failure of the Servicer to provide access to such information as a result of such obligation shall not constitute a breach of this Section. Section 6.09. Appointments. (a) The Servicer may at any time appoint any Person to perform all or any portion of its obligations as Servicer hereunder; provided, however, that the Rating Agency Condition shall have been satisfied in connection therewith (except that with respect to Moody's it shall be sufficient to provide ten days prior notice); and, provided, further, that the Servicer shall remain obligated and be liable under this Agreement for the servicing and administering of the Transition Property in accordance with the provisions hereof without diminution of such obligation and liability by virtue of the appointment of such Person and to the same extent and under the same terms and conditions as if the Servicer alone were servicing and administering the Transition Property; and, provided, further, however, that nothing herein (including the Rating Agency Condition) shall preclude the execution by the Servicer of a TPS Service Agreement with any TPS pursuant to applicable DPUC Regulations. The fees and expenses of any such Person shall be as agreed between the Servicer and such Person from time to time and none of the Note Issuer, the Note Trustee, the Noteholders or any other Person shall have any responsibility therefor or right or claim thereto. Any such appointment shall not constitute a Servicer resignation under Section 6.05. (b) The Servicer has no employees. Therefore, in carrying out the foregoing duties or any of its other obligations under this Agreement, the Servicer may enter into transactions with or otherwise deal with any of its Affiliates to obtain the services of employees of such Affiliates as is its current practice; provided, however, that the terms of any such transactions or dealings shall be no less favorable to the Note Issuer than would be available from unaffiliated parties or that would be available if the Servicer were to hire its own employees to perform such services. Section 6.10. No Servicer Advances. The Servicer shall not make any advances of interest on or principal of the Notes or the Certificates. Section 6.11. Maintenance of Operations. The Servicer agrees to continue to operate its distribution system to provide service to its customers so long as it is acting as the Servicer under this Agreement. ARTICLE 7 DEFAULT Section 7.01. Servicer Default. If any one of the following events (each a "Servicer Default") shall occur and be continuing: (a) any failure by the Servicer to remit to the Collection Account on behalf of the Note Issuer any required Remittance that shall continue unremedied for a period of five (5) Business Days after written notice of such failure is received by the Servicer from the Note Issuer or the Note Trustee; or (b) any failure on the part of the Servicer duly to observe or to perform in any material respect any other covenants or agreements of the Servicer set forth in this Agreement, which failure shall (a) materially and adversely affect the rights of the Noteholders or Certificateholders and (ii) continue unremedied for a period of 60 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given (A) to the Servicer by the Note Issuer or (B) to the Servicer by the Note Trustee or by the Holders of Notes evidencing not less than 25 percent of the Outstanding Amount of the Notes; or (c) any representation or warranty made by the Servicer in this Agreement shall prove to have been incorrect in any material respect when made, which has a material adverse effect on the Noteholders or Certificateholders and which material adverse effect continues unremedied for a period of 60 days after written notice of such failure is received by the Servicer from the Note Issuer or the Note Trustee; (d) an Insolvency Event occurs with respect to the Servicer; or (e) an "Event of Termination" under the Seller's Receivables Purchase and Sale Agreement occurs and has not been remedied or waived; then, and in each and every case, so long as the Servicer Default shall not have been remedied, either the Note Trustee, or the Holders of Notes evidencing not less than 25 percent of the Outstanding Amount of the Notes, by notice then given in writing to the Servicer (and to the Note Trustee if given by the Noteholders) (a "Termination Notice") may terminate all the rights and obligations (other than the obligations set forth in Section 6.02) of the Servicer under this Agreement. In addition, upon a Servicer Default described in Section 7.01(a), each of the following shall be entitled to apply to the DPUC for sequestration and payment of revenues arising with respect to the Transition Property in accordance with Sections 16-245k(e) and Section 16-245k(g) of the Statute: (1) the Note Trustee or the Noteholders; (2) the Certificate Trustee or the Certificateholders; (3) the Delaware Trustee; (4) the Note Issuer or its assignees; or (5) pledgees or transferees of the Transition Property. On or after the receipt by the Servicer of a Termination Notice, and subject to the approval of the DPUC, all authority and power of the Servicer under this Agreement, whether with respect to the Notes, the Transition Property, the RRB Charge or otherwise, shall, without further action, pass to and be vested in such successor Servicer as may be appointed under Section 7.02; and, without limitation, the Note Trustee is hereby authorized and empowered to execute and deliver, on behalf of the predecessor Servicer, as attorney-in-fact or otherwise, any and all documents and other instruments, and to do or accomplish all other acts or things necessary or appropriate to effect the purposes of such Termination Notice, whether to complete the transfer of the Transition Property Records and related documents, or otherwise. The predecessor Servicer shall cooperate with the successor Servicer, the Note Issuer and the Note Trustee in effecting the termination of the responsibilities and rights of the predecessor Servicer under this Agreement, including the transfer to the successor Servicer for administration by it of all cash amounts that shall at the time be held by the predecessor Servicer for remittance, or shall thereafter be received by it with respect to the Transition Property or the RRB Charge. In case a successor Servicer is appointed as a result of a Servicer Default, all reasonable costs and expenses (including reasonable attorneys' fees and expenses) incurred in connection with transferring the Transition Property Records to the successor Servicer and amending this Agreement to reflect such succession as Servicer pursuant to this Section shall be paid by the predecessor Servicer upon presentation of reasonable documentation of such costs and expenses. All other reasonable costs and expenses incurred in transferring servicing responsibilities to a successor servicer shall constitute Operating Expenses of the Note Issuer. Section 7.02. Appointment of Successor. (a) Upon the Servicer's receipt of a Termination Notice pursuant to Section 7.01 or the Servicer's resignation or removal in accordance with the terms of this Agreement, the predecessor Servicer shall continue to perform its functions as Servicer under this Agreement, and shall be entitled to receive the requisite portion of the Servicing Fee and reimbursement of expenses as provided herein, until a successor Servicer shall have assumed in writing the obligations of the Servicer hereunder as described below. In the event of the Servicer's termination hereunder, the Note Issuer shall appoint, subject to the approval of the DPUC, a successor Servicer with the Note Trustee's prior written consent thereto (which consent shall not be unreasonably withheld), and the successor Servicer shall accept its appointment by a written assumption in form reasonably acceptable to the Note Issuer and the Note Trustee. If within 30 days after the delivery of the Termination Notice, the Note Issuer shall not have obtained such a new Servicer, the Note Trustee may appoint (subject to the approval of the DPUC) or petition the DPUC or a court of competent jurisdiction to appoint a successor Servicer under this Agreement. A Person shall qualify as a successor Servicer only if (i) such Person is permitted under DPUC Regulations to perform the duties of the Servicer, (ii) the Rating Agency Condition shall have been satisfied and (iii) such Person assumes in writing the obligations of the Servicer hereunder or enters into a servicing agreement with the Note Issuer having substantially the same provisions as this Agreement. (b) Upon appointment, the successor Servicer shall be the successor in all respects to the predecessor Servicer and shall be subject to all the responsibilities, duties and liabilities arising thereafter relating thereto placed on the predecessor Servicer and shall be entitled to the Servicing Fee and all the rights granted to the predecessor Servicer by the terms and provisions of this Agreement. Section 7.03. Waiver of Past Defaults. The Holders of Notes evidencing not less than a majority of the Outstanding Amount of the Notes may, on behalf of all Noteholders, waive in writing any default by the Servicer in the performance of its obligations hereunder and its consequences, except a default in making any required Remittances to the Collection Account in accordance with this Agreement. Upon any such waiver of a past default, such default shall cease to exist, and any Servicer Default arising therefrom shall be deemed to have been remedied for every purpose of this Agreement. No such waiver shall extend to any subsequent or other default or impair any right consequent thereto. Section 7.04. Notice of Servicer Default. The Servicer shall deliver to the Note Issuer, the Note Trustee, the Certificate Trustee, the Certificate Issuer, the Finance Authority and the Rating Agencies, promptly after any of its Responsible Officers having obtained actual knowledge thereof, but in no event later than five Business Days thereafter, written notice in an Officers' Certificate of any event which with the giving of notice or lapse of time, or both, would become a Servicer Default under Section 7.01(a) or (b). Section 7.05. Inter-Creditor Agreement. So long as the Inter-Creditor Agreement remains in effect, the rights and remedies set forth in this Article 7 shall be subject to the provisions of the Inter-Creditor Agreement. ARTICLE 8 MISCELLANEOUS PROVISIONS Section 8.01. Amendment. (a) This Agreement may be amended in writing by the Servicer and the Note Issuer with ten Business Days' prior written notice given to the Rating Agencies and the prior written consent of the Note Trustee (which consent shall not be unreasonably withheld), but without the consent of any of the Noteholders or any of the Certificateholders (notwithstanding any provision of any other document that would otherwise require such consent as a precondition of Note Trustee consent), to cure any ambiguity, to correct or supplement any provisions in this Agreement or for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions in this Agreement or of modifying in any manner the rights of the Noteholders; provided, however, that such action shall not, as evidenced by an Officer's Certificate delivered to the Note Issuer, the Note Trustee and any Swap Counterparty, adversely affect in any material respect the interests of any Noteholder, or any Certificateholder or adversely affect the interests of any Swap Counterparty. No amendment may be made to this Agreement that would adversely affect any Swap Counterparty without its prior written consent. (b) This Agreement may also be amended in writing from time to time by the Servicer and the Note Issuer with ten Business Days' prior written notice given to the Rating Agencies and the prior written consent of the Note Trustee (which consent shall not be unreasonably withheld) and the prior written consent of the Holders of Notes evidencing not less than a majority of the Outstanding Amount of the Notes, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of modifying in any manner the rights of the Noteholders; provided, however, that any amendment of the provisions of Sections 4.01 or 4.03 shall satisfy the Rating Agency Condition. (c) If the written consent of Noteholders is required in connection with an amendment hereof, approval by Noteholders of the substance of any proposed amendment or consent shall constitute sufficient consent of the Noteholders pursuant to this Section, and it shall not be necessary that Noteholders approve of the particular form of any amendment or consent. (d) Promptly after the execution thereof, the Note Issuer shall provide each of the Rating Agencies with a copy of any amendment to this Agreement. (e) Prior to its consent to any amendment to this Agreement, the Note Trustee shall be entitled to receive and conclusively rely upon an Opinion of Counsel stating that such amendment is authorized or permitted by this Agreement. The Note Trustee may, but shall not be obligated to, enter into any such amendment which affects the Note Trustee's own rights, duties or immunities under this Agreement or otherwise. Section 8.02. Maintenance of Accounts and Records. (a) The Servicer shall maintain accounts and records as to the Transition Property accurately and in accordance with its standard accounting procedures. (b) The Servicer shall permit the Note Trustee and its agents at any time during normal business hours, upon reasonable notice to the Servicer and to the extent it does not unreasonably interfere with the Servicer's normal operations, to inspect, audit and make copies of and abstracts from the Servicer's records regarding the Transition Property and the RRB Charge. Nothing in this Section 8.02(b) shall affect the obligation of the Servicer to observe any applicable law (including any DPUC Regulation) prohibiting disclosure of information regarding the customers, and the failure of the Servicer to provide access to such information as a result of such obligation shall not constitute a breach of this Section 8.02(b). Section 8.03. Notices. Unless otherwise specifically provided herein, all notices, directions, consents and waivers required under the terms and provisions of this Agreement shall be in English and in writing, and any such notice, direction, consent or waiver may be given by United States mail, courier service, facsimile transmission or electronic mail (confirmed by telephone, United States mail or courier service in the case of notice by facsimile transmission or electronic mail) or any other customary means of communication, and any such notice, direction, consent or waiver shall be effective when delivered, or if mailed, three days after deposit in the United States mail with proper postage for ordinary mail prepaid: (a) if to the Servicer, to The Connecticut Light and Power Company c/o Northeast Utilities Service Company if by U.S. Mail: P.O. Box 270 Hartford, CT 06141-0270 if by courier: 107 Selden Street Berlin, CT 06037 Attention: Treasurer Facsimile: (860) 665-5457 Telephone: (860) 665-3258 Email: shoopra@nu.com (b) if to the Note Issuer, to CL&P Funding LLC c/o The Connecticut Light and Power Company if by U.S. Mail: P.O. Box 270 Hartford, CT 06141-0270 if by courier: 107 Selden Street Berlin, CT 06037 Attention: President Facsimile: (860) 665-5457 Telephone: (860) 665-3258 Email: shoopra@nu.com with a copy to: The Connecticut Light and Power Company if by U.S. Mail: P.O. Box 270 Hartford, CT 06141-0270 if by courier: 107 Selden Street Berlin, CT 06037 Attention: Treasurer Facsimile: 860-665-5457 Telephone: 860-665-3258 Email: shoopra@nu.com (c) if to the Note Trustee, to First Union Trust Company, National Association One Rodney Square 920 King Street, 1st Floor Wilmington, DE 19801-7475 Attention: Corporate Trust Administration Facsimile: (302) 888-7544 Telephone: (302) 888-7500 (d) if to Moody's, to Moody's Investors Service, Inc. 99 Church Street New York, NY 10007 Attention: ABS Monitoring Department Facsimile: (212) 553-0573 Telephone: (212) 553-3686 (e) if to S&P, to Standard & Poor's 55 Water Street, 40th Floor New York, NY 10041 Attention: Asset Backed Surveillance Department Facsimile: (212) 438-2655 Telephone: (212) 438-2000 (f) if to Fitch, to Fitch, Inc. One State Street Plaza New York, NY 10004 Attention: ABS Surveillance Facsimile: (212) 514-9879 Telephone: (212) 908-0500 Email: surv@fitchratings.com (g) if to the Finance Authority, to Office of the State Treasurer 55 Elm Street Hartford, CT 06103 Attention: Assistant Treasurer - Debt Management Facsimile: (860) 702-3127 Telephone: (860) 702-3034 (h) if to the Certificate Issuer, to: Connecticut RRB Special Purpose Trust CL&P-1 First Union Trust Company, National Association One Rodney Square 920 King Street, 1st Floor Wilmington, DE 19801-7475 Attention: Corporate Trust Administration Facsimile: (302) 888-7544 Telephone: (302) 888-7500 (with copies to the Finance Authority at the addresses listed herein) (i) if to any Swap Counterparty, to the address and in the manner set forth in any Swap Agreement (a copy of which will be provided by the Certificate Trustee, upon request); and (j) as to each of the foregoing, at such other address as shall be designated by written notice to the other parties. Section 8.04. Assignment. Notwithstanding anything to the contrary contained herein, except as provided in Section 6.04 and as provided in the provisions of this Agreement concerning the resignation of the Servicer, this Agreement may not be assigned by the Servicer. Section 8.05. Limitations on Rights of Third Parties. The provisions of this Agreement are solely for the benefit of the Servicer, the Note Issuer, the Noteholders, the Certificateholders, any Swap Counterparty, the Note Trustee, the Certificate Trustee, the Delaware Trustee, the Finance Authority, the Certificate Issuer and the other Persons expressly referred to herein and such Persons shall have the right to enforce the relevant provisions of this Agreement, except that the Noteholders, and the Certificateholders and any Swap Counterparty shall be entitled to enforce their rights against the Servicer under this Agreement solely through a cause of action brought for their benefit by the Note Trustee or the Certificate Trustee, as the case may be. Nothing in this Agreement, whether express or implied, shall be construed to give to any other Person any legal or equitable right, remedy or claim in the Transition Property or under or in respect of this Agreement or any covenants, conditions or provisions contained herein. Section 8.06. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Section 8.07. Separate Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. Section 8.08. Headings. The headings of the various Articles and Sections herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Section 8.09. Governing Law. This Agreement shall be construed in accordance with the substantive laws of the State of Connecticut, without giving effect to its conflict of law or other principles that would cause the application of the laws of another jurisdiction, and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws. Section 8.10. Assignment to Note Trustee. The Servicer hereby acknowledges and consents to the collateral assignment of any or all of the Note Issuer's rights and obligations hereunder to the Note Trustee for the benefit of the holders of the Notes and to the further assignment of the Note Trustee's rights and obligations under the Note Indenture to the Certificate Trustee for the benefit of the holders of the Certificates. Section 8.11. Nonpetition Covenants. Notwithstanding any prior termination of this Agreement or the Note Indenture, but subject to the DPUC's right to order the sequestration and payment of revenues arising with respect to the Transition Property notwithstanding any bankruptcy, reorganization or other insolvency proceedings with respect to the debtor, pledgor or transferor of the Transition Property pursuant to Sections 16-245k(e) and 16-245k(g) of the Statute, the Servicer shall not, prior to the date which is one year and one day after the termination of the Note Indenture with respect to the Note Issuer, petition or otherwise invoke or cause the Note Issuer or the Trust to invoke the process of any court or governmental authority for the purpose of commencing or sustaining a case against the Note Issuer or the Trust under any federal or state bankruptcy, insolvency or similar law or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Note Issuer or the Trust or any substantial part of the property of the Note Issuer or the Trust, or ordering the winding up or liquidation of the affairs of the Note Issuer or the Trust. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties hereto have caused this Transition Property Servicing Agreement to be duly executed by their respective officers as of the day and year first above written. CL&P FUNDING LLC, Note Issuer By: /S/RANDY A. SHOOP Name: Randy A. Shoop Title: President THE CONNECTICUT LIGHT AND POWER COMPANY, Servicer By /S/RANDY A. SHOOP Name: Randy A. Shoop Title: Treasurer EXHIBIT A CERTIFICATE OF COMPLIANCE The undersigned hereby certifies that he/she is the duly elected and acting [________] of The Connecticut Light and Power Company, as servicer (the "Servicer") under the Transition Property Servicing Agreement, dated as of March __, 2001 (the "Servicing Agreement"), between the Servicer and CL&P Funding LLC (the "Note Issuer"), and further certifies on behalf of the Servicer that: 1. A review of the activities of the Servicer and of its performance under the Servicing Agreement during the __________ months ended December 31, 20[_] has been made under the supervision of the undersigned pursuant to Section 3.03 of the Servicing Agreement; and 2. To the undersigned's knowledge, based on such review, the Servicer has fulfilled all of its material obligations in all material respects under the Servicing Agreement throughout the __________ months ended December 31, 20[_], except as listed on Annex A hereto. Executed as of this _______ day of ___________, 20__ . THE CONNECTICUT LIGHT AND POWER COMPANY, Servicer By: /S/ RANDY A. SHOOP Name: RANDY A. SHOOP Title: Treasurer ANNEX A TO EXHIBIT A LIST OF SERVICER DEFAULTS Nature of Default Status EXHIBIT B FORM OF ROUTINE TRUE-UP LETTER [date] ADVICE THE STATE OF CONNECTICUT DEPARTMENT OF PUBLIC UTILITY CONTROL (THE "DEPARTMENT") SUBJECT: Periodic RRB Charge True-Up Mechanism Advice Filing Pursuant to DPUC Docket No. 00-05-01 (the "Financing Order"), The Connecticut Light and Power Company ("CL&P"), as servicer of the RRBs or any successor Servicer and on behalf of the RRB Trustee as assignee of the special purpose entity (the "SPE"), shall apply for adjustment to the RRB Charge fifteen days prior to January first of each year and at such additional intervals as may be provided for in the Financing Order. Any capitalized terms not defined herein shall have the meanings ascribed thereto in the Financing Order. PURPOSE This filing establishes the revised RRB Charge to be assessed and collected from CL&P's customers, whether or not CL&P's distribution system is being operated by CL&P or a successor distribution company. The RRB Charge is a usage-based component of the competitive transition assessment on each customer's monthly bill and may include any back-up, maintenance, emergency or other delivery or energy service fee collected until the Total RRB Payment Requirements are discharged in full. The RRB Charge is applied equally to all customers of the same class in accordance with the method of allocation in effect on July 1, 1998. In the Financing Order, the Department authorized CL&P to file Routine True-Up Letters fifteen days prior to the first day of January of each year and at such additional intervals, if necessary, as provided for in the Financing Order. CL&P, or a successor Servicer, is authorized to file periodic RRB Charge adjustments to the extent necessary to ensure the timely recovery of revenues sufficient to provide for the payment of an amount equal to the sum of the Periodic RRB Payment Requirement for the upcoming year, which may include indemnity obligations of the SPE in the RRB transaction documents for SPE officers and directors, trustee fees, liabilities of the special purpose trust and liabilities to the underwriters related to the underwriting of the RRBs. Routine True-Up Letter filings are those where CL&P uses the methodology approved by the Department in the Financing Order to adjust upward or downward the existing RRB Charge. Using the methodology approved by the Department in the Financing Order, this filing modifies the variables used in the RRB Charge calculation and provides the resulting modified RRB Charge. Table I shows the revised assumptions for each of the variables used in calculating the RRB Charge for customers. The assumptions underlying the current RRB Charges were filed in an Issuance Advice Letter, dated March 30, 2001. Table I below shows the current assumptions for each of the variables used in the RRB Charge calculation. TABLE I INPUT VALUES FOR RRB CHARGE Forecasted retail kWh sales for the period:_____ Forecasted percent of customers' billed amounts charged-off:_____ Percent of customers' billed amounts charged-off:_____ Weighted average days sales outstanding:_____ (calculated as follows) Percent of billed amounts collected in current month:_____ Percent of billed amounts collected in second month after billing:_____ Percent of billed amounts collected in third month after billing:_____ Percent of billed amounts collected in fourth month after billing:_____ Percent of billed amounts collected in fifth month after billing:_____ Forecasted ongoing interest and transaction expenses (including any already accrued but unpaid for the period):_____ Current Overcollateralization Subaccount balance:______ Scheduled Overcollateralization Subaccount balance at the end of the period:______ Current Capital Subaccount balance:______ Initial Capital Subaccount balance:______ Current RRB outstanding balance:_____ Scheduled RRB outstanding balance at the end of the period:______ Current Reserve Subaccount balance:______ The adjusted RRB Charge calculated for customers is as follows: _____ EFFECTIVE DATE In accordance with the Financing Order, Routine True-Up Letters for annual RRB Charge adjustments shall be filed fifteen days prior to January 1 each year or more frequently, if necessary, with the resulting changes to be effective 15 days after the filing, notwithstanding the fact that adjustments to other components of the CTA will occur simultaneously and may not become effective immediately. No approval by the Department is required. Therefore, these RRB Charges shall be effective as of ___________. NOTICE Copies of this filing are being furnished to the parties on the attached service list. Notice to the public is hereby given by filing and keeping this filing open for public inspection at CL&P's corporate headquarters. Enclosures EXHIBIT C FORM OF MONTHLY SERVICER CERTIFICATE Pursuant to Section 4.01(d)(2) of the Transition Property Servicing Agreement, dated as of March 30, 2001 (the "Agreement"), between The Connecticut Light and Power Company, as servicer (the "Servicer") and CL&P Funding LLC, the Servicer does hereby certify as follows: Capitalized terms used herein have their respective meanings as set forth in the Agreement. For the Monthly Period:_____________ 1. Billings: a) Monthly kWh Consumption: b) Applicable RRB Charge: c) Total RRB Charge Amount Billed this Month: d) Cumulative RRB Charge Amount Billed this Remittance Period: 2. Remittances: a) Total Amount Remitted this Month: b) Cumulative Amount Remitted this Remittance Period: c) "RRB%" (calculated in accordance with Annex II to the Agreement)for this Remittance Period: 3. Draws on Subaccounts: a) Reserve Subaccount Draw Amount this Month: b) Cumulative Reserve Subaccount Draw Amount this Remittance Period (net of funding): c) Overcollateralization Subaccount Draw Amount this Month: d) Cumulative Overcollateralization Subaccount Draw Amount this Remittance Period (net of funding): e) Capital Subaccount Draw Amount this Month: f) Cumulative Capital Subaccount Draw Amount this Remittance Period (net of funding): Executed as of this day of . THE CONNECTICUT LIGHT AND POWER COMPANY, Servicer By: /s/ RANDY A. SHOOP Name: RANDY A. SHOOP Title: TREASURER EXHIBIT D FORM OF QUARTERLY SERVICER CERTIFICATE Pursuant to Section 4.01(d)(3) of the Transition Property Servicing Agreement, dated as of March 30, 2001 (the "Agreement"), between The Connecticut Light and Power Company, as servicer (the "Servicer"), and CL&P Funding LLC, the Servicer does hereby certify, for the current Payment Date (__________ __, 20[ ]) (the "Current Payment Date"), as follows: Capitalized terms used herein have their respective meanings as set forth in the Agreement. References herein to certain sections and subsections are references to the respective sections of the Agreement. 1. RRB Charge Collections and Aggregate Amounts Available for the Current Payment Date: i. Amount Remitted [Month] [Year] ii. Amount Remitted [Month] [Year] iii. Amount Remitted [Month] [Year] iv. Amount Remitted [Month] [Year] v. Amount Remitted [Month] [Year] vi. Amount Remitted [Month] [Year] vii. Amount Remitted [Month] [Year] viii. Amount Remitted [Month] [Year] ix. Total Amount Remitted for this Period (sum of i. through viii. above): x. Net Earnings on Collection Account: xi. Expenses Paid to Date: xii. General Subaccount Balance (sum of ix. and x.above minus xi.): xiii. Reserve Subaccount Balance xiv. Overcollateralization Subaccount Balance xv. Capital Subaccount Balance xvi. Collection Account Balance (sum of xii.through xv. above): 2. Outstanding Principal Balance as of Prior Payment Date by Tranche: i. Class A-1 Principal Balance Outstanding Note/Certificate: ii. Class A-2 Principal Balance Outstanding Note/Certificate: iii. Class A-3 Principal Balance Outstanding Note/Certificate: iv. Class A-4 Principal Balance Outstanding Note/Certificate: v Class A-5 Principal Balance Outstanding Note/Certificate: vi. Total Note/Certificate Principal Balance: 3. Required Funding/Payments as of Current Payment Date a) Projected Principal Balances and Payments Projected Quarterly Principal Principal Due i. Class A-1 Note/Certificate ii. Class A-2 Note/Certificate iii. Class A-3 Note/Certificate iv. Class A-4 Note/Certificate v. Class A-5 Note/Certificate vi. Total Projected Principal Amount: b) Required Interest Payments Note/Cert Days in Interest Interest Rate Applicable Due i. Class A-1 Note/Certificate ii. Class A-2 Note/Certificate iii. Class A-3 Note/Certificate iv. Class A-4 Note/Certificate v. Class A-5 Note/Certificate vi. Total Required Interest Amount: c) Projected Subaccount Payments and Levels Subaccount Projected Level Level Required i. Capital Subaccount: ii. Overcollateralization Subaccount: iii. Total Subaccount Payments and Levels: 4. Allocation of Remittances as of Current Payment Date Pursuant to Section 8.02(d) of Note Indenture: a) Quarterly Expenses Net Expense Amount (Payable on Current Payment Date) i. Note, Delaware and Certificate Trustee Fees and Expenses: ii. Quarterly Servicing Fee: iii. Quarterly Administration Fee: iv. Operating Expenses (subject to $100,000 cap): v. Total Expenses: b) Quarterly Interest Per $1000 of Aggregate Original Principal Amount i. Class A-1 Note/Certificate ii. Class A-2 Note/Certificate iii. Class A-3 Note/Certificate iv. Class A-4 Note/Certificate v. Class A-5 Note/Certificate vi. Total Quarterly Interest: c) Quarterly Principal Per $1000 of Aggregate Original Principal Amount i. Class A-1 Note/Certificate ii. Class A-2 Note/Certificate iii. Class A-3 Note/Certificate iv. Class A-4 Note/Certificate v. Class A-5 Note/Certificate vi. Total Quarterly Principal: d) Other Payments i. Operating Expenses (in excess of $100,000): ii. Funding of Capital Subaccount (to required amount): iii. Funding of Overcollateralization Subaccount (to required level): iv. Deposits to Reserve Subaccount: v. Interest earnings on Capital Account Released to Note Issuer: e) Aggregate Payments Pursuant to Section 8.02(d)(i) of Note Indenture i. To Note Trustee, Certificate Trustee and Delaware Trustee: ii. To Finance Authority and Certificate Issuer: 5. Outstanding Principal Balance and Collection Account Balance as of Current Payment Date (after giving effect to payments to be made on such distribution date): a) Principal Balance Outstanding: i. Class A-1 Principal Balance Outstanding Note/Certificate: ii. Class A-2 Principal Balance Outstanding Note/Certificate: iii. Class A-3 Principal Balance Outstanding Note/Certificate: iv. Class A-4 Principal Balance Outstanding Note/Certificate: v. Class A-5 Principal Balance Outstanding Note/Certificate: vi. Total Note/Certificate Principal Balance: b) Collection Account Balances Outstanding: i. Capital Subaccount: ii. Overcollateralization Subaccount: iii. Reserve Subaccount: iv. Total Subaccount Amount: 6. Subaccount Draws as of Current Payment Date (if applicable, pursuant to Section 8.02(e) of Note Indenture): i. Capital Subaccount: ii. Overcollateralization Subaccount: iii. Reserve Subaccount: iv. Total Subaccount Draws: 7. Shortfalls in Interest and Principal Payments as of Current Payment Date (if applicable): a) Quarterly Interest Shortfall i. Class A-1 Note/Certificate ii. Class A-2 Note/Certificate iii. Class A-3 Note/Certificate iv. Class A-4 Note/Certificate v. Class A-5 Note/Certificate vi. Total Quarterly Interest Shortfall: b) Quarterly Principal Shortfall i. Class A-1 Note/Certificate ii. Class A-2 Note/Certificate iii. Class A-3 Note/Certificate iv. Class A-4 Note/Certificate v. Class A-5 Note/Certificate vi. Total Quarterly Principal Shortfall: 8. Shortfalls in Required Subaccount Levels as of Current Distribution Date: i. Capital Subaccount ii. Overcollateralization Subaccount: iii. Total Subaccount Shortfalls: IN WITNESS WHEREOF, the undersigned has duly executed and delivered this Quarterly Servicer Certificate this ___ day of ____, ____. THE CONNECTICUT LIGHT AND POWER COMPANY, Servicer By: /s/RANDY A. SHOOP Name: RANDY A. SHOOP Title: TREASURER SCHEDULE 4.01(a) Expected Amortization Schedule Outstanding Principal Balance
Payment Class Class Class Class Class Date A-1 A-2 A-3 A-4 A-5 Closing 224,858,822 255,056,333 292,381,624 287,907,878 378,195,343 9/30/01 181,027,904 255,056,333 292,381,624 287,907,878 378,195,343 12/30/01 145,111,154 255,056,333 292,381,624 287,907,878 378,195,343 3/30/02 112,308,456 255,056,333 292,381,624 287,907,878 378,195,343 6/30/02 87,709,027 255,056,333 292,381,624 287,907,878 378,195,343 9/30/02 58,292,404 255,056,333 292,381,624 287,907,878 378,195,343 12/30/02 32,187,247 255,056,333 292,381,624 287,907,878 378,195,343 3/30/03 0 255,056,333 292,381,624 287,907,878 378,195,343 6/30/03 0 227,732,868 292,381,624 287,907,878 378,195,343 9/30/03 0 195,337,425 292,381,624 287,907,878 378,195,343 12/30/03 0 166,293,780 292,381,624 287,907,878 378,195,343 3/30/04 0 131,792,472 292,381,624 287,907,878 378,195,343 6/30/04 0 102,416,672 292,381,624 287,907,878 378,195,343 9/30/04 0 67,903,967 292,381,624 287,907,878 378,195,343 12/30/04 0 36,747,662 292,381,624 287,907,878 378,195,343 3/30/05 0 0 292,381,624 287,907,878 378,195,343 6/30/05 0 0 260,766,487 287,907,878 378,195,343 9/30/05 0 0 223,906,099 287,907,878 378,195,343 12/30/05 0 0 190,375,878 287,907,878 378,195,343 3/30/06 0 0 151,200,741 287,907,878 378,195,343 6/30/06 0 0 117,159,077 287,907,878 378,195,343 9/30/06 0 0 77,796,006 287,907,878 378,195,343 12/30/06 0 0 41,760,787 287,907,878 378,195,343 3/30/07 0 0 0 287,907,878 378,195,343 6/30/07 0 0 0 251,293,044 378,195,343
9/30/07 0 0 0 209,247,737 378,195,343 12/30/07 0 0 0 170,490,986 378,195,343 3/30/08 0 0 0 125,955,154 378,195,343 6/30/08 0 0 0 86,550,513 378,195,343 9/30/08 0 0 0 41,638,744 378,195,343 12/30/08 0 0 0 0 378,195,343 3/30/09 0 0 0 0 330,702,282 6/30/09 0 0 0 0 288,320,065 9/30/09 0 0 0 0 240,335,496 12/30/09 0 0 0 0 195,586,975 3/30/10 0 0 0 0 144,900,682 6/30/10 0 0 0 0 99,319,619 9/30/10 0 0 0 0 48,054,208 12/30/10 0 0 0 0 0
ANNEX I SERVICING PROCEDURES The Servicer agrees to comply with the following servicing procedures: SECTION 1. DEFINITIONS (a) Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Agreement. (b) Whenever used in this Annex I, the following words and phrases shall have the following meanings: "Billed RRB Charges" means the dollar amounts billed to customers or the Applicable TPS or allocated from special contract customers in accordance with Section 3.01(a)(3) of the Agreement, in each case in respect of the RRB Charge, whether billed to customers or the Applicable TPS by the Servicer or to customers by a TPS pursuant to a TPS Service Agreement. "Servicer Policies and Practices" means, with respect to the Servicer's duties under this Annex I, the policies and practices of the Servicer applicable to such duties that the Servicer follows with respect to comparable assets that it services for itself or others, as in effect from time to time and in accordance with DPUC Regulations. The Servicer shall provide ten days' prior written notice to the Rating Agencies of any amendment to the Servicer Policies and Practices that would adversely affect in any material respect the Noteholders or Certificateholders. SECTION 2. DATA ACQUISITION (a) Installation and Maintenance of Meters. Except to the extent that a TPS is responsible for such services pursuant to a TPS Service Agreement, the Servicer shall cause to be installed, replaced and maintained meters in accordance with the Servicer Policies and Practices. (b) Meter Reading. In accordance with the Servicer Policies and Practices, the Servicer shall obtain usage measurements for each customer; provided, however, that the Servicer may determine any customer's usage on the basis of estimates in accordance with applicable DPUC Regulations; and, provided, further, that the Servicer may obtain usage measurements from the Applicable TPS for customers receiving meter reading services from such TPS if the applicable TPS Service Agreement so provides. (c) Cost of Metering. The Note Issuer shall not be obligated to pay any costs associated with the metering duties set forth in this Section 2, including the costs of installing, replacing and maintaining meters, nor shall the Note Issuer be entitled to any credit against the Servicing Fee for any cost savings realized by the Servicer or any TPS as a result of new metering and/or billing technologies. SECTION 3. USAGE AND BILL CALCULATION The Servicer shall obtain a calculation of each customer's usage (which may be based on data obtained from such customer's meter read or on usage estimates determined in accordance with applicable DPUC Regulations) in accordance with the Servicer Policies and Practices and shall determine therefrom Billed RRB Charges; provided, however, that in the case of customers served by a TPS pursuant to a TPS Service Agreement, the Servicer may obtain usage measurements from the Applicable TPS for customers receiving meter reading services from such TPS if the applicable TPS Service Agreement so provides and shall determine therefrom Billed RRB Charges. SECTION 4. BILLING (a) The Servicer shall implement the RRB Charge as of the Closing Date and shall thereafter bill each customer or the Applicable TPS, or allocate from special contract customers in accordance with Section 3.01(a)(3) of the Agreement, in each case for each customer's Billed RRB Charges in accordance with the provisions of this Section 4. (b) Frequency of Bills; Billing Practices. In accordance with the Servicer Policies and Practices, the Servicer shall generate and issue a Bill to each customer, or, in the case of a customer who is being billed by a TPS, to the Applicable TPS, or allocate from special contract customers in accordance with Section 3.01(a)(3) of the Agreement, in each case with respect to such customer's Billed RRB Charges. In the event that the Servicer makes any material modification to the Servicer Policies and Practices, it shall notify the Note Issuer, the Note Trustee, the Certificate Trustee and the Rating Agencies as soon as practicable, and in no event later than 60 Servicer Business Days after such modification goes into effect; provided, however, that the Servicer may not make any modification that will materially adversely affect the Certificateholders. (c) Format. (i) Each Bill to a customer shall contain or be deemed to contain a CTA that shall include the RRB Charge owed by such customer for the applicable billing period, subject, in the case of special contract customers, to Section 3.01(a)(3) of the Agreement. (ii) Each Bill in which the CTA is listed as a line item shall contain a statement (as a footnote) to the effect that all or a portion of the CTA is owned by the Note Issuer and not the Seller. (iii) The Servicer shall conform to such requirements in respect of the format, structure and text of Bills delivered to customers and TPSs as applicable DPUC Regulations shall from time to time prescribe. To the extent that Bill format, structure and text are not prescribed by applicable law or by applicable DPUC Regulations, the Servicer shall, subject to clauses (i) and (ii) of this subsection (c), determine the format, structure and text of all Bills in accordance with its reasonable business judgment, the Servicer Policies and Practices and historical practice. (d) Delivery. Except as provided in the next sentence, the Servicer shall deliver all Bills to customers (i) by United States mail in such class or classes as are consistent with the Servicer Policies and Practices or (ii) by any other means, whether electronic or otherwise, that the Servicer may from time to time use in accordance with the Servicer Policies and Practices. In the case of customers that have elected to be billed by a TPS, the Servicer shall deliver all Bills to the Applicable TPSs by such means as are mutually agreed upon by the Servicer and the Applicable TPS in the TPS Service Agreement and which are consistent with DPUC Regulations. The Servicer or a TPS, as applicable, shall pay from its own funds all costs of issuance and delivery of all Bills that it renders, including printing and postage costs as the same may increase or decrease from time to time. SECTION 5. CUSTOMER SERVICE FUNCTIONS The Servicer or a TPS to the extent provided in the applicable TPS Service Agreement shall handle all customer inquiries and other customer service matters according to the Servicer Policies and Practices. SECTION 6. COLLECTIONS; PAYMENT PROCESSING; REMITTANCE (a) Collection Efforts, Policies, Procedures. (i) The Servicer shall collect Billed RRB Charges from customers and TPSs as and when the same become due in accordance with such collection procedures as it follows with respect to comparable assets that it services for itself or others, including the following: (A) The Servicer shall prepare and deliver overdue notices to customers and TPSs in accordance with applicable DPUC Regulations and the Servicer Policies and Practices. (B) The Servicer shall deliver past-due and shut-off notices in accordance with applicable DPUC Regulations and the Servicer Policies and Practices. (C) The Servicer shall adhere to and carry out disconnection policies and termination of billing by a TPS pursuant to a TPS Service Agreement in accordance with Sections 16-262c, 16-262d and 16-262e of the Connecticut General Statutes or successor provisions, applicable DPUC Regulations and the Servicer Policies and Practices. (D) The Servicer may employ the assistance of collection agents in accordance with applicable DPUC Regulations and the Servicer Policies and Practices. (E) The Servicer shall apply customer and TPS deposits to the payment of delinquent accounts in accordance with applicable DPUC Regulations and the Servicer Polices and Practices. (F) The Servicer shall comply with the provisions of Section 3.01(a)(3) of the Agreement relating to special contract customers. (ii) The Servicer shall not waive any late payment charge or any other fee or charge relating to delinquent payments, if any, or waive, vary or modify any terms of payment of any amounts payable by a customer, in each case unless such waiver or action: (A) would be in accordance with the Servicer Policies and Practices, (B) would not materially adversely affect the Certificateholders and (B) would comply in all material respects with applicable law. (iii) The Servicer shall accept payment from customers in respect of Billed RRB Charges in such forms and methods and at such times and places in accordance with the Servicer Policies and Practices. The Servicer shall accept payment from TPSs in respect of Billed RRB Charges in such forms and methods and at such times and places as the Servicer and each TPS shall mutually agree in accordance with the applicable TPS Service Agreement and applicable DPUC Regulations. (b) Payment Processing, Allocation, Priority of Payments. The Servicer shall post all payments received to customer or TPS accounts as promptly as practicable, and, in any event, substantially all payments shall be posted no later than one Servicer Business Day after receipt. (c) Investment of RRB Charge Payments Received. Prior to remittance on the applicable Remittance Date, the Servicer may invest RRB Charge Payments at its own risk and for its own benefit, and such investments and funds shall not be required to be segregated from the other investments and funds of the Servicer. The Servicer shall be entitled to retain as additional compensation any interest earnings on RRB Charge Payments invested by it. (d) Calculation of RRB Charge Payments; Remittances. In accordance with Section 4.03(a) of the Agreement, the Servicer shall remit to the Note Trustee for deposit in the Collection Account an amount equal to the RRB Charge Payments calculated in accordance with the methodology described in Annex II attached to the Agreement. (e) Remittances. (i) The Note Issuer shall cause to be established the Collection Account in the name of the Note Trustee in accordance with Section 8.02 of the Note Indenture. (ii) The Servicer shall make or cause to be made Remittances to the Collection Account in accordance with Section 4.03 of the Agreement. (iii) Any change of account or change of institution affecting the Collection Account shall not take effect until the Note Issuer has provided at least fifteen (15) Servicer Business Days written notice thereof to the Servicer. SECTION 7. TPSs In the event a TPS performs services pursuant to a TPS Service Agreement, the Servicer shall comply with the procedures set forth in Schedule A to this Annex I. SCHEDULE A TO ANNEX I Additional Servicing Procedures Applicable to TPSs 1. Establishing TPS Relationship In addition to any actions required by the DPUC or by applicable law, for each TPS that is responsible for collecting Billed RRB Charges, the Servicer shall take the following steps: (a) Maintain adequate records of the payment arrangement applicable to such TPS; (b) Maintain copies of all customer requests to convert to billing by a TPS; (c) Verify with the DPUC that each TPS is licensed to supply electricity in Connecticut; (d) Obtain information from the TPS including, but not limited to: name, contact, address, telephone facsimile transmission number and internet address; (e) Maintain and update records of customers to permit prompt reversion to dual-billing; (f) Maintain estimates of one month's maximum RRB Charge Payments for each TPS required to post a bond, letter of credit or cash deposit pursuant to the applicable TPS Service Agreement; and (g) Comply with credit conditions set out in the Financing Order and applicable TPS Service Agreement. 2. Monitoring TPS Obligations (a) The Servicer shall require each TPS to pay all undisputed and all disputed Billed RRB Charges or make a financial arrangement for such payment according to the applicable TPS Service Agreement; and (b) For all TPSs subject to any remittance option where such TPS is liable for all amounts billed in respect of customers served thereby regardless of the amounts received therefrom, the Servicer shall monitor payment compliance and take all actions permitted by the DPUC and the Financing Order in the event of a default in payment. 3. Enforcing TPS Obligations The Servicer shall promptly take all actions specified by the Financing Order with respect to amounts not remitted to the Servicer in accordance with the payment terms specified by the Financing Order, in addition to any other remedies available at law. ANNEX II REMITTANCE METHODOLOGY EX-10.57 27 y58564v.txt Exhibit 10.57 PURCHASE AND SALE AGREEMENT between PSNH FUNDING LLC Issuer and PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE Seller Dated as of April 25, 2001 This PURCHASE AND SALE AGREEMENT, dated as of April 25, 2001, is between PSNH Funding LLC, a Delaware limited liability company (the "Issuer"), and Public Service Company of New Hampshire, a New Hampshire corporation (together with its successors in interest to the extent permitted hereunder, the "Seller"). RECITALS WHEREAS, the Issuer desires to purchase the RRB Property (as defined herein) created pursuant to the Statute and the Finance Order (each as defined herein); and WHEREAS, the Seller is willing to sell the RRB Property to the Issuer. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS Section 1.01. Definitions. Whenever used in this Agreement, the following words and phrases shall have the following meanings: "Administration Agreement" means the Administration Agreement dated as of the date hereof between Public Service Company of New Hampshire, as Administrator, and the Issuer, as amended and supplemented from time to time. "Agreement" means this Purchase and Sale Agreement, as amended and supplemented from time to time. "Authorized Officer" means an officer of the Seller listed on the list of Authorized Officers delivered by the Seller to the Trustee on the date of issuance of the Bonds (as such list may be modified or supplemented by the Seller from time to time). "Back-Up Security Interest" has the meaning specified in Section 2.01. "Basic Documents" means, collectively, this Agreement, the Indenture, the Servicing Agreement, the Administration Agreement, the Underwriting Agreement and the Fee and Indemnity Agreement. "Bondholder" or "Holder" means the Person in whose name a Bond is registered on the Register. "Bonds" means the PSNH Funding LLC Bonds issued under the Indenture. "Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions or trust companies in New York, New York, Hartford, Connecticut, Manchester, New Hampshire or Wilmington, Delaware are authorized or obligated by law, regulation or executive order to remain closed. "Capital Subaccount" has the meaning specified in Section 8.02(a) of the Indenture. "Closing Date" means April 25, 2001. "Collection Account" has the meaning specified in Section 8.02(a) of the Indenture. "Corporate Trust Office" has the meaning specified in Section 1.01(a) of the Indenture. "Date of Breach" means, with respect to the repurchase obligation specified in Section 5.01(b), the date of a breach of a representation or warranty that triggers such repurchase obligation. "Fee and Indemnity Agreement" means the Fee and Indemnity Agreement dated as of the date hereof between the Issuer and the Trustee, as amended and supplemented from time to time. "Finance Order" means the order of the NHPUC, DE 99-099 , issued on September 8, 2000 (Order No. 23,550). "Fitch" means Fitch, Inc. or its successor. "Indemnified Person" has the meaning specified in Section 5.01(c), Section 5.01(d), Section 5.01(e) or in Section 5.01(h), for the purposes set forth therein. "Indenture" means the Indenture dated as of the date hereof between the Issuer and the Trustee, as amended and supplemented from time to time. "Independent" has the meaning specified in Section 1.01(a) of the Indenture. "Interest Reserve Subaccount" has the meaning specified in Section 8.02(a) of the Indenture. "Issuance Advice Letter" means the initial Issuance Advice Letter, dated April 23, 2001, filed with the NHPUC by the Seller pursuant to the Finance Order. "Issuance Date" has the meaning specified in Section 2.01(c)(i) of the Indenture. "Issuer" has the meaning set forth in the preamble of this Agreement. "Lien" means a security interest, lien, charge, pledge or encumbrance of any kind. "Losses" has the meaning specified in Section 5.01(e). "Moody's" means Moody's Investors Service, Inc. or its successor. "NHPUC" means the New Hampshire Public Utilities Commission and any successor thereto. "NHPUC Regulations" has the meaning specified in Section 1.01 of the Servicing Agreement. "Officer's Certificate" means a certificate signed by the chairman of the board, the chief executive officer, the president, the vice chairman of the board, any vice president, the treasurer, any assistant treasurer, the secretary, any assistant secretary, the controller or the finance manager of the Seller. "Operating Expense" has the meaning specified in Section 1.01(a) of the Indenture. "Opinion of Counsel" means one or more written opinions of counsel who may be an employee of or counsel to the party providing such opinion of counsel, which counsel shall be reasonably acceptable to the party receiving such opinion of counsel. "Outstanding Amount" has the meaning specified in Section 1.01(a) of the Indenture. "Overcollateralization Subaccount" has the meaning specified in Section 8.02(a) of the Indenture. "Person" means any individual, corporation, limited liability company, estate, partnership, joint venture, association, joint stock company, trust (including any beneficiary thereof), unincorporated organization or government or any agency or political subdivision thereof. "Prospectus" means the prospectus dated April 20, 2001 offering the Bonds. "Rating Agencies" means, collectively, S&P, Moody's and Fitch. "Register" has the meaning specified in Section 2.05 of the Indenture. "Repurchase Date" means the date that is five Business Days after the date that is (i) if the terms of Section 5.01(b)(i)(A) and Section 5.01(b)(i)(B)(2) are applicable, two Business Days after the Date of Breach if the Seller fails to make the deposit required by Section 5.01(b)(i)(B)(2) or 90 days after the Date of Breach if the Seller makes the deposit required by Section 5.01(b)(i)(B)(2); (ii) if the terms of Section 5.01(b)(ii) are applicable, 90 days after the Date of Breach; and (iii) if the terms of Section 5.01(b)(i)(A) and Section 5.01(b)(i)(B)(1) are applicable, 90 days after the Date of Breach. "Repurchase Price" has the meaning specified in Section 5.01(b)(i). "Required Capital Level" has the meaning specified in Section 1.01(a) of the Indenture. "Required Overcollateralization Level" has the meaning specified in Section 1.01(a) of the Indenture. "Required Interest Reserve Level" has the meaning specified in Section 1.01(a) of the Indenture. "RRB Charge" means the portion (which may become all) of the Seller's "stranded cost recovery charge" designated pursuant to the Finance Order and RSA 369-B:2, XIII as the RRB Charge, as the same may be adjusted from time to time as provided in the Finance Order. "RRB Charge Collections" has the meaning specified in Section 1.01 of the Servicing Agreement. "RRB Property" means the RRB Property that exists under Approval Nos. 20 to 22 of the Finance Order. "RSA" means New Hampshire Revised Statutes Annotated. "Seller" has the meaning set forth in the preamble of this Agreement. "Servicer Default" means an event specified in Section 7.01 of the Servicing Agreement. "Servicing Agreement" means the Servicing Agreement dated as of the date hereof between Public Service Company of New Hampshire, as Servicer, and the Issuer, as amended and supplemented from time to time. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw Hill Companies, Inc. or its successor. "State Treasurer" means the Treasurer of the State of New Hampshire. "Statute" means RSA Chapter 369-B. "Trustee" means the Person acting as trustee under the Indenture. "Underwriting Agreement" means the Underwriting Agreement dated as of April 20, 2001 among Public Service Company of New Hampshire, the Issuer and the underwriters named therein. Section 1.02. Other Definitional Provisions. (a) All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (b) The words "hereof," "herein," "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement; Section, Schedule and Exhibit references contained in this Agreement are references to Sections, Schedules and Exhibits in or to this Agreement unless otherwise specified; and the term "including" shall mean "including without limitation". (c) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms. ARTICLE 2 CONVEYANCE OF RRB PROPERTY Section 2.01. Conveyance of RRB Property. In consideration of the Issuer's delivery to or upon the order of the Seller of $518,558,601.33, the Seller does hereby irrevocably sell, transfer, assign, set over and otherwise convey to the Issuer, WITHOUT RECOURSE OR WARRANTY, except as specifically set forth herein, all right, title and interest of the Seller in and to the RRB Property (such sale, transfer, assignment, setting over and conveyance of the RRB Property includes, to the fullest extent permitted by the Statute, the assignment of all revenues, collections, claims, payments, money or proceeds of or arising from the RRB Charge pursuant to the Finance Order) and copies of all books and records related thereto. Such sale, transfer, assignment, setting over and conveyance is hereby expressly stated to be a sale and, pursuant to RSA 369-B:6, V, shall be treated as an absolute transfer of all of the Seller's right, title and interest in (as in a true sale), and not as a pledge or other financing of, the RRB Property. If such sale, transfer, assignment, setting over and conveyance is held by any court of competent jurisdiction not to be a true sale as provided in RSA 369-B:6, V, then such sale, transfer, assignment, setting over and conveyance shall be treated as the creation of a security interest in the RRB Property and, without prejudice to its position that it has absolutely transferred all of its rights in the RRB Property to the Issuer, the Seller hereby grants to the Issuer a security interest in the RRB Property (including, to the fullest extent permitted by the Statute, all revenues, collections, claims, payments, money or proceeds of or arising from the RRB Charge pursuant to the Finance Order) to secure a payment obligation incurred by the Seller in respect of the amount paid by the Issuer to the Seller pursuant to this Agreement (the "Back-Up Security Interest"). Such sale, transfer, assignment, setting over and conveyance of the RRB Property includes the right to use the Seller's computer software system to access and create copies of all books and records related to the RRB Property. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER Subject to Section 3.09 hereof, the Seller makes the following representations and warranties, as of the Closing Date, on which the Issuer has relied in acquiring the RRB Property. Section 3.01. Organization and Good Standing. The Seller is duly organized and validly existing as a corporation in good standing under the laws of the State of New Hampshire, with the requisite corporate power and authority to own its properties as such properties are currently owned and to conduct its business as such business is now conducted by it, and has the requisite corporate power and authority to own the RRB Property. Section 3.02. Due Qualification. The Seller is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of property or the conduct of its business shall require such qualifications, licenses or approvals (except where the failure to so qualify or obtain such licenses and approvals would not be reasonably likely to have a material adverse effect on the Seller's business, operations, assets, revenues or properties). Section 3.03. Power and Authority. The Seller has the requisite corporate power and authority to execute and deliver this Agreement and to carry out its terms; and the execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action on the part of the Seller. Section 3.04. Binding Obligation. This Agreement constitutes a legal, valid and binding obligation of the Seller enforceable against it in accordance with its terms, subject to applicable insolvency, reorganization, moratorium, fraudulent transfer and other laws relating to or affecting creditors' or secured parties' rights generally from time to time in effect and to general principles of equity (including concepts of materiality, reasonableness, good faith and fair dealing), regardless of whether considered in a proceeding in equity or at law. Section 3.05. No Violation. The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof do not: (i) conflict with or result in any breach of any of the terms and provisions of, nor constitute (with or without notice or lapse of time) a default under, the articles of organization or by-laws of the Seller, or any material indenture, agreement or other instrument to which the Seller is a party or by which it is bound; (ii) result in the creation or imposition of any Lien upon any of the Seller's properties pursuant to the terms of any such indenture, agreement or other instrument (other than any Lien that may be granted under the Basic Documents or any Lien created pursuant to RSA 369 B:7, VIII); or (iii) violate any existing law or any existing order, rule or regulation applicable to the Seller of any court or of any federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Seller or its properties. Section 3.06. No Proceedings. Except as described under the caption "Risk Factors - Bondholders could experience payment delays or losses as a result of amendment, repeal or invalidation of the securitization statute, breach of the state pledge or invalidation of the stranded cost recovery charge - Appeal of settlement order" in the Prospectus, there are no proceedings pending and, to the Seller's knowledge, there are no proceedings threatened and, to the Seller's knowledge, there are no investigations pending or threatened, before any court, federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Seller or its properties involving or relating to the Seller or the Issuer or, to the Seller's knowledge, any other Person: (i) asserting the invalidity of this Agreement, any of the other Basic Documents, the Bonds, the Statute or the Finance Order, (ii) seeking to prevent the issuance of the Bonds or the consummation of any of the transactions contemplated by this Agreement or any of the other Basic Documents, (iii) seeking any determination or ruling that might materially and adversely affect the performance by the Seller of its obligations under, or the validity or enforceability of, this Agreement, any of the other Basic Documents or the Bonds or (iv) seeking to adversely affect the federal or state income tax classification of the Bonds as debt. Section 3.07. Approvals. No approval, authorization, consent, order or other action of, or filing with, any court, federal or state regulatory body, administrative agency or other governmental instrumentality is required in connection with the execution and delivery by the Seller of this Agreement, the performance by the Seller of the transactions contemplated hereby or the fulfillment by the Seller of the terms hereof, except those that have been obtained or made and those that the Seller, in its capacity as Servicer under the Servicing Agreement, is required to make in the future pursuant to the Servicing Agreement and post closing filings required in connection therewith. Section 3.08. The RRB Property. (a) Title. It is the intention of the parties hereto that the transfer and assignment herein contemplated constitute a sale of the RRB Property from the Seller to the Issuer and that no interest in, or title to, the RRB Property shall be part of the Seller's estate in the event of the filing of a bankruptcy petition by or against the Seller under any bankruptcy law. No portion of the RRB Property has been sold, transferred, assigned or pledged by the Seller to any Person other than the Issuer. On the Closing Date, immediately upon the sale hereunder, the Seller has transferred, sold and conveyed the RRB Property to the Issuer, free and clear of all Liens (including the Lien of the Seller's first mortgage indenture but excluding any Lien created pursuant to RSA 369-B:7, VIII and any Lien that may be granted under the Basic Documents), and pursuant to RSA 369-B:6, V such transfer shall be treated as an absolute transfer of all of the Seller's right, title and interest (as in a true sale), and not as a pledge or other financing of, the RRB Property. (b) Transfer Filings. On the Closing Date, immediately upon the sale hereunder, the RRB Property has been validly transferred and sold to the Issuer, the Issuer shall own all such RRB Property free and clear of all Liens (including the Lien of the Seller's first mortgage indenture but excluding any Lien created pursuant to RSA 369-B:7, VIII and any Lien that may be granted under the Basic Documents) and all filings to be made by the Seller (including filings with the NHPUC under the Statute) necessary in any jurisdiction to give the Issuer a valid first priority perfected ownership interest and to grant to the Trustee a first priority perfected security interest (subject to any Lien created pursuant to RSA 369-B:7, VIII and any Lien that may be granted under the Basic Documents) in the RRB Property have been made. No further action is required to maintain the Issuer's first priority perfected ownership interest or the Trustee's first priority perfected security interest (subject to any Lien created pursuant to RSA 369 B:7, VIII and any Lien that may be granted under the Basic Documents). Filings have also been made to the extent required by applicable law in any jurisdiction to perfect the Back-Up Security Interest granted by the Seller to the Issuer (subject to any Lien created pursuant to RSA 369-B:7, VIII and any Lien that may be granted under the Basic Documents). (c) Finance Order and Issuance Advice Letter; Other Approvals. On the Closing Date, under the laws of the State of New Hampshire and the United States in effect on the Closing Date, (i) the Finance Order pursuant to which the RRB Property has been created is in full force and effect; (ii) the Bondholders are entitled to the protections of the Statute and, accordingly, the Finance Order is not revocable by the Commission; (iii) the State of New Hampshire may neither limit nor alter the RRB Charge, RRB Property, the Finance Order and all rights thereunder, in a manner that would substantially impair the rights of Bondholders, absent a demonstration that an impairment is narrowly-tailored and is necessary to advance an important public interest, such as responding to a "great public calamity," until the Bonds, together with accrued interest, are fully met and discharged; provided that the State of New Hampshire is not precluded from such limitation or alteration if and when adequate provision is made by law for the protection of the Issuer, the Bondholders and the Trustee; (iv) except for periodic adjustments to the RRB Charge required under the Statute, the NHPUC does not have authority, either by rescinding, altering or amending the Finance Order or otherwise, to revalue or revise for ratemaking purposes the stranded costs or the costs of providing, recovering, financing or refinancing the stranded costs, to determine that the RRB Charge is unjust or unreasonable or in any way to reduce or impair the value of RRB Property either directly or indirectly by taking the RRB Charge into account when setting other rates for the Seller; nor are the amount of revenues arising with respect thereto subject to reduction, impairment, postponement or termination; (v) the process by which the Finance Order was adopted and approved, and the Finance Order and Issuance Advice Letter themselves, comply with all applicable laws, rules and regulations; (vi) the Issuance Advice Letter has been filed in accordance with the Finance Order; (vii) no other approval, authorization, consent, order or other action of, or filing with, any court, Federal or state regulatory body, administrative agency or other governmental instrumentality is required in connection with the creation or sale of the RRB Property, except those that have been obtained or made and post closing filings required in connection therewith and those that the Seller, in its capacity as Servicer under the Servicing Agreement, is required to make in the future pursuant to the Servicing Agreement; and (viii) the State of New Hampshire, in the exercise of its executive or legislative powers, may not repeal or amend the Statute or the Finance Order, or take any action in contravention of the pledge by the State of New Hampshire in RSA 369-B:6, II, without paying just compensation to the Bondholders, as determined by a court of competent jurisdiction, if this action would constitute a permanent appropriation of a substantial property interest of Bondholders in the RRB Property and deprive the Bondholders of their reasonable expectations arising from their investments in the Bonds. (d) Assumptions. On the Closing Date, based upon the information available to the Seller on the Closing Date, the assumptions used in calculating the initial RRB Charge are reasonable and are made in good faith. Notwithstanding the foregoing, the Seller makes no representation or warranty that the assumptions used in calculating such RRB Charge will in fact be realized. (e) Creation of RRB Property. Upon the effectiveness of the Finance Order and the Issuance Advice Letter: (i) all of the RRB Property constitutes an existing property right; (ii) the RRB Property includes the right, title and interest in and to all revenues, collections, claims, payments, money, or proceeds of or arising from the RRB Charge, as adjusted from time to time pursuant to the Finance Order, and all rights to obtain adjustments to the RRB Charge pursuant to the Finance Order; and (iii) subject to the cap on the Seller's "stranded cost recovery charge" set forth in the Statute and the Finance Order, the owner of the RRB Property is legally entitled to collect payments in respect of the RRB Charge in the aggregate sufficient to pay the interest on and principal of the Bonds, to pay the fees and expenses of servicing the Bonds, to replenish the Capital Subaccount to the Required Capital Level and to fund the Overcollateralization Subaccount to the Required Overcollateralization Level, to fund the Interest Reserve Subaccount to the Required Interest Reserve Level and to enforce all other material rights conferred in the Finance Order and the Statute until the earlier of 14 years after "competition day" (as defined in the Statute) and the date on which the Bonds are paid in full. Notwithstanding the foregoing, the Seller makes no representation or warranty that any amounts actually collected in respect of the RRB Charge will in fact be sufficient to meet payment obligations with respect to the Bonds (other than as provided in the Finance Order with respect to other components of the "stranded cost recovery charge" (as defined in the Statute). (f) Prospectus. As of the date hereof, the information describing the Seller under the caption "The Seller and Servicer" in the Prospectus is correct in all material respects. Section 3.09. Limitations on Representations and Warranties. Notwithstanding any other provisions of this Agreement, the Seller will not be in breach of any representation or warranty as a result of a change in law by means of a legislative enactment or constitutional amendment or (if such means become available in the future) referendum or initiative petition. Notwithstanding anything to the contrary in this Agreement, the Seller makes no representation or warranty that any amounts actually collected in respect of the RRB Charge will in fact be sufficient to meet payment obligations with respect to the Bonds or that the assumptions used in calculating the RRB Charge will in fact be realized nor shall the Seller be obligated to reduce, or accept a reduction of, any rates or charges to which it would otherwise be entitled in respect of services rendered or to be rendered to customers in order to permit the payment of the RRB Charge (other than as provided in the Finance Order with respect to other components of the "stranded cost recovery charge" (as defined in the Statute). ARTICLE 4 COVENANTS OF THE SELLER Section 4.01. Corporate Existence. So long as any of the Bonds are outstanding, the Seller (a) will keep in full force and effect its existence, rights and franchises as a corporation under the laws of the jurisdiction of its organization and (b) will obtain and preserve its qualification to do business, in each case to the extent that in each such jurisdiction such existence or qualification is or shall be necessary to protect the validity and enforceability of this Agreement, the other Basic Documents to which the Seller is a party and each other instrument or agreement necessary or appropriate to the proper administration of this Agreement and the transactions contemplated hereby. Section 4.02. No Liens. Except for the conveyances hereunder or any Lien under RSA 369-B:7, VIII, the Seller will not sell, pledge, assign or transfer, or grant, create, or incur any Lien on, any of the RRB Property, or any interest therein, and the Seller shall defend the right, title and interest of the Issuer and the Trustee in, to and under the RRB Property against all claims of third parties claiming through or under the Seller. Public Service Company of New Hampshire, in its capacity as Seller, will not at any time assert any Lien against, or with respect to, any of the RRB Property. Section 4.03. Delivery of Collections. If the Seller receives any payments in respect of the RRB Charge or the proceeds thereof when it is not acting as the Servicer, the Seller agrees to pay to the Servicer all payments received by it in respect thereof as soon as practicable after receipt thereof by it. Section 4.04. Notice of Liens. The Seller shall notify the Issuer and the Trustee promptly after becoming aware of any Lien on any of the RRB Property, other than the conveyances hereunder, any Lien under the Basic Documents or any Lien under RSA 369-B:7, VIII. Section 4.05. Compliance with Law. The Seller hereby agrees to comply with its organizational and governing documents and all laws, treaties, rules, regulations and determinations of any governmental instrumentality applicable to it, except to the extent that failure to so comply would not adversely affect the Issuer's or the Trustee's interests in the RRB Property or under any of the other Basic Documents to which the Seller is party or the Seller's performance of its obligations hereunder or under any of the other Basic Documents to which it is party. Section 4.06. Covenants Related to Bonds and RRB Property. (a) So long as any of the Bonds are outstanding, the Seller shall treat the Bonds as debt of the Issuer and not of the Seller, except for financial accounting or tax reporting purposes. (b) So long as any of the Bonds are outstanding, the Seller shall indicate in its financial statements that it is not the owner of the RRB Property and that the assets of the Issuer are not available to pay creditors of the Seller or any of its Affiliates (other than the Issuer). (c) So long as any of the Bonds are outstanding, the Seller shall disclose the effects of all transactions between the Seller and the Issuer in accordance with generally accepted accounting principles. (d) So long as any of the Bonds are outstanding, the Seller shall not own or purchase any Bonds. (e) The Seller agrees that, upon the sale by the Seller of the RRB Property to the Issuer pursuant to this Agreement, (i) to the fullest extent permitted by law, including the Statute and applicable NHPUC Regulations, the Issuer shall have all of the rights originally held by the Seller with respect to the RRB Property, including the right (subject to the terms of the Servicing Agreement) to exercise any and all rights and remedies to collect any amounts payable by any customer or third party supplier in respect of the RRB Property, notwithstanding any objection or direction to the contrary by the Seller and (ii) any payment by any customer or third party supplier to the Issuer shall discharge such customer's or third party supplier's obligations in respect of the RRB Property to the extent of such payment, notwithstanding any objection or direction to the contrary by the Seller. (f) So long as any of the Bonds are outstanding, (i) (A) the Seller shall affirmatively certify and confirm that it has sold the RRB Property to the Issuer (other than for financial accounting or tax reporting purposes), and (B) the Seller shall not make any statement or reference in respect of the RRB Property that is inconsistent with the ownership thereof by the Issuer (other than for financial accounting or tax reporting purposes), and (ii) the Seller shall not take any action in respect of the RRB Property except solely in its capacity as the Servicer thereof pursuant to the Servicing Agreement or as otherwise contemplated by the Basic Documents. Section 4.07. Protection of Title. The Seller shall execute and file such filings, including filings with the NHPUC pursuant to the Statute and Uniform Commercial Code filings, and cause to be executed and filed such filings, all in such manner and in such places as may be required by law fully to preserve, maintain and protect the ownership or security interest of the Issuer and the Trustee in the RRB Property and the Back-Up Security Interest, including all filings required under the Statute and the applicable Uniform Commercial Code relating to the transfer of the ownership or security interest in the RRB Property by the Seller to the Issuer and the granting of a security interest in the RRB Property by the Issuer to the Trustee and the Back-Up Security Interest and the continued perfection of such ownership or security interest. The Seller shall deliver (or cause to be delivered) to the Issuer and the Trustee file-stamped copies of, or filing receipts for, any document filed as provided above, as soon as available following such filing. The Seller shall institute any action or proceeding necessary to compel performance by the NHPUC or the State of New Hampshire of any of their obligations or duties under the Statute or the Finance Order, and the Seller agrees to take such legal or administrative actions, including defending against or instituting and pursuing legal actions and appearing or testifying at hearings or similar proceedings, as may be reasonably necessary (i) to protect the Issuer, the Bondholders, the Trustee, the State of New Hampshire, the State Treasurer, agencies of the State of New Hampshire and any of their respective affiliates, officials, officers, directors, employees, consultants, counsel and agents from claims, state actions or other actions or proceedings of third parties which, if successfully pursued, would result in a breach of any representation set forth in Article III or (ii) to block or overturn any attempts to cause a repeal of, modification of or supplement to the Statute, the Finance Order, any Advice Letter (as defined in the Indenture), the Settlement Agreement (as defined in the Finance Order) (to the extent it adversely affects the rights of Bondholders or the validity or value of the RRB Property) or the rights of Bondholders by executive action, legislative enactment or constitutional amendment that would be adverse to the Issuer, the Trustee or the Bondholders. If the Servicer performs its obligations under Section 5.02(d) of the Servicing Agreement in all respects, such performance shall be deemed to constitute performance of the Seller's obligations pursuant to clause (ii) of the immediately preceding sentence. In such event, the Seller agrees to assist the Servicer as reasonably necessary to perform its obligations under Section 5.02(d) of the Servicing Agreement in all respects. The costs of any such actions or proceedings shall be payable from RRB Charge Collections as an Operating Expense in accordance with the priorities set forth in Section 8.02(d) of the Indenture. The Seller's obligations pursuant to this Section 4.07 shall survive and continue notwithstanding the fact that the payment of Operating Expenses pursuant to Section 8.02(d) of the Indenture may be delayed (it being understood that the Seller may be required to advance its own funds to satisfy its obligations hereunder). Section 4.08. Nonpetition Covenants. Notwithstanding any prior termination of this Agreement or the Indenture, but subject to the NHPUC's right to order the sequestration and payment of revenues arising with respect to the RRB Property notwithstanding any bankruptcy, reorganization or other insolvency proceedings with respect to the Seller pursuant to RSA 369-B:7, V or RSA 369-B:7, VIII, the Seller shall not, prior to the date which is one year and one day after the termination of the Indenture, petition or otherwise invoke or cause the Issuer to invoke the process of any court or government authority for the purpose of commencing or sustaining a case against the Issuer under any Federal or state bankruptcy, insolvency or similar law, appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Issuer or any substantial part of the property of the Issuer, or ordering the winding up or liquidation of the affairs of the Issuer. Section 4.09. Taxes. (a) So long as any of the Bonds are outstanding, the Seller shall, and shall cause each of its subsidiaries to, pay all material taxes, assessments and governmental charges imposed upon it or any of its properties or assets or with respect to any of its franchises, business, income or property before any penalty accrues thereon if the failure to pay any such taxes, assessments and governmental charges would, after any applicable grace periods, notices or other similar requirements, result in a lien on the RRB Property; provided that no such tax need be paid if the Seller or one of its subsidiaries is contesting the same in good faith by appropriate proceedings promptly instituted and diligently conducted and if the Seller or such subsidiary has established appropriate reserves as shall be required in conformity with generally accepted accounting principles. (b) The Seller represents, warrants and covenants that any New Hampshire income taxes, including without limitation the New Hampshire Business Profits Tax imposed under the provisions of New Hampshire RSA Chapter 77-A (taking into account credits in respect of the New Hampshire Business Enterprise Tax imposed under RSA Chapter 77-E), associated with the Issuer will be allocated to, and paid by, the Seller in accordance with the Amended and Restated NU Tax Allocation Agreement, dated as of January 1, 1990, as amended (the "NU Tax Sharing Agreement"), and that the applicable provisions of the NU Tax Sharing Agreement, which currently provide for such treatment by their reliance on federal income tax principles in allocating state income tax liabilities, shall not be amended or modified by the Seller in contravention of this Section 4.09(b) for so long as the Bonds are outstanding. Section 4.10. Additional Sales of RRB Property. So long as any of the Bonds are outstanding, the Seller shall not sell any RRB property (as defined in the Statute) to secure another issuance of rate reduction bonds (as defined in the Statute) if it would cause the then existing ratings on any class of Bonds from the Rating Agencies to be withdrawn or downgraded. Section 4.11. Issuance Advice Letter. The Seller hereby agrees not to withdraw the filing of the Issuance Advice Letter with the NHPUC. Section 4.12. Maintenance of Working Papers. So long as any of the Bonds are outstanding, the Seller shall keep and maintain any and all working papers, reports and other documents used by the firm of Independent certified public accountants in the preparation of its letters delivered on the Issuance Date pursuant to Section 2.10(g) of the Indenture and Section 6(h) of the Underwriting Agreement. ARTICLE 5 THE SELLER Section 5.01. Liability of Seller; Indemnities. (a) The Seller shall be liable in accordance herewith only to the extent of the obligations specifically undertaken by the Seller under this Agreement. (b) In the event of a breach by the Seller of any representation and warranty specified in Sections 3.08(c) or 3.08(e) that has a material adverse effect on the Bondholders, the Seller shall repurchase the RRB Property from the Issuer at a purchase price equal to the then outstanding principal amount of the Bonds and all accrued and unpaid interest thereon, excluding any premium or penalty of any kind (the "Repurchase Price"), as of the Repurchase Date; provided, however, that the Seller shall not be obligated to repurchase the RRB Property if (A) within 90 days after the Date of Breach such breach is cured or the Seller takes remedial action such that there is not and will not be a material adverse effect on the Bondholders as a result of such breach and (B) either (1) if the Seller had, immediately prior to the Date of Breach, a long term debt rating of at least "A3" by Moody's and "BBB" or the equivalent by S&P or Fitch, and the Seller enters into a binding agreement with the Issuer to pay any amounts necessary so that all interest payments due on the Bonds during such 90-day period will be paid in full, or (2) if the Seller does not have such long term debt ratings, the Seller deposits, within two Business Days after the Date of Breach, an amount in escrow with the Trustee sufficient, taking into account amounts on deposit in the Collection Account which will be available for such purpose, to pay all interest payments which will become due on the Bonds during such 90-day period. (i) In the event of a breach by the Seller of any representation and warranty specified in Sections 3.01, 3.03, 3.04, 3.05, 3.06, 3.08(a) or 3.08(b) that has a material adverse effect on the Bondholders, if within 90 days after the Date of Breach such breach has not been cured or the Seller has not taken remedial action such that there is not and will not be a material adverse effect on the Bondholders as a result of such breach, then the Seller shall repurchase the RRB Property from the Issuer for the Repurchase Price on the Repurchase Date. (ii) Notwithstanding any other provision of this Agreement, upon the payment by the Seller of the Repurchase Price pursuant to this Section 5.01(b), neither the Issuer nor any other Person shall have any other claims, rights or remedies against the Seller under, arising from or with respect to this Agreement, except as set forth in Section 5.01(h). (c) Subject to Section 5.01(i), the Seller shall indemnify the Issuer, the Trustee, the State of New Hampshire, the State Treasurer, agencies of the State of New Hampshire and the Bondholders (each an "Indemnified Person" for purposes of this Section 5.01(c) and Section 5.01(i)) for, and defend and hold harmless each such Indemnified Person from and against, any and all taxes (other than taxes imposed on Bondholders solely as a result of their ownership of Bonds) that may at any time be imposed on or asserted against any such Person under existing law as of the Closing Date as a result of the sale of the RRB Property to the Issuer, including any sales, gross receipts, general corporation, tangible personal property, privilege or license taxes; provided, however, that the Bondholders shall be entitled to enforce their rights against the Seller under this Section 5.01(c) solely through a cause of action brought for their benefit by the Trustee. (d) Subject to Section 5.01(i), the Seller shall indemnify the Issuer, the Trustee, the State of New Hampshire, the State Treasurer, agencies of the State of New Hampshire and the Bondholders (each an "Indemnified Person" for purposes of this Section 5.01(d) and Section 5.01(i)) for, and defend and hold harmless each such Indemnified Person from and against, any and all taxes that may be imposed on or asserted against any such Indemnified Person under existing law as of the Closing Date as a result of the issuance and sale by the Issuer of the Bonds, or the other transactions contemplated herein, including any sales, gross receipts, general corporation, tangible personal property, privilege or license taxes; provided, however, that the Bondholders shall be entitled to enforce their rights against the Seller under this Section 5.01(d) solely through a cause of action brought for their benefit by the Trustee. The Seller shall be reimbursed for any payments under this Section 5.01(d) from RRB Charge Collections as an Operating Expense in accordance with the priorities set forth in Section 8.02(d) of the Indenture. (e) Subject to Section 5.01(i), the Seller shall indemnify the Issuer and the Bondholders (each an "Indemnified Person" for purposes of this Section 5.01(e) and Section 5.01(i)) for, and defend and hold harmless each such Person from and against, any and all liabilities, obligations, losses, actions, suits, claims, damages, payments, costs or expenses of any kind whatsoever (collectively, "Losses") that may be imposed on, incurred by or asserted against each such Indemnified Person as a result of (i) the Seller's willful misconduct or negligence in the performance of its duties or observance of its covenants under this Agreement, or (ii) the Seller's breach in any material respect of any of its representations and warranties contained in this Agreement (other than the representations and warranties specified in Sections 3.01, 3.03, 3.04, 3.05, 3.06, 3.08(a), 3.08(b), 3.08(c) or 3.08(e), the breach of which are subject to the repurchase obligation set forth in Section 5.01(b)), except in the case of both clauses (i) and (ii) to the extent of Losses either resulting from the willful misconduct or gross negligence of such Indemnified Person or resulting from a breach of a representation and warranty made by such Indemnified Person in any of the Basic Documents that gives rise to the Seller's breach; provided, however, that the Bondholders shall be entitled to enforce their rights against the Seller under this indemnification solely through a cause of action brought for their benefit by the Trustee; provided, further, that the Seller may, at its election and in full satisfaction of its obligations under this Section 5.01(e), repurchase the RRB Property at the Repurchase Price, in which case neither the Issuer nor any other Person shall have any other claims, rights or remedies against the Seller under, arising from or with respect to this Agreement, except as set forth in Section 5.01(h). (f) Indemnification under Sections 5.01(c), 5.01(d), 5.01(e) and 5.01(h) shall survive the resignation or removal of the Trustee and the termination of this Agreement and shall include reasonable fees and out-of pocket expenses of investigation and litigation (including reasonable attorneys' fees and expenses), except as otherwise provided in this Agreement. (g) Without prejudice to any of the other rights of the parties, the Seller will not be in breach of any representation or warranty as a result of a change in law by means of a legislative enactment or constitutional amendment or (if such means become available in the future) referendum or initiative petition. Notwithstanding anything to the contrary in this Agreement, the Seller makes no representation or warranty that any amounts actually collected in respect of the RRB Charge will in fact be sufficient to meet payment obligations with respect to the Bonds or that the assumptions used in calculating the RRB Charge will in fact be realized nor shall the Seller be obligated to reduce, or accept a reduction of, any rates or charges to which it would otherwise be entitled in respect of services rendered or to be rendered to customers in order to permit the payment of the RRB Charge (other than as provided in the Finance Order with respect to other components of the "stranded cost recovery charge" (as defined in the Statute)). (h) Subject to Section 5.01(i), the Seller shall indemnify and hold harmless the Trustee, the State of New Hampshire, the State Treasurer, agencies of the State of New Hampshire and any of their respective affiliates, officials, officers, directors, employees, consultants, counsel and agents (each an "Indemnified Person" for purposes of this Section 5.01(h) and Section 5.01(i)) against any and all Losses incurred by any of such Indemnified Persons as a result of (i) the Seller's willful misconduct or negligence in the performance of its duties or observance of its covenants under this Agreement or (ii) the Seller's breach in any material respect of any of its representations and warranties contained in this Agreement, except in the case of both clauses (i) and (ii) to the extent of Losses either resulting from the willful misconduct or gross negligence of such Indemnified Person or resulting from a breach of a representation or warranty made by such Indemnified Person in any of the Basic Documents that gives rise to the Seller's breach. (i) The Seller shall not be required to indemnify any Indemnified Person under Sections 5.01(c), 5.01(d), 5.01(e) or 5.01(h) for any amount paid or payable by such Indemnified Person in the settlement of any action, proceeding or investigation without the written consent of the Seller, which consent shall not be unreasonably withheld. Promptly after receipt by an Indemnified Person of notice of its involvement in any action, proceeding or investigation, such Indemnified Person shall, if a claim for indemnification in respect thereof is to be made against the Seller under this Section 5.01, notify the Seller in writing of such involvement. Failure by an Indemnified Person to so notify the Seller shall relieve the Seller from the obligation to indemnify and hold harmless such Indemnified Person under this Section 5.01 only to the extent that the Seller suffers actual prejudice as a result of such failure. With respect to any action, proceeding or investigation brought by a third party for which indemnification may be sought under this Section 5.01, the Seller shall be entitled to assume the defense of any such action, proceeding or investigation. Upon assumption by the Seller of the defense of any such action, proceeding or investigation, the Indemnified Person shall have the right to participate in such action or proceeding and to retain its own counsel. The Seller shall be entitled to appoint counsel of the Seller's choice at the Seller's expense to represent the Indemnified Person in any action, proceeding or investigation for which a claim of indemnification is made against the Seller under this Section 5.01 (in which case the Seller shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the Indemnified Person except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the Indemnified Person. Notwithstanding the Seller's election to appoint counsel to represent the Indemnified Person in an action, proceeding or investigation, the Indemnified Person shall have the right to employ separate counsel (including local counsel), and the Seller shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of counsel chosen by the Seller to represent the Indemnified Person would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the Indemnified Person and the Seller and the Indemnified Person shall have reasonably concluded that there may be legal defenses available to it that are different from or additional to those available to the Seller, (iii) the Seller shall not have employed counsel reasonably satisfactory to the Indemnified Person to represent the Indemnified Person within a reasonable time after notice of the institution of such action or (iv) the Seller shall authorize the Indemnified Person to employ separate counsel at the expense of the Seller. Notwithstanding the foregoing, the Seller shall not be obligated to pay for the fees, costs and expenses of more than one separate counsel for the Indemnified Persons (in addition to local counsel). The Seller will not, without the prior written consent of the Indemnified Person, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought under this Section 5.01 (whether or not the Indemnified Person is an actual or potential party to such claim or action) unless such settlement, compromise or consent includes an unconditional release of the Indemnified Person from all liability arising out of such claim, action, suit or proceeding. (j) The remedies of the Issuer and the Bondholders provided in this Agreement are each such Person's sole and exclusive remedies against the Seller for breach of its representations and warranties in this Agreement. Section 5.02. Merger or Consolidation of, or Assumption of the Obligations of, Seller. Any Person (a) into which the Seller may be merged or consolidated, (b) that may result from any merger or consolidation to which the Seller shall be a party or (c) that may succeed to the properties and assets of the Seller substantially as a whole, which Person in the case described in the foregoing clause (c) executes an agreement of assumption to perform every obligation of the Seller hereunder, shall be the successor to the Seller under this Agreement without further act on the part of any of the parties to this Agreement; provided, however, that (i) if the Seller is the Servicer, no Servicer Default, and no event which, after notice or lapse of time, or both, would become a Servicer Default shall have occurred and be continuing, (ii) the Seller shall have delivered to the Issuer and the Trustee an Officer's Certificate stating that such consolidation, merger or succession and such agreement of assumption comply with this Section and that all conditions precedent, if any, provided for in this Agreement relating to such transaction have been complied with, (iii) the Seller shall have delivered to the Issuer and the Trustee an Opinion of Counsel stating that, in the opinion of such counsel (A) such consolidation, merger or succession and such agreement of assumption comply with this Section and that all conditions precedent provided for in this Agreement relating to such transaction have been complied with and (B) either (1) all filings to be made by the Seller, including filings with the NHPUC pursuant to the Statute and filings under the applicable Uniform Commercial Code, have been executed and filed that are necessary to preserve and protect fully the interests of the Issuer and the Trustee in the RRB Property and reciting the details of such filings or (2) no such action shall be necessary to preserve and protect such interests and (iv) the Rating Agencies shall have received prior written notice of such transaction. When any Person acquires the properties and assets of the Seller substantially as a whole and becomes the successor to the Seller in accordance with the terms of this Section 5.02 and execution by such successor of an agreement of assumption to perform every obligation of the Seller hereunder, then upon satisfaction of all of the other conditions of this Section 5.02, the Seller shall automatically and without further notice be released from all of its obligations hereunder. Section 5.03. Limitation on Liability of Seller and Others. The Seller and any director, officer, employee or agent of the Seller may rely in good faith on the advice of counsel or on any document of any kind, prima facie properly executed and submitted by any Person, respecting any matters arising hereunder. ARTICLE 6 MISCELLANEOUS PROVISIONS Section 6.01. Amendment. This Agreement may be amended by the Seller and the Issuer, with ten Business Days' prior written notice given to the Rating Agencies and the prior written consent of the Trustee, but without the consent of any of the Bondholders, to cure any ambiguity, to correct or supplement any provisions in this Agreement or for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions in this Agreement or of modifying in any manner the rights of the Bondholders; provided, however, that such action shall not, as evidenced by an Officer's Certificate delivered to the Issuer and the Trustee, adversely affect in any material respect the interests of any Bondholder. This Agreement may also be amended from time to time by the Seller and the Issuer, with ten Business Days' prior written notice given to the Rating Agencies and the prior written consent of the Trustee and the prior written consent of the Holders of Bonds evidencing not less than a majority of the Outstanding Amount of the Bonds affected thereby, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of modifying in any manner the rights of the Bondholders. It shall not be necessary for the consent of Bondholders pursuant to this Section to approve the particular form of any proposed amendment or consent, but it shall be sufficient if such consent shall approve the substance thereof. Prior to the execution of any amendment to this Agreement, the Trustee shall be entitled to receive and rely upon an Opinion of Counsel stating that the execution of such amendment is authorized or permitted by this Agreement. The Trustee may, but shall not be obligated to, enter into any such amendment which affects the Trustee's own rights, duties or immunities under this Agreement or otherwise. Section 6.02. Notices. Unless otherwise specifically provided herein, all notices, directions, consents and waivers required under the terms and provisions of this Agreement shall be in English and in writing, and any such notice, direction, consent or waiver may be given by United States mail, courier service, facsimile transmission or electronic mail (confirmed by telephone, United States mail or courier service in the case of notice by facsimile transmission or electronic mail) or any other customary means of communication, and any such notice, direction, consent or waiver shall be effective when delivered, or if mailed, three days after deposit in the United States mail with proper postage for ordinary mail prepaid: (a) if to the Seller, to 1000 Elm Street Manchester, NH Facsimile: (860) 665-5457 Telephone: (860) 665-3258 E-Mail: shoopra@nu.com (email) with a copy to: Public Service Company of New Hampshire c/o Northeast Utilities Service Company if by U.S. Mail: P.O. Box 270 Hartford, CT 06141-0270 if by courier: 107 Selden Street Berlin, CT 06037 Attention: Assistant Treasurer - Finance Facsimile: (860) 665-5457 Telephone: (860) 665-3258 E-Mail: shoopra@nu.com (b) if to the Issuer, to PSNH Funding LLC c/o Public Service Company of New Hampshire 1000 Elm Street Manchester, NH 03105 Facsimile: (860) 665-5457 Telephone: (860) 665-3258 E-Mail: shoopra@nu.com (email) with a copy to: Public Service Company of New Hampshire c/o Northeast Utilities Service Company if by U.S. Mail: P.O. Box 270 Hartford, CT 06141-0270 if by courier: 107 Selden Street Berlin, CT 06037 Attention: Assistant Treasurer - Finance Facsimile: (860) 665-5457 Telephone: (860) 665-3258 E-Mail: shoopra@nu.com (c) if to the Trustee, to The Bank of New York 101 Barclay Street Floor 12 East New York, NY 10286 Attention: ABS Unit Facsimile: (212) 815-5563 Telephone: (212) 815-5368 (d) if to Moody's, to Moody's Investors Service, Inc. 99 Church Street New York, NY 10007 Attention: ABS Monitoring Department Facsimile: (212) 553-0573 Telephone: (212) 553-3686 (e) if to S&P, to Standard & Poor's 55 Water Street, 41st Floor New York, NY 10041 Attention: Asset Backed Surveillance Department Facsimile: (212) 438-2664 Telephone: (212) 438-2000 (f) if to Fitch, to Fitch, Inc. One State Street Plaza New York, NY 10004 Attention: ABS Surveillance Facsimile: (212) 514-9879 Telephone: (212) 908-0500 E-mail: surv@fitchratings.com (g) as to each of the foregoing, at such other address as shall be designated by written notice to the other parties. Section 6.03. Assignment. Notwithstanding anything to the contrary contained herein, except as provided in Section 5.02, this Agreement may not be assigned by the Seller. Section 6.04. Limitations on Rights of Third Parties. The provisions of this Agreement are solely for the benefit of the Seller, the Issuer, the Bondholders, the Trustee, the State of New Hampshire, the State Treasurer, agencies of the State of New Hampshire and the other Persons expressly referred to herein, and such Persons shall have the right to enforce the relevant provisions of this Agreement, except that the Bondholders shall be entitled to enforce their rights against the Seller under this Agreement solely through a cause of action brought for their benefit by the Trustee. Nothing in this Agreement, whether express or implied, shall be construed to give to any other Person any legal or equitable right, remedy or claim in the RRB Property or under or in respect of this Agreement or any covenants, conditions or provisions contained herein. Section 6.05. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Section 6.06. Separate Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. Section 6.07. Headings. The headings of the various Articles and Sections herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Section 6.08. Governing Law. This Agreement shall be construed in accordance with the laws of the State of New Hampshire, without reference to its conflict of law provisions, and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws. Section 6.09. Assignment to Trustee. The Seller hereby acknowledges and consents to any mortgage, pledge, assignment and grant of a security interest by the Issuer to the Trustee pursuant to the Indenture for the benefit of the Bondholders of all right, title and interest of the Issuer in, to and under the RRB Property and the proceeds thereof and the mortgage, pledge, assignment of, and grant of a security interest by the Issuer to the Trustee in, any or all of the Issuer's rights and obligations hereunder to the Trustee. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties hereto have caused this Purchase and Sale Agreement to be duly executed by their respective officers as of the day and year first above written. PSNH FUNDING LLC, Issuer By: /s/ Randy A. Shoop Name: Randy A. Shoop Title: President PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE, Seller By: /s/ Randy A. Shoop Name: Randy A. Shoop Title: Assistant Treasurer - Finance EX-10.58 28 y58564w.txt Exhibit 10.58 PSNH FUNDING LLC, as Issuer and PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE as Servicer SERVICING AGREEMENT Dated as of April 25, 2001
PAGE ---- Article 1 DEFINITIONS 1 Section 1.01. Definitions..................................................................1 Section 1.02. Other Definitional Provisions................................................5 Article 2 APPOINTMENT AND AUTHORIZATION...........................................................6 Section 2.01. Appointment of Servicer; Acceptance of Appointment...........................6 Section 2.02. Authorization................................................................6 Section 2.03. Dominion and Control Over the RRB Property...................................6 Article 3 BILLING SERVICES........................................................................7 Section 3.01. Duties of Servicer...........................................................7 Section 3.02. Servicing and Maintenance Standards..........................................8 Section 3.03. Certificate of Compliance....................................................8 Section 3.04. Annual Report by Independent Public Accountants..............................8 Article 4 SERVICES RELATED TO PERIODIC ADJUSTMENTS; REMITTANCES...................................9 Section 4.01. Periodic Adjustments.........................................................9 Section 4.02. Limitation of Liability.....................................................11 Section 4.03. Remittances.................................................................11 Article 5 THE RRB PROPERTY.......................................................................12 Section 5.01. Custody of RRB Property Records.............................................12 Section 5.02. Duties of Servicer as Custodian.............................................12 Section 5.03. Instructions; Authority to Act..............................................14 Section 5.04. Effective Period and Termination............................................14 Section 5.05. Monitoring of Third Party Suppliers.........................................14 Article 6 THE SERVICER...........................................................................14 Section 6.01. Representations and Warranties of Servicer..................................14 Section 6.02. Indemnities of Servicer.....................................................16 Section 6.03. Limitation on Liability of Servicer and Others..............................18 Section 6.04. Merger or Consolidation of, or Assumption of the Obligations of, Servicer...18 Section 6.05. Public Service Company of New Hampshire Not to Resign as Servicer...........19
-ii-
PAGE ---- Section 6.06. Servicing Compensation......................................................19 Section 6.07. Compliance with Applicable Law..............................................20 Section 6.08. Access to Certain Records and Information Regarding RRB Property............20 Section 6.09. Appointments................................................................20 Section 6.10. No Servicer Advances........................................................21 Section 6.11. Maintenance of Operations...................................................21 Article 7 DEFAULT 21 Section 7.01. Servicer Default............................................................21 Section 7.02. Appointment of Successor....................................................22 Section 7.03. Waiver of Past Defaults.....................................................23 Section 7.04. Notice of Servicer Default..................................................23 Article 8 MISCELLANEOUS PROVISIONS...............................................................23 Section 8.01. Amendment...................................................................23 Section 8.02. Maintenance of Accounts and Records.........................................24 Section 8.03. Notices.....................................................................25 Section 8.04. Assignment..................................................................27 Section 8.05. Limitations on Rights of Third Parties......................................27 Section 8.06. Severability................................................................27 Section 8.07. Separate Counterparts.......................................................27 Section 8.08. Headings....................................................................27 Section 8.09. Governing Law...............................................................28 Section 8.10. Assignment to Trustee.......................................................28 Section 8.11. Nonpetition Covenants.......................................................28
-iii- This SERVICING AGREEMENT, dated as of April 25, 2001, is between PSNH Funding LLC, a Delaware limited liability company (together with any successor thereto permitted under the Indenture, as hereinafter defined, the "Issuer"), and Public Service Company of New Hampshire, a New Hampshire corporation. RECITALS WHEREAS, pursuant to the Statute and the Finance Order, the Seller and the Issuer are concurrently entering into the Sale Agreement pursuant to which the Seller is selling to the Issuer the RRB Property created pursuant to the Statute and the Finance Order. WHEREAS, in connection with its ownership of the RRB Property and in order to collect the RRB Charge, the Issuer desires to engage the Servicer to carry out the functions described herein. The Servicer currently performs similar functions for itself with respect to its own charges to its customers. In addition, the Issuer desires to engage the Servicer to act on its behalf in obtaining Periodic Adjustments from the NHPUC. The Servicer desires to perform all of these activities on behalf of the Issuer. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: Article 1 DEFINITIONS Section 1.01. Definitions. Whenever used in this Agreement, the following words and phrases shall have the following meanings: "Advice Letter" means any filing made with the NHPUC by the Servicer on behalf of the Issuer to set or adjust the RRB Charge, including the Issuance Advice Letter, a Routine Semiannual True-Up Letter, a Routine True-Up Letter or a Non-Routine True-Up Letter. "Agreement" means this Servicing Agreement, together with all Exhibits, Schedules and Annexes hereto, as the same may be amended and supplemented from time to time. "Annual Accountant's Report" has the meaning set forth in Section 3.04. "Applicable TPS" means, with respect to each customer, the TPS, if any, billing the RRB Charge to that customer. "Bills" means each of the regular monthly bills, summary bills and other bills issued to customers or TPSs by Public Service Company of New Hampshire on its own behalf and in its capacity as Servicer. "Certificate of Compliance" has the meaning set forth in Section 3.03. "Closing Date" means April 25 2001. "Expected Amortization Schedule" means Schedule 4.01(a) hereto. "Finance Order" means the order of the NHPUC, DE 99-099, issued on September 8, 2000 (Order No. 23,550). "Indemnified Person" has the meaning assigned to such term in Section 6.02. -4- "Insolvency Event" means, with respect to a specified Person, (a) the filing of a decree or order for relief by a court having jurisdiction in the premises in respect of such Person or any substantial part of its property in an involuntary case under any applicable Federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or ordering the winding-up or liquidation of such Person's affairs, and such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (b) the commencement by such Person of a voluntary case under any applicable Federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or the consent by such Person to the entry of an order for relief in an involuntary case under any such law, or the consent by such Person to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or the making by such Person of any general assignment for the benefit of creditors, or the failure by such Person generally to pay its debts as such debts become due. "Indenture" means the Indenture dated as of the date hereof between the Issuer and the Trustee, as the same may be amended and supplemented from time to time. "Issuer" has the meaning set forth in the preamble to this Agreement. "Issuance Advice Letter" means the initial Issuance Advice Letter, dated April 23, 2001, filed with the NHPUC pursuant to the Finance Order. "Lien" means a security interest, lien, charge, pledge or encumbrance of any kind. "Losses" has the meaning assigned to that term in Section 6.02(b). "Monthly Servicer Certificate" has the meaning assigned to that term in Section 4.01(d)(2). "NHPUC" means the New Hampshire Public Utilities Commission and any successor thereto. "NHPUC Regulations" means all regulations, rules, tariffs and laws applicable to public utilities or TPSs, as the case may be, and promulgated by, enforced by or otherwise within the jurisdiction of the NHPUC. "Non-Routine Periodic Adjustment" has the meaning set forth in Section 4.01(c)(1). "Non-Routine True-Up Letter" means a letter filed with the NHPUC in accordance with the Finance Order with respect to any Non-Routine Periodic Adjustment, pursuant to which the related Non-Routine Periodic Adjustment will become effective within 60 days after filing of the Non-Routine True-Up Letter, subject to the review and approval of the NHPUC. "Officer's Certificate" means a certificate of the Servicer signed by a Responsible Officer. "Opinion of Counsel" means one or more written opinions of counsel who may be an employee of or counsel to the party providing such opinion(s) of counsel, which counsel shall be reasonably acceptable to the party receiving such opinion(s) of counsel. "Periodic Adjustment" means each adjustment to the RRB Charge made pursuant to the terms of the Finance Order and in accordance with Section 4.01 hereof. "Principal Balance" means, as of any Payment Date, the sum of the outstanding -5- principal amount of the Bonds. "Projected Principal Balance" means, as of any Payment Date, the sum of the projected outstanding principal amount of the Bonds for such Payment Date set forth in the Expected Amortization Schedule. "Quarterly Servicer Certificate" has the meaning assigned to that term in Section 4.01(d)(3). "Remittance" means each remittance pursuant to Section 4.03 of RRB Charge Payments by the Servicer to the Trustee. "Remittance Date" means each Servicer Business Day on which a Remittance is to be made by the Servicer pursuant to Section 4.03. "Remittance Period" means, in each year, each successive six-month period commencing on April 25 and ending on October 24 and commencing on October 25 and ending on April 24; provided, however, that the initial Remittance Period shall commence on the Closing Date and end on October 24, 2001. "Required Debt Service" means, for any Remittance Period, the total dollar amount calculated by the Servicer in accordance with Section 4.01(b)(1) as necessary to be remitted to the Collection Account during such Remittance Period (after giving effect to (a) the allocation and distribution of amounts on deposit in the Reserve Subaccount at the time of calculation and which are available for payments on the Bonds, (b) any shortfalls in Required Debt Service for any prior Remittance Period and (c) any Remittances based upon the RRB Charge in effect in the prior Remittance Period that are expected to be realized in such Remittance Period) in order to ensure that, as of the Payment Date immediately following the end of such period, (i) all accrued and unpaid interest on the Bonds then due shall have been paid in full, (ii) the Principal Balance of the Bonds is equal to the Projected Principal Balance of the Bonds for that Payment Date, (iii) the balance on deposit in the Interest Reserve Subaccount equals the aggregate Required Interest Reserve Level, (iv) the balance on deposit in the Capital Subaccount equals the aggregate Required Capital Level, (v) the balance on deposit in the Overcollateralization Subaccount equals the aggregate Required Overcollateralization Level and (vi) all other fees, expenses and indemnities due and owing and required or allowed to be paid under Section 8.02 of the Indenture as of such date shall have been paid in full; provided, however, that, with respect to any Periodic Adjustment occurring after the last Scheduled Maturity Date for any Bonds, the Required Debt Service shall be calculated to ensure that sufficient amounts will be collected to retire such Bonds in full as of the earlier of (x) the next Payment Date and (y) the Final Maturity Date for such Bonds. "Responsible Officer" means the chief executive officer, the president, the chairman or vice chairman of the board, the any vice president, the treasurer, any assistant treasurer, the secretary, the clerk, any assistant secretary, and assistant clerk, the controller or the finance manager of the Servicer. "Retirement of the Bonds" means the day on which the final payment is made to the Trustee in respect of the last outstanding Bond. "Routine Semiannual True-Up Letter" means a letter filed with the NHPUC, substantially in the form of Exhibit B hereto, not later than 30 days prior to April 25 and October 25 in each year, in respect of a semiannual Periodic Adjustment. Absent -6- manifest error in the Routine Semiannual True-Up Letter, the resulting upward or downward adjustments to the RRB Charge will be effective on the ensuing April 25 or October 25. "Routine True-Up Letter" means a letter filed with the NHPUC, substantially in the form of Exhibit B hereto, as frequently as monthly, in respect of a Periodic Adjustment. Absent manifest error in the Routine True-Up Letter, the resulting upward or downward adjustments to the RRB Charge will be effective immediately upon the filing of such Routine True-Up Letter. "RRB Charge" means the portion (which may become all) of the Seller's "stranded cost recovery charge" designated pursuant to the Finance Order and RSA 369-B:2, XIII as the RRB Charge, as the same may be adjusted from time to time as provided in the Finance Order. "RRB Charge Collections" means the RRB Charge Payments remitted to the Collection Account. "RRB Charge Payments" means the actual payments received by the Servicer, directly or indirectly (including through a TPS), from or on behalf of customers, multiplied by the percentage of such collections which is calculated in accordance with Annex II hereto to have been received in respect of the RRB Charge. "RRB Property" means the RRB Property that exists under Approval Nos. 20 to 22 of the Finance Order and is sold by the Seller to the Issuer under the Sale Agreement. "RRB Property Records" has the meaning assigned to that term in Section 5.01. "Sale Agreement" means the Purchase and Sale Agreement dated as of the date hereof between Public Service Company of New Hampshire, as Seller, and the Issuer, as the same may be amended and supplemented from time to time. "Seller" means Public Service Company of New Hampshire, a New Hampshire corporation, and its permitted successors and assigns under the Sale Agreement. "Servicer" means Public Service Company of New Hampshire, as the servicer of the RRB Property, or each successor (in the same capacity) pursuant to Section 6.04 or Section 7.02. "Servicer Business Day" means any Business Day on which the Servicer's offices in the State of New Hampshire are open for business. "Servicer Default" means an event specified in Section 7.01. "Servicing Fee" has the meaning set forth in Section 6.06(a). "Statute" means RSA Chapter 369-B. "Termination Notice" has the meaning assigned to that term in Section 7.01. "TPS" means a third party supplier of energy who has entered into a TPS Service Agreement with the Servicer. "TPS Service Agreement" means an agreement between a third party supplier of energy and the Servicer pursuant to which such third party supplier of energy bills and collects the RRB Charge to and from customers in accordance with NHPUC Regulations, the Finance Order and the guidelines described in Schedule A to Annex I. Section 1.02. Other Definitional Provisions. (a) Capitalized terms used herein and not otherwise defined herein have the meanings assigned to them in the Indenture. (b) All terms defined in this Agreement shall have the defined meanings -7- when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (c) The words "hereof," "herein," "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement; Section, Schedule, Exhibit and Annex references contained in this Agreement are references to Sections, Schedules, Exhibits and Annexes in or to this Agreement unless otherwise specified; and the term "including" shall mean "including without limitation." (d) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter forms of such terms. Article 2 APPOINTMENT AND AUTHORIZATION Section 2.01. Appointment of Servicer; Acceptance of Appointment. Subject to Section 6.05 and Article 7, the Issuer hereby appoints the Servicer, and the Servicer hereby accepts such appointment, to perform the Servicer's obligations pursuant to this Agreement on behalf of and for the benefit of the Issuer or any assignee thereof in accordance with the terms of this Agreement and applicable law. This appointment and the Servicer's acceptance thereof may not be revoked except in accordance with the express terms of this Agreement. Section 2.02. Authorization. With respect to all or any portion of the RRB Property, the Servicer shall be, and hereby is, authorized and empowered by the Issuer to (a) execute and deliver, on behalf of itself and/or the Issuer, as the case may be, any and all instruments, documents or notices, and (b) on behalf of itself and/or the Issuer, as the case may be, make any filing and participate in proceedings of any kind with any governmental authorities, including with the NHPUC. The Issuer shall execute and/or furnish the Servicer with such documents as have been prepared by the Servicer for execution by the Issuer, and with such other documents as may be in the Issuer's possession, as the Servicer may determine to be necessary or appropriate to enable it to carry out its servicing and administrative duties hereunder. Upon the Servicer's written request, the Issuer shall furnish the Servicer with any powers of attorney or other documents necessary or appropriate to enable the Servicer to carry out its duties hereunder. Section 2.03. Dominion and Control Over the RRB Property. Notwithstanding any other provision herein, the Issuer shall have dominion and control over the RRB Property, and the Servicer, in accordance with the terms hereof, is acting solely as the servicing agent and custodian for the Issuer with respect to the RRB Property and the RRB Property Records. The Servicer shall not take any action that is not authorized by this Agreement or that shall impair the rights of the Issuer or the Trustee in the RRB Property, in each case unless such action is required by applicable law. Article 3 BILLING SERVICES Section 3.01. Duties of Servicer. The Servicer, as agent for the Issuer, shall have -8- the following duties: (a) Duties of Servicer Generally. (1) General Duties. The Servicer's duties in general shall include management, servicing and administration of the RRB Property; obtaining meter reads, calculating electricity usage (including usage by customers of any TPS), billing, collection and posting of all payments in respect of the RRB Property; responding to inquiries by customers, the NHPUC, or any federal, local or other state governmental authorities with respect to the RRB Property; delivering Bills to customers and TPSs, investigating and handling delinquencies, processing and depositing collections and making periodic remittances; furnishing periodic reports to the Issuer, the Trustee and the Rating Agencies; and taking all necessary action in connection with Periodic Adjustments as set forth herein. Certain of the duties set forth above may be performed by TPSs pursuant to TPS Service Agreements. Without limiting the generality of this Section 3.01(a)(1), in furtherance of the foregoing, the Servicer hereby agrees that it shall also have, and shall comply with, the duties and responsibilities relating to data acquisition, usage and bill calculation, billing, customer service functions, collection, payment processing and remittance set forth in Annex I hereto. (2) NHPUC Regulations Control. Notwithstanding anything to the contrary in this Agreement, the duties of the Servicer set forth in this Agreement shall be qualified in their entirety by any NHPUC Regulations as in effect at the time such duties are to be performed. (b) Reporting Functions. (1) Notification of Laws and Regulations. The Servicer shall promptly notify the Issuer, the Trustee and the Rating Agencies in writing of any laws or NHPUC Regulations hereafter promulgated that have a material adverse effect on the Servicer's ability to perform its duties under this Agreement. (2) Other Information. Upon the reasonable request of the Issuer, the Trustee or any Rating Agency, the Servicer shall provide to such Issuer, Trustee or the Rating Agencies, as the case may be, any public financial information in respect of the Servicer, or any material information regarding the RRB Property to the extent it is reasonably available to the Servicer, as may be reasonably necessary and permitted by law for the Issuer, the Trustee , or the Rating Agencies to monitor the Servicer's performance hereunder. (3) Preparation of Reports to be Filed with the SEC. The Servicer shall prepare or cause to be prepared any reports required to be filed by the Issuer under the securities laws, including a copy of each Quarterly Servicer Certificate described in Section 4.01(d)(3), the annual Certificate of Compliance described in Section 3.03 and the Annual Accountant's Report described in Section 3.04. Section 3.02. Servicing and Maintenance Standards. On behalf of the Issuer, the Servicer shall (a) manage, service, administer and make collections in respect of the RRB Property with reasonable care and in accordance with applicable law, including all applicable NHPUC Regulations and guidelines, using the same degree of care and diligence that the Servicer exercises with respect to similar assets for its own account and, if applicable, for others; (b) follow customary standards, policies and procedures for the industry in performing its duties as Servicer; (c) use all reasonable efforts, consistent -9- with its customary servicing procedures, to bill and collect the RRB Charge; (d) file all filings under the applicable Uniform Commercial Code or the Statute necessary or desirable to maintain the perfected ownership interest and security interest of the Issuer and the Trustee in the RRB Property; and (e) comply in all material respects with all laws and regulations applicable to and binding on it relating to the RRB Property. The Servicer shall follow such customary and usual practices and procedures as it shall deem necessary or advisable in its servicing of all or any portion of the RRB Property, which, in the Servicer's judgment, may include the taking of legal action, at the Issuer's expense. Section 3.03. Certificate of Compliance. The Servicer shall deliver to the Issuer, the Trustee and the Rating Agencies on or before March 31 of each year, commencing March 31, 2002 to and including the March 31 succeeding the Retirement of the Bonds, an Officer's Certificate substantially in the form of Exhibit A hereto (a "Certificate of Compliance"), stating that: (i) a review of the activities of the Servicer during the twelve months ended the preceding December 31 (or, in the case of the first Certificate of Compliance to be delivered on or before March 31, 2002, the period of time from the date of this Agreement until December 31, 2001) and of its performance under this Agreement has been made under such Responsible Officer's supervision, and (ii) to such Responsible Officer's knowledge, based on such review, the Servicer has fulfilled all of its obligations in all material respects under this Agreement throughout such twelve months (or, in the case of the Certificate of Compliance to be delivered on or before March 31, 2002, the period of time from the date of this Agreement until December 31, 2001), or, if there has been a default in the fulfillment of any such material obligation, specifying each such material default known to such Responsible Officer and the nature and status thereof. Section 3.04. Annual Report by Independent Public Accountants. (a) The Servicer, at the Issuer's expense, shall cause a firm of independent certified public accountants (which may provide other services to the Servicer) to prepare, and the Servicer shall deliver to the Issuer, the Trustee and the Rating Agencies, a report addressed to the Servicer (the "Annual Accountant's Report"), which may be included as part of the Servicer's customary auditing activities, for the information and use of the Issuer, the Trustee and the Rating Agencies, on or before March 31 each year, beginning March 31, 2002 to and including the March 31 succeeding the Retirement of the Bonds, to the effect that such firm has performed certain procedures, agreed between the Servicer and such accountants, in connection with the Servicer's compliance with its obligations under this Agreement during the preceding twelve months ended December 31 (or, in the case of the first Annual Accountant's Report to be delivered on or before March 31, 2002, the period of time from the date of this Agreement until December 31, 2001), identifying the results of such procedures and including any exceptions noted. (b) The Annual Accountant's Report shall also indicate that the accounting firm providing such report is independent of the Servicer within the meaning of the Code of Professional Ethics of the American Institute of Certified Public Accountants. Article 4 SERVICES RELATED TO PERIODIC ADJUSTMENTS; REMITTANCES -10- Section 4.01. Periodic Adjustments. From time to time, until the Retirement of the Bonds, the Servicer shall identify the need for Periodic Adjustments and shall take all reasonable action to obtain and implement such Periodic Adjustments, all in accordance with the following: (a) Expected Amortization Schedule. The Expected Amortization Schedule is attached hereto as Schedule 4.01(a). (b) Routine Periodic Adjustments and Semiannual Filings. (1) Routine Semiannual Periodic Adjustments and Filings. For the purpose of preparing a Routine Semiannual True-Up Letter, the Servicer shall: (A) update the assumptions underlying the calculation of the RRB Charge, including energy usage volume, the rate of charge-offs and estimated expenses and fees of the Issuer to the extent not fixed, for the Remittance Period beginning on April 25 or October 25 (whichever is next to occur) of each year; (B) determine the Required Debt Service for such Remittance Period based upon such updated assumptions; and (C) determine the RRB Charge to be charged during such Remittance Period based upon such Required Debt Service. The Servicer shall file a Routine Semiannual True-Up Letter with the NHPUC no later than 30 days prior to April 25 and October 25 of each year. (2) Routine Periodic Adjustments. The Servicer shall file a Routine True-Up Letter at least 15 days before the end of any calendar month, at each such time as the Servicer may reasonably determine is necessary to meet the Required Debt Service for the then current Remittance Period. (3) The Servicer shall take all reasonable actions and make all reasonable efforts to secure any Periodic Adjustments. (c) Non-Routine Periodic Adjustments. (1) Whenever the Servicer determines that the existing model for calculating the RRB Charge should be amended or revised, subject to the consent of the Issuer under the conditions set forth in Section 3.18 of the Indenture, the Servicer shall file a Non-Routine True-Up Letter with the NHPUC designating the adjustments to such model and any corresponding adjustments to the RRB Charge (collectively, a "Non-Routine Periodic Adjustment"), subject to the review and approval of the NHPUC pursuant to the Finance Order. (2) The Servicer shall take all reasonable actions and make all reasonable efforts to secure any Non-Routine Periodic Adjustments. (3) The Servicer shall implement any resulting adjustments to the model and any resulting revised RRB Charge as of the effective date of the Non-Routine True-Up Letter. (d) Reports. (1) Notification of Advice Letter Filings and Periodic Adjustments. Whenever the Servicer files an Advice Letter with the NHPUC, the Servicer shall send a copy of such filing to the Issuer, the Trustee and the Rating Agencies concurrently therewith. If any Periodic Adjustment requested in any such Advice Letter filing does not become effective on the applicable date as provided by the Finance Order, the Servicer shall notify the Issuer, the Trustee and the Rating Agencies by the end of the second Servicer Business Day after such applicable date. (2) Monthly Servicer Certificate. So long as any Bonds are -11- outstanding, not later than fifteen (15) days after the end of each month after the Bonds are issued (excluding April, 2001), or if such day is not a Servicer Business Day, the next succeeding Servicer Business Day, the Servicer shall deliver a written report substantially in the form of Exhibit C hereto (the "Monthly Servicer Certificate") to the Issuer, the Trustee and the Rating Agencies. (3) Quarterly Servicer Certificate. So long as any Bonds are outstanding, not later than 11:00 a.m. (New York City time) on the Servicer Business Day immediately preceding each Payment Date, the Servicer shall deliver a written report substantially in the form of Exhibit D hereto (the "Quarterly Servicer Certificate") to the Issuer, the Trustee and the Rating Agencies. (4) TPS Reports. The Servicer shall provide to the Rating Agencies, upon request, any publicly available reports filed by the Servicer with the NHPUC (or otherwise made publicly available by the Servicer) relating to TPSs and any other non-confidential and non-proprietary information relating to TPSs reasonably requested by the Rating Agencies. (e) Uniformity of RRB Charge. The Servicer shall not take any action to implement any Periodic Adjustment that would cause the RRB Charge to vary among customer classes unless the Rating Agency Condition shall have been satisfied. Section 4.02. Limitation of Liability. (a) The Issuer and the Servicer expressly agree and acknowledge that: (1) In connection with any Periodic Adjustment, the Servicer is acting solely in its capacity as the servicing agent hereunder. (2) Neither the Servicer nor the Issuer shall be responsible in any manner for, and shall have no liability whatsoever as a result of, any action, decision, ruling or other determination made or not made, or any delay (other than any delay resulting from the Servicer's failure to file for Periodic Adjustments or Non-Routine Periodic Adjustments required by Section 4.01 in a timely and correct manner or other material breach by the Servicer of its duties under this Agreement that materially and adversely affects any Periodic Adjustments or Non-Routine Periodic Adjustments), by the NHPUC (or, in connection with any Non-Routine Periodic Adjustment, by the Rating Agencies) in any way related to the RRB Property or in connection with any Periodic Adjustment or Non-Routine Periodic Adjustment, the subject of any filings under Section 4.01, any proposed Periodic Adjustment or Non-Routine Periodic Adjustment, or the approval of the RRB Charge and the adjustments thereto. (3) The Servicer shall have no liability whatsoever relating to the calculation of the RRB Charge and the adjustments thereto (including any Non-Routine Periodic Adjustment), including as a result of any inaccuracy of any of the assumptions made in such calculation regarding expected energy usage volume, the rate of charge-offs, estimated expenses and fees of the Issuer, so long as the Servicer has not acted in a negligent manner in connection therewith, nor shall the Servicer have any liability whatsoever as a result of any Person, including the Bondholders, not receiving any payment, amount or return anticipated or expected in respect of any Bond generally, except only to the extent that the Servicer is liable under Section 6.02 of this Agreement. (b) Notwithstanding the foregoing, this Section 4.02 shall not relieve the Servicer of any liability under Section 6.02 for any misrepresentation by the Servicer -12- under Section 6.01 or for any breach by the Servicer of its obligations under this Agreement. Section 4.03. Remittances. (a) Pursuant to the remittance methodology more fully described in Annex II hereto, starting with collections that are received on the first Servicer Business Day that is at least 45 days after the first day on which Public Service Company of New Hampshire imposes the RRB Charge, the Servicer will remit to the Trustee on each Servicer Business Day, within two Servicer Business Days after receipt, by wire transfer of immediately available funds to the General Subaccount of the Collection Account, an amount equal to the RRB Charge Payments (as calculated in accordance with Annex II hereto) received on such Servicer Business Day and on any prior day that was not a Servicer Business Day for which a Remittance has not previously been made. Prior to or simultaneous with each Remittance to the General Subaccount of the Collection Account pursuant to this Section, the Servicer shall provide written notice to the Trustee of each such Remittance (including the exact dollar amount to be remitted). (b) The Servicer may elect to make Remittances less frequently than on a daily basis, and shall be permitted to do so, but in any event shall make Remittances within one calendar month of collection thereof, provided that the Servicer shall send written notice of such election to the Issuer and the Trustee, together with (i) an Officer's Certificate stating that no Servicer Default has occurred and is continuing under this Servicing Agreement, (ii) evidence that the Rating Agency Condition has been satisfied, (iii) evidence of the delivery by the Servicer to the Issuer or the Trustee, as applicable, of any credit enhancement which may be required by the Rating Agencies in connection therewith in form and substance satisfactory to the Issuer and the Trustee, as applicable, the cost of which credit enhancement shall be borne solely by the Servicer, and (iv) an executed copy of any appropriate amendment hereto or to the Indenture or any other Basic Agreement as reasonably requested by the Servicer, the Issuer or the Trustee in connection therewith. (c) The Servicer agrees and acknowledges that it will remit RRB Charge Payments in accordance with this Section 4.03 without any surcharge, fee, offset, charge or other deduction except for late fees permitted by Section 6.06. Article 5 THE RRB PROPERTY Section 5.01. Custody of RRB Property Records. To assure uniform quality in servicing the RRB Property and to reduce administrative costs, the Issuer hereby revocably appoints the Servicer, and the Servicer hereby accepts such appointment, to act as the agent of the Issuer and the Trustee as custodian of any and all documents and records that the Servicer shall keep on file, in accordance with its customary procedures, relating to the RRB Property, including copies of the Finance Order and Advice Letters relating thereto and all documents filed with the NHPUC in connection with any Periodic Adjustment or Non-Routine Periodic Adjustment and computational records relating thereto (collectively, the "RRB Property Records"), which are hereby constructively delivered to the Trustee, as pledgee of the Issuer with respect to all RRB Property. Section 5.02. Duties of Servicer as Custodian. -13- (a) Safekeeping. The Servicer shall hold the RRB Property Records on behalf of the Issuer and the Trustee and maintain such accurate and complete accounts, records and computer systems pertaining to the RRB Property Records on behalf of the Issuer and the Trustee as shall enable the Issuer to comply with this Agreement and the Indenture. In performing its duties as custodian the Servicer shall act with reasonable care, using that degree of care and diligence that the Servicer exercises with respect to comparable assets that the Servicer services for itself or, if applicable, for others. The Servicer shall promptly report to the Issuer and the Trustee any failure on its part to hold the RRB Property Records and maintain its accounts, records and computer systems as herein provided and promptly take appropriate action to remedy any such failure. Nothing herein shall be deemed to require an initial review or any periodic review by the Issuer or the Trustee of the RRB Property Records. The Servicer's duties to hold the RRB Property Records on behalf of the Issuer set forth in this Section 5.02, to the extent such RRB Property Records have not been previously transferred to a successor Servicer pursuant to Article 7, shall terminate one year and one day after the earlier of the date on which (i) the Servicer is succeeded by a successor Servicer in accordance with Article 7 and (ii) no Bonds are outstanding. (b) Maintenance of and Access to Records. The Servicer shall maintain at all times records and accounts that permit the Servicer to identify RRB Charges billed. The Servicer shall maintain the RRB Property Records in Manchester, New Hampshire, Berlin, Connecticut or at such other office in the United States as shall be specified to the Issuer and the Trustee by written notice at least 30 days prior to any change in location. The Servicer shall make available for inspection to the Issuer, the Trustee, the NHPUC or their respective duly authorized representatives, attorneys or auditors the RRB Property Records at such times during normal business hours as the Issuer, the Trustee or the NHPUC shall reasonably request and which do not unreasonably interfere with the Servicer's normal operations. Nothing in this Section 5.02(b) shall affect the obligation of the Servicer to observe any applicable law (including any NHPUC Regulations) prohibiting disclosure of information regarding the customers, and the failure of the Servicer to provide access to such information as a result of such obligation shall not constitute a breach of this Section 5.02(b). (c) Release of Documents. Upon instruction from the Trustee in accordance with the Indenture, the Servicer shall release any RRB Property Records to the Trustee, the Trustee's agent or the Trustee's designee, as the case may be, at such place or places as the Trustee may designate, as soon as practicable. (d) Defending RRB Property Against Claims. The Servicer shall institute any action or proceeding necessary to compel performance by the NHPUC or the State of New Hampshire of any of their obligations or duties under the Statute, the Finance Order or any Advice Letter, and the Servicer agrees to take such legal or administrative actions, including defending against or instituting and pursuing legal actions and appearing or testifying at hearings or similar proceedings, as may be reasonably necessary to block or overturn any attempts to cause a repeal of, modification of or supplement to the Statute or the Finance Order or the rights of holders of RRB Property by executive action, legislative enactment or constitutional amendment or (if such means become available in the future) referendum or initiative petition that would be adverse to Bondholders, the -14- Issuer or the Trustee. The costs of any such action shall be payable from RRB Charge Collections as an Operating Expense in accordance with the priorities set forth in Section 8.02(d) of the Indenture. The Servicer's obligations pursuant to this Section 5.02 shall survive and continue notwithstanding the fact that the payment of Operating Expenses pursuant to Section 8.02(d) of the Indenture may be delayed, it being understood that the Servicer may be required to advance its own funds to satisfy its obligations hereunder. If the Servicer must incur costs to satisfy its obligations hereunder and is required hereunder to advance its own funds with respect to such costs but is unable to do so, the Servicer shall, in accordance with the provisions of Section 8.02(j) of the Indenture, make written request to the Trustee to pay such costs from amounts on deposit in the Servicer Advance Subaccount. Amounts so paid by the Trustee from amounts on deposit in the Servicer Advance Subaccount in accordance with the provisions of Section 8.02(j) of the Indenture shall remain payable as Operating Expenses advanced by the Servicer in accordance with this Section 5.02(d) and Section 8.02(j) of the Indenture. Section 5.03. Instructions; Authority to Act. For so long as any Bonds remain outstanding, the Servicer shall be deemed to have received proper instructions with respect to the RRB Property Records upon its receipt of written instructions signed by a Responsible Officer (as defined in the Indenture) of the Trustee. Section 5.04. Effective Period and Termination. The Servicer's appointment as custodian shall become effective as of the Closing Date and shall continue in full force and effect until terminated pursuant to this Section 5.04. If any Servicer shall resign as Servicer in accordance with the provisions of this Agreement or if all of the rights and obligations of any Servicer shall have been terminated under Section 7.01, the appointment of such Servicer as custodian shall terminate upon appointment of a successor Servicer, subject to the approval of the NHPUC, and acceptance by such successor Servicer of such appointment. Section 5.05. Monitoring of Third Party Suppliers. From time to time, until the Retirement of the Bonds, the Servicer shall, using the same degree of care and diligence that it exercises with respect to payments owed to it for its own account, implement such procedures and policies as are necessary to properly enforce the obligations of each TPS to remit RRB Charges, in accordance with the terms and provisions of the Finance Order, the TPS Service Agreement and Schedule A to Annex I hereto. Article 6 THE SERVICER Section 6.01. Representations and Warranties of Servicer. The Servicer makes the following representations and warranties, as of the Closing Date, on which the Issuer is deemed to have relied in entering into this Agreement relating to the servicing of the RRB Property. (a) Organization and Good Standing. The Servicer is duly organized and validly existing as a corporation in good standing under the laws of the State of New Hampshire, with the requisite corporate power and authority to own its properties as such properties are currently owned and to conduct its business as such business is now conducted by it, and has the requisite corporate power and authority to service the RRB Property and to hold the RRB Property Records as custodian. -15- (b) Due Qualification. The Servicer is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of property or the conduct of its business (including the servicing of the RRB Property as required by this Agreement) shall require such qualifications, licenses or approvals (except where the failure to so qualify or obtain such licenses and approvals would not be reasonably likely to have a material adverse effect on the Servicer's business, operations, assets, revenues or properties or adversely affect the servicing of the RRB Property). (c) Power and Authority. The Servicer has the requisite corporate power and authority to execute and deliver this Agreement and to carry out its terms; and the execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action on the part of the Servicer. (d) Binding Obligation. This Agreement constitutes a legal, valid and binding obligation of the Servicer enforceable against it in accordance with its terms, subject to applicable insolvency, reorganization, moratorium, fraudulent transfer and other laws relating to or affecting creditors' rights generally from time to time in effect and to general principles of equity (including concepts of materiality, reasonableness, good faith and fair dealing), regardless of whether considered in a proceeding in equity or at law. (e) No Violation. The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof do not: (i) conflict with or result in any breach of any of the terms and provisions of, nor constitute (with or without notice or lapse of time) a default under the articles of organization or by-laws of the Servicer, or any material indenture, agreement or other instrument to which the Servicer is a party or by which it is bound; (ii) result in the creation or imposition of any Lien upon any of the Servicer's properties pursuant to the terms of any such indenture, agreement or other instrument; nor violate any existing law or any existing order, rule or regulation applicable to the Servicer of any court or of any federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Servicer or its properties, so as to adversely affect the Servicer, the Issuer or the Bondholders. (f) No Proceedings. There are no proceedings pending and, to the Servicer's knowledge, there are no proceedings threatened and, to the Servicer's knowledge, there are no investigations pending or threatened, before any court, federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Servicer or its properties involving or relating to the Servicer or the Issuer or, to the Servicer's knowledge, any other Person: (i) asserting the invalidity of this Agreement; (ii) seeking to prevent the consummation of any of the transactions contemplated by this Agreement; or (iii) seeking any determination or ruling that might materially and adversely affect the performance by the Servicer of its obligations under, or the validity or enforceability of, this Agreement. (g) Approvals. No approval, authorization, consent, order or other action of, or filing with, any court, federal or state regulatory body, administrative agency or other governmental instrumentality is required in connection with the execution and delivery by the Servicer of this Agreement, the performance by the Servicer of the -16- transactions contemplated hereby or the fulfillment by the Servicer of the terms hereof, except those that have been obtained or made and those that the Servicer is required to make in the future pursuant to Article 3 or Article 4 and post-closing filings in connection therewith. Section 6.02. Indemnities of Servicer. (a) The Servicer shall be liable in accordance herewith only to the extent of the obligations specifically undertaken by the Servicer and as expressly provided under this Section 6.02. (b) The Servicer shall indemnify the Issuer and the Bondholders (each an "Indemnified Person" for purposes of Sections 6.02 (b) and (d)) for, and defend and hold harmless each such Person from and against, any and all liabilities, obligations, losses, damages, payments, claims, costs or expenses of any kind whatsoever (collectively, "Losses") that may be imposed on, incurred by or asserted against any such Person as a result of (i) the Servicer's willful misconduct or negligence in the performance of its duties or observance of its covenants under this Agreement (including the Servicer's willful misconduct or negligence relating to the maintenance and custody by the Servicer, as custodian, of the RRB Property Records) or (ii) the Servicer's breach in any material respect of any of its representations or warranties in this Agreement; provided, however, that the Servicer shall not be liable for any Losses resulting from the willful misconduct or gross negligence of any such Indemnified Person; and, provided, further, that the Bondholders shall be entitled to enforce their rights and remedies against the Servicer under this Section 6.02(b) solely through a cause of action brought for their benefit by the Trustee; and, provided, further, that the Servicer shall not be liable for any Losses, regardless of when incurred, after the Bonds have been paid in full, except as provided in Section 6.02(c). (c) The Servicer shall indemnify and hold harmless the Trustee, the State of New Hampshire, the Treasurer of the State of New Hampshire, agencies of the State of New Hampshire and any of their respective affiliates, officials, officers, directors, employees, consultants, counsel and agents (each an "Indemnified Person" for purposes of Section 6.02(c) and (d)) for, and defend and hold harmless each such Person from and against, any and all Losses imposed on, incurred by or asserted against any of such Indemnified Persons as a result of: (i) the Servicer's willful misconduct or negligence in the performance of its duties or observance of its covenants under this Agreement (including the Servicer's willful misconduct or negligence relating to the maintenance and custody by the Servicer, as custodian, of the RRB Property Records) or (ii) the Servicer's breach in any material respect of any of its representations or warranties in this Agreement; provided, however, that the Servicer shall not be liable for any Losses resulting from the willful misconduct or gross negligence of such Indemnified Person or resulting from a breach of a representation or warranty made by such Indemnified Person in any of the Basic Documents that gives rise to the Servicer's breach. (d) The Servicer shall not be required to indemnify an Indemnified Person for any amount paid or payable by such Indemnified Person pursuant to Section 6.02(b) or Section 6.02(c) in the settlement of any action, proceeding or investigation without the written consent of the Servicer, which consent shall not be unreasonably withheld. Promptly after receipt by an Indemnified Person of notice of its involvement in any -17- action, proceeding or investigation, such Indemnified Person shall, if a claim for indemnification in respect thereof is to be made against the Servicer under Section 6.02(b) or Section 6.02(c), notify the Servicer in writing of such involvement. Failure by an Indemnified Person to so notify the Servicer shall relieve the Servicer from the obligation to indemnify and hold harmless such Indemnified Person under Section 6.02(b) or Section 6.02(c), as applicable, only to the extent that the Servicer suffers actual prejudice as a result of such failure. With respect to any action, proceeding or investigation brought by a third party for which indemnification may be sought under Section 6.02(b) or Section 6.02(c), the Servicer shall be entitled to assume the defense of any such action, proceeding or investigation. Upon assumption by the Servicer of the defense of any such action, proceeding or investigation, the Indemnified Person shall have the right to participate in such action or proceeding and to retain its own counsel. The Servicer shall be entitled to appoint counsel of the Servicer's choice at the Servicer's expense to represent the Indemnified Person in any action, proceeding or investigation for which a claim of indemnification is made against the Servicer under Section 6.02(b) or Section 6.02(c) (in which case the Servicer shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the Indemnified Person except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the Indemnified Person. Notwithstanding the Servicer's election to appoint counsel to represent the Indemnified Person in an action, proceeding or investigation, the Indemnified Person shall have the right to employ separate counsel (including local counsel), and the Servicer shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of counsel chosen by the Servicer to represent the Indemnified Person would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the Indemnified Person and the Servicer and the Indemnified Person shall have reasonably concluded that there may be legal defenses available to it that are different from or additional to those available to the Servicer, (iii) the Servicer shall not have employed counsel reasonably satisfactory to the Indemnified Person to represent the Indemnified Person within a reasonable time after notice of the institution of such action or (iv) the Servicer shall authorize the Indemnified Person to employ separate counsel at the expense of the Servicer. Notwithstanding the foregoing, the Servicer shall not be obligated to pay for the fees, costs and expenses of more than one separate counsel for the Indemnified Persons (in addition to local counsel). The Servicer will not, without the prior written consent of the Indemnified Person, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought under Section 6.02(b) or Section 6.02(c), as applicable, (whether or not the Indemnified Person is an actual or potential party to such claim or action) unless such settlement, compromise or consent includes an unconditional release of the Indemnified Person from all liability arising out of such claim, action, suit or proceeding. (e) Indemnification under Section 6.02(b) and Section 6.02(c) shall survive the resignation or removal of the Trustee and the termination of this Agreement and shall include reasonable fees and out-of-pocket expenses of investigation and litigation (including reasonable attorneys' fees and expenses), except as otherwise -18- provided in this Agreement. (f) For purposes of Section 6.02(b) and Section 6.02(c), in the event of the termination of the rights and obligations of Public Service Company of New Hampshire (or any successor thereto pursuant to Section 6.04) as Servicer pursuant to Section 7.01, or a resignation by such Servicer pursuant to this Agreement, such Servicer shall be deemed to be the Servicer pending appointment of a successor Servicer pursuant to Section 7.02. Section 6.03. Limitation on Liability of Servicer and Others. Except as otherwise provided under this Agreement, neither the Servicer nor any of the directors, officers, employees or agents of the Servicer shall be liable to the Issuer or any other Person for any action taken or for refraining from the taking of any action pursuant to this Agreement or for errors in judgment; provided, however, that this provision shall not protect the Servicer or any director, officer, employee or agent of the Servicer against any liability that would otherwise be imposed by reason of willful misconduct or negligence in the performance of duties under this Agreement. The Servicer and any director, officer, employee or agent of the Servicer may rely in good faith on the advice of counsel reasonably acceptable to the Trustee or on any document of any kind, prima facie properly executed and submitted by any Person, respecting any matters arising under this Agreement. Except as provided in this Agreement, the Servicer shall not be under any obligation to appear in, prosecute or defend any legal action relating to the RRB Property. Section 6.04. Merger or Consolidation of, or Assumption of the Obligations of, Servicer. Any Person (a) into which the Servicer may be merged or consolidated, (b) which may result from any merger or consolidation to which the Servicer shall be a party or (c) which may succeed to the properties and assets of the Servicer substantially as a whole, which Person in any of the foregoing cases executes an agreement of assumption to perform every obligation of the Servicer hereunder, shall be the successor to the Servicer under this Agreement without further act on the part of any of the parties to this Agreement; provided, however, that (i) immediately after giving effect to such transaction, no Servicer Default and no event which, after notice or lapse of time, or both, would become a Servicer Default shall have occurred and be continuing, (ii) the Servicer shall have delivered to the Issuer and the Trustee an Officers' Certificate stating that such consolidation, merger or succession and such agreement of assumption comply with this Section and that all conditions precedent provided for in this Agreement relating to such transaction have been complied with, (iii) the Servicer shall have delivered to the Issuer and the Trustee an Opinion of Counsel stating that, in the opinion of such counsel (A) such consolidation, merger or succession and such agreement of assumption comply with this Section and that all conditions precedent provided for in this Agreement relating to such transaction have been complied with and (B) either (1) all filings to be made by the Servicer, including filings with the NHPUC pursuant to the Statute and filings under the applicable Uniform Commercial Code, have been executed and filed that are necessary to preserve and protect fully the interests of the Issuer and the Trustee in the RRB Property and reciting the details of such filings or (2) no such action shall be necessary to preserve and protect such interests and (iv) the Rating Agencies shall have received prior written notice of such transaction. When any Person acquires the properties and assets of the -19- Servicer substantially as a whole and becomes the successor to the Servicer in accordance with the terms of this Section 6.04, then upon satisfaction of all of the other conditions of this Section 6.04, the Servicer shall automatically and without further notice be released from all its obligations hereunder. Section 6.05. Public Service Company of New Hampshire Not to Resign as Servicer. Subject to the provisions of Section 6.04, Public Service Company of New Hampshire shall not resign from the obligations and duties hereby imposed on it as Servicer under this Agreement except upon either (a) a determination that the performance of its duties under this Agreement shall no longer be permissible under applicable law or (b) satisfaction of the following: (i) the Rating Agency Condition shall have been satisfied (except that with respect to Moody's it shall be sufficient to provide ten days prior notice) and (ii) the NHPUC shall have approved such resignation. Notice of any such determination permitting the resignation of Public Service Company of New Hampshire shall be communicated to the Issuer, the Trustee and the Rating Agencies at the earliest practicable time (and, if such communication is not in writing, shall be confirmed in writing at the earliest practicable time) and any such determination that the performance of Public Service Company of New Hampshire's duties under this Agreement shall no longer be permissible under applicable law shall be evidenced by an Opinion of Counsel to such effect delivered by Public Service Company of New Hampshire to the Issuer and the Trustee concurrently with or promptly after such notice. No such resignation shall become effective until a successor Servicer shall have assumed the responsibilities and obligations of Public Service Company of New Hampshire in accordance with Section 7.02. Section 6.06. Servicing Compensation. (a) In consideration for its services hereunder, until the Retirement of the Bonds, the Servicer shall receive an annual fee (the "Servicing Fee") in an amount equal to (i) one-quarter of one percent (0.25%) of the outstanding principal balance of the Bonds for so long as the Servicer is Public Service Company of New Hampshire or any successor Servicer that bills the RRB Charge concurrently with other charges for services or (ii) up to one and one-half percent (1.5%) of the outstanding principal balance of the Bonds for so long as the Servicer is a successor Servicer that bills the RRB Charge separately to customers (which amount shall be determined by a separate agreement between the Issuer and the Servicer). The Servicing Fee shall be payable in quarterly installments on each Payment Date. The Servicer also shall be entitled to retain as additional compensation (i) any interest earnings on RRB Charge Payments received by the Servicer and invested by the Servicer pursuant to Section 6(c) of Annex I hereto prior to remittance to the Collection Account and (ii) all late payment charges, if any, collected from customers or TPSs. (b) The Servicing Fee set forth in Section 6.06(a) and expenses provided for in Section 6.06(c) shall be paid to the Servicer by the Trustee, on each Payment Date in accordance with the priorities set forth in Section 8.02(d) of the Indenture, by wire transfer of immediately available funds from the Collection Account to an account designated by the Servicer. Any portion of the Servicing Fee not paid on such date shall be added to the Servicing Fee payable on the subsequent Payment Date. (c) The Issuer shall pay all expenses incurred by the Servicer in -20- connection with its activities hereunder (including any reasonable fees to and disbursements by accountants, counsel, or any other Person, any taxes imposed on the Servicer (other than taxes based on the Servicer's net income) and any expenses incurred in connection with reports to Bondholders, subject to the priorities set forth in Section 8.02(d) of the Indenture). Section 6.07. Compliance with Applicable Law. The Servicer covenants and agrees, in servicing the RRB Property, to comply in all material respects with all laws applicable to, and binding upon, the Servicer and relating to such RRB Property the noncompliance with which would have a material adverse effect on the value of the RRB Property; provided, however, that the foregoing is not intended to, and shall not, impose any liability on the Servicer for noncompliance with any law that the Servicer is contesting in good faith in accordance with its customary standards and procedures. Section 6.08. Access to Certain Records and Information Regarding RRB Property. The Servicer shall provide to the Bondholders, the Issuer and the Trustee access to the RRB Property Records in such cases where the Bondholders, the Issuer or the Trustee shall be required by applicable law to be provided access to such records. Access shall be afforded without charge, but only upon reasonable request and during normal business hours at the respective offices of the Servicer. Nothing in this Section shall affect the obligation of the Servicer to observe any applicable law (including any NHPUC Regulation) prohibiting disclosure of information regarding the customers, and the failure of the Servicer to provide access to such information as a result of such obligation shall not constitute a breach of this Section. Section 6.09. Appointments. (a) The Servicer may at any time appoint any Person to perform all or any portion of its obligations as Servicer hereunder; provided, however, that the Rating Agency Condition shall have been satisfied in connection therewith (except that with respect to Moody's it shall be sufficient to provide ten days prior notice); and, provided, further, that the Servicer shall remain obligated and be liable under this Agreement for the servicing and administering of the RRB Property in accordance with the provisions hereof without diminution of such obligation and liability by virtue of the appointment of such Person and to the same extent and under the same terms and conditions as if the Servicer alone were servicing and administering the RRB Property; and, provided, further, however, that nothing herein (including the Rating Agency Condition) shall preclude the execution by the Servicer of a TPS Service Agreement with any TPS pursuant to applicable NHPUC Regulations. The fees and expenses of any such Person shall be as agreed between the Servicer and such Person from time to time and none of the Issuer, the Trustee, the Bondholders or any other Person shall have any responsibility therefor or right or claim thereto. Any such appointment shall not constitute a Servicer resignation under Section 6.05. (b) The Servicer has no employees. Therefore, in carrying out the foregoing duties or any of its other obligations under this Agreement, the Servicer may enter into transactions with or otherwise deal with any of its Affiliates to obtain the services of employees of such Affiliates as is its current practice; provided, however, that the terms of any such transactions or dealings shall be no less favorable to the Issuer than would be available from unaffiliated parties or that would be available if the Servicer -21- were to hire its own employees to perform such services. Section 6.10. No Servicer Advances. The Servicer shall not make any advances of interest on or principal of the Bonds. Section 6.11. Maintenance of Operations. The Servicer agrees to continue to operate its distribution system to provide service to its customers so long as it is acting as the Servicer under this Agreement. Article 7 DEFAULT Section 7.01. Servicer Default. If any one of the following events (each a "Servicer Default") shall occur and be continuing: (a) any failure by the Servicer to remit to the Collection Account on behalf of the Issuer any required Remittance that shall continue unremedied for a period of five (5) Business Days after written notice of such failure is received by the Servicer from the Issuer or the Trustee; or (b) any failure on the part of the Servicer duly to observe or to perform in any material respect any other covenants or agreements of the Servicer set forth in this Agreement, which failure shall (a) materially and adversely affect the rights of the Bondholders and (ii) continue unremedied for a period of 60 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given (A) to the Servicer by the Issuer or (B) to the Servicer by the Trustee or by the Holders of Bonds evidencing not less than 25 percent of the Outstanding Amount of the Bonds; or (c) any representation or warranty made by the Servicer in this Agreement shall prove to have been incorrect in any material respect when made, which has a material adverse effect on the Bondholders and which material adverse effect continues unremedied for a period of 60 days after written notice of such failure is received by the Servicer from the Issuer or the Trustee; or (d) an Insolvency Event occurs with respect to the Servicer; then, and in each and every case, so long as the Servicer Default shall not have been remedied, either the Trustee, or the Holders of Bonds evidencing not less than 25 percent of the Outstanding Amount of the Bonds, by notice then given in writing to the Servicer (and to the Trustee if given by the Bondholders) (a "Termination Notice") may terminate all the rights and obligations (other than the obligations set forth in Section 6.02) of the Servicer under this Agreement. In addition, upon a Servicer Default described in Section 7.01(a), each of the following shall be entitled to apply to the NHPUC for sequestration and payment of revenues arising with respect to the RRB Property in accordance with RSA 369-B:7, VI and VIII: (1) the Bondholders or the Trustee; (2) the Issuer or its assignees; or (3) pledgees or transferees of the RRB Property. On or after the receipt by the Servicer of a Termination Notice, and subject to the approval of the NHPUC, all authority and power of the Servicer under this Agreement, whether with respect to the Bonds, the RRB Property, the RRB Charge or otherwise, shall, without further action, pass to and be vested in such successor Servicer as may be appointed under Section 7.02; and, without limitation, the Trustee is hereby authorized and empowered to execute and deliver, on behalf of the predecessor Servicer, as attorney-in-fact or otherwise, any and all documents and other instruments, and to do or accomplish all other acts or things -22- necessary or appropriate to effect the purposes of such Termination Notice, whether to complete the transfer of the RRB Property Records and related documents, or otherwise. The predecessor Servicer shall cooperate with the successor Servicer, the Issuer and the Trustee in effecting the termination of the responsibilities and rights of the predecessor Servicer under this Agreement, including the transfer to the successor Servicer for administration by it of all cash amounts that shall at the time be held by the predecessor Servicer for remittance, or shall thereafter be received by it with respect to the RRB Property or the RRB Charge. In case a successor Servicer is appointed as a result of a Servicer Default, all reasonable costs and expenses (including reasonable attorneys' fees and expenses) incurred in connection with transferring the RRB Property Records to the successor Servicer and amending this Agreement to reflect such succession as Servicer pursuant to this Section shall be paid by the predecessor Servicer upon presentation of reasonable documentation of such costs and expenses. All other reasonable costs and expenses incurred in transferring servicing responsibilities to a successor servicer shall constitute Operating Expenses of the Issuer. Section 7.02. Appointment of Successor. (a) Upon the Servicer's receipt of a Termination Notice pursuant to Section 7.01 or the Servicer's resignation or removal in accordance with the terms of this Agreement, the predecessor Servicer shall continue to perform its functions as Servicer under this Agreement, and shall be entitled to receive the requisite portion of the Servicing Fee and reimbursement of expenses as provided herein, until a successor Servicer shall have assumed in writing the obligations of the Servicer hereunder as described below. In the event of the Servicer's termination hereunder, the Issuer shall appoint, subject to the approval of the NHPUC, a successor Servicer with the Trustee's prior written consent thereto (which consent shall not be unreasonably withheld), and the successor Servicer shall accept its appointment by a written assumption in form reasonably acceptable to the Issuer and the Trustee. If within 30 days after the delivery of the Termination Notice, the Issuer shall not have obtained such a new Servicer, the Trustee may appoint (subject to the approval of the NHPUC) or petition the NHPUC or a court of competent jurisdiction to appoint a successor Servicer under this Agreement. A Person shall qualify as a successor Servicer only if (i) such Person is permitted under NHPUC Regulations to perform the duties of the Servicer, (ii) the Rating Agency Condition shall have been satisfied and (iii) such Person assumes in writing the obligations of the Servicer hereunder or enters into a servicing agreement with the Issuer having substantially the same provisions as this Agreement. (b) Upon appointment, the successor Servicer shall be the successor in all respects to the predecessor Servicer and shall be subject to all the responsibilities, duties and liabilities arising thereafter relating thereto placed on the predecessor Servicer and shall be entitled to the Servicing Fee and all the rights granted to the predecessor Servicer by the terms and provisions of this Agreement. Section 7.03. Waiver of Past Defaults. The Holders of Bonds evidencing not less than a majority of the Outstanding Amount of the Bonds may, on behalf of all Bondholders, waive in writing any default by the Servicer in the performance of its obligations hereunder and its consequences, except a default in making any required Remittances to the Collection Account in accordance with this Agreement. Upon any -23- such waiver of a past default, such default shall cease to exist, and any Servicer Default arising therefrom shall be deemed to have been remedied for every purpose of this Agreement. No such waiver shall extend to any subsequent or other default or impair any right consequent thereto. Section 7.04. Notice of Servicer Default. The Servicer shall deliver to the Issuer, the Trustee and the Rating Agencies, promptly after any of its Responsible Officers having obtained actual knowledge thereof, but in no event later than five Business Days thereafter, written notice in an Officers' Certificate of any event which with the giving of notice or lapse of time, or both, would become a Servicer Default under Section 7.01(a) or Section 7.01(b). Article 8 MISCELLANEOUS PROVISIONS Section 8.01. Amendment. (a) This Agreement may be amended in writing by the Servicer and the Issuer with ten Business Days' prior written notice given to the Rating Agencies and the prior written consent of the Trustee (which consent shall not be unreasonably withheld), but without the consent of any of the Bondholders, to cure any ambiguity, to correct or supplement any provisions in this Agreement or for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions in this Agreement or of modifying in any manner the rights of the Bondholders; provided, however, that such action shall not, as evidenced by an Officer's Certificate delivered to the Issuer and the Trustee, adversely affect in any material respect the interests of any Bondholder. (b) This Agreement may also be amended in writing from time to time by the Servicer and the Issuer with ten Business Days' prior written notice given to the Rating Agencies and the prior written consent of the Trustee (which consent shall not be unreasonably withheld) and the prior written consent of the Holders of Bonds evidencing not less than a majority of the Outstanding Amount of the Bonds, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of modifying in any manner the rights of the Bondholders; provided, however, that any amendment of the provisions of Section 4.01 or Section 4.03 shall satisfy the Rating Agency Condition. (c) If the written consent of Bondholders is required in connection with an amendment hereof, approval by Bondholders of the substance of any proposed amendment or consent shall constitute sufficient consent of the Bondholders pursuant to this Section, and it shall not be necessary that Bondholders approve of the particular form of any amendment or consent. (d) Promptly after the execution thereof, the Issuer shall provide each of the Rating Agencies with a copy of any amendment to this Agreement. (e) Prior to its consent to any amendment to this Agreement, the Trustee shall be entitled to receive and conclusively rely upon an Opinion of Counsel stating that such amendment is authorized or permitted by this Agreement. The Trustee may, but shall not be obligated to, enter into any such amendment which affects the Trustee's own rights, duties or immunities under this Agreement or otherwise. Section 8.02. Maintenance of Accounts and Records. -24- (a) The Servicer shall maintain accounts and records as to the RRB Property accurately and in accordance with its standard accounting procedures. (b) The Servicer shall permit the Issuer and the Trustee and its agents at any time during normal business hours, upon reasonable notice to the Servicer and to the extent it does not unreasonably interfere with the Servicer's normal operations, to inspect, audit and make copies of and abstracts from the Servicer's records regarding the RRB Property and the RRB Charge. Nothing in this Section 8.02(b) shall affect the obligation of the Servicer to observe any applicable law (including any NHPUC Regulation) prohibiting disclosure of information regarding the customers, and the failure of the Servicer to provide access to such information as a result of such obligation shall not constitute a breach of this Section 8.02(b). Section 8.03. Notices. Unless otherwise specifically provided herein, all notices, directions, consents and waivers required under the terms and provisions of this Agreement shall be in English and in writing, and any such notice, direction, consent or waiver may be given by United States mail, courier service, facsimile transmission or electronic mail (confirmed by telephone, United States mail or courier service in the case of notice by facsimile transmission or electronic mail) or any other customary means of communication, and any such notice, direction, consent or waiver shall be effective when delivered, or if mailed, three days after deposit in the United States mail with proper postage for ordinary mail prepaid: (a) if to the Servicer, to Public Service Company of New Hampshire 1000 Elm Street Manchester, NH 03105 Facsimile: (860) 665-5457 Telephone: (860) 665-3258 E-Mail: shoopra@nu.com (email) with a copy to: Public Service Company of New Hampshire c/o Northeast Utilities Service Company if by U.S. Mail: P.O. Box 270 Hartford, CT 06141-0270 if by courier: 107 Selden Street Berlin, CT 06037 Attention: Assistant Treasurer - Finance Facsimile: (860) 665-5457 -25- Telephone: (860) 665-3258 E-Mail: shoopra@nu.com (b) if to the Issuer, to PSNH Funding LLc c/o Public Service Company of New Hampshire 1000 Elm Street Manchester, NH 03105 Facsimile: (860) 665-5457 Telephone: (860) 665-3258 E-Mail: shoopra@nu.com (email) with a copy to: Public Service Company of New Hampshire c/o Northeast Utilities Service Company if by U.S. Mail: P.O. Box 270 Hartford, CT 06141-0270 if by courier: 107 Selden Street Berlin, CT 06037 Attention: Assistant Treasurer - Finance Facsimile: (860) 665-5457 Telephone: (860) 665-3258 E-Mail: shoopra@nu.com (c) if to the Trustee, to The Bank of New York 101 Barclay Street Floor 12 East New York, NY 10286 Attention: ABS Unit Facsimile: (212) 815-5563 Telephone: (212) 815-5368 (d) if to Moody's, to Moody's Investors Service, Inc. 99 Church Street New York, NY 10007 Attention: ABS Monitoring Department Facsimile: (212) 553-0573 Telephone: (212) 553-3686 -26- (e) if to S&P, to Standard & Poor's 55 Water Street, 41st Floor New York, NY 10041 Attention: Asset Backed Surveillance Department Facsimile: (212) 438-2664 Telephone: (212) 438-2000 (f) if to Fitch, to Fitch, Inc. One State Street Plaza New York, NY 10004 Attention: ABS Surveillance Facsimile: (212) 514-9879 Telephone: (212) 908-0500 E-mail: surv@fitchratings.com (g) as to each of the foregoing, at such other address as shall be designated by written notice to the other parties. Section 8.04. Assignment. Notwithstanding anything to the contrary contained herein, except as provided in Section 6.04 and as provided in the provisions of this Agreement concerning the resignation of the Servicer, this Agreement may not be assigned by the Servicer. Section 8.05. Limitations on Rights of Third Parties. The provisions of this Agreement are solely for the benefit of the Servicer, the Issuer, the Bondholders, the Trustee, the State of New Hampshire, the Treasurer of the State of New Hampshire, agencies of the State of New Hampshire and the other Persons expressly referred to herein and such Persons shall have the right to enforce the relevant provisions of this Agreement, except that the Bondholders shall be entitled to enforce their rights against the Servicer under this Agreement solely through a cause of action brought for their benefit by the Trustee. Nothing in this Agreement, whether express or implied, shall be construed to give to any other Person any legal or equitable right, remedy or claim in the RRB Property or under or in respect of this Agreement or any covenants, conditions or provisions contained herein. Section 8.06. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Section 8.07. Separate Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. Section 8.08. Headings. The headings of the various Articles and Sections -27- herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Section 8.09. Governing Law. This Agreement shall be construed in accordance with the substantive laws of the State of New Hampshire, without giving effect to its conflict of law or other principles that would cause the application of the laws of another jurisdiction, and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws. Section 8.10. Assignment to Trustee. The Servicer hereby acknowledges and consents to the collateral assignment or pledge of, or grant of a security interest in, any or all of the Issuer's rights and obligations hereunder to the Trustee for the benefit of the holders of the Bonds. Section 8.11. Nonpetition Covenants. Notwithstanding any prior termination of this Agreement or the Indenture, but subject to the NHPUC's right to order the sequestration and payment of revenues arising with respect to the RRB Property notwithstanding any bankruptcy, reorganization or other insolvency proceedings with respect to the debtor, pledgor or transferor of the RRB Property pursuant to RSA 369-B:7, VI and RSA 369-B:7, VIII, the Servicer shall not, prior to the date which is one year and one day after the termination of the Indenture with respect to the Issuer, petition or otherwise invoke or cause the Issuer to invoke the process of any court or governmental authority for the purpose of commencing or sustaining a case against the Issuer under any federal or state bankruptcy, insolvency or similar law or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Issuer or any substantial part of the property of the Issuer, or ordering the winding up or liquidation of the affairs of the Issuer. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -28- IN WITNESS WHEREOF, the parties hereto have caused this Servicing Agreement to be duly executed by their respective officers as of the day and year first above written. PSNH FUNDING LLC, Issuer By: /s/ Randy A. Shoop ----------------------------------------------- Name: Randy A. Shoop Title: President PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE, Servicer By: /s/ Randy A. Shoop ----------------------------------------------- Name: Randy A. Shoop Title: Assistant Treasurer - Finance S-29- EXHIBIT A CERTIFICATE OF COMPLIANCE The undersigned hereby certifies that he/she is the duly elected and acting [________] of Public Service Company of New Hampshire, as servicer (the "Servicer") under the Servicing Agreement, dated as of April 25, 2001 (the "Servicing Agreement"), between the Servicer and PSNH Funding LLC (the "Issuer"), and further certifies on behalf of the Servicer that: 1. A review of the activities of the Servicer and of its performance under the Servicing Agreement during the __________ months ended December 31, 20[_] has been made under the supervision of the undersigned pursuant to Section 3.03 of the Servicing Agreement; and 2. To the undersigned's knowledge, based on such review, the Servicer has fulfilled all of its material obligations in all material respects under the Servicing Agreement throughout the __________ months ended December 31, 20[_], except as listed on Annex A hereto. Executed as of this _______ day of ___________, 20__ . PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE, Servicer By: ------------------------------------------ Name: Title: -30- ANNEX A TO EXHIBIT A LIST OF SERVICER DEFAULTS Nature of Default Status - ----------------- ------ -A-31- EXHIBIT B FORM OF ROUTINE TRUE-UP LETTER [date] ADVICE NEW HAMPSHIRE PUBLIC UTILITIES COMMISSION (THE "COMMISSION") SUBJECT: Periodic RRB Charge True-Up Mechanism Advice Filing Pursuant to the order of the Commission, DE 99-099 , issued on September 8, 2000 (Order No. 23,550) (the "FINANCE ORDER"), Public Service Company of New Hampshire ("PSNH"), as servicer of the RRBs or any successor Servicer and on behalf of the RRB trustee as assignee of the special purpose entity (the "SPE"), shall apply for adjustment to the RRB Charge not later than 30 days prior to each semiannual anniversary of the RRB transaction closing and at such additional intervals, if necessary, as may be provided for in the Finance Order. Any capitalized terms not defined herein shall have the meanings ascribed thereto in the Finance Order. PURPOSE This filing establishes the revised RRB Charge to be assessed and collected from retail users of PSNH's distribution system within PSNH's service territory, whether or not energy is purchased from PSNH or third party supplier, and whether or not such distribution system is being operated by PSNH or a successor distribution company. The RRB Charge is a usage-based component of the stranded cost recovery charge on each retail user's monthly bill until the Total RRB Payment Requirements are discharged in full. In the Finance Order, the Commission authorized PSNH to file Routine True-Up Letters not later than 30 days prior to each semiannual anniversary of the RRB transaction closing and at such additional intervals, if necessary, as may be provided for in the Finance Order. The purpose of such filings and resulting adjusted RRB Charges is to ensure the timely recovery of revenues sufficient to provide for the payment of an amount equal to the sum of the Periodic RRB Payment Requirements for the upcoming period, which may include indemnity obligations of the SPE in the RRB transaction documents for SPE officers and directors, trustee fees and other liabilities of the SPE. Using the methodology approved by the Commission in the Finance Order, this filing modifies the variables used in the RRB Charge calculation and provides the resulting modified RRB Charge. Table I shows the revised assumptions for each of the variables used in calculating the RRB Charge for customers. The assumptions underlying the current RRB Charges were filed in an Issuance Advice Letter, dated ______________. Table I below shows the current assumptions for each of the variables used in the RRB Charge calculation. -B-32- TABLE I INPUT VALUES FOR RRB CHARGE Forecasted retail kWh sales for the period: January:________________________ February:________________________ March:________________________ April:________________________ May:________________________ June:________________________ July:________________________ August:________________________ September:________________________ October:________________________ November:________________________ December:________________________ Percent of billed amounts expected to be charged-off:________ Weighted average days sales outstanding:_____ (calculated as follows) Percent of billed amounts collected in current month:_____ Percent of billed amounts collected in second month after billing:_____ Percent of billed amounts collected in third month after billing:_____ Percent of billed amounts collected in fourth month after billing:_____ Percent of billed amounts collected in fifth month after billing:_____ Forecasted ongoing interest and transaction expenses (including any already accrued but unpaid for the period):_____ Current Interest Reserve Subaccount balance:______ Scheduled Interest Reserve Subaccount balance at the end of the period:______ Current Overcollateralization Subaccount balance:______ Scheduled Overcollateralization Subaccount balance at the end of the period:____ Current Capital Subaccount balance:______ Initial Capital Subaccount balance:______ Current RRB outstanding balance:_____ Scheduled RRB outstanding balance at the end of the period:______ Current Reserve Subaccount balance:______ The adjusted RRB Charge calculated for retail users is as follows:_____(cent)/kWh -B-33- EFFECTIVE DATE In accordance with the Finance Order, Routine True-Up Letters for semiannual RRB Charge adjustments shall be filed not later than 30 days prior to each semiannual anniversary of the RRB transaction closing, with the resulting upward or downward adjustments to the RRB Charge to be effective - absent manifest error in the Routine True-Up Letters - on the ensuing semiannual anniversary. In accordance with the Finance Order, Routine True-Up Letters may also be filed as frequently as monthly, with the resulting upward or downward adjustments to the RRB Charge to be effective - absent manifest error in the Routine True-Up Letters - immediately upon the filing of the on the Routine True-Up Letters. No approval by the Commission is required. Therefore, these RRB Charges shall be effective as of ___________. NOTICE Copies of this filing are being furnished to the parties on the attached service list. Notice to the public is hereby given by filing and keeping this filing open for public inspection at PSNH's corporate headquarters. Enclosures -B-34- EXHIBIT C FORM OF MONTHLY SERVICER CERTIFICATE Pursuant to Section 4.01(d)(2) of the Servicing Agreement, dated as of April 25, 2001 (the "Agreement"), between Public Service Company of New Hampshire, as servicer (the "Servicer"), and PSNH Funding LLC, the Servicer does hereby certify as follows: Capitalized terms used herein have their respective meanings as set forth in the Agreement. For the Monthly Period:_____________ 1. BILLINGS: a) Monthly kWh Consumption: b) Applicable RRB Charge: c) Total RRB Charge Amount Billed this Month: d) Cumulative RRB Charge Amount Billed this Remittance Period: 2. REMITTANCES: a) Total Amount Remitted this Month: b) Cumulative Amount Remitted this Remittance Period: c) "RRB %" (calculated in accordance with Annex II to the Agreement) for this Remittance Period: 3. DRAWS ON SUBACCOUNTS: a) Reserve Subaccount Draw Amount this Month: b) Cumulative Reserve Subaccount Draw Amount this Remittance Period (net of funding): c) Overcollateralization Subaccount Draw Amount this Month: d) Cumulative Overcollateralization Subaccount Draw Amount this Remittance Period (net of funding): e) Capital Subaccount Draw Amount this Month: f) Cumulative Capital Subaccount Draw Amount this Remittance Period (net of funding): g) Interest Reserve Subaccount Draw Amount this Month: h) Cumulative Interest Reserve Subaccount Draw Amount this Remittance Period (net of funding): i) Servicer Advance Subaccount Draw Amount this Month: j) Cumulative Servicer Advance Subaccount Draw Amount this Remittance Period: -C-35- Executed as of this _____________ day of ___________. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE, Servicer By: ----------------------------------------- Name: Title: -C-36- EXHIBIT D FORM OF QUARTERLY SERVICER CERTIFICATE Pursuant to Section 4.01(d)(3) of the Servicing Agreement, dated as of April 25, 2001 (the "Agreement"), between Public Service Company of New Hampshire, as servicer (the "Servicer"), and PSNH Funding LLC, the Servicer does hereby certify, for the current Payment Date (__________, __ 20[ ]) (the "Current Payment Date"), as follows: Capitalized terms used herein have their respective meanings as set forth in the Agreement. References herein to certain sections and subsections are references to the respective sections of the Agreement. 1. RRB CHARGE COLLECTIONS AND AGGREGATE AMOUNTS AVAILABLE FOR THE CURRENT PAYMENT DATE: i. Amount Remitted [Month] [Year] ii. Amount Remitted [Month] [Year] iii. Amount Remitted [Month] [Year] iv. Amount Remitted [Month] [Year] v. Amount Remitted [Month] [Year] vi. Amount Remitted [Month] [Year] vii. Amount Remitted [Month] [Year] viii. Amount Remitted [Month] [Year] IX. TOTAL AMOUNT REMITTED FOR THIS PERIOD (SUM OF I. THROUGH VIII. ABOVE): x. Net Earnings on Collection Account: xi. Expenses Paid to Date: XII. GENERAL SUBACCOUNT BALANCE (SUM OF IX. AND X. ABOVE MINUS XI.): xiii. Reserve Subaccount Balance xiv. Overcollateralization Subaccount Balance xv. Capital Subaccount Balance xvi. Interest Reserve Subaccount Balance xvii. Servicer Advance Subaccount Balance XVIII. COLLECTION ACCOUNT BALANCE (SUM OF XII. THROUGH XVII. ABOVE): 2. OUTSTANDING PRINCIPAL BALANCE AS OF PRIOR PAYMENT DATE BY TRANCHE: i. Class A-1 Principal Balance Outstanding Bond: ii. Class A-2 Principal Balance Outstanding Bond: iii. Class A-3 Principal Balance Outstanding Bond: IV. TOTAL BOND PRINCIPAL BALANCE: 3. REQUIRED FUNDING/PAYMENTS AS OF CURRENT PAYMENT DATE -D-37- A) PROJECTED PRINCIPAL BALANCES AND PAYMENTS Projected Quarterly Principal Balance Principal Due ----------------- ------------- i. Class A-1 Bond ii. Class A-2 Bond iii. Class A-3 Bond IV. TOTAL PROJECTED PRINCIPAL AMOUNT: B) REQUIRED INTEREST PAYMENTS Bond Days in Interest Interest Rate Applicable Period Due ------------- ----------------- --- i. Class A-1 Bond ii. Class A-2 Bond iii. Class A-3 Bond IV. TOTAL REQUIRED INTEREST AMOUNT: C) PROJECTED SUBACCOUNT PAYMENTS AND LEVELS Projected Funding Subaccount Level Required ---------- ----- -------- i. Interest Reserve Subaccount: ii. Capital Subaccount: iii. Overcollateralization Subaccount: iv. Servicer Advance Subaccount: N/A V. TOTAL SUBACCOUNT PAYMENTS AND LEVELS: 4. ALLOCATION OF REMITTANCES AS OF CURRENT PAYMENT DATE PURSUANT TO SECTION 8.02(D) OF INDENTURE: A) QUARTERLY EXPENSES Net Expense Amount (Payable on Current Payment Date) i. Trustee Fees and Expenses: ii. Quarterly Servicing Fee: iii. Quarterly Administration Fee: iv. Operating Expenses (subject to $100,000 cap): -D-38- V. TOTAL EXPENSES: B) QUARTERLY INTEREST Per $1000 of Aggregate Original Principal Amount -------- ---------------- i. Class A-1 Bond ii. Class A-2 Bond iii. Class A-3 Bond IV. TOTAL QUARTERLY INTEREST: C) QUARTERLY PRINCIPAL Per $1000 of Aggregate Original Principal Amount -------- ---------------- i. Class A-1 Bond ii. Class A-2 Bond iii. Class A-3 Bond IV. TOTAL QUARTERLY PRINCIPAL: D) OTHER PAYMENTS i. Operating Expenses (in excess of $100,000): ii. Funding of Interest Reserve Subaccount (to required level): iii. Funding of Capital Subaccount (to required amount): iv. Funding of Overcollateralization Subaccount (to required level): v. Deposits to Reserve Subaccount: vi. Interest earnings on Capital Subaccount Released to Issuer: vii. Interest earnings on Servicer Advance Subaccount Released to Issuer: viii. Operating Expenses Paid From Servicer Advance Subaccount at Request of Servicer: E) AGGREGATE PAYMENTS PURSUANT TO SECTION 8.02(D)(I) OF INDENTURE -D-39- i. To Trustee: ii. To other Persons indemnified under Indenture or Fee and Indemnity Agreement: 5. OUTSTANDING PRINCIPAL BALANCE AND COLLECTION ACCOUNT BALANCE AS OF CURRENT PAYMENT DATE (AFTER GIVING EFFECT TO PAYMENTS TO BE MADE ON SUCH DISTRIBUTION DATE): A) PRINCIPAL BALANCE OUTSTANDING: i. Class A-1 Principal Balance Outstanding Bond: ii. Class A-2 Principal Balance Outstanding Bond: iii. Class A-3 Principal Balance Outstanding Bond: IV. TOTAL BOND PRINCIPAL BALANCE: B) COLLECTION ACCOUNT BALANCES OUTSTANDING: i. Interest Reserve Subaccount: ii. Capital Subaccount: iii. Overcollateralization Subaccount: iv. Reserve Subaccount: v. Servicer Advance Subaccount VI. TOTAL SUBACCOUNT AMOUNT: 6. SUBACCOUNT DRAWS AS OF CURRENT PAYMENT DATE (IF APPLICABLE, PURSUANT TO SECTION 8.02(E) OR 8.02(J) OF INDENTURE): i. Interest Reserve Subaccount: ii. Capital Subaccount: iii. Overcollateralization Subaccount: iv. Reserve Subaccount: v. Servicer Advance Subaccount: VI. TOTAL SUBACCOUNT DRAWS: 7. SHORTFALLS IN INTEREST AND PRINCIPAL PAYMENTS AS OF CURRENT PAYMENT DATE (IF APPLICABLE): A) QUARTERLY INTEREST SHORTFALL i. Class A-1 Bond -D-40- ii. Class A-2 Bond iii. Class A-3 Bond IV. TOTAL QUARTERLY INTEREST SHORTFALL: B) QUARTERLY PRINCIPAL SHORTFALL i. Class A-1 Bond ii. Class A-2 Bond iii. Class A-3 Bond IV. TOTAL QUARTERLY PRINCIPAL SHORTFALL: 8. SHORTFALLS IN REQUIRED SUBACCOUNT LEVELS AS OF CURRENT DISTRIBUTION DATE: i. Interest Reserve Subaccount ii. Capital Subaccount iii. Overcollateralization Subaccount: IV. TOTAL SUBACCOUNT SHORTFALLS: IN WITNESS WHEREOF, the undersigned has duly executed and delivered this Quarterly Servicer Certificate this ___ day of ____, ____. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE, Servicer By: ----------------------------------------- Name: Title: -D-41- SCHEDULE 4.01(a) EXPECTED AMORTIZATION SCHEDULE OUTSTANDING PRINCIPAL AMOUNT
- -------------------------------------------------------------------------------- Class Class Class Payment Date A-1 A-2 A-3 - ------------ --- --- --- Closing $75,211,483 $214,649,395 $235,139,122 11/1/01 57,592,606 214,649,395 235,139,122 2/1/02 43,797,063 214,649,395 235,139,122 5/1/02 28,368,117 214,649,395 235,139,122 8/1/02 20,697,824 214,649,395 235,139,122 11/1/02 14,392,034 214,649,395 235,139,122 2/1/03 7,780,415 214,649,395 235,139,122 5/1/03 (0) 214,649,395 235,139,122 8/1/03 0 206,917,868 235,139,122 11/1/03 0 197,869,570 235,139,122 2/1/04 0 189,598,432 235,139,122 5/1/04 0 180,590,351 235,139,122 8/1/04 0 172,246,415 235,139,122 11/1/04 0 162,796,874 235,139,122 2/1/05 0 154,148,908 235,139,122 5/1/05 0 144,473,833 235,139,122 8/1/05 0 135,568,653 235,139,122 11/1/05 0 125,605,470 235,139,122 2/1/06 0 116,266,274 235,139,122 5/1/06 0 106,175,553 235,139,122 8/1/06 0 96,723,253 235,139,122 11/1/06 0 86,167,370 235,139,122 2/1/07 0 76,211,779 235,139,122 5/1/07 0 65,563,711 235,139,122 8/1/07 0 55,515,784 235,139,122 11/1/07 0 44,346,853 235,139,122 2/1/08 0 33,748,007 235,139,122 5/1/08 0 22,498,547 235,139,122 8/1/08 0 11,818,671 235,139,122 11/1/08 0 0 235,139,122 2/1/09 0 0 223,861,093 5/1/09 0 0 211,970,981 8/1/09 0 0 200,623,964 11/1/09 0 0 188,113,319 2/1/10 0 0 176,150,999 5/1/10 0 0 163,545,614 8/1/10 0 0 151,478,734 11/1/10 0 0 138,246,734 - --------------------------------------------------------------------------------
- Schedule 4.01(a)-42 2/1/11 0 0 125,549,313 5/1/11 0 0 112,194,918 8/1/11 0 0 99,366,197 11/1/11 0 0 85,367,758 2/1/12 0 0 71,905,110 5/1/12 0 0 57,742,177 8/1/12 0 0 44,103,087 11/1/12 0 0 29,294,415 2/1/13 0 0 14,974,162 5/1/13 0 0 0 - --------------------------------------------------------------------------------
- Schedule 4.01(a)-43 ANNEX I SERVICING PROCEDURES The Servicer agrees to comply with the following servicing procedures: SECTION 1. DEFINITIONS (a) Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Agreement. (b) Whenever used in this Annex I, the following words and phrases shall have the following meanings: "Billed RRB Charges" means the dollar amounts billed to customers or the Applicable TPS in respect of the RRB Charge, whether billed to customers or the Applicable TPS by the Servicer or to customers by a TPS pursuant to a TPS Service Agreement. "Servicer Policies and Practices" means, with respect to the Servicer's duties under this Annex I, the policies and practices of the Servicer applicable to such duties that the Servicer follows with respect to comparable assets that it services for itself or others, as in effect from time to time and in accordance with NHPUC Regulations. The Servicer shall provide ten days' prior written notice to the Rating Agencies of any amendment to the Servicer Policies and Practices that would adversely affect in any material respect the Bondholders. SECTION 2. DATA ACQUISITION (a) Installation and Maintenance of Meters. Except to the extent that a TPS is responsible for such services pursuant to a TPS Service Agreement, the Servicer shall cause to be installed, replaced and maintained meters in accordance with the Servicer Policies and Practices. (b) Meter Reading. In accordance with the Servicer Policies and Practices, the Servicer shall obtain usage measurements for each customer; provided, however, that the Servicer may determine any customer's usage on the basis of estimates in accordance with applicable NHPUC Regulations; and, provided, further, that the Servicer may obtain usage measurements from the Applicable TPS for customers receiving meter reading services from such TPS if the applicable TPS Service Agreement so provides. (c) Cost of Metering. The Issuer shall not be obligated to pay any costs associated with the metering duties set forth in this Section 2, including the costs of installing, replacing and maintaining meters, nor shall the Issuer be entitled to any credit against the Servicing Fee for any cost savings realized by the Servicer or any TPS as a -Annex I-44- result of new metering and/or billing technologies. SECTION 3. USAGE AND BILL CALCULATION The Servicer shall obtain a calculation of each customer's usage (which may be based on data obtained from such customer's meter read or on usage estimates determined in accordance with applicable NHPUC Regulations) in accordance with the Servicer Policies and Practices and shall determine therefrom Billed RRB Charges; provided, however, that in the case of customers served by a TPS pursuant to a TPS Service Agreement, the Servicer may obtain usage measurements from the Applicable TPS for customers receiving meter reading services from such TPS if the applicable TPS Service Agreement so provides and shall determine therefrom Billed RRB Charges. SECTION 4. BILLING (a) The Servicer shall implement the RRB Charge as of the Closing Date and shall thereafter bill each customer or the Applicable TPS for each customer's Billed RRB Charges in accordance with the provisions of this Section 4. (b) Frequency of Bills; Billing Practices. In accordance with the Servicer Policies and Practices, the Servicer shall generate and issue a Bill to each customer, or, in the case of a customer who is being billed by a TPS, to the Applicable TPS with respect to such customer's Billed RRB Charges. In the event that the Servicer makes any material modification to the Servicer Policies and Practices, it shall notify the Issuer, the Trustee and the Rating Agencies as soon as practicable, and in no event later than 60 Servicer Business Days after such modification goes into effect; provided, however, that the Servicer may not make any modification that will materially adversely affect the Bondholders. (c) Format. (i) Each Bill to a customer shall contain a stranded cost recovery charge that shall include the RRB Charge owed by such customer for the applicable billing period. (ii) Each Bill in which the stranded cost recovery charge is listed as a line item shall contain a statement (as a footnote) to the effect that all or a portion of the stranded cost recovery charge is owned by the Issuer and not the Seller. (iii) The Servicer shall conform to such requirements in respect of the format, structure and text of Bills delivered to customers and TPSs as applicable NHPUC Regulations shall from time to time prescribe. To the extent that Bill format, structure and text are not prescribed by applicable law or by applicable NHPUC Regulations, the Servicer shall, subject to clauses (i) and (ii) of this subsection (c), determine the format, structure and text of all Bills in accordance with its reasonable business judgment, the Servicer Policies and Practices and historical practice. -Annex I-45- (d) Delivery. Except as provided in the next sentence, the Servicer shall deliver all Bills to customers (i) by United States mail in such class or classes as are consistent with the Servicer Policies and Practices or (ii) by any other means, whether electronic or otherwise, that the Servicer may from time to time use in accordance with the Servicer Policies and Practices. In the case of customers that have elected to be billed by a TPS, the Servicer shall deliver all Bills to the Applicable TPSs by such means as are mutually agreed upon by the Servicer and the Applicable TPS in the TPS Service Agreement and which are consistent with NHPUC Regulations. The Servicer or a TPS, as applicable, shall pay from its own funds all costs of issuance and delivery of all Bills that it renders, including printing and postage costs as the same may increase or decrease from time to time. SECTION 5. CUSTOMER SERVICE FUNCTIONS The Servicer or a TPS to the extent provided in the applicable TPS Service Agreement shall handle all customer inquiries and other customer service matters according to the Servicer Policies and Practices. SECTION 6. COLLECTIONS; PAYMENT PROCESSING; REMITTANCE (a) Collection Efforts, Policies, Procedures. (i) The Servicer shall collect Billed RRB Charges from customers and TPSs as and when the same become due in accordance with such collection procedures as it follows with respect to comparable assets that it services for itself or others, including the following: (A) The Servicer shall prepare and deliver overdue notices to customers and TPSs in accordance with applicable NHPUC Regulations and the Servicer Policies and Practices. (B) The Servicer shall deliver past-due and shut-off notices in accordance with applicable NHPUC Regulations and the Servicer Policies and Practices. (C) The Servicer shall adhere to and carry out disconnection policies and termination of billing by a TPS pursuant to a TPS Service Agreement in accordance with RSA 369-B:4, IV, the Finance Order, applicable NHPUC Regulations and the Servicer Policies and Practices. (D) The Servicer may employ the assistance of collection agents in accordance with applicable NHPUC Regulations and the Servicer Policies and Practices. (E) The Servicer shall apply customer and TPS deposits to the payment of delinquent accounts in accordance with applicable NHPUC Regulations and the Servicer Polices and Practices. (ii) The Servicer shall not waive any late payment charge or any other -Annex I-46- fee or charge relating to delinquent payments, if any, or waive, vary or modify any terms of payment of any amounts payable by a customer, in each case unless such waiver or action: (A) would be in accordance with the Servicer Policies and Practices, (B) would not materially adversely affect the Bondholders, and (B) would comply in all material respects with applicable law. (iii) The Servicer shall accept payment from customers in respect of Billed RRB Charges in such forms and methods and at such times and places in accordance with the Servicer Policies and Practices. The Servicer shall accept payment from TPSs in respect of Billed RRB Charges in such forms and methods and at such times and places as the Servicer and each TPS shall mutually agree in accordance with the applicable TPS Service Agreement and applicable NHPUC Regulations. (b) Payment Processing, Allocation, Priority of Payments. The Servicer shall post all payments received to customer or TPS accounts as promptly as practicable, and, in any event, substantially all payments shall be posted no later than one Servicer Business Day after receipt. (c) Investment of RRB Charge Payments Received. Prior to remittance on the applicable Remittance Date, the Servicer may invest RRB Charge Payments at its own risk and for its own benefit, and such investments and funds shall not be required to be segregated from the other investments and funds of the Servicer. The Servicer shall be entitled to retain as additional compensation any interest earnings on RRB Charge Payments invested by it. (d) Calculation of RRB Charge Payments; Remittances. In accordance with Section 4.03(a) of the Agreement, the Servicer shall remit to the Trustee for deposit in the Collection Account an amount equal to the RRB Charge Payments calculated in accordance with the methodology described in Annex II attached to the Agreement. (e) Remittances. (i) The Issuer shall cause to be established the Collection Account in the name of the Trustee in accordance with Section 8.02 of the Indenture. (ii) The Servicer shall make or cause to be made Remittances to the Collection Account in accordance with Section 4.03 of the Agreement. (iii) Any change of account or change of institution affecting the Collection Account shall not take effect until the Issuer has provided at least fifteen (15) Servicer Business Days written notice thereof to the Servicer. SECTION 7. TPSs In the event a TPS performs services pursuant to a TPS Service Agreement, the Servicer shall comply with the procedures set forth in Schedule A to this Annex I. -Annex I-47- SCHEDULE A TO ANNEX I Additional Servicing Procedures Applicable to TPSs 1. Establishing TPS Relationship In addition to any actions required by the NHPUC or by applicable law, for each TPS that is responsible for collecting Billed RRB Charges, the Servicer shall take the following steps: (a) Maintain adequate records of the payment arrangement applicable to such TPS; (b) Maintain copies of all customer requests to convert to billing by a TPS; (c) Verify with the NHPUC that each TPS is licensed to supply electricity in New Hampshire; (d) Obtain information from the TPS including, but not limited to: name, contact, address, telephone facsimile transmission number and internet address; (e) Maintain and update records of customers to permit prompt reversion to dual-billing; (f) Maintain estimates of one month's maximum RRB Charge Payments for each TPS required to post a bond, letter of credit or cash deposit pursuant to the applicable TPS Service Agreement; and (g) Comply with credit conditions set out in the Finance Order and applicable TPS Service Agreement. 2. Monitoring TPS Obligations (a) The Servicer shall require each TPS to pay all undisputed and all disputed Billed RRB Charges or make a financial arrangement for such payment according to the applicable TPS Service Agreement; and (b) For all TPSs subject to any remittance option where such TPS is liable for all amounts billed in respect of customers served thereby regardless of the amounts received therefrom, the Servicer shall monitor payment compliance and take all actions permitted by the NHPUC and the Finance Order in the event of a default in payment. 3. Enforcing TPS Obligations The Servicer shall promptly take all actions specified by the Finance Order with respect to amounts not remitted to the Servicer in accordance with the payment terms specified by the Finance Order, in addition to any other remedies available at law. -Annex I-48- ANNEX II REMITTANCE METHODOLOGY -Annex I-49- EX-10.59 29 y58564x.txt Exhibit 10.59 PURCHASE AND SALE AGREEMENT between PSNH FUNDING LLC 2 Issuer and PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE Seller Dated as of January 30, 2002 This PURCHASE AND SALE AGREEMENT, dated as of January 30, 2002, is between PSNH Funding LLC 2, a Delaware limited liability company (the "Issuer"), and Public Service Company of New Hampshire, a New Hampshire corporation (together with its successors in interest to the extent permitted hereunder, the "Seller"). RECITALS WHEREAS, the Issuer desires to purchase the RRB Property (as defined herein) created pursuant to the Statute and the Finance Order (each as defined herein); and WHEREAS, the Seller is willing to sell the RRB Property to the Issuer. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS Section 1.01. Definitions. Whenever used in this Agreement, the following words and phrases shall have the following meanings: "Administration Agreement" means the Administration Agreement dated as of the date hereof between Public Service Company of New Hampshire, as Administrator, and the Issuer, as amended and supplemented from time to time. "Affiliate" means, with respect to any specified Person, any other Person controlling or controlled by or under common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agreement" means this Purchase and Sale Agreement, as amended and supplemented from time to time. "Authorized Officer" means an officer of the Seller listed on the list of Authorized Officers delivered by the Seller to the Trustee on the date of issuance of the Bonds (as such list may be modified or supplemented by the Seller from time to time). "Back-Up Security Interest" has the meaning specified in Section 2.01. "Basic Documents" means, collectively, this Agreement, the Indenture, the Servicing Agreement, the Administration Agreement, the Underwriting Agreement and the Fee and Indemnity Agreement. "Bondholder" or "Holder" means the Person in whose name a Bond is registered on the Register. "Bonds" means the PSNH Funding LLC 2 Bonds issued under the Indenture. "Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions or trust companies in New York, New York, Hartford, Connecticut, Manchester, New Hampshire or Wilmington, Delaware are authorized or obligated by law, regulation or executive order to remain closed. "Capital Subaccount" has the meaning specified in Section 8.02(a) of the Indenture. -2- "Closing Date" means January 30, 2002. "Collection Account" has the meaning specified in Section 8.02(a) of the Indenture. "Corporate Trust Office" has the meaning specified in Section 1.01(a) of the Indenture. "Date of Breach" means, with respect to the repurchase obligation specified in Section 5.01(b), the date of a breach of a representation or warranty that triggers such repurchase obligation. "Fee and Indemnity Agreement" means the Fee and Indemnity Agreement dated as of the date hereof between the Issuer and the Trustee, as amended and supplemented from time to time. "Finance Order" means the order of the NHPUC, DE 01-089, issued on December 6, 2001 (Order No. 23,859). "Fitch" means Fitch, Inc. or its successor. "Indemnified Person" has the meaning specified in Section 5.01(c), Section 5.01(d), Section 5.01(e) or in Section 5.01(h), for the purposes set forth therein. "Indenture" means the Indenture dated as of the date hereof between the Issuer and the Trustee, as amended and supplemented from time to time. "Independent" has the meaning specified in Section 1.01(a) of the Indenture. "Interest Reserve Subaccount" has the meaning specified in Section 8.02(a) of the Indenture. "Issuance Advice Letter" means the initial Issuance Advice Letter, dated January 25, 2002, filed with the NHPUC by the Seller pursuant to the Finance Order. "Issuance Date" has the meaning specified in Section 2.01(c)(i) of the Indenture. "Issuer" has the meaning set forth in the preamble of this Agreement. "Lien" means a security interest, lien, charge, pledge or encumbrance of any kind. "Losses" has the meaning specified in Section 5.01(e). "Moody's" means Moody's Investors Service, Inc. or its successor. "NHPUC" means the New Hampshire Public Utilities Commission and any successor thereto. "NHPUC Regulations" has the meaning specified in Section 1.01 of the Servicing Agreement. "Officer's Certificate" means a certificate signed by the chairman of the board, the chief executive officer, the president, the vice chairman of the board, any vice president, the treasurer, any assistant treasurer, the secretary, any assistant secretary, the controller or the finance manager of the Seller. "Operating Expense" has the meaning specified in Section 1.01(a) of the Indenture. "Opinion of Counsel" means one or more written opinions of counsel who may be an employee of or counsel to the party providing such opinion of counsel, which counsel shall be reasonably acceptable to the party receiving such opinion of counsel. "Outstanding Amount" has the meaning specified in Section 1.01(a) of the Indenture. "Overcollateralization Subaccount" has the meaning specified in Section 8.02(a) -3- of the Indenture. "Person" means any individual, corporation, limited liability company, estate, partnership, joint venture, association, joint stock company, trust (including any beneficiary thereof), unincorporated organization or government or any agency or political subdivision thereof. "Prospectus" means the prospectus dated January 16, 2002 offering the Bonds. "Rating Agencies" means, collectively, S&P, Moody's and Fitch. "Register" has the meaning specified in Section 2.05 of the Indenture. "Repurchase Date" means the date that is five Business Days after the date that is (i) if the terms of Section 5.01(b)(i)(A) and Section 5.01(b)(i)(B)(2) are applicable, two Business Days after the Date of Breach if the Seller fails to make the deposit required by Section 5.01(b)(i)(B)(2) or 90 days after the Date of Breach if the Seller makes the deposit required by Section 5.01(b)(i)(B)(2); (ii) if the terms of Section 5.01(b)(ii) are applicable, 90 days after the Date of Breach; and (iii) if the terms of Section 5.01(b)(i)(A) and Section 5.01(b)(i)(B)(1) are applicable, 90 days after the Date of Breach. "Repurchase Price" has the meaning specified in Section 5.01(b)(i). "Required Capital Level" has the meaning specified in Section 1.01(a) of the Indenture. "Required Interest Reserve Level" has the meaning specified in Section 1.01(a) of the Indenture. "Required Overcollateralization Level" has the meaning specified in Section 1.01(a) of the Indenture. "RRB Charge" means the portion (which may become all) of the Seller's "stranded cost recovery charge" designated pursuant to the Finance Order and RSA 369-B:2, XIII as the RRB Charge, as the same may be adjusted from time to time as provided in the Finance Order. "RRB Charge Collections" has the meaning specified in Section 1.01 of the Servicing Agreement. "RRB Property" means the RRB Property that exists under Approval Nos. 20 to 22 of the Finance Order. "RSA" means New Hampshire Revised Statutes Annotated. "Seller" has the meaning set forth in the preamble of this Agreement. "Servicer Default" means an event specified in Section 7.01 of the Servicing Agreement. "Servicing Agreement" means the Servicing Agreement dated as of the date hereof between Public Service Company of New Hampshire, as Servicer, and the Issuer, as amended and supplemented from time to time. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw Hill Companies, Inc. or its successor. "State Treasurer" means the Treasurer of the State of New Hampshire. "Statute" means RSA Chapter 369-B. "Trustee" means the Person acting as trustee under the Indenture. "Underwriting Agreement" means the Underwriting Agreement dated as of January 16, 2002 among Public Service Company of New Hampshire, the Issuer and the -4- underwriters named therein. Section 1.02. Other Definitional Provisions. (a) All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (b) The words "hereof," "herein," "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement; Section, Schedule and Exhibit references contained in this Agreement are references to Sections, Schedules and Exhibits in or to this Agreement unless otherwise specified; and the term "including" shall mean "including without limitation". (c) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms. ARTICLE 2 CONVEYANCE OF RRB PROPERTY Section 2.01. Conveyance of RRB Property. In consideration of the Issuer's delivery to or upon the order of the Seller of $49,385,134, the Seller does hereby irrevocably sell, transfer, assign, set over and otherwise convey to the Issuer, WITHOUT RECOURSE OR WARRANTY, except as specifically set forth herein, all right, title and interest of the Seller in and to the RRB Property (such sale, transfer, assignment, setting over and conveyance of the RRB Property includes, to the fullest extent permitted by the Statute, the assignment of all revenues, collections, claims, payments, money or proceeds of or arising from the RRB Charge pursuant to the Finance Order) and copies of all books and records related thereto. Such sale, transfer, assignment, setting over and conveyance is hereby expressly stated to be a sale and, pursuant to RSA 369-B:6, V, shall be treated as an absolute transfer of all of the Seller's right, title and interest in (as in a true sale), and not as a pledge or other financing of, the RRB Property. If such sale, transfer, assignment, setting over and conveyance is held by any court of competent jurisdiction not to be a true sale as provided in RSA 369-B:6, V, then such sale, transfer, assignment, setting over and conveyance shall be treated as the creation of a security interest in the RRB Property and, without prejudice to its position that it has absolutely transferred all of its rights in the RRB Property to the Issuer, the Seller hereby grants to the Issuer a security interest in the RRB Property (including, to the fullest extent permitted by the Statute, all revenues, collections, claims, payments, money or proceeds of or arising from the RRB Charge pursuant to the Finance Order) to secure a payment obligation incurred by the Seller in respect of the amount paid by the Issuer to the Seller pursuant to this Agreement (the "Back-Up Security Interest"). Such sale, transfer, assignment, setting over and conveyance of the RRB Property includes the right to use the Seller's computer software system to access and create copies of all books and records related to the RRB Property. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER -5- Subject to Section 3.09 hereof, the Seller makes the following representations and warranties, as of the Closing Date, on which the Issuer has relied in acquiring the RRB Property. Section 3.01. Organization and Good Standing. The Seller is duly organized and validly existing as a corporation in good standing under the laws of the State of New Hampshire, with the requisite corporate power and authority to own its properties as such properties are currently owned and to conduct its business as such business is now conducted by it, and has the requisite corporate power and authority to own the RRB Property. Section 3.02. Due Qualification. The Seller is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of property or the conduct of its business shall require such qualifications, licenses or approvals (except where the failure to so qualify or obtain such licenses and approvals would not be reasonably likely to have a material adverse effect on the Seller's business, operations, assets, revenues or properties). Section 3.03. Power and Authority. The Seller has the requisite corporate power and authority to execute and deliver this Agreement and to carry out its terms; and the execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action on the part of the Seller. Section 3.04. Binding Obligation. This Agreement constitutes a legal, valid and binding obligation of the Seller enforceable against it in accordance with its terms, subject to applicable insolvency, reorganization, moratorium, fraudulent transfer and other laws relating to or affecting creditors' or secured parties' rights generally from time to time in effect and to general principles of equity (including concepts of materiality, reasonableness, good faith and fair dealing), regardless of whether considered in a proceeding in equity or at law. Section 3.05. No Violation. The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof do not: (i) conflict with or result in any breach of any of the terms and provisions of, nor constitute (with or without notice or lapse of time) a default under, the articles of organization or by-laws of the Seller, or any material indenture, agreement or other instrument to which the Seller is a party or by which it is bound; (ii) result in the creation or imposition of any Lien upon any of the Seller's properties pursuant to the terms of any such indenture, agreement or other instrument (other than any Lien that may be granted under the Basic Documents or any Lien created pursuant to RSA 369-B:7, VIII); or (iii) violate any existing law or any existing order, rule or regulation applicable to the Seller of any court or of any federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Seller or its properties. Section 3.06. No Proceedings. There are no proceedings pending and, to the Seller's knowledge, there are no proceedings threatened and, to the Seller's knowledge, there are no investigations pending or threatened, before any court, federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Seller or its properties involving or relating to the Seller or the Issuer -6- or, to the Seller's knowledge, any other Person: (i) asserting the invalidity of this Agreement, any of the other Basic Documents, the Bonds, the Statute or the Finance Order, (ii) seeking to prevent the issuance of the Bonds or the consummation of any of the transactions contemplated by this Agreement or any of the other Basic Documents, (iii) seeking any determination or ruling that might materially and adversely affect the performance by the Seller of its obligations under, or the validity or enforceability of, this Agreement, any of the other Basic Documents or the Bonds or (iv) seeking to adversely affect the federal or state income tax classification of the Bonds as debt. Section 3.07. Approvals. No approval, authorization, consent, order or other action of, or filing with, any court, federal or state regulatory body, administrative agency or other governmental instrumentality is required in connection with the execution and delivery by the Seller of this Agreement, the performance by the Seller of the transactions contemplated hereby or the fulfillment by the Seller of the terms hereof, except those that have been obtained or made and those that the Seller, in its capacity as Servicer under the Servicing Agreement, is required to make in the future pursuant to the Servicing Agreement and post closing filings required in connection therewith. Section 3.08. The RRB Property. (a) Title. It is the intention of the parties hereto that the transfer and assignment herein contemplated constitute a sale of the RRB Property from the Seller to the Issuer and that no interest in, or title to, the RRB Property shall be part of the Seller's estate in the event of the filing of a bankruptcy petition by or against the Seller under any bankruptcy law. No portion of the RRB Property has been sold, transferred, assigned or pledged by the Seller to any Person other than the Issuer. On the Closing Date, immediately upon the sale hereunder, the Seller has transferred, sold and conveyed the RRB Property to the Issuer, free and clear of all Liens (including the Lien of the Seller's first mortgage indenture but excluding any Lien created pursuant to RSA 369-B:7, VIII and any Lien that may be granted under the Basic Documents), and pursuant to RSA 369-B:6, V such transfer shall be treated as an absolute transfer of all of the Seller's right, title and interest (as in a true sale), and not as a pledge or other financing of, the RRB Property. (b) Transfer Filings. On the Closing Date, immediately upon the sale hereunder, the RRB Property has been validly transferred and sold to the Issuer, the Issuer shall own all such RRB Property free and clear of all Liens (including the Lien of the Seller's first mortgage indenture but excluding any Lien created pursuant to RSA 369-B:7, VIII and any Lien that may be granted under the Basic Documents) and all filings to be made by the Seller (including filings with the NHPUC under the Statute) necessary in any jurisdiction to give the Issuer a valid first priority perfected ownership interest and to grant to the Trustee a first priority perfected security interest (subject to any Lien created pursuant to RSA 369-B:7, VIII and any Lien that may be granted under the Basic Documents) in the RRB Property have been made. No further action is required to maintain the Issuer's first priority perfected ownership interest or the Trustee's first priority perfected security interest (subject to any Lien created pursuant to RSA 369-B:7, VIII and any Lien that may be granted under the Basic Documents). Filings have also been made to the extent required by applicable law in any jurisdiction -7- to perfect the Back-Up Security Interest granted by the Seller to the Issuer (subject to any Lien created pursuant to RSA 369-B:7, VIII and any Lien that may be granted under the Basic Documents). (c) Finance Order and Issuance Advice Letter; Other Approvals. On the Closing Date, under the laws of the State of New Hampshire and the United States in effect on the Closing Date, (i) the Finance Order pursuant to which the RRB Property has been created is in full force and effect; (ii) the Bondholders are entitled to the protections of the Statute and, accordingly, the Finance Order is not revocable by the Commission; (iii) the State of New Hampshire may neither limit nor alter the RRB Charge, RRB Property, the Finance Order and all rights thereunder, in a manner that would substantially impair the rights of Bondholders, absent a demonstration that an impairment is narrowly-tailored and is necessary to advance an important public interest, such as responding to a "great public calamity," until the Bonds, together with accrued interest, are fully met and discharged; provided that the State of New Hampshire is not precluded from such limitation or alteration if and when adequate provision is made by law for the protection of the Issuer, the Bondholders and the Trustee; (iv) except for periodic adjustments to the RRB Charge required under the Statute, the NHPUC does not have authority, either by rescinding, altering or amending the Finance Order or otherwise, to revalue or revise for ratemaking purposes the stranded costs or the costs of providing, recovering, financing or refinancing the stranded costs, to determine that the RRB Charge is unjust or unreasonable or in any way to reduce or impair the value of RRB Property either directly or indirectly by taking the RRB Charge into account when setting other rates for the Seller; nor are the amount of revenues arising with respect thereto subject to reduction, impairment, postponement or termination; (v) the process by which the Finance Order was adopted and approved, and the Finance Order and Issuance Advice Letter themselves, comply with all applicable laws, rules and regulations; (vi) the Issuance Advice Letter has been filed in accordance with the Finance Order; (vii) no other approval, authorization, consent, order or other action of, or filing with, any court, Federal or state regulatory body, administrative agency or other governmental instrumentality is required in connection with the creation or sale of the RRB Property, except those that have been obtained or made and post closing filings required in connection therewith and those that the Seller, in its capacity as Servicer under the Servicing Agreement, is required to make in the future pursuant to the Servicing Agreement; and (viii) the State of New Hampshire, in the exercise of its executive or legislative powers, may not repeal or amend the Statute or the Finance Order, or take any action in contravention of the pledge by the State of New Hampshire in RSA 369-B:6, II, without paying just compensation to the Bondholders, as determined by a court of competent jurisdiction, if this action would constitute a permanent appropriation of a substantial property interest of Bondholders in the RRB Property and deprive the Bondholders of their reasonable expectations arising from their investments in the Bonds. (d) Assumptions. On the Closing Date, based upon the information available to the Seller on the Closing Date, the assumptions used in calculating the initial RRB Charge are reasonable and are made in good faith. Notwithstanding the foregoing, the Seller makes no representation or warranty that the assumptions used in calculating -8- such RRB Charge will in fact be realized. (e) Creation of RRB Property. Upon the effectiveness of the Finance Order and the Issuance Advice Letter: (i) all of the RRB Property constitutes an existing property right; (ii) the RRB Property includes the right, title and interest in and to all revenues, collections, claims, payments, money, or proceeds of or arising from the RRB Charge, as adjusted from time to time pursuant to the Finance Order, and all rights to obtain adjustments to the RRB Charge pursuant to the Finance Order; and (iii) subject to the cap on the Seller's "stranded cost recovery charge" set forth in the Statute and the Finance Order, the owner of the RRB Property is legally entitled to collect payments in respect of the RRB Charge in the aggregate sufficient to pay the interest on and principal of the Bonds, to pay the fees and expenses of servicing the Bonds, to replenish the Capital Subaccount to the Required Capital Level and to fund the Overcollateralization Subaccount to the Required Overcollateralization Level, to fund the Interest Reserve Subaccount to the Required Interest Reserve Level and to enforce all other material rights conferred in the Finance Order and the Statute until the earlier of the eighth anniversary of the issuance of the Bonds and the date on which the Bonds are paid in full. Notwithstanding the foregoing, the Seller makes no representation or warranty that any amounts actually collected in respect of the RRB Charge will in fact be sufficient to meet payment obligations with respect to the Bonds (other than as provided in the Finance Order with respect to other components of the "stranded cost recovery charge" (as defined in the Statute)). (f) Prospectus. As of the date hereof, the information describing the Seller under the caption "The Seller and Servicer" in the Prospectus is correct in all material respects. Section 3.09. Limitations on Representations and Warranties. Notwithstanding any other provisions of this Agreement, the Seller will not be in breach of any representation or warranty as a result of a change in law by means of a legislative enactment or constitutional amendment or (if such means become available in the future) referendum or initiative petition. Notwithstanding anything to the contrary in this Agreement, the Seller makes no representation or warranty that any amounts actually collected in respect of the RRB Charge will in fact be sufficient to meet payment obligations with respect to the Bonds or that the assumptions used in calculating the RRB Charge will in fact be realized nor shall the Seller be obligated to reduce, or accept a reduction of, any rates or charges to which it would otherwise be entitled in respect of services rendered or to be rendered to customers in order to permit the payment of the RRB Charge (other than as provided in the Finance Order with respect to other components of the "stranded cost recovery charge" (as defined in the Statute)). ARTICLE 4 COVENANTS OF THE SELLER Section 4.01. Corporate Existence. So long as any of the Bonds are outstanding, the Seller (a) will keep in full force and effect its existence, rights and franchises as a corporation under the laws of the jurisdiction of its organization and (b) will obtain and preserve its qualification to do business, in each case to the extent that in each such -9- jurisdiction such existence or qualification is or shall be necessary to protect the validity and enforceability of this Agreement, the other Basic Documents to which the Seller is a party and each other instrument or agreement necessary or appropriate to the proper administration of this Agreement and the transactions contemplated hereby. Section 4.02. No Liens. Except for the conveyances hereunder or any Lien under RSA 369-B:7, VIII, the Seller will not sell, pledge, assign or transfer, or grant, create, or incur any Lien on, any of the RRB Property, or any interest therein, and the Seller shall defend the right, title and interest of the Issuer and the Trustee in, to and under the RRB Property against all claims of third parties claiming through or under the Seller. Public Service Company of New Hampshire, in its capacity as Seller, will not at any time assert any Lien against, or with respect to, any of the RRB Property. Section 4.03. Delivery of Collections. If the Seller receives any payments in respect of the RRB Charge or the proceeds thereof when it is not acting as the Servicer, the Seller agrees to pay to the Servicer all payments received by it in respect thereof as soon as practicable after receipt thereof by it. Section 4.04. Notice of Liens. The Seller shall notify the Issuer and the Trustee promptly after becoming aware of any Lien on any of the RRB Property, other than the conveyances hereunder, any Lien under the Basic Documents or any Lien under RSA 369-B:7, VIII. Section 4.05. Compliance with Law. The Seller hereby agrees to comply with its organizational and governing documents and all laws, treaties, rules, regulations and determinations of any governmental instrumentality applicable to it, except to the extent that failure to so comply would not adversely affect the Issuer's or the Trustee's interests in the RRB Property or under any of the other Basic Documents to which the Seller is party or the Seller's performance of its obligations hereunder or under any of the other Basic Documents to which it is party. Section 4.06. Covenants Related to Bonds and RRB Property. (a) So long as any of the Bonds are outstanding, the Seller shall treat the Bonds as debt of the Issuer and not of the Seller, except for financial accounting or tax reporting purposes. (b) So long as any of the Bonds are outstanding, the Seller shall indicate in its financial statements that it is not the owner of the RRB Property and that the assets of the Issuer are not available to pay creditors of the Seller or any of its Affiliates (other than the Issuer). (c) So long as any of the Bonds are outstanding, the Seller shall disclose the effects of all transactions between the Seller and the Issuer in accordance with generally accepted accounting principles. (d) So long as any of the Bonds are outstanding, the Seller shall not own or purchase any Bonds. (e) The Seller agrees that, upon the sale by the Seller of the RRB Property to the Issuer pursuant to this Agreement, (i) to the fullest extent permitted by law, including the Statute and applicable NHPUC Regulations, the Issuer shall have all of the rights originally held by the Seller with respect to the RRB Property, including the right (subject to the terms of the Servicing Agreement) to exercise any and all rights and -10- remedies to collect any amounts payable by any customer or third party supplier in respect of the RRB Property, notwithstanding any objection or direction to the contrary by the Seller and (ii) any payment by any customer or third party supplier to the Issuer shall discharge such customer's or third party supplier's obligations in respect of the RRB Property to the extent of such payment, notwithstanding any objection or direction to the contrary by the Seller. (f) So long as any of the Bonds are outstanding, (i) (A) the Seller shall affirmatively certify and confirm that it has sold the RRB Property to the Issuer (other than for financial accounting or tax reporting purposes), and (B) the Seller shall not make any statement or reference in respect of the RRB Property that is inconsistent with the ownership thereof by the Issuer (other than for financial accounting or tax reporting purposes), and (ii) the Seller shall not take any action in respect of the RRB Property except solely in its capacity as the Servicer thereof pursuant to the Servicing Agreement or as otherwise contemplated by the Basic Documents. Section 4.07. Protection of Title. The Seller shall execute and file such filings, including filings with the NHPUC pursuant to the Statute and Uniform Commercial Code filings, and cause to be executed and filed such filings, all in such manner and in such places as may be required by law fully to preserve, maintain and protect the ownership or security interest of the Issuer and the Trustee in the RRB Property and the Back-Up Security Interest, including all filings required under the Statute and the applicable Uniform Commercial Code relating to the transfer of the ownership or security interest in the RRB Property by the Seller to the Issuer and the granting of a security interest in the RRB Property by the Issuer to the Trustee and the Back-Up Security Interest and the continued perfection of such ownership or security interest. The Seller shall deliver (or cause to be delivered) to the Issuer and the Trustee file-stamped copies of, or filing receipts for, any document filed as provided above, as soon as available following such filing. The Seller shall institute any action or proceeding necessary to compel performance by the NHPUC or the State of New Hampshire of any of their obligations or duties under the Statute or the Finance Order, and the Seller agrees to take such legal or administrative actions, including defending against or instituting and pursuing legal actions and appearing or testifying at hearings or similar proceedings, as may be reasonably necessary (i) to protect the Issuer, the Bondholders, the Trustee, the State of New Hampshire, the State Treasurer, agencies of the State of New Hampshire and any of their respective affiliates, officials, officers, directors, employees, consultants, counsel and agents from claims, state actions or other actions or proceedings of third parties which, if successfully pursued, would result in a breach of any representation set forth in Article III or (ii) to block or overturn any attempts to cause a repeal of, modification of or supplement to the Statute, the Finance Order, any Advice Letter (as defined in the Indenture), the Settlement Agreement (as defined in the Finance Order) (to the extent it adversely affects the rights of Bondholders or the validity or value of the RRB Property) or the rights of Bondholders by executive action, legislative enactment or constitutional amendment that would be adverse to the Issuer, the Trustee or the Bondholders. If the Servicer performs its obligations under Section 5.02(d) of the Servicing Agreement in all respects, such performance shall be deemed to constitute performance of the Seller's -11- obligations pursuant to clause (ii) of the immediately preceding sentence. In such event, the Seller agrees to assist the Servicer as reasonably necessary to perform its obligations under Section 5.02(d) of the Servicing Agreement in all respects. The costs of any such actions or proceedings shall be payable from RRB Charge Collections as an Operating Expense in accordance with the priorities set forth in Section 8.02(d) of the Indenture. The Seller's obligations pursuant to this Section 4.07 shall survive and continue notwithstanding the fact that the payment of Operating Expenses pursuant to Section 8.02(d) of the Indenture may be delayed (it being understood that the Seller may be required to advance its own funds to satisfy its obligations hereunder). Section 4.08. Nonpetition Covenants. Notwithstanding any prior termination of this Agreement or the Indenture, but subject to the NHPUC's right to order the sequestration and payment of revenues arising with respect to the RRB Property notwithstanding any bankruptcy, reorganization or other insolvency proceedings with respect to the Seller pursuant to RSA 369-B:7, V or RSA 369-B:7, VIII, the Seller shall not, prior to the date which is one year and one day after the termination of the Indenture, petition or otherwise invoke or cause the Issuer to invoke the process of any court or government authority for the purpose of commencing or sustaining a case against the Issuer under any Federal or state bankruptcy, insolvency or similar law, appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Issuer or any substantial part of the property of the Issuer, or ordering the winding up or liquidation of the affairs of the Issuer. Section 4.09. Taxes. (a) So long as any of the Bonds are outstanding, the Seller shall, and shall cause each of its subsidiaries to, pay all material taxes, assessments and governmental charges imposed upon it or any of its properties or assets or with respect to any of its franchises, business, income or property before any penalty accrues thereon if the failure to pay any such taxes, assessments and governmental charges would, after any applicable grace periods, notices or other similar requirements, result in a lien on the RRB Property; provided that no such tax need be paid if the Seller or one of its subsidiaries is contesting the same in good faith by appropriate proceedings promptly instituted and diligently conducted and if the Seller or such subsidiary has established appropriate reserves as shall be required in conformity with generally accepted accounting principles. (b) The Seller represents, warrants and covenants that any New Hampshire income taxes, including without limitation the New Hampshire Business Profits Tax imposed under the provisions of New Hampshire RSA Chapter 77-A (taking into account credits in respect of the New Hampshire Business Enterprise Tax imposed under RSA Chapter 77-E), associated with the Issuer will be allocated to, and paid by, the Seller in accordance with the Amended and Restated NU Tax Allocation Agreement, dated as of January 1, 1990, as amended (the "NU Tax Sharing Agreement"), and that the applicable provisions of the NU Tax Sharing Agreement, which currently provide for such treatment by their reliance on federal income tax principles in allocating state income tax liabilities, shall not be amended or modified by the Seller in contravention of this Section 4.09(b) for so long as the Bonds are outstanding. Section 4.10. Additional Sales of RRB Property. So long as any of the Bonds -12- are outstanding, the Seller shall not sell any RRB property (as defined in the Statute) to secure another issuance of rate reduction bonds (as defined in the Statute) if it would cause the then existing ratings on any class of Bonds from the Rating Agencies to be withdrawn or downgraded. Section 4.11. Issuance Advice Letter. The Seller hereby agrees not to withdraw the filing of the Issuance Advice Letter with the NHPUC. Section 4.12. Maintenance of Working Papers. So long as any of the Bonds are outstanding, the Seller shall keep and maintain any and all working papers, reports and other documents used by the firm of Independent certified public accountants in the preparation of its letters delivered on the Issuance Date pursuant to Section 2.10(g) of the Indenture and Section 6(h) of the Underwriting Agreement. ARTICLE 5 THE SELLER Section 5.01. Liability of Seller; Indemnities. (a) The Seller shall be liable in accordance herewith only to the extent of the obligations specifically undertaken by the Seller under this Agreement. (b) (i) In the event of a breach by the Seller of any representation and warranty specified in Sections 3.08(c) or 3.08(e) that has a material adverse effect on the Bondholders, the Seller shall repurchase the RRB Property from the Issuer at a purchase price equal to the then outstanding principal amount of the Bonds and all accrued and unpaid interest thereon, excluding any premium or penalty of any kind (the "Repurchase Price"), as of the Repurchase Date; provided, however, that the Seller shall not be obligated to repurchase the RRB Property if (A) within 90 days after the Date of Breach such breach is cured or the Seller takes remedial action such that there is not and will not be a material adverse effect on the Bondholders as a result of such breach and (B) either (1) if the Seller had, immediately prior to the Date of Breach, a long term debt rating of at least "A3" by Moody's and "BBB" or the equivalent by S&P or Fitch, and the Seller enters into a binding agreement with the Issuer to pay any amounts necessary so that all interest payments due on the Bonds during such 90-day period will be paid in full, or (2) if the Seller does not have such long term debt ratings, the Seller deposits, within two Business Days after the Date of Breach, an amount in escrow with the Trustee sufficient, taking into account amounts on deposit in the Collection Account which will be available for such purpose, to pay all interest payments which will become due on the Bonds during such 90-day period. (ii) In the event of a breach by the Seller of any representation and warranty specified in Sections 3.01, 3.03, 3.04, 3.05, 3.06, 3.08(a) or 3.08(b) that has a material adverse effect on the Bondholders, if within 90 days after the Date of Breach such breach has not been cured or the Seller has not taken remedial action such that there is not and will not be a material adverse effect on the Bondholders as a result of such breach, then the Seller shall repurchase the RRB Property from the Issuer for the Repurchase Price on the Repurchase Date. (iii) Notwithstanding any other provision of this Agreement, -13- upon the payment by the Seller of the Repurchase Price pursuant to this Section 5.01(b), neither the Issuer nor any other Person shall have any other claims, rights or remedies against the Seller under, arising from or with respect to this Agreement, except as set forth in Section 5.01(h). (c) Subject to Section 5.01(i), the Seller shall indemnify the Issuer, the Trustee, the State of New Hampshire, the State Treasurer, agencies of the State of New Hampshire and the Bondholders (each an "Indemnified Person" for purposes of this Section 5.01(c) and Section 5.01(i)) for, and defend and hold harmless each such Indemnified Person from and against, any and all taxes (other than taxes imposed on Bondholders solely as a result of their ownership of Bonds) that may at any time be imposed on or asserted against any such Person under existing law as of the Closing Date as a result of the sale of the RRB Property to the Issuer, including any sales, gross receipts, general corporation, tangible personal property, privilege or license taxes; provided, however, that the Bondholders shall be entitled to enforce their rights against the Seller under this Section 5.01(c) solely through a cause of action brought for their benefit by the Trustee. (d) Subject to Section 5.01(i), the Seller shall indemnify the Issuer, the Trustee, the State of New Hampshire, the State Treasurer, agencies of the State of New Hampshire and the Bondholders (each an "Indemnified Person" for purposes of this Section 5.01(d) and Section 5.01(i)) for, and defend and hold harmless each such Indemnified Person from and against, any and all taxes that may be imposed on or asserted against any such Indemnified Person under existing law as of the Closing Date as a result of the issuance and sale by the Issuer of the Bonds, or the other transactions contemplated herein, including any sales, gross receipts, general corporation, tangible personal property, privilege or license taxes; provided, however, that the Bondholders shall be entitled to enforce their rights against the Seller under this Section 5.01(d) solely through a cause of action brought for their benefit by the Trustee. The Seller shall be reimbursed for any payments under this Section 5.01(d) from RRB Charge Collections as an Operating Expense in accordance with the priorities set forth in Section 8.02(d) of the Indenture. (e) Subject to Section 5.01(i), the Seller shall indemnify the Issuer and the Bondholders (each an "Indemnified Person" for purposes of this Section 5.01(e) and Section 5.01(i)) for, and defend and hold harmless each such Person from and against, any and all liabilities, obligations, losses, actions, suits, claims, damages, payments, costs or expenses of any kind whatsoever (collectively, "Losses") that may be imposed on, incurred by or asserted against each such Indemnified Person as a result of (i) the Seller's willful misconduct or negligence in the performance of its duties or observance of its covenants under this Agreement, or (ii) the Seller's breach in any material respect of any of its representations and warranties contained in this Agreement (other than the representations and warranties specified in Sections 3.01, 3.03, 3.04, 3.05, 3.06, 3.08(a), 3.08(b), 3.08(c) or 3.08(e), the breach of which are subject to the repurchase obligation set forth in Section 5.01(b)), except in the case of both clauses (i) and (ii) to the extent of Losses either resulting from the willful misconduct or gross negligence of such Indemnified Person or resulting from a breach of a representation and warranty made by -14- such Indemnified Person in any of the Basic Documents that gives rise to the Seller's breach; provided, however, that the Bondholders shall be entitled to enforce their rights against the Seller under this indemnification solely through a cause of action brought for their benefit by the Trustee; provided, further, that the Seller may, at its election and in full satisfaction of its obligations under this Section 5.01(e), repurchase the RRB Property at the Repurchase Price, in which case neither the Issuer nor any other Person shall have any other claims, rights or remedies against the Seller under, arising from or with respect to this Agreement, except as set forth in Section 5.01(h). (f) Indemnification under Sections 5.01(c), 5.01(d), 5.01(e) and 5.01(h) shall survive the resignation or removal of the Trustee and the termination of this Agreement and shall include reasonable fees and out-of-pocket expenses of investigation and litigation (including reasonable attorneys' fees and expenses), except as otherwise provided in this Agreement. (g) Without prejudice to any of the other rights of the parties, the Seller will not be in breach of any representation or warranty as a result of a change in law by means of a legislative enactment or constitutional amendment or (if such means become available in the future) referendum or initiative petition. Notwithstanding anything to the contrary in this Agreement, the Seller makes no representation or warranty that any amounts actually collected in respect of the RRB Charge will in fact be sufficient to meet payment obligations with respect to the Bonds or that the assumptions used in calculating the RRB Charge will in fact be realized nor shall the Seller be obligated to reduce, or accept a reduction of, any rates or charges to which it would otherwise be entitled in respect of services rendered or to be rendered to customers in order to permit the payment of the RRB Charge (other than as provided in the Finance Order with respect to other components of the "stranded cost recovery charge" (as defined in the Statute)). (h) Subject to Section 5.01(i), the Seller shall indemnify and hold harmless the Trustee, the State of New Hampshire, the State Treasurer, agencies of the State of New Hampshire and any of their respective affiliates, officials, officers, directors, employees, consultants, counsel and agents (each an "Indemnified Person" for purposes of this Section 5.01(h) and Section 5.01(i)) against any and all Losses incurred by any of such Indemnified Persons as a result of (i) the Seller's willful misconduct or negligence in the performance of its duties or observance of its covenants under this Agreement or (ii) the Seller's breach in any material respect of any of its representations and warranties contained in this Agreement, except in the case of both clauses (i) and (ii) to the extent of Losses either resulting from the willful misconduct or gross negligence of such Indemnified Person or resulting from a breach of a representation or warranty made by such Indemnified Person in any of the Basic Documents that gives rise to the Seller's breach. (i) The Seller shall not be required to indemnify any Indemnified Person under Sections 5.01(c), 5.01(d), 5.01(e) or 5.01(h) for any amount paid or payable by such Indemnified Person in the settlement of any action, proceeding or investigation without the written consent of the Seller, which consent shall not be unreasonably withheld. Promptly after receipt by an Indemnified Person of notice of its involvement in any action, proceeding or investigation, such Indemnified Person shall, if a claim for -15- indemnification in respect thereof is to be made against the Seller under this Section 5.01, notify the Seller in writing of such involvement. Failure by an Indemnified Person to so notify the Seller shall relieve the Seller from the obligation to indemnify and hold harmless such Indemnified Person under this Section 5.01 only to the extent that the Seller suffers actual prejudice as a result of such failure. With respect to any action, proceeding or investigation brought by a third party for which indemnification may be sought under this Section 5.01, the Seller shall be entitled to assume the defense of any such action, proceeding or investigation. Upon assumption by the Seller of the defense of any such action, proceeding or investigation, the Indemnified Person shall have the right to participate in such action or proceeding and to retain its own counsel. The Seller shall be entitled to appoint counsel of the Seller's choice at the Seller's expense to represent the Indemnified Person in any action, proceeding or investigation for which a claim of indemnification is made against the Seller under this Section 5.01 (in which case the Seller shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the Indemnified Person except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the Indemnified Person. Notwithstanding the Seller's election to appoint counsel to represent the Indemnified Person in an action, proceeding or investigation, the Indemnified Person shall have the right to employ separate counsel (including local counsel), and the Seller shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of counsel chosen by the Seller to represent the Indemnified Person would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the Indemnified Person and the Seller and the Indemnified Person shall have reasonably concluded that there may be legal defenses available to it that are different from or additional to those available to the Seller, (iii) the Seller shall not have employed counsel reasonably satisfactory to the Indemnified Person to represent the Indemnified Person within a reasonable time after notice of the institution of such action or (iv) the Seller shall authorize the Indemnified Person to employ separate counsel at the expense of the Seller. Notwithstanding the foregoing, the Seller shall not be obligated to pay for the fees, costs and expenses of more than one separate counsel for the Indemnified Persons (in addition to local counsel). The Seller will not, without the prior written consent of the Indemnified Person, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought under this Section 5.01 (whether or not the Indemnified Person is an actual or potential party to such claim or action) unless such settlement, compromise or consent includes an unconditional release of the Indemnified Person from all liability arising out of such claim, action, suit or proceeding. (j) The remedies of the Issuer and the Bondholders provided in this Agreement are each such Person's sole and exclusive remedies against the Seller for breach of its representations and warranties in this Agreement. Section 5.02. Merger or Consolidation of, or Assumption of the Obligations of, Seller. Any Person (a) into which the Seller may be merged or consolidated, (b) that may result from any merger or consolidation to which the Seller shall be a party or (c) that may succeed to the properties and assets of the Seller substantially as a whole, which -16- Person in the case described in the foregoing clause (c) executes an agreement of assumption to perform every obligation of the Seller hereunder, shall be the successor to the Seller under this Agreement without further act on the part of any of the parties to this Agreement; provided, however, that (i) if the Seller is the Servicer, no Servicer Default, and no event which, after notice or lapse of time, or both, would become a Servicer Default shall have occurred and be continuing, (ii) the Seller shall have delivered to the Issuer and the Trustee an Officer's Certificate stating that such consolidation, merger or succession and such agreement of assumption comply with this Section and that all conditions precedent, if any, provided for in this Agreement relating to such transaction have been complied with, (iii) the Seller shall have delivered to the Issuer and the Trustee an Opinion of Counsel stating that, in the opinion of such counsel (A) such consolidation, merger or succession and such agreement of assumption comply with this Section and that all conditions precedent provided for in this Agreement relating to such transaction have been complied with and (B) either (1) all filings to be made by the Seller, including filings with the NHPUC pursuant to the Statute and filings under the applicable Uniform Commercial Code, have been executed and filed that are necessary to preserve and protect fully the interests of the Issuer and the Trustee in the RRB Property and reciting the details of such filings or (2) no such action shall be necessary to preserve and protect such interests and (iv) the Rating Agencies shall have received prior written notice of such transaction. When any Person acquires the properties and assets of the Seller substantially as a whole and becomes the successor to the Seller in accordance with the terms of this Section 5.02 and execution by such successor of an agreement of assumption to perform every obligation of the Seller hereunder, then upon satisfaction of all of the other conditions of this Section 5.02, the Seller shall automatically and without further notice be released from all of its obligations hereunder. Section 5.03. Limitation on Liability of Seller and Others. The Seller and any director, officer, employee or agent of the Seller may rely in good faith on the advice of counsel or on any document of any kind, prima facie properly executed and submitted by any Person, respecting any matters arising hereunder. ARTICLE 6 MISCELLANEOUS PROVISIONS Section 6.01. Amendment. This Agreement may be amended by the Seller and the Issuer, with ten Business Days' prior written notice given to the Rating Agencies and the prior written consent of the Trustee, but without the consent of any of the Bondholders, to cure any ambiguity, to correct or supplement any provisions in this Agreement or for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions in this Agreement or of modifying in any manner the rights of the Bondholders; provided, however, that such action shall not, as evidenced by an Officer's Certificate delivered to the Issuer and the Trustee, adversely affect in any material respect the interests of any Bondholder. This Agreement may also be amended from time to time by the Seller and the Issuer, with ten Business Days' prior written notice given to the Rating Agencies and the prior written consent of the Trustee and the prior written consent of the Holders of Bonds -17- evidencing not less than a majority of the Outstanding Amount of the Bonds affected thereby, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of modifying in any manner the rights of the Bondholders. It shall not be necessary for the consent of Bondholders pursuant to this Section to approve the particular form of any proposed amendment or consent, but it shall be sufficient if such consent shall approve the substance thereof. Prior to the execution of any amendment to this Agreement, the Trustee shall be entitled to receive and rely upon an Opinion of Counsel stating that the execution of such amendment is authorized or permitted by this Agreement. The Trustee may, but shall not be obligated to, enter into any such amendment which affects the Trustee's own rights, duties or immunities under this Agreement or otherwise. Section 6.02. Notices. Unless otherwise specifically provided herein, all notices, directions, consents and waivers required under the terms and provisions of this Agreement shall be in English and in writing, and any such notice, direction, consent or waiver may be given by United States mail, courier service, facsimile transmission or electronic mail (confirmed by telephone, United States mail or courier service in the case of notice by facsimile transmission or electronic mail) or any other customary means of communication, and any such notice, direction, consent or waiver shall be effective when delivered, or if mailed, three days after deposit in the United States mail with proper postage for ordinary mail prepaid: (a) if to the Seller, to if prior to April 1, 2002: 1000 Elm Street Manchester, NH 03101 if on or after April 1, 2002: 780 North Commercial Street Manchester, NH 03101 Facsimile: (860) 665-5457 Telephone: (860) 665-3258 E-Mail: shoopra@nu.com (email) with a copy to: Public Service Company of New Hampshire c/o Northeast Utilities Service Company -18- if by U.S. Mail: P.O. Box 270 Hartford, CT 06141-0270 if by courier: 107 Selden Street Berlin, CT 06037 Attention: Assistant Treasurer - Finance Facsimile: (860) 665-5457 Telephone: (860) 665-3258 E-Mail: shoopra@nu.com (b) if to the Issuer, to PSNH Funding LLC 2 c/o Public Service Company of New Hampshire if prior to April 1, 2002: 1000 Elm Street Manchester, NH 03101 if on or after April 1, 2002: 780 North Commercial Street Manchester, NH 03101 Facsimile: (860) 665-5457 Telephone: (860) 665-3258 E-Mail: shoopra@nu.com (email) with a copy to: Public Service Company of New Hampshire c/o Northeast Utilities Service Company if by U.S. Mail: P.O. Box 270 Hartford, CT 06141-0270 -19- if by courier: 107 Selden Street Berlin, CT 06037 Attention: Assistant Treasurer - Finance Facsimile: (860) 665-5457 Telephone: (860) 665-3258 E-Mail: shoopra@nu.com (c) if to the Trustee, to The Bank of New York 5 Penn Plaza 16th Floor New York, New York 10001 Attention: ABS Unit Facsimile: (212) 328-7623 Telephone: (212) 328-7549 (d) if to Moody's, to Moody's Investors Service, Inc. 99 Church Street New York, NY 10007 Attention: ABS Monitoring Department Facsimile: (212) 553-0573 Telephone: (212) 553-3686 (e) if to S&P, to Standard & Poor's 55 Water Street, 41st Floor New York, NY 10041 Attention: Asset Backed Surveillance Department Facsimile: (212) 438-2664 Telephone: (212) 438-2000 (f) if to Fitch, to Fitch, Inc. One State Street Plaza New York, NY 10004 Attention: ABS Surveillance Facsimile: (212) 514-9879 Telephone: (212) 908-0500 E-mail: surv@fitchratings.com (g) as to each of the foregoing, at such other address as shall be designated by written notice to the other parties. Section 6.03. Assignment. Notwithstanding anything to the contrary contained herein, except as provided in Section 5.02, this Agreement may not be assigned by the Seller. -20- Section 6.04. Limitations on Rights of Third Parties. The provisions of this Agreement are solely for the benefit of the Seller, the Issuer, the Bondholders, the Trustee, the State of New Hampshire, the State Treasurer, agencies of the State of New Hampshire and the other Persons expressly referred to herein, and such Persons shall have the right to enforce the relevant provisions of this Agreement, except that the Bondholders shall be entitled to enforce their rights against the Seller under this Agreement solely through a cause of action brought for their benefit by the Trustee. Nothing in this Agreement, whether express or implied, shall be construed to give to any other Person any legal or equitable right, remedy or claim in the RRB Property or under or in respect of this Agreement or any covenants, conditions or provisions contained herein. Section 6.05. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Section 6.06. Separate Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. Section 6.07. Headings. The headings of the various Articles and Sections herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Section 6.08. Governing Law. This Agreement shall be construed in accordance with the laws of the State of New Hampshire, without reference to its conflict of law provisions, and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws. Section 6.09. Assignment to Trustee. The Seller hereby acknowledges and consents to any mortgage, pledge, assignment and grant of a security interest by the Issuer to the Trustee pursuant to the Indenture for the benefit of the Bondholders of all right, title and interest of the Issuer in, to and under the RRB Property and the proceeds thereof and the mortgage, pledge, assignment of, and grant of a security interest by the Issuer to the Trustee in, any or all of the Issuer's rights and obligations hereunder to the Trustee. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -21- IN WITNESS WHEREOF, the parties hereto have caused this Purchase and Sale Agreement to be duly executed by their respective officers as of the day and year first above written. PSNH FUNDING LLC 2, Issuer By: /s/ Randy A. Shoop ------------------------------------ Name: Randy A. Shoop Title: President PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE, Seller By: /s/ Randy A. Shoop ------------------------------------ Name: Randy A. Shoop Title: Assistant Treasurer - Finance -S-22- EX-10.60 30 y58564y.txt Exhibit 10.60 PSNH FUNDING LLC 2, as Issuer and PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE as Servicer - -------------------------------------------------------------------------------- SERVICING AGREEMENT Dated as of January 30, 2002 - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE Article 1 DEFINITIONS Section 1.01. Definitions................................................................. 1 Section 1.02. Other Definitional Provisions............................................... 6 Article 2 APPOINTMENT AND AUTHORIZATION........................................................... 6 Section 2.01. Appointment of Servicer; Acceptance of Appointment.......................... 6 Section 2.02. Authorization............................................................... 6 Section 2.03. Dominion and Control Over the RRB Property.................................. 7 Article 3 BILLING SERVICES........................................................................ 7 Section 3.01. Duties of Servicer.......................................................... 7 Section 3.02. Servicing and Maintenance Standards......................................... 8 Section 3.03. Certificate of Compliance................................................... 8 Section 3.04. Annual Report by Independent Public Accountants............................. 9 Article 4 SERVICES RELATED TO PERIODIC ADJUSTMENTS; REMITTANCES................................... 9 Section 4.01. Periodic Adjustments........................................................ 9 Section 4.02. Limitation of Liability..................................................... 11 Section 4.03. Remittances................................................................. 12 Article 5 THE RRB PROPERTY........................................................................ 13 Section 5.01. Custody of RRB Property Records............................................. 13 Section 5.02. Duties of Servicer as Custodian............................................. 13 Section 5.03. Instructions; Authority to Act.............................................. 14 Section 5.04. Effective Period and Termination............................................ 14 Section 5.05. Monitoring of Third Party Suppliers......................................... 14 Article 6 THE SERVICER............................................................................ 15 Section 6.01. Representations and Warranties of Servicer.................................. 15 Section 6.02. Indemnities of Servicer..................................................... 16 Section 6.03. Limitation on Liability of Servicer and Others.............................. 18 Section 6.04. Merger or Consolidation of, or Assumption of the Obligations of, Servicer... 18 Section 6.05. Public Service Company of New Hampshire Not to Resign as Servicer........... 19
-ii- TABLE OF CONTENTS (CONTINUED)
PAGE Section 6.06. Servicing Compensation...................................................... 19 Section 6.07. Compliance with Applicable Law.............................................. 20 Section 6.08. Access to Certain Records and Information Regarding RRB Property............ 20 Section 6.09. Appointments................................................................ 20 Section 6.10. No Servicer Advances........................................................ 21 Section 6.11. Maintenance of Operations................................................... 21 Article 7 DEFAULT................................................................................. 18 Section 7.01. Servicer Default............................................................ 21 Section 7.02. Appointment of Successor.................................................... 22 Section 7.03. Waiver of Past Defaults..................................................... 23 Section 7.04. Notice of Servicer Default.................................................. 23 Article 8 MISCELLANEOUS PROVISIONS................................................................ 23 Section 8.01. Amendment................................................................... 23 Section 8.02. Maintenance of Accounts and Records......................................... 24 Section 8.03. Notices..................................................................... 24 Section 8.04. Assignment.................................................................. 27 Section 8.05. Limitations on Rights of Third Parties...................................... 27 Section 8.06. Severability................................................................ 28 Section 8.07. Separate Counterparts....................................................... 28 Section 8.08. Headings.................................................................... 28 Section 8.09. Governing Law............................................................... 28 Section 8.10. Assignment to Trustee....................................................... 28 Section 8.11. Nonpetition Covenants....................................................... 28
-iii- This SERVICING AGREEMENT, dated as of January 30, 2002, is between PSNH Funding LLC 2, a Delaware limited liability company (together with any successor thereto permitted under the Indenture, as hereinafter defined, the "Issuer"), and Public Service Company of New Hampshire, a New Hampshire corporation. RECITALS WHEREAS, pursuant to the Statute and the Finance Order, the Seller and the Issuer are concurrently entering into the Sale Agreement pursuant to which the Seller is selling to the Issuer the RRB Property created pursuant to the Statute and the Finance Order. WHEREAS, in connection with its ownership of the RRB Property and in order to collect the RRB Charge, the Issuer desires to engage the Servicer to carry out the functions described herein. The Servicer currently performs similar functions for itself with respect to its own charges to its customers. In addition, the Issuer desires to engage the Servicer to act on its behalf in obtaining Periodic Adjustments from the NHPUC. The Servicer desires to perform all of these activities on behalf of the Issuer. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS Section 1.01. Definitions. Whenever used in this Agreement, the following words and phrases shall have the following meanings: "Advice Letter" means any filing made with the NHPUC by the Servicer on behalf of the Issuer to set or adjust the RRB Charge, including the Issuance Advice Letter, a Routine Semiannual True-Up Letter, a Routine True-Up Letter or a Non-Routine True-Up Letter. "Agreement" means this Servicing Agreement, together with all Exhibits, Schedules and Annexes hereto, as the same may be amended and supplemented from time to time. "Annual Accountant's Report" has the meaning set forth in Section 3.04. "Applicable TPS" means, with respect to each customer, the TPS, if any, billing the RRB Charge to that customer. "Bills" means each of the regular monthly bills, summary bills and other bills issued to customers or TPSs by Public Service Company of New Hampshire on its own behalf and in its capacity as Servicer. "Certificate of Compliance" has the meaning set forth in Section 3.03. "Closing Date" means January 30, 2002. "Expected Amortization Schedule" means Schedule 4.01(a) hereto. "Finance Order" means the order of the NHPUC, DE 01-089, issued on December 6, 2001 (Order No. 23,859). "Indemnified Person" has the meaning assigned to such term in Section 6.02. -4- "Indenture" means the Indenture dated as of the date hereof between the Issuer and the Trustee, as the same may be amended and supplemented from time to time. "Insolvency Event" means, with respect to a specified Person, (a) the filing of a decree or order for relief by a court having jurisdiction in the premises in respect of such Person or any substantial part of its property in an involuntary case under any applicable Federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or ordering the winding-up or liquidation of such Person's affairs, and such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (b) the commencement by such Person of a voluntary case under any applicable Federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or the consent by such Person to the entry of an order for relief in an involuntary case under any such law, or the consent by such Person to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or the making by such Person of any general assignment for the benefit of creditors, or the failure by such Person generally to pay its debts as such debts become due. "Issuer" has the meaning set forth in the preamble to this Agreement. "Issuance Advice Letter" means the initial Issuance Advice Letter, dated January 25, 2002, filed with the NHPUC pursuant to the Finance Order. "Lien" means a security interest, lien, charge, pledge or encumbrance of any kind. "Losses" has the meaning assigned to that term in Section 6.02(b). "Monthly Servicer Certificate" has the meaning assigned to that term in Section 4.01(d)(2). "NHPUC" means the New Hampshire Public Utilities Commission and any successor thereto. "NHPUC Regulations" means all regulations, rules, tariffs and laws applicable to public utilities or TPSs, as the case may be, and promulgated by, enforced by or otherwise within the jurisdiction of the NHPUC. "Non-Routine Periodic Adjustment" has the meaning set forth in Section 4.01(c)(1). "Non-Routine True-Up Letter" means a letter filed with the NHPUC in accordance with the Finance Order with respect to any Non-Routine Periodic Adjustment, pursuant to which the related Non-Routine Periodic Adjustment will become effective within 60 days after filing of the Non-Routine True-Up Letter, subject to the review and approval of the NHPUC. "Officer's Certificate" means a certificate of the Servicer signed by a Responsible Officer. "Opinion of Counsel" means one or more written opinions of counsel who may be an employee of or counsel to the party providing such opinion(s) of counsel, which counsel shall be reasonably acceptable to the party receiving such opinion(s) of counsel. "Periodic Adjustment" means each adjustment to the RRB Charge made pursuant to the terms of the Finance Order and in accordance with Section 4.01 hereof. "Principal Balance" means, as of any Payment Date, the sum of the outstanding -5- principal amount of the Bonds. "Projected Principal Balance" means, as of any Payment Date, the sum of the projected outstanding principal amount of the Bonds for such Payment Date set forth in the Expected Amortization Schedule. "Quarterly Servicer Certificate" has the meaning assigned to that term in Section 4.01(d)(3). "Remittance" means each remittance pursuant to Section 4.03 of RRB Charge Payments by the Servicer to the Trustee. "Remittance Date" means each Servicer Business Day on which a Remittance is to be made by the Servicer pursuant to Section 4.03. "Remittance Period" means, in each year, each successive six-month period commencing on May 1 and ending on October 31 and commencing on November 1 and ending on April 30; provided, however, that the initial Remittance Period shall commence on the Closing Date and end on April 30, 2002. "Required Debt Service" means, for any Remittance Period, the total dollar amount calculated by the Servicer in accordance with Section 4.01(b)(1) as necessary to be remitted to the Collection Account during such Remittance Period (after giving effect to (a) the allocation and distribution of amounts on deposit in the Reserve Subaccount at the time of calculation and which are available for payments on the Bonds, (b) any shortfalls in Required Debt Service for any prior Remittance Period and (c) any Remittances based upon the RRB Charge in effect in the prior Remittance Period that are expected to be realized in such Remittance Period) in order to ensure that, as of the Payment Date immediately following the end of such period, (i) all accrued and unpaid interest on the Bonds then due shall have been paid in full, (ii) the Principal Balance of the Bonds is equal to the Projected Principal Balance of the Bonds for that Payment Date, (iii) the balance on deposit in the Interest Reserve Subaccount equals the aggregate Required Interest Reserve Level, (iv) the balance on deposit in the Capital Subaccount equals the aggregate Required Capital Level, (v) the balance on deposit in the Overcollateralization Subaccount equals the aggregate Required Overcollateralization Level and (vi) all other fees, expenses and indemnities due and owing and required or allowed to be paid under Section 8.02 of the Indenture as of such date shall have been paid in full; provided, however, that, with respect to any Periodic Adjustment occurring after the last Scheduled Maturity Date for any Bonds, the Required Debt Service shall be calculated to ensure that sufficient amounts will be collected to retire such Bonds in full as of the earlier of (x) the next Payment Date and (y) the Final Maturity Date for such Bonds. "Responsible Officer" means the chief executive officer, the president, the chairman or vice chairman of the board, the any vice president, the treasurer, any assistant treasurer, the secretary, the clerk, any assistant secretary, and assistant clerk, the controller or the finance manager of the Servicer. "Retirement of the Bonds" means the day on which the final payment is made to the Trustee in respect of the last outstanding Bond. "Routine Semiannual True-Up Letter" means a letter filed with the NHPUC, substantially in the form of Exhibit B hereto, not later than 30 days prior to April 25 and October 25 in each year, in respect of a semiannual Periodic Adjustment. Absent -6- manifest error in the Routine Semiannual True-Up Letter, the resulting upward or downward adjustments to the RRB Charge will be effective on the ensuing May 1 or November 1. "Routine True-Up Letter" means a letter filed with the NHPUC, substantially in the form of Exhibit B hereto, as frequently as monthly, in respect of a Periodic Adjustment. Absent manifest error in the Routine True-Up Letter, the resulting upward or downward adjustments to the RRB Charge will be effective immediately upon the filing of such Routine True-Up Letter. "RRB Charge" means the portion (which may become all) of the Seller's "stranded cost recovery charge" designated pursuant to the Finance Order and RSA 369-B:2, XIII as the RRB Charge, as the same may be adjusted from time to time as provided in the Finance Order. "RRB Charge Collections" means the RRB Charge Payments remitted to the Collection Account. "RRB Charge Payments" means the actual payments received by the Servicer, directly or indirectly (including through a TPS), from or on behalf of customers, multiplied by the percentage of such collections which is calculated in accordance with Annex II hereto to have been received in respect of the RRB Charge. "RRB Property" means the RRB Property that exists under Approval Nos. 20 to 22 of the Finance Order and is sold by the Seller to the Issuer under the Sale Agreement. "RRB Property Records" has the meaning assigned to that term in Section 5.01. "Sale Agreement" means the Purchase and Sale Agreement dated as of the date hereof between Public Service Company of New Hampshire, as Seller, and the Issuer, as the same may be amended and supplemented from time to time. "Seller" means Public Service Company of New Hampshire, a New Hampshire corporation, and its permitted successors and assigns under the Sale Agreement. "Servicer" means Public Service Company of New Hampshire, as the servicer of the RRB Property, or each successor (in the same capacity) pursuant to Section 6.04 or Section 7.02. "Servicer Business Day" means any Business Day on which the Servicer's offices in the State of New Hampshire are open for business. "Servicer Default" means an event specified in Section 7.01. "Servicing Fee" has the meaning set forth in Section 6.06(a). "Statute" means RSA Chapter 369-B. "Termination Notice" has the meaning assigned to that term in Section 7.01. "TPS" means a third party supplier of energy who has entered into a TPS Service Agreement with the Servicer. "TPS Service Agreement" means an agreement between a third party supplier of energy and the Servicer pursuant to which such third party supplier of energy bills and collects the RRB Charge to and from customers in accordance with NHPUC Regulations, the Finance Order and the guidelines described in Schedule A to Annex I. Section 1.02. Other Definitional Provisions. (a) Capitalized terms used herein and not otherwise defined herein have the meanings assigned to them in the Indenture. (b) All terms defined in this Agreement shall have the defined meanings -7- when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (c) The words "hereof," "herein," "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement; Section, Schedule, Exhibit and Annex references contained in this Agreement are references to Sections, Schedules, Exhibits and Annexes in or to this Agreement unless otherwise specified; and the term "including" shall mean "including without limitation." (d) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter forms of such terms. ARTICLE 2 APPOINTMENT AND AUTHORIZATION Section 2.01. Appointment of Servicer; Acceptance of Appointment. Subject to Section 6.05 and Article 7, the Issuer hereby appoints the Servicer, and the Servicer hereby accepts such appointment, to perform the Servicer's obligations pursuant to this Agreement on behalf of and for the benefit of the Issuer or any assignee thereof in accordance with the terms of this Agreement and applicable law. This appointment and the Servicer's acceptance thereof may not be revoked except in accordance with the express terms of this Agreement. Section 2.02. Authorization. With respect to all or any portion of the RRB Property, the Servicer shall be, and hereby is, authorized and empowered by the Issuer to (a) execute and deliver, on behalf of itself and/or the Issuer, as the case may be, any and all instruments, documents or notices, and (b) on behalf of itself and/or the Issuer, as the case may be, make any filing and participate in proceedings of any kind with any governmental authorities, including with the NHPUC. The Issuer shall execute and/or furnish the Servicer with such documents as have been prepared by the Servicer for execution by the Issuer, and with such other documents as may be in the Issuer's possession, as the Servicer may determine to be necessary or appropriate to enable it to carry out its servicing and administrative duties hereunder. Upon the Servicer's written request, the Issuer shall furnish the Servicer with any powers of attorney or other documents necessary or appropriate to enable the Servicer to carry out its duties hereunder. Section 2.03. Dominion and Control Over the RRB Property. Notwithstanding any other provision herein, the Issuer shall have dominion and control over the RRB Property, and the Servicer, in accordance with the terms hereof, is acting solely as the servicing agent and custodian for the Issuer with respect to the RRB Property and the RRB Property Records. The Servicer shall not take any action that is not authorized by this Agreement or that shall impair the rights of the Issuer or the Trustee in the RRB Property, in each case unless such action is required by applicable law. ARTICLE 3 BILLING SERVICES Section 3.01. Duties of Servicer. The Servicer, as agent for the Issuer, shall have -8- the following duties: (a) Duties of Servicer Generally. (1) General Duties. The Servicer's duties in general shall include management, servicing and administration of the RRB Property; obtaining meter reads, calculating electricity usage (including usage by customers of any TPS), billing, collection and posting of all payments in respect of the RRB Property; responding to inquiries by customers, the NHPUC, or any federal, local or other state governmental authorities with respect to the RRB Property; delivering Bills to customers and TPSs, investigating and handling delinquencies, processing and depositing collections and making periodic remittances; furnishing periodic reports to the Issuer, the Trustee and the Rating Agencies; and taking all necessary action in connection with Periodic Adjustments as set forth herein. Certain of the duties set forth above may be performed by TPSs pursuant to TPS Service Agreements. Without limiting the generality of this Section 3.01(a)(1), in furtherance of the foregoing, the Servicer hereby agrees that it shall also have, and shall comply with, the duties and responsibilities relating to data acquisition, usage and bill calculation, billing, customer service functions, collection, payment processing and remittance set forth in Annex I hereto. (2) NHPUC Regulations Control. Notwithstanding anything to the contrary in this Agreement, the duties of the Servicer set forth in this Agreement shall be qualified in their entirety by any NHPUC Regulations as in effect at the time such duties are to be performed. (b) Reporting Functions. (1) Notification of Laws and Regulations. The Servicer shall promptly notify the Issuer, the Trustee and the Rating Agencies in writing of any laws or NHPUC Regulations hereafter promulgated that have a material adverse effect on the Servicer's ability to perform its duties under this Agreement. (2) Other Information. Upon the reasonable request of the Issuer, the Trustee or any Rating Agency, the Servicer shall provide to such Issuer, Trustee or the Rating Agencies, as the case may be, any public financial information in respect of the Servicer, or any material information regarding the RRB Property to the extent it is reasonably available to the Servicer, as may be reasonably necessary and permitted by law for the Issuer, the Trustee , or the Rating Agencies to monitor the Servicer's performance hereunder. (3) Preparation of Reports to be Filed with the SEC. The Servicer shall prepare or cause to be prepared any reports required to be filed by the Issuer under the securities laws, including a copy of each Quarterly Servicer Certificate described in Section 4.01(d)(3), the annual Certificate of Compliance described in Section 3.03 and the Annual Accountant's Report described in Section 3.04. Section 3.02. Servicing and Maintenance Standards. On behalf of the Issuer, the Servicer shall (a) manage, service, administer and make collections in respect of the RRB Property with reasonable care and in accordance with applicable law, including all applicable NHPUC Regulations and guidelines, using the same degree of care and diligence that the Servicer exercises with respect to similar assets for its own account and, if applicable, for others; (b) follow customary standards, policies and procedures for the industry in performing its duties as Servicer; (c) use all reasonable efforts, consistent -9- with its customary servicing procedures, to bill and collect the RRB Charge; (d) file all filings under the applicable Uniform Commercial Code or the Statute necessary or desirable to maintain the perfected ownership interest and security interest of the Issuer and the Trustee in the RRB Property; and (e) comply in all material respects with all laws and regulations applicable to and binding on it relating to the RRB Property. The Servicer shall follow such customary and usual practices and procedures as it shall deem necessary or advisable in its servicing of all or any portion of the RRB Property, which, in the Servicer's judgment, may include the taking of legal action, at the Issuer's expense. Section 3.03. Certificate of Compliance. The Servicer shall deliver to the Issuer, the Trustee and the Rating Agencies on or before March 31 of each year, commencing March 31, 2003 to and including the March 31 succeeding the Retirement of the Bonds, an Officer's Certificate substantially in the form of Exhibit A hereto (a "Certificate of Compliance"), stating that: (i) a review of the activities of the Servicer during the twelve months ended the preceding December 31 (or, in the case of the first Certificate of Compliance to be delivered on or before March 31, 2003, the period of time from the date of this Agreement until December 31, 2002) and of its performance under this Agreement has been made under such Responsible Officer's supervision, and (ii) to such Responsible Officer's knowledge, based on such review, the Servicer has fulfilled all of its obligations in all material respects under this Agreement throughout such twelve months (or, in the case of the Certificate of Compliance to be delivered on or before March 31, 2003 the period of time from the date of this Agreement until December 31, 2002), or, if there has been a default in the fulfillment of any such material obligation, specifying each such material default known to such Responsible Officer and the nature and status thereof. Section 3.04. Annual Report by Independent Public Accountants. (a) The Servicer, at the Issuer's expense, shall cause a firm of independent certified public accountants (which may provide other services to the Servicer) to prepare, and the Servicer shall deliver to the Issuer, the Trustee and the Rating Agencies, a report addressed to the Servicer (the "Annual Accountant's Report"), which may be included as part of the Servicer's customary auditing activities, for the information and use of the Issuer, the Trustee and the Rating Agencies, on or before March 31 each year, beginning March 31, 2003 to and including the March 31 succeeding the Retirement of the Bonds, to the effect that such firm has performed certain procedures, agreed between the Servicer and such accountants, in connection with the Servicer's compliance with its obligations under this Agreement during the preceding twelve months ended December 31 (or, in the case of the first Annual Accountant's Report to be delivered on or before March 31, 2003, the period of time from the date of this Agreement until December 31, 2002), identifying the results of such procedures and including any exceptions noted. (b) The Annual Accountant's Report shall also indicate that the accounting firm providing such report is independent of the Servicer within the meaning of the Code of Professional Ethics of the American Institute of Certified Public Accountants. ARTICLE 4 SERVICES RELATED TO PERIODIC ADJUSTMENTS; REMITTANCES -10- Section 4.01. Periodic Adjustments. From time to time, until the Retirement of the Bonds, the Servicer shall identify the need for Periodic Adjustments and shall take all reasonable action to obtain and implement such Periodic Adjustments, all in accordance with the following: (a) Expected Amortization Schedule. The Expected Amortization Schedule is attached hereto as Schedule 4.01(a). (b) Routine Periodic Adjustments and Semiannual Filings. (1) Routine Semiannual Periodic Adjustments and Filings. For the purpose of preparing a Routine Semiannual True-Up Letter, the Servicer shall: (A) update the assumptions underlying the calculation of the RRB Charge, including energy usage volume, the rate of charge-offs and estimated expenses and fees of the Issuer to the extent not fixed, for the Remittance Period beginning on May 1 or November 1 (whichever is next to occur) of each year; (B) determine the Required Debt Service for such Remittance Period based upon such updated assumptions; and (C) determine the RRB Charge to be charged during such Remittance Period based upon such Required Debt Service. The Servicer shall file a Routine Semiannual True-Up Letter with the NHPUC no later than 30 days prior to April 25 and October 25 of each year. (2) Routine Periodic Adjustments. The Servicer shall file a Routine True-Up Letter at least 15 days before the end of any calendar month, at each such time as the Servicer may reasonably determine is necessary to meet the Required Debt Service for the then current Remittance Period. (3) The Servicer shall take all reasonable actions and make all reasonable efforts to secure any Periodic Adjustments. (c) Non-Routine Periodic Adjustments. (1) Whenever the Servicer determines that the existing model for calculating the RRB Charge should be amended or revised, subject to the consent of the Issuer under the conditions set forth in Section 3.18 of the Indenture, the Servicer shall file a Non-Routine True-Up Letter with the NHPUC designating the adjustments to such model and any corresponding adjustments to the RRB Charge (collectively, a "Non-Routine Periodic Adjustment"), subject to the review and approval of the NHPUC pursuant to the Finance Order. (2) The Servicer shall take all reasonable actions and make all reasonable efforts to secure any Non-Routine Periodic Adjustments. (3) The Servicer shall implement any resulting adjustments to the model and any resulting revised RRB Charge as of the effective date of the Non-Routine True-Up Letter. (d) Reports. (1) Notification of Advice Letter Filings and Periodic Adjustments. Whenever the Servicer files an Advice Letter with the NHPUC, the Servicer shall send a copy of such filing to the Issuer, the Trustee and the Rating Agencies concurrently therewith. If any Periodic Adjustment requested in any such Advice Letter filing does not become effective on the applicable date as provided by the Finance Order, the Servicer shall notify the Issuer, the Trustee and the Rating Agencies by the end of the second Servicer Business Day after such applicable date. -11- (2) Monthly Servicer Certificate. So long as any Bonds are outstanding, not later than fifteen (15) days after the end of each month after the Bonds are issued (excluding January, 2002), or if such day is not a Servicer Business Day, the next succeeding Servicer Business Day, the Servicer shall deliver a written report substantially in the form of Exhibit C hereto (the "Monthly Servicer Certificate") to the Issuer, the Trustee and the Rating Agencies. (3) Quarterly Servicer Certificate. So long as any Bonds are outstanding, not later than 11:00 a.m. (New York City time) on the Servicer Business Day immediately preceding each Payment Date, the Servicer shall deliver a written report substantially in the form of Exhibit D hereto (the "Quarterly Servicer Certificate") to the Issuer, the Trustee and the Rating Agencies. (4) TPS Reports. The Servicer shall provide to the Rating Agencies, upon request, any publicly available reports filed by the Servicer with the NHPUC (or otherwise made publicly available by the Servicer) relating to TPSs and any other non-confidential and non-proprietary information relating to TPSs reasonably requested by the Rating Agencies. (e) Uniformity of RRB Charge. The Servicer shall not take any action to implement any Periodic Adjustment that would cause the RRB Charge to vary among customer classes unless the Rating Agency Condition shall have been satisfied. Section 4.02. Limitation of Liability. (a) The Issuer and the Servicer expressly agree and acknowledge that: (1) In connection with any Periodic Adjustment, the Servicer is acting solely in its capacity as the servicing agent hereunder. (2) Neither the Servicer nor the Issuer shall be responsible in any manner for, and shall have no liability whatsoever as a result of, any action, decision, ruling or other determination made or not made, or any delay (other than any delay resulting from the Servicer's failure to file for Periodic Adjustments or Non-Routine Periodic Adjustments required by Section 4.01 in a timely and correct manner or other material breach by the Servicer of its duties under this Agreement that materially and adversely affects any Periodic Adjustments or Non-Routine Periodic Adjustments), by the NHPUC (or, in connection with any Non-Routine Periodic Adjustment, by the Rating Agencies) in any way related to the RRB Property or in connection with any Periodic Adjustment or Non-Routine Periodic Adjustment, the subject of any filings under Section 4.01, any proposed Periodic Adjustment or Non-Routine Periodic Adjustment, or the approval of the RRB Charge and the adjustments thereto. (3) The Servicer shall have no liability whatsoever relating to the calculation of the RRB Charge and the adjustments thereto (including any Non-Routine Periodic Adjustment), including as a result of any inaccuracy of any of the assumptions made in such calculation regarding expected energy usage volume, the rate of charge-offs, estimated expenses and fees of the Issuer, so long as the Servicer has not acted in a negligent manner in connection therewith, nor shall the Servicer have any liability whatsoever as a result of any Person, including the Bondholders, not receiving any payment, amount or return anticipated or expected in respect of any Bond generally, except only to the extent that the Servicer is liable under Section 6.02 of this Agreement. (b) Notwithstanding the foregoing, this Section 4.02 shall not relieve the -12- Servicer of any liability under Section 6.02 for any misrepresentation by the Servicer under Section 6.01 or for any breach by the Servicer of its obligations under this Agreement. Section 4.03. Remittances. (a) Pursuant to the remittance methodology more fully described in Annex II hereto, starting with collections that are received on the first Servicer Business Day that is at least 45 days after the first day on which Public Service Company of New Hampshire imposes the RRB Charge, the Servicer will remit to the Trustee on each Servicer Business Day, within two Servicer Business Days after receipt, by wire transfer of immediately available funds to the General Subaccount of the Collection Account, an amount equal to the RRB Charge Payments (as calculated in accordance with Annex II hereto) received on such Servicer Business Day and on any prior day that was not a Servicer Business Day for which a Remittance has not previously been made. Prior to or simultaneous with each Remittance to the General Subaccount of the Collection Account pursuant to this Section, the Servicer shall provide written notice to the Trustee of each such Remittance (including the exact dollar amount to be remitted). (b) The Servicer may elect to make Remittances less frequently than on a daily basis, and shall be permitted to do so, but in any event shall make Remittances within one calendar month of collection thereof, provided that the Servicer shall send written notice of such election to the Issuer and the Trustee, together with (i) an Officer's Certificate stating that no Servicer Default has occurred and is continuing under this Servicing Agreement, (ii) evidence that the Rating Agency Condition has been satisfied, (iii) evidence of the delivery by the Servicer to the Issuer or the Trustee, as applicable, of any credit enhancement which may be required by the Rating Agencies in connection therewith in form and substance satisfactory to the Issuer and the Trustee, as applicable, the cost of which credit enhancement shall be borne solely by the Servicer, and (iv) an executed copy of any appropriate amendment hereto or to the Indenture or any other Basic Agreement as reasonably requested by the Servicer, the Issuer or the Trustee in connection therewith. (c) The Servicer agrees and acknowledges that it will remit RRB Charge Payments in accordance with this Section 4.03 without any surcharge, fee, offset, charge or other deduction except for late fees permitted by Section 6.06. ARTICLE 5 THE RRB PROPERTY Section 5.01. Custody of RRB Property Records. To assure uniform quality in servicing the RRB Property and to reduce administrative costs, the Issuer hereby revocably appoints the Servicer, and the Servicer hereby accepts such appointment, to act as the agent of the Issuer and the Trustee as custodian of any and all documents and records that the Servicer shall keep on file, in accordance with its customary procedures, relating to the RRB Property, including copies of the Finance Order and Advice Letters relating thereto and all documents filed with the NHPUC in connection with any Periodic Adjustment or Non-Routine Periodic Adjustment and computational records relating thereto (collectively, the "RRB Property Records"), which are hereby constructively delivered to the Trustee, as pledgee of the Issuer with respect to all RRB Property. -13- Section 5.02. Duties of Servicer as Custodian. (a) Safekeeping. The Servicer shall hold the RRB Property Records on behalf of the Issuer and the Trustee and maintain such accurate and complete accounts, records and computer systems pertaining to the RRB Property Records on behalf of the Issuer and the Trustee as shall enable the Issuer to comply with this Agreement and the Indenture. In performing its duties as custodian the Servicer shall act with reasonable care, using that degree of care and diligence that the Servicer exercises with respect to comparable assets that the Servicer services for itself or, if applicable, for others. The Servicer shall promptly report to the Issuer and the Trustee any failure on its part to hold the RRB Property Records and maintain its accounts, records and computer systems as herein provided and promptly take appropriate action to remedy any such failure. Nothing herein shall be deemed to require an initial review or any periodic review by the Issuer or the Trustee of the RRB Property Records. The Servicer's duties to hold the RRB Property Records on behalf of the Issuer set forth in this Section 5.02, to the extent such RRB Property Records have not been previously transferred to a successor Servicer pursuant to Article 7, shall terminate one year and one day after the earlier of the date on which (i) the Servicer is succeeded by a successor Servicer in accordance with Article 7 and (ii) no Bonds are outstanding. (b) Maintenance of and Access to Records. The Servicer shall maintain at all times records and accounts that permit the Servicer to identify RRB Charges billed. The Servicer shall maintain the RRB Property Records in Manchester, New Hampshire, Berlin, Connecticut or at such other office in the United States as shall be specified to the Issuer and the Trustee by written notice at least 30 days prior to any change in location. The Servicer shall make available for inspection to the Issuer, the Trustee, the NHPUC or their respective duly authorized representatives, attorneys or auditors the RRB Property Records at such times during normal business hours as the Issuer, the Trustee or the NHPUC shall reasonably request and which do not unreasonably interfere with the Servicer's normal operations. Nothing in this Section 5.02(b) shall affect the obligation of the Servicer to observe any applicable law (including any NHPUC Regulations) prohibiting disclosure of information regarding the customers, and the failure of the Servicer to provide access to such information as a result of such obligation shall not constitute a breach of this Section 5.02(b). (c) Release of Documents. Upon instruction from the Trustee in accordance with the Indenture, the Servicer shall release any RRB Property Records to the Trustee, the Trustee's agent or the Trustee's designee, as the case may be, at such place or places as the Trustee may designate, as soon as practicable. (d) Defending RRB Property Against Claims. The Servicer shall institute any action or proceeding necessary to compel performance by the NHPUC or the State of New Hampshire of any of their obligations or duties under the Statute, the Finance Order or any Advice Letter, and the Servicer agrees to take such legal or administrative actions, including defending against or instituting and pursuing legal actions and appearing or testifying at hearings or similar proceedings, as may be reasonably necessary to block or overturn any attempts to cause a repeal of, modification of or supplement to the Statute or the Finance Order or the rights of holders of RRB Property by executive action, legislative enactment or constitutional amendment or (if such means become available in -14- the future) referendum or initiative petition that would be adverse to Bondholders, the Issuer or the Trustee. The costs of any such action shall be payable from RRB Charge Collections as an Operating Expense in accordance with the priorities set forth in Section 8.02(d) of the Indenture. The Servicer's obligations pursuant to this Section 5.02 shall survive and continue notwithstanding the fact that the payment of Operating Expenses pursuant to Section 8.02(d) of the Indenture may be delayed, it being understood that the Servicer may be required to advance its own funds to satisfy its obligations hereunder. Section 5.03. Instructions; Authority to Act. For so long as any Bonds remain outstanding, the Servicer shall be deemed to have received proper instructions with respect to the RRB Property Records upon its receipt of written instructions signed by a Responsible Officer (as defined in the Indenture) of the Trustee. Section 5.04. Effective Period and Termination. The Servicer's appointment as custodian shall become effective as of the Closing Date and shall continue in full force and effect until terminated pursuant to this Section 5.04. If any Servicer shall resign as Servicer in accordance with the provisions of this Agreement or if all of the rights and obligations of any Servicer shall have been terminated under Section 7.01, the appointment of such Servicer as custodian shall terminate upon appointment of a successor Servicer, subject to the approval of the NHPUC, and acceptance by such successor Servicer of such appointment. Section 5.05. Monitoring of Third Party Suppliers. From time to time, until the Retirement of the Bonds, the Servicer shall, using the same degree of care and diligence that it exercises with respect to payments owed to it for its own account, implement such procedures and policies as are necessary to properly enforce the obligations of each TPS to remit RRB Charges, in accordance with the terms and provisions of the Finance Order, the TPS Service Agreement and Schedule A to Annex I hereto. ARTICLE 6 THE SERVICER Section 6.01. Representations and Warranties of Servicer. The Servicer makes the following representations and warranties, as of the Closing Date, on which the Issuer is deemed to have relied in entering into this Agreement relating to the servicing of the RRB Property. (a) Organization and Good Standing. The Servicer is duly organized and validly existing as a corporation in good standing under the laws of the State of New Hampshire, with the requisite corporate power and authority to own its properties as such properties are currently owned and to conduct its business as such business is now conducted by it, and has the requisite corporate power and authority to service the RRB Property and to hold the RRB Property Records as custodian. (b) Due Qualification. The Servicer is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of property or the conduct of its business (including the servicing of the RRB Property as required by this Agreement) shall require such qualifications, licenses or approvals (except where the failure to so qualify or obtain such licenses and approvals would not be reasonably likely to have a material adverse effect on the Servicer's business, operations, assets, revenues -15- or properties or adversely affect the servicing of the RRB Property). (c) Power and Authority. The Servicer has the requisite corporate power and authority to execute and deliver this Agreement and to carry out its terms; and the execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action on the part of the Servicer. (d) Binding Obligation. This Agreement constitutes a legal, valid and binding obligation of the Servicer enforceable against it in accordance with its terms, subject to applicable insolvency, reorganization, moratorium, fraudulent transfer and other laws relating to or affecting creditors' rights generally from time to time in effect and to general principles of equity (including concepts of materiality, reasonableness, good faith and fair dealing), regardless of whether considered in a proceeding in equity or at law. (e) No Violation. The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof do not: (i) conflict with or result in any breach of any of the terms and provisions of, nor constitute (with or without notice or lapse of time) a default under, the articles of organization or by-laws of the Servicer, or any material indenture, agreement or other instrument to which the Servicer is a party or by which it is bound; (ii) result in the creation or imposition of any Lien upon any of the Servicer's properties pursuant to the terms of any such indenture, agreement or other instrument; nor violate any existing law or any existing order, rule or regulation applicable to the Servicer of any court or of any federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Servicer or its properties, so as to adversely affect the Servicer, the Issuer or the Bondholders. (f) No Proceedings. There are no proceedings pending and, to the Servicer's knowledge, there are no proceedings threatened and, to the Servicer's knowledge, there are no investigations pending or threatened, before any court, federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Servicer or its properties involving or relating to the Servicer or the Issuer or, to the Servicer's knowledge, any other Person: (i) asserting the invalidity of this Agreement; (ii) seeking to prevent the consummation of any of the transactions contemplated by this Agreement; or (iii) seeking any determination or ruling that might materially and adversely affect the performance by the Servicer of its obligations under, or the validity or enforceability of, this Agreement. (g) Approvals. No approval, authorization, consent, order or other action of, or filing with, any court, federal or state regulatory body, administrative agency or other governmental instrumentality is required in connection with the execution and delivery by the Servicer of this Agreement, the performance by the Servicer of the transactions contemplated hereby or the fulfillment by the Servicer of the terms hereof, except those that have been obtained or made and those that the Servicer is required to make in the future pursuant to Article 3 or Article 4 and post-closing filings in connection therewith. Section 6.02. Indemnities of Servicer. (a) The Servicer shall be liable in accordance herewith only to the extent of the obligations specifically undertaken by the Servicer and as expressly provided -16- under this Section 6.02. (b) The Servicer shall indemnify the Issuer and the Bondholders (each an "Indemnified Person" for purposes of Sections 6.02 (b) and (d)) for, and defend and hold harmless each such Person from and against, any and all liabilities, obligations, losses, damages, payments, claims, costs or expenses of any kind whatsoever (collectively, "Losses") that may be imposed on, incurred by or asserted against any such Person as a result of (i) the Servicer's willful misconduct or negligence in the performance of its duties or observance of its covenants under this Agreement (including the Servicer's willful misconduct or negligence relating to the maintenance and custody by the Servicer, as custodian, of the RRB Property Records) or (ii) the Servicer's breach in any material respect of any of its representations or warranties in this Agreement; provided, however, that the Servicer shall not be liable for any Losses resulting from the willful misconduct or gross negligence of any such Indemnified Person; and, provided, further, that the Bondholders shall be entitled to enforce their rights and remedies against the Servicer under this Section 6.02(b) solely through a cause of action brought for their benefit by the Trustee; and, provided, further, that the Servicer shall not be liable for any Losses, regardless of when incurred, after the Bonds have been paid in full, except as provided in Section 6.02(c). (c) The Servicer shall indemnify and hold harmless the Trustee, the State of New Hampshire, the Treasurer of the State of New Hampshire, agencies of the State of New Hampshire and any of their respective affiliates, officials, officers, directors, employees, consultants, counsel and agents (each an "Indemnified Person" for purposes of Section 6.02(c) and (d)) for, and defend and hold harmless each such Person from and against, any and all Losses imposed on, incurred by or asserted against any of such Indemnified Persons as a result of: (i) the Servicer's willful misconduct or negligence in the performance of its duties or observance of its covenants under this Agreement (including the Servicer's willful misconduct or negligence relating to the maintenance and custody by the Servicer, as custodian, of the RRB Property Records) or (ii) the Servicer's breach in any material respect of any of its representations or warranties in this Agreement; provided, however, that the Servicer shall not be liable for any Losses resulting from the willful misconduct or gross negligence of such Indemnified Person or resulting from a breach of a representation or warranty made by such Indemnified Person in any of the Basic Documents that gives rise to the Servicer's breach. (d) The Servicer shall not be required to indemnify an Indemnified Person for any amount paid or payable by such Indemnified Person pursuant to Section 6.02(b) or Section 6.02(c) in the settlement of any action, proceeding or investigation without the written consent of the Servicer, which consent shall not be unreasonably withheld. Promptly after receipt by an Indemnified Person of notice of its involvement in any action, proceeding or investigation, such Indemnified Person shall, if a claim for indemnification in respect thereof is to be made against the Servicer under Section 6.02(b) or Section 6.02(c), notify the Servicer in writing of such involvement. Failure by an Indemnified Person to so notify the Servicer shall relieve the Servicer from the obligation to indemnify and hold harmless such Indemnified Person under Section 6.02(b) or Section 6.02(c), as applicable, only to the extent that the Servicer suffers actual prejudice as a result of such failure. With respect to any action, proceeding or -17- investigation brought by a third party for which indemnification may be sought under Section 6.02(b) or Section 6.02(c), the Servicer shall be entitled to assume the defense of any such action, proceeding or investigation. Upon assumption by the Servicer of the defense of any such action, proceeding or investigation, the Indemnified Person shall have the right to participate in such action or proceeding and to retain its own counsel. The Servicer shall be entitled to appoint counsel of the Servicer's choice at the Servicer's expense to represent the Indemnified Person in any action, proceeding or investigation for which a claim of indemnification is made against the Servicer under Section 6.02(b) or Section 6.02(c) (in which case the Servicer shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the Indemnified Person except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the Indemnified Person. Notwithstanding the Servicer's election to appoint counsel to represent the Indemnified Person in an action, proceeding or investigation, the Indemnified Person shall have the right to employ separate counsel (including local counsel), and the Servicer shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of counsel chosen by the Servicer to represent the Indemnified Person would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the Indemnified Person and the Servicer and the Indemnified Person shall have reasonably concluded that there may be legal defenses available to it that are different from or additional to those available to the Servicer, (iii) the Servicer shall not have employed counsel reasonably satisfactory to the Indemnified Person to represent the Indemnified Person within a reasonable time after notice of the institution of such action or (iv) the Servicer shall authorize the Indemnified Person to employ separate counsel at the expense of the Servicer. Notwithstanding the foregoing, the Servicer shall not be obligated to pay for the fees, costs and expenses of more than one separate counsel for the Indemnified Persons (in addition to local counsel). The Servicer will not, without the prior written consent of the Indemnified Person, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought under Section 6.02(b) or Section 6.02(c), as applicable, (whether or not the Indemnified Person is an actual or potential party to such claim or action) unless such settlement, compromise or consent includes an unconditional release of the Indemnified Person from all liability arising out of such claim, action, suit or proceeding. (e) Indemnification under Section 6.02(b) and Section 6.02(c) shall survive the resignation or removal of the Trustee and the termination of this Agreement and shall include reasonable fees and out-of-pocket expenses of investigation and litigation (including reasonable attorneys' fees and expenses), except as otherwise provided in this Agreement. (f) For purposes of Section 6.02(b) and Section 6.02(c), in the event of the termination of the rights and obligations of Public Service Company of New Hampshire (or any successor thereto pursuant to Section 6.04) as Servicer pursuant to Section 7.01, or a resignation by such Servicer pursuant to this Agreement, such Servicer shall be deemed to be the Servicer pending appointment of a successor Servicer pursuant to Section 7.02. -18- Section 6.03. Limitation on Liability of Servicer and Others. Except as otherwise provided under this Agreement, neither the Servicer nor any of the directors, officers, employees or agents of the Servicer shall be liable to the Issuer or any other Person for any action taken or for refraining from the taking of any action pursuant to this Agreement or for errors in judgment; provided, however, that this provision shall not protect the Servicer or any director, officer, employee or agent of the Servicer against any liability that would otherwise be imposed by reason of willful misconduct or negligence in the performance of duties under this Agreement. The Servicer and any director, officer, employee or agent of the Servicer may rely in good faith on the advice of counsel reasonably acceptable to the Trustee or on any document of any kind, prima facie properly executed and submitted by any Person, respecting any matters arising under this Agreement. Except as provided in this Agreement, the Servicer shall not be under any obligation to appear in, prosecute or defend any legal action relating to the RRB Property. Section 6.04. Merger or Consolidation of, or Assumption of the Obligations of, Servicer. Any Person (a) into which the Servicer may be merged or consolidated, (b) which may result from any merger or consolidation to which the Servicer shall be a party or (c) which may succeed to the properties and assets of the Servicer substantially as a whole, which Person in any of the foregoing cases executes an agreement of assumption to perform every obligation of the Servicer hereunder, shall be the successor to the Servicer under this Agreement without further act on the part of any of the parties to this Agreement; provided, however, that (i) immediately after giving effect to such transaction, no Servicer Default and no event which, after notice or lapse of time, or both, would become a Servicer Default shall have occurred and be continuing, (ii) the Servicer shall have delivered to the Issuer and the Trustee an Officers' Certificate stating that such consolidation, merger or succession and such agreement of assumption comply with this Section and that all conditions precedent provided for in this Agreement relating to such transaction have been complied with, (iii) the Servicer shall have delivered to the Issuer and the Trustee an Opinion of Counsel stating that, in the opinion of such counsel (A) such consolidation, merger or succession and such agreement of assumption comply with this Section and that all conditions precedent provided for in this Agreement relating to such transaction have been complied with and (B) either (1) all filings to be made by the Servicer, including filings with the NHPUC pursuant to the Statute and filings under the applicable Uniform Commercial Code, have been executed and filed that are necessary to preserve and protect fully the interests of the Issuer and the Trustee in the RRB Property and reciting the details of such filings or (2) no such action shall be necessary to preserve and protect such interests and (iv) the Rating Agencies shall have received prior written notice of such transaction. When any Person acquires the properties and assets of the Servicer substantially as a whole and becomes the successor to the Servicer in accordance with the terms of this Section 6.04, then upon satisfaction of all of the other conditions of this Section 6.04, the Servicer shall automatically and without further notice be released from all its obligations hereunder. Section 6.05. Public Service Company of New Hampshire Not to Resign as Servicer. Subject to the provisions of Section 6.04, Public Service Company of New Hampshire shall not resign from the obligations and duties hereby imposed on it as -19- Servicer under this Agreement except upon either (a) a determination that the performance of its duties under this Agreement shall no longer be permissible under applicable law or (b) satisfaction of the following: (i) the Rating Agency Condition shall have been satisfied (except that with respect to Moody's it shall be sufficient to provide ten days prior notice) and (ii) the NHPUC shall have approved such resignation. Notice of any such determination permitting the resignation of Public Service Company of New Hampshire shall be communicated to the Issuer, the Trustee and the Rating Agencies at the earliest practicable time (and, if such communication is not in writing, shall be confirmed in writing at the earliest practicable time) and any such determination that the performance of Public Service Company of New Hampshire's duties under this Agreement shall no longer be permissible under applicable law shall be evidenced by an Opinion of Counsel to such effect delivered by Public Service Company of New Hampshire to the Issuer and the Trustee concurrently with or promptly after such notice. No such resignation shall become effective until a successor Servicer shall have assumed the responsibilities and obligations of Public Service Company of New Hampshire in accordance with Section 7.02. Section 6.06. Servicing Compensation. (a) In consideration for its services hereunder, until the Retirement of the Bonds, the Servicer shall receive an annual fee (the "Servicing Fee") in an amount equal to (i) one-quarter of one percent (0.25%) of the outstanding principal balance of the Bonds for so long as the Servicer is Public Service Company of New Hampshire or any successor Servicer that bills the RRB Charge concurrently with other charges for services or (ii) up to one and one-half percent (1.5%) of the outstanding principal balance of the Bonds for so long as the Servicer is a successor Servicer that bills the RRB Charge separately to customers (which amount shall be determined by a separate agreement between the Issuer and the Servicer). The Servicing Fee shall be payable in quarterly installments on each Payment Date. The Servicer also shall be entitled to retain as additional compensation (i) any interest earnings on RRB Charge Payments received by the Servicer and invested by the Servicer pursuant to Section 6(c) of Annex I hereto prior to remittance to the Collection Account and (ii) all late payment charges, if any, collected from customers or TPSs. (b) The Servicing Fee set forth in Section 6.06(a) and expenses provided for in Section 6.06(c) shall be paid to the Servicer by the Trustee, on each Payment Date in accordance with the priorities set forth in Section 8.02(d) of the Indenture, by wire transfer of immediately available funds from the Collection Account to an account designated by the Servicer. Any portion of the Servicing Fee not paid on such date shall be added to the Servicing Fee payable on the subsequent Payment Date. (c) The Issuer shall pay all expenses incurred by the Servicer in connection with its activities hereunder (including any reasonable fees to and disbursements by accountants, counsel, or any other Person, any taxes imposed on the Servicer (other than taxes based on the Servicer's net income) and any expenses incurred in connection with reports to Bondholders, subject to the priorities set forth in Section 8.02(d) of the Indenture). Section 6.07. Compliance with Applicable Law. The Servicer covenants and agrees, in servicing the RRB Property, to comply in all material respects with all laws -20- applicable to, and binding upon, the Servicer and relating to such RRB Property the noncompliance with which would have a material adverse effect on the value of the RRB Property; provided, however, that the foregoing is not intended to, and shall not, impose any liability on the Servicer for noncompliance with any law that the Servicer is contesting in good faith in accordance with its customary standards and procedures. Section 6.08. Access to Certain Records and Information Regarding RRB Property. The Servicer shall provide to the Bondholders, the Issuer and the Trustee access to the RRB Property Records in such cases where the Bondholders, the Issuer or the Trustee shall be required by applicable law to be provided access to such records. Access shall be afforded without charge, but only upon reasonable request and during normal business hours at the respective offices of the Servicer. Nothing in this Section shall affect the obligation of the Servicer to observe any applicable law (including any NHPUC Regulation) prohibiting disclosure of information regarding the customers, and the failure of the Servicer to provide access to such information as a result of such obligation shall not constitute a breach of this Section. Section 6.09. Appointments. (a) The Servicer may at any time appoint any Person to perform all or any portion of its obligations as Servicer hereunder; provided, however, that the Rating Agency Condition shall have been satisfied in connection therewith (except that with respect to Moody's it shall be sufficient to provide ten days prior notice); and, provided, further, that the Servicer shall remain obligated and be liable under this Agreement for the servicing and administering of the RRB Property in accordance with the provisions hereof without diminution of such obligation and liability by virtue of the appointment of such Person and to the same extent and under the same terms and conditions as if the Servicer alone were servicing and administering the RRB Property; and, provided, further, however, that nothing herein (including the Rating Agency Condition) shall preclude the execution by the Servicer of a TPS Service Agreement with any TPS pursuant to applicable NHPUC Regulations. The fees and expenses of any such Person shall be as agreed between the Servicer and such Person from time to time and none of the Issuer, the Trustee, the Bondholders or any other Person shall have any responsibility therefor or right or claim thereto. Any such appointment shall not constitute a Servicer resignation under Section 6.05. (b) The Servicer has no employees. Therefore, in carrying out the foregoing duties or any of its other obligations under this Agreement, the Servicer may enter into transactions with or otherwise deal with any of its Affiliates to obtain the services of employees of such Affiliates as is its current practice; provided, however, that the terms of any such transactions or dealings shall be no less favorable to the Issuer than would be available from unaffiliated parties or that would be available if the Servicer were to hire its own employees to perform such services. Section 6.10. No Servicer Advances. The Servicer shall not make any advances of interest on or principal of the Bonds. Section 6.11. Maintenance of Operations. The Servicer agrees to continue to operate its distribution system to provide service to its customers so long as it is acting as the Servicer under this Agreement. -21- ARTICLE 7 DEFAULT Section 7.01. Servicer Default. If any one of the following events (each a "Servicer Default") shall occur and be continuing: (a) any failure by the Servicer to remit to the Collection Account on behalf of the Issuer any required Remittance that shall continue unremedied for a period of five (5) Business Days after written notice of such failure is received by the Servicer from the Issuer or the Trustee; or (b) any failure on the part of the Servicer duly to observe or to perform in any material respect any other covenants or agreements of the Servicer set forth in this Agreement, which failure shall (a) materially and adversely affect the rights of the Bondholders and (ii) continue unremedied for a period of 60 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given (A) to the Servicer by the Issuer or (B) to the Servicer by the Trustee or by the Holders of Bonds evidencing not less than 25 percent of the Outstanding Amount of the Bonds; or (c) any representation or warranty made by the Servicer in this Agreement shall prove to have been incorrect in any material respect when made, which has a material adverse effect on the Bondholders and which material adverse effect continues unremedied for a period of 60 days after written notice of such failure is received by the Servicer from the Issuer or the Trustee; or (d) an Insolvency Event occurs with respect to the Servicer; then, and in each and every case, so long as the Servicer Default shall not have been remedied, either the Trustee, or the Holders of Bonds evidencing not less than 25 percent of the Outstanding Amount of the Bonds, by notice then given in writing to the Servicer (and to the Trustee if given by the Bondholders) (a "Termination Notice") may terminate all the rights and obligations (other than the obligations set forth in Section 6.02) of the Servicer under this Agreement. In addition, upon a Servicer Default described in Section 7.01(a), each of the following shall be entitled to apply to the NHPUC for sequestration and payment of revenues arising with respect to the RRB Property in accordance with RSA 369-B:7, VI and VIII: (1) the Bondholders or the Trustee; (2) the Issuer or its assignees; or (3) pledgees or transferees of the RRB Property. On or after the receipt by the Servicer of a Termination Notice, and subject to the approval of the NHPUC, all authority and power of the Servicer under this Agreement, whether with respect to the Bonds, the RRB Property, the RRB Charge or otherwise, shall, without further action, pass to and be vested in such successor Servicer as may be appointed under Section 7.02; and, without limitation, the Trustee is hereby authorized and empowered to execute and deliver, on behalf of the predecessor Servicer, as attorney-in-fact or otherwise, any and all documents and other instruments, and to do or accomplish all other acts or things necessary or appropriate to effect the purposes of such Termination Notice, whether to complete the transfer of the RRB Property Records and related documents, or otherwise. The predecessor Servicer shall cooperate with the successor Servicer, the Issuer and the Trustee in effecting the termination of the responsibilities and rights of the predecessor Servicer under this Agreement, including the transfer to the successor Servicer for administration by it of all cash amounts that shall at the time be held by the predecessor Servicer for remittance, or shall thereafter be received by it with respect to the RRB -22- Property or the RRB Charge. In case a successor Servicer is appointed as a result of a Servicer Default, all reasonable costs and expenses (including reasonable attorneys' fees and expenses) incurred in connection with transferring the RRB Property Records to the successor Servicer and amending this Agreement to reflect such succession as Servicer pursuant to this Section shall be paid by the predecessor Servicer upon presentation of reasonable documentation of such costs and expenses. All other reasonable costs and expenses incurred in transferring servicing responsibilities to a successor servicer shall constitute Operating Expenses of the Issuer. Section 7.02. Appointment of Successor. (a) Upon the Servicer's receipt of a Termination Notice pursuant to Section 7.01 or the Servicer's resignation or removal in accordance with the terms of this Agreement, the predecessor Servicer shall continue to perform its functions as Servicer under this Agreement, and shall be entitled to receive the requisite portion of the Servicing Fee and reimbursement of expenses as provided herein, until a successor Servicer shall have assumed in writing the obligations of the Servicer hereunder as described below. In the event of the Servicer's termination hereunder, the Issuer shall appoint, subject to the approval of the NHPUC, a successor Servicer with the Trustee's prior written consent thereto (which consent shall not be unreasonably withheld), and the successor Servicer shall accept its appointment by a written assumption in form reasonably acceptable to the Issuer and the Trustee. If within 30 days after the delivery of the Termination Notice, the Issuer shall not have obtained such a new Servicer, the Trustee may appoint (subject to the approval of the NHPUC) or petition the NHPUC or a court of competent jurisdiction to appoint a successor Servicer under this Agreement. A Person shall qualify as a successor Servicer only if (i) such Person is permitted under NHPUC Regulations to perform the duties of the Servicer, (ii) the Rating Agency Condition shall have been satisfied and (iii) such Person assumes in writing the obligations of the Servicer hereunder or enters into a servicing agreement with the Issuer having substantially the same provisions as this Agreement. (b) Upon appointment, the successor Servicer shall be the successor in all respects to the predecessor Servicer and shall be subject to all the responsibilities, duties and liabilities arising thereafter relating thereto placed on the predecessor Servicer and shall be entitled to the Servicing Fee and all the rights granted to the predecessor Servicer by the terms and provisions of this Agreement. Section 7.03. Waiver of Past Defaults. The Holders of Bonds evidencing not less than a majority of the Outstanding Amount of the Bonds may, on behalf of all Bondholders, waive in writing any default by the Servicer in the performance of its obligations hereunder and its consequences, except a default in making any required Remittances to the Collection Account in accordance with this Agreement. Upon any such waiver of a past default, such default shall cease to exist, and any Servicer Default arising therefrom shall be deemed to have been remedied for every purpose of this Agreement. No such waiver shall extend to any subsequent or other default or impair any right consequent thereto. Section 7.04. Notice of Servicer Default. The Servicer shall deliver to the Issuer, the Trustee and the Rating Agencies, promptly after any of its Responsible Officers having obtained actual knowledge thereof, but in no event later than five -23- Business Days thereafter, written notice in an Officers' Certificate of any event which with the giving of notice or lapse of time, or both, would become a Servicer Default under Section 7.01(a) or Section 7.01(b). ARTICLE 8 MISCELLANEOUS PROVISIONS Section 8.01. Amendment. (a) This Agreement may be amended in writing by the Servicer and the Issuer with ten Business Days' prior written notice given to the Rating Agencies and the prior written consent of the Trustee (which consent shall not be unreasonably withheld), but without the consent of any of the Bondholders, to cure any ambiguity, to correct or supplement any provisions in this Agreement or for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions in this Agreement or of modifying in any manner the rights of the Bondholders; provided, however, that such action shall not, as evidenced by an Officer's Certificate delivered to the Issuer and the Trustee, adversely affect in any material respect the interests of any Bondholder. (b) This Agreement may also be amended in writing from time to time by the Servicer and the Issuer with ten Business Days' prior written notice given to the Rating Agencies and the prior written consent of the Trustee (which consent shall not be unreasonably withheld) and the prior written consent of the Holders of Bonds evidencing not less than a majority of the Outstanding Amount of the Bonds, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of modifying in any manner the rights of the Bondholders; provided, however, that any amendment of the provisions of Section 4.01 or Section 4.03 shall satisfy the Rating Agency Condition. (c) If the written consent of Bondholders is required in connection with an amendment hereof, approval by Bondholders of the substance of any proposed amendment or consent shall constitute sufficient consent of the Bondholders pursuant to this Section, and it shall not be necessary that Bondholders approve of the particular form of any amendment or consent. (d) Promptly after the execution thereof, the Issuer shall provide each of the Rating Agencies with a copy of any amendment to this Agreement. (e) Prior to its consent to any amendment to this Agreement, the Trustee shall be entitled to receive and conclusively rely upon an Opinion of Counsel stating that such amendment is authorized or permitted by this Agreement. The Trustee may, but shall not be obligated to, enter into any such amendment which affects the Trustee's own rights, duties or immunities under this Agreement or otherwise. Section 8.02. Maintenance of Accounts and Records. (a) The Servicer shall maintain accounts and records as to the RRB Property accurately and in accordance with its standard accounting procedures. (b) The Servicer shall permit the Issuer and the Trustee and its agents at any time during normal business hours, upon reasonable notice to the Servicer and to the extent it does not unreasonably interfere with the Servicer's normal operations, to inspect, audit and make copies of and abstracts from the Servicer's records regarding the RRB Property and the RRB Charge. Nothing in this Section 8.02(b) shall affect the -24- obligation of the Servicer to observe any applicable law (including any NHPUC Regulation) prohibiting disclosure of information regarding the customers, and the failure of the Servicer to provide access to such information as a result of such obligation shall not constitute a breach of this Section 8.02(b). Section 8.03. Notices. Unless otherwise specifically provided herein, all notices, directions, consents and waivers required under the terms and provisions of this Agreement shall be in English and in writing, and any such notice, direction, consent or waiver may be given by United States mail, courier service, facsimile transmission or electronic mail (confirmed by telephone, United States mail or courier service in the case of notice by facsimile transmission or electronic mail) or any other customary means of communication, and any such notice, direction, consent or waiver shall be effective when delivered, or if mailed, three days after deposit in the United States mail with proper postage for ordinary mail prepaid: (a) if to the Servicer, to Public Service Company of New Hampshire if prior to April 1, 2002: 1000 Elm Street Manchester, NH 03101 if on or after April 1, 2002: 780 North Commercial Street Manchester, NH 03101 Facsimile: (860) 665-5457 Telephone: (860) 665-3258 E-Mail: shoopra@nu.com (email) with a copy to: Public Service Company of New Hampshire c/o Northeast Utilities Service Company if by U.S. Mail: P.O. Box 270 Hartford, CT 06141-0270 if by courier: 107 Selden Street Berlin, CT 06037 -25- Attention: Assistant Treasurer - Finance Facsimile: (860) 665-5457 Telephone: (860) 665-3258 E-Mail: shoopra@nu.com (b) if to the Issuer, to PSNH Funding LLC 2 c/o Public Service Company of New Hampshire if prior to April 1, 2002: 1000 Elm Street Manchester, NH 03101 if on or after April 1, 2002: 780 North Commercial Street Manchester, NH 03101 Facsimile: (860) 665-5457 Telephone: (860) 665-3258 E-Mail: shoopra@nu.com (email) with a copy to: Public Service Company of New Hampshire c/o Northeast Utilities Service Company if by U.S. Mail: P.O. Box 270 Hartford, CT 06141-0270 if by courier: 107 Selden Street Berlin, CT 06037 Attention: Assistant Treasurer - Finance Facsimile: (860) 665-5457 Telephone: (860) 665-3258 E-Mail: shoopra@nu.com (c) if to the Trustee, to The Bank of New York 5 Penn Plaza 16th Floor -26- New York, New York 10001 Attention: ABS Unit Facsimile: (212) 328-7623 Telephone: (212) 328-7549 (d) if to Moody's, to Moody's Investors Service, Inc. 99 Church Street New York, NY 10007 Attention: ABS Monitoring Department Facsimile: (212) 553-0573 Telephone: (212) 553-3686 (e) if to S&P, to Standard & Poor's 55 Water Street, 41st Floor New York, NY 10041 Attention: Asset Backed Surveillance Department Facsimile: (212) 438-2664 Telephone: (212) 438-2000 (f) if to Fitch, to Fitch, Inc. One State Street Plaza New York, NY 10004 Attention: ABS Surveillance Facsimile: (212) 514-9879 Telephone: (212) 908-0500 E-mail: surv@fitchratings.com (g) as to each of the foregoing, at such other address as shall be designated by written notice to the other parties. Section 8.04. Assignment. Notwithstanding anything to the contrary contained herein, except as provided in Section 6.04 and as provided in the provisions of this Agreement concerning the resignation of the Servicer, this Agreement may not be assigned by the Servicer. Section 8.05. Limitations on Rights of Third Parties. The provisions of this Agreement are solely for the benefit of the Servicer, the Issuer, the Bondholders, the Trustee, the State of New Hampshire, the Treasurer of the State of New Hampshire, agencies of the State of New Hampshire and the other Persons expressly referred to herein and such Persons shall have the right to enforce the relevant provisions of this Agreement, except that the Bondholders shall be entitled to enforce their rights against the Servicer under this Agreement solely through a cause of action brought for their benefit by the Trustee. Nothing in this Agreement, whether express or implied, shall be construed to give to any other Person any legal or equitable right, remedy or claim in the -27- RRB Property or under or in respect of this Agreement or any covenants, conditions or provisions contained herein. Section 8.06. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Section 8.07. Separate Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. Section 8.08. Headings. The headings of the various Articles and Sections herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Section 8.09. Governing Law. This Agreement shall be construed in accordance with the substantive laws of the State of New Hampshire, without giving effect to its conflict of law or other principles that would cause the application of the laws of another jurisdiction, and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws. Section 8.10. Assignment to Trustee. The Servicer hereby acknowledges and consents to the collateral assignment or pledge of, or grant of a security interest in, any or all of the Issuer's rights and obligations hereunder to the Trustee for the benefit of the holders of the Bonds. Section 8.11. Nonpetition Covenants. Notwithstanding any prior termination of this Agreement or the Indenture, but subject to the NHPUC's right to order the sequestration and payment of revenues arising with respect to the RRB Property notwithstanding any bankruptcy, reorganization or other insolvency proceedings with respect to the debtor, pledgor or transferor of the RRB Property pursuant to RSA 369-B:7, VI and RSA 369-B:7, VIII, the Servicer shall not, prior to the date which is one year and one day after the termination of the Indenture with respect to the Issuer, petition or otherwise invoke or cause the Issuer to invoke the process of any court or governmental authority for the purpose of commencing or sustaining a case against the Issuer under any federal or state bankruptcy, insolvency or similar law or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Issuer or any substantial part of the property of the Issuer, or ordering the winding up or liquidation of the affairs of the Issuer. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -28- IN WITNESS WHEREOF, the parties hereto have caused this Servicing Agreement to be duly executed by their respective officers as of the day and year first above written. PSNH FUNDING LLC 2, Issuer By: /s/ Randy A. Shoop ------------------------------------ Name: Randy A. Shoop Title: President PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE, Servicer By: /s/ Randy A. Shoop ------------------------------------ Name: Randy A. Shoop Title: Assistant Treasurer - Finance -S-29- EXHIBIT A CERTIFICATE OF COMPLIANCE The undersigned hereby certifies that he/she is the duly elected and acting [________] of Public Service Company of New Hampshire, as servicer (the "Servicer") under the Servicing Agreement, dated as of January 30, 2002 (the "Servicing Agreement"), between the Servicer and PSNH Funding LLC 2 (the "Issuer"), and further certifies on behalf of the Servicer that: 1. A review of the activities of the Servicer and of its performance under the Servicing Agreement during the __________ months ended December 31, 20[_] has been made under the supervision of the undersigned pursuant to Section 3.03 of the Servicing Agreement; and 2. To the undersigned's knowledge, based on such review, the Servicer has fulfilled all of its material obligations in all material respects under the Servicing Agreement throughout the __________ months ended December 31, 20[_], except as listed on Annex A hereto. Executed as of this _______ day of ___________, 20__ . PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE, Servicer By: ----------------------------------- Name: Title: -30- ANNEX A TO EXHIBIT A LIST OF SERVICER DEFAULTS
Nature of Default Status
-A-31- EXHIBIT B FORM OF ROUTINE TRUE-UP LETTER [Date] [Name] New Hampshire Public Utilities Commission 8 Old Suncook Road Concord, NH 03301 RE: ORDER NO. 23,859 ("FINANCE ORDER"), DOCKET NO. DE 01-089 PERIODIC RRB CHARGE TRUE-UP MECHANISM ADVICE FILING Dear [name]: Pursuant to Order No. 23,859 issued on December 6, 2001 in Docket No. DE 01-089 (the "Finance Order"), Public Service Company of New Hampshire ("PSNH"), as servicer of the Rate Reduction Bonds ("RRBs") and on behalf of the RRB trustee as assignee of PSNH Funding LLC 2 (the special purpose entity, or "the SPE"), shall apply for adjustment to the RRB Charge semiannually and at such additional intervals, if necessary, as may be provided for in the Finance Order. Any capitalized terms not defined herein shall have the meanings ascribed thereto in the Finance Order. PURPOSE This filing establishes the revised RRB Charge to be assessed and collected from retail users of PSNH's distribution system within PSNH's service territory, whether or not energy is purchased from PSNH or third party supplier, and whether or not such distribution system is being operated by PSNH or a successor distribution company. The RRB Charge is a usage-based component of the stranded cost recovery charge on each retail user's monthly bill until the Total RRB Payment Requirements are discharged in full. In the Finance Order, the Commission authorized PSNH to file Routine True-Up Letters semi-annually and at such additional intervals, if necessary, as may be provided for in the Finance Order. The purpose of such filings and resulting adjusted RRB Charges is to ensure the timely recovery of revenues sufficient to provide for the payment of an amount equal to the sum of the Periodic RRB Payment Requirements for the upcoming period, which may include indemnity obligations of the SPE in the RRB transaction documents for SPE officers and directors, trustee fees and other liabilities of the SPE. Using the methodology approved by the Commission in the Finance Order, this filing modifies the variables used in the RRB Charge calculation and provides the resulting modified RRB Charge. Table 1 shows the revised assumptions for each of the variables used in calculating the RRB Charge for customers. The assumptions underlying the current RRB Charges were filed in an Issuance Advice Letter, dated January 25, 2002. Table I below shows the current assumptions for each of the variables used in the RRB Charge calculation. -B-32- Table 1 below shows the current assumptions for each of the variables used in the RRB Charge calculation. TABLE 1 INPUT VALUES FOR RRB CHARGE FORECASTED USAGE (kWh) Percent of billed amounts expected to be charged-off: ________ Weighted average days sales outstanding: _____ COLLECTIONS CURVE
RESIDENTIAL COMMERCIAL INDUSTRIAL OTHER ----------- ---------- ---------- ----- 1m 2m 3m 4m
Forecasted ongoing interest and transaction expenses (including any already accrued but unpaid for the period): _____ Current Interest Reserve Subaccount balance: ______ Scheduled Interest Reserve Subaccount balance at the end of the period: ______ Current Overcollateralization Subaccount balance: ______ Scheduled Overcollateralization Subaccount balance at the end of the period: ______ Current Capital Subaccount balance: ______ Initial Capital Subaccount balance: ______ Current RRB outstanding balance: _____ -B-33- Scheduled RRB outstanding balance at the end of the period: ______ Current Reserve Subaccount balance: ______ THE ADJUSTED RRB CHARGE CALCULATED FOR RETAIL USERS IS AS FOLLOWS: _____(CENT)/kWh EFFECTIVE DATE In accordance with the Finance Order, Routine True-Up Letters for semiannual RRB Charge adjustments shall be filed not later than 30 days prior to April 25 and October 25 in each year, with the resulting upward or downward adjustments to the RRB Charge to be effective - absent manifest error in the Routine True-Up Letters - on the ensuing May 1 or November 1, as applicable. In accordance with the Finance Order, Routine True-Up Letters may also be filed as frequently as monthly, with the resulting upward or downward adjustments to the RRB Charge to be effective - absent manifest error in the Routine True-Up Letters - immediately upon the filing of the on the Routine True-Up Letters. No approval by the Commission is required. Therefore, these RRB Charges shall be effective as of ___________. NOTICE Copies of this filing are being furnished to the parties on the attached service list. Notice to the public is hereby given by filing and PSNH will keep this filing open for public inspection at PSNH's corporate headquarters, [1000 Elm Street, Manchester (prior to April 1, 2002)][780 North Commercial Street, Manchester (on or after April 1, 2002)]. -B-34- EXHIBIT C FORM OF MONTHLY SERVICER CERTIFICATE Pursuant to Section 4.01(d)(2) of the Servicing Agreement, dated as of January 30, 2002 (the "Agreement"), between Public Service Company of New Hampshire, as servicer (the "Servicer"), and PSNH Funding LLC 2, the Servicer does hereby certify as follows: Capitalized terms used herein have their respective meanings as set forth in the Agreement. For the Monthly Period:_____________ 1. BILLINGS: a) Monthly kWh Consumption: b) Applicable RRB Charge: c) Total RRB Charge Amount Billed this Month: d) Cumulative RRB Charge Amount Billed this Remittance Period: 2. REMITTANCES: a) Total Amount Remitted this Month: b) Cumulative Amount Remitted this Remittance Period: c) "RRB %" (calculated in accordance with Annex II to the Agreement) for this Remittance Period: 3. DRAWS ON SUBACCOUNTS: a) Reserve Subaccount Draw Amount this Month: b) Cumulative Reserve Subaccount Draw Amount this Remittance Period (net of funding): c) Overcollateralization Subaccount Draw Amount this Month: d) Cumulative Overcollateralization Subaccount Draw Amount this Remittance Period (net of funding): e) Capital Subaccount Draw Amount this Month: f) Cumulative Capital Subaccount Draw Amount this Remittance Period (net of funding): g) Interest Reserve Subaccount Draw Amount this Month: h) Cumulative Interest Reserve Subaccount Draw Amount this Remittance Period (net of funding): -C-35- Executed as of this _____________ day of ___________. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE, Servicer By: ------------------------------------ Name: Title: -C-36- EXHIBIT D FORM OF QUARTERLY SERVICER CERTIFICATE Pursuant to Section 4.01(d)(3) of the Servicing Agreement, dated as of January 30, 2002 (the "Agreement"), between Public Service Company of New Hampshire, as servicer (the "Servicer"), and PSNH Funding LLC 2, the Servicer does hereby certify, for the current Payment Date (__________, __ 20[ ]) (the "Current Payment Date"), as follows: Capitalized terms used herein have their respective meanings as set forth in the Agreement. References herein to certain sections and subsections are references to the respective sections of the Agreement. 1. RRB CHARGE COLLECTIONS AND AGGREGATE AMOUNTS AVAILABLE FOR THE CURRENT PAYMENT DATE: i. Amount Remitted [Month] [Year] ii. Amount Remitted [Month] [Year] iii. Amount Remitted [Month] [Year] iv. Amount Remitted [Month] [Year] v. Amount Remitted [Month] [Year] vi. Amount Remitted [Month] [Year] vii. Amount Remitted [Month] [Year] viii. Amount Remitted [Month] [Year] ix. TOTAL AMOUNT REMITTED FOR THIS PERIOD (SUM OF i. THROUGH viii. ABOVE): x. Net Earnings on Collection Account: xi. Expenses Paid to Date: xii. GENERAL SUBACCOUNT BALANCE (SUM OF ix. AND x. ABOVE MINUS xi.): xiii. Reserve Subaccount Balance xiv. Overcollateralization Subaccount Balance xv. Capital Subaccount Balance xvi. Interest Reserve Subaccount Balance xvii. COLLECTION ACCOUNT BALANCE (SUM OF xii. THROUGH xvi. ABOVE): 2. OUTSTANDING PRINCIPAL BALANCE AS OF PRIOR PAYMENT DATE BY TRANCHE: i. Class A-1 Principal Balance Outstanding Bond: ii. TOTAL BOND PRINCIPAL BALANCE: 3. REQUIRED FUNDING/PAYMENTS AS OF CURRENT PAYMENT DATE a) PROJECTED PRINCIPAL BALANCES AND PAYMENTS -D-37-
Projected Quarterly Principal Balance Principal Due ----------------- ------------- i. Class A-1 Bond iv. TOTAL PROJECTED PRINCIPAL AMOUNT:
b) REQUIRED INTEREST PAYMENTS
Bond Days in Interest Interest Rate Applicable Period Due ------------- ----------------- -------- i. Class A-1 Bond ii. TOTAL REQUIRED INTEREST AMOUNT:
c) PROJECTED SUBACCOUNT PAYMENTS AND LEVELS
Subaccount Projected Level Funding Required ---------- --------------- ---------------- i. Interest Reserve Subaccount: ii. Capital Subaccount: iii. Overcollateralization Subaccount: iv. TOTAL SUBACCOUNT PAYMENTS AND LEVELS:
4. ALLOCATION OF REMITTANCES AS OF CURRENT PAYMENT DATE PURSUANT TO SECTION 8.02(d) OF INDENTURE: a) QUARTERLY EXPENSES Net Expense Amount (Payable on Current Payment Date) i. Trustee Fees and Expenses: ii. Quarterly Servicing Fee: iii. Quarterly Administration Fee: iv. Operating Expenses (subject to $100,000 cap): v. TOTAL EXPENSES: b) QUARTERLY INTEREST -D-38-
Per $1000 of Aggregate Original Principal Amount ------------ ---------------- i. Class A-1 Bond ii. TOTAL QUARTERLY INTEREST:
c) QUARTERLY PRINCIPAL
Per $1000 of Aggregate Original Principal Amount ------------ ---------------- i. Class A-1 Bond ii. TOTAL QUARTERLY PRINCIPAL:
d) OTHER PAYMENTS i. Operating Expenses (in excess of $100,000): ii. Funding of Interest Reserve Subaccount (to required level): iii. Funding of Capital Subaccount (to required amount): iv. Funding of Overcollateralization Subaccount (to required level): v. Deposits to Reserve Subaccount: vi. Interest earnings on Capital Subaccount Released to Issuer: e) AGGREGATE PAYMENTS PURSUANT TO SECTION 8.02(D)(I) OF INDENTURE i. To Trustee: ii. To other Persons indemnified under Indenture or Fee and Indemnity Agreement: 5. OUTSTANDING PRINCIPAL BALANCE AND COLLECTION ACCOUNT BALANCE AS OF CURRENT PAYMENT DATE (AFTER GIVING EFFECT TO PAYMENTS TO BE MADE ON SUCH DISTRIBUTION DATE): a) PRINCIPAL BALANCE OUTSTANDING: i. Class A-1 Principal Balance Outstanding Bond: ii. TOTAL BOND PRINCIPAL BALANCE: b) COLLECTION ACCOUNT BALANCES OUTSTANDING: i. Interest Reserve Subaccount: -D-39- ii. Capital Subaccount: iii. Overcollateralization Subaccount: iv. Reserve Subaccount: v. TOTAL SUBACCOUNT AMOUNT: 6. SUBACCOUNT DRAWS AS OF CURRENT PAYMENT DATE (IF APPLICABLE, PURSUANT TO SECTION 8.02(e) OF INDENTURE): i. Interest Reserve Subaccount: ii. Capital Subaccount: iii. Overcollateralization Subaccount: iv. Reserve Subaccount: v. TOTAL SUBACCOUNT DRAWS: 7. SHORTFALLS IN INTEREST AND PRINCIPAL PAYMENTS AS OF CURRENT PAYMENT DATE (IF APPLICABLE): a) QUARTERLY INTEREST SHORTFALL i. Class A-1 Bond ii. TOTAL QUARTERLY INTEREST SHORTFALL: b) QUARTERLY PRINCIPAL SHORTFALL i. Class A-1 Bond ii. TOTAL QUARTERLY PRINCIPAL SHORTFALL: 8. SHORTFALLS IN REQUIRED SUBACCOUNT LEVELS AS OF CURRENT DISTRIBUTION DATE: i. Interest Reserve Subaccount ii. Capital Subaccount iii. Overcollateralization Subaccount: iv. TOTAL SUBACCOUNT SHORTFALLS: IN WITNESS WHEREOF, the undersigned has duly executed and delivered this Quarterly Servicer Certificate this ___ day of ____, ____. -D-40- PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE, Servicer By: ------------------------------------ Name: Title: -D-41- SCHEDULE 4.01(a) EXPECTED AMORTIZATION SCHEDULE
PAYMENT OUTSTANDING DATE PRINCIPAL BALANCE ------- ----------------- Closing Date 50,000,000 8/1/2002 48,167,365 11/1/2002 46,660,745 2/1/2003 45,081,055 5/1/2003 43,222,109 8/1/2003 41,374,844 11/1/2003 39,212,967 2/1/2004 37,236,774 5/1/2004 35,084,506 8/1/2004 33,090,920 11/1/2004 30,833,175 2/1/2005 28,766,948 5/1/2005 26,455,318 8/1/2005 24,327,636 11/1/2005 21,947,169 2/1/2006 19,715,789 5/1/2006 17,304,850 8/1/2006 15,046,446 11/1/2006 12,524,367 2/1/2007 10,145,714 5/1/2007 7,601,610 8/1/2007 5,200,896 11/1/2007 2,532,344 2/1/2008 --
-Schedule 4.01(a)-42- ANNEX I SERVICING PROCEDURES The Servicer agrees to comply with the following servicing procedures: SECTION 1. DEFINITIONS (a) Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Agreement. (b) Whenever used in this Annex I, the following words and phrases shall have the following meanings: "Billed RRB Charges" means the dollar amounts billed to customers or the Applicable TPS in respect of the RRB Charge, whether billed to customers or the Applicable TPS by the Servicer or to customers by a TPS pursuant to a TPS Service Agreement. "Servicer Policies and Practices" means, with respect to the Servicer's duties under this Annex I, the policies and practices of the Servicer applicable to such duties that the Servicer follows with respect to comparable assets that it services for itself or others, as in effect from time to time and in accordance with NHPUC Regulations. The Servicer shall provide ten days' prior written notice to the Rating Agencies of any amendment to the Servicer Policies and Practices that would adversely affect in any material respect the Bondholders. SECTION 2. DATA ACQUISITION (a) Installation and Maintenance of Meters. Except to the extent that a TPS is responsible for such services pursuant to a TPS Service Agreement, the Servicer shall cause to be installed, replaced and maintained meters in accordance with the Servicer Policies and Practices. (b) Meter Reading. In accordance with the Servicer Policies and Practices, the Servicer shall obtain usage measurements for each customer; provided, however, that the Servicer may determine any customer's usage on the basis of estimates in accordance with applicable NHPUC Regulations; and, provided, further, that the Servicer may obtain usage measurements from the Applicable TPS for customers receiving meter reading services from such TPS if the applicable TPS Service Agreement so provides. (c) Cost of Metering. The Issuer shall not be obligated to pay any costs associated with the metering duties set forth in this Section 2, including the costs of installing, replacing and maintaining meters, nor shall the Issuer be entitled to any credit against the Servicing Fee for any cost savings realized by the Servicer or any TPS as a -Schedule 4.01(a)-43- result of new metering and/or billing technologies. SECTION 3. USAGE AND BILL CALCULATION The Servicer shall obtain a calculation of each customer's usage (which may be based on data obtained from such customer's meter read or on usage estimates determined in accordance with applicable NHPUC Regulations) in accordance with the Servicer Policies and Practices and shall determine therefrom Billed RRB Charges; provided, however, that in the case of customers served by a TPS pursuant to a TPS Service Agreement, the Servicer may obtain usage measurements from the Applicable TPS for customers receiving meter reading services from such TPS if the applicable TPS Service Agreement so provides and shall determine therefrom Billed RRB Charges. SECTION 4. BILLING (a) The Servicer shall implement the RRB Charge as of the Closing Date and shall thereafter bill each customer or the Applicable TPS for each customer's Billed RRB Charges in accordance with the provisions of this Section 4. (b) Frequency of Bills; Billing Practices. In accordance with the Servicer Policies and Practices, the Servicer shall generate and issue a Bill to each customer, or, in the case of a customer who is being billed by a TPS, to the Applicable TPS with respect to such customer's Billed RRB Charges. In the event that the Servicer makes any material modification to the Servicer Policies and Practices, it shall notify the Issuer, the Trustee and the Rating Agencies as soon as practicable, and in no event later than 60 Servicer Business Days after such modification goes into effect; provided, however, that the Servicer may not make any modification that will materially adversely affect the Bondholders. (c) Format. (i) Each Bill to a customer shall contain a stranded cost recovery charge that shall include the RRB Charge owed by such customer for the applicable billing period. (ii) Each Bill in which the stranded cost recovery charge is listed as a line item shall contain a statement (as a footnote) to the effect that all or a portion of the stranded cost recovery charge is owned by the Issuer and not the Seller. (iii) The Servicer shall conform to such requirements in respect of the format, structure and text of Bills delivered to customers and TPSs as applicable NHPUC Regulations shall from time to time prescribe. To the extent that Bill format, structure and text are not prescribed by applicable law or by applicable NHPUC Regulations, the Servicer shall, subject to clauses (i) and (ii) of this subsection (c), determine the format, structure and text of all Bills in accordance with its reasonable business judgment, the -Annex I-44- Servicer Policies and Practices and historical practice. (d) Delivery. Except as provided in the next sentence, the Servicer shall deliver all Bills to customers (i) by United States mail in such class or classes as are consistent with the Servicer Policies and Practices or (ii) by any other means, whether electronic or otherwise, that the Servicer may from time to time use in accordance with the Servicer Policies and Practices. In the case of customers that have elected to be billed by a TPS, the Servicer shall deliver all Bills to the Applicable TPSs by such means as are mutually agreed upon by the Servicer and the Applicable TPS in the TPS Service Agreement and which are consistent with NHPUC Regulations. The Servicer or a TPS, as applicable, shall pay from its own funds all costs of issuance and delivery of all Bills that it renders, including printing and postage costs as the same may increase or decrease from time to time. SECTION 5. CUSTOMER SERVICE FUNCTIONS The Servicer or a TPS to the extent provided in the applicable TPS Service Agreement shall handle all customer inquiries and other customer service matters according to the Servicer Policies and Practices. SECTION 6. COLLECTIONS; PAYMENT PROCESSING; REMITTANCE (a) Collection Efforts, Policies, Procedures. (i) The Servicer shall collect Billed RRB Charges from customers and TPSs as and when the same become due in accordance with such collection procedures as it follows with respect to comparable assets that it services for itself or others, including the following: (A) The Servicer shall prepare and deliver overdue notices to customers and TPSs in accordance with applicable NHPUC Regulations and the Servicer Policies and Practices. (B) The Servicer shall deliver past-due and shut-off notices in accordance with applicable NHPUC Regulations and the Servicer Policies and Practices. (C) The Servicer shall adhere to and carry out disconnection policies and termination of billing by a TPS pursuant to a TPS Service Agreement in accordance with RSA 369-B:4, IV, the Finance Order, applicable NHPUC Regulations and the Servicer Policies and Practices. (D) The Servicer may employ the assistance of collection agents in accordance with applicable NHPUC Regulations and the Servicer Policies and Practices. (E) The Servicer shall apply customer and TPS deposits to the payment of delinquent accounts in accordance with applicable NHPUC Regulations and -Annex I-45- the Servicer Polices and Practices. (ii) The Servicer shall not waive any late payment charge or any other fee or charge relating to delinquent payments, if any, or waive, vary or modify any terms of payment of any amounts payable by a customer, in each case unless such waiver or action: (A) would be in accordance with the Servicer Policies and Practices, (B) would not materially adversely affect the Bondholders, and (C) would comply in all material respects with applicable law. (iii) The Servicer shall accept payment from customers in respect of Billed RRB Charges in such forms and methods and at such times and places in accordance with the Servicer Policies and Practices. The Servicer shall accept payment from TPSs in respect of Billed RRB Charges in such forms and methods and at such times and places as the Servicer and each TPS shall mutually agree in accordance with the applicable TPS Service Agreement and applicable NHPUC Regulations. (b) Payment Processing, Allocation, Priority of Payments. The Servicer shall post all payments received to customer or TPS accounts as promptly as practicable, and, in any event, substantially all payments shall be posted no later than one Servicer Business Day after receipt. (c) Investment of RRB Charge Payments Received. Prior to remittance on the applicable Remittance Date, the Servicer may invest RRB Charge Payments at its own risk and for its own benefit, and such investments and funds shall not be required to be segregated from the other investments and funds of the Servicer. The Servicer shall be entitled to retain as additional compensation any interest earnings on RRB Charge Payments invested by it. (d) Calculation of RRB Charge Payments; Remittances. In accordance with Section 4.03(a) of the Agreement, the Servicer shall remit to the Trustee for deposit in the Collection Account an amount equal to the RRB Charge Payments calculated in accordance with the methodology described in Annex II attached to the Agreement. (e) Remittances. (i) The Issuer shall cause to be established the Collection Account in the name of the Trustee in accordance with Section 8.02 of the Indenture. (ii) The Servicer shall make or cause to be made Remittances to the Collection Account in accordance with Section 4.03 of the Agreement. (iii) Any change of account or change of institution affecting the Collection Account shall not take effect until the Issuer has provided at least fifteen (15) Servicer Business Days written notice thereof to the Servicer. SECTION 7. TPSs -Annex I-46- In the event a TPS performs services pursuant to a TPS Service Agreement, the Servicer shall comply with the procedures set forth in Schedule A to this Annex I. -Annex I-47- SCHEDULE A TO ANNEX I Additional Servicing Procedures Applicable to TPSs 1. Establishing TPS Relationship In addition to any actions required by the NHPUC or by applicable law, for each TPS that is responsible for collecting Billed RRB Charges, the Servicer shall take the following steps: (a) Maintain adequate records of the payment arrangement applicable to such TPS; (b) Maintain copies of all customer requests to convert to billing by a TPS; (c) Verify with the NHPUC that each TPS is licensed to supply electricity in New Hampshire; (d) Obtain information from the TPS including, but not limited to: name, contact, address, telephone facsimile transmission number and internet address; (e) Maintain and update records of customers to permit prompt reversion to dual-billing; (f) Maintain estimates of one month's maximum RRB Charge Payments for each TPS required to post a bond, letter of credit or cash deposit pursuant to the applicable TPS Service Agreement; and (g) Comply with credit conditions set out in the Finance Order and applicable TPS Service Agreement. 2. Monitoring TPS Obligations (a) The Servicer shall require each TPS to pay all undisputed and all disputed Billed RRB Charges or make a financial arrangement for such payment according to the applicable TPS Service Agreement; and (b) For all TPSs subject to any remittance option where such TPS is liable for all amounts billed in respect of customers served thereby regardless of the amounts received therefrom, the Servicer shall monitor payment compliance and take all actions permitted by the NHPUC and the Finance Order in the event of a default in payment. 3. Enforcing TPS Obligations The Servicer shall promptly take all actions specified by the Finance Order with respect to amounts not remitted to the Servicer in accordance with the payment terms specified by the Finance Order, in addition to any other remedies available at law. -Annex I-48- ANNEX II REMITTANCE METHODOLOGY -Annex II-49- EX-10.61 31 y58564z.txt Exhibit 10.61 TRANSITION PROPERTY PURCHASE AND SALE AGREEMENT between WMECO FUNDING LLC Note Issuer and WESTERN MASSACHUSETTS ELECTRIC COMPANY Seller Dated as of May 17, 2001 This TRANSITION PROPERTY PURCHASE AND SALE AGREEMENT, dated as of May 17, 2001, is between WMECO Funding LLC, a Delaware limited liability company (the "Note Issuer"), and Western Massachusetts Electric Company, a Massachusetts corporation (together with its successors in interest to the extent permitted hereunder, the "Seller"). RECITALS WHEREAS, the Note Issuer desires to purchase the Transition Property (as defined herein) created pursuant to the Statute and the Financing Order (each as defined herein); and WHEREAS, the Seller is willing to sell the Transition Property to the Note Issuer. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS Section 1.01. Definitions. Whenever used in this Agreement, the following words and phrases shall have the following meanings: "Administration Agreement" means the Administration Agreement dated as of May 17, 2001 between Western Massachusetts Electric Company, as Administrator, and the Note Issuer, as amended and supplemented from time to time. "Agencies" means, collectively, the Massachusetts Development Finance Agency and the Massachusetts Health and Educational Facilities Authority. "Agreement" means this Transition Property Purchase and Sale Agreement, as amended and supplemented from time to time. "Authorized Officer" means an officer of the Seller listed on the list of Authorized Officers delivered by the Seller to the Note Trustee and the Certificate Trustee on the date of issuance of the Certificates (as such list may be modified or supplemented by the Seller from time to time). "Back-Up Security Interest" has the meaning specified in Section 2.01. "Basic Documents" means, collectively, this Agreement, the Note Indenture, the Declaration of Trust, the Certificate Indenture, the Servicing Agreement, the Administration Agreement, the Note Purchase Agreement, the Underwriting Agreement and the Fee and Indemnity Agreement. "Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions or trust companies in New York, New York, Boston, Massachusetts, Hartford, Connecticut or Wilmington, Delaware are authorized or obligated by law, regulation or executive order to remain closed. "Capital Subaccount" has the meaning specified in Section 8.02(a) of the Note Indenture. "Certificate Indenture" means the Certificate Indenture dated as of May 17, 2001, between the Certificate Issuer and the Certificate Trustee, as amended and supplemented from time to time. "Certificate Trustee" means the Person acting as trustee under the Certificate Indenture. "Certificateholders" has the meaning specified in Section 1.01(a) of the Certificate Indenture. "Certificates" means the Massachusetts RRB Special Purpose Trust WMECO-1 Rate Reduction Certificates issued under the Certificate Indenture. "Closing Date" means May 17, 2001. "Collection Account" has the meaning specified in Section 8.02(a) of the Note Indenture. "Corporate Trust Office" has the meaning specified in Section 1.01(a) of the Note Indenture. "Customers" means all of Seller's customers or ratepayers taking the delivery, transmission, distribution, back-up, maintenance, emergency and any other delivery or energy service provided by Seller to customers within the territory in which it serves customers, regardless of any such customer's source of electric power. "Date of Breach" means, with respect to the repurchase obligation specified in Section 5.01(b), the date of a breach of a representation or warranty that triggers such repurchase obligation. "Declaration of Trust" means the Declaration of Trust dated as of May 15, 2001, among the Agencies and the Delaware Trustee, as amended and supplemented from time to time. "Delaware Trustee" means the Person acting as trustee under the Declaration of Trust. "DTE" means the Massachusetts Department of Telecommunications and Energy and any successor thereto. "DTE Regulations" has the meaning specified in Section 1.01 of the Servicing Agreement. "Fee and Indemnity Agreement" means the Fee and Indemnity Agreement dated as of May 17, 2001 among the Note Issuer, the Delaware Trustee, the Certificate Trustee, the Trust and the Agencies, as amended and supplemented from time to time. "Financing Order" means the order of the DTE, DTE-00-40 , issued on February 7, 2001. "Fitch" means Fitch, Inc. or its successor. "Grant" means mortgage, pledge, collaterally assign and grant a lien upon and a security interest in. A Grant of any agreement or instrument shall include all rights, powers and options (but none of the obligations) of the Granting Person thereunder, the immediate and continuing right to claim for, collect, receive and give receipts for payments in respect of and all other monies payable thereunder, to give and receive notices and other communications, to make waivers or other agreements, to exercise all rights and options, to bring proceedings in the name of the Granting Person or otherwise, and generally to do and receive anything that the Granting Person is or may be entitled to do or receive thereunder with respect thereto. "Indemnified Person" has the meaning specified in Section 5.01(c), Section 5.01(d), Section 5.01(e) or in Section 5.01(h), for the purposes set forth therein. "Independent" has the meaning specified in Section 1.01(a) of the Note Indenture. "Issuance Advice Letter" means the initial Issuance Advice Letter, dated May 16, 2001, filed with the DTE by the Seller pursuant to the Financing Order. "Issuance Date" has the meaning specified in Section 2.01(c)(i) of the Note Indenture. "Lien" means a security interest, lien, charge, pledge or encumbrance of any kind. "Losses" has the meaning specified in Section 5.01(e). "Moody's" means Moody's Investors Service, Inc. or its successor. "Note Indenture" means the Note Indenture dated as of May 17, 2001, between the Note Issuer and the Note Trustee, as amended and supplemented from time to time. "Note Issuer" has the meaning set forth in the preamble of this Agreement. "Note Purchase Agreement" means the Note Purchase Agreement dated as of May 17, 2001 between the Note Issuer and the Trust, as amended and supplemented from time to time. "Note Register" has the meaning specified in Section 2.05 of the Note Indenture. "Note Trustee" means the Person acting as trustee under the Note Indenture. "Noteholder" or "Holder" means the Person in whose name a Note is registered on the Note Register. "Notes" means the WMECO Funding LLC Notes issued under the Note Indenture. "Officer's Certificate" means a certificate signed by the chairman of the board, the chief executive officer, the president, the vice chairman of the board, any vice president, the treasurer, any assistant treasurer, the clerk, any assistant clerk, the controller or the finance manager of the Seller. "Operating Expense" has the meaning specified in Section 1.01(a) of the Note Indenture. "Opinion of Counsel" means one or more written opinions of counsel who may be an employee of or counsel to the party providing such opinion of counsel, which counsel shall be reasonably acceptable to the party receiving such opinion of counsel. "Outstanding Amount" has the meaning specified in Section 1.01(a) of the Note Indenture. "Overcollateralization Subaccount" has the meaning specified in Section 8.02(a) of the Note Indenture. "Person" means any individual, corporation, limited liability company, estate, partnership, joint venture, association, joint stock company, trust (including any beneficiary thereof), unincorporated organization or government or any agency or political subdivision thereof. "Rating Agencies" means, collectively, S&P, Moody's and Fitch. "Repurchase Date" means the date that is five Business Days after the date that is (i) if the terms of Section 5.01(b)(i)(A) and Section 5.01(b)(i)(B)(2) are applicable, two Business Days after the Date of Breach if the Seller fails to make the deposit required by Section 5.01(b)(i)(B)(2) or 90 days after the Date of Breach if the Seller makes the deposit required by Section 5.01(b)(i)(B)(2); (ii) if the terms of Section 5.01(b)(ii) are applicable, 90 days after the Date of Breach; and (iii) if the terms of Section 5.01(b)(i)(A) and Section 5.01(b)(i)(B)(1) are applicable, 90 days after the Date of Breach. "Repurchase Price" has the meaning specified in Section 5.01(b)(i). "Required Overcollateralization Level" has the meaning specified in Section 1.01(a) of the Note Indenture. "RTC Charge" means the portion (which may become all) of the Transition Charge designated pursuant to the Financing Order as the RTC Charge, as the same may be adjusted from time to time as provided in the Financing Order, and may in the future include a pro rata component of any exit fee collected pursuant to Section 1G(g) of Chapter 164 of the Massachusetts General Laws. "RTC Charge Collections" has the meaning specified in Section 1.01 of the Servicing Agreement. "Seller" has the meaning set forth in the preamble of this Agreement. "Servicer Default" means an event specified in Section 7.01 of the Servicing Agreement. "Servicing Agreement" means the Transition Property Servicing Agreement dated as of May 17, 2001 between Western Massachusetts Electric Company, as Servicer, and the Note Issuer, as amended and supplemented from time to time. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw Hill Companies, Inc. or its successor. "Statute" means Chapter 164 of the Massachusetts Acts of 1997, entitled An Act Relative to Restructuring the Electric Utility Industry in the Commonwealth, Regulating the Provision of Electricity and Other Services, and Promoting Enhanced Consumer Protections Therein. "Transition Charge" means the "Transition Charge" as defined in the Statute and referred to as the Seller's "Transition Charge" in Western Massachusetts Electric Company's Restructuring Order, DTE Docket No. 97-120 and subsequent filings with the DTE pursuant thereto. "Transition Property" means the transition property that exists under Order 7 of the Financing Order. "Trust" or "Certificate Issuer" means Massachusetts RRB Special Purpose Trust WMECO-1, a Delaware business trust. "UCC" means, unless the context otherwise requires, the Uniform Commercial Code, as in effect in the relevant jurisdiction, as amended from time to time. "Underwriting Agreement" means the Underwriting Agreement dated as of May 14, 2001 among Western Massachusetts Electric Company, the Note Issuer and the underwriters named therein. Section 1.02. Other Definitional Provisions. (a) All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (b) The words "hereof," "herein," "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement; Section, Schedule and Exhibit references contained in this Agreement are references to Sections, Schedules and Exhibits in or to this Agreement unless otherwise specified; and the term "including" shall mean "including without limitation". (c) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms. ARTICLE 2 CONVEYANCE OF TRANSITION PROPERTY Section 2.01. Conveyance of Transition Property. In consideration of the Note Issuer's delivery to or upon the order of the Seller of $153,964,509.50, the Seller does hereby irrevocably sell, transfer, assign, set over and otherwise convey to the Note Issuer, WITHOUT RECOURSE OR WARRANTY, except as specifically set forth herein, all right, title and interest of the Seller in and to the Transition Property (such sale, transfer, assignment, setting over and conveyance of the Transition Property includes, to the fullest extent permitted by the Statute, the assignment of all revenues, collections, claims, payments, money or proceeds of or arising from the RTC Charge pursuant to the Financing Order) and copies of all books and records related thereto. Such sale, transfer, assignment, setting over and conveyance is hereby expressly stated to be a sale and, pursuant to Section 1H(f)(1) of Chapter 164 of the Massachusetts General Laws, shall be treated as an absolute transfer of all of the Seller's right, title and interest in (as in a true sale), and not as a pledge or other financing of, the Transition Property. If such sale, transfer, assignment, setting over and conveyance is held by any court of competent jurisdiction not to be a true sale as provided in Section 1H(f)(1) of Chapter 164 of the Massachusetts General Laws, then such sale, transfer, assignment, setting over and conveyance shall be treated as the creation of a security interest in the Transition Property and, without prejudice to its position that it has absolutely transferred all of its rights in the Transition Property to the Note Issuer, the Seller hereby Grants to the Note Issuer a security interest in the Transition Property (including, to the fullest extent permitted by the Statute, the assignment of all revenues, collections, claims, payments, money or proceeds of or arising from the RTC Charge pursuant to the Financing Order) to secure a payment obligation incurred by the Seller in respect of the amount paid by the Note Issuer to the Seller pursuant to this Agreement (the "Back-Up Security Interest"). Such sale, transfer, assignment, setting over and conveyance of the Transition Property includes the right to use the Seller's computer software system to access and create copies of all books and records related to the Transition Property. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER Subject to Section 3.09 hereof, the Seller makes the following representations and warranties, as of the Closing Date, on which the Note Issuer has relied in acquiring the Transition Property. Section 3.01. Organization and Good Standing. The Seller is duly organized and validly existing as a corporation in good standing under the laws of The Commonwealth of Massachusetts, with the requisite corporate power and authority to own its properties as such properties are currently owned and to conduct its business as such business is now conducted by it, and has the requisite corporate power and authority to own the Transition Property. Section 3.02. Due Qualification. The Seller is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of property or the conduct of its business shall require such qualifications, licenses or approvals (except where the failure to so qualify or obtain such licenses and approvals would not be reasonably likely to have a material adverse effect on the Seller's business, operations, assets, revenues or properties). Section 3.03. Power and Authority. The Seller has the requisite corporate power and authority to execute and deliver this Agreement and to carry out its terms; and the execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action on the part of the Seller. Section 3.04. Binding Obligation. This Agreement constitutes a legal, valid and binding obligation of the Seller enforceable against it in accordance with its terms, subject to applicable insolvency, reorganization, moratorium, fraudulent transfer and other laws relating to or affecting creditors' or secured parties' rights generally from time to time in effect and to general principles of equity (including concepts of materiality, reasonableness, good faith and fair dealing), regardless of whether considered in a proceeding in equity or at law. Section 3.05. No Violation. The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof do not: (i) conflict with or result in any breach of any of the terms and provisions of, nor constitute (with or without notice or lapse of time) a default under, the articles of organization or by-laws of the Seller, or any material indenture, agreement or other instrument to which the Seller is a party or by which it is bound; (ii) result in the creation or imposition of any Lien upon any of the Seller's properties pursuant to the terms of any such indenture, agreement or other instrument (other than any Lien that may be granted under the Basic Documents or any Lien created pursuant to Section 1H(e) of Chapter 164 of the Massachusetts General Laws); or (iii) violate any existing law or any existing order, rule or regulation applicable to the Seller of any court or of any federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Seller or its properties. Section 3.06. No Proceedings. There are no proceedings pending and, to the Seller's knowledge, there are no proceedings threatened and, to the Seller's knowledge, there are no investigations pending or threatened, before any court, federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Seller or its properties involving or relating to the Seller or the Note Issuer or, to the Seller's knowledge, any other Person: (i) asserting the invalidity of this Agreement, any of the other Basic Documents, the Notes, the Certificates, the Statute or the Financing Order, (ii) seeking to prevent the issuance of the Notes or the Certificates or the consummation of any of the transactions contemplated by this Agreement or any of the other Basic Documents, (iii) seeking any determination or ruling that might materially and adversely affect the performance by the Seller of its obligations under, or the validity or enforceability of, this Agreement, any of the other Basic Documents, the Notes or the Certificates or (iv) seeking to adversely affect the federal or state income tax classification of the Notes or the Certificates as debt. Section 3.07. Approvals. No approval, authorization, consent, order or other action of, or filing with, any court, federal or state regulatory body, administrative agency or other governmental instrumentality is required in connection with the execution and delivery by the Seller of this Agreement, the performance by the Seller of the transactions contemplated hereby or the fulfillment by the Seller of the terms hereof, except those that have been obtained or made and those that the Seller, in its capacity as Servicer under the Servicing Agreement, is required to make in the future pursuant to the Servicing Agreement and post closing filings required under federal securities law in connection therewith. Section 3.08. The Transition Property. (a) Title. It is the intention of the parties hereto that the transfer and assignment herein contemplated constitute a sale of the Transition Property from the Seller to the Note Issuer and that no interest in, or title to, the Transition Property shall be part of the Seller's estate in the event of the filing of a bankruptcy petition by or against the Seller under any bankruptcy law. No portion of the Transition Property has been sold, transferred, assigned or pledged by the Seller to any Person other than the Note Issuer. On the Closing Date, immediately upon the sale hereunder, the Seller has transferred, sold and conveyed the Transition Property to the Note Issuer, free and clear of all Liens (except for any Liens created pursuant to Section 1H(e) of Chapter 164 of the Massachusetts General Laws and any Liens that may be granted under the Basic Documents), and pursuant to Section 1H(f)(1) of Chapter 164 of the Massachusetts General Laws such transfer shall be treated as an absolute transfer of all of the Seller's right, title and interest (as in a true sale), and not as a pledge or other financing of, the Transition Property. (b) Transfer Filings. On the Closing Date, immediately upon the sale hereunder, the Transition Property has been validly transferred and sold to the Note Issuer, the Note Issuer shall own all such Transition Property free and clear of all Liens (excluding any Lien created pursuant to Section 1H(e) of Chapter 164 of the Massachusetts General Laws and any Lien that may be Granted under the Basic Documents) and all filings to be made by the Seller (including filings with the DTE under the Statute) necessary in any jurisdiction to Grant the Note Issuer a valid first priority perfected ownership interest (subject to any Lien created pursuant to Section 1H(e) of Chapter 164 of the Massachusetts General Laws and any Lien that may be Granted under the Basic Documents) in, and to Grant the Note Trustee a valid first priority perfected security interest (subject to any Lien created pursuant to Section 1H(e) of Chapter 164 of the Massachusetts General Laws and any Lien that may be granted under the Basic Documents) in, the Transition Property have been made. No further action is required to maintain the Note Issuer's first priority perfected ownership interest or the Note Trustee's first priority perfected security interest (in each case, subject to any Lien created pursuant to Section 1H(e) of Chapter 164 of the Massachusetts General Laws and any Lien that may be Granted under the Basic Documents). Filings have also been made to the extent required in any jurisdiction to perfect the Back-Up Security Interest granted by the Seller to the Note Issuer (subject to any Lien created pursuant to Section 1H(e) of Chapter 164 of the Massachusetts General Laws and any Lien that may be Granted under the Basic Documents). (c) Financing Order and Issuance Advice Letter; Other Approvals. On the Closing Date, under the laws of The Commonwealth of Massachusetts and the United States in effect on the Closing Date, (i) the Financing Order pursuant to which the Transition Property has been created is in full force and effect; (ii) the Certificateholders are entitled to the protections of the Statute and, accordingly, the Financing Order is not revocable by the DTE; (iii) The Commonwealth of Massachusetts may not alter the provisions of the Statute that make the RTC Charge irrevocable and binding, limit or alter the Transition Charge, the Transition Property, or the Financing Order and all rights thereunder, in a manner that would substantially impair the rights of the Certificateholders, absent a demonstration by The Commonwealth of Massachusetts that an impairment is narrowly-tailored and is necessary to advance an important public interest, such as responding to a "great public calamity" until the Certificates, together with interest thereon, are fully met and discharged; (iv) except for periodic adjustments to the RTC Charge required under the Statute, the DTE does not have authority, either by rescinding, altering or amending the Financing Order or otherwise, to revalue or revised for ratemaking purposes the Transition Costs, determine that the reimbursable transition costs amounts or Transition Charges are unjust or unreasonable or in any way to reduce or impair the value of Transition Property either directly or indirectly by taking the reimbursable transition costs amounts into account when setting other rates for the Seller; nor are the amount of revenues arising with respect thereto subject to reduction, impairment, postponement or termination; (v) the process by which the Financing Order was adopted and approved, and the Financing Order and Issuance Advice Letter themselves, comply with all applicable laws, rules and regulations; (vi) the Issuance Advice Letter has been filed in accordance with the Financing Order; (vii) no other approval, authorization, consent, order or other action of, or filing with, any court, Federal or state regulatory body, administrative agency or other governmental instrumentality is required in connection with the creation or sale of the Transition Property, except those that have been obtained or made and post closing filings required in connection therewith and those that the Seller, in its capacity as Servicer under the Servicing Agreement, is required to make in the future pursuant to the Servicing Agreement; and (viii) The Commonwealth of Massachusetts, in the exercise of its executive or legislative powers, may not repeal or amend the Statute or the Financing Order, or take any action in contravention of the pledge by The Commonwealth of Massachusetts in Section 1H(b)(3) of Chapter 164 of the Massachusetts General Laws, without paying just compensation to the Certificateholders, as determined by a court of competent jurisdiction, if this action would constitute a permanent appropriation of a substantial property interest of Certificateholders in the Transition Property and deprive the Certifcateholders of their reasonable expectations arising from their investments in the Certificates. (d) Assumptions. On the Closing Date, based upon the information available to the Seller on the Closing Date, the assumptions used in calculating the initial RTC Charge are reasonable and are made in good faith. Notwithstanding the foregoing, the Seller makes no representation or warranty that the assumptions used in calculating such RTC Charge will in fact be realized. (e) Creation of Transition Property. Upon the effectiveness of the Financing Order and the Issuance Advice Letter: (i) all of the Transition Property constitutes an existing property right; (ii) the Transition Property includes the right, title and interest in and to all revenues, collections, claims, payments, money, or proceeds of or arising from the RTC Charge, as adjusted from time to time pursuant to the Financing Order, and all rights to obtain adjustments to the RTC Charge pursuant to the Financing Order; and (iii) subject to the cap on the Seller's Transition Charge set forth in the Financing Order, the owner of the Transition Property is legally entitled to collect payments in respect of the RTC Charge in the aggregate sufficient to pay the interest on and principal of the Notes, to pay the fees and expenses of servicing the Notes and the Certificates, to replenish the Capital Subaccount to the Required Capital Level and to fund the Overcollateralization Subaccount to the Required Overcollateralization Level and to enforce all other material rights conferred in the Financing Order and the Statute until the Notes and the Certificates are paid in full. Notwithstanding the foregoing, the Seller makes no representation or warranty that any amounts actually collected in respect of the RTC Charge will in fact be sufficient to meet payment obligations with respect to the Notes and the Certificates. (f) Prospectus. As of the date hereof, the information describing the Seller in "The Seller and Servicer" section of the prospectus dated May 14, 2001 offering the Notes and the Certificates is correct in all material respects. Section 3.09. Limitations on Representations and Warranties. Notwithstanding any other provisions of this Agreement, the Seller will not be in breach of any representation or warranty as a result of a change in law by means of a legislative enactment, constitutional amendment or voter initiative. Notwithstanding anything to the contrary in this Agreement, the Seller makes no representation or warranty that any amounts actually collected in respect of the RTC Charge will in fact be sufficient to meet payment obligations with respect to the Notes and the Certificates or that the assumptions used in calculating the RTC Charge will in fact be realized nor shall the Seller be obligated to reduce, or accept a reduction of, any rates or charges to which it would otherwise be entitled in respect of services rendered or to be rendered to Customers in order to permit the payment of the RTC Charge. ARTICLE 4 COVENANTS OF THE SELLER Section 4.01. Corporate Existence. So long as any of the Notes are outstanding, the Seller (a) will keep in full force and effect its existence, rights and franchises as a corporation under the laws of the jurisdiction of its organization and (b) will obtain and preserve its qualification to do business, in each case to the extent that in each such jurisdiction such existence or qualification is or shall be necessary to protect the validity and enforceability of this Agreement, the other Basic Documents to which the Seller is a party and each other instrument or agreement necessary or appropriate to the proper administration of this Agreement and the transactions contemplated hereby. Section 4.02. No Liens. Except for the conveyances hereunder, any Lien under Section 1H(e) of Chapter 164 of the Massachusetts General Laws or the Back-Up Security Interest, the Seller will not sell, pledge, assign or transfer, or grant, create, or incur any Lien on, any of the Transition Property, or any interest therein, and the Seller shall defend the right, title and interest of the Note Issuer and the Note Trustee in, to and under the Transition Property against all claims of third parties claiming through or under the Seller. Western Massachusetts Electric Company, in its capacity as Seller, will not at any time assert any Lien against, or with respect to, any of the Transition Property. Section 4.03. Delivery of Collections. If the Seller receives any payments in respect of the RTC Charge or the proceeds thereof when it is not acting as the Servicer, the Seller agrees to pay to the Servicer all payments received by it in respect thereof as soon as practicable after receipt thereof by it. Section 4.04. Notice of Liens. The Seller shall notify the Note Issuer and the Note Trustee promptly after becoming aware of any Lien on any of the Transition Property, other than the conveyances hereunder, any Lien Granted by the Issuer under the Basic Documents or any Lien under Section 1H(e) of Chapter 164 of the Massachusetts General Laws or the Back-Up Security Interest. Section 4.05. Compliance with Law. The Seller hereby agrees to comply with its organizational and governing documents and all laws, treaties, rules, regulations and determinations of any governmental instrumentality applicable to it, except to the extent that failure to so comply would not adversely affect the Note Issuer's or the Note Trustee's interests in the Transition Property or under any of the other Basic Documents to which the Seller is party or the Seller's performance of its obligations hereunder or under any of the other Basic Documents to which it is party. Section 4.06. Covenants Related to Notes and Transition Property. (a) So long as any of the Notes are outstanding, the Seller shall treat the Notes as debt of the Note Issuer and not of the Seller, except for financial accounting or tax reporting purposes. (b) So long as any of the Notes are outstanding, the Seller shall indicate in its financial statements that it is not the owner of the Transition Property and that the assets of the Note Issuer are not available to pay creditors of the Seller or any of its Affiliates (other than the Note Issuer). (c) So long as any of the Notes are outstanding, the Seller shall disclose the effects of all transactions between the Seller and the Note Issuer in accordance with generally accepted accounting principles. (d) So long as any of the Notes or Certificates are outstanding, the Seller shall not own or purchase any Notes or Certificates. (e) The Seller agrees that, upon the sale by the Seller of the Transition Property to the Note Issuer pursuant to this Agreement, (i) to the fullest extent permitted by law, including the Statute and applicable DTE Regulations, the Note Issuer shall have all of the rights originally held by the Seller with respect to the Transition Property, including the right (subject to the terms of the Servicing Agreement) to exercise any and all rights and remedies to collect any amounts payable by any Customer or third party supplier in respect of the Transition Property, notwithstanding any objection or direction to the contrary by the Seller and (ii) any payment by any Customer or third party supplier to the Note Issuer shall discharge such Customer's or third party supplier's obligations in respect of the Transition Property to the extent of such payment, notwithstanding any objection or direction to the contrary by the Seller. (f) So long as any of the Notes are outstanding, (i) (A) the Seller shall affirmatively certify and confirm that it has sold the Transition Property to the Note Issuer (other than for financial accounting or tax reporting purposes), and (B) the Seller shall not make any statement or reference in respect of the Transition Property that is inconsistent with the ownership thereof by the Note Issuer (other than for financial accounting or tax reporting purposes), and (ii) the Seller shall not take any action in respect of the Transition Property except solely in its capacity as the Servicer thereof pursuant to the Servicing Agreement or as otherwise contemplated by the Basic Documents. Section 4.07. Protection of Title. The Seller shall execute and file such filings, including filings with the DTE pursuant to the Statute and UCC filings, and cause to be executed and filed such filings, all in such manner and in such places as may be required by law fully to preserve, maintain and protect the ownership or security interest of the Note Issuer in and the Note Trustee in the Transition Property and the Back-Up Security Interest, including all filings required under the Statute and the applicable UCC relating to the transfer of the ownership or security interest in the Transition Property by the Seller to the Note Issuer, the granting of a security interest in the Transition Property by the Note Issuer to the Note Trustee and the Back-Up Security Interest and the continued perfection of such ownership or security interest. The Seller shall deliver (or cause to be delivered) to the Note Trustee (with a copy of the Note Issuer) file-stamped copies of, or filing receipts for, any document filed as provided above, as soon as available following such filing. The Seller shall institute any action or proceeding necessary to compel performance by the DTE or The Commonwealth of Massachusetts of any of their obligations or duties under the Statute or the Financing Order, and the Seller agrees to take such legal or administrative actions, including defending against or instituting and pursuing legal actions and appearing or testifying at hearings or similar proceedings, as may be reasonably necessary (i) to protect the Note Issuer, the Noteholders, the Certificateholders, the Note Trustee, the Delaware Trustee, the Certificate Trustee, the Certificate Issuer, the Commonwealth of Massachusetts, the Executive Office for Administration and Finance of The Commonwealth of Massachusetts and the Agencies and any of their respective affiliates, officials, officers, directors, employees, consultants, counsel and agents from claims, state actions or other actions or proceedings of third parties which, if successfully pursued, would result in a breach of any representation set forth in Article III or (ii) to block or overturn any attempts to cause a repeal of, modification of or supplement to the Statute, the Financing Order, any Advice Letter (as defined in the Note Indenture), the Restructuring Order (as defined in the Financing Order) (to the extent it adversely affects the rights of Noteholders or the validity or value of the Transition Property) or the rights of Noteholders by executive action, legislative enactment or constitutional amendment that would be adverse to the Note Issuer, the Note Trustee or the Noteholders. If the Servicer performs its obligations under Section 5.02(d) of the Servicing Agreement in all respects, such performance shall be deemed to constitute performance of the Seller's obligations pursuant to clause (ii) of the immediately preceding sentence. In such event, the Seller agrees to assist the Servicer as reasonably necessary to perform its obligations under Section 5.02(d) of the Servicing Agreement in all respects. The costs of any such actions or proceedings shall be payable from RTC Charge Collections as an Operating Expense in accordance with the priorities set forth in Section 8.02(d) of the Note Indenture. The Seller's obligations pursuant to this Section 4.07 shall survive and continue notwithstanding the fact that the payment of Operating Expenses pursuant to Section 8.02(d) of the Note Indenture may be delayed (it being understood that the Seller may be required to advance its own funds to satisfy its obligations hereunder). Section 4.08. Nonpetition Covenants. Notwithstanding any prior termination of this Agreement or the Note Indenture, but subject to the DTE's right to order the sequestration and payment of revenues arising with respect to the Transition Property notwithstanding any bankruptcy, reorganization or other insolvency proceedings with respect to the Seller pursuant to Section 1H(d)(5) of Chapter 164 of the Massachusetts General Laws, the Seller shall not, prior to the date which is one year and one day after the termination of the Note Indenture, petition or otherwise invoke or cause the Note Issuer to invoke the process of any court or government authority for the purpose of commencing or sustaining a case against the Note Issuer under any Federal or state bankruptcy, insolvency or similar law, appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Note Issuer or any substantial part of the property of the Note Issuer, or ordering the winding up or liquidation of the affairs of the Note Issuer. Section 4.09. Taxes. So long as any of the Notes are outstanding, the Seller shall, and shall cause each of its subsidiaries to, pay all material taxes, assessments and governmental charges imposed upon it or any of its properties or assets or with respect to any of its franchises, business, income or property before any penalty accrues thereon if the failure to pay any such taxes, assessments and governmental charges would, after any applicable grace periods, notices or other similar requirements, result in a lien on the Transition Property; provided that no such tax need be paid if the Seller or one of its subsidiaries is contesting the same in good faith by appropriate proceedings promptly instituted and diligently conducted and if the Seller or such subsidiary has established appropriate reserves as shall be required in conformity with generally accepted accounting principles. Section 4.10. Additional Sales of Transition Property. So long as any of the Notes are outstanding, the Seller shall not sell any transition property (as defined in the Statute) to secure another issuance of electric rate reduction bonds (as defined in the Statute) if it would cause the then existing ratings on any Class of Certificates from the Rating Agencies to be withdrawn or downgraded and in that regard, the Seller shall not consummate any such sale unless the Rating Agency Condition (as defined in the Note Indenture) shall have been satisfied and Moody's shall have provided written confirmation that such sale will not result in the withdrawal or downgrade of Moody's then existing ratings on any Class of Certificates. Section 4.11. Issuance Advice Letter. The Seller hereby agrees not to withdraw the filing of the Issuance Advice Letter with the DTE. Section 4.12. Maintenance of Working Papers. So long as any of the Notes are outstanding, the Seller shall keep and maintain any and all working papers, reports and other documents used by the firm of Independent certified public accountants in the preparation of its letters delivered on the Issuance Date pursuant to Section 2.10(g) of the Note Indenture and [Section 6(k)] of the Underwriting Agreement. ARTICLE 5 THE SELLER Section 5.01. Liability of Seller; Indemnities. (a) The Seller shall be liable in accordance herewith only to the extent of the obligations specifically undertaken by the Seller under this Agreement. (b) In the event of a breach by the Seller of any representation and warranty specified in Sections 3.08(c) or 3.08(e) that has a material adverse effect on the Certificateholders, the Seller shall repurchase the Transition Property from the Note Issuer at a purchase price equal to the then outstanding principal amount of the Notes and all accrued and unpaid interest thereon, excluding any premium or penalty of any kind (the "Repurchase Price"), as of the Repurchase Date; provided, however, that the Seller shall not be obligated to repurchase the Transition Property if (A) within 90 days after the Date of Breach such breach is cured or the Seller takes remedial action such that there is not and will not be a material adverse effect on the Certificateholders as a result of such breach and (B) either (1) if the Seller had, immediately prior to the Date of Breach, a long term debt rating of at least "A3" by Moody's and "BBB" or the equivalent by S&P or Fitch, and the Seller enters into a binding agreement with the Note Issuer to pay any amounts necessary so that all interest payments due on the Notes during such 90-day period will be paid in full, or (2) if the Seller does not have such long term debt ratings, the Seller deposits, within two Business Days after the Date of Breach, an amount in escrow with the Note Trustee sufficient, taking into account amounts on deposit in the Collection Account which will be available for such purpose, to pay all interest payments which will become due on the Notes during such 90-day period. (i) In the event of a breach by the Seller of any representation and warranty specified in Sections 3.01, 3.03, 3.04, 3.05, 3.06, 3.08(a) or 3.08(b) that has a material adverse effect on the Certificateholders, if within 90 days after the Date of Breach such breach has not been cured or the Seller has not taken remedial action such that there is not and will not be a material adverse effect on the Certificateholders as a result of such breach, then the Seller shall repurchase the Transition Property from the Note Issuer for the Repurchase Price on the Repurchase Date. (ii) Notwithstanding any other provision of this Agreement, upon the payment by the Seller of the Repurchase Price pursuant to this Section 5.01(b), neither the Note Issuer nor any other Person shall have any other claims, rights or remedies against the Seller under, arising from or with respect to this Agreement, except as set forth in Section 5.01(b), 5.01(c), 5.01(d) and 5.01(h). (c) Subject to Section 5.01(i), the Seller shall indemnify the Note Issuer, the Note Trustee, the Certificate Trustee, the Delaware Trustee, the Commonwealth of Massachusetts, the Executive Office for Administration and Finance of The Commonwealth of Massachusetts, the Agencies, the Certificate Issuer, the Noteholders and the Certificateholders (each an "Indemnified Person" for purposes of this Section 5.01(c) and Section 5.01(i)) for, and defend and hold harmless each such Indemnified Person from and against, any and all taxes (other than taxes imposed on Noteholders or Certificateholders solely as a result of their ownership of Notes or Certificates, respectively) that may at any time be imposed on or asserted against any such Person under existing law as of the Closing Date as a result of the sale of the Transition Property to the Note Issuer, including any sales, gross receipts, general corporation, tangible personal property, privilege or license taxes; provided, however, that the Noteholders and the Certificateholders shall be entitled to enforce their rights against the Seller under this Section 5.01(c) solely through a cause of action brought for their benefit by the Note Trustee or the Certificate Trustee, as the case may be. (d) Subject to Section 5.01(i), the Seller shall indemnify the Note Issuer, the Note Trustee, the Certificate Trustee, the Delaware Trustee, The Commonwealth of Massachusetts, the Executive Office for Administration and Finance of The Commonwealth of Massachusetts, the Agencies, the Certificate Issuer, the Noteholders and the Certificateholders (each an "Indemnified Person" for purposes of this Section 5.01(d) and Section 5.01(i)) for, and defend and hold harmless each such Indemnified Person from and against, any and all taxes that may be imposed on or asserted against any such Indemnified Person under existing law as of the Closing Date as a result of the issuance and sale by the Note Issuer of the Notes, the issuance and sale by the Trust of the Certificates or the other transactions contemplated herein, including any sales, gross receipts, general corporation, tangible personal property, privilege or license taxes; provided, however, that the Noteholders and the Certificateholders shall be entitled to enforce their rights against the Seller under this Section 5.01(d) solely through a cause of action brought for their benefit by the Note Trustee or the Certificate Trustee, as the case may be. The Seller shall be reimbursed for any payments under this Section 5.01(d) from RTC Charge Collections as an Operating Expense in accordance with the priorities set forth in Section 8.02(d) of the Note Indenture. (e) Subject to Section 5.01(i), the Seller shall indemnify the Note Issuer, the Noteholders and the Certificateholders (each an "Indemnified Person" for purposes of this Section 5.01(e) and Section 5.01(i)) for, and defend and hold harmless each such Person from and against, any and all liabilities, obligations, losses, actions, suits, claims, damages, payments, costs or expenses of any kind whatsoever (collectively, "Losses") that may be imposed on, incurred by or asserted against each such Indemnified Person as a result of (i) the Seller's willful misconduct or negligence in the performance of its duties or observance of its covenants under this Agreement, or (ii) the Seller's breach in any material respect of any of its representations and warranties contained in this Agreement (other than the representations and warranties specified in Sections 3.01, 3.03, 3.04, 3.05, 3.06, 3.08(a), 3.08(b), 3.08(c) or 3.08(e), the breach of which are subject to the repurchase obligation set forth in Section 5.01(b)), except in the case of both clauses (i) and (ii) to the extent of Losses either resulting from the willful misconduct or gross negligence of such Indemnified Person or resulting from a breach of a representation and warranty made by such Indemnified Person in any of the Basic Documents that gives rise to the Seller's breach; provided, however, that the Noteholders and the Certificateholders shall be entitled to enforce their rights against the Seller under this indemnification solely through a cause of action brought for their benefit by the Note Trustee or the Certificate Trustee, as the case may be; provided, further, that the Seller may, at its election and in full satisfaction of its obligations under this Section 5.01(e), repurchase the Transition Property at the Repurchase Price, in which case neither the Note Issuer nor any other Person shall have any other claims, rights or remedies against the Seller under, arising from or with respect to this Agreement, except as set forth in Sections 5.01(b), 5.01(c), 5.01(d) and 5.01(h). (f) Indemnification under Sections 5.01(c), 5.01(d), 5.01(e) and 5.01(h) shall include reasonable fees and out-of-pocket expenses of investigation and litigation (including reasonable attorneys' fees and expenses), except as otherwise provided in this Agreement. (g) Without prejudice to any of the other rights of the parties, the Seller will not be in breach of any representation or warranty as a result of a change in law by means of a legislative enactment, constitutional amendment or voter initiative. Notwithstanding anything to the contrary in this Agreement, the Seller makes no representation or warranty that any amounts actually collected in respect of the RTC Charge will in fact be sufficient to meet payment obligations with respect to the Notes and the Certificates or that the assumptions used in calculating the RTC Charge will in fact be realized nor shall the Seller be obligated to reduce, or accept a reduction of, any rates or charges to which it would otherwise be entitled in respect of services rendered or to be rendered to customers in order to permit the payment of the RTC Charge (other than deferrals for future recovery). (h) Subject to Section 5.01(i), the Seller shall indemnify and hold harmless the Note Trustee, the Delaware Trustee, the Certificate Trustee, the Certificate Issuer, The Commonwealth of Massachusetts, the Executive Office for Administration and Finance of The Commonwealth of Massachusetts, the Agencies and any of their respective affiliates, officials, officers, directors, employees, consultants, counsel and agents (each an "Indemnified Person" for purposes of this Section 5.01(h) and Section 5.01(i)) against any and all Losses incurred by any of such Indemnified Persons as a result of (i) the Seller's willful misconduct or negligence in the performance of its duties or observance of its covenants under this Agreement or (ii) the Seller's breach in any material respect of any of its representations and warranties contained in this Agreement, except in the case of both clauses (i) and (ii) to the extent of Losses either resulting from the willful misconduct or gross negligence of such Indemnified Person or resulting from a breach of a representation or warranty made by such Indemnified Person in any of the Basic Documents that gives rise to the Seller's breach. The indemnities contained in this Section 5.01(h) shall survive the resignation or termination of the Note Trustee, the Certificate Trustee or the Delaware Trustee or the termination of this Agreement. (i) The Seller shall not be required to indemnify any Indemnified Person under Sections 5.01(c), 5.01(d), 5.01(e) or 5.01(h) for any amount paid or payable by such Indemnified Person in the settlement of any action, proceeding or investigation without the written consent of the Seller, which consent shall not be unreasonably withheld. Promptly after receipt by an Indemnified Person of notice of its involvement in any action, proceeding or investigation, such Indemnified Person shall, if a claim for indemnification in respect thereof is to be made against the Seller under this Section 5.01, notify the Seller in writing of such involvement. Failure by an Indemnified Person to so notify the Seller shall relieve the Seller from the obligation to indemnify and hold harmless such Indemnified Person under this Section 5.01 only to the extent that the Seller suffers actual prejudice as a result of such failure. With respect to any action, proceeding or investigation brought by a third party for which indemnification may be sought under this Section 5.01, the Seller shall be entitled to assume the defense of any such action, proceeding or investigation. Upon assumption by the Seller of the defense of any such action, proceeding or investigation, the Indemnified Person shall have the right to participate in such action or proceeding and to retain its own counsel. The Seller shall be entitled to appoint counsel of the Seller's choice at the Seller's expense to represent the Indemnified Person in any action, proceeding or investigation for which a claim of indemnification is made against the Seller under this Section 5.01 (in which case the Seller shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the Indemnified Person except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the Indemnified Person. Notwithstanding the Seller's election to appoint counsel to represent the Indemnified Person in an action, proceeding or investigation, the Indemnified Person shall have the right to employ separate counsel (including local counsel), and the Seller shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of counsel chosen by the Seller to represent the Indemnified Person would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the Indemnified Person and the Seller and the Indemnified Person shall have reasonably concluded that there may be legal defenses available to it that are different from or additional to those available to the Seller, (iii) the Seller shall not have employed counsel reasonably satisfactory to the Indemnified Person to represent the Indemnified Person within a reasonable time after notice of the institution of such action or (iv) the Seller shall authorize the Indemnified Person to employ separate counsel at the expense of the Seller. Notwithstanding the foregoing, the Seller shall not be obligated to pay for the fees, costs and expenses of more than one separate counsel for the Indemnified Persons (in addition to local counsel). The Seller will not, without the prior written consent of the Indemnified Person, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought under this Section 5.01 (whether or not the Indemnified Person is an actual or potential party to such claim or action) unless such settlement, compromise or consent includes an unconditional release of the Indemnified Person from all liability arising out of such claim, action, suit or proceeding. (j) The remedies of the Note Issuer, the Noteholders and the Certificateholders provided in this Agreement are each such Person's sole and exclusive remedies against the Seller for breach of its representations and warranties in this Agreement. Section 5.02. Merger or Consolidation of, or Assumption of the Obligations of, Seller. Any Person (a) into which the Seller may be merged or consolidated, (b) that may result from any merger or consolidation to which the Seller shall be a party or (c) that may succeed to the properties and assets of the Seller substantially as a whole, which Person in any case described in the foregoing clause (c) executes an agreement of assumption to perform every obligation of the Seller hereunder, shall be the successor to the Seller under this Agreement without further act on the part of any of the parties to this Agreement; provided, however, that (i) if the Seller is the Servicer, no Servicer Default, and no event which, after notice or lapse of time, or both, would become a Servicer Default shall have occurred and be continuing, (ii) the Seller shall have delivered to the Note Issuer and the Note Trustee an Officer's Certificate stating that such consolidation, merger or succession and such agreement of assumption comply with this Section and that all conditions precedent, if any, provided for in this Agreement relating to such transaction have been complied with, (iii) the Seller shall have delivered to the Note Issuer and the Note Trustee an Opinion of Counsel stating that, in the opinion of such counsel (A) such consolidation, merger or succession and such agreement of assumption comply with this Section and that all conditions precedent provided for in this Agreement relating to such transaction have been complied with and (B) either (1) all filings to be made by the Seller, including filings with the DTE pursuant to the Statute and under the applicable UCC, have been executed and filed that are necessary to preserve and protect fully the interests of the Note Issuer and the Note Trustee in the Transition Property and reciting the details of such filings, or (2) no such action shall be necessary to preserve and protect such interests and (iv) the Rating Agencies shall have received prior written notice of such transaction. When any Person acquires the properties and assets of the Seller substantially as a whole and becomes the successor to the Seller in accordance with the terms of this Section 5.02 and execution by such successor of an agreement of assumption to perform every obligation of the Seller hereunder, then upon satisfaction of all of the other conditions of this Section 5.02, the Seller shall automatically and without further notice be released from all of its obligations hereunder, except with respect to any acts or omissions of the Seller that occurred prior to such assumption. Section 5.03. Limitation on Liability of Seller and Others. The Seller and any director, officer, employee or agent of the Seller may rely in good faith on the advice of counsel or on any document of any kind, prima facie properly executed and submitted by any Person, respecting any matters arising hereunder. ARTICLE 6 MISCELLANEOUS PROVISIONS Section 6.01. Amendment. This Agreement may be amended by the Seller and the Note Issuer, with ten Business Days' prior written notice given to the Rating Agencies and the prior written consent of the Note Trustee, but without the consent of any of the Noteholders, to cure any ambiguity, to correct or supplement any provisions in this Agreement or for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions in this Agreement or of modifying in any manner the rights of the Noteholders; provided, however, that such action shall not, as evidenced by an Officer's Certificate delivered to the Note Issuer and the Note Trustee, adversely affect in any material respect the interests of any Noteholder. This Agreement may also be amended from time to time by the Seller and the Note Issuer, with ten Business Days' prior written notice given to the Rating Agencies and the prior written consent of the Note Trustee and the prior written consent of the Holders of Notes evidencing not less than a majority of the Outstanding Amount of the Notes affected thereby, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of modifying in any manner the rights of the Noteholders. It shall not be necessary for the consent of Noteholders pursuant to this Section to approve the particular form of any proposed amendment or consent, but it shall be sufficient if such consent shall approve the substance thereof. Prior to the execution of any amendment to this Agreement, the Note Trustee shall be entitled to receive and rely upon an Opinion of Counsel stating that the execution of such amendment is authorized or permitted by this Agreement. The Note Trustee may, but shall not be obligated to, enter into any such amendment which affects the Note Trustee's own rights, duties or immunities under this Agreement or otherwise. The Note Issuer shall provide a copy of any amendment to this Agreement to the Rating Agencies and the Note Trustee promptly after the execution thereof. Section 6.02. Notices. Unless otherwise specifically provided herein, all notices, directions, consents and waivers required under the terms and provisions of this Agreement shall be in English and in writing, and any such notice, direction, consent or waiver may be given by United States mail, courier service, facsimile transmission or electronic mail (confirmed by telephone, United States mail or courier service in the case of notice by facsimile transmission or electronic mail) or any other customary means of communication, and any such notice, direction, consent or waiver shall be effective when delivered, or if mailed, three days after deposit in the United States mail with proper postage for ordinary mail prepaid: (a) if to the Seller, to Western Massachusetts Electric Company 174 Brush Hill Avenue West Springfield, MA 01089 Attention: Assistant Treasurer-Finance Facsimile: (860) 665-5457 Telephone: (860) 665-3258 Email: rshoopra@nu.com With a copy to: Western Massachusetts Electric Company c/o Northeast Utilities Service Company if by U.S. Mail: P.O. Box 270 Hartford, CT 02141-0270 if by courier: 107 Selden Street Berlin, CT 06037 Attention: Assistant Treasurer-Finance Facsimile: (860) 665-5457 Telephone: (860) 665-3258 Email: shoopra@nu.com (b) if to the Note Issuer, to WMECO Funding LLC c/o Western Massachusetts Electric Company 174 Brush Hill Avenue West Springfield, MA 01089 Attention: Assistant Treasurer-Finance Facsimile: (860) 665-5457 Telephone: (860) 665-3258 Email: shoopra@nu.com with a copy to: Western Massachusetts Electric Company c/o Northeast Utilities Service Company 107 Selden Street Berlin, CT 06037 Attention: Assistant Treasurer-Finance Facsimile: (860) 665-5457 Telephone: (860) 665-3258 Email: shoopra@nu.com (c) if to the Note Trustee, to The Bank of New York, as trustee 101 Barclay Street Floor 12 East New York, NY 10286 Attention: ABS Unit Facsimile: (212) 815-5563 Telephone: (212) 815-5368 (d) if to Moody's, to Moody's Investors Service, Inc. 99 Church Street New York, NY 10007 Attention: ABS Monitoring Department Facsimile: (212) 553-0573 Telephone: (212) 553-3686 (e) if to S&P, to Standard & Poor's 55 Water Street, 41st Floor New York, NY 10041 Attention: Asset Backed Surveillance Department Facsimile: (212) 438-2664 Telephone: (212) 438-2000 (f) if to Fitch, to Fitch, Inc. One State Street Plaza New York, NY 10004 Attention: ABS Surveillance Facsimile: (212) 514-9879 Telephone: (212) 908-0500 Email: surv@fitchratings.com (g) if to the Agencies, to: Massachusetts Development Finance Agency 75 Federal Street Boston, MA 02110 Attention: General Counsel Facsimile: (617) 727-8741 Telephone: (617) 451-2477 and Massachusetts Health and Educational Facilities Authority 99 Summer Street, 10th Floor Boston, MA 02110 Attention: General Counsel Facsimile: (617) 737-8366 Telephone: (617) 737-8377 (h) if to the Certificate Issuer, to: The Bank of New York (Delaware), as Delaware Trustee for Massachusetts RRB Special Purpose Trust WMECO-1 700 White Clay Center Route 273 Newark, Delaware 19711 Attention: Compliance Facsimile: (302) 283-8298 Telephone: (302) 451-2500 with a copy to: The Bank of New York 101 Barclay Street Floor 12 East New York, NY 10286 Attention: ABS Unit Facsimile: (212) 815-5563 Telephone: (212) 815-5368 (with copies to the Agencies at the addresses listed herein) (i) as to each of the foregoing, at such other address as shall be designated by written notice to the other parties. Section 6.03. Assignment. Notwithstanding anything to the contrary contained herein, except as provided in Section 5.02, this Agreement may not be assigned by the Seller. Section 6.04. Limitations on Rights of Third Parties. The provisions of this Agreement are solely for the benefit of the Seller, the Note Issuer, the Noteholders, the Certificateholders, the Note Trustee, the Certificate Trustee, the Delaware Trustee, The Commonwealth of Massachusetts, the Executive Office for Administration and Finance of The Commonwealth of Massachusetts, the Agencies, the Certificate Issuer and the other Persons expressly referred to herein, and such Persons shall have the right to enforce the relevant provisions of this Agreement, except that the Noteholders and the Certificateholders shall be entitled to enforce their rights against the Seller under this Agreement solely through a cause of action brought for their benefit by the Note Trustee or the Certificate Trustee, as the case may be. Nothing in this Agreement, whether express or implied, shall be construed to give to any other Person any legal or equitable right, remedy or claim in the Transition Property or under or in respect of this Agreement or any covenants, conditions or provisions contained herein. Section 6.05. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Section 6.06. Separate Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. Section 6.07. Headings. The headings of the various Articles and Sections herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Section 6.08. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts, without reference to its conflict of law provisions, and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws. Section 6.09. Assignment to Note Trustee. The Seller hereby acknowledges and consents to any Grant of a Lien by the Note Issuer to the Note Trustee pursuant to the Note Indenture for the benefit of the Noteholders and the Note Trustee of all right, title and interest of the Note Issuer in, to and under the Transition Property and the proceeds thereof and the assignment of any or all of the Note Issuer's rights and obligations hereunder to the Note Trustee. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties hereto have caused this Transition Property Purchase and Sale Agreement to be duly executed under seal by their respective officers as of the day and year first above written. WMECO FUNDING LLC, Note Issuer By: /s/ Randy A. Shoop ------------------------------------- Name: Randy A. Shoop Title: President WESTERN MASSACHUSETTS ELECTRIC COMPANY, Seller By: /s/ Randy A. Shoop ------------------------------------- Name: Randy A. Shoop Title: Assistant Treasurer - Finance EX-10.62 32 y58564aa.txt Exhibit 10.62 WMECO FUNDING LLC, as Note Issuer and WESTERN MASSACHUSETTS ELECTRIC COMPANY, as Servicer TRANSITION PROPERTY SERVICING AGREEMENT Dated as of May 17, 2001 ARTICLE 1 DEFINITIONS Section 1.01. Definitions Section 1.02. Other Definitional Provisions ARTICLE 2 APPOINTMENT AND AUTHORIZATION Section 2.01. Appointment of Servicer; Acceptance of Appointment Section 2.02. Authorization Section 2.03. Dominion and Control Over the Transition Property ARTICLE 3 BILLING SERVICES Section 3.01. Duties of Servicer Section 3.02. Servicing and Maintenance Standards Section 3.03. Certificate of Compliance Section 3.04. Annual Report by Independent Public Accountants ARTICLE 4 SERVICES RELATED TO PERIODIC ADJUSTMENTS; REMITTANCES Section 4.01. Periodic Adjustments Section 4.02. Limitation of Liability Section 4.03. Remittances ARTICLE 5 THE TRANSITION PROPERTY Section 5.01. Custody of Transition Property Records Section 5.02. Duties of Servicer as Custodian Section 5.03. Instructions; Authority to Act Section 5.04. Effective Period and Termination Section 5.05. Monitoring of Third-Party Suppliers Section 5.06. Monitoring and Collecting Exit Charges ARTICLE 6 THE SERVICER Section 6.01. Representations and Warranties of Servicer Section 6.02. Indemnities of Servicer Section 6.03. Limitation on Liability of Servicer and Others Section 6.04. Merger or Consolidation of, or Assumption of the Obligations of, Servicer Section 6.05. Western Massachusetts Electric Company Not to Resign as Servicer Section 6.06. Servicing Compensation Section 6.07. Compliance with Applicable Law
Section 6.08.Access to Certain Records and Information Regarding Transition Property Section 6.09. Appointments Section 6.10. No Servicer Advances Section 6.11. Maintenance of Operations ARTICLE 7 DEFAULT Section 7.01. Servicer Default Section 7.02. Appointment of Successor Section 7.03. Waiver of Past Defaults Section 7.04. Notice of Servicer Default ARTICLE 8 MISCELLANEOUS PROVISIONS Section 8.01. Amendment Section 8.02. Maintenance of Accounts and Records Section 8.03. Notices Section 8.04. Assignment Section 8.05. Limitations on Rights of Third Parties Section 8.06. Severability Section 8.07. Separate Counterparts Section 8.08. Headings Section 8.09. Governing Law Section 8.10. Assignment to Note Trustee Section 8.11. Nonpetition Covenants
This TRANSITION PROPERTY SERVICING AGREEMENT, dated as of May 17, 2001, is between WMECO Funding LLC, a Delaware limited liability company (together with any successor thereto permitted under the Note Indenture, as hereinafter defined, the "Note Issuer"), and Western Massachusetts Electric Company, a Massachusetts corporation. RECITALS WHEREAS, pursuant to the Statute and the Financing Order, the Seller and the Note Issuer are concurrently entering into the Sale Agreement pursuant to which the Seller is selling to the Note Issuer the Transition Property created pursuant to the Statute and the Financing Order. WHEREAS, in connection with its ownership of the Transition Property and in order to collect the RTC Charge, the Note Issuer desires to engage the Servicer to carry out the functions described herein. The Servicer currently performs similar functions for itself with respect to its own charges to its customers and for others. In addition, the Note Issuer desires to engage the Servicer to act on its behalf in obtaining Periodic Adjustments from the DTE. The Servicer desires to perform all of these activities on behalf of the Note Issuer. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS Section 1.01. Definitions. Whenever used in this Agreement, the following words and phrases shall have the following meanings: "Advice Letter" means any filing made with the DTE by the Servicer on behalf of the Note Issuer to set or adjust the RTC Charge, including the Issuance Advice Letter, a Routine Anniversary True-Up Letter, a Routine True-Up Letter or a Non-Routine True-Up Letter. "Agreement" means this Transition Property Servicing Agreement, together with all Exhibits, Schedules and Annexes hereto, as the same may be amended and supplemented from time to time. "Annual Accountant's Report" has the meaning set forth in Section 3.04. "Applicable TPS" means, with respect to each Customer, the TPS, if any, billing the RTC Charge to that Customer. "Bills" means each of the regular monthly bills, summary bills and other bills issued to Customers or TPSs by Western Massachusetts Electric Company on its own behalf and in its capacity as Servicer. "Certificate of Compliance" has the meaning set forth in Section 3.03. "Closing Date" means May 17, 2001. "Customers" means Seller's customers and ratepayers taking the delivery, transmission, distribution, back-up, maintenance, emergency and any other delivery or energy service provided by Seller to such customer within the territory in which Seller serves customers, regardless of that customer's source of electric power whether or not energy is purchased from WMECO or any TPS and whether or not such distribution system is being operated by Seller or a successor distribution company. "Declaration of Trust" means the Declaration of Trust dated as of May 15, 2001 by The Bank of New York (Delaware), a Delaware banking corporation, as Delaware Trustee, the Massachusetts Development Finance Agency and the Massachusetts Health and Educational Facilities Authority, as the same may be amended and supplemented from time to time. "DTE" means the Massachusetts Department of Telecommunications and Energy and any successor thereto. "DTE Regulations" means all regulations, rules, tariffs and laws applicable to public utilities or TPSs, as the case may be, and promulgated by, enforced by or otherwise within the jurisdiction of the DTE. "Expected Amortization Schedule" means Schedule 4.01(a) hereto. "Financing Order" means the order of the DTE, DTE-00-40, issued on February 7, 2001. "Financing Order Anniversary Date" means February 7 of each year. "Indemnified Person" has the meaning assigned to such term in Section 6.02. "Insolvency Event" means, with respect to a specified Person, (a) the filing of a decree or order for relief by a court having jurisdiction in the premises in respect of such Person or any substantial part of its property in an involuntary case under any applicable Federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or ordering the winding-up or liquidation of such Person's affairs, and such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (b) the commencement by such Person of a voluntary case under any applicable Federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or the consent by such Person to the entry of an order for relief in an involuntary case under any such law, or the consent by such Person to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or the making by such Person of any general assignment for the benefit of creditors, or the failure by such Person generally to pay its debts as such debts become due. "Issuance Advice Letter" means the initial Issuance Advice Letter, dated May 16, 2001, filed with the DTE pursuant to the Financing Order. "Lien" means a security interest, lien, charge, pledge or encumbrance of any kind. "Losses" has the meaning assigned to that term in Section 6.02(b). "Monthly Servicer Certificate" has the meaning assigned to that term in Section 4.01(d)(2). "Non-Routine Periodic Adjustment" has the meaning set forth in Section 4.01(c)(1). "Non-Routine True-Up Letter" means a letter filed with the DTE in accordance with the Financing Order with respect to any Non-Routine Periodic Adjustment, pursuant to which the related Non-Routine Periodic Adjustment will become effective within 60 days after filing of the Non-Routine True-Up Letter, subject to the review and approval of the DTE. "Note Indenture" means the Note Indenture dated as of May 17, 2001, between the Note Issuer and the Note Trustee, as the same may be amended and supplemented from time to time. "Note Issuer" has the meaning set forth in the preamble to this Agreement. "Officer's Certificate" means a certificate of the Servicer signed by a Responsible Officer. "Opinion of Counsel" means one or more written opinions of counsel who may be an employee of or counsel to the party providing such opinion(s) of counsel, which counsel shall be reasonably acceptable to the party receiving such opinion(s) of counsel. "Periodic Adjustment" means each adjustment to the RTC Charge made pursuant to the terms of the Financing Order and in accordance with Section 4.01 hereof. "Principal Balance" means, as of any Payment Date, the sum of the outstanding principal amount of the Notes. "Projected Principal Balance" means, as of any Payment Date, the sum of the projected outstanding principal amount of the Notes for such Payment Date set forth in the Expected Amortization Schedule. "Quarterly Servicer Certificate" has the meaning assigned to that term in Section 4.01(d)(3). "Remittance" means each remittance pursuant to Section 4.03 of RTC Charge Payments by the Servicer to the Note Trustee. "Remittance Date" means each Servicer Business Day on which a Remittance is to be made by the Servicer pursuant to Section 4.03. "Remittance Period" means the twelve-month period commencing on March 1 of each year and ending on the last day of February of the succeeding year; provided, however, that the initial Remittance Period shall commence on the Closing Date and end on February 28, 2002. "Required Debt Service" means, for any Remittance Period, the total dollar amount calculated by the Servicer in accordance with Section 4.01(b)(1) as necessary to be remitted to the Collection Account during such Remittance Period (after giving effect to (a) the allocation and distribution of amounts on deposit in the Reserve Subaccount at the time of calculation and which are available for payments on the Notes, (b) any shortfalls in Required Debt Service for any prior Remittance Period and (c) any Remittances based upon the RTC Charge in effect in the prior Remittance Period that are expected to be realized in such Remittance Period) in order to ensure that, as of the Payment Date immediately following the end of such period, (i) all accrued and unpaid interest on the Notes then due shall have been paid in full, (ii) the Principal Balance of the Notes is equal to the Projected Principal Balance of the Notes for that Payment Date, (iii) the balance on deposit in the Capital Subaccount equals the aggregate Required Capital Level, (iv) the balance on deposit in the Overcollateralization Subaccount equals the aggregate Required Overcollateralization Level and (v) all other fees, expenses and indemnities due and owing and required or allowed to be paid under Section 8.02 of the Note Indenture as of such date shall have been paid in full; provided, however, that, with respect to any Periodic Adjustment occurring after the last Scheduled Maturity Date for any Notes, the Required Debt Service shall be calculated to ensure that sufficient amounts will be collected to retire such Notes in full as of the earlier of (x) the next Payment Date and (y) the Final Maturity Date for such Notes. "Responsible Officer" means the chief executive officer, the president, the chairman or vice chairman of the board, any vice president, the treasurer, any assistant treasurer, the clerk, any assistant clerk, the secretary, any assistant secretary, the controller or the finance manager of the Servicer. "Retirement of the Notes" means the day on which the final payment is made to the Note Trustee in respect of the last outstanding Note. "Routine Anniversary True-Up Letter" means a letter substantially in the form of Exhibit B hereto filed with the DTE prior to the Financing Order Anniversary Date in respect of an annual Periodic Adjustment. The Routine Anniversary True-Up Letter will become effective on the first calendar day of the next succeeding calendar month after filing, or such date as may be specified in such Routine Anniversary True-Up Letter, so long as such effective date is at least 15 days after the filing of such Routine Anniversary True-Up Letter. "Routine True-Up Letter" means letter filed with the DTE in respect of a Periodic Adjustment, substantially in the form of Exhibit B hereto. The Routine True-Up Letter will become effective on the first calendar day of the next succeeding calendar month after filing, or such date as may be specified in such Routine True-Up Letter, so long as such effective date is at least 15 days after the filing of such Routine True-Up Letter. "RTC Charge" means the portion (which may become all) of the Transition Charge designated pursuant to the Financing Order as the RTC Charge, as the same may be adjusted from time to time as provided in the Financing Order, and may in the future include a pro rata component of any exit fee collected pursuant to Section 1G(g) of Chapter 164 of the Massachusetts General Laws. "RTC Charge Collections" means the RTC Charge Payments remitted to the Collection Account. "RTC Charge Payments" means the actual payments received by the Servicer, directly or indirectly (including through a TPS), from or on behalf of Customers, multiplied by the percentage of such collections which is calculated in accordance with Annex II hereto to have been received in respect of the RTC Charge. "Sale Agreement" means the Transition Property Purchase and Sale Agreement dated as of May 17, 2001, between Western Massachusetts Electric Company, as Seller, and the Note Issuer, as the same may be amended and supplemented from time to time. "Seller" means Western Massachusetts Electric Company, a Massachusetts corporation, and its permitted successors and assigns under the Sale Agreement. "Servicer" means Western Massachusetts Electric Company, as the servicer of the Transition Property, or each successor (in the same capacity) pursuant to Sections 6.04 or 7.02. "Servicer Business Day" means any Business Day on which the Servicer's offices in The Commonwealth of Massachusetts and in the State of Connecticut are open for business. "Servicer Default" means an event specified in Section 7.01. "Servicing Fee" has the meaning set forth in Section 6.06(a). "Statute" means Chapter 164 of the Massachusetts Acts of 1997, entitled an Act Relative to Restructuring the Electric Utility Industry in the Commonwealth, Regulating the Provision of Electricity and Other Services, and Promoting Enhanced Consumer Protections Therein. "Termination Notice" has the meaning assigned to that term in Section 7.01(e). "TPS" means a third party supplier of energy who has entered into a TPS Service Agreement with the Servicer. "TPS Service Agreement" means an agreement between a third party supplier of energy and the Servicer pursuant to which such third party supplier of energy bills and collects the RTC Charge to and from Customers in accordance with DTE Regulations, the Financing Order and the guidelines described in Schedule A to Annex I. "Transition Charge" means the "Transition Charge" as defined in the Statute and referred to as the Seller's "Transition Charge" in Western Massachusetts Electric Company's, DTE Docket No. 97-120 and subsequent filings with the DTE pursuant thereto. "Transition Property" means the transition property that exists under Order 7 of the Financing Order and is sold by the Seller to the Note Issuer under the Sale Agreement. "Transition Property Records" has the meaning assigned to that term in Section 5.01. Section 1.02. Other Definitional Provisions. (a) Capitalized terms used herein and not otherwise defined herein have the meanings assigned to them in the Note Indenture. (b) All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (c) The words "hereof," "herein," "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement; Section, Schedule, Exhibit and Annex references contained in this Agreement are references to Sections, Schedules, Exhibits and Annexes in or to this Agreement unless otherwise specified; and the term "including" shall mean "including without limitation." (d) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter forms of such terms. ARTICLE 2 APPOINTMENT AND AUTHORIZATION Section 2.01. Appointment of Servicer; Acceptance of Appointment. Subject to Section 6.05 and Article 7, the Note Issuer hereby appoints the Servicer, and the Servicer hereby accepts such appointment, to perform the Servicer's obligations pursuant to this Agreement on behalf of and for the benefit of the Note Issuer or any assignee thereof in accordance with the terms of this Agreement and applicable law. This appointment and the Servicer's acceptance thereof may not be revoked except in accordance with the express terms of this Agreement. Section 2.02. Authorization. With respect to all or any portion of the Transition Property, the Servicer shall be, and hereby is, authorized and empowered by the Note Issuer to (a) execute and deliver, on behalf of itself and/or the Note Issuer, as the case may be, any and all instruments, documents or notices, and (b) on behalf of itself and/or the Note Issuer, as the case may be, make any filing and participate in proceedings of any kind with any governmental authorities, including with the DTE. The Note Issuer shall execute and/or furnish the Servicer with such documents as have been prepared by the Servicer for execution by the Note Issuer, and with such other documents as may be in the Note Issuer's possession, as the Servicer may determine to be necessary or appropriate to enable it to carry out its servicing and administrative duties hereunder. Upon the Servicer's written request, the Note Issuer shall furnish the Servicer with any powers of attorney or other documents necessary or appropriate to enable the Servicer to carry out its duties hereunder. Section 2.03. Dominion and Control Over the Transition Property. Notwithstanding any other provision herein, the Note Issuer shall have dominion and control over the Transition Property, and the Servicer, in accordance with the terms hereof, is acting solely as the servicing agent and custodian for the Note Issuer with respect to the Transition Property and the Transition Property Records. The Servicer shall not take any action that is not authorized by this Agreement or that shall impair the rights of the Note Issuer or the Note Trustee in the Transition Property, in each case unless such action is required by applicable law. ARTICLE 3 BILLING SERVICES Section 3.01. Duties of Servicer. The Servicer, as agent for the Note Issuer, shall have the following duties: (a) Duties of Servicer Generally. (1) General Duties. The Servicer's duties in general shall include management, servicing and administration of the Transition Property; obtaining meter reads, calculating electricity usage (including usage by Customers of any TPS), billing, collection and posting of all payments in respect of the Transition Property; responding to inquiries by Customers, the DTE, or any federal, local or other state governmental authorities with respect to the Transition Property; delivering Bills to Customers and TPSs, investigating and handling delinquencies, processing and depositing collections and making periodic remittances; furnishing periodic reports to the Note Issuer, the Note Trustee, the Certificate Trustee and the Rating Agencies; and taking all necessary action in connection with Periodic Adjustments as set forth herein. Certain of the duties set forth above may be performed by TPSs pursuant to TPS Service Agreements. Without limiting the generality of this Section 3.01(a)(1), in furtherance of the foregoing, the Servicer hereby agrees that it shall also have, and shall comply with, the duties and responsibilities relating to data acquisition, usage and bill calculation, billing, customer service functions, collection, payment processing and remittance set forth in Annex I hereto. (2) DTE Regulations Control. Notwithstanding anything to the contrary in this Agreement, the duties of the Servicer set forth in this Agreement shall be qualified in their entirety by any DTE Regulations as in effect at the time such duties are to be performed. (b) Reporting Functions. (1) Notification of Laws and Regulations. The Servicer shall promptly notify the Note Issuer, the Note Trustee, the Certificate Trustee and the Rating Agencies in writing of any laws or DTE Regulations hereafter promulgated that have a material adverse effect on the Servicer's ability to perform its duties under this Agreement. (2) Other Information. Upon the reasonable request of the Note Issuer, the Note Trustee, the Certificate Trustee, or any Rating Agency, the Servicer shall provide to such Note Issuer, Note Trustee, Certificate Trustee, or the Rating Agencies, as the case may be, any public financial information in respect of the Servicer, or any material information regarding the Transition Property to the extent it is reasonably available to the Servicer, as may be reasonably necessary and permitted by law for the Note Issuer, the Note Trustee, the Certificate Trustee, or the Rating Agencies to monitor the Servicer's performance hereunder. (3) Preparation of Reports to be Filed with the SEC. The Servicer shall prepare or cause to be prepared any reports required to be filed by the Note Issuer or the Certificate Issuer under the securities laws, including a copy of each Quarterly Servicer Certificate described in Section 4.01(d)(3), the annual Certificate of Compliance described in Section 3.03 and the Annual Accountant's Report described in Section 3.04. Section 3.02. Servicing and Maintenance Standards. On behalf of the Note Issuer, the Servicer shall (a) manage, service, administer and make collections in respect of the Transition Property with reasonable care and in accordance with applicable law, including all applicable DTE Regulations and guidelines, using the same degree of care and diligence that the Servicer exercises with respect to similar assets for its own account and, if applicable, for others; (b) follow customary standards, policies and procedures for the industry in performing its duties as Servicer; (c) use all reasonable efforts, consistent with its customary servicing procedures, to bill and collect the RTC Charge; (d) file all filings under the applicable Uniform Commercial Code or the Statute necessary or desirable to maintain the perfected ownership interest and security interest of the Note Issuer and the Note Trustee in the Transition Property, (e) comply in all material respects with all laws and regulations applicable to and binding on it relating to the Transition Property, and (f) submit at least annually the Periodic Adjustments pursuant to Section 4.01. The Servicer shall follow such customary and usual practices and procedures as it shall deem necessary or advisable in its servicing of all or any portion of the Transition Property, which, in the Servicer's judgment, may include the taking of legal action, at the Note Issuer's expense. Section 3.03. Certificate of Compliance. The Servicer shall deliver to the Note Issuer, the Note Trustee, the Certificate Trustee and the Rating Agencies on or before March 31 of each year, commencing March 31, 2002 to and including the March 31 succeeding the Retirement of the Notes, an Officer's Certificate substantially in the form of Exhibit A hereto (a "Certificate of Compliance"), stating that: (i) a review of the activities of the Servicer during the twelve months ended the preceding December 31 (or, in the case of the first Certificate of Compliance to be delivered on or before March 31, 2002, the period of time from the date of this Agreement until December 31, 2001) and of its performance under this Agreement has been made under such Responsible Officer's supervision, and (ii) to such Responsible Officer's knowledge, based on such review, the Servicer has fulfilled all of its obligations in all material respects under this Agreement throughout such twelve months (or, in the case of the Certificate of Compliance to be delivered on or before March 31, 2002, the period of time from the date of this Agreement until December 31, 2001), or, if there has been a default in the fulfillment of any such material obligation, specifying each such material default known to such Responsible Officer and the nature and status thereof. Section 3.04. Annual Report by Independent Public Accountants. (a) The Servicer, at the Note Issuer's expense, shall cause a firm of independent certified public accountants (which may provide other services to the Servicer) to prepare, and the Servicer shall deliver to the Note Issuer, the Note Trustee, the Certificate Trustee and the Rating Agencies, a report addressed to the Servicer (the "Annual Accountant's Report"), which may be included as part of the Servicer's customary auditing activities, for the information and use of the Note Issuer, the Note Trustee, the Certificate Trustee and the Rating Agencies, on or before March 31 each year, beginning March 31, 2002 to and including the March 31 succeeding the Retirement of the Notes, to the effect that such firm has performed certain procedures, agreed between the Servicer and such accountants, in connection with the Servicer's compliance with its obligations under this Agreement during the preceding twelve months ended December 31 (or, in the case of the first Annual Accountant's Report to be delivered on or before March 31, 2002, the period of time from the date of this Agreement until December 31, 2001), identifying the results of such procedures and including any exceptions noted. (b) The Annual Accountant's Report shall also indicate that the accounting firm providing such report is independent of the Servicer within the meaning of the Code of Professional Ethics of the American Institute of Certified Public Accountants. ARTICLE 4 SERVICES RELATED TO PERIODIC ADJUSTMENTS; REMITTANCES Section 4.01. Periodic Adjustments. From time to time, until the Retirement of the Notes, the Servicer shall identify the need for Periodic Adjustments and shall take all reasonable action to obtain and implement such Periodic Adjustments, all in accordance with the following: (a) Expected Amortization Schedule. The Expected Amortization Schedule is attached hereto as Schedule 4.01(a). (b) Routine Periodic Adjustments and Yearly Filings. (1) Routine Anniversary Periodic Adjustments and Filings. For the purpose of preparing a Routine Anniversary True-Up Letter, the Servicer shall: (A) update the assumptions underlying the calculation of the RTC Charge, including energy usage volume, the rate of charge-offs and estimated expenses and fees of the Note Issuer and the Certificate Issuer to the extent not fixed, in each case for the Remittance Period beginning on March 1 of each year; (B) determine the Required Debt Service for such Remittance Period based upon such updated assumptions; and (C) determine the RTC Charge to be charged during such Remittance Period based upon such Required Debt Service. The Servicer shall file a Routine Anniversary True-Up Letter with the DTE prior to February 7 of each year and such Routine Anniversary True-Up Letter shall reflect information updated in all respects as of a date no earlier than December 31 of the calendar year preceding the calendar year in which such Routine Anniversary True-Up Letter is filed. (2) Routine Periodic Adjustments. Beginning in the last year the Notes are scheduled to be outstanding, the Servicer shall file a Routine True-Up Letter at least 15 days before the end of each calendar quarter. In addition, the Servicer shall file a Routine True-Up Letter at least 15 days before the end of any calendar quarter or, beginning in the last year the Notes are scheduled to be outstanding, at least 15 days before the end of any calendar month, at each such time as the Servicer may reasonably determine is necessary to meet the Required Debt Service for the then current Remittance Period. (3) Servicer's Efforts. The Servicer shall take all reasonable actions and make all reasonable efforts to secure any Periodic Adjustments. (c) Non-Routine Periodic Adjustments. (1) When Required. Whenever the Servicer determines that the existing model for calculating the RTC Charge should be amended or revised, subject to the consent of the Note Issuer under the conditions set forth in Section 3.18 of the Note Indenture, the Servicer shall file a Non-Routine True-Up Letter with the DTE designating the adjustments to such model and any corresponding adjustments to the RTC Charge (collectively, a "Non-Routine Periodic Adjustment"), subject to the review and approval of the DTE pursuant to the Financing Order. (2) Servicer's Efforts. The Servicer shall take all reasonable actions and make all reasonable efforts to secure any Non-Routine Periodic Adjustments. (3) Implementation. The Servicer shall implement any resulting adjustments to the model and any resulting revised RTC Charge as of the effective date of the Non-Routine True-Up Letter. (d) Reports. (1) Notification of Advice Letter Filings and Periodic Adjustments. Whenever the Servicer files an Advice Letter with the DTE, the Servicer shall send a copy of such filing to the Note Issuer, the Note Trustee, the Certificate Trustee and the Rating Agencies concurrently therewith. If any Periodic Adjustment requested in any such Advice Letter filing does not become effective on the applicable date as provided by the Financing Order, the Servicer shall notify the Note Issuer, the Note Trustee, the Certificate Trustee and the Rating Agencies by the end of the second Servicer Business Day after such applicable date. (2) Monthly Servicer Certificate. So long as any Notes are outstanding, not later than fifteen (15) days after the end of each month after the Certificates are issued (excluding May, 2001), or if such day is not a Servicer Business Day, the next succeeding Servicer Business Day, the Servicer shall deliver a written report substantially in the form of Exhibit C hereto (the "Monthly Servicer Certificate") to the Note Issuer, the Note Trustee, the Certificate Trustee and the Rating Agencies. (3) Quarterly Servicer Certificate. So long as any Notes are outstanding, not later than 11:00 a.m. (New York City time) on the Servicer Business Day immediately preceding each Payment Date, the Servicer shall deliver a written report substantially in the form of Exhibit D hereto (the "Quarterly Servicer Certificate") to the Note Issuer, the Note Trustee, the Certificate Trustee and the Rating Agencies. (4) TPS Reports. The Servicer shall provide to the Rating Agencies, upon request, any publicly available reports filed by the Servicer with the DTE (or otherwise made publicly available by the Servicer) relating to TPSs and any other non-confidential and non-proprietary information relating to TPSs reasonably requested by the Rating Agencies. Section 4.02. Limitation of Liability. (a) Specific Limitations. The Note Issuer and the Servicer expressly agree and acknowledge that: (1) Capacity. In connection with any Periodic Adjustment, the Servicer is acting solely in its capacity as the servicing agent hereunder. (2) No Liability for Failure to File. Neither the Servicer nor the Note Issuer shall be responsible in any manner for, and shall have no liability whatsoever as a result of, any action, decision, ruling or other determination made or not made, or any delay (other than any delay resulting from the Servicer's failure to file for Periodic Adjustments or Non-Routine Periodic Adjustments required by Section 4.01 in a timely and correct manner or other material breach by the Servicer of its duties under this Agreement that materially and adversely affects any Periodic Adjustments or Non-Routine Periodic Adjustments), by the DTE (or, in connection with any Non-Routine Periodic Adjustment, by the Rating Agencies) in any way related to the Transition Property or in connection with any Periodic Adjustment or Non- Routine Periodic Adjustment, the subject of any filings under Section 4.01, any proposed Periodic Adjustment or Non-Routine Periodic Adjustment, or the approval of the RTC Charge and the adjustments thereto. (3) No Liability for Calculation. The Servicer shall have no liability whatsoever relating to the calculation of the RTC Charge and the adjustments thereto (including any Non-Routine Periodic Adjustment), including as a result of any inaccuracy of any of the assumptions made in such calculation regarding expected energy usage volume, the rate of charge-offs, estimated expenses and fees of the Note Issuer and the Certificate Issuer, so long as the Servicer has not acted in a negligent manner in connection therewith, nor shall the Servicer have any liability whatsoever as a result of any Person, including the Noteholders or the Certificateholders, not receiving any payment, amount or return anticipated or expected in respect of any Note or Certificate generally, except only to the extent that the Servicer is liable under Section 6.02 of this Agreement. (b) Liability for Misrepresentation and Breach. Notwithstanding the foregoing, this Section 4.02 shall not relieve the Servicer of any liability under Section 6.02 for any misrepresentation by the Servicer under Section 6.01 or for any breach by the Servicer of its obligations under this Agreement. Section 4.03. Remittances. (a) Remittance to General Subaccount. Pursuant to the remittance methodology more fully described in Annex II hereto, starting with collections that are received on the first Servicer Business Day that is at least 45 days after the first day on which Western Massachusetts Electric Company imposes the RRB Charge, the Servicer will remit to the Note Trustee, within two Servicer Business Days after receipt, by wire transfer of immediately available funds to the General Subaccount of the Collection Account, an amount equal to the RTC Charge Payments (as calculated in accordance with Annex II hereto) received on such day and on any prior day that was not a Servicer Business Day for which a Remittance has not previously been made. Prior to or simultaneous with each Remittance to the General Subaccount of the Collection Account pursuant to this Section, the Servicer shall provide written notice to the Note Trustee of each such Remittance (including the exact dollar amount to be remitted). (b) Frequency of Remittances. The Servicer may elect to make Remittances less frequently than on a daily basis, and shall be permitted to do so, but in any event shall make Remittances within one calendar month of collection thereof, provided that the Servicer shall send written notice of such election to the Note Issuer, the Note Trustee and the Certificate Trustee, together with (i) an Officer's Certificate stating that no Servicer Default has occurred and is continuing under this Servicing Agreement, (ii) evidence that the Rating Agency Condition has been satisfied, (iii) either the Servicer's commercial paper is rated P-1 by Moody's or the Servicer's long term unsecured debt is rated A2 or better by Moody's, (iv) evidence of the delivery by the Servicer to the Note Issuer or the Note Trustee, as applicable, of any credit enhancement which may be required by the Rating Agencies in connection therewith in form and substance satisfactory or to the Note Issuer and the Note Trustee, as applicable, the cost of which credit enhancement shall be borne solely by the Servicer, and (v) an executed copy of any appropriate amendment hereto or to the Note Indenture or any other Basic Agreement as reasonably requested by the Servicer, the Note Issuer or the Note Trustee in connection therewith. (c) No Deduction. The Servicer agrees and acknowledges that it will remit RTC Charge Payments in accordance with this Section 4.03 without any surcharge, fee, offset, charge or other deduction except for late fees permitted by Section 6.06. ARTICLE 5 THE TRANSITION PROPERTY Section 5.01. Custody of Transition Property Records. To assure uniform quality in servicing the Transition Property and to reduce administrative costs, the Note Issuer hereby revocably appoints the Servicer, and the Servicer hereby accepts such appointment, to act as the agent of the Note Issuer and the Note Trustee as custodian of any and all documents and records that the Servicer shall keep on file, in accordance with its customary procedures, relating to the Transition Property, including copies of the Financing Order and Advice Letters relating thereto and all documents filed with the DTE in connection with any Periodic Adjustment or Non-Routine Periodic Adjustment and computational records relating thereto (collectively, the "Transition Property Records"), which are hereby constructively delivered to the Note Trustee, as pledgee of the Note Issuer with respect to all Transition Property. Section 5.02. Duties of Servicer as Custodian. (a) Safekeeping. The Servicer shall hold the Transition Property Records on behalf of the Note Issuer and the Note Trustee and maintain such accurate and complete accounts, records and computer systems pertaining to the Transition Property Records on behalf of the Note Issuer and the Note Trustee as shall enable the Note Issuer to comply with this Agreement and the Note Indenture. In performing its duties as custodian the Servicer shall act with reasonable care, using that degree of care and diligence that the Servicer exercises with respect to comparable assets that the Servicer services for itself or, if applicable, for others. The Servicer shall promptly report to the Note Issuer and the Note Trustee any failure on its part to hold the Transition Property Records and maintain its accounts, records and computer systems as herein provided and promptly take appropriate action to remedy any such failure. Nothing herein shall be deemed to require an initial review or any periodic review by the Note Issuer or the Note Trustee of the Transition Property Records. The Servicer's duties to hold the Transition Property Records on behalf of the Note Issuer set forth in this Section 5.02, to the extent such Transition Property Records have not been previously transferred to a successor Servicer pursuant to Article 7, shall terminate one year and one day after the earlier of the date on which (i) the Servicer is succeeded by a successor Servicer in accordance with Article 7 and (ii) no Notes are outstanding. (b) Maintenance of and Access to Records. The Servicer shall maintain at all times records and accounts that permit the Servicer to identify RTC Charges billed. The Servicer shall maintain the Transition Property Records in West Springfield, Massachusetts or at such other office in the United States of America as shall be specified to the Note Issuer and the Note Trustee by written notice at least 30 days prior to any change in location. The Servicer shall make available for inspection to the Note Issuer and the Note Trustee or their respective duly authorized representatives, attorneys or auditors the Transition Property Records at such times during normal business hours as the Note Issuer or the Note Trustee shall reasonably request and which do not unreasonably interfere with the Servicer's normal operations. Nothing in this Section 5.02(b) shall affect the obligation of the Servicer to observe any applicable law (including any DTE Regulations) prohibiting disclosure of information regarding the Customers, and the failure of the Servicer to provide access to such information as a result of such obligation shall not constitute a breach of this Section 5.02(b). (c) Release of Documents. Upon instruction from the Note Trustee in accordance with the Note Indenture, the Servicer shall release any Transition Property Records to the Note Trustee, the Note Trustee's agent or the Note Trustee's designee, as the case may be, at such place or places as the Note Trustee may designate, as soon as practicable. (d) Defending Transition Property Against Claims. The Servicer, shall institute any action or proceeding necessary to compel performance by the DTE or The Commonwealth of Massachusetts of any of their obligations or duties under the Statute, the Financing Order or any Advice Letter, and the Servicer agrees to take such legal or administrative actions, including defending against or instituting and pursuing legal actions and appearing or testifying at hearings or similar proceedings, as may be reasonably necessary to block or overturn any attempts to cause a repeal of, modification of or supplement to the Statute or the Financing Order or the rights of holders of Transition Property by executive action, legislative enactment, voter initiative or constitutional amendment that would be adverse to Certificateholders, Noteholders, the Note Issuer, the Note Trustee, the Delaware Trustee or the Certificate Trustee. The costs of any such action shall be payable from RTC Charge Collections as an Operating Expense in accordance with the priorities set forth in Section 8.02(d) of the Note Indenture. The Servicer's obligations pursuant to this Section 5.02 shall survive and continue notwithstanding the fact that the payment of Operating Expenses pursuant to Section 8.02(d) of the Note Indenture may be delayed (it being understood that the Servicer may be required to advance its own funds to satisfy its obligations hereunder). Section 5.03. Instructions; Authority to Act. For so long as any Notes remain outstanding, the Servicer shall be deemed to have received proper instructions with respect to the Transition Property Records upon its receipt of written instructions signed by a Responsible Officer (as defined in the Note Indenture) of the Note Trustee. Section 5.04. Effective Period and Termination. The Servicer's appointment as custodian shall become effective as of the Closing Date and shall continue in full force and effect until terminated pursuant to this Section 5.04. If any Servicer shall resign as Servicer in accordance with the provisions of this Agreement or if all of the rights and obligations of any Servicer shall have been terminated under Section 7.01, the appointment of such Servicer as custodian shall terminate upon appointment of a successor Servicer, subject to the approval of the DTE, and acceptance by such successor Servicer of such appointment. Section 5.05. Monitoring of Third-Party Suppliers. From time to time, until the Retirement of the Notes, the Servicer shall, using the same degree of care and diligence that it exercises with respect to payments owed to it for its own account, implement such procedures and policies as are necessary to properly enforce the obligations of each TPS to remit RTC Charges, in accordance with the terms and provisions of the Financing Order, the TPS Service Agreement and Schedule A to Annex I hereto. Section 5.06. Monitoring and Collecting Exit Charges. The Servicer shall, using the same degree of care and diligence that it exercises with respect to payments owed to it for its own account, bill and collect any exit charges to which it may be entitled pursuant to Section 1G(g) of Chapter 164 of the Massachusetts General Laws, and shall remit that portion of the exit charges representing (or allocable to) the RTC Charge together with the RTC Charge Payments for a particular billing date. ARTICLE 6 THE SERVICER Section 6.01. Representations and Warranties of Servicer. The Servicer makes the following representations and warranties, as of the Closing Date, on which the Note Issuer is deemed to have relied in entering into this Agreement relating to the servicing of the Transition Property. (a) Organization and Good Standing. The Servicer is duly organized and validly existing as a corporation in good standing under the laws of The Commonwealth of Massachusetts, with the requisite corporate power and authority to own its properties as such properties are currently owned and to conduct its business as such business is now conducted by it, and has the requisite corporate power and authority to service the Transition Property and to hold the Transition Property Records as custodian. (b) Due Qualification. The Servicer is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of property or the conduct of its business (including the servicing of the Transition Property as required by this Agreement) shall require such qualifications, licenses or approvals (except where the failure to so qualify or obtain such licenses and approvals would not be reasonably likely to have a material adverse effect on the Servicer's business, operations, assets, revenues or properties or adversely affect the servicing of the Transition Property). (c) Power and Authority. The Servicer has the requisite corporate power and authority to execute and deliver this Agreement and to carry out its terms; and the execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action on the part of the Servicer. (d) Binding Obligation. This Agreement constitutes a legal, valid and binding obligation of the Servicer enforceable against it in accordance with its terms, subject to applicable insolvency, reorganization, moratorium, fraudulent transfer and other laws relating to or affecting creditors' rights generally from time to time in effect and to general principles of equity (including concepts of materiality, reasonableness, good faith and fair dealing), regardless of whether considered in a proceeding in equity or at law. (e) No Violation. The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof do not: (i) conflict with or result in any breach of any of the terms and provisions of, nor constitute (with or without notice or lapse of time) a default under, the articles of organization or by-laws of the Servicer, or any material indenture, agreement or other instrument to which the Servicer is a party or by which it is bound; (ii) result in the creation or imposition of any Lien upon any of the Servicer's properties pursuant to the terms of any such indenture, agreement or other instrument; nor violate any existing law or any existing order, rule or regulation applicable to the Servicer of any court or of any federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Servicer or its properties, so as to adversely affect the Servicer, the Noteholders or the Certificateholders. (f) No Proceedings. There are no proceedings pending and, to the Servicer's knowledge, there are no proceedings threatened and, to the Servicer's knowledge, there are no investigations pending or threatened, before any court, federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Servicer or its properties involving or relating to the Servicer or the Note Issuer or, to the Servicer's knowledge, any other Person: (i) asserting the invalidity of this Agreement; (ii) seeking to prevent the consummation of any of the transactions contemplated by this Agreement; or (iii) seeking any determination or ruling that might materially and adversely affect the performance by the Servicer of its obligations under, or the validity or enforceability of, this Agreement. (g) Approvals. No approval, authorization, consent, order or other action of, or filing with, any court, federal or state regulatory body, administrative agency or other governmental instrumentality is required in connection with the execution and delivery by the Servicer of this Agreement, the performance by the Servicer of the transactions contemplated hereby or the fulfillment by the Servicer of the terms hereof, except those that have been obtained or made and those that the Servicer is required to make in the future pursuant to Article 3 or 4 and post-closing filings in connection therewith. Section 6.02. Indemnities of Servicer. (a) The Servicer shall be liable in accordance herewith only to the extent of the obligations specifically undertaken by the Servicer and as expressly provided under this Section 6.02. (b) The Servicer shall indemnify the Note Issuer, the Noteholders and the Certificateholders (each an "Indemnified Person" for purposes of Section 6.02 (b) and (d)) for, and defend and hold harmless each such Person from and against, any and all liabilities, obligations, losses, damages, payments, claims, costs or expenses of any kind whatsoever (collectively, "Losses") that may be imposed on, incurred by or asserted against any such Person as a result of (i) the Servicer's willful misconduct or negligence in the performance of its duties or observance of its covenants under this Agreement (including the Servicer's willful misconduct or negligence relating to the maintenance and custody by the Servicer, as custodian, of the Transition Property Records) or (ii) the Servicer's breach in any material respect of any of its representations or warranties in this Agreement; provided, however, that the Servicer shall not be liable for any Losses resulting from the willful misconduct or gross negligence of any such Indemnified Person; and, provided, further, that the Noteholders and the Certificateholders shall be entitled to enforce their rights and remedies against the Servicer under this Section 6.02(b) solely through a cause of action brought for their benefit by the Note Trustee or the Certificate Trustee, as the case may be; and, provided, further, that the Servicer shall not be liable for any Losses, regardless of when incurred, after the Notes and the Certificates have been paid in full, except as provided in Section 6.02(c). (c) The Servicer shall indemnify and hold harmless the Note Trustee, the Delaware Trustee, the Certificate Trustee, the Certificate Issuer, The Commonwealth of Massachusetts, the Executive Office for Administration and Finance of The Commonwealth of Massachusetts and the Agencies and any of their respective affiliates, officials, officers, directors, employees, consultants, counsel and agents (each an "Indemnified Person" for purposes of Section 6.02(c) and (d)) for, and defend and hold harmless each such Person from and against, any and all Losses imposed on, incurred by or asserted against any of such Indemnified Persons as a result of: (i) the Servicer's willful misconduct or negligence in the performance of its duties or observance of its covenants under this Agreement (including the Servicer's willful misconduct or negligence relating to the maintenance and custody by the Servicer, as custodian, of the Transition Property Records) or (ii) the Servicer's breach in any material respect of any of its representations or warranties in this Agreement; provided, however, that the Servicer shall not be liable for any Losses resulting from the willful misconduct or gross negligence of such Indemnified Person or resulting from a breach of a representation or warranty made by such Indemnified Person in any of the Basic Documents that gives rise to the Servicer's breach. (d) The Servicer shall not be required to indemnify an Indemnified Person for any amount paid or payable by such Indemnified Person pursuant to Section 6.02(b) or (c) in the settlement of any action, proceeding or investigation without the written consent of the Servicer, which consent shall not be unreasonably withheld. Promptly after receipt by an Indemnified Person of notice of its involvement in any action, proceeding or investigation, such Indemnified Person shall, if a claim for indemnification in respect thereof is to be made against the Servicer under Section 6.02 (b) or (c), notify the Servicer in writing of such involvement. Failure by an Indemnified Person to so notify the Servicer shall relieve the Servicer from the obligation to indemnify and hold harmless such Indemnified Person under Section 6.02(b) or (c), as applicable, only to the extent that the Servicer suffers actual prejudice as a result of such failure. With respect to any action, proceeding or investigation brought by a third party for which indemnification may be sought under Section 6.02(b) or (c), the Servicer shall be entitled to assume the defense of any such action, proceeding or investigation. Upon assumption by the Servicer of the defense of any such action, proceeding or investigation, the Indemnified Person shall have the right to participate in such action or proceeding and to retain its own counsel. The Servicer shall be entitled to appoint counsel of the Servicer's choice at the Servicer's expense to represent the Indemnified Person in any action, proceeding or investigation for which a claim of indemnification is made against the Servicer under Section 6.02(b) or (c) (in which case the Servicer shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the Indemnified Person except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the Indemnified Person. Notwithstanding the Servicer's election to appoint counsel to represent the Indemnified Person in an action, proceeding or investigation, the Indemnified Person shall have the right to employ separate counsel (including local counsel), and the Servicer shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of counsel chosen by the Servicer to represent the Indemnified Person would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the Indemnified Person and the Servicer and the Indemnified Person shall have reasonably concluded that there may be legal defenses available to it that are different from or additional to those available to the Servicer, (iii) the Servicer shall not have employed counsel reasonably satisfactory to the Indemnified Person to represent the Indemnified Person within a reasonable time after notice of the institution of such action or (iv) the Servicer shall authorize the Indemnified Person to employ separate counsel at the expense of the Servicer. Notwithstanding the foregoing, the Servicer shall not be obligated to pay for the fees, costs and expenses of more than one separate counsel for the Indemnified Persons (in addition to local counsel). The Servicer will not, without the prior written consent of the Indemnified Person, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought under Section 6.02(b) or (c), as applicable (whether or not the Indemnified Person is an actual or potential party to such claim or action) unless such settlement, compromise or consent includes an unconditional release of the Indemnified Person from all liability arising out of such claim, action, suit or proceeding. (e) Indemnification under Section 6.02(b) and 6.02(c) shall include reasonable fees and out-of-pocket expenses of investigation and litigation (including reasonable attorneys' fees and expenses), except as otherwise provided in this Agreement. (f) For purposes of Section 6.02(b) and 6.02(c), in the event of the termination of the rights and obligations of Western Massachusetts Electric Company (or any successor thereto pursuant to Section 6.04) as Servicer pursuant to Section 7.01, or a resignation by such Servicer pursuant to this Agreement, such Servicer shall be deemed to be the Servicer pending appointment of a successor Servicer pursuant to Section 7.02. (g) The indemnities contained in this Section 6.02 survive the resignation or termination of the Note Trustee, the Certificate Trustee or the Delaware Trustee or the termination of this Agreement. Section 6.03. Limitation on Liability of Servicer and Others. Except as otherwise provided under this Agreement, neither the Servicer nor any of the directors, officers, employees or agents of the Servicer shall be liable to the Note Issuer or any other Person for any action taken or for refraining from the taking of any action pursuant to this Agreement or for errors in judgment; provided, however, that this provision shall not protect the Servicer or any director, officer, employee or agent of the Servicer against any liability that would otherwise be imposed by reason of willful misconduct or negligence in the performance of duties under this Agreement. The Servicer and any director, officer, employee or agent of the Servicer may rely in good faith on the advice of counsel reasonably acceptable to the Note Trustee or on any document of any kind, prima facie properly executed and submitted by any Person, respecting any matters arising under this Agreement. Except as provided in this Agreement, the Servicer shall not be under any obligation to appear in, prosecute or defend any legal action relating to the Transition Property. Section 6.04. Merger or Consolidation of, or Assumption of the Obligations of, Servicer. Any Person (a) into which the Servicer may be merged or consolidated, (b) which may result from any merger or consolidation to which the Servicer shall be a party or (c) which may succeed to the properties and assets of the Servicer substantially as a whole, which Person in any of the foregoing cases executes an agreement of assumption to perform every obligation of the Servicer hereunder, shall be the successor to the Servicer under this Agreement without further act on the part of any of the parties to this Agreement; provided, however, that (i) immediately after giving effect to such transaction, no Servicer Default and no event which, after notice or lapse of time, or both, would become a Servicer Default shall have occurred and be continuing, (ii) the Servicer shall have delivered to the Note Issuer and the Note Trustee an Officers' Certificate stating that such consolidation, merger or succession and such agreement of assumption comply with this Section and that all conditions precedent provided for in this Agreement relating to such transaction have been complied with, (iii) the Servicer shall have delivered to the Note Issuer and the Note Trustee an Opinion of Counsel stating that, in the opinion of such counsel (A) such consolidation, merger or succession and such agreement of assumption comply with this Section and that all conditions precedent provided for in this Agreement relating to such transaction have been complied with and (B) either (1) all statutory filings to be made by the Servicer, including filings with the DTE pursuant to the Statute and filings under the applicable UCC, have been executed and filed that are necessary to preserve and protect fully the interests of the Note Issuer and the Note Trustee in the Transition Property and reciting the details of such filings or (2) no such action shall be necessary to preserve and protect such interests and (iv) the Rating Agencies shall have received prior written notice of such transaction. When any Person acquires the properties and assets of the Servicer substantially as a whole and becomes the successor to the Servicer in accordance with the terms of this Section 6.04, then upon satisfaction of all of the other conditions of this Section 6.04, the Servicer shall automatically and without further notice be released from all its obligations hereunder. Section 6.05. Western Massachusetts Electric Company Not to Resign as Servicer. Subject to the provisions of Section 6.04, Western Massachusetts Electric Company shall not resign from the obligations and duties hereby imposed on it as Servicer under this Agreement except upon either (a) a determination that the performance of its duties under this Agreement shall no longer be permissible under applicable law or (b) satisfaction of the following: (i) the Rating Agency Condition shall have been satisfied (except that with respect to Moody's it shall be sufficient to provide ten days prior notice) and (ii) the DTE shall have approved such resignation. Notice of any such determination permitting the resignation of Western Massachusetts Electric Company shall be communicated to the Note Issuer, the Note Trustee, the Certificate Trustee and the Rating Agencies at the earliest practicable time (and, if such communication is not in writing, shall be confirmed in writing at the earliest practicable time) and any such determination that the performance of Western Massachusetts Electric Company's duties under this Agreement shall no longer be permissible under applicable law shall be evidenced by an Opinion of Counsel to such effect delivered by Western Massachusetts Electric Company to the Note Issuer, the Note Trustee and the Certificate Trustee concurrently with or promptly after such notice. No such resignation shall become effective until a successor Servicer shall have assumed the responsibilities and obligations of Western Massachusetts Electric Company in accordance with Section 7.02. Section 6.06. Servicing Compensation. (a) In consideration for its services hereunder, until the Retirement of the Notes, the Servicer shall receive an annual fee (the "Servicing Fee") in an amount equal to (i) five one-hundredth of one percent (0.05%) of the initial principal balance of the Notes for so long as the Servicer is Western Massachusetts Electric Company or any successor Servicer that bills the RTC Charge concurrently with other charges for services or (ii) up to one and one-quarter percent (1.25%) of the initial principal balance of the Notes for so long as the Servicer is a successor Servicer that bills the RTC Charge separately to Customers (which amount shall be determined by a separate agreement between the Note Issuer and the Servicer). The Servicing Fee shall be payable in quarterly installments on each Payment Date. The Servicer also shall be entitled to retain as additional compensation (i) any interest earnings on RTC Charge Payments received by the Servicer and invested by the Servicer pursuant to Section 6(c) of Annex I hereto prior to remittance to the Collection Account and (ii) all late payment charges, if any, collected from Customers or TPSs. (b) The Servicing Fee set forth in Section 6.06(a) and expenses provided for in Section 6.06(c) shall be paid to the Servicer by the Note Trustee, on each Payment Date in accordance with the priorities set forth in Section 8.02(d) of the Note Indenture, by wire transfer of immediately available funds from the Collection Account to an account designated by the Servicer. Any portion of the Servicing Fee not paid on such date shall be added to the Servicing Fee payable on the subsequent Payment Date. (c) The Note Issuer shall pay all expenses incurred by the Servicer in connection with its activities hereunder (including any reasonable fees to and disbursements by accountants, counsel, or any other Person, any taxes imposed on the Servicer (other than taxes based on the Servicer's net income) and any expenses incurred in connection with reports to Noteholders and Certificateholders, subject to the priorities set forth in Section 8.02(d) of the Note Indenture). Section 6.07. Compliance with Applicable Law. The Servicer covenants and agrees, in servicing the Transition Property, to comply in all material respects with all laws applicable to, and binding upon, the Servicer and relating to such Transition Property the noncompliance with which would have a material adverse effect on the value of the Transition Property; provided, however, that the foregoing is not intended to, and shall not, impose any liability on the Servicer for noncompliance with any law that the Servicer is contesting in good faith in accordance with its customary standards and procedures. Section 6.08. Access to Certain Records and Information Regarding Transition Property. The Servicer shall provide to the Noteholders, the Note Issuer, the Note Trustee and the Certificate Trustee access to the Transition Property Records in such cases where the Noteholders, the Note Issuer, the Note Trustee and the Certificate Trustee shall be required by applicable law to be provided access to such records. Access shall be afforded without charge, but only upon reasonable request and during normal business hours at the respective offices of the Servicer. Nothing in this Section shall affect the obligation of the Servicer to observe any applicable law (including any DTE Regulation) prohibiting disclosure of information regarding the Customers, and the failure of the Servicer to provide access to such information as a result of such obligation shall not constitute a breach of this Section. Section 6.09. Appointments. (a) The Servicer may at any time appoint any Person to perform all or any portion of its obligations as Servicer hereunder; provided, however, that the Rating Agency Condition shall have been satisfied in connection therewith (except that with respect to Moody's it shall be sufficient to provide ten days prior notice); and, provided, further, that the Servicer shall remain obligated and be liable under this Agreement for the servicing and administering of the Transition Property in accordance with the provisions hereof without diminution of such obligation and liability by virtue of the appointment of such Person and to the same extent and under the same terms and conditions as if the Servicer alone were servicing and administering the Transition Property; and, provided, further, however, that nothing herein (including the Rating Agency Condition) shall preclude the execution by the Servicer of a TPS Service Agreement with any TPS pursuant to applicable DTE Regulations. The fees and expenses of any such Person shall be as agreed between the Servicer and such Person from time to time and none of the Note Issuer, the Note Trustee, the Noteholders or any other Person shall have any responsibility therefor or right or claim thereto. Any such appointment shall not constitute a Servicer resignation under Section 6.05. (b) The Servicer has no employees. Therefore, in carrying out the foregoing duties or any of its other obligations under this Agreement, the Servicer may enter into transactions with or otherwise deal with any of its Affiliates to obtain the services of employees of such Affiliates as is its current practice; provided, however, that the terms of any such transactions or dealings shall be no less favorable to the Note Issuer than would be available from unaffiliated parties or that would be available if the Servicer were to hire its own employees to perform such services. Section 6.10. No Servicer Advances. The Servicer shall not make any advances of interest on or principal of the Notes or the Certificates. Section 6.11. Maintenance of Operations. The Servicer agrees to continue to operate its distribution system to provide service to its customers so long as it is acting as the Servicer under this Agreement. ARTICLE 7 DEFAULT Section 7.01. Servicer Default. If any one of the following events (each a "Servicer Default") shall occur and be continuing: (a) any failure by the Servicer to remit to the Collection Account on behalf of the Note Issuer any required Remittance that shall continue unremedied for a period of five (5) Business Days after written notice of such failure is received by the Servicer from the Note Issuer or the Note Trustee; or (b) any failure on the part of the Servicer duly to observe or to perform in any material respect any other covenants or agreements of the Servicer set forth in this Agreement, which failure shall (a) materially and adversely affect the rights of the Noteholders or Certificateholders and (ii) continue unremedied for a period of 60 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given (A) to the Servicer by the Note Issuer or (B) to the Servicer by the Note Trustee or by the Holders of Notes evidencing not less than 25 percent of the Outstanding Amount of the Notes; or (c) any representation or warranty made by the Servicer in this Agreement shall prove to have been incorrect in any material respect when made, which has a material adverse effect on the Noteholders or Certificateholders and which material adverse effect continues unremedied for a period of 60 days after written notice of such failure is received by the Servicer from the Note Issuer or the Note Trustee; or (d) an Insolvency Event occurs with respect to the Servicer; then, and in each and every case, so long as the Servicer Default shall not have been remedied, either the Note Trustee, or the Holders of Notes evidencing not less than 25 percent of the Outstanding Amount of the Notes, by notice then given in writing to the Servicer (and to the Note Trustee if given by the Noteholders) (a "Termination Notice") may terminate all the rights and obligations (other than the obligations set forth in Section 6.02) of the Servicer under this Agreement. In addition, upon a Servicer Default described in Section 7.01(a), each of the following shall be entitled to apply to the DTE for sequestration and payment of revenues arising with respect to the Transition Property: (1) the Note Trustee or the Noteholders; (2) the Certificate Trustee or the Certificateholders; (3) the Delaware Trustee; (4) the Note Issuer or its assignees; or (5) pledgees or transferees of the Transition Property, including transferees under Section 1H(f) of Chapter 164 of the Massachusetts General Laws and beneficiaries of the statutory lien pursuant to Section 1H(e) of Chapter 164 of the Massachusetts General Laws. On or after the receipt by the Servicer of a Termination Notice, and subject to the approval of the DTE, all authority and power of the Servicer under this Agreement, whether with respect to the Notes, the Transition Property, the RTC Charge or otherwise, shall, without further action, pass to and be vested in such successor Servicer as may be appointed under Section 7.02; and, without limitation, the Note Trustee is hereby authorized and empowered to execute and deliver, on behalf of the predecessor Servicer, as attorney-in-fact or otherwise, any and all documents and other instruments, and to do or accomplish all other acts or things necessary or appropriate to effect the purposes of such Termination Notice, whether to complete the transfer of the Transition Property Records and related documents, or otherwise. The predecessor Servicer shall cooperate with the successor Servicer, the Note Issuer and the Note Trustee in effecting the termination of the responsibilities and rights of the predecessor Servicer under this Agreement, including the transfer to the successor Servicer for administration by it of all cash amounts that shall at the time be held by the predecessor Servicer for remittance, or shall thereafter be received by it with respect to the Transition Property or the RTC Charge. In case a successor Servicer is appointed as a result of a Servicer Default, all reasonable costs and expenses (including reasonable attorneys' fees and expenses) incurred in connection with transferring the Transition Property Records to the successor Servicer and amending this Agreement to reflect such succession as Servicer pursuant to this Section shall be paid by the predecessor Servicer upon presentation of reasonable documentation of such costs and expenses. All other reasonable costs and expenses incurred in transferring servicing responsibilities to a successor servicer shall constitute Operating Expenses of the Note Issuer. Section 7.02. Appointment of Successor. (a) Upon the Servicer's receipt of a Termination Notice pursuant to Section 7.01 or the Servicer's resignation or removal in accordance with the terms of this Agreement, the predecessor Servicer shall continue to perform its functions as Servicer under this Agreement, and shall be entitled to receive the requisite portion of the Servicing Fee and reimbursement of expenses as provided herein, until a successor Servicer shall have assumed in writing the obligations of the Servicer hereunder as described below. In the event of the Servicer's termination hereunder, the Note Issuer shall appoint, subject to the approval of the DTE, a successor Servicer with the Note Trustee's prior written consent thereto (which consent shall not be unreasonably withheld), and the successor Servicer shall accept its appointment by a written assumption in form reasonably acceptable to the Note Issuer and the Note Trustee. If within 30 days after the delivery of the Termination Notice, the Note Issuer shall not have obtained such a new Servicer, the Note Trustee may appoint (subject to the approval of the DTE) or petition the DTE or a court of competent jurisdiction to appoint a successor Servicer under this Agreement. A Person shall qualify as a successor Servicer only if (i) such Person is permitted under DTE Regulations to perform the duties of the Servicer, (ii) the Rating Agency Condition shall have been satisfied and (iii) such Person assumes in writing the obligations of the Servicer hereunder or enters into a servicing agreement with the Note Issuer having substantially the same provisions as this Agreement. (b) Upon appointment, the successor Servicer shall be the successor in all respects to the predecessor Servicer and shall be subject to all the responsibilities, duties and liabilities arising thereafter relating thereto placed on the predecessor Servicer and shall be entitled to the Servicing Fee and all the rights granted to the predecessor Servicer by the terms and provisions of this Agreement. Section 7.03. Waiver of Past Defaults. The Holders of Notes evidencing not less than a majority of the Outstanding Amount of the Notes may, on behalf of all Noteholders, waive in writing any default by the Servicer in the performance of its obligations hereunder and its consequences, except a default in making any required Remittances to the Collection Account in accordance with this Agreement. Upon any such waiver of a past default, such default shall cease to exist, and any Servicer Default arising therefrom shall be deemed to have been remedied for every purpose of this Agreement. No such waiver shall extend to any subsequent or other default or impair any right consequent thereto. Section 7.04. Notice of Servicer Default. The Servicer shall deliver to the Note Issuer, the Note Trustee, the Certificate Trustee, the Certificate Issuer, the Agencies and the Rating Agencies, promptly after any of its Responsible Officers having obtained actual knowledge thereof, but in no event later than five Business Days thereafter, written notice in an Officers' Certificate of any event which with the giving of notice or lapse of time, or both, would become a Servicer Default under Section 7.01(a) or (b). ARTICLE 8 MISCELLANEOUS PROVISIONS Section 8.01. Amendment. (a) This Agreement may be amended in writing by the Servicer and the Note Issuer with ten Business Days' prior written notice given to the Rating Agencies and the prior written consent of the Note Trustee (which consent shall not be unreasonably withheld), but without the consent of any of the Noteholders or any of the Certificateholders (notwithstanding any provision of any other document that would otherwise require such consent as a precondition of Note Trustee consent), to cure any ambiguity, to correct or supplement any provisions in this Agreement or for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions in this Agreement or of modifying in any manner the rights of the Noteholders; provided, however, that such action shall not, as evidenced by an Officer's Certificate delivered to the Note Issuer and the Note Trustee, adversely affect in any material respect the interests of any Noteholder or any Certificateholder. (b) This Agreement may also be amended in writing from time to time by the Servicer and the Note Issuer with ten Business Days' prior written notice given to the Rating Agencies and the prior written consent of the Note Trustee (which consent shall not be unreasonably withheld) and the prior written consent of the Holders of Notes evidencing not less than a majority of the Outstanding Amount of the Notes, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of modifying in any manner the rights of the Noteholders; provided, however, that any amendment of the provisions of Sections 4.01 or 4.03 shall satisfy the Rating Agency Condition. (c) If the written consent of Noteholders is required in connection with an amendment hereof, approval by Noteholders of the substance of any proposed amendment or consent shall constitute sufficient consent of the Noteholders pursuant to this Section, and it shall not be necessary that Noteholders approve of the particular form of any amendment or consent. (d) Promptly after the execution thereof, the Note Issuer shall provide each of the Rating Agencies with a copy of any amendment to this Agreement. (e) Prior to its consent to any amendment to this Agreement, the Note Trustee shall be entitled to receive and conclusively rely upon an Opinion of Counsel stating that such amendment is authorized or permitted by this Agreement. The Note Trustee may, but shall not be obligated to, enter into any such amendment which affects the Note Trustee's own rights, duties or immunities under this Agreement or otherwise. Section 8.02. Maintenance of Accounts and Records. (a) The Servicer shall maintain accounts and records as to the Transition Property accurately and in accordance with its standard accounting procedures. (b) The Servicer shall permit the Note Issuer and the Note Trustee and its agents at any time during normal business hours, upon reasonable notice to the Servicer and to the extent it does not unreasonably interfere with the Servicer's normal operations, to inspect, audit and make copies of and abstracts from the Servicer's records regarding the Transition Property and the RTC Charge. Nothing in this Section 8.02(b) shall affect the obligation of the Servicer to observe any applicable law (including any DTE Regulation) prohibiting disclosure of information regarding the Customers, and the failure of the Servicer to provide access to such information as a result of such obligation shall not constitute a breach of this Section 8.02(b). Section 8.03. Notices. Unless otherwise specifically provided herein, all notices, directions, consents and waivers required under the terms and provisions of this Agreement shall be in English and in writing, and any such notice, direction, consent or waiver may be given by United States mail, courier service, facsimile transmission or electronic mail (confirmed by telephone, United States mail or courier service in the case of notice by facsimile transmission or electronic mail) or any other customary means of communication, and any such notice, direction, consent or waiver shall be effective when delivered, or if mailed, three days after deposit in the United States mail with proper postage for ordinary mail prepaid: (a) if to the Servicer, to Western Massachusetts Electric Company 174 Brush Hill Avenue West Springfield, MA 01089 Facsimile: (860) 665-5457 Telephone: (860) 665-3258 Email: shoopra@nu.com with a copy to: Western Massachusetts Electric Company c/o Northeast Utilities Service Company if by U.S. Mail: P.O. Box 270 Hartford, CT 06141-0270 if by courier: 107 Selden Street Berlin, CT 06037 Attention: Assistant Treasurer-Finance Facsimile: (860) 665-5457 Telephone: (860) 665-3258 Email: shoopra@nu.com (b) if to the Note Issuer, to WMECO Funding LLC c/o Western Massachusetts Electric Company 174 Brush Hill Avenue West Springfield, MA 01089 Facsimile: (860) 665-5457 Telephone: (860) 665-3258 Email: shoopra@nu.com with a copy to: Western Massachusetts Electric Company c/o Northeast Utilities Service Company 107 Selden Street Berlin, CT 06037 Attention: Assistant Treasurer-Finance Facsimile: 860-665-5457 Telephone: 860-665-3258 Email: shoopra@nu.com (c) if to the Note Trustee or the Certificate Trustee, to The Bank of New York, as trustee 101 Barclay Street Floor 12 East New York, NY 10286 Attention: ABS Unit Facsimile: (212) 815-5563 Telephone: (212) 815-5368 (d) if to Moody's, to Moody's Investors Service, Inc. 99 Church Street New York, NY 10007 Attention: ABS Monitoring Department Facsimile: (212) 553-0573 Telephone: (212) 553-3686 (e) if to S&P, to Standard & Poor's 55 Water Street, 41st Floor New York, NY 10041 Attention: Asset Backed Surveillance Department Facsimile: (212) 438-2664 Telephone: (212) 438-2000 (f) if to Fitch, to Fitch, Inc. One State Street Plaza New York, NY 10004 Attention: ABS Surveillance Facsimile: (212) 514-9879 Telephone: (212) 908-0500 Email: surv@fitchratings.com (g) if to the Agencies, to Massachusetts Development Finance Agency 75 Federal Street Boston, MA 02110 Attention: General Counsel Facsimile: (617) 727-8741 Telephone: (617) 451-2477 and Massachusetts Health and Educational Facilities Authority 99 Summer Street, 10th Floor Boston, MA 02110 Attention: General Counsel Facsimile: (617) 737-8366 Telephone: (617) 737-8377 (h) if to the Certificate Issuer, to: The Bank of New York (Delaware), as Delaware Trustee for Massachusetts RRB Special Purpose Trust WMECO-1 700 White Clay Center Route 273 Newark, Delaware 19711 Attention: Compliance Facsimile: (302) 283-8298 Telephone: (302) 451-2500 with a copy to: The Bank of New York 101 Barclay Street Floor 12 East New York, NY 10286 Attention: ABS Unit Facsimile: (212) 815-5563 Telephone: (212) 815-5368 (with copies to the Agencies at the addresses listed herein) (i) as to each of the foregoing, at such other address as shall be designated by written notice to the other parties. Section 8.04. Assignment. Notwithstanding anything to the contrary contained herein, except as provided in Section 6.04 and as provided in the provisions of this Agreement concerning the resignation of the Servicer, this Agreement may not be assigned by the Servicer. Section 8.05. Limitations on Rights of Third Parties. The provisions of this Agreement are solely for the benefit of the Servicer, the Note Issuer, the Noteholders, the Certificateholders, the Note Trustee, the Certificate Trustee, the Delaware Trustee, the Agencies, the Certificate Issuer and the other Persons expressly referred to herein and such Persons shall have the right to enforce the relevant provisions of this Agreement, except that the Noteholders and the Certificateholders shall be entitled to enforce their rights against the Servicer under this Agreement solely through a cause of action brought for their benefit by the Note Trustee or the Certificate Trustee, as the case may be. Nothing in this Agreement, whether express or implied, shall be construed to give to any other Person any legal or equitable right, remedy or claim in the Transition Property or under or in respect of this Agreement or any covenants, conditions or provisions contained herein. Section 8.06. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Section 8.07. Separate Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. Section 8.08. Headings. The headings of the various Articles and Sections herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Section 8.09. Governing Law. This Agreement shall be construed in accordance with the substantive laws of The Commonwealth of Massachusetts, without giving effect to its conflict of law or other principles that would cause the application of the laws of another jurisdiction, and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws. Section 8.10. Assignment to Note Trustee. The Servicer hereby acknowledges and consents to the collateral assignment or pledge of, or grant of a security interest in, any or all of the Note Issuer's rights and obligations hereunder to the Note Trustee for the benefit of the holders of the Notes and to the further assignment of the Note Trustee's rights and obligations under the Note Indenture to the Certificate Trustee for the benefit of the holders of the Certificates. Section 8.11. Nonpetition Covenants. Notwithstanding any prior termination of this Agreement or the Note Indenture, but subject to the DTE's right to order the sequestration and payment of revenues arising with respect to the Transition Property notwithstanding any bankruptcy, reorganization or other insolvency proceedings with respect to the debtor, pledgor or transferor of the Transition Property pursuant to Sections 1H(d)(5) and 1H(e) of Chapter 164 of the Massachusetts General Laws, the Servicer shall not, prior to the date which is one year and one day after the termination of the Note Indenture with respect to the Note Issuer, petition or otherwise invoke or cause the Note Issuer or the Trust to invoke the process of any court or governmental authority for the purpose of commencing or sustaining a case against the Note Issuer or the Trust under any federal or state bankruptcy, insolvency or similar law or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Note Issuer or the Trust or any substantial part of the property of the Note Issuer or the Trust, or ordering the winding up or liquidation of the affairs of the Note Issuer or the Trust. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties hereto have caused this Transition Property Servicing Agreement to be duly executed under seal by their respective officers as of the day and year first above written. WMECO FUNDING LLC, Note Issuer By: /s/ Randy A. Shoop ------------------------------------------ Name: Randy A. Shoop Title: President WESTERN MASSACHUSETTS ELECTRIC COMPANY, Servicer By: /s/ Randy A. Shoop ------------------------------------------ Name: Randy A. Shoop Title: Assistant Treasurer-Finance EXHIBIT A CERTIFICATE OF COMPLIANCE The undersigned hereby certifies that he/she is the duly elected and acting [________] of Western Massachusetts Electric Company, as servicer (the "Servicer") under the Transition Property Servicing Agreement, dated as of May 17, 2001 (the "Servicing Agreement"), between the Servicer and WMECO Funding LLC (the "Note Issuer"), and further certifies on behalf of the Servicer that: 1. A review of the activities of the Servicer and of its performance under the Servicing Agreement during the [_____________] months ended December 31, 20[_] has been made under the supervision of the undersigned pursuant to Section 3.03 of the Servicing Agreement; and 2. To the undersigned's knowledge, based on such review, the Servicer has fulfilled all of its material obligations in all material respects under the Servicing Agreement throughout the [__________________] months ended December 31, 20[_], except as listed on Annex A hereto. Executed as of this _______ day of ________________, 20__. WESTERN MASSACHUSETTS ELECTRIC COMPANY, Servicer By: ------------------------------------------ Name: Title: ANNEX A TO EXHIBIT A LIST OF SERVICER DEFAULTS Nature of Default Status EXHIBIT B FORM OF ROUTINE TRUE-UP ADVICE LETTER [Date] ADVICE ------------------ DEPARTMENT OF TELECOMMUNICATIONS AND ENERGY (THE "DEPARTMENT") OF THE COMMONWEALTH OF MASSACHUSETTS SUBJECT: Periodic RTC Charge True-Up Mechanism Advice Filing Pursuant to D.T.E. Docket No. 00-40 (the "Financing Order"), Western Massachusetts Electric Company ("WMECO"), as servicer of the RRBs or any successor Servicer and on behalf of the trustee for the SPE Debt Securities as assignee of the special purpose entity (the "SPE"), shall apply for adjustment to the RTC Charge no later than 15 days prior to each anniversary of the date of the Financing Order and at such additional intervals as may be provided for in the Financing Order. Any capitalized terms not defined herein shall have the meanings ascribed thereto in the Financing Order. PURPOSE This filing establishes the revised RTC Charge to be assessed and collected from all Seller customers and ratepayers taking the delivery, transmission, distribution, back-up, maintenance, emergency and any other delivery or energy service provided by Seller to such customer within the territory in which Seller serves customers, regardless of that customer's source of electric power, whether or not energy is purchased from WMECO or any TPS, and whether or not such distribution system is being operated by WMECO or a successor distribution company ("Retail Customers"). The RTC Charge is a usage-based component of the transition charge on each Retail Customer's monthly bill and may include in the future a component of any exit fee collected pursuant to M.G.L. c. 164, Section 1G(g), until the Total RRB Payment Requirements are discharged in full. In the Financing Order, the Department authorized WMECO to file Routine True-Up Letters prior to each anniversary of the date of the Financing Order and at such additional intervals, if necessary, as provided for in the Financing Order. WMECO, or a successor Servicer, is authorized to file periodic RTC Charge adjustments to the extent necessary to ensure the timely recovery of revenues sufficient to provide for the payment of an amount equal to the sum of the Periodic RRB Payment Requirements (as defined in the Financing Order) for the upcoming year, which may include indemnity obligations of the SPE in the RRB transaction documents for SPE officers and directors, trustee fees, liabilities of the special purpose trust and liabilities to the underwriters related to the underwriting of the RRBs. Routine True-Up Letter filings are those in which WMECO uses the methodology approved by the Department in the Financing Order to adjust upward or downward the existing RTC Charge. Using the methodology approved by the Department in the Financing Order, this filing modifies the variables used in the RTC Charge calculation and provides the resulting modified RTC Charge. Table I shows the revised assumptions for each of the variables used in calculating the RTC Charge for Retail Customers. The assumptions underlying the current RTC Charges were filed in an [Issuance] Advice Letter, dated __________ __, 200_. Table I below shows the current assumptions for each of the variables used in the RTC Charge calculation. TABLE I INPUT VALUES FOR RTC CHARGE Period from ____________ to _____________ Forecasted retail kWh sales for the period: Forecasted percent of Retail Customers' billed amounts charged-off: Percent of Retail Customers' billed amounts charged-off: Weighted average days sales outstanding: (calculated as follows) Percent of billed amounts collected in current month: Percent of billed amounts collected in second month after billing: Percent of billed amounts collected in third month after billing: Percent of billed amounts collected in fourth month after billing: Percent of billed amounts collected in fifth month after billing: Forecasted ongoing interest and transaction expenses (including any already accrued but unpaid for the period): Current Overcollateralization Subaccount balance: Scheduled Overcollateralization Subaccount balance at the end of the period: Current Capital Subaccount balance: Initial Capital Subaccount balance: Current RRB outstanding balance: Scheduled RRB outstanding balance at the end of the period: Current Reserve Subaccount balance: The adjusted RTC Charge calculated for Retail _________cents/kWh Customers is as follows: EFFECTIVE DATE In accordance with the Financing Order, Routine True-Up Letters for annual RTC Charge adjustments shall be filed prior to the anniversary of the Financing Order, or more frequently if necessary, with the resulting changes to be effective on the first day of the succeeding calendar month, or such date as may be specified in the Routine True-Up Letter, as long as such effective date is at least 15 days after the filing of such Routine True-Up Letter. No approval by the Department is required. Therefore, these RTC Charges shall be effective as of _______________. NOTICE Copies of this filing are being furnished to the parties on the attached service list. Notice to the public is hereby given by filing and keeping this filing open for public inspection at WMECO's corporate headquarters. EXHIBIT C FORM OF MONTHLY SERVICER CERTIFICATE Pursuant to Section 4.01(d)(2) of the Transition Property Servicing Agreement, dated as of May 17, 2001 (the "Agreement"), between Western Massachusetts Electric Company, as servicer (the "Servicer") and WMECO Funding LLC, the Servicer does hereby certify as follows: Capitalized terms used herein have their respective meanings as set forth in the Agreement. For the Monthly Period:_____________ 1. Billings: a) Monthly kWh Consumption: b) Applicable RTC Charge: c) Total RTC Charge Amount Billed this Month: d) Cumulative RTC Charge Amount Billed this Remittance Period: 2. Remittances: a) Total Amount Remitted this Month: b) Cumulative Amount Remitted this Remittance Period: c) "RTC %" (calculated in accordance with Annex II to the Agreement) for this Monthly Period: 3. Draws on Subaccounts: a) Reserve Subaccount Draw Amount this Month: b) Cumulative Reserve Subaccount Draw Amount this Remittance Period (net of funding): c) Overcollateralization Subaccount Draw Amount this Month: d) Cumulative Overcollateralization Subaccount Draw Amount this Remittance Period (net of funding): e) Capital Subaccount Draw Amount this Month: f) Cumulative Capital Subaccount Draw Amount this Remittance Period (net of funding): 4. Balances in Collection Account and Subaccounts: a) Balance in Collection Account b) Balance in Overcollateralization Subaccount c) Required Overcollateralization Level d) Balance in Reserve Subaccount e) Balance in Capital Subaccount f) Required Capital Level Executed as of this _____________ day of ___________. WESTERN MASSACHUSETTS ELECTRIC COMPANY, Servicer By: ------------------------------------------ Name: Title: EXHIBIT D FORM OF QUARTERLY SERVICER CERTIFICATE Pursuant to Section 4.01(d)(3) of the Transition Property Servicing Agreement, dated as of May __, 2001 (the "Agreement"), between Western Massachusetts Electric Company, as Servicer and WMECO Funding LLC, the Servicer does hereby certify, for the Current Payment Date, as follows: Capitalized terms used herein have their respective meanings as set forth in the Agreement. References herein to certain sections and subsections are references to the respective sections of the Agreement. 1. RTC Charge Collections and Aggregate Amounts Available for the Current Payment Date: i. Amount Remitted [Month] [Year] ii. Amount Remitted [Month] [Year] iii Amount Remitted [Month] [Year] iv. Amount Remitted [Month] [Year] v. Amount Remitted [Month] [Year] vi. Amount Remitted [Month] [Year] vii Amount Remitted [Month] [Year] viii Amount Remitted [Month] [Year] ix. Total Amount Remitted for this Period (sum of i. through viii. above): x. Net Earnings on Collection Account: xi. Expenses Paid to Date: xii. General Subaccount Balance (sum of ix. and x. above minus xi.): xiii.Reserve Subaccount Balance xiv. Overcollateralization Subaccount Balance xv. Capital Subaccount Balance xvi. Collection Account Balance (sum of xii. through xv. above): 2. Outstanding Principal Balance as of Prior Payment Date by Tranche: i. Class A-1 Principal Balance Outstanding Note/Certificate: ii. Total Note/Certificate Principal Balance: 3. Required Funding/Payments as of Current Payment Date a) Projected Principal Balances and Payments Projected Quarterly Principal Principal Balance Due i. Class A-1 Note/Certificate ii. Total Projected Principal Amount: b) Required Interest Payments Note/Cert Days in Interest Interest Applicable Due Rate Period i. Class A-1 Note/Certificate ii. Total Required Interest Amount: c) Projected Subaccount Payments and Levels Subaccount Projected Funding Level Required i. Capital Subaccount: ii. Overcollateraliza- tion Subaccount: ii Total Subaccount i. Payments and Levels: 4. Allocation of Remittances as of Current Payment Date Pursuant to Section 8.02(d) of Note Indenture: a) Quarterly Expenses Net Expense Amount (Payable on Current Payment Date) i. Note, Delaware and Certificate Trustee Fees and Expenses: ii. Quarterly Servicing Fee: iii.Quarterly Administration Fee: iv. Operating Expenses (subject to $100,000 cap): v. Total Expenses: b) Quarterly Interest Per $1000 of Aggregate Original Principal Amount i. Class A-1 Note/Certificate ii. Total Quarterly Interest: c) Quarterly Principal Per $1000 of Aggregate Original Principal Amount i. Class A-1 Note/Certificate ii. Total Quarterly Principal: d) Other Payments i. Operating Expenses (in excess of $100,000): ii. Funding of Capital Subaccount (to required amount): iii.Funding of Overcollateralization Subaccount (to required level): iv. Deposits to Reserve Subaccount: v. Interest earnings on Capital Account Released to Note Issuer: e) Aggregate Payments Pursuant to Section 8.02(d)(i) of Note Indenture i. To Note Trustee, Certificate Trustee and Delaware Trustee: ii To Agencies and Certificate Issuer: 5. Outstanding Principal Balance and Collection Account Balance as of Current Payment Date (after giving effect to payments to be made on such distribution date): a) Principal Balance Outstanding: i. Class A-1 Principal Balance Outstanding Note/Certificate: ii. Total Note/Certificate Principal Balance: b) Collection Account Balances Outstanding: i. Capital Subaccount: ii. Overcollateralization Subaccount: iii.Reserve Subaccount: iv. Total Subaccount Amount: 6. Subaccount Draws as of Current Payment Date (if applicable, pursuant to Section 8.02(e) of Note Indenture): i. Capital Subaccount: ii. Overcollateralization Subaccount: iii.Reserve Subaccount: iv. Total Subaccount Draws: 7. Shortfalls in Interest and Principal Payments as of Current Payment Date (if applicable): a) Quarterly Interest Shortfall i. Class A-1 Note/Certificate ii. Total Quarterly Interest Shortfall: b) Quarterly Principal Shortfall i. Class A-1 Note/Certificate ii. Total Quarterly Principal Shortfall: 8. Shortfalls in Required Subaccount Levels as of Current Distribution Date: i. Capital Subaccount ii. Overcollateralization Subaccount: iii.Total Subaccount Shortfalls: IN WITNESS WHEREOF, the undersigned has duly executed and delivered this Quarterly Servicer Certificate under seal this _______ day of _____________, 20__. WESTERN MASSACHUSETTS ELECTRIC COMPANY, Servicer By: ------------------------------------------ Name: Title: SCHEDULE 4.01(a) Expected Amortization Schedule
Payment Outstanding Payment Outstanding Date Principal Date Principal Amount Amount Closing 155,000,000 9/1/2007 89,888,002 12/1/2001 152,317,336 12/1/2007 86,731,394 3/1/2002 149,568,944 3/1/2008 83,261,952 6/1/2002 147,184,844 6/1/2008 79,875,484 9/1/2002 144,980,067 9/1/2008 76,552,625 12/1/2002 142,742,170 12/1/2008 73,176,352 3/1/2003 140,219,779 3/1/2009 69,496,635 6/1/2003 137,769,289 6/1/2009 65,893,553 9/1/2003 135,383,097 9/1/2009 62,343,137 12/1/2003 132,959,538 12/1/2009 58,735,305 3/1/2004 130,247,945 3/1/2010 54,814,526 6/1/2004 127,628,222 6/1/2010 50,970,210 9/1/2004 125,078,425 9/1/2010 47,178,396 12/1/2004 122,488,629 12/1/2010 43,325,013 3/1/2005 119,611,970 3/1/2011 39,154,564 6/1/2005 116,822,982 6/1/2011 35,056,795 9/1/2005 114,098,464 9/1/2011 31,007,335 12/1/2005 111,330,951 12/1/2011 26,891,856 3/1/2006 108,267,623 3/1/2012 22,451,624 6/1/2006 105,293,016 6/1/2012 18,078,675 9/1/2006 102,383,760 9/1/2012 13,750,638
12/1/2006 99,428,304 12/1/2012 9,351,812 3/1/2007 96,167,724 3/1/2013 4,636,241 6/1/2007 92,994,977 6/1/2013 0
ANNEX I SERVICING PROCEDURES The Servicer agrees to comply with the following servicing procedures: SECTION 1. DEFINITIONS (a) Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Agreement. (b) Whenever used in this Annex I, the following words and phrases shall have the following meanings: "Billed RTC Charges" means the dollar amounts billed to Customers or the Applicable TPS in respect of the RTC Charge, whether billed to Customers or the Applicable TPS by the Servicer or to Customers by a TPS pursuant to a TPS Service Agreement. "Servicer Policies and Practices" means, with respect to the Servicer's duties under this Annex I, the policies and practices of the Servicer applicable to such duties that the Servicer follows with respect to comparable assets that it services for itself or others, as in effect from time to time and in accordance with DTE Regulations. The Servicer shall provide ten days' prior written notice to the Rating Agencies of any amendment to the Servicer Policies and Practices that would adversely affect in any material respect the Noteholders or Certificateholders. SECTION 2. DATA ACQUISITION (a) Installation and Maintenance of Meters. Except to the extent that a TPS is responsible for such services pursuant to a TPS Service Agreement, the Servicer shall cause to be installed, replaced and maintained meters in accordance with the Servicer Policies and Practices. (b) Meter Reading. In accordance with the Servicer Policies and Practices, the Servicer shall obtain usage measurements for each Customer; provided, however, that the Servicer may determine any Customer's usage on the basis of estimates in accordance with applicable DTE Regulations; and, provided, further, that the Servicer may obtain usage measurements from the Applicable TPS for Customers receiving meter reading services from such TPS if the applicable TPS Service Agreement so provides. (c) Cost of Metering. The Note Issuer shall not be obligated to pay any costs associated with the metering duties set forth in this Section 2, including the costs of installing, replacing and maintaining meters, nor shall the Note Issuer be entitled to any credit against the Servicing Fee for any cost savings realized by the Servicer or any TPS as a result of new metering and/or billing technologies. SECTION 3. USAGE AND BILL CALCULATION The Servicer shall obtain a calculation of each Customer's usage (which may be based on data obtained from such Customer's meter read or on usage estimates determined in accordance with applicable DTE Regulations) in accordance with the Servicer Policies and Practices and shall determine therefrom Billed RTC Charges; provided, however, that in the case of Customers served by a TPS pursuant to a TPS Service Agreement, the Servicer may obtain usage measurements from the Applicable TPS for Customers receiving meter reading services from such TPS if the applicable TPS Service Agreement so provides and shall determine therefrom Billed RTC Charges. SECTION 4. BILLING (a) The Servicer shall implement the RTC Charge as of the Closing Date and shall thereafter bill each Customer or the Applicable TPS for each Customer's Billed RTC Charges in accordance with the provisions of this Section 4. (b) Frequency of Bills; Billing Practices. In accordance with the Servicer Policies and Practices, the Servicer shall generate and issue a Bill to each Customer, or, in the case of a Customer who is being billed by a TPS, to the Applicable TPS, with respect to such Customer's Billed RTC Charges. In the event that the Servicer makes any material modification to the Servicer Policies and Practices, it shall notify the Note Issuer, the Note Trustee, the Certificate Trustee and the Rating Agencies as soon as practicable, and in no event later than 60 Servicer Business Days after such modification goes into effect; provided, however, that the Servicer may not make any modification that will materially adversely affect the Certificateholders. (c) Format. (i) Each Bill to a Customer shall contain a Transition Charge that shall include the RTC Charge owed by such Customer for the applicable billing period. (ii) Each Bill in which the Transition Charge is listed as a line item shall contain a statement (as a footnote) to the effect that all or a portion of the Transition Charge is owned by the Note Issuer and not the Seller. (iii)The Servicer shall conform to such requirements in respect of the format, structure and text of Bills delivered to Customers and TPSs as applicable DTE Regulations shall from time to time prescribe. To the extent that Bill format, structure and text are not prescribed by applicable law or by applicable DTE Regulations, the Servicer shall, subject to clauses (i) and (ii) of this subsection (c), determine the format, structure and text of all Bills in accordance with its reasonable business judgment, the Servicer Policies and Practices and historical practice. (d) Delivery. Except as provided in the next sentence, the Servicer shall deliver all Bills to Customers (i) by United States mail in such class or classes as are consistent with the Servicer Policies and Practices or (ii) by any other means, whether electronic or otherwise, that the Servicer may from time to time use in accordance with the Servicer Policies and Practices. In the case of Customers that have elected to be billed by a TPS, the Servicer shall deliver all Bills to the Applicable TPSs by such means as are mutually agreed upon by the Servicer and the Applicable TPS in the TPS Service Agreement and which are consistent with DTE Regulations. The Servicer or a TPS, as applicable, shall pay from its own funds all costs of issuance and delivery of all Bills that it renders, including printing and postage costs as the same may increase or decrease from time to time. SECTION 5. CUSTOMER SERVICE FUNCTIONS The Servicer or a TPS to the extent provided in the applicable TPS Service Agreement shall handle all Customer inquiries and other Customer service matters according to the Servicer Policies and Practices. SECTION 6. COLLECTIONS; PAYMENT PROCESSING; REMITTANCE (a) Collection Efforts, Policies, Procedures. (i) The Servicer shall collect Billed RTC Charges from Customers and TPSs as and when the same become due in accordance with such collection procedures as it follows with respect to comparable assets that it services for itself or others, including the following: (A) The Servicer shall prepare and deliver overdue notices to Customers and TPSs in accordance with applicable DTE Regulations and the Servicer Policies and Practices. (B) The Servicer shall deliver past-due and shut-off notices in accordance with applicable DTE Regulations and the Servicer Policies and Practices. (C) The Servicer shall adhere to and carry out disconnection policies and termination of billing by a TPS pursuant to a TPS Service Agreement in accordance with Massachusetts General Laws Chapter 164, 116, 124-124I or successor provisions, applicable DTE Regulations and the Servicer Policies and Practices. (D) The Servicer may employ the assistance of collection agents in accordance with applicable DTE Regulations and the Servicer Policies and Practices. (E) The Servicer shall apply Customer and TPS deposits to the payment of delinquent accounts in accordance with applicable DTE Regulations and the Servicer Polices and Practices. (ii) The Servicer shall not waive any late payment charge or any other fee or charge relating to delinquent payments, if any, or waive, vary or modify any terms of payment of any amounts payable by a Customer, in each case unless such waiver or action: (A) would be in accordance with the Servicer Policies and Practices, (B) would not materially adversely affect the Certificateholders and (C) would comply in all material respects with applicable law. (iii) The Servicer shall accept payment from Customers in respect of Billed RTC Charges in such forms and methods and at such times and places in accordance with the Servicer Policies and Practices. The Servicer shall accept payment from TPSs in respect of Billed RTC Charges in such forms and methods and at such times and places as the Servicer and each TPS shall mutually agree in accordance with the applicable TPS Service Agreement and applicable DTE Regulations. (b) Payment Processing, Allocation, Priority of Payments. The Servicer shall post all payments received to Customer or TPS accounts as promptly as practicable, and, in any event, substantially all payments shall be posted no later than one Servicer Business Day after receipt. (c) Investment of RTC Charge Payments Received. Prior to remittance on the applicable Remittance Date, the Servicer may invest RTC Charge Payments at its own risk and for its own benefit, and such investments and funds shall not be required to be segregated from the other investments and funds of the Servicer. The Servicer shall be entitled to retain as additional compensation any interest earnings on RTC Charge Payments invested by it. (d) Calculation of RTC Charge Payments; Remittances. In accordance with Section 4.03(a) of the Agreement, the Servicer shall remit to the Note Trustee for deposit in the Collection Account an amount equal to the RTC Charge Payments calculated in accordance with the methodology described in Annex II attached to the Agreement. (e) Remittances. (i) The Note Issuer shall cause to be established the Collection Account in the name of the Note Trustee in accordance with Section 8.02 of the Note Indenture. (ii) The Servicer shall make or cause to be made Remittances to the Collection Account in accordance with Section 4.03 of the Agreement. (iii)Any change of account or change of institution affecting the Collection Account shall not take effect until the Note Issuer has provided at least fifteen (15) Servicer Business Days written notice thereof to the Servicer. SECTION 7. TPSs In the event a TPS performs services pursuant to a TPS Service Agreement, the Servicer shall comply with the procedures set forth in Schedule A to this Annex I. SCHEDULE A TO ANNEX I Additional Servicing Procedures Applicable to TPSs 1. Establishing TPS Relationship In addition to any actions required by the DTE or by applicable law, for each TPS that is responsible for collecting Billed RTC Charges, the Servicer shall take the following steps: (a) Maintain adequate records of the payment arrangement applicable to such TPS; (b) Maintain copies of all Customer requests to convert to billing by a TPS; (c) Verify with the DTE that each TPS is licensed to supply electricity in Massachusetts; (d) Obtain information from the TPS including, but not limited to: name, contact, address, telephone facsimile transmission number and internet address; (e) Maintain and update records of Customers to permit prompt reversion to dual-billing; (f) Maintain estimates of one month's maximum RTC Charge Payments for each TPS required to post a bond, letter of credit or cash deposit pursuant to the applicable TPS Service Agreement; and (g) Comply with credit conditions set out in the Financing Order and applicable TPS Service Agreement. 2. Monitoring TPS Obligations (a) The Servicer shall require each TPS to pay all undisputed and all disputed Billed RTC Charges or make a financial arrangement for such payment according to the applicable TPS Service Agreement; and (b) For all TPSs subject to any remittance option where such TPS is liable for all amounts billed in respect of Customers served thereby regardless of the amounts received therefrom, the Servicer shall monitor payment compliance and take all actions permitted by the DTE and the Financing Order in the event of a default in payment. 3. Enforcing TPS Obligations The Servicer shall promptly take all actions specified by the Financing Order with respect to amounts not remitted to the Servicer in accordance with the payment terms specified by the Financing Order, in addition to any other remedies available at law. ANNEX II REMITTANCE METHODOLOGY EX-21 33 y58564bb.txt EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
State of Incorporation ---------------------- Northeast Utilities (a Massachusetts business trust) MA The Connecticut Light and Power Company CT CL&P Funding LLC DE CL&P Receivables Corporation CT Holyoke Water Power Company MA Holyoke Power and Electric Company MA North Atlantic Energy Corporation NH North Atlantic Energy Service Corporation NH Northeast Nuclear Energy Company CT Northeast Utilities Service Company CT NU Enterprises, Inc. CT Select Energy Services, Inc. (formerly HEC Inc.) MA Select Energy Contracting, Inc. MA Mode 1 Communications, Inc. CT Northeast Generation Company CT Northeast Generation Services Company CT E. S. Boulos Company CT Select Energy, Inc. CT Select Energy New York, Inc. DE Public Service Company of New Hampshire NH PSNH Funding LLC DE PSNH Funding LLC 2 DE The Quinnehtuk Company MA The Rocky River Realty Company CT Western Massachusetts Electric Company MA Yankee Energy System, Inc. CT Yankee Gas Services Company CT
EX-13.1 34 nuannualreport2002.txt EXHIBIT 13.1 ANNUAL REPORT OF NORTHEAST UTILITIES MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL CONDITION - -------------------------------------------------------------------------------- OVERVIEW Northeast Utilities and subsidiaries (NU or the company) reported 2001 earnings of $243.5 million, or $1.79 per share on a fully diluted basis, compared with a loss of $28.6 million, or $0.20 per share on a fully diluted basis in 2000 and earnings of $34.2 million, or $0.26 per share on a fully diluted basis in 1999. In 2001 and 2000, NU's results were affected significantly by nonrecurring items. In 2001, NU recorded an after-tax gain of $115.6 million, or $0.85 per share, in connection with the sale of the Millstone nuclear units to a subsidiary of Dominion Resources, Inc., Dominion Nuclear Connecticut, Inc. (DNCI). In 2001, NU also recorded an after-tax nonrecurring loss of $22.4 million, or $0.17 per share, as a result of the adoption of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, and an after-tax mark-to- market loss of $35.4 million, or $0.26 per share, associated with the repurchase of NU shares in the first half of 2001. In 2000, NU recorded an extraordinary after-tax loss of $233.9 million, or $1.65 per share, primarily associated with electric utility industry restructuring in New Hampshire. Excluding the effect of these nonrecurring items, NU earned $185.7 million, or $1.37 per share on a fully diluted basis, in 2001, compared with $205.3 million, or $1.45 per share on a fully diluted basis, in 2000. The decline in operating results at NU's regulated companies was due to a number of factors. Earnings at both The Connecticut Light and Power Company (CL&P) and Western Massachusetts Electric Company (WMECO) decreased primarily because the sale of Millstone three months into 2001 removed a significant source of earnings as compared with 2000. Earnings before preferred dividends at CL&P totaled $109.8 million in 2001, compared with $148.1 million in 2000 and a loss of $13.6 million in 1999. Earnings before preferred dividends at WMECO totaled $15 million in 2001, compared with $35.3 million in 2000 and $2.9 million in 1999. In addition to the sale of Millstone, CL&P's lower earnings also reflect a $21.1 million reduction in distribution and transmission rates the Connecticut Department of Public Utility Control (DPUC) imposed, which was effective on June 20, 2001. Operating results at Public Service Company of New Hampshire (PSNH) and North Atlantic Energy Corporation (NAEC) declined as a result of the implementation of industry restructuring and an 11 percent reduction in retail rates on May 1, 2001. Earnings before preferred dividends at PSNH totaled $81.8 million in 2001, compared with a loss of $146.7 million in 2000 and earnings of $84.2 million in 1999. The PSNH results included an after-tax gain of $15.5 million associated with the Millstone sale in 2001 and an after-tax $214.2 million extraordinary charge associated with electric industry restructuring in 2000. Earnings at NAEC totaled $4.2 million in 2001, compared with $32.5 million in 2000 and $29.6 million in 1999. The lower results at NAEC reflect a reduction in payments made by PSNH to NAEC due to a buydown of the Seabrook Power Contracts with the proceeds from the sale of rate reduction bonds. Management expects combined operating results at PSNH and NAEC to continue to decline in 2002, reflecting the effects of a full year of electric utility industry restructuring. Results at NU's competitive energy subsidiaries also declined in 2001. The competitive energy subsidiaries earned $5 million on revenues of $3 billion in 2001, compared with a contribution towards NU's consolidated earnings of $13.6 million on revenues of $1.9 billion in 2000 and a loss of $37 million on revenues of $0.6 billion in 1999, excluding nonrecurring items. The decline was primarily due to higher purchased power costs in the winter of 2001 and lower than expected summer and fall customer loads due to mild weather conditions. Partially offsetting those declines in operating results was a significant increase in earnings at Yankee Energy System, Inc. (Yankee), which NU acquired on March 1, 2000. Yankee earned $25.8 million in 2001, compared with a loss of $0.7 million during the 10 months of 2000 it was part of the Northeast Utilities system (NU system). The improved results were primarily due to the inclusion of January 2001 and February 2001 results in 2001 earnings and the settlement of property tax litigation with the City of Meriden, Connecticut. NU's earnings per share (EPS) benefited from the repurchase of approximately 14.3 million NU common shares in 2001. NU's outstanding share count totaled 130.1 million shares on December 31, 2001, compared with 143.8 million shares outstanding on December 31, 2000. FUTURE OUTLOOK NU estimates that its EPS will range between $1.40 per share and $1.65 per share in 2002, excluding significant nonrecurring items. NU expects that no retail rate cases will be filed in 2002. The company therefore expects the financial performance of its regulated businesses to be relatively stable and predictable in 2002, absent significant adverse events, such as a catastrophic storm. Also affecting the 2002 earnings range is the income associated with NU's qualified pension plan. In 2001, NU's operating results included pretax pension income of approximately $101 million associated with this plan, excluding the effects of the Voluntary Separation Program. NU currently expects pretax pension income in 2002 to be reduced to approximately $73 million. Pension income is annually adjusted during the second quarter based upon updated actuarial evaluations, and the 2002 estimate may be modified at that time. Additionally, a prime determinant of where NU performs within the aforementioned 2002 earnings range is the performance of the company's competitive energy subsidiaries. NU expects revenues from its competitive energy subsidiaries to exceed $3.8 billion in 2002. Much of that increase over 2001 is the result of Select Energy, Inc.'s (Select Energy) acquisition of Niagara Mohawk Energy Marketing, Inc. (NMEM) in late November 2001 for approximately $31.7 million. That business was subsequently renamed Select Energy New York, Inc. (SENY). In 2001, Select Energy's profits from its wholesale electric sales were reduced by its obligation to serve 50 percent of CL&P's standard offer service load at below market rates. Select Energy's obligation to serve that load, continues through 2003. Select Energy's results would benefit from an increase in the pricing for CL&P's standard offer service load. A proceeding to begin this process was filed with the DPUC in 2001, and management is pursuing raising those prices in 2002 and 2003. Select Energy's profits also will depend on its ability to renew and expand its wholesale business in its 12-state Northeastern market area, as well as to continue to grow its retail natural gas and electric businesses. CONSOLIDATED EDISON, INC. MERGER LITIGATION On March 5, 2001, Consolidated Edison, Inc. (Con Edison) advised NU that it was unwilling to close its merger with NU on the terms set forth in the parties' October 13, 1999, Agreement and Plan of Merger, as amended and restated as of January 11, 2000, (Merger Agreement). That same day, NU notified Con Edison that it would treat Con Edison's refusal to proceed with the merger as a repudiation and breach of the Merger Agreement, and would file suit to obtain the benefits of the transaction for NU shareholders. On March 6, 2001, Con Edison filed suit in the United States District Court for the Southern District of New York (District Court) seeking a declaratory judgment that it had been relieved of its obligation to proceed with the merger due to, among other things, NU's alleged breach of the Merger Agreement and the alleged occurrence of a "Material Adverse Change" with respect to NU as that term is defined in the Merger Agreement. Con Edison also contends that it is entitled to recover damages from NU equal to the benefits it would have received if the merger had been consummated together with the costs incurred in preparing for and seeking approval of the merger. NU believes that Con Edison's claim for damages is without merit and, in any event, that Con Edison's proposed measure of damages is inappropriate. On March 12, 2001, NU filed suit against Con Edison in the District Court seeking damages in excess of $1 billion arising from Con Edison's breach of the Merger Agreement. On May 11, 2001, in accordance with a stipulation of the parties and order of the District Court, Con Edison filed an amended complaint in which it added claims seeking damages for breach of contract, fraudulent inducement and negligent misrepresentation. On June 1, 2001, NU answered Con Edison's amended complaint, denying all of its material allegations and asserting affirmative defenses, and asserted a counterclaim seeking damages in excess of $1 billion against Con Edison for breach of the Merger Agreement. NU subsequently dismissed its March 12, 2001, complaint as duplicative of the June 1, 2001, counterclaim. On June 8, 2001, Con Edison answered NU's counterclaim, denying its material allegations and asserting affirmative defenses. The parties substantially completed fact discovery in the litigation on December 21, 2001, and are currently conducting expert discovery. The case schedule currently calls for the parties to be prepared for trial on or after June 21, 2002; however no trial date has yet been set by the court. In addition, separate petitions were filed with the DPUC asking that its merger approval be rescinded or reversed. The DPUC reopened its docket approving the merger and asked parties to comment on the question of whether a date certain should be imposed for consummation of the merger and whether that date should be January 31, 2002. On January 30, 2002, the DPUC issued a decision establishing January 31, 2002, as the deadline for merger consummation. As a result, the DPUC's prior approval of the merger is no longer effective. At this early stage of the litigation, management can predict neither the outcome of this matter nor its ultimate effect on NU. LIQUIDITY The year 2001 was marked by tremendous inflows of cash into the NU system as a result of the securitization of stranded costs and the sale of the Millstone units. During a seven-week period between March 30, 2001, and May 17, 2001, NU's subsidiaries' liquidity benefited from the issuance of $2.1 billion in rate reduction bonds and certificates and the receipt of the $1.2 billion from the sale of the Millstone units. The largest share of those proceeds was used for the repayment of debt and preferred securities. As a result, NU's combined short-term and long-term debt other than rate reduction bonds decreased to approximately $2.6 billion at the end of 2001 from approximately $3.7 billion at the end of 2000. Capital lease obligations declined to $17.5 million at the end of 2001 from $159.9 million at the end of 2000. In 2001, CL&P also repaid $100 million of Monthly Income Preferred Securities and reduced the amount outstanding under its accounts receivable facility by $170 million. WMECO and PSNH repaid all of their preferred stock, leaving CL&P's $116.2 million of preferred stock not subject to mandatory redemption as the only preferred securities in the NU system. Of the $2.1 billion of rate reduction bonds and certificates issued by CL&P, PSNH and WMECO, approximately $1.2 billion was used to buyout or buydown high-cost, long-term purchased-power contracts. PSNH paid approximately another $50 million in December 2001 to buyout other purchased-power contracts and issued an equivalent amount of rate reduction bonds in January 2002, to pay for those costs. PSNH continues to negotiate buyout or buydown arrangements with other plant operators and may require additional funds if successfully renegotiated agreements are approved by the New Hampshire Public Utilities Commission (NHPUC) and result in upfront payments. The remaining proceeds from the Millstone sale were used primarily to pay state and federal income taxes on the Millstone sale and return equity capital to NU parent from the regulated electric companies. Including both return of capital and common dividends, CL&P, PSNH, WMECO, and NAEC paid $60.1 million, $287 million, $37 million, and $136 million, respectively, to NU parent in 2001. Yankee paid no dividends to NU parent in 2001, as NU parent used Yankee earnings and the receipt of approximately $20 million from the sale of interests in certain electric generating facilities owned by Yankee subsidiaries to repay debt and fund Yankee's expanded capital expenditure program. NU parent used the dividends and return of capital primarily to repurchase approximately 14.3 million NU common shares in 2001 of which approximately 10.3 million shares were repurchased in the second quarter of 2001. In July 2001, the NU Board of Trustees authorized the repurchase of 15 million additional NU common shares by July 2003. Under this authorization, NU repurchased approximately 4 million shares by the end of the year and has authorization to repurchase approximately another 11 million shares. In addition to repurchasing shares, NU spent another $31.7 million through Select Energy to acquire NMEM and through its subsidiary Mode 1 Communications, Inc. (Mode 1) lent $15 million to NEON Communications, Inc. (NEON) in the form of subordinated convertible notes. On December 6, 2001, NEON announced that it had retained an unaffiliated financial institution to explore, among other options, debt restructuring. On January 22, 2002, NEON announced it was seeking a waiver from one of its significant unaffiliated suppliers on a $7.3 million payment that had been due on December 31, 2001. If that supplier accelerates payment on its $42 million note from NEON, the action would trigger a cross-default on $180 million of senior notes previously issued by NEON. If NEON were to restructure its debt obligations or declare bankruptcy, NU management believes that some or all of its debt and equity investment in NEON would be impaired. In addition to the $15 million of subordinated convertible notes, Mode 1 owns approximately 4 million shares of NEON common stock. This equity investment had a book value of $4.6 million, and a fair value of $11.2 million at December 31, 2001. Subsequent to December 31, 2001, the market value of NEON stock has decreased significantly. NU continues to pursue additional investments in both the regulated and unregulated energy businesses in the Northeast United States or other strategic initiatives from time to time and will weigh making those investments against continued share repurchases. Aside from the issuance of rate reduction bonds and certificates, the NU system undertook a number of refinancings in 2001. On February 28, 2001, NU issued $263 million of variable-rate unsecured notes to repay an equal amount of bank debt incurred a year earlier when NU acquired Yankee. On October 18, 2001, Northeast Generation Company (NGC) issued $440 million of amortizing senior secured debt. The $440 million includes $120 million of bonds that mature on October 15, 2005, at an interest rate of 4.998 percent, and $320 million of bonds that mature on October 15, 2026, at an interest rate of 8.812 percent. Proceeds from the issuance plus cash on hand were used to return $75 million to NU parent through a combination of capital and common dividends and to repay bank borrowings NGC had incurred to acquire 1,289 megawatts (MW) of predominantly hydroelectric generation assets in early 2000. On December 19, 2001, PSNH refinanced $287.5 million of tax-exempt pollution control revenue bonds (PCRBs) by issuing $109 million of insured lower fixed-rate bonds and $178.5 million of insured variable-rate bonds. At current rates, that refinancing is expected to save PSNH in excess of $10 million annually. Also, in late 2001, Holyoke Water Power Company (HWP) repaid all of its public debt in connection with the sale of its hydroelectric generation assets and electric distribution system to the City of Holyoke for $17.5 million. Primarily as a result of the Millstone sale and the issuance of rate reduction bonds and certificates, NU's consolidated capitalization ratio was significantly stronger at the end of 2001 than it was a year earlier. Including capital lease obligations, but excluding rate reduction bonds as these bonds are nonrecourse to the NU system, NU's capitalization ratio was 54.3 percent debt, 2.4 percent preferred securities and 43.3 percent common equity at the end of 2001, compared with 60.4 percent debt, 4.4 percent preferred securities and 35.2 percent common equity at the end of 2000. The improved capitalization ratio and lowered overall risk profile resulted in a series of upgrades of the NU system securities through 2001. At the end of 2001, senior debt ratings on NU parent securities were Baa1 and BBB, A2 and A- for CL&P, A3 and BBB+ for WMECO, and A3, BBB+, and BBB for PSNH. Overall, those ratings were the highest for NU securities in decades and are expected to continue to enhance the NU system's access to low-cost capital. NU's net cash flows provided by operating activities declined to $376.7 million in 2001, compared with $578.4 million in 2000 and $614.2 million in 1999. In 2001, cash flows provided by operating activities, decreased primarily due to an increase in receivables and unbilled revenues, net, associated with the sales growth at NU's competitive energy subsidiaries. The level of common dividends totaled $60.9 million in 2001, as compared to $57.4 million in 2000 and $13.2 million in 1999. This increase was a result of NU paying a $0.10 per share quarterly common dividend in the first two quarters of 2001 and a $0.125 per share quarterly common dividend in the last two quarters of 2001, as compared to paying a $0.10 per share quarterly common dividend for all of 2000. The level of preferred dividends decreased to $7.3 million in 2001, compared with $14.2 million in 2000 and $22.8 million in 1999, reflecting NU's ongoing effort to reduce preferred stock outstanding. The NU system companies currently forecast construction expenditures of up to $593 million for the year 2002. On September 28, 2001, NU paid a quarterly dividend of $0.125 per share, an increase of 25 percent from a quarterly dividend of $0.10 per share declared since the fourth quarter of 1999. Similar dividends were declared for payment on December 31, 2001, and were declared in January 2002 for payment on March 29, 2002. NU anticipates increasing its dividend by approximately 10 percent annually and eventually paying out approximately 50 percent of the aggregate earnings of its regulated companies in the form of common dividends. Such a program will be dependent upon numerous factors, including NU's ability to meet earnings targets and the judgment of its Board of Trustees at the time. Over the coming years, management expects WMECO and NAEC to pay out substantially all of their earnings as dividends to the parent company. PSNH is expected to pay out most of its earnings in the form of dividends to the parent company. There may also be an additional dividend to NU near the end of 2002, depending on the amount of cash received as a result of the sale of Seabrook. NGC also is expected to pay annual dividends to NU as allowed by the bond covenants contained in NGC's 2001 bond indenture. Yankee Gas Services Company (Yankee Gas) is expected to reinvest its earnings in its distribution expansion program. NU is expected to make an additional equity contribution to Yankee Gas in 2002 to help fund its expansion program. CL&P's dividend policy will depend largely on its earnings and the timing and scope of its expected increasing investment in its distribution and transmission system. In 2002, both CL&P and WMECO may make additional dividend payments to NU to help achieve their target leverage ratios of approximately 55 percent, excluding rate reduction bonds. As of December 31, 2001, CL&P's capitalization included total debt of approximately 48 percent and WMECO's capitalization included total debt of approximately 52 percent, in each case excluding rate reduction bonds. The NU system has $50.5 million of sinking fund obligations due in 2002, primarily at NU parent and NGC. Management expects to meet those obligations through operating cash flows. Additionally, NU plans to refinance a $263 million variable-rate note with a fixed-rate note in April 2002, to take advantage of current interest rates. NU also expects to meet its capital expenditure and common dividend obligations in 2002 primarily through operating cash flows, while maintaining excess funds for further common share repurchases. Beyond 2001, management expects that Yankee Gas will likely need to issue additional long-term debt to fund its capital investment program, even without paying any common dividends to NU. CL&P also may need to issue long-term debt if its currently planned transmission construction program is approved by regulators. Current debt levels at WMECO are expected to remain stable in future years and the level at PSNH may decline, contingent upon the results of the sale of NAEC's share of Seabrook. The NU system could need additional sources of capital to fund expansion of its competitive energy subsidiaries in future years, but management cannot currently estimate that amount. COMPETITIVE ENERGY SUBSIDIARIES NU's competitive energy subsidiaries grew significantly in 2001 with revenues of $3 billion, compared with revenues of $1.9 billion in 2000. Earnings, however, declined to $5 million before the cumulative effect of an accounting change in 2001, as compared to a contribution toward NU's consolidated earnings of $13.6 million before an extraordinary charge in 2000. NU's competitive energy subsidiaries own and manage 1,436 MW of generation capacity, including 1,289 MW at NGC and 147 MW at HWP. These businesses also include wholesale and retail energy marketing organizations and an expanding trading business. The energy marketing organizations also buy and sell natural gas and other fuels. The competitive energy subsidiaries also include Select Energy Services, Inc. (SES) (formerly HEC Inc.), which performs energy management services for large industrial, commercial and institutional facilities, including the United States Department of Defense, and Northeast Generation Services Company (NGS), which operates and maintains NGC's and HWP's generation assets and provides third-party contracting services for power plants and large industrial facilities. NU operates its competitive energy subsidiaries as a combined entity. However, in connection with the initial financing of NGC and its issuance of nonrecourse debt, Select Energy has an above-market contract to purchase energy and related products from NGC. Select Energy's performance under that contract is guaranteed by NU. Select Energy has another contract to acquire power from HWP's 147 megawatt coal-fired Mount Tom generating unit in Holyoke, Massachusetts. Primarily as a result of the favorable terms to NGC and HWP in those contracts, NGC earned $42.3 million on revenues of $129.7 million in 2001 and HWP earned $4.4 million on revenues of $55.2 million in 2001. Both of NU's primary energy services businesses also were profitable in 2001 with NGS earning $4.6 million on revenues of $112 million and SES earning $2.4 million on revenues of $102 million. Select Energy's marketing and trading business combines the output and capacity from NGC and HWP with other generation and provides wholesale and retail electric service throughout the Northeast United States. In addition to electricity, Select Energy sells natural gas and other fuels on a wholesale and retail basis. NU's investment in Select Energy grew in 2001 due in large part to the acquisition of NMEM, and the need to post additional working capital as a result of a significantly increased level of business. NU invested $109.4 million of equity in Select Energy in 2001 and Select Energy had borrowings from the parent company of $162 million and $114.1 million at December 31, 2001 and 2000, respectively. This investment was partially offset by the return of $75 million to NU parent through a combination of capital and common dividends by NGC in October 2001. One of management's primary goals in 2002 is to improve the results of Select Energy's energy marketing and trading businesses. To reduce risk, Select Energy has already procured almost 100 percent of the projected on-peak and the vast majority of the off-peak electricity requirements needed to serve the CL&P standard offer service load. In addition, management continues to work with state regulators to increase CL&P's standard offer service price to make it more competitive with alternative energy suppliers. Select Energy management also continues to work with third parties to arrange new profitable energy contracts to replace a number of wholesale contracts that are in the process of expiring. Management also expects the operations of SENY to significantly increase its business in New York and to generate positive net income in 2002. NU provides credit assurance in the form of guarantees and letters of credit for the financial performance obligations of certain of its competitive energy subsidiaries. NU currently has authorization from the Securities and Exchange Commission (SEC) to provide up to $500 million of guarantees, and has applied for authority to increase this amount to $750 million. As of December 31, 2001, NU had provided approximately $268.2 million and $45 million of such guarantees and letters of credit, respectively. In addition, NU's "aggregate investment" in Select Energy and its other energy service companies (but not including NGC, HWP or certain subsidiaries of SES) (which is inclusive of most of such credit assurances) is limited by SEC rule to 15 percent of NU's most recent quarterly consolidated capitalization. In light of the increasing size of the energy marketing and trading businesses, NU has applied to the SEC for authority to exempt Select Energy and SENY from this limitation. COMPETITIVE ENERGY SUBSIDIARIES' MARKET AND OTHER RISKS NU's competitive energy subsidiaries, as major providers of electricity and natural gas, are exposed to certain market risks inherent in their business activities. The competitive energy subsidiaries enter into contracts of varying lengths of time to buy and sell energy commodities, primarily electricity, natural gas and oil. Market risk represents the risk of loss that may impact the companies' financial statements due to adverse changes in commodity market prices. The competitive energy subsidiaries manage their portfolio of contracts and assets to maximize value and minimize associated risks. The lengths of contracts to buy and sell energy vary in duration from daily/hourly to several years. At any point in time, the portfolio may be long (purchases exceed sales) or short (sales exceed purchases). Portfolio and risk management disciplines are used to manage exposures to market risks. Policies and procedures have been established to manage these risks. At market spot prices in effect at December 31, 2001, the portfolio had a positive mark-to-market position. There is significant volatility in the energy commodities market, and for certain of the energy products and contracts there has been limited liquidity. The position increased in value due to the decline in energy prices in the region and new transactions entered into during 2001. Select Energy also engages in the trading of commodity derivatives, which are accounted for using the mark-to-market method under Emerging Issues Task Force Issue No. 98-10, "Accounting for Energy Trading and Risk Management Activities." All other nontrading transactions are recognized when settled. All trading positions are marked-to-market daily at the end of each trading day. All NYMEX futures and options are marked to closing exchange prices. Over-the-counter forwards and options are marked to the mid-point of bid and ask quotes. In most cases there are multiple sources of over-the-counter and broker quotes. Options, for which specific quotes are not available, are marked-to-market using a forward volatility curve derived from other options for which quotes are available. As of and for the year ended December 31, 2001, the sources of the fair value of these trading activities and the change in fair value of these trading activities are as follows:
- -------------------------------------------------------------------------------- (Millions of Dollars) Fair Value of Contracts at December 31, 2001 - -------------------------------------------------------------------------------- Maturity Maturity Maturity in Less than of One to Excess of Total Sources of Fair Value One Year Four Years Four Years Fair Value - -------------------------------------------------------------------------------- Prices actively quoted $ 1.0 $ 0.2 $ -- $ 1.2 Prices provided by external sources 6.5 15.9 20.8 43.2 Prices based on model or other valuation method -- -- -- -- - -------------------------------------------------------------------------------- Totals $ 7.5 $16.1 $20.8 $44.4 ================================================================================
- -------------------------------------------------------------------------------- (Millions of Dollars) Total Fair Value - -------------------------------------------------------------------------------- Fair value at beginning of period (January 1, 2001) $13.8 Contracts realized or otherwise settled during the period (7.9) Fair value of new contracts entered into during the period 17.7 Changes in fair value of contracts that existed at the beginning of the period 20.8 - -------------------------------------------------------------------------------- Fair value at end of period (December 31, 2001) $44.4 ================================================================================
For further information see Note 1J, "Summary of Significant Accounting Policies - Accounting for Competitive Energy Contracts," Note 9, "Market Risk and Risk Management Instruments," and Note 12, "Other Comprehensive Income," to the consolidated financial statements. BUSINESS DEVELOPMENT AND CAPITAL EXPENDITURES In 2001, NU system companies announced a number of initiatives to significantly increase their investment in regulated electric transmission and natural gas distribution facilities, particularly in Connecticut. CL&P announced that it planned to construct two new 345,000 volt transmission line facilities totaling approximately 85 miles into Norwalk, Connecticut at a combined cost of approximately $520 million. An application to construct one of the facilities, an approximately 20 mile facility from Bethel, Connecticut to Norwalk, Connecticut, was filed in October 2001 with the Connecticut Siting Council. A decision is expected by the fall of 2002. The application related to a second facility from Middletown, Connecticut to Norwalk, Connecticut will be filed with the Connecticut Siting Council later in 2002. CL&P also has proposed replacing the existing 138,000 volt transmission line beneath Long Island Sound between Norwalk, Connecticut and Northport - Long Island, New York. CL&P, which owns an equal share of the existing line with the Long Island Power Authority, would bear approximately half of the cost of the $80 million project. That project would require Connecticut, New York and federal regulatory approvals. This application was filed with the Connecticut Siting Council in February 2002. If approved, these three projects would increase CL&P's capital expenditures. CL&P's capital investments in electric utility plant totaled $237.4 million in 2001 and $208.2 million in 2000, well above the $132.2 million level of 1998, primarily as a result of increased spending on CL&P's distribution system. CL&P's capital expenditures are expected to total $244 million in 2002 and higher in 2003 through 2005, if the transmission projects are approved. In addition to the three CL&P transmission projects noted above, the NU system announced plans for a fourth project involving construction of a new undersea direct-current line between Norwalk, Connecticut and western Long Island that is projected to be in service by no later than 2005. The cost of that line, which will require several regulatory approvals, depends on a number of factors, including its size and route. Management expects the line to be built and owned by a new NU transmission subsidiary that will secure its own external financing and receive an equity contribution from NU. Yankee Gas received approval for a significant expansion of its distribution system as it has a relatively low penetration rate for gas service in its service territory. To begin increasing that penetration rate, Yankee Gas commenced work in 2001 on 12 projects expected to cost $23 million in total. As a result, Yankee Gas' capital expenditures were $47.8 million in 2001, compared with $21.6 million in 2000. Yankee Gas has proposed system expansion projects totaling $190 million through 2005, including the 12 projects announced in 2001. Yankee Gas also is considering construction of a liquefied natural gas storage terminal in Waterbury, Connecticut that could cost in excess of $50 million. Yankee Gas may issue up to $100 million of long-term debt in 2002 to finance its capital needs and may require additional debt issuances in later years, depending on the extent of its capital program. Capital investments in electric utility plant at PSNH and WMECO totaled $92.6 million and $30.9 million, respectively, in 2001, as compared to $69.5 million and $27.3 million, respectively, in 2000. The company anticipates no material increase in capital expenditures at those subsidiaries in the next several years. Capital expenditures at NU's competitive energy subsidiaries are expected to be modest over the next several years. The most significant ongoing project is a repowering of six hydroelectric generation units at the Cabot Facility in Turners Falls, Massachusetts. That project began in 2001 and is expected to cost approximately $7 million per year and continue through 2003. NU continues to search for investment opportunities in competitive energy businesses in the Northeast United States. Over the past three years, NU acquired Denron, a heating, ventilating and air conditioning contractor based in New Hampshire; E.S. Boulos Company (Boulos), a high-voltage electrical contractor based in Maine, and; NMEM, an energy marketing company based in New York. NU also invested $10 million in Acumentrics, a Massachusetts firm that manufactures power quality and uninterruptible power quality components. The NMEM acquisition at approximately $31.7 million, was the largest investment of the four aforementioned investments. With approximately $570 million in revenues in 2001, this acquisition is expected to increase Select Energy's consolidated revenues by approximately 25 percent in 2002 and significantly increase Select Energy's activities in the New York market. RESTRUCTURING AND RATE MATTERS Connecticut - CL&P: Industry restructuring for CL&P was essentially completed in 2000. In June 2001, the DPUC concluded an investigation of potential overearnings by CL&P and ordered a $21.1 million reduction in CL&P's electric transmission and distribution rates and an equal increase in CL&P's Generation Services Charge. The DPUC also implemented an earnings sharing mechanism under which earnings in excess of a 10.3 percent return on equity will be shared equally by shareholders and ratepayers. On September 28, 2001, the DPUC ordered a $21.3 million annual reduction in CL&P's System Benefits Charge as a result of a sharp reduction in decommissioning collections and an equal increase in the Competitive Transition Assessment, effective January 1, 2002. Also, on July 26, 2001, the DPUC authorized CL&P to assess a charge of approximately $0.002 per kilowatt-hour (kWh) from August 2001 through December 2003 to collect approximately $98.5 million of deferred fuel costs. The net result of these decisions was a reduction in CL&P's pretax earnings of $21.1 million beginning June 20, 2001, an acceleration of CL&P's recovery of stranded costs in 2002 and 2003, and further enhancement of CL&P's cash flows. On September 27, 2001, CL&P filed its application with the DPUC for approval of the disposition of the proceeds from the sale of the Millstone units to DNCI. This application described and requested DPUC approval for CL&P's treatment of its share of the proceeds from the sale. A decision from the DPUC is expected in the first half of 2002. Since retail competition began in Connecticut in 2000, an extremely small number of CL&P customers have opted to choose their retail supplier. As of December 31, 2001, virtually all of CL&P's customers were procuring their electricity through CL&P's standard offer service. Through December 2003, 50 percent of CL&P's standard offer service requirements will be purchased from Select Energy with the remaining 50 percent being purchased from two unaffiliated companies. On November 18, 2001, at the request of one of the unaffiliated companies, CL&P filed a request with the DPUC to raise the standard offer service rate from an average of $0.0495 per kWh to $0.0595 per kWh to help promote competition in advance of the January 1, 2004, termination of the standard offer service period and to provide financial relief to the standard offer suppliers. In December 2001, the DPUC rejected CL&P's request, but opened two new dockets to examine the absence of effective retail electric competition in Connecticut and the financial condition of the suppliers. The dockets will include the gathering of information regarding the viability of the standard offer service contracts, their reliability and whether the standard offer service contracts should be linked to market conditions. The DPUC held hearings in February 2002. A decision in this docket which could lead to the re-opening of CL&P's standard offer docket to consider these issues is expected to be issued in the first half of 2002. Connecticut - Yankee Gas: On July 24, 2001, Yankee Gas filed a rate application with the DPUC requesting a 7.64 percent or $29.2 million increase in rates to fund system reliability projects and a proposed expansion of its distribution system. On January 30, 2002, the DPUC issued a final decision which ordered a $4 million rate decrease effective March 1, 2002. This rate decrease was, in part, based upon adjustments that Yankee Gas had agreed to during the proceedings. The final decision however, approved partially or fully many of the proposals made by Yankee Gas in its filing. The decision endorses Yankee Gas' distribution system expansion plan, subject to annual reviews and approves, with some conditions, its ratemaking recovery mechanism (Infrastructure Expansion Rate Mechanism). The final decision also authorizes an 11 percent return on equity for Yankee Gas and a sharing formula for earnings above that level from 2002 through 2005. Subsequent to the final decision, the effective date of the rate decrease was delayed until April 1, 2002. New Hampshire: On May 1, 2001, PSNH implemented industry restructuring allowing its customers to begin choosing their electric suppliers (competition day). They also received an overall reduction of 10 percent, in addition to the 5 percent reduction they received on October 1, 2000. On May 22, 2001, the Governor of New Hampshire signed a bill modifying the state's 1996 and 2000 electric utility industry restructuring laws. The revisions delay the sale of PSNH's fossil and hydroelectric generation assets to no sooner than 33 months after restructuring takes effect, or February 1, 2004. The revisions also fixed the charges retail customers will pay PSNH for electric supply, or transition service. PSNH and NAEC have entered into two contracts where PSNH is obligated to purchase NAEC's 35.98 percent ownership of the capacity and output of Seabrook. The 2001 amended restructuring bill requires the NHPUC to complete the sale of NAEC's share of Seabrook in an expeditious manner. In late 2001, the NHPUC and the DPUC named J. P. Morgan as the selling agent for all owners seeking to sell their Seabrook shares. Those owners, which include CL&P with its 4.06 percent share, collectively own approximately 88 percent of Seabrook. J. P. Morgan expects to consummate the sale in late 2002. NAEC's proceeds will be used to repay all $90 million of NAEC's outstanding debt and return all NAEC's equity, which totaled $35 million as of December 31, 2001, to NU. Following the sale of NAEC's share of Seabrook, the Seabrook Power Contracts will be terminated. PSNH will use these proceeds to more quickly amortize stranded costs. On October 10, 2000, NU reached an agreement with an unaffiliated joint owner of Seabrook under which that joint owner would include its aggregate 15 percent ownership share of Seabrook in the upcoming sale. Under the terms of the agreement, in the event that the sale yields proceeds for that joint owner of more than $87.2 million, NU and that joint owner would share the excess proceeds. Should those sales proceeds be less than $87.2 million, NU would make up the difference below that amount up to a maximum of $17.4 million. The agreement also limits any top-off amount required to be funded by that joint owner for decommissioning as part of the sale process at the amount required by the Nuclear Regulatory Commission (NRC) regulations. Massachusetts: Unlike Connecticut, Massachusetts has experienced a continued expansion in the number of customers securing their electric supply through competitive suppliers. In January 2001, WMECO instituted approximately a 17 percent overall rate increase for its customers taking standard offer service. The increase reflected a sharp increase, from approximately $0.045 per kWh to approximately $0.073 per kWh, in prices paid to third-party suppliers during 2001. In December 2001, however, the Massachusetts Department of Telecommunications and Energy approved approximately a 14 percent reduction in WMECO's overall rates for standard offer service customers, primarily reflecting a reduction in WMECO's standard offer service supply costs in 2002 to approximately $0.048 per kWh. The significant reduction in supply costs in 2002 will result in a material reduction in WMECO's operating revenues and purchased power costs in 2002, but should not have a significant impact on financial performance since electric supply costs are passed through to customers. For further information regarding commitments and contingencies related to restructuring, see Note 7A, "Commitments and Contingencies - Restructuring," to the consolidated financial statements. REGIONAL TRANSMISSION ORGANIZATION The Federal Energy Regulatory Commission (FERC) has required all transmission owning utilities to voluntarily start forming regional transmission organizations (RTO) or to state why this process has not begun. In July 2001, the FERC stated that the three existing Northeastern Independent System Operators (ISO) (PJM, New York and New England) should work together to form one RTO. The FERC initiated a mediation effort between all interested parties to begin the process of forming such an entity. NU has been discussing with the other transmission owners in the three pool area the potential to form an Independent Transmission Company (ITC). The ITC would be a for-profit entity and would perform certain transmission functions required by the FERC including tariff control, system planning and system operations. The remaining functions required by the FERC would be performed by the ISO and deal with the energy market and short-term reliability. Together, the ITC and ISO form the FERC desired RTO. In January 2002, the New York and New England ISOs announced their intention to form an RTO. NU is working with the other transmission owners in these two power pools to create an ITC. The agreements needed to create the ITC and to define the working relationships among the ISO, the ITC and the transmission owners should be created in 2002 and will allow the ITC to begin operation shortly thereafter. The ITC and/or ISO will have the responsibility to collect the revenue requirements of each transmission owning entity from the market place through FERC approved tariffs. The creation of the ITC and/or RTO will require a FERC rate case and the impact on NU's return on equity as a result of this rate case cannot be estimated at this time. NUCLEAR PLANT PERFORMANCE AND OTHER MATTERS Seabrook: Seabrook operated at a capacity factor of 85.9 percent in 2001. After returning from a scheduled refueling outage in January 2001, Seabrook operated at a capacity factor of 93.4 percent. Seabrook is scheduled to undergo a refueling outage in the spring of 2002. The NU system companies own 40.04 percent of Seabrook. Yankee Companies: In August 2001, Vermont Yankee Nuclear Power Corporation announced it would sell the unit to an unaffiliated company for $180 million, including $145 million for the plant and materials and supplies and $35 million for the nuclear fuel. NU subsidiaries own 16 percent of the unit, and under the terms of the sale, will continue to buy 16 percent of the plant's output through March 2012 at a range of fixed prices. The sale requires several regulatory approvals and is scheduled to close during the first half of 2002. Millstone: On March 31, 2001, CL&P and WMECO consummated the sale of Millstone 1 and 2 to DNCI. Additionally, CL&P, PSNH and WMECO sold their ownership interests in Millstone 3 to DNCI. On October 5, 2001, NU issued a report, following an extensive search, concerning two missing fuel pins at the retired Millstone 1 nuclear unit, which was sold to DNCI on March 31, 2001. As of December 31, 2001, costs related to this search totaled $7.1 million. The report concluded that the pins are currently located in one of four facilities licensed to store low or high-level nuclear waste and that they are not a threat to public health and safety. A follow-up review by the NRC commenced shortly after the report was filed and resulted in a NRC sponsored public meeting on January 15, 2002. In February 2002, the NRC issued a written inspection report which concluded that NU's investigation was thorough and complete, and that its conclusions were reasonable and supportable. NUCLEAR DECOMMISSIONING In connection with the aforementioned sale of the Millstone units, DNCI has agreed to assume responsibility for decommissioning those units. For further information regarding nuclear decommissioning, see Note 8, "Nuclear Decommissioning and Plant Closure Costs," to the consolidated financial statements. SPENT NUCLEAR FUEL DISPOSAL COSTS The United States Department of Energy (DOE) originally was scheduled to begin accepting delivery of spent nuclear fuel on January 31, 1998. However, delays in confirming the suitability of a permanent storage site continually have postponed plans for the DOE's long-term storage and disposal site. Extended delays or a default by the DOE could lead to consideration of costly alternatives. NU has the primary responsibility for the interim storage of its spent nuclear fuel prior to divestiture of its remaining operating nuclear units, Seabrook and Vermont Yankee, as well as the three nuclear units currently undergoing decommissioning, Connecticut Yankee, Maine Yankee and Yankee Rowe. For further information regarding spent nuclear fuel disposal costs, see Note 7C, "Commitments and Contingencies - Spent Nuclear Fuel Disposal Costs," to the consolidated financial statements. OTHER MATTERS Critical Accounting Policies: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates, assumptions and at times difficult, subjective or complex judgments. Accounting policies related to the recoverability of certain regulatory assets, the performance of impairment assessments of recorded goodwill and other long-lived assets, mark-to-market accounting and the related treatment of derivative instruments and certain trading and hedging activities, and the assumptions used in developing the pension and postretirement benefit obligations are the accounting principles that management believes are critical and could have a significant impact on NU's consolidated financial statements. Regulatory Assets: The accounting policies of the NU system's regulated operating companies historically reflect the effects of the rate-making process in accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." Through their cost-of-service rate regulated transmission and distribution businesses, CL&P, PSNH and WMECO are currently recovering their investments in long-lived assets, including regulatory assets, and management believes that the application of SFAS No. 71 to that portion of their businesses continues to be appropriate. Management must reaffirm this conclusion at each balance sheet date. If, as a result of a change in circumstances, it is determined that any portion of these investments is no longer recoverable under SFAS No. 71, that portion would be written off. Such a write-off could have a material impact on NU's consolidated financial statements. Management currently believes that all long-lived assets, including regulatory assets, are recoverable. Goodwill and Other Intangible Assets: Effective January 1, 2002, under SFAS No. 142, "Goodwill and Other Intangible Assets," NU is required to perform at least an annual assessment for impairment of goodwill by applying a fair value-based test. Management is in the process of the first assessment of impairment of goodwill and expects to complete this assessment by the June 30, 2002, deadline imposed by SFAS No. 142. Upon adoption of the impairment testing rules under SFAS No. 142, there may be a cumulative effect of an accounting change which management has not evaluated at this time. Mark-To-Market Accounting: At each balance sheet date, NU's energy trading positions are marked-to-market using closing exchange prices or quotes from external sources. Market risk represents the risk of loss that may impact NU's financial statements due to adverse changes in commodity market prices which could affect the realizability of the positive mark-to-market position of $44.4 million at December 31, 2001. Additionally, the mark-to-market position for certain effective hedging activities is currently included in other comprehensive income. If it is determined that these hedging activities are no longer effective, as defined in SFAS No. 133, this mark-to-market position would be included currently in earnings. This mark-to-market position was a negative $36.9 million at December 31, 2001, net of tax (decrease to equity). Pension and Postretirement Benefit Obligations: The NU system companies participate in a uniform noncontributory defined benefit retirement plan covering substantially all regular NU system employees and also provide certain health care benefits, primarily medical and dental, and life insurance benefits through a benefit plan to retired employees. For each of these plans, the development of the benefit obligation, fair value of plan assets, funded status and net periodic benefit credit or cost is based on several significant assumptions. These assumptions primarily relate to the application of a discount rate, expected long-term rate of return and other trend rates. If these assumptions were changed, the resultant change in benefit obligations, fair values of plan assets, funded status and net periodic benefit credits or costs could have a material impact on NU's consolidated financial statements. For further information regarding these types of activities, see Note 1G, "Regulatory Accounting and Assets," Note 1C, "New Accounting Standards," Note 9, "Market Risk and Risk Management Instruments," and Note 4, "Employee Benefits," to the consolidated financial statements. Environmental Matters: The NU system is subject to environmental laws and regulations structured to mitigate or remove the effect of past operations and to improve or maintain the quality of the environment. For further information regarding environmental matters, see Note 7B, "Commitments and Contingencies - Environmental Matters," to the consolidated financial statements. Other Commitments and Contingencies: For further information regarding other commitments and contingencies, see Note 7, "Commitments and Contingencies," to the consolidated financial statements. Contractual Obligations and Commercial Commitments: Aggregated information regarding the NU system's contractual obligations and commercial commitments as of December 31, 2001, is summarized as follows:
- --------------------------------------------------------------------------------------------------------------------- (Millions of Dollars) 2002 2003 2004 2005 2006 Totals - --------------------------------------------------------------------------------------------------------------------- Notes payable to banks $ 290.5 $ -- $ -- $ -- $ -- $ 290.5 Long-term debt 50.5 318.6 58.5 86.6 24.3 538.5 Capital leases 3.1 3.1 3.0 2.8 2.7 14.7 Operating leases 23.7 18.4 15.5 13.3 11.1 82.0 Long-term contractual obligations 442.1 450.8 459.3 462.2 411.9 2,226.3 Select Energy purchase agreements 2,416.2 836.2 145.9 95.7 34.8 3,528.8 - --------------------------------------------------------------------------------------------------------------------- Totals $3,226.1 $1,627.1 $ 682.2 $ 660.6 $ 484.8 $6,680.8 =====================================================================================================================
For further information regarding NU's contractual obligations and commercial commitments, see the Consolidated Statements of Capitalization and related footnotes, and Note 2, "Short-Term Debt," Note 3, "Leases," and Note 7E, "Long-Term Contractual Arrangements," to the consolidated financial statements. Forward Looking Statements: This discussion and analysis includes forward looking statements, which are statements of future expectations and not facts including, but not limited to, statements regarding future earnings, refinancings, the use of proceeds from restructuring, and the recovery of operating costs. Words such as estimates, expects, anticipates, intends, plans, and similar expressions identify forward looking statements. Actual results or outcomes could differ materially as a result of further actions by state and federal regulatory bodies, competition and industry restructuring, changes in economic conditions, changes in historical weather patterns, changes in laws, developments in legal or public policy doctrines, technological developments, and other presently unknown or unforeseen factors. RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- The components of significant income statement variances for the past two years are provided in the table below. - -------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------- Income Statement Variances 2001 over/(under) 2000 2000 over/(under) 1999 ------------------------- -------------------------- (Millions of Dollars) Amount Percent Amount Percent - ----------------------------------------------------------------------------------------------------------------------- Operating Revenues $ 997 17% $1,405 31% - ----------------------------------------------------------------------------------------------------------------------- Operating Expenses: Fuel, purchased and net interchange power 1,237 37 1,406 74 Other operation (93) (11) 11 1 Maintenance 3 1 (85) (25) Depreciation (39) (16) (62) (21) Amortization of regulatory assets, net 706 (a) (320) (54) Taxes other than income taxes (19) (8) (23) (9) Gain on sale of utility plant (642) (100) 309 100 - ----------------------------------------------------------------------------------------------------------------------- Total operating expenses 1,153 22 1,236 31 - ----------------------------------------------------------------------------------------------------------------------- Operating Income (156) (22) 169 32 Other income (loss), net 202 (a) 92 87 Interest expense, net (19) (7) 36 14 - ----------------------------------------------------------------------------------------------------------------------- Income before income tax expense 65 17 225 (a) Income tax expense 12 7 63 64 Preferred dividends of subsidiaries (7) (47) (9) (38) - ----------------------------------------------------------------------------------------------------------------------- Income before extraordinary loss and cumulative effect of accounting change 60 30 171 (a) Extraordinary loss, net of tax benefit 234 100 (234) 100 Cumulative effect of accounting change, net of tax benefit (22) 100 -- -- - ----------------------------------------------------------------------------------------------------------------------- Net income/(loss) $ 272 (a) $ (63) (a) =======================================================================================================================
(a) Percent greater than 100. OPERATING REVENUES Total revenues increased by $997 million or 17 percent in the year 2001, compared with the year 2000, primarily due to higher revenues from the competitive energy subsidiaries ($1,069 million which reflects eliminations of sales to other NU affiliates), higher revenues from Yankee Gas ($127 million) and higher regulated retail electric revenues ($33 million), partially offset by lower wholesale regulated revenues ($190 million) and lower transmission revenues ($26 million). The competitive energy subsidiaries' increase is primarily due to higher revenues from Select Energy as a result of new contracts for energy services. The Yankee Gas increase is primarily due to a full year of revenue in 2001 versus ten months post merger in 2000. The regulated retail increase is primarily due to a 1.7 percent increase in sales ($41 million), the increase in WMECO's standard offer service rate ($59 million) and the recovery of previously deferred fuel costs for CL&P ($19 million), partially offset by the 5 and 11 percent rate decreases for PSNH that were effective October 1, 2000 and May 1, 2001, respectively ($89 million). Wholesale revenues were lower primarily due to the sale of Millstone at the end of the first quarter of 2001. Total revenues increased by $1,405 million or 31 percent in 2000, primarily due to higher revenues from the competitive energy subsidiaries ($1,246 million of which $669 million represents sales to other NU affiliates which are eliminated in consolidation), the acquisition of Yankee ($262 million) and higher regulated wholesale revenues ($727 million of which $281 million represents sales to other NU affiliates which are eliminated in consolidation), partially offset by lower regulated retail revenues ($26 million). The competitive energy subsidiaries' increase is primarily due to higher revenues from Select Energy as a result of new contracts for energy sales and services. The regulated wholesale revenue increase is primarily due to higher PSNH energy sales and higher CL&P and WMECO revenue from the sale of the output from Millstone 2 and 3. The regulated retail decrease is primarily due to retail rate reductions for CL&P and PSNH ($108 and $8 million, respectively), partially offset by the impact of Millstone 2 being returned to CL&P's rate base ($33 million), higher retail sales ($18 million), higher fuel revenues for PSNH ($15 million), and higher retail revenue attributed to lower price discounts in 2000 and changing customer mix ($24 million). Regulated retail kWh sales increased by 0.8 percent in 2000. FUEL, PURCHASED AND NET INTERCHANGE POWER Fuel, purchased and net interchange power expense increased in 2001, primarily due to higher purchased energy and capacity costs as a result of higher sales for Select Energy ($1,252 million which reflects eliminations of purchases from other NU affiliates), higher expense for Yankee primarily due to a full year in 2001 and higher gas prices ($83 million), and higher expense for WMECO primarily due to the increased cost of the standard offer supply ($70 million), partially offset by lower wholesale cost for CL&P and PSNH ($173 million, net of eliminations). Fuel, purchased and net interchange power expense increased in 2000, primarily due to higher purchased energy and capacity costs as a result of higher sales for Select Energy ($1,036 million of which $660 million represents purchases from other NU affiliates which are eliminated in consolidation), Yankee expenses ($135 million) and higher purchased power for regulated subsidiaries ($235 million). OTHER OPERATION AND MAINTENANCE Other operation and maintenance (O&M) expenses decreased $90 million in 2001, primarily due to lower nuclear expenses ($133 million) as a result of the sale of the Millstone units at the end of the first quarter of 2001, partially offset by higher O&M expenses for the competitive energy subsidiaries, primarily due to the acquisition of Boulos ($49 million). Other O&M expenses decreased $74 million in 2000, primarily due to lower spending at the nuclear units due to better performance ($75 million), lower expenses due to the sale of certain CL&P and WMECO fossil and hydroelectric generation assets ($74 million), lower corporate support ($38 million), the decommissioning status of Millstone 1 ($17 million), lower environmental- related costs ($12 million) and 1999 expenses associated with the Con Edison merger ($12 million), partially offset by the addition of Yankee ($60 million), higher O&M expenses for the unregulated businesses ($84 million), primarily due to the business expansion, and higher distribution expenses ($29 million), including increased conservation program expenses. DEPRECIATION Depreciation expense decreased $39 million in 2001, primarily due to the elimination of decommissioning expenses as a result of the sale of the Millstone units at the end of the first quarter of 2001 ($25 million) and the buydown of the Seabrook Power Contracts ($14 million). Depreciation decreased $62 million in 2000, primarily due to the effect of discontinuing SFAS No. 71 for the portion of the generation business for CL&P and WMECO and the resulting reclassification of depreciable nuclear plant balances to regulatory assets ($84 million) and the sale of certain CL&P and WMECO fossil and hydroelectric generation assets, partially offset by the addition of Yankee ($23 million). AMORTIZATION OF REGULATORY ASSETS, NET Amortization of regulatory assets, net increased in 2001, primarily due to the amortization in 2001 related to the gain on sale of the Millstone units by CL&P and WMECO ($641 million) and higher amortization related to restructuring. Amortization of regulatory assets, net decreased in 2000, primarily due to the amortization in 1999 of the gain on sale of fossil and hydroelectric generation assets for WMECO and CL&P ($309 million), and changes in amortization levels as a result of industry restructuring ($95 million). These decreases were partially offset by higher amortization associated with the reclassified nuclear plant balances ($84 million). TAXES OTHER THAN INCOME TAXES Taxes other than income taxes decreased in 2001, primarily due to settlement of a property tax appeal with the City of Meriden for CL&P and Yankee in 2001 ($15 million), the reduction in property tax for CL&P and WMECO due to the sale of the Millstone units ($16 million) and lower New Hampshire franchise tax ($5 million), partially offset by higher Connecticut gross earnings taxes ($14 million) on higher CL&P revenues. Taxes other than income taxes decreased in 2000, primarily due to lower Connecticut gross earnings taxes ($12 million) and lower payroll taxes ($7 million). GAIN ON SALE OF UTILITY PLANT NU recorded gains on the sale of CL&P's and WMECO's ownership interests in Millstone. A corresponding amount of amortization expense was recorded in 2001. CL&P and WMECO recorded gains on the sale of their fossil and hydroelectric generation assets in 1999. A corresponding amount of amortization expense was recorded. OTHER INCOME/(LOSS), NET Other income/(loss), net increased primarily due to NU's recognition in 2001 of a gain in connection with the sale of the Millstone nuclear units to DNCI (the pretax amount of $189 million is included in other income with an offsetting income tax expense impact of $73 million), lower nuclear related costs in 2001 ($18 million), lower environmental reserve expense in 2001 ($10 million), and higher interest and dividend income ($20 million), partially offset by the charge related to the forward purchase of 10.1 million NU common shares ($35 million). Other income/(loss), net increased in 2000, primarily due to lower nuclear related costs in 2000 ($53 million), a one-time gain related to the company's investment in NEON of Mode 1 ($17 million), and the loss in 1999 on the CL&P assignment of market-based contracts to Select Energy ($15 million). INTEREST EXPENSE, NET Interest expense, net decreased in 2001, primarily due to reacquisitions and retirements of long-term debt ($54 million) and higher short-term borrowings in 2000 associated with asset transfers and the Yankee merger ($54 million), partially offset by the interest expense associated with the issuance of rate reduction bonds and certificates in 2001 ($88 million). Interest expense, net increased in 2000, primarily due to higher short-term borrowings associated with the NGC asset transfer and the Yankee merger, partially offset by lower long-term debt as a result of reacquisitions and retirements. INCOME TAX EXPENSE The consolidated statement of income taxes provides a reconciliation of actual and expected tax expense. The tax effect of temporary differences is accounted for in accordance with the rate-making treatment of the applicable regulatory commissions. In past years, this rate-making treatment has required the company to provide the customers with a portion of the tax benefits associated with accelerated tax depreciation in the year it is generated (flow-through depreciation). As these flow-through differences turn around, higher tax expense is recorded. Federal and state income taxes combined increased in 2001, primarily due to higher taxable income. The increase in income taxes as a result of higher taxable income was partially offset by a reduction in income taxes as a result of the favorable resolution of certain tax contingencies. For further information regarding income taxes, see the Consolidated Statements of Income Taxes. Federal and state income tax expense increased approximately $63 million in 2000. Significant variances responsible for this increase include higher pretax earnings ($90 million) and lower adjustments to the tax valuation allowance ($21 million). Reduction in flow-through depreciation and amortization ($51 million) partially offset the overall change. PREFERRED DIVIDENDS OF SUBSIDIARIES Preferred dividends decreased in 1999, 2000, and 2001 primarily due to lower preferred stock outstanding. EXTRAORDINARY LOSS, NET OF TAX BENEFIT The extraordinary loss, net of tax benefit, is primarily due to an after-tax write-off by PSNH of approximately $225 million of stranded costs under an industry restructuring settlement with the state of New Hampshire, combined with other positive effects on PSNH from the discontinuance of SFAS No. 71 ($11 million) and a loss associated with the then pending sale of certain HWP assets ($20 million). CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX BENEFIT The cumulative effect of accounting change, net of tax benefit, recorded in 2001, represents the effect of the adoption of SFAS No. 133 ($22 million). COMPANY REPORT - ------------------------------------------------------------------------------- The accompanying consolidated financial statements of Northeast Utilities and subsidiaries and other sections of this annual report were prepared by the company. These financial statements, which were audited by Arthur Andersen LLP, were prepared in accordance with accounting principles generally accepted in the United States using estimates and judgments, where required, and giving consideration to materiality. The company has endeavored to establish a control environment that encourages the maintenance of high standards of conduct in all of its business activities. The company maintains a system of internal controls over financial reporting, which is designed to provide reasonable assurance to the company's management and Board of Trustees regarding the preparation of reliable, published financial statements. The system is supported by an organization of trained management personnel, policies and procedures, and a comprehensive program of internal audits. Through established programs, the company regularly communicates to its management employees their internal control responsibilities and policies prohibiting conflicts of interest. The Audit Committee of the Board of Trustees is composed entirely of independent trustees. The Audit Committee meets periodically with management, the internal auditors and the independent auditors to review the activities of each and to discuss audit matters, financial reporting and the adequacy of internal controls. Because of inherent limitations in any system of internal controls, errors or irregularities may occur and not be detected. The company believes, however, that its system of internal accounting controls and control environment provide reasonable assurance that its assets are safeguarded from loss or unauthorized use and that its financial records, which are the basis for the preparation of all financial statements, are reliable. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - ------------------------------------------------------------------------------- To the Board of Trustees and Shareholders of Northeast Utilities: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Northeast Utilities (a Massachusetts trust) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income, shareholders' equity, cash flows, and income taxes for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Northeast Utilities and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1C to the consolidated financial statements, effective January 1, 2001, the company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. /s/ ARTHUR ANDERSEN LLP ------------------- ARTHUR ANDERSEN LLP Hartford, Connecticut January 22, 2002 CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------------------------------ For the Years Ended December 31, - ------------------------------------------------------------------------------------------------------------------ (Thousands of Dollars, except share information) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------- OPERATING REVENUES $6,873,826 $5,876,620 $4,471,251 - ------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Operation -- Fuel, purchased and net interchange power 4,541,342 3,303,995 1,898,314 Other 773,058 866,742 855,917 Maintenance 258,961 255,884 340,419 Depreciation 201,013 239,798 302,305 Amortization of regulatory assets, net 983,037 276,821 596,437 Taxes other than income taxes 219,197 238,587 261,353 Gain on sale of utility plant (641,956) -- (308,914) - ------------------------------------------------------------------------------------------------------------------- Total operating expenses 6,334,652 5,181,827 3,945,831 - ------------------------------------------------------------------------------------------------------------------- Operating Income 539,174 694,793 525,420 Other Income/(Loss), Net 187,627 (14,309) (106,187) - ------------------------------------------------------------------------------------------------------------------- Income Before Interest and Income Tax Expense 726,801 680,484 419,233 - ------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest on long-term debt 147,049 200,697 258,093 Interest on rate reduction bonds 87,616 -- -- Other interest 44,993 98,605 5,558 - ------------------------------------------------------------------------------------------------------------------- Interest expense, net 279,658 299,302 263,651 - ------------------------------------------------------------------------------------------------------------------- Income Before Income Tax Expense 447,143 381,182 155,582 Income Tax Expense 173,952 161,725 98,611 - ------------------------------------------------------------------------------------------------------------------- Income Before Preferred Dividends of Subsidiaries 273,191 219,457 56,971 Preferred Dividends of Subsidiaries 7,249 14,162 22,755 - ------------------------------------------------------------------------------------------------------------------- Income before extraordinary loss and cumulative effect of accounting change, net of tax benefits 265,942 205,295 34,216 Extraordinary loss, net of tax benefit of $169,562 -- (233,881) -- Cumulative effect of accounting change, net of tax benefit of $14,908 (22,432) -- -- - ------------------------------------------------------------------------------------------------------------------- Net Income/(Loss) $243,510 $(28,586) $34,216 =================================================================================================================== BASIC EARNINGS/(LOSS) PER COMMON SHARE: Income before extraordinary loss and cumulative effect of accounting change, net of tax benefits $1.97 $1.45 $0.26 Extraordinary loss, net of tax benefit -- (1.65) -- Cumulative effect of accounting change, net of tax benefit (0.17) -- -- - ------------------------------------------------------------------------------------------------------------------- Basic Earnings/(Loss) Per Common Share $1.80 $(0.20) $0.26 =================================================================================================================== FULLY DILUTED EARNINGS/(LOSS) PER COMMON SHARE: Income before extraordinary loss and cumulative effect of accounting change, net of tax benefits $1.96 $1.45 $0.26 Extraordinary loss, net of tax benefit -- (1.65) -- Cumulative effect of accounting change, net of tax benefit (0.17) -- -- - ------------------------------------------------------------------------------------------------------------------- Fully Diluted Earnings/(Loss) Per Common Share $1.79 $(0.20) $0.26 =================================================================================================================== Basic Common Shares Outstanding (average) 135,632,126 141,549,860 131,415,126 =================================================================================================================== Fully Diluted Common Shares Outstanding (average) 135,917,423 141,967,216 132,031,573 ===================================================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- ------------------------------------------------------------------------------------------------------- For the Years Ended December 31, - ------------------------------------------------------------------------------------------------------- (Thousands of Dollars) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------- NET INCOME/(LOSS) $243,510 $(28,586) $34,216 - ------------------------------------------------------------------------------------------------------- OTHER COMPREHENSIVE (LOSS)/INCOME, NET OF TAX: Qualified cash flow hedging instruments (36,859) -- -- Unrealized gains on securities 2,620 245 118 Foreign currency translation adjustments -- -- 1 - ------------------------------------------------------------------------------------------------------- Other comprehensive (loss)/income, net of tax (34,239) 245 119 - ------------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME/(LOSS) $209,271 $(28,341) $34,335 =======================================================================================================
The accompanying notes are an integral part of these financial statements. CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------ At December 31, - ------------------------------------------------------------------------------------------------------------------------ (Thousands of Dollars) 2001 2000 - ------------------------------------------------------------------------------------------------------------------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 96,658 $ 200,017 Investments in securitizable assets 36,367 98,146 Receivables, less accumulated provision for uncollectible accounts of $16,353 in 2001 and $12,500 in 2000 831,221 472,863 Unbilled revenues 126,398 121,090 Fuel, materials and supplies, at average cost 108,516 163,711 Special deposits 60,261 2,624 Prepayments and other 126,233 91,904 - ------------------------------------------------------------------------------------------------------------------------ 1,385,654 1,150,355 - ------------------------------------------------------------------------------------------------------------------------ PROPERTY, PLANT AND EQUIPMENT: Electric utility 5,743,575 9,003,298 Gas utility 634,884 608,153 Competitive energy 344,063 409,035 Other 195,741 211,417 - ------------------------------------------------------------------------------------------------------------------------ 6,918,263 10,231,903 Less: Accumulated provision for depreciation 3,418,577 7,041,279 - ------------------------------------------------------------------------------------------------------------------------ 3,499,686 3,190,624 Construction work in progress 289,889 228,330 Nuclear fuel, net 32,564 128,261 - ------------------------------------------------------------------------------------------------------------------------ 3,822,139 3,547,215 - ------------------------------------------------------------------------------------------------------------------------ DEFERRED DEBITS AND OTHER ASSETS: Regulatory assets 3,950,445 3,910,801 Goodwill and other purchased intangible assets, net 322,600 324,389 Prepaid pension 232,398 139,546 Nuclear decommissioning trusts, at market 61,713 740,058 Other 466,460 404,785 - ------------------------------------------------------------------------------------------------------------------------ 5,033,616 5,519,579 - ------------------------------------------------------------------------------------------------------------------------ Total Assets $10,241,409 $ 10,217,149 ========================================================================================================================
The accompanying notes are an integral part of these financial statements. CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------------------------------- At December 31, - ----------------------------------------------------------------------------------------------------------------------------------- (Thousands of Dollars) 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND CAPITALIZATION CURRENT LIABILITIES: Notes payable to banks $ 290,500 $ 1,309,977 Long-term debt and preferred stock - current portion 50,462 340,041 Accounts payable 669,545 538,983 Accrued taxes 26,203 54,088 Accrued interest 35,659 41,131 Other 178,071 304,810 - ----------------------------------------------------------------------------------------------------------------------------------- 1,250,440 2,589,030 - ----------------------------------------------------------------------------------------------------------------------------------- Rate Reduction Bonds 2,018,351 -- - ----------------------------------------------------------------------------------------------------------------------------------- Minority Interest in Consolidated Subsidiary -- 100,000 - ----------------------------------------------------------------------------------------------------------------------------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 1,491,394 1,585,494 Accumulated deferred investment tax credits 120,071 153,155 Decommissioning obligation - Millstone 1 -- 692,560 Deferred contractual obligations 216,566 244,608 Other 618,191 452,926 - ----------------------------------------------------------------------------------------------------------------------------------- 2,446,222 3,128,743 - ----------------------------------------------------------------------------------------------------------------------------------- CAPITALIZATION: Long-Term Debt 2,292,556 2,029,593 - ----------------------------------------------------------------------------------------------------------------------------------- Preferred Stock 116,200 151,200 - ----------------------------------------------------------------------------------------------------------------------------------- COMMON SHAREHOLDERS' EQUITY: Common shares, $5 par value - authorized 225,000,000 shares; 148,890,640 shares issued and 130,132,136 shares outstanding in 2001 and 148,781,861 shares issued and 143,820,405 shares outstanding in 2000 744,453 693,345 Capital surplus, paid in 1,107,609 942,144 Temporary equity from stock forward -- 215,000 Deferred contribution plan - employee stock ownership plan (101,809) (114,463) Retained earnings 678,460 495,873 Accumulated other comprehensive (loss)/income (32,470) 1,769 Treasury stock (278,603) (15,085) - ----------------------------------------------------------------------------------------------------------------------------------- Common Shareholders' Equity 2,117,640 2,218,583 - ----------------------------------------------------------------------------------------------------------------------------------- Total Capitalization 4,526,396 4,399,376 - ----------------------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (NOTE 7) Total Liabilities and Capitalization $10,241,409 $10,217,149 ===================================================================================================================================
The accompanying notes are an integral part of these financial statements. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------- Capital Accumulated Common Surplus, Deferred Retained Other Shares Paid In Contribution Earnings Comprehensive Treasury (Thousands of Dollars) (a) (a) Plan -- ESOP (b) Income/(Loss) Stock Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance as of January 1, 1999 $685,156 $ 941,960 $(140,619) $560,769 $ 1,405 $ (1,299) $2,047,372 - ----------------------------------------------------------------------------------------------------------------------------------- Net income for 1999 34,216 34,216 Cash dividends on common shares-$0.10 per share (13,168) (13,168) Issuance of 362,565 common shares, $5 par value 1,813 3,505 5,318 Allocation of benefits-ESOP (3,053) 12,894 9,841 Unearned stock compensation (1,194) (1,194) Capital stock expenses, net 807 807 Other comprehensive income 119 119 - ----------------------------------------------------------------------------------------------------------------------------------- Balance as of December 31, 1999 686,969 942,025 (127,725) 581,817 1,524 (1,299) 2,083,311 - ----------------------------------------------------------------------------------------------------------------------------------- Net loss for 2000 (28,586) (28,586) Cash dividends on common shares-$0.40 per share (57,358) (57,358) Issuance of 11,388,032 common shares, $5 par value 56,940 164,443 221,383 Transaction fee on forward share purchase arrangement (13,786) (13,786) Allocation of benefits-ESOP (1,617) 13,262 11,645 Redemption of preferred stock (749) (749) Capital stock expenses, net 2,478 2,478 Other comprehensive income 245 245 - ----------------------------------------------------------------------------------------------------------------------------------- Balance as of December 31, 2000 743,909 1,106,580 (114,463) 495,873 1,769 (15,085) 2,218,583 - ----------------------------------------------------------------------------------------------------------------------------------- Net income for 2001 243,510 243,510 Cash dividends on common shares-$0.45 per share (60,923) (60,923) Issuance of 108,779 common shares, $5 par value 544 1,207 1,751 Transaction fee on forward share purchase arrangement (1,663) (1,663) Allocation of benefits-ESOP (2,296) 12,654 10,358 Repurchase of common shares (291,789) (291,789) Mark-to-market on forward share purchase arrangement 29,934 29,934 Capital stock expenses, net 2,118 2,118 Other comprehensive loss (34,239) (34,239) - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AS OF DECEMBER 31, 2001 $744,453 $1,107,609 $(101,809) $678,460 $(32,470) $(278,603) $2,117,640 - -----------------------------------------------------------------------------------------------------------------------------------
(a) In conjunction with NU's forward share purchase arrangement, 10,112,879 shares or $50.6 million and $164.4 million, respectively, were reclassified from Common Shares and Capital Surplus, Paid In, at December 31, 2000 and 1999, to Temporary Equity from Stock Forward. (b) Certain consolidated subsidiaries have dividend restrictions imposed by their long-term debt agreements. These restrictions also limit the amount of retained earnings available for NU common dividends. At December 31, 2001, retained earnings available for payment of dividends totaled $267.5 million. The accompanying notes are an integral part of these financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, - ----------------------------------------------------------------------------------------------------------------------------------- (Thousands of Dollars) 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Income before preferred dividends of subsidiaries $ 273,191 $ 219,457 $ 56,971 Adjustments to reconcile to net cash flows provided by operating activities: Depreciation 201,013 239,798 302,305 Deferred income taxes and investment tax credits, net (116,704) (16,117) (183,356) Amortization of regulatory assets, net 983,037 276,821 596,437 Gain on sale of utility plant (641,956) -- (308,914) Cumulative effect of accounting change (22,432) -- -- Net other (uses)/sources of cash (80,362) (101,927) 36,360 Changes in working capital: Receivables and unbilled revenues, net (356,863) (104,868) (106,566) Fuel, materials and supplies 55,195 12,450 29,688 Accounts payable 130,562 171,148 8,709 Accrued taxes (27,885) (128,107) 107,929 Investments in securitizable assets 61,779 9,474 74,498 Other working capital (excludes cash) (81,837) 254 157 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash flows provided by operating activities 376,738 578,383 614,218 - ----------------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Investments in regulated plant: Electric, gas and other utility plant (428,312) (345,596) (278,726) Nuclear fuel (14,275) (61,286) (42,471) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash flows used for investments in regulated plant (442,587) (406,882) (321,197) Investments in nuclear decommissioning trusts (105,076) (39,550) (74,231) Investments in competitive energy assets (15,368) (7,140) (31,897) Other investment activities, net (51,677) (28,478) 13,084 Net proceeds from the sale of utility plant 1,048,636 -- 565,436 Buyout/buydown of IPP contracts (1,176,872) -- -- Payment for the purchase of SENY, net of cash acquired (25,823) -- -- Payment for the purchase of Yankee, net of cash acquired -- (260,347) -- - ----------------------------------------------------------------------------------------------------------------------------------- Net cash flows (used in)/provided by investing activities (768,767) (742,397) 151,195 - ----------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Issuance of common shares 1,751 4,269 5,318 Repurchase of common shares (291,789) -- -- Issuance of long-term debt 703,000 26,477 200 Issuance of rate reduction bonds 2,118,400 -- -- Retirement of rate reduction bonds (100,049) -- -- Net (decrease)/increase in short-term debt (1,019,477) 961,977 248,000 Reacquisitions and retirements of long-term debt (714,226) (685,555) (817,759) Reacquisitions and retirements of preferred stock (60,768) (126,771) (46,250) Retirement of monthly income preferred securities (100,000) -- -- Retirement of capital lease obligation (180,000) -- -- Cash dividends on preferred stock (7,249) (14,162) (22,755) Cash dividends on common shares (60,923) (57,358) (13,168) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash flows provided by/(used in) financing activities 288,670 108,877 (646,414) - ----------------------------------------------------------------------------------------------------------------------------------- Net (decrease)/increase in cash and cash equivalents (103,359) (55,137) 118,999 Cash and cash equivalents - beginning of year 200,017 255,154 136,155 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents - end of year $ 96,658 $200,017 $255,154 ===================================================================================================================================
The accompanying notes are an integral part of these financial statements. CONSOLIDATED STATEMENTS OF CAPITALIZATION
- ----------------------------------------------------------------------------------------------------------------------------------- At December 31, - ----------------------------------------------------------------------------------------------------------------------------------- (Thousands of Dollars) 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- COMMON SHAREHOLDERS' EQUITY (a) $ 2,117,640 $ 2,218,583 - ----------------------------------------------------------------------------------------------------------------------------------- CUMULATIVE PREFERRED STOCK OF SUBSIDIARIES: $25 par value - authorized 36,600,000 shares at December 31, 2001 and 2000; no shares outstanding in 2001 and 1,630,722 shares outstanding in 2000 $50 par value - authorized 9,000,000 shares at December 31, 2001 and 2000; 2,324,000 shares outstanding in 2001 and 2000 $100 par value - authorized 1,000,000 shares at December 31, 2001 and 2000; no shares outstanding in 2001 and 200,000 shares outstanding in 2000 - -----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- At December 31, - ----------------------------------------------------------------------------------------------------------------------------------- Current Redemption Current Shares Dividend Rates Prices Outstanding 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- NOT SUBJECT TO MANDATORY REDEMPTION: $50 par value - $1.90 to $3.28 $50.50 to $54.00 2,324,000 116,200 116,200 $100 par value - $7.72 -- -- -- 20,000 - ----------------------------------------------------------------------------------------------------------------------------------- Total Preferred Stock Not Subject to Mandatory Redemption 116,200 136,200 - ----------------------------------------------------------------------------------------------------------------------------------- SUBJECT TO MANDATORY REDEMPTION: $25 par value - $1.90 to $2.65 -- -- -- 40,768 - ----------------------------------------------------------------------------------------------------------------------------------- Total Preferred Stock Subject to Mandatory Redemption -- -- 40,768 Less: Preferred Stock to Be Redeemed Within One Year -- -- 25,768 - ----------------------------------------------------------------------------------------------------------------------------------- Preferred Stock Subject to Mandatory Redemption, Net -- -- 15,000 - -----------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT: (b) First Mortgage Bonds -
- ----------------------------------------------------------------------------------------------------------------------------------- At December 31, - ----------------------------------------------------------------------------------------------------------------------------------- Maturity Interest Rates 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- 2001 7.375% to 7.875% -- 220,000 2002 9.05% -- 375,000 2005 4.998% to 6.75% 140,000 20,000 2009-2012 6.20% to 7.19% 80,000 80,000 2019-2024 7.875% to 10.07% 255,945 313,050 2026 8.81% 320,000 -- - ----------------------------------------------------------------------------------------------------------------------------------- Total First Mortgage Bonds 795,945 1,008,050 - ----------------------------------------------------------------------------------------------------------------------------------- Other Long-Term Debt - Pollution Control Notes and Other Notes - (c) 2003-2006 Adjustable Rate and 6.24% to 8.58% 381,500 139,600 2013-2018 Adjustable Rate and 5.90% 25,400 33,400 2020 Adjustable Rate -- 15,300 2021-2022 Adjustable Rate and 5.45% to 7.65% 428,285 443,285 2028 5.85% to 5.95% 369,300 369,300 2031 Adjustable Rate 62,000 62,000 - ----------------------------------------------------------------------------------------------------------------------------------- Total Pollution Control Notes and Other Notes 1,266,485 1,062,885 Fees and interest due for spent nuclear fuel disposal costs 249,314 240,303 Other 36,257 38,978 - ----------------------------------------------------------------------------------------------------------------------------------- Total Other Long-Term Debt 1,552,056 1,342,166 - ----------------------------------------------------------------------------------------------------------------------------------- Unamortized Premium and Discount, Net (4,983) (6,350) - ----------------------------------------------------------------------------------------------------------------------------------- Total Long-Term Debt 2,343,018 2,343,866 Less: Amounts due within one year 50,462 314,273 - ----------------------------------------------------------------------------------------------------------------------------------- Long-Term Debt, Net 2,292,556 2,029,593 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL CAPITALIZATION $4,526,396 $4,399,376 ===================================================================================================================================
The accompanying notes are an integral part of these financial statements. NOTES TO CONSOLIDATED STATEMENTS OF CAPITALIZATION (a) On January 2, 2001, NU modified its forward share purchase arrangements for NU common shares. To initially effect these arrangements, the financial institutions (counterparties) purchased approximately 10.1 million NU common shares on the open market in December 1999 and January 2000, in a total aggregate amount of $215 million, at an average price of $21.26. The counterparties maintained ownership of the shares until the transactions were settled. NU accrued charges on the total aggregate amount at LIBOR plus an agreed upon percentage per annum, until the transactions were settled. These transactions could have been settled in cash or NU common shares at the company's discretion. NU repurchased the shares from the counterparties in April 2001 with the proceeds from restructuring. This amount has been classified as temporary equity from stock forward on NU's consolidated balance sheets at December 31, 2000. (b) Long-term debt maturities and cash sinking fund requirements, excluding fees and interest due for spent nuclear fuel disposal costs, on debt outstanding at December 31, 2001, for the years 2002 through 2006 are $50.5 million, $318.6 million, $58.5 million, $86.6 million, and $24.3 million, respectively. Essentially all utility plant of CL&P, PSNH, NGC, and Yankee is subject to the liens of each company's respective first mortgage bond indenture. CL&P has $315.5 million of pollution control notes secured by second mortgage liens on transmission assets, junior to the liens of their first mortgage bond indentures. CL&P has $62 million of tax-exempt PCRBs with bond insurance secured by the first mortgage bonds and a liquidity facility. For financial reporting purposes, these first mortgage bonds would not be considered outstanding unless CL&P failed to meet its obligations under the PCRBs. PSNH entered into financing arrangements with the Business Finance Authority (BFA) of the state of New Hampshire. Pursuant to which the BFA issued five series of PCRBs and loaned the proceeds to PSNH. At December 31, 2001 and 2000, $407.3 million of the PCRBs were outstanding. PSNH's obligation to repay each series of PCRBs is secured by bond insurance and the first mortgage bonds. Each such series of first mortgage bonds contains similar terms and provisions as the applicable series of PCRBs. For financial reporting purposes, these first mortgage bonds would not be considered outstanding unless PSNH failed to meet its obligations under the PCRBs. (c) The average effective interest rate on the variable-rate pollution control notes ranged from 1.2 percent to 3.8 percent for 2001 and 3.2 percent to 6.8 percent for 2000. Consolidated Statements of Income Taxes
- --------------------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, - --------------------------------------------------------------------------------------------------------------------------------- (Thousands of Dollars) 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------------------------- The components of the federal and state income tax provisions charged to the operations are: Current income taxes: Federal $ 244,501 $ 154,790 $ 248,012 State 46,155 23,052 33,955 - --------------------------------------------------------------------------------------------------------------------------------- Total current 290,656 177,842 281,967 - --------------------------------------------------------------------------------------------------------------------------------- Deferred income taxes, net: Federal (80,968) 7,297 (134,773) State (15,644) (5,529) (28,789) - --------------------------------------------------------------------------------------------------------------------------------- Total deferred (96,612) 1,768 (163,562) - --------------------------------------------------------------------------------------------------------------------------------- Investment tax credits, net (20,092) (17,885) (19,794) - --------------------------------------------------------------------------------------------------------------------------------- TOTAL INCOME TAX EXPENSE $ 173,952 $ 161,725 $ 98,611 ================================================================================================================================= Deferred income taxes are comprised of the tax effects of temporary differences as follows: Deferred tax asset associated with net operating losses $ 2,206 $ 1,563 $ 14,801 Depreciation, leased nuclear fuel, settlement credits and disposal costs (185,850) 9,514 (4,580) Regulatory deferral (33,187) (34,486) (27,297) Regulatory disallowance 2,323 -- (30,719) Sale of generation assets (225,019) -- (125,807) Pension 24,183 25,751 8,936 Loss on bond redemptions 12,396 655 314 Securitized contract termination costs and other 279,673 -- -- Contract settlements 16,640 (4,442) (7,622) Other 10,023 3,213 8,412 - --------------------------------------------------------------------------------------------------------------------------------- DEFERRED INCOME TAXES, NET $ (96,612) $ 1,768 $(163,562) ================================================================================================================================= A reconciliation between income tax expense and the expected tax expense at the statutory rate is as follows: Expected federal income tax $ 156,500 $ 133,413 $ 54,454 Tax effect of differences: Depreciation 5,313 2,882 24,583 Amortization of regulatory assets 5,748 16,835 45,825 Amortization of PSNH acquisition costs 4,512 9,946 9,946 Investment tax credit amortization (20,092) (17,885) (19,794) State income taxes, net of federal benefit 19,832 11,390 3,358 Nondeductible stock expenses 12,388 -- -- Dividends received deduction (3,382) (8,618) (1,314) Tax asset valuation allowance/reserve adjustments (7,000) (2,136) (23,129) Merger-related expenditures (4,589) 5,829 4,597 Other, net 4,722 10,069 85 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL INCOME TAX EXPENSE $ 173,952 $ 161,725 $ 98,611 =================================================================================================================================
The accompanying notes are an integral part of these financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. About Northeast Utilities Northeast Utilities (NU or the company) is the parent company of the Northeast Utilities system (NU system). Through its regulated utilities and competitive energy subsidiaries, NU strives to become the leading regional provider of energy products and services, and one of the major energy traders in the Northeast. The NU system's regulated utilities furnish franchised retail electric service in Connecticut, New Hampshire and western Massachusetts through three wholly owned subsidiaries: The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH) and Western Massachusetts Electric Company (WMECO). Another wholly owned subsidiary, North Atlantic Energy Corporation (NAEC), sells all of its entitlement to the capacity and output of the Seabrook Station nuclear unit (Seabrook) to PSNH under the terms of two life-of-unit, full cost recovery contracts (Seabrook Power Contracts). A fifth wholly owned subsidiary, Holyoke Water Power Company (HWP), also is engaged in the production of electric power. A sixth wholly owned subsidiary, Yankee Energy System, Inc. (Yankee), the parent company of Yankee Gas Services Company (Yankee Gas), is Connecticut's largest natural gas distribution system. On November 30, 2001, Select Energy, Inc. (Select Energy) acquired Niagara Mohawk Energy Marketing, Inc. (NMEM) for $31.7 million. Assuming Select Energy and NMEM had been combined as of January 1, 2001, NU's operating revenues, income before extraordinary loss and cumulative effect of accounting change, net income, and total fully diluted earnings per share (EPS) would have been $7.4 billion, $255.5 million, $245.8 million, and $1.81, respectively, for the year ended December 31, 2001. NU is registered with the Securities and Exchange Commission (SEC) as a holding company under the Public Utility Holding Company Act of 1935 (1935 Act), and the NU system is subject to the provisions of the 1935 Act. Arrangements among the NU system companies, outside agencies and other utilities covering interconnections, interchange of electric power and sales of utility property are subject to regulation by the Federal Energy Regulatory Commission (FERC) and/or the SEC. The operating subsidiaries are subject to further regulation for rates, accounting and other matters by the FERC and/or applicable state regulatory commissions. NU Enterprises, Inc. is a wholly owned subsidiary of NU and acts as the holding company for certain of NU's competitive energy subsidiaries. These subsidiaries include Select Energy Services, Inc. (SES), a provider of energy management, demand-side management and related consulting services for commercial, industrial and institutional electric companies and electric utility companies; Northeast Generation Company (NGC), a corporation that acquires and manages generation facilities; Northeast Generation Services Company (NGS), a corporation that maintains and services any fossil or hydroelectric facility that is acquired or contracted with for fossil or hydroelectric generation services, and; Select Energy, a corporation engaged in the marketing, transportation, storage, and sale of energy commodities, at wholesale, in designated geographical areas and in the marketing of electricity to retail customers. Another subsidiary is Mode 1 Communications, Inc. (Mode 1), an investor in a fiber-optic communications network. Several wholly owned subsidiaries of NU provide support services for the NU system companies and, in some cases, for other New England utilities. Northeast Utilities Service Company provides centralized accounting, administrative, engineering, financial, information resources, legal, operational, planning, purchasing, and other services to the NU system companies. North Atlantic Energy Service Corporation has operational responsibility for Seabrook. Three other subsidiaries construct, acquire or lease some of the property and facilities used by the NU system companies. B. Presentation The consolidated financial statements of the NU system include the accounts of all subsidiaries. Intercompany transactions have been eliminated in consolidation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications of prior years' data have been made to conform with the current year's presentation. C. New Accounting Standards Derivative Instruments: Effective January 1, 2001, NU adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. All derivative instruments have been identified and recorded at fair value effective January 1, 2001. In addition, for those derivative instruments which are hedging an identified risk, NU has designated and documented all hedging relationships. For those contracts that do not meet the hedging requirements, the changes in fair value of those contracts were recognized currently in earnings. As explained in Note 9, commodity derivatives that are utilized for trading purposes are accounted for using the mark-to-market method, under Emerging Issues Task Force (EITF) Issue No. 98-10, "Accounting for Energy Trading and Risk Management Activities." On June 27, 2001, the Financial Accounting Standards Board (FASB) cleared SFAS No. 133 Implementation Issue No. C15, "Scope Exceptions: Normal Purchases and Normal Sales Exception for Option-Type Contracts and Forward Contracts in Electricity." Under Issue No. C15, power purchase or sales agreements, including capacity contracts, for the purchase or sale of electricity would qualify for the normal purchases and normal sales exception provided that certain criteria are met. The company has reviewed its capacity contracts and other applicable energy contracts and has determined that they should not be marked-to-market under the criteria in the guidance cleared by the FASB on June 27, 2001. On December 19, 2001, the FASB issued revised guidance regarding power purchase and sales agreements. The revised guidance is effective on July 1, 2002. Management is currently evaluating the impacts of the guidance issued by the FASB on December 19, 2001, on its accounting for capacity contracts, however, management does not expect it to have a material effect on its consolidated financial statements. Goodwill and Other Intangible Assets: In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." This statement requires that goodwill and indefinite-lived intangible assets not be amortized effective January 1, 2002. This statement also requires that goodwill will be subject to at least an annual assessment for impairment by applying a fair value-based test also effective January 1, 2002. Based on the goodwill and intangible assets maintained by the NU system companies, management believes that upon adoption of SFAS No. 142, annual goodwill amortization expense will be reduced by $9 million. Management is in the process of the first assessment of impairment of goodwill and expects to complete this assessment by the June 30, 2002, deadline. Upon adoption of the impairment testing rules under SFAS No. 142, there may be a cumulative effect of an accounting change which management has not evaluated at this time. Asset Retirement Obligations: Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and applies to (a) all entities and (b) legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS No. 143 is effective for NU's 2003 calendar year. Upon adoption of SFAS No. 143, there may be an impact on NU's consolidated financial statements which management has not estimated at this time. Long-Lived Assets: In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement modifies financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 is effective for NU's 2002 calendar year. Currently, management does not expect the adoption of SFAS No. 144 to have a material impact on NU's consolidated financial statements. D. Investments and Jointly Owned Electric Utility Plant Regional Nuclear Generating Companies: CL&P, PSNH and WMECO own common stock in four regional nuclear companies (Yankee Companies). The NU system's ownership interests in the Yankee Companies at December 31, 2001 and 2000, which are accounted for on the equity method due to the NU system companies' ability to exercise significant influence over their operating and financial policies are 49 percent of the Connecticut Yankee Atomic Power Company (CYAPC), 38.5 percent of the Yankee Atomic Electric Company (YAEC), 20 percent of the Maine Yankee Atomic Power Company (MYAPC), and 16 percent of the Vermont Yankee Nuclear Power Corporation (VYNPC). The NU system's total equity investment in the Yankee Companies at December 31, 2001 and 2000, is $52.5 million and $62.5 million, respectively. Each Yankee Company owns a single nuclear generating unit. However, VYNPC was the only unit still in operation at December 31, 2001. Seabrook: CL&P and NAEC together have a 40.04 percent joint ownership interest in Seabrook, a 1,148 megawatt nuclear generating unit. NAEC sells all of its share of the power generated by Seabrook to PSNH under the Seabrook Power Contracts. CL&P and NAEC expect to sell their joint ownership interests in Seabrook around the end of 2002 through a public auction. Plant-in-service and the accumulated provision for depreciation for the NU system's share of Millstone 2 and 3 and Seabrook are as follows: - --------------------------------------------------------------------- At December 31, - --------------------------------------------------------------------- (Millions of Dollar) 2001 2000 - --------------------------------------------------------------------- Plant-in-service: Millstone 2 $ -- $ 962.0 Millstone 3 -- 2,427.2 Seabrook 912.5 909.3 Accumulated provision for depreciation: Millstone 2 $ -- $ 953.6 Millstone 3 -- 2,214.3 Seabrook 840.6 821.3 ===================================================================== Hydro-Quebec: NU has a 22.66 percent equity ownership interest, totaling $13.6 million and $15 million at December 31, 2001 and 2000, respectively, in two companies that transmit electricity imported from the Hydro-Quebec system in Canada. E. Depreciation The provision for depreciation is calculated using the straight-line method based on the estimated remaining useful lives of depreciable utility plant-in-service, adjusted for salvage value and removal costs, as approved by the appropriate regulatory agency where applicable. Depreciation rates are applied to plant-in-service from the time they are placed in service. When plant is retired from service, the original cost of the plant, including costs of removal less salvage, is charged to the accumulated provision for depreciation. The depreciation rates for the several classes of electric plant-in-service are equivalent to a composite rate of 3.1 percent in 2001 and 2000 and 3.3 percent in 1999. As a result of discontinuing the application of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," for CL&P's and WMECO's generation businesses in 1999, including CL&P's ownership interest in Seabrook, NU recorded a charge to accumulated depreciation for the nuclear plant in excess of the estimated fair market value at the time in the amount of approximately $2 billion and a corresponding regulatory asset was created. In 2000, HWP discontinued SFAS No. 71 and recorded a charge to accumulated depreciation for the plant in excess of fair value for certain hydroelectric generation assets, which was recorded as an extraordinary loss. These assets were sold in the fourth quarter of 2001. F. Revenues Regulated utility revenues are based on authorized rates applied to each customer's use of energy. In general, rates can be changed only through a formal proceeding before the appropriate regulatory commission. Regulatory commissions also have authority over the terms and conditions of nontraditional rate-making arrangements. Revenues for NU's competitive energy subsidiaries, including Select Energy and NGC, are recognized when the energy is delivered or service is provided. At the end of each accounting period, CL&P, PSNH, WMECO, Select Energy, and Yankee Gas accrue a revenue estimate for the amount of energy delivered but unbilled. G. Regulatory Accounting and Assets The accounting policies of the NU system regulated operating companies conform to accounting principles generally accepted in the United States applicable to rate-regulated enterprises and historically reflect the effects of the rate-making process in accordance with SFAS No. 71. CL&P's, PSNH's and WMECO's transmission and distribution businesses continue to be cost-of-service rate regulated, and management believes the application of SFAS No. 71 to that portion of those businesses continues to be appropriate. Management also believes it is probable that the NU system operating companies will recover their investments in long-lived assets, including regulatory assets. These costs will be recovered over a period of time ranging from 7 to 26 years, subject to certain adjustments. Stranded costs for CL&P and WMECO will be recovered through a transition charge over a 12-year period. PSNH has three categories of stranded costs. Part 1 costs are securitized regulatory assets that are recovered over the life of the rate reduction bonds. Part 2 costs are ongoing costs consisting of nuclear decommissioning and independent power producer costs that are recovered as incurred, over the time period PSNH is responsible for those costs. Part 3 costs are nonsecuritized regulatory assets which must be recovered by a recovery end date to be determined in accordance with the "Agreement to Settle PSNH Restructuring" (Settlement Agreement) or which will be written off as stipulated by that Settlement Agreement. Based on current projections, PSNH expects to fully recover all of its Part 3 costs by the recovery end date. In March 2000, CL&P and WMECO completed the auction of certain hydroelectric generation assets with a book value of $129 million. NGC was the winning bidder in the auction and paid approximately $865.5 million for these assets. Restructuring legislation in both Connecticut and Massachusetts requires gains from the sale of generation to be used to reduce regulatory assets and other stranded costs. Since the entities to the transaction are all wholly owned by NU, a gain was not recognized. In connection with this transaction, the remaining unamortized balance of the regulatory asset created of $654.5 million will be recovered over the next 24 years. This regulatory asset is not specifically earning a return in rates. Management continues to evaluate the recovery of this regulatory asset for impairment and has concluded the asset is not impaired at this time. In addition, all other remaining material regulatory assets are earning a return. The components of the NU system companies' regulatory assets are as follows: - ------------------------------------------------------------------- At December 31, - ------------------------------------------------------------------- (Millions of Dollars) 2001 2000 - ------------------------------------------------------------------- Recoverable nuclear costs $ 894.5 $2,565.8 Securitized regulatory assets 2,004.1 -- Income taxes, net 312.8 504.7 Unrecovered contractual obligations 78.3 255.8 Recoverable energy costs, net 334.5 332.5 Other 326.2 252.0 - ------------------------------------------------------------------- Totals $3,950.4 $3,910.8 =================================================================== As a result of discontinuing the application of SFAS No. 71 for CL&P's and WMECO's generation businesses, CL&P and WMECO had unamortized balances of $1.35 billion and $286.9 million, respectively, included in recoverable nuclear costs at December 31, 2000. These amounts were the result of reclassified nuclear plant in excess of its estimated fair market value from plant to regulatory assets, which took place in 1999. In March 2001, CL&P and WMECO sold their ownership interests in the Millstone units. The gain on these sales in the amount of approximately $521.6 million and $119.8 million, respectively, for CL&P and WMECO were used to offset recoverable nuclear costs, resulting in unamortized balances of $690.3 million and $130.7 million, respectively, after the current year's amortization expense. Also included in that regulatory asset component for 2001 and 2000 are $44.5 million and $449.2 million, respectively, which includes Millstone 1 recoverable nuclear costs relating to the recoverable portion of the undepreciated plant and related assets ($44.5 million and $90.8 million, respectively) and the decommissioning and closure obligation ($358.4 million in 2000). Additionally, in March 2001, PSNH recorded a regulatory asset in conjunction with the sale of the Millstone units. The unamortized balance of $29 million as of December 31, 2001, is included in recoverable nuclear costs. In 2000, PSNH discontinued the application of SFAS No. 71 for its generation business, and created a regulatory asset for Seabrook over market generation, which was classified as recoverable nuclear costs. The unamortized balance of the regulatory asset created was $484.7 million as of December 31, 2000. In April 2001, PSNH issued rate reduction bonds in the amount of $525 million. PSNH used the majority of this amount to buydown its power contracts with NAEC. The Seabrook over market generation was securitized at that time and was reclassified as a securitized regulatory asset as of December 31, 2001. CL&P issued $1.4 billion in rate reduction certificates and used $1.1 billion of those proceeds to buyout or buydown certain contracts with independent power producers. WMECO, issued rate reduction certificates in the amount of $155 million in May of 2001 and used $99.7 million of those proceeds to buyout two contracts with independent power producers. The majority of the payments to buyout or buydown these contracts were recorded as securitized regulatory assets. CL&P also securitized a portion of its SFAS No. 109 regulatory asset. CL&P, WMECO and PSNH, under the terms of contracts with the Yankee Companies, are responsible for their proportionate share of the remaining costs of the units, including decommissioning. These amounts are recorded as unrecovered contractual obligations. A portion of these obligations was securitized in 2001 and is included in securitized regulatory assets. CL&P, PSNH, WMECO, and NAEC, under the Energy Policy Act of 1992 (Energy Act), are assessed for their proportionate shares of the costs of decontaminating and decommissioning uranium enrichment plants owned by the United States Department of Energy (DOE) (D&D Assessment). The Energy Act requires that regulators treat D&D Assessments as a reasonable and necessary current cost of fuel, to be fully recovered in rates like any other fuel cost. CL&P, PSNH, WMECO, and NAEC are currently recovering these costs through rates. As of December 31, 2001 and 2000, the NU system's total D&D Assessment deferrals were $35.4 million and $34.5 million, respectively, and have been recorded as recoverable energy costs, net. In addition, through December 31, 1999, CL&P had an energy adjustment clause under which fuel prices above or below base-rate levels were charged to or credited to customers. Coincident with the start of restructuring, the energy adjustment clause was terminated. Energy costs deferred and not yet collected under the energy adjustment clause amounted to $59 million and $61.1 million at December 31, 2001 and 2000, respectively, which have been recorded as recoverable energy costs, net. In conjunction with the implementation of restructuring under the Settlement Agreement on May 1, 2001, the fuel and purchased-power adjustment clause (FPPAC) was discontinued. At December 31, 2001 and 2000, PSNH had $251.4 million and $230.1 million, respectively, of recoverable energy costs deferred under the FPPAC, including previous deferrals of purchases from independent power producers. Under the Settlement Agreement, the FPPAC deferrals are recovered as a Part 3 regulatory asset through a transition charge, subject to a prudence determination by the New Hampshire Public Utilities Commission (NHPUC). H. Income Taxes The tax effect of temporary differences (differences between the periods in which transactions affect income in the financial statements and the periods in which they affect the determination of taxable income) is accounted for in accordance with the rate-making treatment of the applicable regulatory commissions. The tax effect of temporary differences, including timing differences accrued under previously approved accounting standards, that give rise to the accumulated deferred tax obligation is as follows: - ------------------------------------------------------------------- At December 31, - ------------------------------------------------------------------- (Millions of Dollars) 2001 2000 - ------------------------------------------------------------------- Accelerated depreciation and other plant-related differences $ 574.1 $ 756.0 Regulatory assets: Nuclear stranded investment 328.4 608.9 Securitized contract termination costs and other 279.7 -- Income tax gross-up 190.0 189.1 Other 119.2 31.5 - ------------------------------------------------------------------- Totals $1,491.4 $1,585.5 =================================================================== I. Cash And Cash Equivalents Cash and cash equivalents includes cash on hand and short-term cash investments which are highly liquid in nature and have original maturities of three months or less. J. Accounting for Competitive Energy Contracts The accounting treatment for energy contracts entered into by Select Energy varies between contracts and depends primarily on the intended use of the particular contract. Contracts that are entered into to provide the normal purchase or sale of energy to customers are recorded at the point of delivery in accordance with accrual accounting. Contracts that are entered into to speculate in the commodity market are marked-to-market in accordance with EITF Issue No. 98-10 and recognized currently in earnings. Contracts that hedge the purchase or delivery of commodities are marked-to-market in accordance with SFAS No. 133 and earnings are deferred in other comprehensive income until the contracts are utilized. K. Other Income/(Loss), Net The components of the NU system companies' other income/(loss), net items are as follows: - ------------------------------------------------------------------------ For the Years Ended December 31, - ------------------------------------------------------------------------ (Millions of Dollars) 2001 2000 1999 - ------------------------------------------------------------------------ Gain related to Millstone sale $ 189.3 $ -- $ -- Loss on share repurchase contracts (35.4) -- -- Other nuclear-related costs -- (17.9) (71.1) Other, net 33.7 3.6 (35.1) - ------------------------------------------------------------------------ Totals $ 187.6 $ (14.3) $(106.2) ======================================================================== L. Supplemental Cash Flow Information In conjunction with the Yankee acquisition on March 1, 2000, common stock was issued and debt was assumed as follows (millions of dollars): - ------------------------------------------------ Fair value of assets acquired, net of liabilities assumed $712.5 Cash paid (261.4) NU common stock issued (217.1) - ------------------------------------------------ $234.0 ================================================ - -------------------------------------------------------------------- For the Years Ended December 31, - -------------------------------------------------------------------- (Millions of Dollars) 2001 2000 1999 - -------------------------------------------------------------------- Cash paid during the year for: Interest, net of amounts capitalized $ 275.3 $ 269.7 $ 266.8 Income taxes $ 321.0 $ 253.4 $ 86.2 ==================================================================== Increase in obligations: Niantic Bay Fuel Trust and other capital leases $ 2.2 $ 8.1 $ 5.9 ==================================================================== 2. SHORT-TERM DEBT Limits: The amount of short-term borrowings that may be incurred by NU and the NU system operating companies is subject to periodic approval by either the SEC under the 1935 Act or by the respective state regulators. Currently, SEC authorization allows NU, CL&P, WMECO, and Yankee Gas to incur total short-term borrowings up to a maximum of $400 million, $375 million, $250 million, and $100 million, respectively. In addition, the charter of CL&P contains preferred stock provisions restricting the amount of unsecured debt that CL&P may incur. As of December 31, 2001, CL&P's charter permits CL&P to incur $535 million of additional unsecured debt. PSNH and NAEC are authorized by the NHPUC to incur short-term borrowings up to a maximum of $100 million and $260 million, respectively. Credit Agreements: Regulated Companies: On November 16, 2001, CL&P, PSNH, WMECO, and Yankee Gas entered into a 364-day unsecured revolving credit facility for $350 million. This facility replaced a $250 million facility for CL&P and WMECO and a $60 million facility for Yankee Gas, both of which expired on November 16, 2001. CL&P may draw up to $150 million under the facility. PSNH, WMECO and Yankee Gas each may draw up to $100 million, subject to the $350 million maximum borrowing limit under the facility. Unless extended, the credit facility will expire on November 15, 2002. At December 31, 2001 and 2000, there were $160.5 million and $225 million, respectively, in borrowings under these facilities. NU Parent: To support the working capital needs of NU and its competitive energy subsidiaries, NU replaced its $400 million 364-day unsecured revolving credit facility which was to expire on November 16, 2001, with a 364-day unsecured revolving credit facility on November 16, 2001. This facility provides a total commitment of $300 million which is available subject to two overlapping sub-limits. First, subject to the notional amount of any letters of credit outstanding, amounts up to $300 million are available for advances. Second, subject to the advances outstanding, letters of credit may be issued in notional amounts up to $200 million. Unless extended, this credit facility will expire on November 15, 2002. At December 31, 2001 and 2000, there were $40 million and $173 million, respectively, in borrowings under these facilities. With regard to credit support, NU had $45 million and $40 million, respectively, in letters of credit issued under these facilities at December 31, 2001 and 2000. NAEC: On November 9, 2001, NAEC entered into an unsecured 364-day term credit agreement for $90 million. This term credit agreement replaced a $200 million term credit agreement which expired on November 9, 2001. The term credit agreement contains a mandatory prepayment provision requiring 100 percent prepayment of the aggregate amount outstanding within two days of the sale of Seabrook. Unless extended, the term credit agreement will expire on November 8, 2002. At December 31, 2001 and 2000, there were $90 million and $200 million, respectively, in borrowings under these term credit agreements. Under the aforementioned credit agreements, the respective borrowers may borrow at fixed or variable rates plus an applicable margin based upon certain debt ratings, as rated by the lower of Standard and Poor's or Moody's Investors Service. The weighted average interest rate on the NU system companies' notes payable to banks outstanding on December 31, 2001 and 2000, was 3.38 percent and 8.85 percent, respectively. These credit agreements provide that the parties to these agreements must comply with certain financial and nonfinancial covenants as are customarily included in such agreements, including, but not limited to, common equity ratios, consolidated debt ratios and interest coverage ratios. The parties to the credit agreements currently are and expect to remain in compliance with these covenants. Guarantees: NU provides credit assurance in the form of guarantees and letters of credit for the financial performance obligations of certain of its competitive energy subsidiaries. NU currently has authorization from the SEC to provide up to $500 million of guarantees, and has applied for authority to increase this amount to $750 million. As of December 31, 2001, NU had provided approximately $268.2 million and $45 million of such guarantees and letters of credit, respectively. 3. Leases The NU system companies have entered into lease agreements, some of which are capital leases, for the use of data processing and office equipment, vehicles, nuclear control room simulators, and office space. The provisions of these lease agreements generally provide for renewal options. Capital lease rental payments charged to operating expense were $13.1 million in 2001, $50.1 million in 2000, and $20.8 million in 1999. Interest included in capital lease rental payments was $4.7 million in 2001, $11.6 million in 2000, and $13.7 million in 1999. Operating lease rental payments charged to expense were $7 million in 2001, $10.1 million in 2000 and $7.5 million in 1999. Future minimum rental payments excluding executory costs, such as property taxes, state use taxes, insurance, and maintenance, under long-term noncancelable leases, as of December 31, 2001 are as follows: - ------------------------------------------------------------ (Millions of Dollars) Capital Operating Year Leases Leases - ------------------------------------------------------------ 2002 $ 3.1 $ 23.7 2003 3.1 18.4 2004 3.0 15.5 2005 2.8 13.3 2006 2.7 11.1 After 2006 25.1 23.6 - ------------------------------------------------------------ Future minimum lease payments 39.8 $105.6 Less amount representing interest 22.3 - ------------------------------------------------------------ Present value of future minimum lease payments $ 17.5 ============================================================ 4. EMPLOYEE BENEFITS A. Pension Benefits and Postretirement Benefits Other Than Pensions The NU system companies, participate in a uniform noncontributory defined benefit retirement plan covering substantially all regular NU system employees. Benefits are based on years of service and the employees' highest eligible compensation during 60 consecutive months of employment. The total pension credit, part of which was credited to utility plant, was $191.7 million in 2001, $97.9 million in 2000, and $33.7 million in 1999. In conjunction with the Voluntary Separation Program (VSP) that was announced in December 2000, NU recorded $90.7 million in settlement and curtailment gains in 2001. This amount is included in the $191.7 million in pension credit recorded in 2001. The VSP was intended to reduce the generation-related support staff between March 1, 2001, and February 28, 2002, and was available to nonbargaining unit employees who, by February 1, 2002, would be at least age 50, with a minimum of five years of credited service, and as of December 15, 2000, were assigned to certain groups and in eligible job classifications. One component of the VSP included special termination benefits equal to the greater of 5 years added to both age and credited service of eligible participants or two weeks pay for each year of service subject to a minimum level of 12 weeks and a maximum level of 52 weeks for eligible participants. The special termination benefits associated with the VSP approximated $93.3 million. The net of the settlement and curtailment gains and the special termination benefits was approximately $2.6 million, of which $7.5 million was included in earnings, $5.1 million was deferred as a regulatory liability and is expected to be returned to customers and $0.2 million was billed to the joint owners of Millstone and Seabrook. Currently, the NU system companies' policy is to annually fund an amount at least equal to that which will satisfy the requirements of the Employee Retirement Income Security Act and Internal Revenue Code. The NU system companies also provide certain health care benefits, primarily medical and dental, and life insurance benefits through a benefit plan to retired employees. These benefits are available for employees retiring from the NU system who have met specified service requirements. For current employees and certain retirees, the total benefit is limited to two times the 1993 per retiree health care cost. These costs are charged to expense over the estimated work life of the employee. The NU system companies annually fund postretirement costs through external trusts with amounts that have been rate-recovered and which also are tax deductible. Pension and trust assets are invested primarily in domestic and international equity securities and bonds. The following table represents information on the plans' benefit obligation, fair value of plan assets, and the respective plans' funded status:
- ----------------------------------------------------------------------------------------------------------------- At December 31, - ----------------------------------------------------------------------------------------------------------------- Pension Benefits Postretirement Benefits - ----------------------------------------------------------------------------------------------------------------- (Millions of Dollars) 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $(1,670.9) $(1,516.6) $ (335.3) $ (306.8) Yankee merger -- (66.7) -- (9.9) Service cost (35.7) (41.2) (6.2) (7.6) Interest cost (119.7) (118.5) (27.2) (25.5) Employee contribution -- -- -- (0.1) Actuarial loss (72.2) (39.4) (76.2) (13.6) Benefits paid 228.3 109.5 38.0 27.5 Settlements and other (17.4) 2.0 6.9 0.7 - ----------------------------------------------------------------------------------------------------------------- BENEFIT OBLIGATION AT END OF YEAR $(1,687.6) $(1,670.9) $ (400.0) $ (335.3) - ----------------------------------------------------------------------------------------------------------------- Change in plan assets Fair value of plan assets at beginning of year $ 2,319.4 $ 2,330.2 $ 197.6 $ 170.7 Yankee merger -- 107.5 -- 16.1 Actual return on plan assets (100.7) (8.8) (17.1) 8.6 Employer contribution -- -- 28.6 29.6 Employee contribution -- -- -- 0.1 Benefits paid (228.3) (109.5) (38.0) (27.5) - ----------------------------------------------------------------------------------------------------------------- FAIR VALUE OF PLAN ASSETS AT END OF YEAR $ 1,990.4 $ 2,319.4 $ 171.1 $ 197.6 - ----------------------------------------------------------------------------------------------------------------- Funded status at December 31 $ 302.8 $ 648.5 $ (228.9) $ (137.7) Unrecognized transition (asset)/obligation (3.6) (5.8) 159.1 180.9 Unrecognized prior service cost 72.8 90.9 -- -- Unrecognized net (gain)/loss (139.6) (594.1) 55.4 (35.5) - ----------------------------------------------------------------------------------------------------------------- PREPAID/(ACCRUED) BENEFIT COST $ 232.4 $ 139.5 $ (14.4) $ 7.7 =================================================================================================================
The following actuarial assumptions were used in calculating the plans' year end funded status:
- ----------------------------------------------------------------------------------------------- At December 31, - ----------------------------------------------------------------------------------------------- Pension Benefits Postretirement Benefits - ----------------------------------------------------------------------------------------------- 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------- Discount rate 7.25% 7.50% 7.25% 7.50% Compensation/progression rate 4.25 4.50 4.25 4.50 Health care cost trend rate (a) N/A N/A 11.00 5.26 ===============================================================================================
(a) The annual per capita cost of covered health care benefits was assumed to decrease to 5.00 percent by 2007. The components of net periodic benefit (credit)/cost are:
- ---------------------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, - ---------------------------------------------------------------------------------------------------------------------------------- Pension Benefits Postretirement Benefits - ---------------------------------------------------------------------------------------------------------------------------------- (Millions of Dollars) 2001 2000 1999 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------------- Service cost $ 35.7 $ 41.2 $ 43.7 $ 6.2 $ 7.6 $ 7.6 Interest cost 119.7 118.5 106.3 27.2 25.5 21.8 Expected return on plan assets (214.1) (205.1) (175.5) (17.0) (15.3) (11.7) Amortization of unrecognized net transition (asset)/obligation (1.5) (1.4) (1.5) 14.5 15.1 15.1 Amortization of prior service cost 6.9 7.9 7.9 -- -- -- Amortization of actuarial gain (47.7) (52.4) (33.5) -- -- -- Other amortization, net -- -- -- (2.6) (4.3) (3.1) Settlements and other (90.7) (6.6) 18.9 11.9 -- -- - ---------------------------------------------------------------------------------------------------------------------------------- NET PERIODIC BENEFIT (CREDIT)/COST $(191.7) $ (97.9) $ (33.7) $ 40.2 $ 28.6 $ 29.7 ==================================================================================================================================
For calculating pension and postretirement benefit costs, the following assumptions were used:
- --------------------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, - --------------------------------------------------------------------------------------------------------------------------------- Pension Benefits Postretirement Benefits - --------------------------------------------------------------------------------------------------------------------------------- 2001 2000 1999 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------------------------- Discount rate 7.50% 7.75% 7.00% 7.50% 7.75% 7.00% Expected long-term rate of return 9.50 9.50 9.50 N/A N/A N/A Compensation/progression rate 4.50 4.75 4.25 4.50 4.75 4.25 Long-term rate of return - Health assets, net of tax N/A N/A N/A 7.50 7.50 7.50 Life assets N/A N/A N/A 9.50 9.50 9.50 =================================================================================================================================
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The effect of changing the assumed health care cost trend rate by one percentage point in each year would have the following effects: - -------------------------------------------------------- One One Percentage Percentage Point Point (Millions of Dollars) Increase Decrease - -------------------------------------------------------- Effect on total service and interest cost components $ 1.1 $ (1.0) Effect on postretirement benefit obligation $13.4 $(12.4) ======================================================== The trust holding the health plan assets is subject to federal income taxes. B. 401(k) Savings Plan NU maintains a 401(k) Savings Plan for substantially all NU system employees. This savings plan provides for employee contributions up to specified limits. NU matches employee contributions up to a maximum of 3 percent of eligible compensation with cash and NU stock. The matching contributions made by NU were $11.7 million in 2001, $13.6 million in 2000, and $13.8 million in 1999. C. ESOP NU maintains an Employee Stock Ownership Plan (ESOP) for purposes of allocating shares to employees participating in the NU system's 401(k) Savings Plan. Under this arrangement, NU issued unsecured notes during 1991 and 1992 totaling $250 million, the proceeds of which were lent to the ESOP trust for the purchase of 10.8 million newly issued NU common shares (ESOP shares). The ESOP trust is obligated to make principal and interest payments on the ESOP notes at the same rate that ESOP shares are allocated to employees. NU makes annual contributions to the ESOP equal to the ESOP's debt service, less dividends received by the ESOP. All dividends received by the ESOP on unallocated shares are used to pay debt service and are not considered dividends for financial reporting purposes. During the fourth quarter of 1999 through the second quarter of 2001, NU declared a $0.10 per share quarterly dividend. During the third quarter of 2001 through the fourth quarter of 2001, NU declared a $0.125 per share quarterly dividend. In 2001 and 2000, the ESOP trust issued 546,610 and 572,863 of NU common shares, respectively, to satisfy 401(k) Savings Plan obligations to employees. As of December 31, 2001 and 2000, the total allocated ESOP shares were 6,401,309 and 5,854,699, respectively, and total unallocated ESOP shares were 4,398,876 and 4,945,486, respectively. The fair market value of unallocated ESOP shares as of December 31, 2001 and 2000, was $77.6 million and $119.9 million, respectively. D. Stock-Based Compensation Employee Stock Purchase Plan (ESPP): Since July 1998, the NU system has maintained an ESPP for all eligible employees. Under the ESPP, shares of NU common stock were purchased at 6-month intervals at 85 percent of the lower of the price on the first or last day of each 6-month period. Employees may purchase shares having a value not exceeding 25 percent of their compensation at the beginning of the purchase period. During 2000, employees purchased 199,520 shares at discounted prices ranging from $17.48 to $18.49. At December 31, 2000, 1,417,156 shares remained reserved for future issuance under the ESPP. Effective January 1, 2001, the ESPP was terminated because of the then pending merger. In the second quarter of 2001, a new ESPP was adopted by NU's Board of Trustees and approved by NU's shareholders. Shares under the new ESPP were issued in the first quarter of 2002. Incentive Plans: The NU system has long-term incentive plans authorizing various types of share-based awards, including stock options, to be made to eligible employees and board members. The exercise price of stock options, as set at the time of grant, is generally equal to the fair market value per share at the date of grant. Under the Northeast Utilities Incentive Plan (Incentive Plan), the number of shares which may be utilized for awards granted during a given calendar year may not exceed one percent of the total number of shares of NU common stock outstanding as of the first day of that calendar year. Stock option transactions for 1999, 2000 and 2001, including those options acquired in connection with the Yankee merger, are as follows:
- ----------------------------------------------------------------------------------------------------------------------------- Exercise Price Per Share --------------------------------------- Weighted Options Range Average - ----------------------------------------------------------------------------------------------------------------------------- Outstanding December 31, 1998 1,233,678 $ 9.6250 -- $ 16.8125 $ 13.5213 Granted 644,123 $ 14.9375 -- $ 21.1250 $ 15.2514 Exercised (19,368) $ 16.3125 -- $ 16.8125 $ 16.3986 Forfeited (32,177) $ 14.9375 -- $ 16.3125 $ 15.8714 - ----------------------------------------------------------------------------------------------------------------------------- Outstanding December 31, 1999 1,826,256 $ 9.6250 -- $ 21.1250 $ 14.0585 Granted 669,470 $ 18.4375 -- $ 22.2500 $ 18.7029 Yankee merger 10,167 $ 9.3640 -- $ 12.6888 $ 10.7653 Exercised (43,750) $ 14.9375 -- $ 19.5000 $ 16.0658 Forfeited (28,281) $ 14.9375 -- $ 19.5000 $ 16.6515 - ----------------------------------------------------------------------------------------------------------------------------- Outstanding December 31, 2000 2,433,862 $ 9.3640 -- $ 22.2500 $ 15.2569 Granted 817,300 $ 17.4000 -- $ 21.0300 $ 20.2065 Exercised (108,779) $ 9.3640 -- $ 19.5000 $ 16.0970 Forfeited (132,467) $ 14.8750 -- $ 21.0300 $ 18.2217 - ----------------------------------------------------------------------------------------------------------------------------- OUTSTANDING DECEMBER 31, 2001 3,009,916 $ 9.6250 -- $ 22.2500 $ 16.4467 ============================================================================================================================= Exercisable December 31, 1999 711,787 $ 9.6250 -- $ 21.1250 $ 14.0102 Exercisable December 31, 2000 1,298,339 $ 9.3640 -- $ 22.2500 $ 14.2021 - ----------------------------------------------------------------------------------------------------------------------------- EXERCISABLE DECEMBER 31, 2001 1,712,260 $ 9.6250 -- $ 22.2500 $ 14.4650 =============================================================================================================================
For certain options that were granted in 2001 and 2000, and for the options that were granted in 1999, the vesting schedule for these options is ratably over three years from the date of grant. Other options granted in 2001 and 2000 vest 50 percent at the date of grant and 50 percent one year from the date of grant. Also under the Incentive Plan, the NU system awarded 91,120 of restricted shares in 1999. These shares have the same vesting schedule as the options granted under the Incentive Plan. The NU system has also made several small grants of restricted stock and other incentive-based stock compensation. During 2001, 2000 and 1999, $1.2 million, $1.9 million and $2.2 million, respectively, was expensed for stock-based compensation. Had compensation cost been determined for the ESPP and the Incentive Plan stock options under the fair value method as opposed to the intrinsic value method followed by the NU system, net income/(loss) and net income/(loss) per share would have been as follows: - ---------------------------------------------------------------------------- (Millions of Dollars, except per share amounts) 2001 2000 1999 - ---------------------------------------------------------------------------- Net income/(loss) $ 239.1 $ (33.9) $ 29.6 Basic income/(loss) per common share $ 1.76 $ (0.24) $ 0.23 Diluted income/(loss) per common share $ 1.76 $ (0.24) $ 0.22 ============================================================================ The fair value of each stock option grant has been estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: - ------------------------------------------------------------- 2001 2000 1999 - ------------------------------------------------------------- Risk-free interest rate 5.34% 6.56% 5.69% Expected life 10 years 10 years 10 years Expected volatility 25.47% 26.15% 36.21% Expected dividend yield 2.11% 1.82% 1.89% ============================================================= The weighted average grant date fair values of options granted during 2001, 2000 and 1999 were $6.94, $7.50, and $6.79, respectively. As of December 31, 2001 and 2000, the weighted average remaining contractual lives for those options outstanding are 7.50 years and 7.92 years, respectively. 5. SALE OF CUSTOMER RECEIVABLES On July 11, 2001, CL&P renewed its accounts receivable securitization credit line for one year. At that time, the credit line capacity was reduced from $200 million to $100 million. As of December 31, 2001, CL&P had no amounts outstanding through the CL&P Receivables Corporation (CRC), a wholly owned subsidiary of CL&P. As of December 31, 2000, CL&P had sold accounts receivable of $170 million to a third-party purchaser with limited recourse through the CRC. In addition, at December 31, 2000, $18.9 million of accounts receivable were designated as collateral under the agreement with the CRC. Concentrations of credit risk to the purchaser under the company's agreement with respect to the receivables are limited due to CL&P's diverse customer base within its service territory. 6. NUCLEAR GENERATION ASSETS DIVESTITURE On March 31, 2001, CL&P and WMECO consummated the sale of Millstone 1 and 2 to a subsidiary of Dominion Resources, Inc., Dominion Nuclear Connecticut, Inc. (DNCI). CL&P, PSNH and WMECO sold their ownership interests in Millstone 3 to DNCI. This sale included all of the respective joint ownership interests of CL&P, PSNH and WMECO in Millstone 3. The NU system received approximately $1.2 billion of cash proceeds from the sale and applied the proceeds to taxes and reductions of debt and equity at CL&P, PSNH and WMECO. As part of the sale, DNCI assumed responsibility for decommissioning the three Millstone units. In connection with the sale, CL&P and WMECO recorded a gain in the amount of $642 million which was used to offset stranded costs. Additionally, NU recorded an after-tax gain of $115.6 million related to the prior settlement of Millstone 3 joint owner claims. 7. COMMITMENTS AND CONTINGENCIES A. Restructuring and Rate Matters Connecticut: On September 27, 2001, CL&P filed its application with the Connecticut Department of Public Utility Control (DPUC) for approval of the disposition of the proceeds from the sale of the Millstone units to DNCI. This application described and requested DPUC approval for CL&P's treatment of its share of the proceeds from the sale. In accordance with Connecticut's electric utility industry restructuring legislation, CL&P was required to utilize any gains from the Millstone sale to offset stranded costs. There are certain contingencies related to this filing regarding the potential disallowance of what management believes were prudently incurred costs. Management believes the recoverability of these costs is probable. A decision from the DPUC is expected in the first half of 2002. New Hampshire: In July 2001, the NHPUC opened a docket to review the FPPAC cost accruals between August 2, 1999, and April 30, 2001. Hearings at the NHPUC are expected to be held during the spring of 2002. Under the Settlement Agreement, the FPPAC deferrals are recovered as a Part 3 regulatory asset through a stranded cost recovery charge. At December 31, 2001 and 2000, PSNH had $183.3 million and $145.9 million, respectively, of recoverable deferred energy costs deferred under the FPPAC, excluding previous deferrals of purchases from independent power producers. Management does not expect the outcome of these hearings to have a material impact on its earnings. Massachusetts: During the first quarter of 2000, WMECO filed its first annual stranded cost reconciliation filing covering the period March 1, 1998 through December 31, 1999. The hearing and briefing processes related to this filing were completed during the second quarter of 2001. A Massachusetts Department of Telecommunications and Energy (DTE) decision is expected in the first half of 2002. On March 30, 2001, WMECO also filed its second annual stranded cost reconciliation with the DTE for calendar year 2000 with the related review and hearing processes anticipated to be scheduled for the first half of 2002. The cumulative deferral of unrecovered stranded costs, as filed through calendar year 2000, is approximately $4 million. Management believes these costs are fully recoverable. WMECO is in the process of finalizing its 2001 annual transition cost reconciliation which is expected to be filed with the DTE on March 29, 2002. This filing reconciles the recovery of stranded generation costs for calendar year 2001. Also included in this filing are the sales proceeds from WMECO's portion of Millstone, the impact of securitization and an approximate $13 million benefit to ratepayers from WMECO's nuclear performance-based ratemaking process. The inclusion of these items as part of the reconciliation filing allows WMECO to accelerate the recovery of total stranded generation assets. Management anticipates a formal hearing in 2002 regarding this filing after a period of data discovery by the DTE and other intervenors. B. Environmental Matters The NU system is subject to environmental laws and regulations intended to mitigate or remove the effect of past operations and improve or maintain the quality of the environment. As such, the NU system has active environmental auditing and training programs and believes it is substantially in compliance with the current laws and regulations. However, the normal course of operations may involve activities and substances that expose the NU system to potential liabilities of which management cannot determine the outcome. Additionally, management cannot determine the outcome for liabilities that may be imposed for past acts, even though such past acts may have been lawful at the time they occurred. Management does not believe, however, that this will have a material impact on the NU system's financial statements. Based upon currently available information for the estimated remediation costs as of December 31, 2001 and 2000, the liability recorded by the NU system for its estimated environmental remediation costs amounted to $46.2 million and $58.2 million, respectively. C. Spent Nuclear Fuel Disposal Costs Under the Nuclear Waste Policy Act of 1982, CL&P, PSNH, WMECO, and NAEC must pay the DOE for the disposal of spent nuclear fuel and high-level radioactive waste. The DOE is responsible for the selection and development of repositories for, and the disposal of, spent nuclear fuel and high-level radioactive waste. For nuclear fuel used to generate electricity prior to April 7, 1983 (Prior Period Fuel), an accrual has been recorded for the full liability and payment must be made prior to the first delivery of spent fuel to the DOE. Until such payment is made, the outstanding balance will continue to accrue interest at the 3-month treasury bill yield rate. As of December 31, 2001 and 2000, fees due to the DOE for the disposal of Prior Period Fuel were $249.3 million and $240.3 million, respectively, including interest costs of $167.2 million and $158.2 million, respectively. Fees for nuclear fuel burned on or after April 7, 1983, are billed currently to customers and paid to the DOE on a quarterly basis. NU remains responsible for fees to be paid for fuel burned until the divestiture of the Millstone and Seabrook nuclear units. D. Nuclear Insurance Contingencies Insurance policies covering the NU system's nuclear facilities have been purchased for the primary cost of repair, replacement or decontamination of utility property, certain extra costs incurred in obtaining replacement power during prolonged accidental outages and the excess cost of repair, replacement or decontamination or premature decommissioning of utility property. The NU system is subject to retroactive assessments if losses under those policies exceed the accumulated funds available to the insurer. The maximum potential assessments with respect to losses arising during the current policy year for the primary property insurance program, the replacement power policies and the excess property damage policies are $4.3 million, $1.4 million and $6.7 million, respectively. In addition, insurance has been purchased in the aggregate amount of $200 million on an industry basis for coverage of worker claims. Under certain circumstances, in the event of a nuclear incident at one of the nuclear facilities covered by the federal government's third-party liability indemnification program, the NU system could be assessed liabilities in proportion to its ownership interest in each of its nuclear units up to $83.9 million. The NU system's payment of this assessment would be limited to, in proportion to its ownership interest in each of its nuclear units, $10 million in any one year per nuclear unit. In addition, if the sum of all claims and costs from any one nuclear incident exceeds the maximum amount of financial protection, the NU system would be subject to an additional 5 percent, or $4.2 million, liability, in proportion to its ownership interests in each of its nuclear units. Based upon its ownership interest in Seabrook, the NU system's maximum liability, including any additional assessments, would be $34.9 million per incident, of which payments would be limited to $4.8 million per year. In addition, through purchased-power contracts with VYNPC, the NU system would be responsible for up to an additional assessment of $14.1 million per incident, of which payments would be limited to $1.6 million per year. NU expects to terminate its nuclear insurance upon the divestiture of its remaining nuclear units. E. Long-Term Contractual Arrangements Yankee Companies: Under the terms of their agreements, the NU system companies paid their ownership (or entitlement) shares of costs, which included depreciation, operation and maintenance (O&M) expenses, taxes, the estimated cost of decommissioning, and a return on invested capital. These costs were recorded as purchased-power expenses. The total cost of purchases under contracts with VYNPC amounted to $25.3 million in 2001, $24.9 million in 2000, and $29.2 million in 1999. VYNPC is in the process of selling its nuclear unit. Upon completion of the sale, it is expected that these long-term contracts will be replaced with different contracts with the new buyer. Energy Procurement Contracts: CL&P, PSNH and WMECO have entered into various arrangements for the purchase of capacity and energy. The total cost of purchases under these arrangements amounted to $363.9 million in 2001, $482.1 million in 2000 and $461.8 million in 1999. Gas Procurement Contracts: Yankee Gas has entered into long-term contracts for the purchase of a specified quantity of gas in the normal course of business as part of its portfolio to meet its actual sales commitments. These contracts extend through 2006. Hydro-Quebec: Along with other New England utilities, CL&P, PSNH, WMECO, and HWP have entered into agreements to support transmission and terminal facilities to import electricity from the Hydro-Quebec system in Canada. CL&P, PSNH, WMECO, and HWP are obligated to pay, over a 30-year period ending in 2020, their proportionate shares of the annual O&M expenses and capital costs of those facilities. Estimated Annual Costs: The estimated annual costs of the NU system's significant long-term contractual arrangements, absent the effects of any contract terminations, buydowns or buyouts, or sales of generation assets are as follows:
- ----------------------------------------------------------------------------------------------------- (Millions of Dollars) 2002 2003 2004 2005 2006 Totals - ----------------------------------------------------------------------------------------------------- VYNPC $ 30.9 $ 29.4 $ 33.5 $ 34.0 $ 30.8 $ 158.6 Energy Procurement Contracts 331.5 341.1 345.6 350.5 350.1 1,718.8 Gas Procurement Contracts 52.6 54.2 55.2 53.6 9.3 224.9 Hydro-Quebec 27.1 26.1 25.0 24.1 21.7 124.0 - ----------------------------------------------------------------------------------------------------- Totals $ 442.1 $ 450.8 $ 459.3 $ 462.2 $ 411.9 $2,226.3 =====================================================================================================
Select Energy: Select Energy maintains long-term agreements to purchase energy in the normal course of business as part of its portfolio of resources to meet its actual or expected sales commitments. The aggregate amount of these purchase contracts was $3.5 billion at December 31, 2001. These contracts extend through 2006 as follows: - -------------------------------------------------------------- (Millions of Dollars) - -------------------------------------------------------------- Year - -------------------------------------------------------------- 2002 $ 2,416.2 2003 836.2 2004 145.9 2005 95.7 2006 34.8 - -------------------------------------------------------------- Total $ 3,528.8 ============================================================== F. Consolidated Edison, Inc. Merger Litigation Certain gain and loss contingencies exist with regard to the litigation related to the merger agreement between NU and Consolidated Edison, Inc. For further information regarding this litigation, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Consolidated Edison, Inc. Merger Litigation." 8. NUCLEAR DECOMMISSIONING AND PLANT CLOSURE COSTS Seabrook: Seabrook has a service life that is expected to end in 2026, and upon retirement, must be decommissioned. The NU system's ownership share of the estimated cost of decommissioning Seabrook, in year end 2001 dollars, is $222.5 million. Nuclear decommissioning costs are accrued over the expected service life of the unit and are included in depreciation expense and the accumulated provision for depreciation. Nuclear decommissioning expenses for Seabrook amounted to $7.8 million in 2001, $7.7 million in 2000 and $7.6 million in 1999. Through December 31, 2001 and 2000, total decommissioning expenses of $52.5 million and $44.7 million, respectively, have been collected from customers related to Seabrook and are reflected in the accumulated provision for depreciation. Payments for the NU system's ownership share of the cost of decommissioning Seabrook are paid to an independent decommissioning financing fund managed by the state of New Hampshire. As of December 31, 2001 and 2000, $52 million and $44.2 million, respectively, have been transferred to the Seabrook external decommissioning trust. Earnings on the decommissioning trust increase the decommissioning trust balance and the accumulated provision for depreciation. Unrealized gains and losses associated with the decommissioning trust also impact the balance of the trust and the accumulated provision for depreciation. The fair values of the amounts in the Seabrook external decommissioning trust were $61.7 million and $56.6 million at December 31, 2001 and 2000, respectively. Upon divestiture, the balance in the Seabrook decommissioning trust will be transferred to the buyer. Yankee Companies: VYNPC owns and operates a nuclear generating unit with a service life that is expected to end in 2012. The NU system's ownership share of estimated costs, in year end 2001 dollars, of decommissioning this unit is $75.4 million. In August 2001, VYNPC agreed to sell its nuclear generating unit for $180 million, including $35 million for nuclear fuel, to an unaffiliated company. Among other commitments, the acquiring company agreed to assume the obligation to decommission the unit after it is taken out of service and agreed to provide the current level of output from the unit through 2012. The sale is subject to the approval of the Vermont Public Service Board, the Nuclear Regulatory Commission, the FERC and other regulatory authorities. The closing on the sale is expected to be in the first half of 2002. As of December 31, 2001 and 2000, NU's remaining estimated obligations, including decommissioning for the units owned by CYAPC, YAEC and MYAPC, which have been shut down were $216.6 million and $244.6 million, respectively. 9. MARKET RISK AND RISK MANAGEMENT INSTRUMENTS Competitive Energy Subsidiaries: Select Energy provides both firm requirement energy services to its customers and engages in energy trading and marketing activities. Select Energy manages its exposure to risk from existing contractual commitments and provides risk management services to its customers through forward contracts, futures, over-the-counter swap agreements, and options (commodity derivatives). Select Energy has utilized the sensitivity analysis methodology to disclose the quantitative information for its commodity price risks. Sensitivity analysis provides a presentation of the potential loss of future earnings, fair values or cash flows from market risk-sensitive instruments over a selected time period due to one or more hypothetical changes in commodity prices, or other similar price changes. Commodity Price Risk - Trading Activities: As a market participant in the Northeast United States, Select Energy conducts commodity-trading activities in electricity and its related products, natural gas and oil and, therefore, experiences net open positions. Select Energy manages these open positions with strict policies which limit its exposure to market risk and require daily reporting to management of potential financial exposure. Commodity derivatives utilized for trading purposes are accounted for using the mark-to-market method, under EITF Issue No. 98-10. Under this methodology, these instruments are adjusted to market value, and the unrealized gains and losses are recognized in income in the current period in the consolidated statements of income as fuel, purchased and net interchange power and in the consolidated balance sheets as prepayments and other. The mark-to-market positions at December 31, 2001 and 2000, were a positive $44.4 million and a positive $13.8 million, respectively. Under sensitivity analysis, the fair value of the portfolio is a function of the underlying commodity, contract prices and market prices represented by each derivative commodity contract. For swaps, forward contracts and options, market value reflects management's best estimates considering over-the-counter quotations, time value and volatility factors of the underlying commitments. Exchange-traded futures and options are recorded at market, based on closing exchange prices. As of December 31, 2001, Select Energy has calculated the market price resulting from a 10 percent unfavorable change in forward market prices. That 10 percent change would result in approximately a $0.6 million decline in the fair value of the Select Energy trading portfolio. In the normal course of business, Select Energy also faces risks that are either nonfinancial or nonquantifiable. Such risks principally include credit risk, which is not reflected in the sensitivity analysis above. Commodity Price Risk - Nontrading Activities: Select Energy utilizes derivative financial and commodity instruments (derivatives), including futures and forward contracts, to reduce market risk associated with fluctuations in the price of electricity and natural gas sold under firm commitments with certain customers. Select Energy also utilizes derivatives, including price swap agreements, call and put option contracts, and futures and forward contracts, to manage the market risk associated with a portion of its anticipated supply requirements. These derivative instruments have been designated as cash flow hedging instruments. When conducting sensitivity analysis of the change in the fair value of Select Energy's electricity, natural gas and oil nontrading portfolio, which would result from a hypothetical change in the future market price of electricity, natural gas and oil, the fair value of the contracts are determined from models which take into account estimated future market prices of electricity, natural gas and oil, the volatility of the market prices in each period, as well as the time value factors of the underlying commitments. In most instances, market prices and volatility are determined from quoted prices on the futures exchange. Select Energy has determined a hypothetical change in the fair value for its nontrading electricity, natural gas and oil contracts, assuming a 10 percent unfavorable change in forward market prices. As of December 31, 2001, an unfavorable 10 percent change in forward market price would have resulted in a decrease in fair value of approximately $29 million. The impact of a change in electricity, natural gas and oil prices on Select Energy's nontrading contracts on December 31, 2001, is not necessarily representative of the results that will be realized when these contracts are physically delivered. Select Energy also maintains natural gas service agreements with certain customers to supply gas at fixed prices for terms extending through 2004. Select Energy has hedged its gas supply risk under these agreements through NYMEX contracts. Under these contracts, the purchase price of a specified quantity of gas is effectively fixed over the term of the gas service agreements, which extend through 2004. As of December 31, 2001, the NYMEX contracts had a notional value of $91.3 million and a negative after-tax mark-to-market position of $14.7 million. Derivative Cash Flow Hedge Accounting: Derivative instruments recorded which were effective cash flow hedges resulted in an increase in other comprehensive income of $12.3 million, net of tax, upon the adoption of SFAS No. 133. During 2001, a positive $4.5 million, net of tax, was reclassified from other comprehensive income upon the conclusion of these hedged transactions and recognized in earnings. An additional $1.3 million, net of tax, was recognized in earnings for those derivatives that were determined to be ineffective. Also, during 2001, new cash flow hedge transactions were entered into which hedge cash flows through 2027. As a result of these new transactions and market value changes since January 1, 2001, other comprehensive income decreased by $53.7 million, net of tax. Accumulated other comprehensive income at December 31, 2001, was a negative $36.9 million, net of tax (decrease to equity), relating to hedged transactions and it is estimated that $29.4 million, net of tax, will be reclassified as a charge to earnings within the next twelve months. Cash flows from the hedge contracts are reported in the same category as cash flows from the hedged assets. Credit Risk: NU serves a wide variety of customers and suppliers that include independent power producers, industrial companies, gas and electric utilities, oil and gas producers, financial institutions, and other energy marketers. Margin accounts exist within this diverse group, and NU realizes interest receipts and payments related to balances outstanding in these accounts. This wide customer and supplier mix generates a need for a variety of contractual structures, products and terms. This multifaceted book of business requires NU to manage the portfolio of market risk inherent in those transactions in a manner consistent with the parameters established by NU's risk management process. Market risks are monitored regularly by a Risk Oversight Council operating outside of the units that create or actively manage these risk exposures to ensure compliance with NU's stated risk management policies. NU tracks and re-balances the risk in its portfolio in accordance with mark-to-market and other risk management methodologies that utilize forward price curves in the energy markets to estimate the size and probability of future potential exposure. Credit risk relates to the risk of loss that NU would incur as a result of non-performance by counterparties pursuant to the terms of their contractual obligations. New York Mercantile Exchange (Exchange) traded futures and option contracts are guaranteed by the Exchange and have a modest credit risk. NU has established written credit policies with regard to its counterparties to minimize overall credit risk on all types of transactions. These policies require an evaluation of potential counterparties' financial conditions (including credit rating), collateral requirements under certain circumstances (including cash in advance, letters of credit, and parent guarantees), and theuse of standardized agreements, which allow for the netting of positive and negative exposures associated with a single counterparty. This evaluation results in establishing credit limits prior to NU entering into trading activities. The appropriateness of these limits is subject to continuing review. Concentrations among these counterparties may impact NU's overall exposure to credit risk, either positively or negatively in that the counterparties may be similarly affected by changes to economic, regulatory or other conditions. Regulated Entities: Interest Rate Risk - Nontrading Activities: NU manages its interest rate risk exposure by maintaining a mix of fixed and variable rate debt. In addition, Yankee has entered into an interest rate sensitive derivative. Yankee uses swap instruments with financial institutions to exchange fixed-rate interest obligations to a blend between fixed and variable-rate obligations without exchanging the underlying notional amounts. These instruments convert fixed interest rate obligations to variable rates. The notional amounts parallel the underlying debt levels and are used to measure interest to be paid or received and do not represent the exposure to credit loss. As of December 31, 2001, Yankee had outstanding agreements with a total notional value of $48 million and a positive mark-to-market position of $0.2 million, which is included within the $36.9 million reported for accumulated other comprehensive income related to hedging activities. Commodity Price Risk - Nontrading Activities: Yankee Gas maintains a master swap agreement with one customer to supply gas at fixed prices for a 10-year term extending through 2005. Under this master swap agreement, the purchase price of a specified quantity of gas is effectively fixed over the term of the gas service agreement, which extends through 2005. As of December 31, 2001, the commodity swap agreement had a notional value of $16.9 million and a negative mark-to-market position of $1.4 million, net of tax, which is included within the $36.9 million reported for accumulated other comprehensive income related to hedging activities. 10. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY CL&P Capital LP (CL&P LP), a subsidiary of CL&P, previously had issued $100 million of cumulative 9.3 percent Monthly Income Preferred Securities (MIPS), Series A. CL&P has the sole ownership in CL&P LP, as a general partner, and was the guarantor of the MIPS securities. Subsequent to the MIPS issuance, CL&P LP loaned the proceeds of the MIPS issuance, along with CL&P's $3.1 million capital contribution, back to CL&P in the form of an unsecured debenture. CL&P consolidates CL&P LP for financial reporting purposes. Upon consolidation, the unsecured debenture was eliminated, and the MIPS securities were accounted for as a minority interest. In the second quarter of 2001, CL&P repaid the $100 million in notes associated with the MIPS. 11. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each of the following financial instruments: Cash and cash equivalents: The carrying amounts approximate fair value due to the short-term nature of cash and cash equivalents. Supplemental Executive Retirement Plan (SERP) Investments: Investments held for the benefit of the SERP are recorded at fair market value. The investments having a cost basis of $6.3 million and $6.5 million held for benefit of the SERP were recorded at their fair market values at December 31, 2001 and 2000, of $9 million and $10.1 million, respectively. Nuclear decommissioning trusts: The investments held in the NU system companies' nuclear decommissioning trusts were marked-to-market by a negative $2.5 million as of December 31, 2001, and a positive $117.6 million as of December 31, 2000, with corresponding offsets to the accumulated provision for depreciation. Preferred stock and long-term debt: The fair value of the NU system's fixed-rate securities is based upon the quoted market price for those issues or similar issues. Adjustable rate securities are assumed to have a fair value equal to their carrying value. The carrying amounts of the NU system's financial instruments and the estimated fair values are as follows: - ------------------------------------------------------------ At December 31, 2001 - ------------------------------------------------------------ (Millions of Dollars) Carrying Amount Fair Value - ------------------------------------------------------------ Preferred stock not subject to mandatory redemption $ 116.2 $ 62.4 Long-term debt-- First mortgage bonds 795.9 847.2 Other long-term debt 1,552.1 1,554.6 Rate reduction bonds 2,018.4 2,061.8 ============================================================ - ------------------------------------------------------------ At December 31, 2000 - ------------------------------------------------------------ (Millions of Dollars) Carrying Amount Fair Value - ------------------------------------------------------------ Preferred stock not subject to mandatory redemption $ 136.2 $ 159.9 Preferred stock subject to mandatory redemption 40.8 42.0 Long-term debt-- First mortgage bonds 1,008.1 1,012.5 Other long-term debt 1,342.2 1,290.6 MIPS 100.0 100.5 ============================================================ 12. OTHER COMPREHENSIVE INCOME The accumulated balance for each other comprehensive income item is as follows: - ----------------------------------------------------------------------------- December 31, Current December 31, (Millions of Dollars) 2000 Period Change 2001 - ----------------------------------------------------------------------------- Qualified cash flow hedging instruments $ -- $(36.9) $(36.9) Unrealized gains on securities 2.4 2.6 5.0 Minimum pension liability adjustments (0.6) -- (0.6) - ----------------------------------------------------------------------------- Accumulated other comprehensive income/(loss) $ 1.8 $(34.3) $(32.5) ============================================================================= - ----------------------------------------------------------------------------- December 31, Current December 31, (Millions of Dollars) 1999 Period Change 2000 - ----------------------------------------------------------------------------- Qualified cash flow hedging instruments $ -- $ -- $ -- Unrealized gains on securities 2.1 0.3 2.4 Minimum pension liability adjustments (0.6) -- (0.6) - ----------------------------------------------------------------------------- Accumulated other comprehensive income $ 1.5 $ 0.3 $ 1.8 ============================================================================= The changes in the components of other comprehensive income are reported net of the following income tax effects: - ----------------------------------------------------------------------------- (Millions of Dollars) 2001 2000 1999 - ----------------------------------------------------------------------------- Qualified cash flow hedging instruments $ 2.3 $ -- $ -- Unrealized gains on securities (1.9) (0.2) (0.1) Minimum pension liability adjustments -- -- -- - ----------------------------------------------------------------------------- Accumulated other comprehensive income/ (loss) $ 0.4 $(0.2) $(0.1) ============================================================================ Accumulated other comprehensive income mark-to-market adjustments of NU's qualified cash flow hedging instruments are as follows: - ------------------------------------------------------------------------------- (Millions of Dollars, Net of Tax) December 31, 2001 - ------------------------------------------------------------------------------- Balance at January 1, 2001 (inception date) $ 12.3 - ------------------------------------------------------------------------------- Hedged transactions recognized into earnings 4.5 Change in fair value (29.6) Cash flow transactions entered into for the period (24.1) - ------------------------------------------------------------------------------- Net change associated with the current period hedging transactions (49.2) - ------------------------------------------------------------------------------- Total mark-to-market adjustments included in accumulated other comprehensive loss $ (36.9) =============================================================================== 13. EARNINGS PER SHARE EPS is computed based upon the weighted average number of common shares outstanding during each year. Diluted EPS is computed on the basis of the weighted average number of common shares outstanding plus the potential dilutive effect if certain securities are converted into common stock. The following table sets forth the components of basic and diluted EPS:
- ---------------------------------------------------------------------------------------------------------------------------------- (Millions of Dollars, except share information) 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------------- Income before preferred dividends of subsidiaries $ 273.2 $ 219.5 $ 57.0 Preferred dividends of subsidiaries 7.3 14.2 22.8 - ---------------------------------------------------------------------------------------------------------------------------------- Income before extraordinary loss and cumulative effect of accounting change 265.9 205.3 34.2 Extraordinary loss, net of tax benefit -- (233.9) -- Cumulative effect of accounting change, net of tax benefit (22.4) -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Net income/(loss) $ 243.5 $ (28.6) $ 34.2 ================================================================================================================================== Basic EPS common shares outstanding (average) 135,632,126 141,549,860 131,415,126 Dilutive effect of employee stock options 285,297 417,356 616,447 - ---------------------------------------------------------------------------------------------------------------------------------- Fully diluted EPS common shares outstanding (average) 135,917,423 141,967,216 132,031,573 - ---------------------------------------------------------------------------------------------------------------------------------- Basic earnings/(loss) per common share: Income before extraordinary loss and cumulative effect of accounting change $ 1.97 $ 1.45 $ 0.26 Extraordinary loss, net of tax benefit -- (1.65) -- Cumulative effect of accounting change, net of tax benefit (0.17) -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Net income/(loss) $ 1.80 $ (0.20) $ 0.26 ================================================================================================================================== Fully diluted earnings/(loss) per common share: Income before extraordinary loss and cumulative effect of accounting change $ 1.96 $ 1.45 $ 0.26 Extraordinary loss, net of tax benefit -- (1.65) -- Cumulative effect of accounting change, net of tax benefit (0.17) -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Net income/(loss) $ 1.79 $ (0.20) $ 0.26 ==================================================================================================================================
14. SEGMENT INFORMATION The NU system is organized between regulated utilities (electric and gas since March 1, 2000) and competitive energy subsidiaries. The regulated utilities segment represents approximately 68 percent and 85 percent of the NU system's total revenues for the years ended December 31, 2001 and 2000, respectively, and is comprised of several business units. Regulated utilities revenues primarily are derived from residential, commercial and industrial customers and are not dependent on any single customer. In 2001, the competitive energy subsidiaries segment had one customer with revenues in excess of 10 percent of its total revenues, CL&P. The purchases by CL&P represented approximately 22 percent, of total competitive energy subsidiaries' revenues for the year ended December 31, 2001. In 2000, the purchases by two customers, one unaffiliated company and CL&P, represented approximately 15 percent and 34 percent, respectively, of total competitive energy subsidiaries' revenues for the year ended December 31, 2000. The competitive energy subsidiaries segment in the following table includes SES, a provider of energy management, demand-side management and related consulting services for commercial, industrial and institutional electric companies and electric utility companies; HWP, a company engaged in the production of electric power; NGC, a corporation that acquires and manages generation facilities; NGS, a corporation that maintains and services any fossil or hydroelectric facility that is acquired or contracted with for fossil or hydroelectric generation services, and; Select Energy, a corporation engaged in the marketing, transportation, storage, and sale of energy commodities, at wholesale, in designated geographical areas and in the marketing of electricity to retail customers. Other in the following table includes the results for Mode 1, an investor in a fiber-optic communications network. Other also includes the results of the nonenergy related subsidiaries of Yankee. Interest expense included in Other primarily relates to the debt of NU parent. Inter-segment eliminations are also included in Other.
- ----------------------------------------------------------------------------------------------------------- For the Year Ended December 31, 2001 - ----------------------------------------------------------------------------------------------------------- Regulated Utilities Competitive Eliminations ------------------- Energy and (Millions of Dollars) Electric Gas Subsidiaries Other Total - ----------------------------------------------------------------------------------------------------------- Operating revenues $ 4,287.0 $ 378.0 $ 2,964.0 $ (755.2) $ 6,873.8 Operating expenses (3,795.5) (327.9) (2,919.1) 707.8 (6,334.7) - ----------------------------------------------------------------------------------------------------------- Operating income/(loss) 491.5 50.1 44.9 (47.4) 539.1 Other income, net 72.8 4.1 5.8 104.9 187.6 Interest expense, net (199.3) (14.0) (42.9) (23.4) (279.6) Income tax expense (154.3) (14.3) (2.8) (2.5) (173.9) Preferred dividends (7.3) -- -- -- (7.3) - ----------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 203.4 25.9 5.0 31.6 265.9 Cumulative effect of accounting change, net of tax benefit -- -- (22.0) (0.4) (22.4) - ----------------------------------------------------------------------------------------------------------- Net income/(loss) $ 203.4 $ 25.9 $ (17.0) $ 31.2 $ 243.5 - ----------------------------------------------------------------------------------------------------------- Total assets $ 8,730.3 $ 890.0 $ 1,017.9 $ (396.8) $10,241.4 ===========================================================================================================
- -------------------------------------------------------------------------------------------------------- For the Year Ended December 31, 2000 - -------------------------------------------------------------------------------------------------------- Regulated Utilities Competitive Eliminations ------------------- Energy and (Millions of Dollars) Electric Gas Subsidiaries Other Total - -------------------------------------------------------------------------------------------------------- Operating revenues $ 4,738.5 $ 251.2 $ 1,894.9 $(1,008.0) $ 5,876.6 Operating expenses (4,078.1) (224.2) (1,830.0) 950.5 (5,181.8) - -------------------------------------------------------------------------------------------------------- Operating income/(loss) 660.4 27.0 64.9 (57.5) 694.8 Other (loss)/income, net (11.6) (7.1) (4.7) 9.1 (14.3) Interest expense, net (191.9) (12.2) (53.4) (41.8) (299.3) Income tax expense (173.4) (6.5) (0.1) 18.3 (161.7) Preferred dividends (14.2) -- -- -- (14.2) - -------------------------------------------------------------------------------------------------------- Income/(loss) before extraordinary loss 269.3 1.2 6.7 (71.9) 205.3 Extraordinary loss, net of tax benefit (214.2) -- (19.7) -- (233.9) - -------------------------------------------------------------------------------------------------------- Net income/(loss) $ 55.1 $ 1.2 $ (13.0) $ (71.9) $ (28.6) - -------------------------------------------------------------------------------------------------------- Total assets $ 9,620.0 $ 912.6 $ 684.1 $ (999.6) $10,217.1 ========================================================================================================
- ----------------------------------------------------------------------------------------------- For the Year Ended December 31, 1999 - ----------------------------------------------------------------------------------------------- Regulated Utilities Competitive Eliminations ------------------- Energy and (Millions of Dollars) Electric Subsidiaries Other Total - ----------------------------------------------------------------------------------------------- Operating revenues $3,846.1 $ 648.8 $ (23.7) $4,471.2 Operating expenses (3,241.4) (713.5) 9.1 (3,945.8) - ---------------------------------------------------------------------------------------------- Operating income/(loss) 604.7 (64.7) (14.6) 525.4 Other (loss)/income, net (105.2) 5.6 (6.6) (106.2) Interest expense, net (245.5) (3.2) (14.9) (263.6) Income tax expense (150.9) 25.3 27.0 (98.6) Preferred dividends (22.8) -- -- (22.8) - ---------------------------------------------------------------------------------------------- Net income/(loss) $ 80.3 $ (37.0) $ (9.1) $ 34.2 - ---------------------------------------------------------------------------------------------- Total assets $9,302.6 $ 308.2 $ 77.3 $9,688.1 ==============================================================================================
CONSOLIDATED STATEMENTS OF QUARTERLY FINANCIAL DATA (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------- Quarter Ended (a) (b) - ----------------------------------------------------------------------------------------------------------------------------- (Thousands of Dollars, except per share information) March 31 June 30 September 30 December 31 - ----------------------------------------------------------------------------------------------------------------------------- 2001 - ----------------------------------------------------------------------------------------------------------------------------- Operating Revenues $ 1,800,544 $ 1,583,294 $ 1,723,894 $ 1,766,094 Operating Income 159,595 133,472 113,378 132,729 Income Before Cumulative Effect of Accounting Change 134,595 46,732 34,631 49,984 Cumulative Effect of Accounting Change, Net of Tax Benefit (22,432) -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Net Income $ 112,163 $ 46,732 $ 34,631 $ 49,984 ============================================================================================================================= Basic Earnings/(Loss) per Common Share: Income Before Cumulative Effect of Accounting Change $ 0.93 $ 0.35 $ 0.26 $ 0.38 Cumulative Effect of Accounting Change, Net of Tax Benefit (0.15) -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Net Income $ 0.78 $ 0.35 $ 0.26 $ 0.38 ============================================================================================================================= Diluted Earnings/(Loss) per Common Share: Income Before Cumulative Effect of Accounting Change $ 0.93 $ 0.35 $ 0.26 $ 0.38 Cumulative Effect of Accounting Change, Net of Tax Benefit (0.15) -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Net Income $ 0.78 $ 0.35 $ 0.26 $ 0.38 - ----------------------------------------------------------------------------------------------------------------------------- 2000 - ----------------------------------------------------------------------------------------------------------------------------- Operating Revenues $ 1,382,321 $ 1,414,973 $ 1,581,947 $ 1,497,379 Operating Income 197,834 146,537 177,343 173,079 Income Before Extraordinary Loss 74,587 12,206 65,543 52,959 Extraordinary Loss, Net of Tax Benefit -- -- -- (233,881) - ----------------------------------------------------------------------------------------------------------------------------- Net Income/(Loss) $ 74,587 $ 12,206 $ 65,543 $ (180,922) ============================================================================================================================= Basic Earnings/(Loss) Per Common Share: Income Before Extraordinary Loss $ 0.55 $ 0.09 $ 0.46 $ 0.37 Extraordinary Loss, Net of Tax Benefit -- -- -- (1.63) - ----------------------------------------------------------------------------------------------------------------------------- Net Income/(Loss) $ 0.55 $ 0.09 $ 0.46 $ (1.26) ============================================================================================================================= Diluted Earnings/(Loss) Per Common Share: Income Before Extraordinary Loss $ 0.55 $ 0.08 $ 0.45 $ 0.37 Extraordinary Loss, Net of Tax Benefit -- -- -- (1.63) - ----------------------------------------------------------------------------------------------------------------------------- Net Income/(Loss) $ 0.55 $ 0.08 $ 0.45 $ (1.26) =============================================================================================================================
(a) Certain reclassifications of prior years' data have been made to conform with the current year's presentation. (b) Summation of quarterly data may not equal annual data due to rounding. SELECTED CONSOLIDATED FINANCIAL DATA (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------- (Thousands of Dollars, except percentages and share information) 2001 2000 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA: Property, Plant and Equipment, Net $ 3,822,139 $ 3,547,215 $ 3,947,434 $ 6,170,881 $ 6,463,158 Total Assets 10,241,409 10,217,149 9,688,052 10,387,381 10,414,412 Total Capitalization (a) 4,576,858 4,739,417 5,216,456 6,030,402 6,472,504 Obligations Under Capital Leases (a) 17,539 159,879 181,293 209,279 207,731 - ---------------------------------------------------------------------------------------------------------------------------------- INCOME DATA: Operating Revenues $ 6,873,826 $ 5,876,620 $ 4,471,251 $ 3,767,714 $ 3,834,806 Income/(Loss) Before Extraordinary Loss and Cumulative Effect of Accounting Change, Net of Tax Benefits 265,942 205,295 34,216 (146,753) (129,962) Extraordinary Loss, Net of Tax Benefit -- (233,881) -- -- -- Cumulative Effect of Accounting Change, Net of Tax Benefit (22,432) -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Net Income/(Loss) $ 243,510 $ (28,586) $ 34,216 $ (146,753) $ (129,962) ================================================================================================================================== COMMON SHARE DATA: Basic Earnings/(Loss) Per Common Share: Income/(Loss) Before Extraordinary Loss and Cumulative Effect of Accounting Change, Net of Tax Benefits $ 1.97 $ 1.45 $ 0.26 $ (1.12) $ (1.01) Extraordinary Loss, Net of Tax Benefit -- (1.65) -- -- -- Cumulative Effect of Accounting Change, Net of Tax Benefit (0.17) -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Net Income/(Loss) $ 1.80 $ (0.20) $ 0.26 $ (1.12) $ (1.01) ================================================================================================================================== Fully Diluted Earnings/(Loss) per Common Share: Income/(Loss) Before Extraordinary Loss and Cumulative Effect of Accounting Change, Net of Tax Benefits $ 1.96 $ 1.45 $ 0.26 $ (1.12) $ (1.01) Extraordinary Loss, Net of Tax Benefit -- (1.65) -- -- -- Cumulative Effect of Accounting Change, Net of Tax Benefit (0.17) -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Net Income/(Loss) $ 1.79 $ (0.20) $ 0.26 $ (1.12) $ (1.01) ================================================================================================================================== Basic Common Shares Outstanding (Average) 135,632,126 141,549,860 131,415,126 130,549,760 129,567,708 Fully Diluted Common Shares Outstanding (Average) 135,917,423 141,967,216 132,031,573 130,549,760 129,567,708 Dividends Per Share $ 0.45 $ 0.40 $ 0.10 $ -- $ 0.25 Market Price - Closing (high) (c) $ 23.75 $ 24.25 $ 22.00 $ 17.25 $ 14.25 Market Price - Closing (low) (c) $ 16.80 $ 18.25 $ 13.56 $ 11.69 $ 7.63 Market Price - Closing (end of year) (c) $ 17.63 $ 24.25 $ 20.56 $ 16.00 $ 11.81 Book Value Per Share (end of year) $ 16.27 $ 15.43 $ 15.80 $ 15.63 $ 16.67 Rate of Return Earned on Average Common Equity (%) 11.2 (1.3) 1.6 (7.0) (5.8) Market-to-Book Ratio (end of year) 1.1 1.6 1.3 1.0 0.7 - ---------------------------------------------------------------------------------------------------------------------------------- CAPITALIZATION: Common Shareholders' Equity 46% 47% 40% 34% 34% Preferred Stock (a) (b) 3 4 5 5 6 Long-Term Debt (a) 51 49 55 61 60 - ---------------------------------------------------------------------------------------------------------------------------------- 100% 100% 100% 100% 100% ==================================================================================================================================
(a) Includes portions due within one year. (b) Excludes $100 million of MIPS. (c) Market price information reflects closing prices as presented in the Wall Street Journal. CONSOLIDATED ELECTRIC SALES STATISTICS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------ 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ REVENUES: (THOUSANDS) Residential $ 1,490,487 $1,469,439 $1,517,913 $1,475,363 $1,499,394 Commercial 1,303,351 1,256,126 1,272,969 1,273,146 1,266,449 Industrial 549,808 566,625 560,801 568,913 560,782 Other Utilities 2,663,930 1,884,082 926,056 336,623 329,764 Streetlighting and Railroads 43,889 45,998 45,564 47,682 48,867 Nonfranchised Sales (438) 16,932 24,659 22,479 21,476 Miscellaneous 115,196 96,666 52,357 16,429 47,446 - ------------------------------------------------------------------------------------------------------------------------------ Total Electric 6,166,223 5,335,868 4,400,319 3,740,635 3,774,178 Gas 566,814 461,716 -- -- -- Other 140,789 79,036 70,932 27,079 60,628 - ------------------------------------------------------------------------------------------------------------------------------ Total $ 6,873,826 $5,876,620 $4,471,251 $3,767,714 $3,834,806 ============================================================================================================================== SALES: (kWh - MILLIONS) Residential 13,322 12,940 12,912 12,162 12,099 Commercial 13,751 13,023 12,850 12,477 12,091 Industrial 6,790 7,130 7,050 6,948 6,801 Other Utilities 51,789 42,127 33,575 9,742 8,034 Streetlighting and Railroads 332 333 314 320 318 Nonfranchised Sales -- 107 147 193 241 - ------------------------------------------------------------------------------------------------------------------------------ Total 85,984 75,660 66,848 41,842 39,584 ============================================================================================================================== CUSTOMERS: (AVERAGE) Residential 1,610,154 1,576,068 1,569,932 1,555,013 1,535,134 Commercial 171,218 166,114 164,932 162,500 159,350 Industrial 7,730 7,701 7,721 7,847 7,804 Other 3,969 3,917 3,908 3,890 3,929 - ------------------------------------------------------------------------------------------------------------------------------ Total Electric 1,793,071 1,753,800 1,746,493 1,729,250 1,706,217 Gas 190,998 185,328 -- -- -- - ------------------------------------------------------------------------------------------------------------------------------ Total 1,984,069 1,939,128 1,746,493 1,729,250 1,706,217 ============================================================================================================================== AVERAGE ANNUAL USE PER RESIDENTIAL CUSTOMER (kWh) 8,251 8,233 8,243 7,799 7,898 ============================================================================================================================== AVERAGE ANNUAL BILL PER RESIDENTIAL CUSTOMER $ 923.70 $ 934.94 $ 969.38 $ 946.80 $ 978.72 ============================================================================================================================== AVERAGE REVENUE PER kWh: Residential 11.20(cent) 11.36(cent) 11.76(cent) 12.14(cent) 12.39(cent) Commercial 9.48 9.65 9.91 10.20 10.47 Industrial 8.10 7.95 7.95 8.19 8.25 ==============================================================================================================================
EX-13.2 35 clp2001.txt EXHIBIT 13.2 2001 Annual Report The Connecticut Light and Power Company and Subsidiaries Index Contents Page - -------- ---- Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 1 Report of Independent Public Accountants...................... 13 Consolidated Statements of Income............................. 15 Consolidated Statements of Comprehensive Income............... 15 Consolidated Balance Sheets................................... 16-17 Consolidated Statements of Common Stockholder's Equity........ 18 Consolidated Statements of Cash Flows......................... 19 Notes to Consolidated Financial Statements.................... 20 Selected Consolidated Financial Data.......................... 43 Consolidated Quarterly Financial Data (Unaudited)............. 43 Consolidated Statistics (Unaudited)........................... 44 Preferred Stockholder and Bondholder Information.............. Back Cover The Connecticut Light and Power Company and Subsidiaries - ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- FINANCIAL CONDITION - ------------------- Overview - -------- The Connecticut Light and Power Company's (CL&P or the company), the Northeast Utilities system's (NU system) largest operating subsidiary, earnings before preferred dividends totaled $109.8 million in 2001, compared with $148.1 million in 2000 and a loss of $13.6 million in 1999. Earnings at CL&P decreased primarily because the sale of Millstone three months into 2001 removed a significant source of earnings as compared with 2000. In addition to the sale of Millstone, CL&P's lower earnings also reflect a $21 million reduction in distribution and transmission rates the Connecticut Department of Public Utility Control (DPUC) imposed, which was effective on June 20, 2001. Future Outlook - -------------- In 2001, as a result of completing industry restructuring, CL&P has evolved into an energy delivery company, delivering electricity to customers that is produced by other companies and sometimes bought by customers through intermediaries. As of January 1, 2000, CL&P secured four-year fixed-price contracts with three suppliers to provide power to customers who choose standard offer service. Select Energy, Inc. (Select Energy), an affiliated company, became responsible for 50 percent of CL&P's standard offer load for the entire standard offer period, or approximately 2,000 megawatts annually at peak. Two other unaffiliated suppliers became responsible for the balance of CL&P's standard offer load also for the entire standard offer period. CL&P is fully recovering from retail customers, through reconciling charges, the cost of buying power from these three standard offer suppliers and expects to continue this recovery through the expiration of the contracts on December 31, 2003. As a result, CL&P expects that its financial performance will be relatively stable and predictable in 2002, absent significant adverse events, such as a catastrophic storm. Liquidity - --------- The year 2001 was marked by tremendous inflows of cash into the NU system and CL&P as a result of the securitization of stranded costs and the sale of the Millstone units. CL&P's liquidity benefited from the issuance of $1.4 billion in rate reduction certificates and the receipt of approximately $800 million from the sale of the Millstone units. The largest share of the proceeds from the Millstone sale was used for the repayment of debt. As a result, CL&P's combined short-term and long-term debt other than rate reduction bonds decreased to $824.3 million at the end of 2001 from approximately $1.3 billion at the end of 2000. Capital lease obligations declined to $16 million at the end of 2001 from $129.9 million at the end of 2000. In 2001, CL&P also repaid $100 million of Monthly Income Preferred Securities and reduced the amount outstanding under its accounts receivable facility by $170 million. Of the $1.4 billion of rate reduction certificates issued by CL&P, $1.1 billion was used to buyout or buydown high-cost, long-term purchased-power contracts. The remaining proceeds from the Millstone sale were used primarily to pay state and federal income taxes on the Millstone sale and return equity capital to NU parent. Including both return of capital and common dividends, CL&P paid $60.1 million to NU parent in 2001. Primarily as a result of the Millstone sale and the issuance of rate reduction certificates, CL&P's consolidated capitalization ratio was significantly stronger at the end of 2001 than it was a year earlier. Including capital lease obligations, but excluding rate reduction bonds as these bonds are nonrecourse to CL&P, CL&P's capitalization ratio was 48.5 percent debt, 6.7 percent preferred securities and 44.8 percent common equity at the end of 2001, compared with 63.5 percent debt, 5.0 percent preferred securities and 31.5 percent common equity at the end of 2000. The improved capitalization ratio and lowered overall risk profile resulted in a series of upgrades of the NU system securities through 2001. At the end of 2001, senior debt ratings on CL&P's securities were A2 and A-. Overall, those ratings were the highest for CL&P securities in decades and are expected to continue to enhance CL&P's access to low-cost capital. CL&P's net cash flows provided by operating activities declined to $44.2 million in 2001, compared with $259.9 million in 2000 and $299.4 million in 1999. In 2001, cash flows provided by operating activities, decreased primarily due to the tax impact of the Millstone sale in March 2001 and a reduction in the accounts receivable sold under CL&P's receivables program. The level of common dividends totaled $60.1 million in 2001, as compared to $72 million in 2000 and no common dividends in 1999. The level of preferred dividends decreased to $5.6 million in 2001, compared with $7.4 million in 2000 and $12.8 million in 1999, reflecting CL&P's ongoing effort to reduce preferred stock outstanding. CL&P currently forecasts construction expenditures of up to $244 million for the year 2002. CL&P's dividend policy will depend largely on its earnings and the timing and scope of its expected increasing investment in its distribution and transmission system. In 2002, CL&P may make additional dividend payments to NU to help achieve its target leverage ratio of approximately 55 percent, excluding rate reduction bonds. As of December 31, 2001, CL&P's capitalization included total debt of approximately 48 percent, excluding rate reduction bonds. Beyond 2001, CL&P may need to issue long-term debt if its currently planned transmission construction program is approved by regulators. Business Development and Capital Expenditures - --------------------------------------------- In 2001, NU system companies announced a number of initiatives to significantly increase their investment in regulated electric transmission facilities, particularly in Connecticut. CL&P announced that it planned to construct two new 345,000 volt transmission line facilities totaling approximately 85 miles into Norwalk, Connecticut at a combined cost of approximately $520 million. An application to construct one of the facilities, an approximately 20-mile facility from Bethel, Connecticut to Norwalk, Connecticut, was filed in October 2001 with the Connecticut Siting Council. A decision is expected by the fall of 2002. The application related to a second facility from Middletown, Connecticut to Norwalk, Connecticut will be filed with the Connecticut Siting Council later in 2002. CL&P also has proposed replacing the existing 138,000 volt transmission line beneath Long Island Sound between Norwalk, Connecticut and Northport - Long Island, New York. CL&P, which owns an equal share of the existing line with the Long Island Power Authority, would bear approximately half of the cost of the $80 million project. That project would require Connecticut, New York and federal regulatory approvals. This application was filed with the Connecticut Siting Council in February 2002. If approved, these three projects would increase CL&P's capital expenditures. CL&P's capital investments in electric utility plant totaled $237.4 million in 2001 and $208.2 million in 2000, well above the $132.2 million level of 1998, primarily as a result of increased spending on CL&P's distribution system. CL&P's capital expenditures are expected to total $244 million in 2002 and higher in 2003 through 2005, if the transmission projects are approved. Restructuring and Rate Matters - ------------------------------ Industry restructuring for CL&P was essentially completed in 2000. In June 2001, the DPUC concluded an investigation of potential overearnings by CL&P and ordered a $21.1 million reduction in CL&P's electric transmission and distribution rates and an equal increase in CL&P's Generation Services Charge. The DPUC also implemented an earnings sharing mechanism under which earnings in excess of a 10.3 percent return on equity will be shared equally by shareholders and ratepayers. On September 28, 2001, the DPUC ordered a $21.3 million annual reduction in CL&P's System Benefits Charge as a result of a sharp reduction in decommissioning collections and an equal increase in the Competitive Transition Assessment, effective January 1, 2002. Also, on July 26, 2001, the DPUC authorized CL&P to assess a charge of approximately $0.002 per kilowatt-hour (kWh) from August 2001 through December 2003 to collect approximately $98.5 million of deferred fuel costs. The net result of these decisions was a reduction in CL&P's pretax earnings of $21.1 million beginning June 20, 2001, an acceleration of CL&P's recovery of stranded costs in 2002 and 2003, and further enhancement of CL&P's cash flows. On September 27, 2001, CL&P filed its application with the DPUC for approval of the disposition of the proceeds from the sale of the Millstone units to a subsidiary of Dominion Resources, Inc., Dominion Nuclear Connecticut, Inc. (DNCI). This application described and requested DPUC approval for CL&P's treatment of its share of the proceeds from the sale. A decision from the DPUC is expected in the first half of 2002. Since retail competition began in Connecticut in 2000, an extremely small number of CL&P customers have opted to choose their retail supplier. As of December 31, 2001, virtually all of CL&P's customers were procuring their electricity through CL&P's standard offer service. Through December 2003, 50 percent of CL&P's standard offer service requirements will be purchased from Select Energy with the remaining 50 percent being purchased from two unaffiliated companies. On November 18, 2001, at the request of one of the unaffiliated companies, CL&P filed a request with the DPUC to raise the standard offer service rate from an average of $0.0495 per kWh to $0.0595 per kWh to help promote competition in advance of the January 1, 2004, termination of the standard offer service period and to provide financial relief to the standard offer suppliers. In December 2001, the DPUC rejected CL&P's request, but opened two new dockets to examine the absence of effective retail electric competition in Connecticut and the financial condition of the suppliers. The dockets will include the gathering of information regarding the viability of the standard offer service contracts, their reliability and whether the standard offer service contracts should be linked to market conditions. The DPUC held hearings in February 2002. A decision in this docket which could lead to the re-opening of CL&P's standard offer docket to consider these issues is expected to be issued in the first half of 2002. For further information regarding commitments and contingencies related to restructuring, see Note 10A, "Commitments and Contingencies - Restructuring," to the consolidated financial statements. Regional Transmission Organization - ---------------------------------- The Federal Energy Regulatory Commission (FERC) has required all transmission owning utilities, including CL&P, to voluntarily start forming regional transmission organizations (RTO) or to state why this process has not begun. In July 2001, the FERC stated that the three existing Northeastern Independent System Operators (ISO) (PJM, New York and New England) should work together to form one RTO. The FERC initiated a mediation effort between all interested parties to begin the process of forming such an entity. NU has been discussing with the other transmission owners in the three pool area the potential to form an Independent Transmission Company (ITC). The ITC would be a for-profit entity and would perform certain transmission functions required by the FERC including tariff control, system planning and system operations. The remaining functions required by the FERC would be performed by the ISO and deal with the energy market and short-term reliability. Together, the ITC and ISO form the FERC desired RTO. In January 2002, the New York and New England ISOs announced their intention to form an RTO. NU is working with the other transmission owners in these two power pools to create an ITC. The agreements needed to create the ITC and to define the working relationships among the ISO, the ITC and the transmission owners should be created in 2002 and will allow the ITC to begin operation shortly thereafter. The ITC and/or ISO will have the responsibility to collect the revenue requirements of each transmission owning entity from the market place through FERC approved tariffs. The creation of the ITC and/or RTO will require a FERC rate case and the impact on NU's return on equity as a result of this rate case cannot be estimated at this time. Nuclear Plant Performance and Other Matters - ------------------------------------------- Seabrook: Seabrook operated at a capacity factor of 85.9 percent in 2001. After returning from a scheduled refueling outage in January 2001, Seabrook operated at a capacity factor of 93.4 percent. Seabrook is scheduled to undergo a refueling outage in the spring of 2002. CL&P owns 4.06 percent of Seabrook. Vermont Yankee: In August 2001, the owners of Vermont Yankee announced they would sell the unit to an unaffiliated company for $180 million, including $145 million for the plant and materials and supplies and $35 million for the nuclear fuel. CL&P owns 9.5 percent of the unit, and under the terms of the sale, will continue to buy 9.5 percent of the plant's output through March 2012 at a range of fixed prices. The sale requires several regulatory approvals and is scheduled to close during the first half of 2002. Millstone: On March 31, 2001, CL&P and Western Massachusetts Electric Company (WMECO) consummated the sale of Millstone 1 and 2 to DNCI. Additionally, CL&P, Public Service Company of New Hampshire, and WMECO sold their ownership interests in Millstone 3 to DNCI. On October 5, 2001, NU issued a report, following an extensive search, concerning two missing fuel pins at the retired Millstone 1 nuclear unit, which was sold to DNCI on March 31, 2001. As of December 31, 2001, costs related to this search for CL&P totaled $5.8 million. The report concluded that the pins are currently located in one of four facilities licensed to store low or high-level nuclear waste and that they are not a threat to public health and safety. A follow-up review by the Nuclear Regulatory Commission (NRC) commenced shortly after the report was filed and resulted in a NRC sponsored public meeting on January 15, 2002. In February 2002, the NRC issued a written inspection report which concluded that NU's investigation was thorough and complete, and that its conclusions were reasonable and supportable. Nuclear Decommissioning - ----------------------- In connection with the aforementioned sale of the Millstone units, DNCI has agreed to assume responsibility for decommissioning those units. For further information regarding nuclear decommissioning, see Note 11, "Nuclear Decommissioning and Plant Closure Costs," to the consolidated financial statements. Spent Nuclear Fuel Disposal Costs - --------------------------------- The United States Department of Energy (DOE) originally was scheduled to begin accepting delivery of spent nuclear fuel on January 31, 1998. However, delays in confirming the suitability of a permanent storage site continually have postponed plans for the DOE's long-term storage and disposal site. Extended delays or a default by the DOE could lead to consideration of costly alternatives. CL&P has the primary responsibility for the interim storage of its spent nuclear fuel prior to divestiture of its remaining operating nuclear units, Seabrook and Vermont Yankee, as well as the three nuclear units currently undergoing decommissioning, Connecticut Yankee, Maine Yankee and Yankee Rowe. For further information regarding spent nuclear fuel disposal costs, see Note 10C, "Commitments and Contingencies - Spent Nuclear Fuel Disposal Costs," to the consolidated financial statements. Other Matters - ------------- Critical Accounting Policies: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates, assumptions and at times difficult, subjective or complex judgments. Accounting policies related to the recoverability of certain regulatory assets and the assumptions used in developing the pension and postretirement benefit obligations are the accounting principles that management believes are critical and could have a significant impact on CL&P's consolidated financial statements. Regulatory Assets: The accounting policies of the NU system's regulated operating companies historically reflect the effects of the rate-making process in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." Through its cost-of-service rate regulated transmission and distribution business, CL&P is currently recovering its investments in long-lived assets, including regulatory assets, and management believes that the application of SFAS No. 71 to that portion of their business continues to be appropriate. Management must reaffirm this conclusion at each balance sheet date. If, as a result of a change in circumstances, it is determined that any portion of these investments is no longer recoverable under SFAS No. 71, that portion would be written off. Such a write-off could have a material impact on CL&P's consolidated financial statements. Management currently believes that all long-lived assets, including regulatory assets, are recoverable. Pension and Postretirement Benefit Obligations: CL&P participates in a uniform noncontributory defined benefit retirement plan covering substantially all regular NU system employees and also provides certain health care benefits, primarily medical and dental, and life insurance benefits through a benefit plan to retired employees. For each of these plans, the development of the benefit obligation, fair value of plan assets, funded status, and net periodic benefit credit or cost is based on several significant assumptions. These assumptions primarily relate to the application of a discount rate, expected long-term rate of return and other trend rates. If these assumptions were changed, the resultant change in benefit obligations, fair values of plan assets, funded status, and net periodic benefit credits or costs could have a material impact on CL&P's consolidated financial statements. For further information regarding these types of activities, see Note 1G, "Regulatory Accounting and Assets," and Note 7, "Pension Benefits and Postretirement Benefits Other Than Pensions," to the consolidated financial statements. Environmental Matters: The NU system, including CL&P, is subject to environmental laws and regulations structured to mitigate or remove the effect of past operations and to improve or maintain the quality of the environment. For further information regarding environmental matters, see Note 10B, "Commitments and Contingencies - Environmental Matters," to the consolidated financial statements. Other Commitments and Contingencies: For further information regarding other commitments and contingencies, see Note 10, "Commitments and Contingencies," to the consolidated financial statements. Contractual Obligations and Commercial Commitments: Aggregated information regarding CL&P's contractual obligations and commercial commitments as of December 31, 2001, is summarized as follows: ------------------------------------------------------------------------------ (Millions of Dollars) 2002 2003 2004 2005 2006 Totals ------------------------------------------------------------------------------ Capital leases $ 2.4 $ 2.4 $ 2.4 $ 2.4 $ 2.4 $ 12.0 Operating leases 10.9 9.3 8.2 7.5 6.4 42.3 Long-term contractual obligations 227.0 231.3 234.1 237.3 237.6 1,167.3 ------------------------------------------------------------------------------ Totals $240.3 $243.0 $244.7 $247.2 $246.4 $1,221.6 ------------------------------------------------------------------------------ For further information regarding CL&P's contractual obligations and commercial commitments, see Note 3, "Leases," and Note 10E, "Long-Term Contractual Arrangements," to the consolidated financial statements. Forward Looking Statements: This discussion and analysis includes forward looking statements, which are statements of future expectations and not facts including, but not limited to, statements regarding future earnings, refinancings, the use of proceeds from restructuring, and the recovery of operating costs. Words such as estimates, expects, anticipates, intends, plans, and similar expressions identify forward looking statements. Actual results or outcomes could differ materially as a result of further actions by state and federal regulatory bodies, competition and industry restructuring, changes in economic conditions, changes in historical weather patterns, changes in laws, developments in legal or public policy doctrines, technological developments, and other presently unknown or unforeseen factors. RESULTS OF OPERATIONS - --------------------- The components of significant income statement variances for the past two years are provided in the table below. Income Statement Variances (Millions of Dollars) 2001 over/(under) 2000 2000 over/(under) 1999 ---------------------- ---------------------- Amount Percent Amount Percent ------ ------- ------ ------- Operating Revenues $(290) (10)% $483 20% ----- ---- ---- --- Operating Expenses: Fuel, purchased and net interchange power (151) (9) 738 80 Other operation (102) (25) (68) (14) Maintenance (30) (22) (82) (38) Depreciation (21) (18) (76) (39) Amortization of regulatory assets, net 649 (a) (350) (78) Taxes other than income taxes (7) (5) (37) (21) Gain on sale of utility plant (522) - 286 100 ----- ---- ---- --- Total operating expenses (184) (7) 411 19 ----- ---- ---- --- Operating income (106) (29) 72 24 Other income/(loss), net 75 (a) 65 74 Interest expense, net 22 23 (40) (29) ----- ---- ---- --- Income before income tax expense (53) (22) 177 (a) Income tax expense (15) (15) 15 18 ----- ---- ---- --- Net income/(loss) $ (38) (26)% $162 (a) ===== ==== ==== === (a) Percent greater than 100. Operating Revenues Total revenues decreased by $290 million or 10 percent in 2001, primarily due to lower wholesale revenues ($325 million) and lower transmission revenues ($19 million), partially offset by higher retail revenues ($57 million). Wholesale revenues were lower primarily as a result of the sale of the Millstone units at the end of the first quarter of 2001 and lower sales of capacity and energy. The lower transmission revenues were partially offset by lower transmission expenses. Retail revenues increased primarily due to higher retail sales ($43 million) and the recovery of previously deferred fuel costs ($19 million), partially offset by a rate decrease ($5 million). Retail sales increased 2.4 percent compared to 2000. Operating revenues increased by $483 million or 20 percent in 2000, primarily due to higher wholesale revenues ($510 million), primarily as a result of the sale of the output from Millstone 2 and 3, and the amortization of the amount related to the transfer of certain hydroelectric generation assets ($25 million) partially offset by lower retail revenues ($51 million). Retail revenues decreased primarily as a result of a 5 percent retail rate decrease ($108 million), partially offset by higher retail sales ($27 million) and by the impact of Millstone 2 being returned to rate base ($30 million). Retail sales increased by 0.4 percent in 2000. Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense decreased in 2001, primarily due to lower purchased power costs resulting from the buydown and buyout of various cogeneration contracts and lower nuclear fuel expense. Fuel, purchased and net interchange power expense increased in 2000, primarily due to the transition, under industry restructuring, to purchasing full requirements for customers from standard offer suppliers, in addition to the remaining fuel costs of the nuclear units and cogenerators. Other Operation and Maintenance Other operation and maintenance (O&M) expenses decreased by $132 million in 2001, primarily due to lower nuclear expenses ($95 million) as a result of the sale of the Millstone units at the end of the first quarter of 2001, lower administrative and general expenses ($22 million), lower transmission expenses ($16 million), and lower fossil/hydro expenses ($3 million), partially offset by higher distribution expenses ($4 million). Other O&M expenses decreased in 2000, primarily due to lower spending at the nuclear units ($56 million), the decommissioning status of Millstone 1 ($14 million), lower expenses due to the sale of certain fossil generation assets ($65 million), and lower administrative and general expenses ($26 million), partially offset by higher customer service expenses ($39 million). Depreciation Depreciation expense decreased in 2001, primarily due to the elimination of decommissioning expenses as a result of the sale of the Millstone units at the end of the first quarter of 2001. Depreciation expense decreased in 2000, primarily due to the effect of discontinuing SFAS No. 71 for the generation portion of the business and the resulting reclassification of depreciable nuclear plant balances to regulatory assets ($70 million), the sale of certain fossil generation assets and the transfer of certain hydroelectric generation assets. Amortization of Regulatory Assets, Net Amortization of regulatory assets, net increased in 2001, primarily due to the amortization related to the gain on the sale of the Millstone units ($524 million) and higher amortization related to securitized assets ($68 million), stranded costs ($30 million), and other amortizations related to restructuring ($27 million). Amortization of regulatory assets, net decreased in 2000, primarily due to changes in amortization levels as a result of industry restructuring ($128 million), the amortization in 1999 of the gain on the sale of fossil plants ($286 million), and the completion of the amortization of CL&P's cogeneration deferral in the first quarter of 1999 ($6 million). These decreases were partially offset by higher amortization associated with the reclassified nuclear plant balances ($70 million). Taxes Other Than Income Taxes Taxes other than income taxes decreased in 2001, primarily due to settlement of a property tax appeal with the City of Meriden in 2001 ($5 million) and the reduction in property tax due to the sale of the Millstone units ($12 million), partially offset by higher gross earnings tax paid on higher revenues ($8 million). Taxes other than income taxes decreased in 2000, primarily due to lower Connecticut gross earnings tax ($18 million) and lower local property taxes ($7 million). Gain on Sale of Utility Plant CL&P recorded a gain on the sale of its ownership share in the Millstone units. A corresponding amount of amortization expense was recorded in 2001. CL&P recorded a gain on the sale of its fossil generation assets in 1999. Other Income/(Loss), Net Other income/(loss), net increased in 2001, primarily due to the gain on the sale of CL&P's ownership share in the Millstone units ($29 million), the settlement, in 2000, of Millstone-related litigation, net of insurance proceeds ($9 million), a write-off associated with the former CMEEC nuclear entitlement ($6 million) in 2000 and higher interest income in 2001, including the allowed return on deferred fuel balances ($10 million), interest on an IRS tax settlement ($10 million), and interest income related to the City of Meriden property tax refund ($2 million). Other income/(loss), net increased in 2000, primarily due to the 1999 write-off of stranded costs in relation to the treatment of market-based contracts ($15 million). Interest Expense, Net Interest expense, net increased in 2001, primarily due to interest associated with the issuance of rate reduction certificates in 2001, partially offset by lower interest on other long-term debt resulting from reacquisitions and retirements of long-term debt in 2001. Interest expense, net decreased in 2000, primarily due to reacquisitions and retirements of long-term debt in 2000. - ------------------------------------------------------------------------------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - ------------------------------------------------------------------------------- To the Board of Directors of The Connecticut Light and Power Company: We have audited the accompanying consolidated balance sheets of The Connecticut Light and Power Company (a Connecticut corporation and a wholly owned subsidiary of Northeast Utilities) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income, common stockholder's equity and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Connecticut Light and Power Company and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Hartford, Connecticut January 22, 2002 THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------------ For the Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------ (Thousands of Dollars) Operating Revenues................................... $ 2,646,123 $ 2,935,922 $ 2,452,855 ------------------------------------------ Operating Expenses: Operation - Fuel, purchased and net interchange power....... 1,514,418 1,665,806 927,989 Other........................................... 310,477 412,230 480,138 Maintenance........................................ 106,228 136,141 217,961 Depreciation....................................... 96,212 117,305 193,776 Amortization of regulatory assets, net............. 746,693 97,315 447,776 Taxes other than income taxes...................... 130,656 137,846 174,884 Gain on sale of utility plant...................... (521,590) - (286,477) ------------------------------------------ Total operating expenses......................... 2,383,094 2,566,643 2,156,047 ------------------------------------------ Operating Income..................................... 263,029 369,279 296,808 Other Income/(Loss), Net............................. 52,804 (22,224) (86,787) ------------------------------------------ Income Before Interest and Income Tax Expense........ 315,833 347,055 210,021 ------------------------------------------ Interest Expense: Interest on long-term debt......................... 59,724 89,841 127,533 Interest on rate reduction bonds................... 60,644 - - Other interest..................................... 761 9,025 10,918 ------------------------------------------ Interest expense, net............................ 121,129 98,866 138,451 ------------------------------------------ Income Before Income Tax Expense..................... 194,704 248,189 71,570 Income Tax Expense................................... 84,901 100,054 85,138 ------------------------------------------ Net Income/(Loss).................................... $ 109,803 $ 148,135 $ (13,568) ========================================== CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Net Income/(Loss).................................... $ 109,803 $ 148,135 $ (13,568) ------------------------------------------ Other comprehensive (loss)/income, net of tax: Unrealized (losses)/gains on securities............ (439) 90 38 ------------------------------------------ Other comprehensive (loss)/income, net of tax... (439) 90 38 ------------------------------------------ Comprehensive Income/(Loss).......................... $ 109,364 $ 148,225 $ (13,530) ==========================================
The accompanying notes are an integral part of these financial statements. THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------- At December 31, 2001 2000 - --------------------------------------------------------------------------------------------- (Thousands of Dollars) ASSETS - ------ Current Assets: Cash and cash equivalents.......................... $ 773 $ 5,461 Investments in securitizable assets................ 36,367 98,146 Notes receivable from affiliated companies......... 77,200 38,000 Receivables, less accumulated provision for uncollectible accounts of $525 in 2001 and $300 in 2000.................................. 247,801 29,245 Accounts receivable from affiliated companies...... 22,134 103,763 Unbilled revenues.................................. 7,492 - Fuel, materials and supplies, at average cost...... 33,085 36,332 Prepayments and other.............................. 17,703 32,291 ---------- ---------- 442,555 343,238 ---------- ---------- Property, Plant and Equipment: Electric utility.................................... 3,127,548 5,756,098 Less: Accumulated provision for depreciation..... 1,236,638 4,210,429 ---------- ---------- 1,890,910 1,545,669 Construction work in progress....................... 134,964 128,835 Nuclear fuel, net................................... 3,299 79,672 ---------- ---------- 2,029,173 1,754,176 ---------- ---------- Deferred Debits and Other Assets: Regulatory assets................................... 1,877,191 1,835,967 Prepaid pension..................................... 233,692 170,672 Nuclear decommissioning trusts, at market........... 6,231 536,912 Other .............................................. 138,715 123,233 ---------- ---------- 2,255,829 2,666,784 ---------- ---------- Total Assets.......................................... $4,727,557 $4,764,198 ========== ==========
The accompanying notes are an integral part of these financial statements. THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------ At December 31, 2001 2000 - ------------------------------------------------------------------------------------------ (Thousands of Dollars) LIABILITIES AND CAPITALIZATION - ------------------------------ Current Liabilities: Notes payable to banks................................ $ - $ 115,000 Long-term debt and preferred stock - current portion.. - 160,000 Accounts payable...................................... 132,593 153,944 Accounts payable to affiliated companies.............. 85,057 122,106 Accrued taxes......................................... 34,823 32,901 Accrued interest...................................... 10,369 13,995 Other................................................. 62,841 161,193 ---------- ---------- 325,683 759,139 ---------- ---------- Rate Reduction Bonds.................................... 1,358,653 - ---------- ---------- Minority Interest in Consolidated Subsidiary............ - 100,000 ---------- ---------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes..................... 820,444 977,439 Accumulated deferred investment tax credits........... 95,996 99,771 Decommissioning obligation - Millstone 1.............. - 580,320 Deferred contractual obligations...................... 141,497 160,590 Other................................................. 267,900 165,307 ---------- ---------- 1,325,837 1,983,427 ---------- ---------- Capitalization: Long-Term Debt........................................ 824,349 1,072,688 ---------- ---------- Preferred Stock....................................... 116,200 116,200 ---------- ---------- Common Stockholder's Equity: Common stock, $10 par value - authorized 24,500,000 shares; 7,584,884 shares outstanding in 2001 and 2000................................... 75,849 75,849 Capital surplus, paid in............................ 414,018 413,192 Retained earnings................................... 286,901 243,197 Accumulated other comprehensive income.............. 67 506 ---------- ---------- Common Stockholder's Equity........................... 776,835 732,744 ---------- ---------- Total Capitalization.................................... 1,717,384 1,921,632 ---------- ---------- Commitments and Contingencies (Note 10) Total Liabilities and Capitalization.................... $4,727,557 $4,764,198 ========== ==========
The accompanying notes are an integral part of these financial statements. THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
- ----------------------------------------------------------------------------------------------------------- Accumulated Capital Other Common Surplus, Retained Comprehensive Total Stock Paid In Earnings Income/(Loss) (a) - ----------------------------------------------------------------------------------------------------------- (Thousands of Dollars) Balance at January 1, 1999............. $ 122,229 $ 664,156 $ 210,108 $ 378 $ 996,871 Net loss for 1999.................... (13,568) (13,568) Cash dividends on preferred stock.... (12,832) (12,832) Capital stock expenses, net.......... 1,442 1,442 Allocation of benefits - ESOP (b).... (30,454) (30,454) Other comprehensive income........... 38 38 --------- ---------- -------- ------------ ---------- Balance at December 31, 1999........... 122,229 665,598 153,254 416 941,497 Net income for 2000.................. 148,135 148,135 Cash dividends on preferred stock.... (7,402) (7,402) Cash dividends on common stock....... (72,014) (72,014) Redemption of preferred stock........ (749) (749) Repurchase of common stock........... (46,380) (253,620) (300,000) Capital stock expenses, net.......... 1,963 1,963 Allocation of benefits - ESOP (b).... 21,224 21,224 Other comprehensive income........... 90 90 --------- ---------- -------- ------------ ---------- Balance at December 31, 2000........... 75,849 413,192 243,197 506 732,744 Net income for 2001.................. 109,803 109,803 Cash dividends on preferred stock.... (5,559) (5,559) Cash dividends on common stock....... (60,072) (60,072) Capital stock expenses, net.......... 826 826 Allocation of benefits - ESOP (b).... (468) (468) Other comprehensive loss............. (439) (439) --------- ---------- -------- ------------ ---------- Balance at December 31, 2001........... $ 75,849 $ 414,018 $ 286,901 $ 67 $ 776,835 ========= ========== ========= ============== ==========
(a) The company has a dividend restriction as well as two tests it must meet before it can pay out any dividends. The most restrictive of which limits the company's ability to pay out approximately $253.8 of equity at December 31, 2001. (b) In June 1999, CL&P paid NU parent $30.5 million for NU shares issued from 1992 through 1998 on behalf of its employees in accordance with NU's 401(k) plan. This transaction resulted in a reduction of the NU parent loss and a tax benefit to CL&P. The amount in 2000 represents the remaining previously unallocated 1993 through 1999 NU parent losses. The accompanying notes are an integral part of these financial statements. THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------- (Thousands of Dollars) Operating Activities: Net income/(loss)............................................. $ 109,803 $ 148,135 $ (13,568) Adjustments to reconcile to net cash flows provided by operating activities: Depreciation................................................ 96,212 117,305 193,776 Deferred income taxes and investment tax credits, net....... (144,559) 5,672 (140,459) Amortization of regulatory assets, net...................... 746,693 97,315 447,776 Tax benefit for 1993-1999 from reduction in NU parent losses............................... - 21,461 - Gain on sale of utility plant............................... (521,590) - (286,477) Net other uses of cash...................................... (132,911) (69,454) (106,396) Changes in working capital: Receivables and unbilled revenues, net...................... (144,419) (109,938) 837 Fuel, materials and supplies................................ 3,247 1,271 34,379 Accounts payable............................................ (58,400) 171,729 (49,477) Accrued taxes............................................... 1,922 (136,313) 149,818 Investments in securitizable assets......................... 61,779 9,474 52,633 Other working capital (excludes cash)....................... 26,440 3,204 16,585 ----------- --------- --------- Net cash flows provided by operating activities................. 44,217 259,861 299,427 ----------- --------- --------- Investing Activities: Investments in regulated plant: Electric utility plant........................................ (237,423) (208,249) (180,982) Nuclear fuel................................................ (1,992) (35,709) (26,198) ----------- --------- --------- Net cash flows used for investments in regulated plant........ (239,415) (243,958) (207,180) Investment in NU system Money Pool............................ (39,200) (38,000) 6,600 Investments in nuclear decommissioning trusts................. (74,866) (25,133) (54,582) Other investment activities, net.............................. (10,164) 10,246 (355) Net proceeds from the sale of utility plant................... 827,681 686,807 516,912 Buyout/buydown of IPP contracts............................... (1,029,008) - - ----------- --------- --------- Net cash flows (used in)/provided by investing activities....... (564,972) 389,962 261,395 ----------- --------- --------- Financing Activities: Repurchase of common stock.................................... - (300,000) - Issuance of rate reduction bonds.............................. 1,438,400 - - Retirement of rate reduction bonds............................ (79,747) - - Net (decrease)/increase in short-term debt.................... (115,000) 13,300 91,700 Reacquisitions and retirements of long-term debt.............. (416,155) (179,071) (620,010) Reacquisitions and retirements of preferred stock............. - (99,539) (19,750) Retirement of monthly income preferred securities............. (100,000) - - Retirement of capital lease obligation........................ (145,800) - - Cash dividends on preferred stock............................. (5,559) (7,402) (12,832) Cash dividends on common stock................................ (60,072) (72,014) - ----------- --------- --------- Net cash flows provided by/(used in) financing activities....... 516,067 (644,726) (560,892) ----------- --------- --------- Net (decrease)/increase in cash and cash equivalents ........... (4,688) 5,097 (70) Cash and cash equivalents - beginning of year................... 5,461 364 434 ----------- --------- --------- Cash and cash equivalents - end of year......................... $ 773 $ 5,461 $ 364 =========== ========= ========= Supplemental Cash Flow Information: Cash paid during the year for: Interest, net of amounts capitalized.......................... $ 120,645 $ 96,735 $ 142,398 =========== ========= ========= Income taxes.................................................. $ 230,144 $ 226,380 $ 19,754 =========== ========= ========= Increase in obligations: Niantic Bay Fuel Trust........................................ $ 1,754 $ 6,535 $ 4,752 ============ ========= =========
The accompanying notes are an integral part of these financial statements. - ------------------------------------------------------------------------------- NOTES TO C0NSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. About The Connecticut Light and Power Company The Connecticut Light and Power Company (CL&P or the company) along with the Public Service Company of New Hampshire (PSNH), Western Massachusetts Electric Company (WMECO), North Atlantic Energy Corporation (NAEC), Holyoke Water Power Company (HWP), and Yankee Energy System, Inc. (Yankee) are the operating companies comprising the Northeast Utilities system (NU system) and are wholly owned by Northeast Utilities (NU). The NU system furnishes franchised retail electric service in Connecticut, New Hampshire and western Massachusetts through CL&P, PSNH and WMECO. NAEC sells all of its entitlement to the capacity and output of the Seabrook Station nuclear unit (Seabrook) to PSNH under the terms of two life-of- unit, full cost recovery contracts (Seabrook Power Contracts). HWP also is engaged in the production of electric power. Yankee, the parent company of Yankee Gas Services Company (Yankee Gas), is Connecticut's largest natural gas distribution system. NU is registered with the Securities and Exchange Commission (SEC) as a holding company under the Public Utility Holding Company Act of 1935 (1935 Act) and the NU system, including CL&P, is subject to the provisions of the 1935 Act. Arrangements among the NU system companies, outside agencies and other utilities covering interconnections, interchange of electric power and sales of utility property are subject to regulation by the Federal Energy Regulatory Commission (FERC) and/or the SEC. CL&P is subject to further regulation for rates, accounting and other matters by the FERC and the Connecticut Department of Public Utility Control (DPUC). Several wholly owned subsidiaries of NU provide support services for the NU system companies, including CL&P, and, in some cases, for other New England utilities. Northeast Utilities Service Company (NUSCO) provides centralized accounting, administrative, engineering, financial, information resources, legal, operational, planning, purchasing, and other services to the NU system companies, including CL&P. North Atlantic Energy Service Corporation has operational responsibility for Seabrook. In addition, CL&P has established two special purpose subsidiaries, one whose operations are solely related to the issuance of rate reduction certificates and one whose business consists solely of the purchase and resale of receivables. B. Presentation The consolidated financial statements of CL&P include the accounts of all subsidiaries. Intercompany transactions have been eliminated in consolidation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications of prior years' data have been made to conform with the current year's presentation. All transactions among affiliated companies are on a recovery of cost basis which may include amounts representing a return on equity and are subject to approval by various federal and state regulatory agencies and the DPUC. C. New Accounting Standards Asset Retirement Obligations: In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and applies to (a) all entities and (b) legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS No. 143 is effective for CL&P's 2003 calendar year. Upon adoption of SFAS No. 143, there may be an impact on CL&P's consolidated financial statements which management has not estimated at this time. Long-Lived Assets: In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement modifies financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 is effective for CL&P's 2002 calendar year. Currently, management does not expect the adoption of SFAS No. 144 to have a material impact on CL&P's consolidated financial statements. D. Investments and Jointly Owned Electric Utility Plant Regional Nuclear Generating Companies: CL&P owns common stock in four regional nuclear companies (Yankee Companies). CL&P's ownership interests in the Yankee Companies at December 31, 2001 and 2000, which are accounted for on the equity method due to CL&P's ability to exercise significant influence over their operating and financial policies are 34.5 percent of the Connecticut Yankee Atomic Power Company (CYAPC), 24.5 percent of the Yankee Atomic Electric Company (YAEC), 12 percent of the Maine Yankee Atomic Power Company (MYAPC), and 9.5 percent of the Vermont Yankee Nuclear Power Corporation (VYNPC). CL&P's total equity investment in the Yankee Companies at December 31, 2001 and 2000, is $34.7 million and $41.4 million, respectively. Each Yankee Company owns a single nuclear generating unit. However, VYNPC is the only unit still in operation at December 31, 2001. Seabrook: CL&P has a 4.06 percent joint ownership interest in Seabrook, a 1,148 megawatt nuclear generating unit. CL&P expects to sell its joint ownership interest in Seabrook, jointly with NAEC, around the end of 2002 through a public auction. Plant-in-service and the accumulated provision for depreciation for CL&P's share of Millstone 2 and 3 and Seabrook are as follows: --------------------------------------------------------------------- At December 31, 2001 2000 --------------------------------------------------------------------- (Millions of Dollars) Plant-in-service: Millstone 2.............................. $ - $ 779.7 Millstone 3.............................. - 1,924.7 Seabrook................................. 174.7 174.7 Accumulated provision for depreciation: Millstone 2.............................. $ - $ 779.1 Millstone 3.............................. - 1,815.0 Seabrook................................. 164.8 164.0 --------------------------------------------------------------------- E. Depreciation The provision for depreciation is calculated using the straight- line method based on the estimated remaining useful lives of depreciable utility plant-in-service, adjusted for salvage value and removal costs, as approved by the appropriate regulatory agency where applicable. Depreciation rates are applied to plant-in- service from the time they are placed in service. When plant is retired from service, the original cost of the plant, including costs of removal less salvage, is charged to the accumulated provision for depreciation. The depreciation rates for the several classes of electric plant-in-service are equivalent to a composite rate of 3.1 percent in 2001, 3 percent in 2000 and 3.3 percent in 1999. As a result of discontinuing the application of SFAS No. 71 "Accounting for the Effects of Certain Types of Regulation," for CL&P's generation business in 1999, including CL&P's ownership interest in Seabrook, the company recorded a charge to accumulated depreciation for the nuclear plant in excess of the estimated fair market value at the time in the amount of $1.7 billion and a corresponding regulatory asset was created. F. Revenues Revenues are based on authorized rates applied to each customer's use of energy. In general, rates can be changed only through a formal proceeding before the DPUC. Regulatory commissions also have authority over the terms and conditions of nontraditional rate- making arrangements. At the end of each accounting period, CL&P accrues a revenue estimate for the amount of energy delivered but unbilled. G. Regulatory Accounting and Assets The accounting policies of CL&P conform to accounting principles generally accepted in the United States applicable to rate- regulated enterprises and historically reflect the effects of the rate-making process in accordance with SFAS No. 71. CL&P's transmission and distribution business continues to be cost- of-service rate regulated, and management believes the application of SFAS No. 71 continues to be appropriate. Management also believes it is probable that CL&P will recover its investments in long-lived assets, including regulatory assets. Stranded costs for CL&P will be recovered through a transition charge over a 12-year period. In addition, the regulatory assets in the following table are earning a return. The components of CL&P's regulatory assets are as follows: --------------------------------------------------------------------- At December 31, 2001 2000 --------------------------------------------------------------------- (Millions of Dollars) Recoverable nuclear costs............... $ 158.1 $1,122.4 Securitized regulatory assets........... 1,356.3 - Income taxes, net....................... 154.2 371.9 Unrecovered contractual obligations..... 2.1 171.8 Recoverable energy costs, net........... 80.1 85.2 Other................................... 126.4 84.7 --------------------------------------------------------------------- Totals.................................. $1,877.2 $1,836.0 --------------------------------------------------------------------- As a result of discontinuing the application of SFAS No. 71 for CL&P's generation business, the company had an unamortized balance ($1.21 billion and $1.35 billion), included in recoverable nuclear costs at December 31, 2001 and 2000, respectively. These amounts were the result of reclassified nuclear plant in excess of its estimated fair market value from plant to regulatory assets, which took place in 1999. This balance is offset by the unamortized balance of the deferred credit on the transfer of assets, in March 2000, to Northeast Generation Company (NGC) of approximately $541.5 million. Since the transfer occurred between CL&P and NGC, two affiliates, the deferred credit is eliminated in consolidation. In March 2001, CL&P sold its ownership interest in the Millstone units. The gain on this sale in the amount of approximately $521.6 million was used to offset recoverable nuclear costs, resulting in an unamortized balance of $148.9 million, after the current year's amortization expense. Also included in that regulatory asset component for 2001 and 2000 are $9.2 million and $344.3 million, respectively, which includes Millstone 1 recoverable nuclear costs relating to the recoverable portion of the undepreciated plant and related assets ($9.2 million and $51.2 million, respectively) and the decommissioning and closure obligations ($293.1 million in 2000). CL&P issued $1.4 billion in rate reduction certificates and used $1.1 billion of those proceeds to buyout or buydown certain contracts with independent power producers. The majority of the payments to buyout or buydown these contracts were recorded as securitized regulatory assets. CL&P also securitized a portion of its SFAS No. 109 regulatory asset. CL&P, under the terms of contracts with the Yankee Companies, is responsible for its proportionate share of the remaining costs of the units, including decommissioning. These amounts are recorded as unrecovered contractual obligations. A portion of these obligations was securitized in 2001 and is included in securitized regulatory assets. CL&P, under the Energy Policy Act of 1992 (Energy Act), is assessed for its proportionate share of the costs of decontaminating and decommissioning uranium enrichment plants owned by the United States Department of Energy (DOE) (D&D Assessment). The Energy Act requires that regulators treat D&D Assessments as a reasonable and necessary current cost of fuel, to be fully recovered in rates like any other fuel cost. CL&P is currently recovering these costs through rates. As of December 31, 2001 and 2000, the CL&P's total D&D Assessment deferrals were $21.1 million and $24.1 million, respectively, and have been recorded as recoverable energy costs, net. In addition, through December 31, 1999, CL&P had an energy adjustment clause under which fuel prices above or below base- rate levels were charged to or credited to customers. Coincident with the start of restructuring, the energy adjustment clause was terminated. Energy costs deferred and not yet collected under the energy adjustment clause amounted to $59 million and $61.1 million at December 31, 2001 and 2000, respectively, which have been recorded as recoverable energy costs, net. H. Income Taxes The tax effect of temporary differences (differences between the periods in which transactions affect income in the financial statements and the periods in which they affect the determination of taxable income) is accounted for in accordance with the rate- making treatment of the applicable regulatory commissions. The tax effect of temporary differences, including timing differences accrued under previously approved accounting standards, that give rise to the accumulated deferred tax obligation, including the impact of the sale of the Millstone units, is as follows: --------------------------------------------------------------------- At December 31, 2001 2000 --------------------------------------------------------------------- (Millions of Dollars) Accelerated depreciation and other plant-related differences........ $279.1 $271.2 Regulatory assets: Nuclear stranded investment............ 276.1 528.8 Securitized contract termination costs and other...................... 63.4 - Income tax gross-up.................... 134.4 142.6 Other.................................... 67.4 34.8 --------------------------------------------------------------------- Totals................................... $820.4 $977.4 --------------------------------------------------------------------- I. Cash and Cash Equivalents Cash and cash equivalents includes cash on hand and short-term cash investments which are highly liquid in nature and have original maturities of three months or less. J. Other Income/(Loss), Net The components of CL&P's other income/(loss), net items are as follows: --------------------------------------------------------------------- For the Years Ended December 31, --------------------------------------------------------------------- 2001 2000 1999 --------------------------------------------------------------------- (Millions of Dollars) Gain related to Millstone sale.................. $29.5 $ - $ - Other nuclear-related costs....... - (14.1) (53.0) Other, net........................ 23.3 (8.1) (33.8) --------------------------------------------------------------------- Totals............................ $52.8 $(22.2) $(86.8) --------------------------------------------------------------------- 2. SHORT-TERM DEBT Limits: The amount of short-term borrowings that may be incurred by CL&P is subject to periodic approval by either the SEC under the 1935 Act or by the respective state regulators. Currently, SEC authorization allows CL&P to incur total short-term borrowings up to a maximum of $375 million. In addition, the charter of CL&P contains preferred stock provisions restricting the amount of unsecured debt the company may incur. As of December 31, 2001, CL&P's charter permits CL&P to incur $535 million of additional unsecured debt. Credit Agreement: On November 16, 2001, CL&P, PSNH, WMECO, and Yankee Gas entered into a 364-day unsecured revolving credit facility for $350 million. This facility replaced a $250 million facility for CL&P and WMECO which expired on November 16, 2001. CL&P may draw up to $150 million under the facility, subject to the maximum facility limit of $350 million. Unless extended, the credit facility will expire on November 15, 2002. At December 31, 2001 and 2000, there were no borrowings and $115 million, respectively, in borrowings under these facilities for CL&P. Under the aforementioned credit agreement, CL&P may borrow at fixed or variable rates plus an applicable margin based upon certain debt ratings, as rated by the lower of Standard and Poor's or Moody's Investors Service. The weighted average interest rate on CL&P's notes payable to banks outstanding on December 31, 2000, was 8.41 percent. This credit agreement provides that CL&P must comply with certain financial and nonfinancial covenants as are customarily included in such agreements, including, but not limited to, consolidated debt ratios and interest coverage ratios. CL&P currently is and expects to remain in compliance with these covenants. Money Pool: Certain subsidiaries of NU, including CL&P, are members of the Northeast Utilities System Money Pool (Pool). The Pool provides a more efficient use of the cash resources of the NU system and reduces outside short-term borrowings. NUSCO administers the Pool as agent for the member companies. Short-term borrowing needs of the member companies are first met with available funds of other member companies, including funds borrowed by NU parent. NU parent may lend to the Pool but may not borrow. Funds may be withdrawn from or repaid to the Pool at any time without prior notice. Investing and borrowing subsidiaries receive or pay interest based on the average daily federal funds rate. Borrowings based on loans from NU parent, however, bear interest at NU parent's cost and must be repaid based upon the terms of NU parent's original borrowing. At December 31, 2001 and 2000, CL&P had $77.2 million and $38 million of lendings to the Pool, respectively. The interest rate on lendings to the Pool at December 31, 2001 and 2000, was 1.5 percent and 5.4 percent, respectively. 3. LEASES CL&P has entered into lease agreements, some of which are capital leases, for the use of data processing and office equipment, vehicles, nuclear control room simulators, and office space. The provisions of these lease agreements generally provide for renewal options. Capital lease rental payments charged to operating expense were $9.2 million in 2001, $36.3 million in 2000, and $10 million in 1999. Interest included in capital lease rental payments was $3.4 million in 2001, $7.9 million in 2000, and $9.4 million in 1999. Operating lease rental payments charged to expense were $7.1 million in 2001, $9.8 million in 2000, and $14.3 million in 1999. Future minimum rental payments, excluding executory costs such as property taxes, state use taxes, insurance, and maintenance, under long- term noncancelable leases, as of December 31, 2001, are as follows: -------------------------------------------------------------------------- Year Capital Leases Operating Leases -------------------------------------------------------------------------- (Millions of Dollars) 2002......................... $ 2.4 $10.9 2003......................... 2.4 9.3 2004......................... 2.4 8.2 2005......................... 2.4 7.5 2006......................... 2.4 6.4 After 2006................... 24.7 11.9 -------------------------------------------------------------------------- Future minimum lease payments............. 36.7 $54.2 Less amount representing interest................... 20.7 -------------------------------------------------------------------------- Present value of future minimum lease payments........... $16.0 -------------------------------------------------------------------------- 4. PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION Details of preferred stock not subject to mandatory redemption are as follows: - ------------------------------------------------------------------------------- December 31, Shares 2001 Outstanding December 31, Redemption December 31, -------------------- Description Price 2001 2001 2000 - ------------------------------------------------------------------------------- (Millions of Dollars) $1.90 Series of 1947 $52.50 163,912 $ 8.2 $ 8.2 $2.00 Series of 1947 54.00 336,088 16.8 16.8 $2.04 Series of 1949 52.00 100,000 5.0 5.0 $2.20 Series of 1949 52.50 200,000 10.0 10.0 3.90% Series of 1949 50.50 160,000 8.0 8.0 $2.06 Series E of 1954 51.00 200,000 10.0 10.0 $2.09 Series F of 1955 51.00 100,000 5.0 5.0 4.50% Series of 1956 50.75 104,000 5.2 5.2 4.96% Series of 1958 50.50 100,000 5.0 5.0 4.50% Series of 1963 50.50 160,000 8.0 8.0 5.28% Series of 1967 51.43 200,000 10.0 10.0 $3.24 Series G of 1968 51.84 300,000 15.0 15.0 6.56% Series of 1968 51.44 200,000 10.0 10.0 - ------------------------------------------------------------------------------- Totals................................................ $116.2 $116.2 - ------------------------------------------------------------------------------- 5. LONG-TERM DEBT Details of long-term debt outstanding are as follows: -------------------------------------------------------------------------- At December 31, 2001 2000 -------------------------------------------------------------------------- (Millions of Dollars) First Mortgage Bonds: 7 7/8% Series A due 2001...................... $ - $160.0 7 3/4% Series C due 2002...................... - 200.0 8 1/2% Series C due 2024...................... 59.0 115.0 7 7/8% Series D due 2024...................... 139.8 140.0 ------ ------ 198.8 615.0 Pollution Control Notes: Variable rate, due 2016-2022................ 46.4 46.4 Variable rate, tax exempt, due 2028-2031.... 377.5 377.5 Fees and interest due for spent nuclear fuel disposal costs......................... 201.9 194.7 Less amounts due within one year.............. - 160.0 Unamortized premium and discount, net......... (0.3) (0.9) -------------------------------------------------------------------------- Long-term debt, net........................... $824.3 $1,072.7 -------------------------------------------------------------------------- Essentially all utility plant of CL&P is subject to the liens of the company's first mortgage bond indenture. CL&P has secured $315.5 million of pollution control notes secured by second mortgage liens on transmission assets, junior to the liens of their first mortgage bond indentures. CL&P has $62 million of tax-exempt Pollution Control Revenue Bonds (PCRBs) with bond insurance secured by the first mortgage bonds and a liquidity facility. For financial reporting purposes, these first mortgage bonds would not be considered outstanding unless CL&P failed to meet its obligations under the PCRBs. The average effective interest rates on the variable-rate pollution control notes ranged from 1.3 percent to 3.6 percent for 2001 and from 3.2 percent to 4.9 percent for 2000. 6. INCOME TAX EXPENSE The components of the federal and state income tax provisions were charged/(credited) to operations as follows: -------------------------------------------------------------------------- For the Years Ended December 31, 2001 2000 1999 -------------------------------------------------------------------------- (Millions of Dollars) Current income taxes: Federal.............................. $190.7 $ 77.2 $197.7 State................................ 38.8 17.2 27.9 ------ ------ ------ Total current...................... 229.5 94.4 225.6 ------ ------ ------ Deferred income taxes, net: Federal.............................. (117.0) 10.6 (113.0) State................................ (23.8) 2.4 (20.1) ------ ------ ------ Total deferred..................... (140.8) 13.0 (133.1) ------ ------ ------ Investment tax credits, net............ (3.8) (7.3) (7.4) -------------------------------------------------------------------------- Total income tax expense............... $ 84.9 $100.1 $ 85.1 -------------------------------------------------------------------------- Deferred income taxes are comprised of the tax effects of temporary differences as follows: -------------------------------------------------------------------------- For the Years Ended December 31, 2001 2000 1999 -------------------------------------------------------------------------- (Millions of Dollars) Depreciation, leased nuclear fuel, settlement credits and disposal costs....................... $ (9.2) $13.8 $ (9.9) Regulatory deferral.................... (33.1) (14.1) 6.2 State net operating loss carryforward.. - - 7.8 Regulatory disallowance................ - - (24.2) Sale of generation assets.............. (197.6) - (126.1) Pension accruals....................... 19.9 13.6 9.8 Securitized contract termination costs and other.......... 63.4 - - Other.................................. 15.8 (0.3) 3.3 -------------------------------------------------------------------------- Deferred income taxes, net............. $(140.8) $13.0 $(133.1) -------------------------------------------------------------------------- A reconciliation between income tax expense and the expected tax expense at the statutory rate is as follows: -------------------------------------------------------------------------- For the Years Ended December 31, 2001 2000 1999 -------------------------------------------------------------------------- (Millions of Dollars) Expected federal income tax............ $68.1 $ 86.9 $25.0 Tax effect of differences: Depreciation......................... 4.0 5.8 27.1 Amortization of regulatory assets.... (0.6) 3.6 31.9 Investment tax credit amortization... (3.8) (7.3) (7.4) State income taxes, net of federal benefit.................... 9.8 12.7 5.1 Other, net........................... 7.4 (1.6) 3.4 -------------------------------------------------------------------------- Total income tax expense............... $84.9 $100.1 $85.1 -------------------------------------------------------------------------- 7. PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The NU system companies, including CL&P, participate in a uniform noncontributory defined benefit retirement plan covering substantially all regular NU system employees. Benefits are based on years of service and the employees' highest eligible compensation during 60 consecutive months of employment. CL&P's portion of the NU system's total pension credit, part of which was credited to utility plant, was $63.7 million in 2001, $57.2 million in 2000 and $40.3 million in 1999. Currently, CL&P's policy is to annually fund an amount at least equal to that which will satisfy the requirements of the Employee Retirement Income Security Act and Internal Revenue Code. The NU system companies, including CL&P, also provide certain health care benefits, primarily medical and dental, and life insurance benefits through a benefit plan to retired employees. These benefits are available for employees retiring from CL&P who have met specified service requirements. For current employees and certain retirees, the total benefit is limited to two times the 1993 per retiree health care cost. These costs are charged to expense over the estimated work life of the employee. CL&P annually funds postretirement costs through external trusts with amounts that have been rate-recovered and which also are tax deductible. Pension and trust assets are invested primarily in domestic and international equity securities and bonds. The following table represents information on the plans' benefit obligation, fair value of plan assets, and the respective plans' funded status:
---------------------------------------------------------------------------- At December 31, ------------------------------------------------------------------------------- Postretirement Pension Benefits Benefits ------------------------------------------------------------------------------- (Millions of Dollars) 2001 2000 2001 2000 ------------------------------------------------------------------------------- Change in benefit obligation Benefit obligation at beginning of year........... $(587.3) $ (551.9) $(136.3) $(131.9) Service cost..................... (10.0) (9.7) (1.9) (1.9) Interest cost.................... (43.7) (42.3) (11.1) (10.1) Transfers........................ (2.4) (4.9) - - Actuarial loss................... (25.1) (18.9) (32.2) (5.2) Benefits paid.................... 45.1 40.4 16.0 12.8 Settlements and other............ (2.6) - (0.2) - ------------------------------------------------------------------------------- Benefit obligation at end of year................. $(626.0) $ (587.3) $(165.7) $(136.3) ------------------------------------------------------------------------------- Change in plan assets Fair value of plan assets at beginning of year........... $ 998.8 $1,037.8 $ 62.4 $ 59.7 Actual return on plan assets..... (45.7) (3.5) (5.8) 3.0 Employer contribution............ - - 14.5 12.5 Benefits paid.................... (45.1) (40.4) (16.0) (12.8) Transfers........................ 2.4 4.9 0.6 - ------------------------------------------------------------------------------- Fair value of plan assets at end of year................. $ 910.4 $ 998.8 $ 55.7 $ 62.4 ------------------------------------------------------------------------------- Funded status at December 31..... $ 284.4 $ 411.5 $ (110.0) $ (73.9) Unrecognized transition (asset)/obligation............. (2.7) (3.7) 80.3 88.2 Unrecognized prior service cost.. 27.6 30.4 - - Unrecognized net (gain)/loss..... (75.6) (267.5) 29.1 (14.3) ------------------------------------------------------------------------------- Prepaid/(accrued) benefit cost... $ 233.7 $ 170.7 $ (0.6) $ - -------------------------------------------------------------------------------
The following actuarial assumptions were used in calculating the plans' year end funded status: -------------------------------------------------------------------------- At December 31, -------------------------------------------------------------------------- Postretirement Pension Benefits Benefits -------------------------------------------------------------------------- 2001 2000 2001 2000 -------------------------------------------------------------------------- Discount rate.................. 7.25% 7.50% 7.25% 7.50% Compensation/progression rate.. 4.25 4.50 4.25 4.50 Health care cost trend rate (a)............... N/A N/A 11.00 5.26 -------------------------------------------------------------------------- (a) The annual per capita cost of covered health care benefits was assumed to decrease to 5.00 percent by 2007. The components of net periodic benefit (credit)/cost are:
---------------------------------------------------------------------------------------- For the Years Ended December 31, ---------------------------------------------------------------------------------------- Pension Benefits Postretirement Benefits ---------------------------------------------------------------------------------------- (Millions of Dollars) 2001 2000 1999 2001 2000 1999 ---------------------------------------------------------------------------------------- Service cost................ $10.0 $ 9.7 $ 11.0 $ 1.9 $ 1.9 $ 2.3 Interest cost............... 43.7 42.3 40.0 11.1 10.1 9.3 Expected return on plan assets............ (95.3) (88.4) (78.1) (5.5) (4.9) (4.2) Amortization of unrecognized net transition (asset)/ obligation................ (0.9) (0.9) (0.9) 7.3 7.3 7.3 Amortization of prior service cost........ 2.6 2.7 2.7 - - - Amortization of actuarial gain............. (21.4) (22.6) (15.0) - - - Other amortization, net..... - - - (0.5) (1.9) (1.3) Settlements and other....... (2.4) - - - - - ---------------------------------------------------------------------------------------- Net periodic benefit (credit)/cost............. $(63.7) $(57.2) $(40.3) $14.3 $12.5 $13.4 ----------------------------------------------------------------------------------------
For calculating pension and postretirement benefit costs, the following assumptions were used: -------------------------------------------------------------------------- For the Years Ended December 31, -------------------------------------------------------------------------- Postretirement Pension Benefits Benefits -------------------------------------------------------------------------- 2001 2000 1999 2001 2000 1999 -------------------------------------------------------------------------- Discount rate............. 7.50% 7.75% 7.00% 7.50% 7.75% 7.00% Expected long-term rate of return.......... 9.50 9.50 9.50 N/A N/A N/A Compensation/ progression rate........ 4.50 4.75 4.25 4.50 4.75 4.25 Long-term rate of return - Health assets, net of tax.......... N/A N/A N/A 7.50 7.50 7.50 Life assets........... N/A N/A N/A 9.50 9.50 9.50 -------------------------------------------------------------------------- Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The effect of changing the assumed health care cost trend rate by one percentage point in each year would have the following effects: -------------------------------------------------------------------------- One Percentage One Percentage (Millions of Dollars) Point Increase Point Decrease -------------------------------------------------------------------------- Effect on total service and interest cost components.......... $0.5 $(0.5) Effect on postretirement benefit obligation............... $6.1 $(5.6) -------------------------------------------------------------------------- The trust holding the health plan assets is subject to federal income taxes. 8. SALE OF CUSTOMER RECEIVABLES On July 11, 2001, CL&P renewed its accounts receivable securitization credit line for one year. At that time, the credit line capacity was reduced from $200 million to $100 million. As of December 31, 2001, CL&P had no amounts outstanding through the CL&P Receivables Corporation (CRC), a wholly owned subsidiary of CL&P. As of December 31, 2000, CL&P had sold accounts receivable of $170 million to a third-party purchaser with limited recourse through the CRC. In addition, at December 31, 2000, $18.9 million of accounts receivable were designated as collateral under the agreement with the CRC. Concentrations of credit risk to the purchaser under the company's agreement with respect to the receivables are limited due to CL&P's diverse customer base within its service territory. 9. NUCLEAR GENERATION ASSETS DIVESTITURE On March 31, 2001, CL&P and WMECO consummated the sale of Millstone 1 and 2 to a subsidiary of Dominion Resources, Inc., Dominion Nuclear Connecticut, Inc. (DNCI). CL&P, PSNH and WMECO sold their ownership interests in Millstone 3 to DNCI. This sale included all of the respective joint ownership interests of CL&P, PSNH and WMECO in Millstone 3. CL&P received approximately $800 million of cash proceeds from the sale and applied the proceeds to taxes and reductions of debt and equity. As part of the sale, DNCI assumed responsibility for decommissioning the three Millstone units. In connection with the sale, CL&P recorded a gain in the amount of approximately $521.6 million which was used to offset stranded costs. 10. COMMITMENTS AND CONTINGENCIES A. Restructuring On September 27, 2001, CL&P filed its application with the DPUC for approval of the disposition of the proceeds from the sale of the Millstone units to DNCI. This application described and requested DPUC approval for CL&P's treatment of its share of the proceeds from the sale. In accordance with Connecticut's electric utility industry restructuring legislation, CL&P was required to utilize any gains from the Millstone sale to offset stranded costs. There are certain contingencies related to this filing regarding the potential disallowance of what management believes were prudently incurred costs. Management believes the recoverability of these costs is probable. A decision from the DPUC is expected in the first half of 2002. B. Environmental Matters The NU system, including CL&P, is subject to environmental laws and regulations structured to mitigate or remove the effect of past operations and to improve or maintain the quality of the environment. As such, the NU system, including CL&P, has active environmental auditing and training programs and believes it is substantially in compliance with the current laws and regulations. However, the normal course of operations may involve activities and substances that expose CL&P to potential liabilities of which management cannot determine the outcome. Additionally, management cannot determine the outcome for liabilities that may be imposed for past acts, even though such past acts may have been lawful at the time they occurred. Management does not believe, however, that this will have a material impact on CL&P's consolidated financial statements. Based upon currently available information for the estimated remediation costs as of December 31, 2001 and 2000, the liability recorded by CL&P for its estimated environmental remediation costs amounted to $2.5 million and $5.2 million, respectively. C. Spent Nuclear Fuel Disposal Costs Under the Nuclear Waste Policy Act of 1982, CL&P must pay the DOE for the disposal of spent nuclear fuel and high-level radioactive waste. The DOE is responsible for the selection and development of repositories for, and the disposal of, spent nuclear fuel and high- level radioactive waste. For nuclear fuel used to generate electricity prior to April 7, 1983 (Prior Period Fuel), an accrual has been recorded for the full liability and payment must be made prior to the first delivery of spent fuel to the DOE. Until such payment is made, the outstanding balance will continue to accrue interest at the 3-month treasury bill yield rate. As of December 31, 2001 and 2000, fees due to the DOE for the disposal of Prior Period Fuel were $201.9 million and $194.7 million, respectively, including interest costs of $135.4 million and $128.1 million, respectively. Fees for nuclear fuel burned on or after April 7, 1983, are billed currently to customers and paid to the DOE on a quarterly basis. CL&P remains responsible for fees to be paid for fuel burned until the divestiture of the Millstone and Seabrook nuclear units. D. Nuclear Insurance Contingencies Insurance policies covering CL&P's ownership share of the NU system's nuclear facilities have been purchased for the primary cost of repair, replacement or decontamination of utility property, certain extra costs incurred in obtaining replacement power during prolonged accidental outages and the excess cost of repair, replacement or decontamination or premature decommissioning of utility property. CL&P is subject to retroactive assessments if losses under those policies exceed the accumulated funds available to the insurer. The maximum potential assessments with respect to losses arising during the current policy year for the primary property insurance program, the replacement power policies and the excess property damage policies are $1.1 million, $0.1 million and $1.6 million, respectively. In addition, insurance has been purchased by the NU system in the aggregate amount of $200 million on an industry basis for coverage of worker claims. Under certain circumstances, in the event of a nuclear incident at one of the nuclear facilities covered by the federal government's third-party liability indemnification program, the NU system, including CL&P, could be assessed liabilities in proportion to its ownership interest in each of its nuclear units up to $83.9 million. The NU system's payment of this assessment would be limited to, in proportion to its ownership interest in each of its nuclear units, $10 million in any one year per nuclear unit. In addition, if the sum of all claims and costs from any one nuclear incident exceeds the maximum amount of financial protection, the NU system, including CL&P, would be subject to an additional 5 percent, or $4.2 million, liability, in proportion to its ownership interests in each of its nuclear units. Based upon its ownership interest in Seabrook, CL&P's maximum liability, including any additional assessments, would be $3.6 million per incident, of which payments would be limited to $0.4 million per year. In addition, through purchased-power contracts with VYNPC, CL&P would be responsible for up to an additional assessment of $8.4 million per incident, of which payments would be limited to $1 million per year. CL&P expects to terminate its nuclear insurance upon the divestiture of its remaining nuclear units. E. Long-Term Contractual Arrangements Yankee Companies: Under the terms of its agreement, CL&P paid its ownership (or entitlement) shares of costs, which included depreciation, operation and maintenance (O&M) expenses, taxes, the estimated cost of decommissioning, and a return on invested capital. These costs were recorded as purchased-power expenses. CL&P's cost of purchases under its contract with VYNPC amounted to $14.7 million in 2001, $14.5 million in 2000, and $17 million in 1999. VYNPC is in the process of selling its nuclear unit. Upon completion of the sale, it is expected that these long-term contracts will be replaced with different contracts with the new buyer. Energy Procurement Contracts: CL&P has entered into various arrangements for the purchase of capacity and energy. CL&P's total cost of purchases under these arrangements amounted to $205 million in 2001, $308.6 million in 2000 and $293.8 million in 1999. Hydro-Quebec: Along with other New England utilities, CL&P has entered into an agreement to support transmission and terminal facilities to import electricity from the Hydro-Quebec system in Canada. CL&P is obligated to pay, over a 30-year period ending in 2020, its proportionate share of the annual O&M expenses and capital costs of those facilities. Estimated Annual Costs: The estimated annual costs of CL&P's significant long-term contractual arrangements, absent the effects of any contract terminations, buydowns or buyouts, or sales of generation assets are as follows: --------------------------------------------------------------------- 2002 2003 2004 2005 2006 Totals --------------------------------------------------------------------- (Millions of Dollars) VYNPC........... $ 18.4 $ 17.5 $ 19.9 $ 20.2 $ 18.3 $ 94.3 Energy Procurement Contracts..... 193.2 199.0 200.0 203.4 206.9 1,002.5 Hydro-Quebec.... 15.4 14.8 14.2 13.7 12.4 70.5 --------------------------------------------------------------------- Totals.......... $227.0 $231.3 $234.1 $237.3 $237.6 $1,167.3 --------------------------------------------------------------------- 11. NUCLEAR DECOMMISSIONING AND PLANT CLOSURE COSTS Seabrook: CL&P's operating nuclear power plant, Seabrook, has a service life that is expected to end in 2026, and upon retirement, must be decommissioned. CL&P's ownership share of the estimated cost of decommissioning Seabrook, in year end 2001 dollars, is $22.6 million. Nuclear decommissioning costs are accrued over the expected service life of the unit and are included in depreciation expense and the accumulated provision for depreciation. Nuclear decommissioning expenses for Seabrook amounted to $0.8 million in 2001, 2000 and 1999. Through December 31, 2001 and 2000, total decommissioning expenses of $5.9 million and $5.1 million, respectively, have been collected from customers related to Seabrook and are reflected in the accumulated provision for depreciation. Payments for CL&P's ownership share of the cost of decommissioning Seabrook are paid to an independent decommissioning financing fund managed by the state of New Hampshire. As of December 31, 2001 and 2000, $5.4 million and $4.6 million, respectively, have been transferred to external decommissioning trusts. Earnings on the decommissioning trust increase the decommissioning trust balance and the accumulated provision for depreciation. Unrealized gains and losses associated with the decommissioning trust also impact the balance of the trust and the accumulated provision for depreciation. The fair values of the amounts in the Seabrook external decommissioning trust were $6.2 million and $5.8 million at December 31, 2001 and 2000, respectively. Upon divestiture, the balance in the Seabrook decommissioning trust will be transferred to the buyer. Yankee Companies: VYNPC owns and operates a nuclear generating unit with a service life that is expected to end in 2012. CL&P's ownership share of estimated costs, in year end 2001 dollars, of decommissioning this unit is $44.7 million. In August 2001, VYNPC agreed to sell its nuclear generating unit for $180 million, including $35 million for nuclear fuel, to an unaffiliated company. Among other commitments, the acquiring company agreed to assume the obligation to decommission the unit after it is taken out of service and agreed to provide the current level of output from the unit through 2012. The sale is subject to the approval of the Vermont Public Service Board, the Nuclear Regulatory Commission, the FERC and other regulatory authorities. The closing on the sale is expected to be in the first half of 2002. As of December 31, 2001 and 2000, CL&P's remaining estimated obligations, including decommissioning for the units owned by CYAPC, YAEC and MYAPC, which have been shut down was $141.5 million and $160.6 million, respectively. 12. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY CL&P Capital LP (CL&P LP), a subsidiary of CL&P, previously had issued $100 million of cumulative 9.3 percent Monthly Income Preferred Securities (MIPS), Series A. CL&P has the sole ownership interest in CL&P LP, as a general partner, and was the guarantor of the MIPS securities. Subsequent to the MIPS issuance, CL&P LP loaned the proceeds of the MIPS issuance, along with CL&P's $3.1 million capital contribution, back to CL&P in the form of an unsecured debenture. CL&P consolidates CL&P LP for financial reporting purposes. Upon consolidation, the unsecured debenture was eliminated, and the MIPS securities were accounted for as a minority interest. In the second quarter of 2001, CL&P repaid the $100 million in notes associated with the MIPS. 13. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each of the following financial instruments: Cash and Cash Equivalents: The carrying amounts approximate fair value due to the short-term nature of cash and cash equivalents. Nuclear Decommissioning Trusts: CL&P's portion of the investments held in the NU system companies' nuclear decommissioning trusts were marked- to-market by a negative $0.1 million as of December 31, 2001, and a positive $83.2 million as of December 31, 2000, with corresponding offsets to the accumulated provision for depreciation. In conjunction with the sale of the Millstone units to DNCI in March 2001, CL&P's Millstone decommissioning trusts were transferred to DNCI. Preferred Stock and Long-Term Debt: The fair value of CL&P's fixed-rate securities is based upon the quoted market price for those issues or similar issues. Adjustable rate securities are assumed to have a fair value equal to their carrying value. The carrying amounts of CL&P's financial instruments and the estimated fair values are as follows: -------------------------------------------------------------------------- At December 31, 2001 -------------------------------------------------------------------------- Carrying Fair (Millions of Dollars) Amount Value -------------------------------------------------------------------------- Preferred stock not subject to mandatory redemption.................. $ 116.2 $ 62.4 Long-term debt - First mortgage bonds..................... 198.8 212.8 Other long-term debt..................... 625.8 615.1 Rate reduction bonds....................... 1,358.7 1,388.3 -------------------------------------------------------------------------- -------------------------------------------------------------------------- At December 31, 2000 -------------------------------------------------------------------------- Carrying Fair (Millions of Dollars) Amount Value -------------------------------------------------------------------------- Preferred stock not subject to mandatory redemption.................. $116.2 $139.7 Long-term debt - First mortgage bonds..................... 615.0 621.6 Other long-term debt..................... 618.6 576.4 MIPS....................................... 100.0 100.5 -------------------------------------------------------------------------- 14. OTHER COMPREHENSIVE INCOME The accumulated balance for each other comprehensive income item is as follows: -------------------------------------------------------------------------- Current December 31, Period December 31, (Millions of Dollars) 2000 Change 2001 -------------------------------------------------------------------------- Unrealized gains on securities................ $0.8 $(0.4) $0.4 Minimum pension liability adjustments........ (0.3) - (0.3) -------------------------------------------------------------------------- Accumulated other comprehensive income/(loss).. $0.5 $(0.4) $0.1 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Current December 31, Period December 31, (Millions of Dollars) 1999 Change 2000 -------------------------------------------------------------------------- Unrealized gains on securities............... $0.7 $0.1 $0.8 Minimum pension liability adjustments....... (0.3) - (0.3) -------------------------------------------------------------------------- Accumulated other comprehensive income........ $0.4 $0.1 $0.5 -------------------------------------------------------------------------- The changes in the components of other comprehensive income are reported net of the following income tax effects: -------------------------------------------------------------------------- (Millions of Dollars) 2001 2000 1999 -------------------------------------------------------------------------- Unrealized gains on securities............... $0.3 $(0.1) $ - Minimum pension liability adjustments....... - - - -------------------------------------------------------------------------- Other comprehensive income/(loss)............... $0.3 $(0.1) $ - -------------------------------------------------------------------------- 15. SEGMENT INFORMATION The NU system is organized between regulated utilities (electric and gas since March 1, 2000) and competitive energy subsidiaries. CL&P is included in the regulated utilities segment of the NU system and has no other reportable segments. The Connecticut Light and Power Company and Subsidiaries
- ------------------------------------------------------------------------------------------------------ SELECTED CONSOLIDATED FINANCIAL DATA 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------ (Thousands of Dollars) Operating Revenues.................... $2,646,123 $2,935,922 $2,452,855 $2,386,864 $2,465,587 Net Income/(Loss)..................... 109,803 148,135 (13,568) (195,725) (139,597) Cash Dividends on Common Stock........ 60,072 72,014 - - 5,989 Total Assets.......................... 4,727,557 4,764,198 5,298,284 6,050,198 6,081,223 Rate Reduction Bonds.................. 1,358,653 - - - - Long-Term Debt(a)..................... 824,349 1,232,688 1,400,056 2,007,957 2,043,327 Preferred Stock Not Subject to Mandatory Redemption............. 116,200 116,200 116,200 116,200 116,200 Preferred Stock Subject to Mandatory Redemption (a)............ - - 99,539 119,289 155,000
- --------------------------------------------------------------------------------------- CONSOLIDATED QUARTERLY FINANCIAL DATA (Unaudited) - --------------------------------------------------------------------------------------- Quarter Ended - --------------------------------------------------------------------------------------- 2001 March 31 June 30 September 30 December 31 - --------------------------------------------------------------------------------------- (Thousands of Dollars) Operating Revenues $733,905 $610,275 $675,578 $626,365 ======== ======== ======== ======== Operating Income $ 65,096 $ 68,114 $ 63,103 $ 66,716 ======== ======== ======== ======== Net Income $ 38,300 $ 18,812 $ 18,824 $ 33,867 ======== ======== ======== ======== - --------------------------------------------------------------------------------------- 2000 - --------------------------------------------------------------------------------------- Operating Revenues $747,976 $683,585 $748,143 $756,218 ======== ======== ======== ======== Operating Income $114,612 $ 70,082 $ 93,157 $ 91,428 ======== ======== ======== ======== Net Income $ 49,643 $ 19,186 $ 27,908 $ 51,398 ======== ======== ======== ========
(a) Includes portion due within one year. The Connecticut Light and Power Company and Subsidiaries - ------------------------------------------------------------------------------- CONSOLIDATED STATISTICS (Unaudited) - ------------------------------------------------------------------------------- Average Gross Electric Annual Utility Plant Use Per December 31, kWh Residential Electric (Thousands of Sales Customer Customers Employees Dollars) (Millions) (kWh) (Average) December 31, - ------------------------------------------------------------------------------- 2001 3,265,811 $32,645 8,884 1,153,234 2,160 2000 5,964,605 42,179 8,976 1,121,551 2,057 1999 6,007,421 29,317 8,969 1,120,846 2,377 1998 6,345,215 27,356 8,476 1,111,370 2,379 1997 6,639,786 25,766 8,526 1,103,309 2,163 EX-13.3 36 wmeco2001.txt Exhibit 13.3 2001 Annual Report Western Massachusetts Electric Company and Subsidiary Index Contents Page - -------- ---- Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 1 Report of Independent Public Accountants.................. 11 Consolidated Statements of Income......................... 13 Consolidated Statements of Comprehensive Income........... 13 Consolidated Balance Sheets............................... 14-15 Consolidated Statements of Common Stockholder's Equity.... 16 Consolidated Statements of Cash Flows..................... 17 Notes to Consolidated Financial Statements................ 18 Selected Consolidated Financial Data...................... 38 Consolidated Quarterly Financial Data (Unaudited)......... 38 Consolidated Statistics (Unaudited)....................... 39 Preferred Stockholder and Bondholder Information.......... Back Cover Western Massachusetts Electric Company and Subsidiary - ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- FINANCIAL CONDITION - ------------------- Overview - -------- Western Massachusetts Electric Company's (WMECO or the company) earnings before preferred dividends totaled $15 million in 2001, compared with $35.3 million in 2000 and $2.9 million in 1999. WMECO is an operating company in the Northeast Utilities system (NU system) and is wholly owned by Northeast Utilities (NU). Earnings at WMECO decreased primarily because the sale of Millstone three months into 2001 removed a significant source of earnings as compared with 2000. Future Outlook - -------------- In 2001, as a result of completing industry restructuring, WMECO has evolved into an energy delivery company, delivering electricity to customers that is produced by other companies and sometimes bought by customers through intermediaries. Customers in Massachusetts currently have the option of choosing alternative power suppliers or relying on WMECO to acquire the power for them through standard offer service. WMECO renegotiated its standard offer supply contracts on an annual basis. As a result, in January 2001, WMECO instituted approximately a 17 percent overall rate increase for its customers taking standard offer service reflecting a sharp increase in prices paid to third-party suppliers during 2001. In December 2001, however, these rates were reduced by 14 percent, primarily reflecting a reduction in WMECO's standard offer service supply costs in 2002. The significant reduction in supply costs in 2002 will result in a material reduction in WMECO's operating revenues and purchased power costs in 2002, but should not have a significant impact on financial performance since electric supply costs are passed through to customers. As a result, WMECO expects that its financial performance will be relatively stable and predictable in 2002, absent significant adverse events, such as a catastrophic storm. Liquidity - --------- The year 2001 was marked by tremendous inflows of cash into the NU system and WMECO as a result of the securitization of stranded costs and the sale of the Millstone units. WMECO's liquidity benefited from the issuance of $155 million in rate reduction certificates and the receipt of approximately $175 million from the sale of the Millstone units. The largest share of the proceeds from the Millstone sale was used for the repayment of debt and preferred securities. As a result, WMECO's combined short-term and long-term debt other than rate reduction bonds decreased to $160.4 million at the end of 2001 from $310 million at the end of 2000. WMECO repaid all of its preferred stock in 2001. Of the $155 million of rate reduction certificates issued by WMECO, $99.7 million was related to the buyout of high-cost, long-term purchased-power contracts. The remaining proceeds from the Millstone sale were used primarily to pay state and federal income taxes on the Millstone sale and return equity capital to NU parent. Including both return of capital and common dividends, WMECO paid $37 million to NU parent in 2001. Primarily as a result of the Millstone sale and the issuance of rate reduction certificates, WMECO's consolidated capitalization ratio was significantly stronger at the end of 2001 than it was a year earlier. Including capital lease obligations, but excluding rate reduction bonds, as these bonds are nonrecourse to WMECO, WMECO's capitalization ratio was 51.6 percent debt and 48.4 percent common equity at the end of 2001, compared with 61.8 percent debt, 6.7 percent preferred securities and 31.5 percent common equity at the end of 2000. The improved capitalization ratio and lowered overall risk profile resulted in a series of upgrades of the NU system securities through 2001. At the end of 2001, senior debt ratings on WMECO's securities were A3 and BBB+. Overall, these ratings were the highest for WMECO securities in decades and are expected to continue to enhance WMECO's access to low-cost capital. WMECO's net cash flows provided by operating activities decreased to $64.9 million in 2001, compared with $71.5 million in 2000 and $21.8 million in 1999. In 2001, cash flows provided by operating activities, decreased primarily due to industry restructuring and the Millstone sale in March 2001. The level of common dividends totaled $22 million in 2001, as compared to $12 million in 2000 and no common dividends in 1999. The level of preferred dividends decreased to $0.4 million in 2001, compared with $2.8 million in 2000 and $3.3 million in 1999, reflecting WMECO's reduced preferred stock outstanding. WMECO currently forecasts construction expenditures of up to $25 million for the year 2002. Over the coming years, management expects WMECO to pay out substantially all of its earnings as dividends to the parent company. In 2002, WMECO may make additional dividend payments to NU to help achieve its target leverage ratio of approximately 55 percent, excluding rate reduction bonds. As of December 31, 2001, WMECO's capitalization included total debt of approximately 52 percent, excluding rate reduction bonds. Current debt levels at WMECO are expected to remain stable in future years. Capital investments in electric utility plant at WMECO totaled $30.9 million in 2001, as compared to $27.3 million in 2000. The company anticipates no material increase in capital expenditures in the next several years. Restructuring and Rate Matters - ------------------------------ Massachusetts has experienced a continued expansion in the number of customers securing their electric supply through competitive suppliers. In January 2001, WMECO instituted approximately a 17 percent overall rate increase for its customers taking standard offer service. The increase reflected a sharp increase, from approximately $0.045 per kilowatt-hour (kWh) to approximately $0.073 per kWh, in prices paid to third-party suppliers during 2001. In December 2001, however, the Massachusetts Department of Telecommunications and Energy approved approximately a 14 percent reduction in WMECO's overall rates for standard offer service customers, primarily reflecting a reduction in WMECO's standard offer service supply costs in 2002 to approximately $0.048 per kWh. The significant reduction in supply costs in 2002 will result in a material reduction in WMECO's operating revenues and purchased power costs in 2002, but should not have a significant impact on financial performance since electric supply costs are passed through to customers. For further information regarding commitments and contingencies related to restructuring, see Note 10A, "Commitments and Contingencies - Restructuring," to the consolidated financial statements. Regional Transmission Organization - ---------------------------------- The Federal Energy Regulatory Commission (FERC) has required all transmission owning utilities, including WMECO, to voluntarily start forming regional transmission organizations (RTO) or to state why this process has not begun. In July 2001, the FERC stated that the three existing Northeastern Independent System Operators (ISO) (PJM, New York and New England) should work together to form one RTO. The FERC initiated a mediation effort between all interested parties to begin the process of forming such an entity. NU has been discussing with the other transmission owners in the three pool area the potential to form an Independent Transmission Company (ITC). The ITC would be a for-profit entity and would perform certain transmission functions required by the FERC including tariff control, system planning and system operations. The remaining functions required by the FERC would be performed by the ISO and deal with the energy market and short-term reliability. Together, the ITC and ISO form the FERC desired RTO. In January 2002, the New York and New England ISOs announced their intention to form an RTO. NU is working with the other transmission owners in these two power pools to create an ITC. The agreements needed to create the ITC and to define the working relationships among the ISO, the ITC and the transmission owners should be created in 2002 and will allow the ITC to begin operation shortly thereafter. The ITC and/or ISO will have the responsibility to collect the revenue requirements of each transmission owning entity from the market place through FERC approved tariffs. The creation of the ITC and/or RTO will require a FERC rate case and the impact on NU's return on equity as a result of this rate case cannot be estimated at this time. Nuclear Plant Performance and Other Matters - ------------------------------------------- Vermont Yankee: In August 2001, the owners of Vermont Yankee announced they would sell the unit to an unaffiliated company for $180 million, including $145 million for the plant and materials and supplies and $35 million for the nuclear fuel. WMECO owns 2.5 percent of the unit, and under the terms of the sale, will continue to buy 2.5 percent of the plant's output through March 2012 at a range of fixed prices. The sale requires several regulatory approvals and is scheduled to close during the first half of 2002. Millstone: On March 31, 2001, WMECO and The Connecticut Light and Power Company (CL&P) consummated the sale of Millstone 1 and 2 to a subsidiary of Dominion Resources, Inc., Dominion Nuclear Connecticut, Inc. (DNCI). Additionally, WMECO, CL&P and Public Service Company of New Hampshire sold their ownership interests in Millstone 3 to DNCI. On October 5, 2001, NU issued a report, following an extensive search, concerning two missing fuel pins at the retired Millstone 1 nuclear unit, which was sold to DNCI on March 31, 2001. As of December 31, 2001, costs related to this search for WMECO totaled $1.3 million. The report concluded that the pins are currently located in one of four facilities licensed to store low or high-level nuclear waste and that they are not a threat to public health and safety. A follow- up review by the Nuclear Regulatory Commission (NRC) commenced shortly after the report was filed and resulted in a NRC sponsored public meeting on January 15, 2002. In February 2002, the NRC issued a written inspection report which concluded that NU's investigation was thorough and complete, and that its conclusions were reasonable and supportable. Nuclear Decommissioning - ----------------------- In connection with the aforementioned sale of the Millstone units, DNCI has agreed to assume responsibility for decommissioning those units. For further information regarding nuclear decommissioning, see Note 11, "Nuclear Decommissioning and Plant Closure Costs," to the consolidated financial statements. Spent Nuclear Fuel Disposal Costs - --------------------------------- The United States Department of Energy (DOE) originally was scheduled to begin accepting delivery of spent nuclear fuel on January 31, 1998. However, delays in confirming the suitability of a permanent storage site continually have postponed plans for the DOE's long-term storage and disposal site. Extended delays or a default by the DOE could lead to consideration of costly alternatives. WMECO has the primary responsibility for the interim storage of its spent nuclear fuel prior to divestiture of its remaining operating nuclear unit, Vermont Yankee, as well as the three nuclear units currently undergoing decommissioning, Connecticut Yankee, Maine Yankee and Yankee Rowe. For further information regarding spent nuclear fuel disposal costs, see Note 10C, "Commitments and Contingencies - Spent Nuclear Fuel Disposal Costs," to the consolidated financial statements. Other Matters - ------------- Critical Accounting Policies: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates, assumptions and at times difficult, subjective or complex judgments. Accounting policies related to the recoverability of certain regulatory assets and the assumptions used in developing the pension and postretirement benefit obligations are the accounting principles that management believes are critical and could have a significant impact on WMECO's consolidated financial statements. Regulatory Assets: The accounting policies of the NU system's regulated operating companies historically reflect the effects of the rate-making process in accordance with Statement of Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." Through its cost-of-service rate regulated transmission and distribution business, WMECO is currently recovering its investments in long-lived assets, including regulatory assets, and management believes that the application of SFAS No. 71 to that portion of their business continues to be appropriate. Management must reaffirm this conclusion at each balance sheet date. If, as a result of a change in circumstances, it is determined that any portion of these investments is no longer recoverable under SFAS No. 71, that portion would be written off. Such a write-off could have a material impact on WMECO's consolidated financial statements. Management currently believes that all long-lived assets, including regulatory assets, are recoverable. Pension and Postretirement Benefit Obligations: WMECO participates in a uniform noncontributory defined benefit retirement plan covering substantially all regular NU system employees and also provides certain health care benefits, primarily medical and dental, and life insurance benefits through a benefit plan to retired employees. For each of these plans, the development of the benefit obligation, fair value of plan assets, funded status, and net periodic benefit credit or cost is based on several significant assumptions. These assumptions primarily relate to the application of a discount rate, expected long-term rate of return and other trend rates. If these assumptions were changed, the resultant change in benefit obligations, fair values of plan assets, funded status, and net periodic benefit credits or costs could have a material impact on WMECO's consolidated financial statements. For further information regarding these types of activities, see Note 1G, "Regulatory Accounting and Assets," and Note 8, "Pension Benefits and Postretirement Benefits Other Than Pensions," to the consolidated financial statements. Environmental Matters: The NU system, including WMECO, is subject to environmental laws and regulations structured to mitigate or remove the effect of past operations and to improve or maintain the quality of the environment. For further information regarding environmental matters, see Note 10B, "Commitments and Contingencies - Environmental Matters," to the consolidated financial statements. Other Commitments and Contingencies: For further information regarding other commitments and contingencies, see Note 10, "Commitments and Contingencies," to the consolidated financial statements. Contractual Obligations and Commercial Commitments: Aggregated information regarding WMECO's contractual obligations and commercial commitments as of December 31, 2001, is summarized as follows: - ------------------------------------------------------------------------------- (Millions of Dollars) 2002 2003 2004 2005 2006 Totals - ------------------------------------------------------------------------------- Notes payable to banks $50.0 $ - $ - $ - $ - $ 50.0 Operating leases 3.5 3.2 3.0 2.9 2.6 15.2 Long-term contractual obligations 10.7 10.4 10.9 10.9 10.1 53.0 - ------------------------------------------------------------------------------- Totals $64.2 $13.6 $13.9 $13.8 $12.7 $118.2 - ------------------------------------------------------------------------------- For further information regarding WMECO's contractual obligations and commercial commitments, see Note 2, "Short-Term Debt," Note 3, "Leases," and Note 10E, "Long-Term Contractual Arrangements," to the consolidated financial statements. Forward Looking Statements: This discussion and analysis includes forward looking statements, which are statements of future expectations and not facts including, but not limited to, statements regarding future earnings, refinancings, the use of proceeds from restructuring, and the recovery of operating costs. Words such as estimates, expects, anticipates, intends, plans, and similar expressions identify forward looking statements. Actual results or outcomes could differ materially as a result of further actions by state and federal regulatory bodies, competition and industry restructuring, changes in economic conditions, changes in historical weather patterns, changes in laws, developments in legal or public policy doctrines, technological developments, and other presently unknown or unforeseen factors. RESULTS OF OPERATIONS - --------------------- The components of significant income statement variances for the past two years are provided in the table below. Income Statement Variances (Millions of Dollars) 2001 over/(under) 2000 2000 over/(under) 1999 ---------------------- ---------------------- Amount Percent Amount Percent ------ ------- ------ ------- Operating Revenues $(35) (7)% $99 24% ---- --- --- --- Operating Expenses: Fuel, purchased and net interchange power 70 28 95 62 Other operation (9) (12) (26) (25) Maintenance (13) (41) (14) (30) Depreciation (4) (22) (10) (36) Amortization of regulatory assets, net 84 (a) 21 80 Taxes other than income taxes (6) (26) (3) (14) Gain on sale of utility plant (120) (a) 22 100 ---- --- --- --- Total operating expenses 2 1 85 24 ---- --- --- --- Operating income (37) (50) 14 24 Other income/(loss), net (2) (a) 22 (a) Interest expense, net (10) (40) (2) (7) ---- --- --- --- Income before income tax expense (29) (57) 38 (a) Income tax expense (9) (57) 6 69 ---- --- --- --- Net Income/(loss) $(20) (58)% $32 (a) ==== === === === (a) Percent greater than 100. Operating Revenues Operating revenues decreased by $35 million or 7 percent in 2001, primarily due to lower wholesale revenues ($85 million), partially offset by higher regulated retail revenues ($52 million). Wholesale revenues were lower primarily as a result of the sale of the Millstone units at the end of the first quarter of 2001 and lower sales of energy and capacity. Retail revenues increased primarily due to an increase in the standard offer service rate partially offset by lower retail sales. Retail sales decreased by 0.9 percent compared to 2000. Operating revenues increased by $99 million or 24 percent in 2000, primarily due to higher wholesale and retail revenues. Wholesale revenues increased ($82 million) as a result of the sale of output from Millstone 2 and 3. Retail revenues increased by $11 million due to retail rate increases in late 1999 and early 2000. Retail sales compared to 1999 were flat. Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense increased in 2001, primarily due to higher purchased energy costs associated with the standard offer supply. Fuel, purchased and net interchange power expense increased in 2000, primarily due to the transition, under industry restructuring, of purchasing full requirements for customers from standard offer suppliers, in addition to the remaining fuel costs of the nuclear units and cogenerators. Other Operation and Maintenance Other operation and maintenance (O&M) expenses decreased in 2001, primarily due to lower nuclear expenses ($29 million) as a result of the sale of the Millstone units at the end of the first quarter in 2001 and lower transmission and distribution expenses ($2 million), partially offset by higher administrative and general expenses ($10 million). Other O&M expenses decreased in 2000, primarily due to lower spending at the nuclear units ($17 million), the decommissioning status of Millstone 1 ($7 million), lower administrative and general expenses ($14 million), lower fossil and hydroelectric expenses due to the sale of certain fossil generation assets, and the transfer of certain hydroelectric generation assets ($6 million), partially offset by higher transmission expenses ($4 million). Depreciation Depreciation expense decreased in 2001, primarily due to the elimination of decommissioning expenses as a result of the sale of the Millstone units at the end of the first quarter of 2001. Depreciation decreased in 2000, primarily due to the effect of discontinuing SFAS No. 71 for the generation portion of the business and the resulting reclassification of depreciable nuclear plant balances to regulatory assets ($14 million), the sale of certain fossil generation assets and the transfer of certain hydroelectric generation assets. Amortization of Regulatory Assets, Net Amortization of regulatory assets, net increased in 2001, primarily due to the amortization in 2001 related to the gain from the sale of Millstone ($120 million), partially offset by lower amortization of nuclear-related transition costs ($22 million) and the current deferral of transition costs ($23 million). Amortization of regulatory assets, net increased in 2000, primarily due to changes in amortization levels as a result of industry restructuring ($24 million) and higher amortization associated with the reclassified nuclear plant balances ($14 million), partially offset by the amortization in 1999 of the gain on the sale of the fossil plants ($12 million). Taxes Other Than Income Taxes Taxes other than income taxes decreased in 2001 and 2000, primarily due to decreases in local property taxes. Gain on Sale of Utility Plant WMECO recorded a gain in 2001 on the sale of its ownership interest in Millstone. A corresponding amount of amortization expense was recorded. Other Income/(Loss), Net Other income/(loss), net decreased in 2001, primarily due to higher environmental reserves in 2001, partially offset by the settlement, in 2000, of Millstone-related litigation, net of insurance proceeds ($2 million). Other income/(loss), net increased in 2000, primarily due to the nuclear- related costs. Nuclear-related costs in 2000 are comprised of a settlement of Millstone 3 joint owner litigation, net of insurance proceeds ($2 million), and a regulatory settlement ($1 million). In comparison, costs in 1999 are comprised of one-time charges related to the return disallowed on Millstone 1 unrecovered plant from March 1998 forward ($11 million), the settlement of Millstone 3 owner litigation, net of insurance proceeds ($5 million), and the disallowed Millstone 1 plant per the Massachusetts restructuring order ($2 million). Additionally, other income/(loss), net increased in 2000, primarily due to an environmental reserve recorded in 1999 ($3 million) and higher equity in earnings of regional nuclear generating and transmission companies from the Connecticut Yankee Atomic Power Company as a result of a rate settlement ($2 million). Interest Expense, Net Interest expense, net decreased in 2001, primarily due to retirement of long- term debt. Interest expense, net decreased in 2000, primarily due to reacquisitions and retirements of long-term debt, partially offset by an increase in interest charges related to short-term borrowings. Income Tax Expense Income tax expense decreased in 2001, primarily due to lower revenues resulting from the sale of Millstone. Income tax expense increased in 2000, primarily due to higher book taxable income. - ------------------------------------------------------------------------------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - ------------------------------------------------------------------------------- To the Board of Directors of Western Massachusetts Electric Company: We have audited the accompanying consolidated balance sheets of Western Massachusetts Electric Company (a Massachusetts corporation and a wholly owned subsidiary of Northeast Utilities) and subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income, common stockholder's equity and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Western Massachusetts Electric Company and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Hartford, Connecticut January 22, 2002 WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
- ----------------------------------------------------------------------------------------- For the Years Ended December 31, 2001 2000 1999 - ----------------------------------------------------------------------------------------- (Thousands of Dollars) Operating Revenues....................................$ 478,869 $ 513,678 $ 414,231 ----------------------------------- Operating Expenses: Operation - Fuel, purchased and net interchange power......... 315,903 246,130 151,714 Other............................................. 66,458 75,940 101,842 Maintenance.......................................... 19,635 33,111 47,586 Depreciation......................................... 13,818 17,693 27,771 Amortization of regulatory assets, net............... 131,876 47,775 26,488 Taxes other than income taxes........................ 13,065 17,759 20,677 Gain on sale of utility plant........................ (119,775) - (22,437) ----------------------------------- Total operating expenses....................... 440,980 438,408 353,641 ----------------------------------- Operating Income....................................... 37,889 75,270 60,590 Other (Loss)/Income, Net............................... (1,050) 685 (21,246) ----------------------------------- Income Before Interest and Income Tax Expense.......... 36,839 75,955 39,344 ----------------------------------- Interest Expense: Interest on long-term debt........................... 5,325 14,051 24,255 Interest on rate reduction bonds..................... 6,251 - - Other interest....................................... 3,735 11,491 3,259 ----------------------------------- Interest expense, net............................. 15,311 25,542 27,514 ----------------------------------- Income Before Income Tax Expense....................... 21,528 50,413 11,830 Income Tax Expense..................................... 6,560 15,145 8,943 ----------------------------------- Net Income............................................$ 14,968 $ 35,268 $ 2,887 =================================== CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Net Income........................................... $ 14,968 $ 35,268 $ 2,887 ----------- ---------- ---------- Other comprehensive (loss)/income, net of tax: Unrealized (losses)/gains on securities............ (123) 22 10 ----------- ---------- ---------- Comprehensive Income................................. $ 14,845 $ 35,290 $ 2,897 ===================================
The accompanying notes are an integral part of these financial statements. WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------- At December 31, 2001 2000 - ------------------------------------------------------------------------------------- (Thousands of Dollars) ASSETS - ------ Current Assets: Cash .................................................. $ 599 $ 985 Receivables, less accumulated provision for uncollectible accounts of $2,028 in 2001 and $1,886 in 2000......................................... 43,761 36,364 Accounts receivable from affiliated companies........... 2,208 16,146 Unbilled revenues....................................... 12,746 21,222 Fuel, materials and supplies, at average cost........... 1,457 1,606 Prepayments and other................................... 1,544 4,817 -------- ---------- 62,315 81,140 -------- ---------- Property, Plant and Equipment: Electric utility........................................ 564,857 1,112,405 Less: Accumulated provision for depreciation........ 186,784 792,923 -------- ---------- 378,073 319,482 Construction work in progress........................... 18,326 22,813 Nuclear fuel, net....................................... - 18,296 -------- ---------- 396,399 360,591 -------- ---------- Deferred Debits and Other Assets: Regulatory assets....................................... 320,222 392,247 Prepaid pension......................................... 54,226 45,473 Nuclear decommissioning trusts, at market............... - 144,921 Other .................................................. 19,500 23,446 -------- ---------- 393,948 606,087 -------- ---------- Total Assets............................................. $852,662 $1,047,818 ======== ==========
The accompanying notes are an integral part of these financial statements. WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------- At December 31, 2001 2000 - --------------------------------------------------------------------------------------- (Thousands of Dollars) LIABILITIES AND CAPITALIZATION - ------------------------------ Current Liabilities: Notes payable to banks................................ $ 50,000 $ 110,000 Notes payable to affiliated company................... 9,200 600 Long-term debt and preferred stock - current portion.. - 61,500 Accounts payable...................................... 34,970 25,298 Accounts payable to affiliated companies.............. 2,982 8,611 Accrued taxes......................................... 3,691 8,471 Accrued interest...................................... 2,201 4,703 Other................................................. 10,214 34,592 -------- ---------- 113,258 253,775 -------- ---------- Rate Reduction Bonds.................................... 152,317 - -------- ---------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes..................... 229,893 224,711 Accumulated deferred investment tax credits........... 3,998 17,580 Decommissioning obligation - Millstone 1.............. - 136,130 Deferred contractual obligations...................... 37,357 42,519 Other................................................. 64,222 26,782 -------- ---------- 335,470 447,722 -------- ---------- Capitalization: Long-Term Debt........................................ 101,170 139,425 -------- ---------- Preferred Stock....................................... - 35,000 -------- ---------- Common Stockholder's Equity: Common stock, $25 par value - authorized 1,072,471 shares; 509,696 shares outstanding in 2001 and 590,093 shares outstanding in 2000..... 12,742 14,752 Capital surplus, paid in............................ 82,224 94,010 Retained earnings................................... 55,422 62,952 Accumulated other comprehensive income.............. 59 182 -------- ---------- Common Stockholder's Equity........................... 150,447 171,896 -------- ---------- Total Capitalization.................................... 251,617 346,321 -------- ---------- Commitments and Contingencies (Note 10) Total Liabilities and Capitalization.................... $852,662 $1,047,818 ======== ==========
The accompanying notes are an integral part of these financial statements. WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
- ----------------------------------------------------------------------------------------------------------- Accumulated Capital Other Common Surplus, Retained Comprehensive Total Stock Paid In Earnings Income/(Loss) (a) - ----------------------------------------------------------------------------------------------------------- (Thousands of Dollars) Balance at January 1, 1999............. $26,812 $151,431 $46,003 $ 150 $224,396 Net income for 1999.................. 2,887 2,887 Cash dividends on preferred stock.... (3,298) (3,298) Capital stock expenses, net.......... 260 260 Allocation of benefits - ESOP (b).... (6,880) (6,880) Capital contribution from Northeast Utilities................ 20,000 20,000 Other comprehensive income........... 10 10 ------- -------- -------- ----- -------- Balance at December 31, 1999........... 26,812 171,691 38,712 160 237,375 Net income for 2000.................. 35,268 35,268 Cash dividends on preferred stock.... (2,798) (2,798) Cash dividends on common stock....... (12,002) (12,002) Repurchase of common stock........... (12,060) (77,940) (90,000) Capital stock expenses, net.......... 259 259 Allocation of benefits - ESOP (b).... 3,772 3,772 Other comprehensive income........... 22 22 ------- -------- -------- ----- -------- Balance at December 31, 2000........... 14,752 94,010 62,952 182 171,896 Net income for 2001.................. 14,968 14,968 Cash dividends on preferred stock.... (404) (404) Cash dividends on common stock....... (22,000) (22,000) Repurchase of common stock........... (2,010) (12,990) (15,000) Capital stock expenses, net.......... 1,204 1,204 Allocation of benefits - ESOP (b).... (94) (94) Other comprehensive loss............. (123) (123) ------- -------- -------- ----- -------- Balance at December 31, 2001........... $12,742 $ 82,224 $ 55,422 $ 59 $150,447 ======= ======== ======== ===== ========
(a) The company has no dividend restrictions. However, the company has two tests it must meet before it can pay out any dividends. The most restrictive of which limits the company to paying out no greater than $55.4 million of equity at December 31, 2001. (b) In June 1999, WMECO paid NU parent $6.9 million for NU shares issued from 1992 through 1998 on behalf of its employees in accordance with NU's 401(k) plan. This transaction resulted in a reduction of the NU parent loss and a tax benefit to WMECO. The amount in 2000 represents the remaining previously unallocated 1993 through 1999 NU parent losses. The accompanying notes are an integral part of these financial statements. WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------- (Thousands of Dollars) Operating Activities: Net income........................................................ $ 14,968 $ 35,268 $ 2,887 Adjustments to reconcile to net cash flows provided by operating activities: Depreciation.................................................... 13,818 17,693 27,771 Deferred income taxes and investment tax credits, net........... 5,281 (11,549) (6,544) Net amortization of recoverable energy costs.................... 3,179 9,386 - Amortization of regulatory assets, net.......................... 131,876 47,775 26,488 Gain on sale of utility plant................................... (119,775) - (22,437) Net other (uses)/sources of cash................................ (2,052) (22,254) 6,759 Changes in working capital: Receivables and unbilled revenues, net.......................... 15,017 (24,637) (22,180) Fuel, materials and supplies.................................... 149 1,491 1,956 Accounts payable................................................ 4,043 17,727 (14,636) Accrued taxes................................................... (4,780) 7,882 (675) Other working capital (excludes cash)........................... 3,204 (7,321) 22,368 --------- --------- --------- Net cash flows provided by operating activities..................... 64,928 71,461 21,757 --------- --------- --------- Investing Activities: Investments in regulated plant: Electric utility plant.......................................... (30,921) (27,267) (30,192) Nuclear fuel.................................................... (140) (7,848) (5,817) --------- --------- --------- Net cash flows used for investments in regulated plant............ (31,061) (35,115) (36,009) Investments in nuclear decommissioning trusts..................... (23,037) (3,437) (11,387) Other investment activities, net.................................. 817 3,589 1,807 Net proceeds from the sale of utility plant....................... 175,154 185,787 48,524 Capital contributions from Northeast Utilities.................... - - 20,000 Buyout of IPP contracts........................................... (80,000) - (19,700) --------- --------- --------- Net cash flows provided by investing activities..................... 41,873 150,824 3,235 --------- --------- --------- Financing Activities: Repurchase of common stock........................................ (15,000) (90,000) - Issuance of rate reduction bonds.................................. 155,000 - - Retirement of rate reduction bonds................................ (2,683) - - Net (decrease)/increase in short-term debt........................ (51,400) (21,800) 81,500 Reacquisitions and retirements of long-term debt.................. (100,000) (94,150) (100,850) Reacquisitions and retirements of preferred stock................. (36,500) (1,500) (1,500) Retirement of capital lease obligation............................ (34,200) - - Cash dividends on preferred stock................................. (404) (2,798) (3,298) Cash dividends on common stock.................................... (22,000) (12,002) - --------- --------- --------- Net cash flows used in financing activities......................... (107,187) (222,250) (24,148) --------- --------- --------- Net (decrease)/increase in cash..................................... (386) 35 844 Cash - beginning of year............................................ 985 950 106 --------- --------- --------- Cash - end of year.................................................. $ 599 $ 985 $ 950 ========= ========= ========= Supplemental Cash Flow Information: Cash paid/(refunded) during the year for: Interest, net of amounts capitalized......................... $ 17,939 $ 26,055 $ 30,958 ========= ========= ========= Income taxes................................................. $ 6,314 $ 18,554 $ (6,296) ========= ========= ========= Increase in obligations: Niantic Bay Fuel Trust........................................ $ 411 $ 1,532 $ 1,112 ========= ========= =========
The accompanying notes are an integral part of these financial statements. - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. About Western Massachusetts Electric Company Western Massachusetts Electric Company (WMECO or the company) along with The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH), North Atlantic Energy Corporation (NAEC), Holyoke Water Power Company (HWP), and Yankee Energy System, Inc. (Yankee) are the operating companies comprising the Northeast Utilities system (NU system) and are wholly owned by Northeast Utilities (NU). The NU system furnishes franchised retail electric service in western Massachusetts, Connecticut and New Hampshire through WMECO, CL&P and PSNH. NAEC sells all of its entitlement to the capacity and output of the Seabrook Station nuclear unit (Seabrook) to PSNH under the terms of two life-of-unit, full cost recovery contracts (Seabrook Power Contracts). HWP also is engaged in the production of electric power. Yankee, the parent company of Yankee Gas Services Company (Yankee Gas), is Connecticut's largest natural gas distribution system. NU is registered with the Securities and Exchange Commission (SEC) as a holding company under the Public Utility Holding Company Act of 1935 (1935 Act) and the NU system, including WMECO, is subject to the provisions of the 1935 Act. Arrangements among the NU system companies, outside agencies and other utilities covering interconnections, interchange of electric power and sales of utility property are subject to regulation by the Federal Energy Regulatory Commission (FERC) and/or the SEC. WMECO is subject to further regulation for rates, accounting and other matters by the FERC and the Massachusetts Department of Telecommunications and Energy (DTE). Several wholly owned subsidiaries of NU provide support services for the NU system companies, including WMECO, and, in some cases, for other New England utilities. Northeast Utilities Service Company (NUSCO) provides centralized accounting, administrative, engineering, financial, information resources, legal, operational, planning, purchasing, and other services to the NU system companies, including WMECO. North Atlantic Energy Service Corporation has operational responsibility for Seabrook. In addition, WMECO has established a special purpose subsidiary whose operations are solely related to the issuance of rate reduction certificates. B. Presentation The consolidated financial statements of WMECO include the accounts of its subsidiary. Intercompany transactions have been eliminated in consolidation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications of prior years' data have been made to conform with the current year's presentation. All transactions among affiliated companies are on a recovery of cost basis which may include amounts representing a return on equity and are subject to approval by various federal and state regulatory agencies and the DTE. C. New Accounting Standards Asset Retirement Obligations: In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and applies to (a) all entities and (b) legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a long- lived asset, except for certain obligations of lessees. SFAS No. 143 is effective for WMECO's 2003 calendar year. Upon adoption of SFAS No. 143, there may be an impact on WMECO's consolidated financial statements which management has not estimated at this time. Long-Lived Assets: In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement modifies financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 is effective for WMECO's 2002 calendar year. Currently, management does not expect the adoption of SFAS No. 144 to have a material impact on WMECO's consolidated financial statements. D. Investments and Jointly Owned Electric Utility Plant Regional Nuclear Generating Companies: WMECO owns common stock in four regional nuclear companies (Yankee Companies). WMECO's ownership interests in the Yankee Companies at December 31, 2001 and 2000, which are accounted for on the equity method due to WMECO's ability to exercise significant influence over their operating and financial policies are 9.5 percent of the Connecticut Yankee Atomic Power Company (CYAPC), 7 percent of the Yankee Atomic Electric Company (YAEC), 3 percent of the Maine Yankee Atomic Power Company (MYAPC), and 2.5 percent of the Vermont Yankee Nuclear Power Corporation (VYNPC). WMECO's total equity investment in the Yankee Companies at December 31, 2001 and 2000, is $9.3 million and $11.1 million, respectively. Each Yankee Company owns a single nuclear generating unit. However, VYNPC is the only unit still in operation at December 31, 2001. Plant-in-service and the accumulated provision for depreciation for WMECO's share of Millstone 2 and 3 are as follows: ----------------------------------------------------------------------- At December 31, 2001 2000 ----------------------------------------------------------------------- (Millions of Dollars) Plant-in-service: Millstone 2.................................. $ - $ 182.3 Millstone 3.................................. - 382.7 Accumulated provision for depreciation: Millstone 2.................................. $ - $ 174.5 Millstone 3.................................. - 357.3 ----------------------------------------------------------------------- E. Depreciation The provision for depreciation is calculated using the straight-line method based on estimated remaining useful lives of depreciable utility plant-in-service, adjusted for salvage value and removal costs, as approved by the appropriate regulatory agency where applicable. Depreciation rates are applied to the average plant-in- service from the time they are placed in service. When plant is retired from service, the original cost of the plant, including costs of removal less salvage, is charged to the accumulated provision for depreciation. The depreciation rates for the several classes of electric plant-in-service are equivalent to a composite rate of 2.3 percent in 2001, 2.2 percent in 2000 and 2.3 percent in 1999. As a result of discontinuing the application of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," for WMECO's generation business in 1999, the company recorded a charge to accumulated depreciation for the nuclear plant in excess of the estimated fair market value at the time in the amount of $330 million and a corresponding regulatory asset was created. F. Revenues Revenues are based on authorized rates applied to each customer's use of energy. In general, rates can be changed only through a formal proceeding before the DTE. Regulatory commissions also have authority over the terms and conditions of nontraditional rate-making arrangements. At the end of each accounting period, WMECO accrues a revenue estimate for the amount of energy delivered but unbilled. G. Regulatory Accounting and Assets The accounting policies of WMECO conform to accounting principles generally accepted in the United States applicable to rate-regulated enterprises and historically reflect the effects of the rate-making process in accordance with SFAS No. 71. WMECO's transmission and distribution business continues to be cost- of-service rate regulated, and management believes the application of SFAS No. 71 continues to be appropriate. Management also believes it is probable that WMECO will recover its investments in long-lived assets, including regulatory assets. Stranded costs for WMECO will be recovered through a transition charge over a 12-year period. In addition, the regulatory assets in the following table are earning a return. The components of WMECO's regulatory assets are as follows: ----------------------------------------------------------------------- At December 31, 2001 2000 ----------------------------------------------------------------------- (Millions of Dollars) Recoverable nuclear costs.................... $ 38.5 $257.7 Securitized regulatory assets................ 149.6 - Income taxes, net............................ 57.3 50.3 Unrecovered contractual obligations.......... 37.4 42.5 Recoverable energy costs, net................ 3.8 6.9 Other........................................ 33.6 34.8 ----------------------------------------------------------------------- Totals....................................... $320.2 $392.2 ----------------------------------------------------------------------- As a result of discontinuing the application of SFAS No. 71 for WMECO's generation business, the company had an unamortized balance ($250.5 million and $286.9 million), included in recoverable nuclear costs at December 31, 2001 and 2000, respectively. These amounts were the result of reclassified nuclear plant in excess of its estimated fair market value from plant to regulatory assets, which took place in 1999. This balance is offset by the unamortized balance of the deferred credit on the transfer of assets, in March 2000, to Northeast Generation Company (NGC) of approximately $127.5 million. Since the transfer occurred between WMECO and NGC, two affiliates, the deferred credit is eliminated in consolidation. In March 2001, WMECO sold its ownership interest in the Millstone units. The gain on this sale in the amount of approximately $119.8 million was used to offset recoverable nuclear costs, resulting in an unamortized balance of $3.3 million, after the current year's amortization expense. Also included in that regulatory asset component for 2001 and 2000 are $35.2 million and $104.9 million, respectively, which includes Millstone 1 recoverable nuclear costs relating to the recoverable portion of the undepreciated plant and related assets ($35.2 million and $39.6 million, respectively) and the decommissioning and closure obligation ($65.3 million in 2000). WMECO issued rate reduction certificates in the amount of $155 million in May of 2001 and $99.7 million of those proceeds were related to the buyout of contracts with independent power producers. The payments to buyout or buydown these contracts were recorded as securitized regulatory assets. WMECO, under the terms of contracts with the Yankee Companies, is responsible for its proportionate share of the remaining costs of the units, including decommissioning. These amounts are recorded as unrecovered contractual obligations. A portion of these obligations was securitized in 2001 and is included in securitized regulatory assets. WMECO, under the Energy Policy Act of 1992 (Energy Act), is assessed for its proportionate share of the costs of decontaminating and decommissioning uranium enrichment plants owned by the United States Department of Energy (DOE) (D&D Assessment). The Energy Act requires that regulators treat D&D Assessments as a reasonable and necessary current cost of fuel, to be fully recovered in rates like any other fuel cost. WMECO is currently recovering these costs through rates. As of December 31, 2001 and 2000, WMECO's total D&D Assessment deferrals were $5.5 million and $8.6 million, respectively, and have been recorded as recoverable energy costs, net. H. Income Taxes The tax effect of temporary differences (differences between the periods in which transactions affect income in the financial statements and the periods in which they affect the determination of taxable income) is accounted for in accordance with the rate-making treatment of the applicable regulatory commissions. The tax effect of temporary differences, including timing differences accrued under previously approved accounting standards, that give rise to the accumulated deferred tax obligation including the impact of the sale of the Millstone units, is as follows: ----------------------------------------------------------------------- At December 31, 2001 2000 ----------------------------------------------------------------------- (Millions of Dollars) Accelerated depreciation and other plant-related differences.............. $107.5 $113.5 Regulatory assets: Nuclear stranded investment.................. 52.3 80.2 Securitized contract termination costs and other............................ 38.4 - Income tax gross-up.......................... 19.0 19.5 Other.......................................... 12.7 11.5 ----------------------------------------------------------------------- Totals......................................... $229.9 $224.7 ----------------------------------------------------------------------- I. Other (Loss)/Income, Net The components of WMECO's other (loss)/income, net items are as follows: ----------------------------------------------------------------------- For the Years Ended December 31, ----------------------------------------------------------------------- 2001 2000 1999 ----------------------------------------------------------------------- (Millions of Dollars) Other nuclear-related costs......... $ - $(2.8) $(18.0) Other, net.......................... (1.0) 3.5 (3.2) ----------------------------------------------------------------------- Totals.............................. $(1.0) $ 0.7 $(21.2) ----------------------------------------------------------------------- 2. SHORT-TERM DEBT Limits: The amount of short-term borrowings that may be incurred by WMECO is subject to periodic approval by either the SEC under the 1935 Act or by the respective state regulators. Currently, SEC authorization allows WMECO to incur total short-term borrowings up to a maximum of $250 million. Credit Agreement: On November 16, 2001, WMECO, CL&P, PSNH, and Yankee Gas entered into a 364-day unsecured revolving credit facility for $350 million. This facility replaced a $250 million facility for CL&P and WMECO which expired on November 16, 2001. WMECO may draw up to $100 million, subject to the maximum facility limit of $350 million. Unless extended, the credit facility will expire on November 15, 2002. At December 31, 2001 and 2000, there were $50 million and $110 million, respectively, in borrowings under these facilities. Under the aforementioned credit agreement, WMECO may borrow at fixed or variable rates plus an applicable margin based upon certain debt ratings, as rated by the lower of Standard and Poor's or Moody's Investors Service. The weighted average interest rates on WMECO's notes payable to banks outstanding on December 31, 2001 and 2000, was 2.98 percent and 8.05 percent, respectively. This credit agreement provides that WMECO must comply with certain financial and nonfinancial covenants as are customarily included in such agreements, including, but not limited to, consolidated debt ratios and interest coverage ratios. WMECO currently is and expects to remain in compliance with these covenants. Money Pool: Certain subsidiaries of NU, including WMECO, are members of the Northeast Utilities System Money Pool (Pool). The Pool provides a more efficient use of the cash resources of the NU system and reduces outside short-term borrowings. NUSCO administers the Pool as agent for the member companies. Short-term borrowing needs of the member companies are first met with available funds of other member companies, including funds borrowed by NU parent. NU parent may lend to the Pool but may not borrow. Funds may be withdrawn from or repaid to the Pool at any time without prior notice. Investing and borrowing subsidiaries receive or pay interest based on the average daily federal funds rate. Borrowings based on loans from NU parent, however, bear interest at NU parent's cost and must be repaid based upon the terms of NU parent's original borrowing. At December 31, 2001 and 2000, WMECO had $9.2 million and $0.6 million, respectively, of borrowings outstanding from the Pool. The interest rate on borrowings from the Pool at December 31, 2001 and 2000, was 1.5 percent and 5.4 percent, respectively. 3. LEASES WMECO has entered into lease agreements for the use of data processing and office equipment, vehicles, nuclear control room simulators, and office space. The provisions of these lease agreements generally provide for renewal options. Capital lease rental payments charged to operating expense were $1.9 million in 2001, $9.6 million in 2000, and $2.6 million in 1999. Interest included in capital lease rental payments was $0.7 million in 2001, $2.8 million in 2000, and $3.1 million in 1999. Operating lease rental payments charged to expense were $2.5 million in 2001, $3.2 million in 2000, and $4.8 million in 1999. Future minimum rental payments, excluding executory costs such as property taxes, state use taxes, insurance, and maintenance, under long- term operating noncancelable leases, as of December 31, 2001, are as follows: --------------------------------------------------------------------------- Year Operating Leases --------------------------------------------------------------------------- (Millions of Dollars) 2002...................................... $ 3.5 2003...................................... 3.2 2004...................................... 3.0 2005...................................... 2.9 2006...................................... 2.6 After 2006................................ 11.4 --------------------------------------------------------------------------- Future minimum lease payments............. $26.6 --------------------------------------------------------------------------- 4. PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION Details of preferred stock not subject to mandatory redemption are as follows: --------------------------------------------------------------------------- December 31, Shares 2001 Outstanding December 31, Redemption December 31, -------------------- Description Price 2001 2001 2000 --------------------------------------------------------------------------- (Millions of Dollars) 7.72% Series B of 1971 $ - - - $20.0 --------------------------------------------------------------------------- 5. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION Details of preferred stock subject to mandatory redemption are as follows: --------------------------------------------------------------------------- December 31, Shares 2001 Outstanding December 31, Redemption December 31, -------------------- Description Price 2001 2001 2000 --------------------------------------------------------------------------- (Millions of Dollars) 7.60% Series of 1987 $ - - $ - $16.5 Less preferred stock to be redeemed within one year - - - 1.5 --------------------------------------------------------------------------- Totals.............................................. $ - $15.0 --------------------------------------------------------------------------- 6. LONG-TERM DEBT Details of long-term debt outstanding are as follows: --------------------------------------------------------------------------- At December 31, 2001 2000 --------------------------------------------------------------------------- (Millions of Dollars) First Mortgage Bonds: 7 3/8% Series B, due 2001........................... $ - $ 60.0 7 3/4% Series V, due 2002........................... - 40.0 ------ ------ - 100.0 Pollution Control Notes: Tax Exempt 1993 Series A, 5.85% due 2028.......... 53.8 53.8 Fees and interest due for spent nuclear fuel disposal costs............................... 47.4 45.6 Less amounts due within one year................... - 60.0 --------------------------------------------------------------------------- Long-term debt, net................................ $101.2 $139.4 --------------------------------------------------------------------------- Essentially all utility plant of WMECO is subject to the liens of the company's first mortgage bond indenture. WMECO has secured $53.8 million of pollution control notes with second mortgage liens on transmission assets, junior to the liens of its first mortgage bond indentures. 7. INCOME TAX EXPENSE The components of the federal and state income tax provisions were charged/(credited) to operations as follows: --------------------------------------------------------------------------- For the Years Ended December 31, 2001 2000 1999 --------------------------------------------------------------------------- (Millions of Dollars) Current income taxes: Federal............................. $ 0.3 $15.8 $13.5 State............................... 1.0 10.9 2.0 ----- ----- ----- Total current..................... 1.3 26.7 15.5 ----- ----- ----- Deferred income taxes, net: Federal............................. 5.3 (0.8) (3.5) State............................... 0.6 (8.6) (0.9) ----- ----- ----- Total deferred.................... 5.9 (9.4) (4.4) ----- ----- ----- Investment tax credits, net........... (0.6) (2.1) (2.2) --------------------------------------------------------------------------- Total income tax expense.............. $ 6.6 $15.2 $ 8.9 --------------------------------------------------------------------------- Deferred income taxes are comprised of the tax effects of temporary differences as follows: --------------------------------------------------------------------------- For the Years Ended December 31, 2001 2000 1999 --------------------------------------------------------------------------- (Millions of Dollars) Depreciation, leased nuclear fuel, settlement credits, and disposal costs..................... $(0.6) $ 0.9 $(2.3) Regulatory deferral.................. (3.7) (16.4) (1.4) Regulatory disallowance.............. - - (4.2) Pension accruals..................... 1.0 5.9 4.2 Sale of generation assets............ (30.5) - - Securitized contract termination costs and other........ 38.4 - - Other................................ 1.3 0.2 (0.7) --------------------------------------------------------------------------- Deferred income taxes, net........... $ 5.9 $(9.4) $(4.4) --------------------------------------------------------------------------- A reconciliation between income tax expense and the expected tax expense at the statutory rate is as follows: --------------------------------------------------------------------------- For the Years Ended December 31, 2001 2000 1999 --------------------------------------------------------------------------- (Millions of Dollars) Expected federal income tax.......... $ 7.5 $17.6 $ 4.1 Tax effect of differences: Depreciation....................... - (1.2) 0.2 Amortization of regulatory assets.. 1.2 1.3 6.2 Investment tax credit amortization. (0.6) (2.1) (2.2) State income taxes, net of federal benefit.................. 1.1 1.5 0.7 Dividends received deduction....... (0.6) (1.7) (0.4) Other, net......................... (2.0) (0.2) 0.3 --------------------------------------------------------------------------- Total income tax expense............. $ 6.6 $15.2 $ 8.9 --------------------------------------------------------------------------- 8. PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The NU system companies, including WMECO, participate in a uniform noncontributory defined benefit retirement plan covering substantially all regular NU system employees. Benefits are based on years of service and the employees' highest eligible compensation during 60 consecutive months of employment. WMECO's portion of the NU system's total pension credit, part of which was credited to utility plant, was $13.9 million in 2001, $19 million in 2000 and $10.8 million in 1999. Currently, WMECO's policy is to annually fund an amount at least equal to that which will satisfy the requirements of the Employee Retirement Income Security Act and Internal Revenue Code. The NU system companies, including WMECO, also provide certain health care benefits, primarily medical and dental, and life insurance benefits through a benefit plan to retired employees. These benefits are available for employees retiring from WMECO who have met specified service requirements. For current employees and certain retirees, the total benefit is limited to two times the 1993 per retiree health care cost. These costs are charged to expense over the estimated work life of the employee. WMECO annually funds postretirement costs through external trusts with amounts that have been rate-recovered and which also are tax deductible. Pension and trust assets are invested primarily in domestic and international equity securities and bonds. The following table represents information on the plans' benefit obligation, fair value of plan assets, and the respective plans' funded status:
------------------------------------------------------------------------------- At December 31, ------------------------------------------------------------------------------- Postretirement Pension Benefits Benefits ------------------------------------------------------------------------------- (Millions of Dollars) 2001 2000 2001 2000 ------------------------------------------------------------------------------- Change in benefit obligation Benefit obligation at beginning of year........... $(121.1) $ (118.1) $(29.3) $(29.5) Service cost..................... (1.9) (2.2) (0.4) (0.4) Interest cost.................... (8.5) (8.9) (2.4) (2.2) Transfers........................ 4.9 0.5 - - Actuarial loss................... (3.0) (3.0) (7.0) (0.5) Benefits paid.................... 8.7 8.2 3.6 2.6 Settlements and other............ (0.4) 2.4 - 0.7 ------------------------------------------------------------------------------- Benefit obligation at end of year................. $(121.3) $(121.1) $(35.5) $(29.3) ------------------------------------------------------------------------------- Change in plan assets Fair value of plan assets at beginning of year........... $ 214.3 $ 223.9 $ 17.3 $ 16.6 Actual return on plan assets..... (9.5) (0.9) (1.6) 0.8 Employer contribution............ - - 2.6 2.5 Benefits paid.................... (8.7) (8.2) (3.6) (2.6) Transfers........................ (4.9) (0.5) - - ------------------------------------------------------------------------------- Fair value of plan assets at end of year................. $ 191.2 $ 214.3 $ 14.7 $ 17.3 ------------------------------------------------------------------------------- Funded status at December 31................. $ 69.9 $ 93.2 $(20.8) $(12.0) Unrecognized transition (asset)/obligation............. (0.7) (0.9) 17.4 19.1 Unrecognized prior service cost.. 6.0 6.6 - - Unrecognized net (gain)/loss..... (21.0) (53.4) 3.8 (6.6) ------------------------------------------------------------------------------- Prepaid benefit cost............. $ 54.2 $ 45.5 $ 0.4 $ 0.5 -------------------------------------------------------------------------------
The following actuarial assumptions were used in calculating the plans' year end funded status: -------------------------------------------------------------------------- At December 31, -------------------------------------------------------------------------- Postretirement Pension Benefits Benefits -------------------------------------------------------------------------- 2001 2000 2001 2000 -------------------------------------------------------------------------- Discount rate.................. 7.25% 7.50% 7.25% 7.50% Compensation/progression rate.. 4.25 4.50 4.25 4.50 Health care cost trend rate (a)............... N/A N/A 11.00 5.26 -------------------------------------------------------------------------- (a) The annual per capita cost of covered health care benefits was assumed to decrease to 5.00 percent by 2007. The components of net periodic benefit (credit)/cost are:
---------------------------------------------------------------------------------------- For the Years Ended December 31, ---------------------------------------------------------------------------------------- Pension Benefits Postretirement Benefits ---------------------------------------------------------------------------------------- (Millions of Dollars) 2001 2000 1999 2001 2000 1999 ---------------------------------------------------------------------------------------- Service cost................ $ 1.9 $ 2.2 $ 2.4 $ 0.4 $ 0.4 $ 0.5 Interest cost............... 8.5 8.9 8.5 2.4 2.2 2.1 Expected return on plan assets............... (20.0) (19.0) (16.9) (1.4) (1.3) (1.0) Amortization of unrecognized net transition (asset)/obligation......... (0.2) (0.2) (0.2) 1.6 1.6 1.6 Amortization of prior service cost............... 0.6 0.6 0.6 - - - Amortization of actuarial gain............. (4.4) (4.9) (3.4) - - - Other amortization, net...... - - - (0.4) (0.4) (0.3) Settlements and other........ (0.3) (6.6) (1.8) - - - ---------------------------------------------------------------------------------------- Net periodic benefit (credit)/cost............... $(13.9) $(19.0) $(10.8) $ 2.6 $ 2.5 $ 2.9 ----------------------------------------------------------------------------------------
For calculating pension and postretirement benefit costs, the following assumptions were used: --------------------------------------------------------------------------- For the Years Ended December 31, --------------------------------------------------------------------------- Postretirement Pension Benefits Benefits --------------------------------------------------------------------------- 2001 2000 1999 2001 2000 1999 --------------------------------------------------------------------------- Discount rate............. 7.50% 7.75% 7.00% 7.50% 7.75% 7.00% Expected long-term rate of return.......... 9.50 9.50 9.50 N/A N/A N/A Compensation/ progression rate........ 4.50 4.75 4.25 4.50 4.75 4.25 Long-term rate of return - Health assets, net of tax.......... N/A N/A N/A 7.50 7.50 7.50 Life assets........... N/A N/A N/A 9.50 9.50 9.50 --------------------------------------------------------------------------- Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The effect of changing the assumed health care cost trend rate by one percentage point in each year would have the following effects: --------------------------------------------------------------------------- One Percentage One Percentage (Millions of Dollars) Point Increase Point Decrease --------------------------------------------------------------------------- Effect on total service and interest cost components...... $0.1 $(0.1) Effect on postretirement benefit obligation............ $1.5 $(1.3) --------------------------------------------------------------------------- The trust holding the health plan assets is subject to federal income taxes. 9. NUCLEAR GENERATION ASSETS DIVESTITURE On March 31, 2001, WMECO and CL&P consummated the sale of Millstone 1 and 2 to a subsidiary of Dominion Resources, Inc., Dominion Nuclear Connecticut, Inc. (DNCI). WMECO, CL&P and PSNH sold their ownership interests in Millstone 3 to DNCI. This sale included all of the respective joint ownership interests of CL&P, PSNH and WMECO in Millstone 3. WMECO received approximately $175 million of cash proceeds from the sale and applied the proceeds to taxes and reductions of debt and equity. As part of the sale, DNCI assumed responsibility for decommissioning the three Millstone units. In connection with the sale, WMECO recorded a gain in the amount of approximately $119.8 million which was used to offset stranded costs. 10. COMMITMENTS AND CONTINGENCIES A. Restructuring During the first quarter of 2000, WMECO filed its first annual stranded cost reconciliation filing covering the period March 1, 1998 through December 31, 1999. The hearing and briefing processes related to this filing were completed during the second quarter of 2001. A DTE decision is expected in the first half of 2002. On March 30, 2001, WMECO also filed its second annual stranded cost reconciliation with the DTE for calendar year 2000 with the related review and hearing processes anticipated to be scheduled for the first half of 2002. The cumulative deferral of unrecovered stranded costs, as filed through calendar year 2000, is approximately $4 million. Management believes these costs are fully recoverable. WMECO is in the process of finalizing its 2001 annual transition cost reconciliation which is expected to be filed with the DTE on March 29, 2002. This filing reconciles the recovery of stranded generation costs for calendar year 2001. Also included in this filing are the sales proceeds from WMECO's portion of Millstone, the impact of securitization and an approximate $13 million benefit to ratepayers from WMECO's nuclear performance-based ratemaking process. The inclusion of these items as part of the reconciliation filing allows WMECO to accelerate the recovery of total stranded generation assets. Management anticipates a formal hearing in 2002 regarding this filing after a period of data discovery by the DTE and other intervenors. B. Environmental Matters The NU system, including WMECO, is subject to environmental laws and regulations intended to mitigate or remove the effect of past operations and improve or maintain the quality of the environment. As such, the NU system, including WMECO, has active environmental auditing and training programs and believes it is substantially in compliance with the current laws and regulations. However, the normal course of operations may involve activities and substances that expose WMECO to potential liabilities of which management cannot determine the outcome. Additionally, management cannot determine the outcome for liabilities that may be imposed for past acts, even though such past acts may have been lawful at the time they occurred. Management does not believe, however, that this will have a material impact on WMECO's consolidated financial statements. Based upon currently available information for the estimated remediation costs as of December 31, 2001 and 2000, the liability recorded by WMECO for its estimated environmental remediation costs amounted to $5.3 million and $4.6 million, respectively. C. Spent Nuclear Fuel Disposal Costs Under the Nuclear Waste Policy Act of 1982, WMECO must pay the DOE for the disposal of spent nuclear fuel and high-level radioactive waste. The DOE is responsible for the selection and development of repositories for, and the disposal of, spent nuclear fuel and high- level radioactive waste. For nuclear fuel used to generate electricity prior to April 7, 1983 (Prior Period Fuel), an accrual has been recorded for the full liability and payment must be made prior to the first delivery of spent fuel to the DOE. Until such payment is made, the outstanding balance will continue to accrue interest at the 3-month treasury bill yield rate. As of December 31, 2001 and 2000, fees due to the DOE for the disposal of Prior Period Fuel were $47.4 million and $45.6 million, respectively, including interest costs of $31.8 million and $30 million, respectively. Fees for nuclear fuel burned on or after April 7, 1983, are billed currently to customers and paid to the DOE on a quarterly basis. WMECO remains responsible for fees to be paid for fuel burned until the divestiture of the Millstone nuclear units. D. Nuclear Insurance Contingencies Insurance policies covering WMECO's ownership share of the NU system's nuclear facilities have been purchased for the primary cost of repair, replacement or decontamination of utility property, certain extra costs incurred in obtaining replacement power during prolonged accidental outages and the excess cost of repair, replacement or decontamination or premature decommissioning of utility property. WMECO is subject to retroactive assessments if losses under those policies exceed the accumulated funds available to the insurer. The maximum potential assessments with respect to losses arising during the current policy year for the primary property insurance program and the excess property damage policies are $0.2 million and $0.3 million, respectively. In addition, insurance has been purchased by the NU system in the aggregate amount of $200 million on an industry basis for coverage of worker claims. Under certain circumstances, in the event of a nuclear incident at one of the nuclear facilities covered by the federal government's third-party liability indemnification program, the NU system, including WMECO, could be assessed liabilities in proportion to its ownership interest in each of its nuclear units up to $83.9 million. The NU system's payment of this assessment would be limited to, in proportion to its ownership interest in each of its nuclear units, $10 million in any one year per nuclear unit. In addition, if the sum of all claims and costs from any one nuclear incident exceeds the maximum amount of financial protection, the NU system, including WMECO, would be subject to an additional 5 percent, or $4.2 million, liability, in proportion to its ownership interests in each of its nuclear units. Through purchased-power contracts with VYNPC, WMECO would be responsible for an assessment of $2.2 million per incident, of which payments would be limited to $0.3 million per year. WMECO expects to terminate its nuclear insurance upon the divestiture of its remaining nuclear units. E. Long-Term Contractual Arrangements Yankee Companies: Under the terms of its agreement, WMECO paid its ownership (or entitlement) shares of costs, which included depreciation, operation and maintenance (O&M) expenses, taxes, the estimated cost of decommissioning, and a return on invested capital. These costs were recorded as purchased-power expenses. WMECO's cost of purchases under its contract with VYNPC amounted to $4.1 million in 2001, $4 million in 2000 and $4.7 million in 1999. VYNPC is in the process of selling its nuclear unit. Upon completion of the sale, it is expected that these long-term contracts will be replaced with different contracts with the new buyer. Energy Procurement Contracts: WMECO has entered into various arrangements for the purchase of capacity and energy. WMECO's total cost of purchases under these arrangements amounted to $14.5 million in 2001, $28.5 million in 2000 and $28.2 million in 1999. Hydro-Quebec: Along with other New England utilities, WMECO has entered into an agreement to support transmission and terminal facilities to import electricity from the Hydro-Quebec system in Canada. WMECO is obligated to pay, over a 30-year period ending in 2020, its proportionate share of the annual O&M expenses and capital costs of those facilities. Estimated Annual Costs: The estimated annual costs of WMECO's significant long-term contractual arrangements, absent the effects of any contract terminations, buydowns or buyouts, or sales of generation assets are as follows: --------------------------------------------------------------------- 2002 2003 2004 2005 2006 Totals --------------------------------------------------------------------- (Millions of Dollars) VYNPC........... $ 4.8 $ 4.6 $ 5.2 $ 5.3 $ 4.8 $24.7 Energy Procurement Contracts..... 2.8 2.8 2.8 2.8 2.8 14.0 Hydro-Quebec.... 3.1 3.0 2.9 2.8 2.5 14.3 --------------------------------------------------------------------- Totals.......... $10.7 $10.4 $10.9 $10.9 $10.1 $53.0 --------------------------------------------------------------------- 11. NUCLEAR DECOMMISSIONING AND PLANT CLOSURE COSTS Yankee Companies: VYNPC owns and operates a nuclear generating unit with a service life that is expected to end in 2012. WMECO's ownership share of estimated costs, in year end 2001 dollars, of decommissioning this unit was $11.8 million. In August 2001, VYNPC agreed to sell its nuclear generating unit for $180 million, including $35 million for nuclear fuel, to an unaffiliated company. Among other commitments, the acquiring company agreed to assume the obligation to decommission the unit after it is taken out of service and agreed to provide the current level of output from the unit through 2012. The sale is subject to the approval of the Vermont Public Service Board, the Nuclear Regulatory Commission, the FERC and other regulatory authorities. The closing on the sale is expected to be in the first half of 2002. As of December 31, 2001 and 2000, WMECO's remaining estimated obligations, including decommissioning for the units owned by CYAPC, YAEC and MYAPC, which have been shut down was $37.4 million and $42.5 million, respectively. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each of the following financial instruments: Nuclear Decommissioning Trusts: WMECO's portion of the investments held in the NU system companies' nuclear decommissioning trusts were transferred to DNCI in conjunction with the sale of the Millstone units to DNCI in March 2001. These investments were marked-to-market by a positive $32.3 million as of December 31, 2000, with corresponding offsets to the accumulated provision for depreciation. Preferred Stock and Long-Term Debt: The fair value of WMECO's fixed-rate securities is based upon the quoted market price for those issues or similar issues. Adjustable rate securities are assumed to have a fair value equal to their carrying value. The carrying amounts of WMECO's financial instruments and the estimated fair values are as follows: -------------------------------------------------------------------------- At December 31, 2001 -------------------------------------------------------------------------- Carrying Fair (Millions of Dollars) Amount Value -------------------------------------------------------------------------- Long-term debt - Other long-term debt..................... $101.2 $101.0 Rate reduction bonds....................... 152.3 154.1 -------------------------------------------------------------------------- -------------------------------------------------------------------------- At December 31, 2000 -------------------------------------------------------------------------- Carrying Fair (Millions of Dollars) Amount Value -------------------------------------------------------------------------- Preferred stock not subject to mandatory redemption.................. $ 20.0 $ 20.2 Preferred stock subject to mandatory redemption..................... 16.5 16.5 Long-term debt - First mortgage bonds..................... 100.0 100.3 Other long-term debt..................... 99.4 93.7 ------------------------------------------------------------------------- 13. OTHER COMPREHENSIVE INCOME The accumulated balance for each other comprehensive income item is as follows: -------------------------------------------------------------------------- Current December 31, Period December 31, (Millions of Dollars) 2000 Change 2001 -------------------------------------------------------------------------- Unrealized gains on securities................ $0.2 $(0.1) $0.1 -------------------------------------------------------------------------- Accumulated other comprehensive income/(loss).. $0.2 $(0.1) $0.1 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Current December 31, Period December 31, (Millions of Dollars) 1999 Change 2000 -------------------------------------------------------------------------- Unrealized gains on securities................ $0.2 $ - $0.2 -------------------------------------------------------------------------- Accumulated other comprehensive income......... $0.2 $ - $0.2 -------------------------------------------------------------------------- The changes in the components of other comprehensive income are reported net of the following income tax effects: -------------------------------------------------------------------------- (Millions of Dollars) 2001 2000 1999 -------------------------------------------------------------------------- Unrealized gains on securities............... $0.1 $ - $ - -------------------------------------------------------------------------- Other comprehensive income.... $0.1 $ - $ - -------------------------------------------------------------------------- 14. SEGMENT INFORMATION The NU system is organized between regulated utilities (electric and gas since March 1, 2000) and competitive energy subsidiaries. WMECO is included in the regulated utilities segment of the NU system and has no other reportable segments.
- ------------------------------------------------------------------------------------------------------ SELECTED CONSOLIDATED FINANCIAL DATA 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------ (Thousands of Dollars) Operating Revenues.................. $478,869 $513,678 $414,231 $393,322 $426,447 Net Income/(Loss)................... 14,968 35,268 2,887 (9,579) (27,460) Cash Dividends on Common Stock...... 22,000 12,002 - - 15,004 Total Assets........................ 852,662 1,047,818 1,253,604 1,287,682 1,179,128 Rate Reduction Bonds................ 152,317 - - - - Long-Term Debt (a).................. 101,170 199,425 290,279 389,314 396,649 Preferred Stock Not Subject to Mandatory Redemption.............. - 20,000 20,000 20,000 20,000 Preferred Stock Subject to Mandatory Redemption (a).......... - 16,500 18,000 19,500 21,000 Obligations Under Capital Leases (a)................ 110 26,921 29,972 34,093 32,887
- ------------------------------------------------------------------------------------------------ CONSOLIDATED QUARTERLY FINANCIAL DATA (Unaudited) - ------------------------------------------------------------------------------------------------ Quarter Ended - ------------------------------------------------------------------------------------------------ 2001 March 31 June 30 September 30 December 31 - ------------------------------------------------------------------------------------------------ (Thousands of Dollars) Operating Revenues......... $143,300 $106,866 $120,679 $108,024 ======== ======== ======== ======== Operating Income........... $ 11,876 $ 6,406 $ 14,821 $ 4,786 ======== ======== ======== ======== Net Income................. $ 3,319 $ 1,518 $ 3,880 $ 6,251 ======== ======== ======== ======== - ------------------------------------------------------------------------------------------------ 2000 - ------------------------------------------------------------------------------------------------ Operating Revenues......... $129,410 $120,090 $130,400 $133,778 ======== ======== ======== ======== Operating Income........... $ 20,244 $ 12,707 $ 20,668 $ 21,651 ======== ======== ======== ======== Net Income................. $ 11,053 $ 2,956 $ 9,638 $ 11,621 ======== ======== ======== ========
(a) Includes portion due within one year. Western Massachusetts Electric Company and Subsidiary - ------------------------------------------------------------------------------- CONSOLIDATED STATISTICS (Unaudited) - ------------------------------------------------------------------------------- Average Gross Electric Annual Utility Plant Use Per December 31, kWh Residential Electric (Thousands of Sales Customer Customers Employees Dollars) (Millions) (kWh) (Average) December 31, - ------------------------------------------------------------------------------- 2001 $ 583,183 4,712 7,476 200,166 405 2000 1,153,514 7,278 7,371 198,372 406 1999 1,216,015 4,654 7,423 198,012 482 1998 1,256,046 4,091 6,979 196,339 533 1997 1,334,233 4,300 7,121 195,324 507 EX-13.4 37 psnh2001.txt Exhibit 13.4 2001 Annual Report Public Service Company of New Hampshire and Subsidiaries Index Contents Page - -------- ---- Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 1 Report of Independent Public Accountants.................... 11 Consolidated Statements of Income........................... 13 Consolidated Statements of Comprehensive Income............. 13 Consolidated Balance Sheets................................. 14-15 Consolidated Statements of Common Stockholder's Equity...... 16 Consolidated Statements of Cash Flows....................... 17 Notes to Consolidated Financial Statements.................. 18 Selected Consolidated Financial Data........................ 38 Consolidated Quarterly Financial Data (Unaudited)........... 38 Consolidated Statistics (Unaudited)......................... 39 Bondholder Information...................................... Back Cover Public Service Company of New Hampshire and Subsidiaries - ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- Financial Condition - ------------------- Overview - -------- Public Service Company of New Hampshire (PSNH or the company), is a wholly owned subsidiary of Northeast Utilities (NU) and is part of the Northeast Utilities system (NU system). PSNH's earnings before preferred dividends totaled $81.8 million in 2001, compared with a loss of $146.7 million in 2000 and earnings of $84.2 million in 1999. The PSNH results included an after-tax gain of $15.5 million associated with the Millstone sale in 2001 and an after- tax $214.2 million extraordinary charge associated with electric industry restructuring in 2000. Management expects operating results at PSNH to continue to decline in 2002, reflecting the effects of a full year of electric utility restructuring. Future Outlook - -------------- During 2000, PSNH and the state of New Hampshire were able to reach a settlement regarding restructuring, which was subsequently approved by the New Hampshire Public Utilities Commission (NHPUC). The "Agreement to Settle PSNH Restructuring," (Settlement Agreement) ended several years of uncertainty related to restructuring and the recovery of stranded costs for PSNH and the state of New Hampshire. On May 1, 2001, PSNH implemented industry restructuring allowing its customers to begin choosing their electric suppliers (competition day). On that date, PSNH's customers received an overall rate reduction of more than 10 percent, in addition to the 5 percent reduction they received on October 1, 2000. In April 2001, legislation was passed in the state of New Hampshire, related to transition and default service and the sale of generation assets by PSNH that effectively amended the previously approved Settlement Agreement. The legislation requires PSNH to supply transition service to its residential and small commercial customers until at least February 1, 2006, and requires that transition service be provided at fixed rates for certain classes of customers until February 1, 2004. The legislation also requires PSNH to delay the sale of its fossil and hydroelectric generation assets until no sooner then February 1, 2004. PSNH will initially supply transition and default service from its generation assets, and when necessary, through supplemental power purchases. PSNH will use the net revenues from the sale of transition and default service to recover non-securitized stranded costs when those revenues exceed service costs. PSNH will be permitted, subject to NHPUC review, to defer and recover as non-securitized stranded costs, generation service costs in excess of transition and default service revenues. As a result of the Settlement Agreement and the legislation passed in April 2001, PSNH expects that its financial performance will be relatively stable and predictable in 2002, absent any unexpected significant adverse events. Liquidity - --------- The year 2001 was marked by tremendous inflows of cash into the NU system and PSNH as a result of the securitization of stranded costs and the sale of the Millstone units. PSNH's liquidity benefited from the issuance of $525 million in rate reduction bonds and the receipt of approximately $25 million from the sale of the Millstone units. The largest share of the proceeds was used for buydown of the Seabrook Power Contracts. Capital lease obligations declined to $110.3 million at the end of 2001 from $629.2 million at the end of 2000. PSNH's long-term debt other than rate reduction bonds decreased to $407.3 million at the end of 2001 from $431.6 million at the end of 2000. PSNH also repaid all of its preferred stock in 2001. PSNH paid approximately another $50 million in December 2001 to buyout other purchased-power contracts and issued an equivalent amount of rate reduction bonds in January 2002, to pay for those costs. PSNH continues to negotiate buyout or buydown arrangements with other plant operators and may require additional funds if successfully renegotiated agreements are approved by the NHPUC and result in upfront payments. The remaining proceeds were used primarily to return equity capital to NU parent. Including both return of capital and common dividends, PSNH paid $287 million to NU parent in 2001. On December 19, 2001, PSNH refinanced $287.5 million of tax-exempt pollution control revenue bonds by issuing $109 million of insured lower fixed-rate bonds and $178.5 million of insured variable-rate bonds. At current rates, that refinancing is expected to save PSNH in excess of $10 million annually. Including capital lease obligations, but excluding rate reduction bonds, as these bonds are nonrecourse to PSNH, PSNH's capitalization ratio was 63.7 percent debt and 36.3 percent common equity at the end of 2001, compared with 64.4 percent debt, 1.5 percent preferred securities and 34.1 percent common equity at the end of 2000. The improved capitalization ratio and lowered overall risk profile resulted in a series of upgrades of the NU system securities through 2001. At the end of 2001, senior debt ratings on PSNH's securities were A3, BBB+ and BBB. Overall, these ratings were the highest for PSNH securities in decades and those ratings are expected to continue to enhance PSNH's access to low-cost capital. PSNH's net cash flows provided by operating activities increased to $251.2 million in 2001, compared with $190.9 million in 2000 and $199.2 million in 1999. In 2001, cash flows provided by operating activities, increased primarily due to the tax impact of the buydown of the Seabrook Power Contracts. The level of common dividends totaled $27 million in 2001, as compared to $50 million in 2000 and no common dividends in 1999. The level of preferred dividends decreased to $1.3 million in 2001, compared with $4 million in 2000 and $6.6 million in 1999, reflecting PSNH's reduced preferred stock outstanding. PSNH currently forecasts construction expenditures of up to $110 million for the year 2002. Over the coming years, PSNH is expected to pay out most of its earnings in the form of dividends to the parent company. There may also be an additional dividend to NU near the end of 2002, depending on the amount of cash received as a result of the sale of Seabrook. Beyond 2001, management expects that current debt levels at PSNH may decline, contingent upon the results of the sale of North Atlantic Energy Corporation's (NAEC) share of Seabrook. Capital investments in electric utility plant at PSNH totaled $92.6 million in 2001, as compared to $69.5 million in 2000. The company anticipates no material increase in capital expenditures in the next several years. Restructuring and Rate Matters - ------------------------------ On May 1, 2001, PSNH implemented industry restructuring allowing its customers to begin choosing their electric suppliers (competition day). They also received an overall reduction of more than 10 percent, in addition to the 5 percent reduction they received on October 1, 2000. On May 22, 2001, the Governor of New Hampshire signed a bill modifying the state's 1996 and 2000 electric utility industry restructuring laws. The revisions delay the sale of PSNH's fossil and hydroelectric generation assets to no sooner than 33 months after restructuring takes effect, or February 1, 2004. The revisions also fixed the charges retail customers will pay PSNH for electric supply, or transition service. PSNH and NAEC have entered into two contracts where PSNH is obligated to purchase NAEC's 35.98 percent ownership of the capacity and output of Seabrook. The 2001 amended restructuring bill requires the NHPUC to complete the sale of NAEC's share of Seabrook in an expeditious manner. In late 2001, the NHPUC and the Connecticut Department of Public Utility Control named J.P. Morgan as the selling agent for all owners seeking to sell their Seabrook shares. Those owners, which include NAEC with its 35.98 percent share, collectively own approximately 88 percent of Seabrook. J.P. Morgan expects to consummate the sale in late 2002. NAEC's proceeds will be used to repay all $90 million of NAEC's outstanding debt and return all NAEC's equity, which totaled $35 million as of December 31, 2001, to NU. Following the sale of NAEC's share of Seabrook, the Seabrook Power Contracts will be terminated. PSNH will use these proceeds to more quickly amortize stranded costs. On October 10, 2000, NU reached an agreement with an unaffiliated joint owner of Seabrook under which that joint owner would include its aggregate 15 percent ownership share of Seabrook in the upcoming sale. Under the terms of the agreement, in the event that the sale yields proceeds for that joint owner of more than $87.2 million, NU and that joint owner would share the excess proceeds. Should those sales proceeds be less than $87.2 million, NU would make up the difference below that amount up to a maximum of $17.4 million. The agreement also limits any top-off amount required to be funded by that joint owner for decommissioning as part of the sale process at the amount required by the Nuclear Regulatory Commission regulations. For further information regarding commitments and contingencies related to restructuring, see Note 10A, "Commitments and Contingencies - Restructuring," to the consolidated financial statements. Regional Transmission Organization - ---------------------------------- The Federal Energy Regulatory Commission (FERC) has required all transmission owning utilities, including PSNH, to voluntarily start forming regional transmission organizations (RTO) or to state why this process has not begun. In July 2001, the FERC stated that the three existing Northeastern Independent System Operators (ISO) (PJM, New York and New England) should work together to form one RTO. The FERC initiated a mediation effort between all interested parties to begin the process of forming such an entity. NU has been discussing with the other transmission owners in the three pool area the potential to form an Independent Transmission Company (ITC). The ITC would be a for-profit entity and would perform certain transmission functions required by the FERC including tariff control, system planning and system operations. The remaining functions required by the FERC would be performed by the ISO and deal with the energy market and short-term reliability. Together, the ITC and ISO form the FERC desired RTO. In January 2002, the New York and New England ISOs announced their intention to form an RTO. NU is working with the other transmission owners in these two power pools to create an ITC. The agreements needed to create the ITC and to define the working relationships among the ISO, the ITC and the transmission owners should be created in 2002 and will allow the ITC to begin operation shortly thereafter. The ITC and/or ISO will have the responsibility to collect the revenue requirements of each transmission owning entity from the market place through FERC approved tariffs. The creation of the ITC and/or RTO will require a FERC rate case and the impact on NU's return on equity as a result of this rate case cannot be estimated at this time. Nuclear Plant Performance and Other Matters - ------------------------------------------- Seabrook: Seabrook operated at a capacity factor of 85.9 percent in 2001. After returning from a scheduled refueling outage in January 2001, Seabrook operated at a capacity factor of 93.4 percent. Seabrook is scheduled to undergo a refueling outage in the spring of 2002. PSNH is obligated to purchase the capacity and output from NAEC's 35.98 percent joint ownership in Seabrook under the Seabrook Power Contracts. Vermont Yankee: In August 2001, the owners of Vermont Yankee announced they would sell the unit to an unaffiliated company for $180 million, including $145 million for the plant and materials and supplies and $35 million for the nuclear fuel. PSNH owns 4 percent of the unit, and under the terms of the sale, will continue to buy 4 percent of the plant's output through March 2012 at a range of fixed prices. The sale requires several regulatory approvals and is scheduled to close during the first half of 2002. Millstone: On March 31, 2001, PSNH, The Connecticut Light and Power Company and Western Massachusetts Electric Company sold their ownership interests in Millstone 3 to a subsidiary of Dominion Resources, Inc., Dominion Nuclear Connecticut, Inc. (DNCI). Nuclear Decommissioning - ----------------------- In connection with the aforementioned sale of the Millstone units, DNCI has agreed to assume responsibility for decommissioning those units. For further information regarding nuclear decommissioning, see Note 11, "Nuclear Decommissioning and Plant Closure Costs," to the consolidated financial statements. Spent Nuclear Fuel Disposal Costs - --------------------------------- The United States Department of Energy (DOE) originally was scheduled to begin accepting delivery of spent nuclear fuel on January 31, 1998. However, delays in confirming the suitability of a permanent storage site continually have postponed plans for the DOE's long-term storage and disposal site. Extended delays or a default by the DOE could lead to consideration of costly alternatives. PSNH has the primary responsibility for the interim storage of its spent nuclear fuel prior to divestiture of its remaining operating nuclear units, Seabrook and Vermont Yankee, as well as the three nuclear units currently undergoing decommissioning, Connecticut Yankee, Maine Yankee and Yankee Rowe. For further information regarding spent nuclear fuel disposal costs, see Note 10C, "Commitments and Contingencies - Spent Nuclear Fuel Disposal Costs," to the consolidated financial statements. Other Matters - ------------- Critical Accounting Policies: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates, assumptions and at times difficult, subjective or complex judgments. Accounting policies related to the recoverability of certain regulatory assets and the assumptions used in developing the pension and postretirement benefit obligations are the accounting principles that management believes are critical and could have a significant impact on PSNH's consolidated financial statements. Regulatory Assets: The accounting policies of the NU system's regulated operating companies historically reflect the effects of the rate-making process in accordance with Statement of Financial Accounting and Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." Through its cost-of-service rate regulated transmission and distribution business, PSNH is currently recovering its investments in long-lived assets, including regulatory assets, and management believes that the application of SFAS No. 71 to that portion of their business continues to be appropriate. Management must reaffirm this conclusion at each balance sheet date. If, as a result of a change in circumstances, it is determined that any portion of these investments is no longer recoverable under SFAS No. 71, that portion would be written off. Such a write-off could have a material impact on PSNH's consolidated financial statements. Management currently believes that all long-lived assets, including regulatory assets, are recoverable. Pension and Postretirement Benefit Obligations: PSNH participates in a uniform noncontributory defined benefit retirement plan covering substantially all regular NU system employees and also provides certain health care benefits, primarily medical and dental, and life insurance benefits through a benefit plan to retired employees. For each of these plans, the development of the benefit obligation, fair value of plan assets, funded status, and net periodic benefit credit or cost is based on several significant assumptions. These assumptions primarily relate to the application of a discount rate, expected long-term rate of return and other trend rates. If these assumptions were changed, the resultant change in benefit obligations, fair values of plan assets, funded status, and net periodic benefit credits or costs could have a material impact on PSNH's consolidated financial statements. For further information regarding these types of activities, see Note 1G, "Regulatory Accounting and Assets," and Note 8, "Pension Benefits and Postretirement Benefits Other Than Pensions," to the consolidated financial statements. Environmental Matters: The NU system, including PSNH, is subject to environmental laws and regulations structured to mitigate or remove the effect of past operations and to improve or maintain the quality of the environment. For further information regarding environmental matters, see Note 10B, "Commitments and Contingencies - Environmental Matters," to the consolidated financial statements. Other Commitments and Contingencies: For further information regarding other commitments and contingencies, see Note 10, "Commitments and Contingencies," to the consolidated financial statements. Contractual Obligations and Commercial Commitments: Aggregated information regarding PSNH's contractual obligations and commercial commitments as of December 31, 2001, is summarized as follows: - ------------------------------------------------------------------------------- (Millions of Dollars) 2002 2003 2004 2005 2006 Totals - ------------------------------------------------------------------------------- Notes payable to banks $ 60.5 $ - $ - $ - $ - $ 60.5 Capital leases 0.4 0.4 0.4 0.4 0.3 1.9 Operating leases 5.9 4.3 3.8 3.2 2.8 20.0 Long-term contractual obligations 151.6 154.7 159.0 160.3 154.8 780.4 - ------------------------------------------------------------------------------- Totals $218.4 $159.4 $163.2 $163.9 $157.9 $862.8 - ------------------------------------------------------------------------------- For further information regarding PSNH's contractual obligations and commercial commitments, see Note 3, "Short-Term Debt," Note 4, "Leases," and Note 10E, "Long-Term Contractual Arrangements," to the consolidated financial statements. Forward Looking Statements: This discussion and analysis includes forward looking statements, which are statements of future expectations and not facts including, but not limited to, statements regarding future earnings, refinancings, the use of proceeds from restructuring, and the recovery of operating costs. Words such as estimates, expects, anticipates, intends, plans, and similar expressions identify forward looking statements. Actual results or outcomes could differ materially as a result of further actions by state and federal regulatory bodies, competition and industry restructuring, changes in economic conditions, changes in historical weather patterns, changes in laws, developments in legal or public policy doctrines, technological developments, and other presently unknown or unforeseen factors. RESULTS OF OPERATIONS - --------------------- The components of significant income statement variances for the past two years are provided in the table below. Income Statement Variances (Millions of Dollars) 2001 over/(under) 2000 2000 over/(under) 1999 ---------------------- ---------------------- Amount Percent Amount Percent ------ ------- ------ ------- Operating Revenues ($120) (9)% $ 131 11% ----- --- ----- --- Operating Expenses: Fuel, purchased and net interchange power (140) (16) 162 23 Other operation 1 1 (5) (4) Maintenance 9 19 (5) (10) Depreciation (4) (9) (4) (8) Amortization of regulatory assets, net 20 43 11 31 Taxes other than income taxes (4) (9) (1) (3) ----- --- ----- --- Total operating expenses (118) (10) (158) 16 ----- --- ----- --- Operating Income (2) (1) (27) (16) Other income/(loss), net 22 (a) 9 (a) Interest expense, net 13 36 (5) (13) ----- --- ----- --- Income before income tax expense 7 7 (13) (10) Income tax expense (7) (15) 4 10 ----- --- ----- --- Income before extraordinary loss 14 21 (17) (20) Extraordinary loss 214 (a) (214) - ----- --- ----- --- Net income/(loss) $ 228 (a) $(231) (a) ===== === ===== === (a) percent greater than 100. Operating Revenues Operating revenue decreased $120 million or 9 percent in 2001, primarily due to lower retail and wholesale revenues. Retail revenues decreased $75 million, primarily due to 5 and 11 percent rate decreases that were effective October 1, 2000 and May 1, 2001, respectively ($89 million), partially offset by higher retail sales ($14 million). Retail kilowatt-hour (kWh) sales increased 1.2 percent. Wholesale revenues decreased $43 million due to lower sales of capacity and energy. Operating revenues increased by $131 million or 11 percent in 2000, primarily due to higher wholesale and retail revenues. Wholesale revenues increased by $128 million primarily due to higher wholesale energy and capacity sales. Retail revenues were higher primarily due to higher retail sales ($12 million), partially offset by a rate decrease as part of PSNH restructuring ($8 million). Retail kWh sales increased by 2.1 percent. Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense decreased in 2001, primarily due to lower purchased power expenses and lower expenses from NAEC as a result of the buydown of the Seabrook Power Contracts. Fuel, purchased and net interchange power expense increased in 2000, primarily due to higher wholesale energy sales. Other Operation and Maintenance Other operation and maintenance (O&M) expenses increased $10 million in 2001, primarily due to higher fossil and hydro expenses ($12 million) and higher transmission and distribution expenses ($2 million), partially offset by lower nuclear expenses ($2 million) and lower administrative and general expenses ($1 million). Other O&M expenses decreased in 2000, primarily due to lower transmission and distribution expenses ($6 million) and lower fossil maintenance expenses ($5 million). Depreciation Depreciation expense decreased in 2001, primarily due to lower fixed assets resulting from the sale of Millstone unit three at the end of the first quarter 2001. Depreciation expense decreased in 2000, primarily due to an increase in Distribution Plant depreciable lives. Amortization of Regulatory Assets, Net Amortization of regulatory assets, net increased in 2001, primarily due to higher amortizations related to restructuring. Amortization of regulatory assets, net increased in 2000, primarily due to the completion of the amortization of regulatory obligations related to net operating loss carryforwards in 1999 as a result of the Global Settlement. Taxes Other Than Income Taxes Taxes other than income taxes decreased in 2001, primarily due to lower New Hampshire franchise taxes in 2001. There were no significant changes to taxes other than income taxes in 2000. Other Income/(Loss), Net Other Income/(loss), net increased in 2001 as a result of PSNH's sale of its ownership in Millstone 3. Other income/(loss), net increased in 2000, primarily due to the 1999 settlement with the New Hampshire Electric Cooperative which resulted in a $6.2 million write-off in 1999. Interest Expense, Net Interest expense, net increased in 2001, primarily due to interest associated with the issuance of rate reduction bonds in 2001, partially offset by lower interest on long-term debt resulting from the retirement and refinancing of long-term debt. Interest on long-term debt decreased in 2000, primarily due to refinancing of long-term debt to lower interest rates. Income Tax Expense Income tax expense decreased in 2001, primarily due to the additional investment tax credits amortization associated with Seabrook. Income tax expense increased in 2000, primarily due to 1999 utilization of net operating loss carryforwards. Extraordinary Loss The extraordinary loss in 2000 is due to an after-tax write-off by PSNH of approximately $225 million of stranded costs under an industry restructuring settlement with the state of New Hampshire, combined with other positive effects relating to the discontinuation of SFAS No. 71 ($11 million). - ------------------------------------------------------------------------------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - ------------------------------------------------------------------------------- To the Board of Directors of Public Service Company of New Hampshire: We have audited the accompanying consolidated balance sheets of Public Service Company of New Hampshire and subsidiaries (a New Hampshire corporation and a wholly owned subsidiary of Northeast Utilities) as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income, common stockholder's equity and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Public Service Company of New Hampshire and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Hartford, Connecticut January 22, 2002 PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
- ----------------------------------------------------------------------------------------------------------- For the Years Ended December 31, 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------- (Thousands of Dollars) Operating Revenues.......................................$ 1,171,686 $ 1,291,332 $ 1,160,589 -------------- -------------- -------------- Operating Expenses: Operation - Fuel, purchased and net interchange power............ 713,668 853,563 691,743 Other................................................ 123,533 122,268 127,635 Maintenance............................................. 56,276 47,429 52,481 Depreciation............................................ 39,741 43,873 47,695 Amortization of regulatory assets, net.................. 65,445 45,874 34,915 Taxes other than income taxes........................... 38,375 42,321 43,409 -------------- -------------- -------------- Total operating expenses.............................. 1,037,038 1,155,328 997,878 -------------- -------------- -------------- Operating Income.......................................... 134,648 136,004 162,711 Other Income, Net......................................... 36,643 14,360 5,837 -------------- -------------- -------------- Income Before Interest and Income Tax Expense............. 171,291 150,364 168,548 -------------- -------------- -------------- Interest Expense: Interest on long-term debt.............................. 30,201 37,510 42,728 Interest on rate reduction bonds........................ 20,721 - - Other interest.......................................... 22 47 547 -------------- -------------- -------------- Interest expense, net................................. 50,944 37,557 43,275 -------------- -------------- -------------- Income Before Income Tax Expense.......................... 120,347 112,807 125,273 Income Tax Expense........................................ 38,571 45,256 41,064 -------------- -------------- -------------- Income Before Extraordinary Loss........................ 81,776 67,551 84,209 Extraordinary loss, net of tax benefit of $155,783............................................. - (214,217) - -------------- -------------- -------------- Net Income/(Loss)........................................$ 81,776 $ (146,666) $ 84,209 ============== ============== ============== STATEMENTS OF COMPREHENSIVE INCOME Net Income/(Loss)........................................$ 81,776 $ (146,666) $ 84,209 -------------- -------------- -------------- Other comprehensive (loss)/income, net of tax: Unrealized (losses)/gains on securities................. (801) 133 70 -------------- -------------- -------------- Comprehensive Income/(Loss)..............................$ 80,975 $ (146,533) $ 84,279 ============== ============== ==============
The accompanying notes are an integral part of these financial statements. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------- At December 31, 2001 2000 - -------------------------------------------------------------------------------------------- (Thousands of Dollars) ASSETS - ------ Current Assets: Cash........................................................ $ 1,479 $ 116,482 Receivables, less accumulated provision for uncollectible accounts of $1,737 in 2001 and $1,869 in 2000......................................... 70,540 71,992 Accounts receivable from affiliated companies............... 13,055 2,239 Taxes receivable............................................ - 10,005 Unbilled revenues........................................... 29,268 41,844 Fuel, materials and supplies, at average cost............... 42,047 28,760 Prepayments and other....................................... 10,211 14,783 ---------- ---------- 166,600 286,105 ---------- ---------- Property, Plant and Equipment: Electric utility............................................ 1,447,955 1,506,168 Other....................................................... 6,221 8,588 ---------- ---------- 1,454,176 1,514,756 Less: Accumulated provision for depreciation.............. 689,397 714,792 ---------- ---------- 764,779 799,964 Construction work in progress................................ 44,961 27,251 Nuclear fuel, net............................................ - 1,924 ---------- ---------- 809,740 829,139 ---------- ---------- Deferred Debits and Other Assets: Regulatory assets............................................ 1,046,760 924,847 Nuclear decommissioning trusts, at market.................... - 7,362 Other ....................................................... 71,414 34,843 ---------- ---------- 1,118,174 967,052 ---------- ---------- Total Assets................................................... $2,094,514 $2,082,296 ========== ==========
The accompanying notes are an integral part of these financial statements. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------ At December 31, 2001 2000 - ------------------------------------------------------------------------------------------ (Thousands of Dollars) LIABILITIES AND CAPITALIZATION - ------------------------------ Current Liabilities: Notes payable to banks................................ $ 60,500 $ - Notes payable to affiliated company................... 23,000 - Preferred stock - current portion..................... - 24,268 Obligations under Seabrook Power Contracts and other capital leases - current portion.......... 24,164 537,528 Accounts payable...................................... 32,285 45,892 Accounts payable to affiliated companies.............. 18,727 54,008 Accrued taxes......................................... 2,281 657 Accrued interest...................................... 9,428 4,962 Other................................................. 25,164 13,112 ---------- ---------- 195,549 680,427 ---------- ---------- Rate Reduction Bonds.................................... 507,381 - ---------- ---------- Obligations under Seabrook Power Contracts and Other Capital Leases.............................. 86,111 91,702 ---------- ---------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes..................... 423,050 179,928 Accumulated deferred investment tax credits........... 12,015 27,348 Deferred contractual obligations...................... 37,712 41,499 Accrued pension....................................... 37,326 41,216 Other................................................. 46,260 63,597 ---------- ---------- 556,363 353,588 ---------- ---------- Capitalization: Long-Term Debt........................................ 407,285 407,285 ---------- ---------- Common stock, $1 par value - authorized 100,000,000 shares; 388 shares outstanding in 2001 and 1,000 shares outstanding in 2000....... - 1 Capital surplus, paid in............................ 165,000 424,909 Retained earnings................................... 176,419 123,177 Accumulated other comprehensive income.............. 406 1,207 ---------- ---------- Common Stockholder's Equity........................... 341,825 549,294 ---------- ---------- Total Capitalization.................................... 749,110 956,579 ---------- ---------- Commitments and Contingencies (Note 10) Total Liabilities and Capitalization..................... $2,094,514 $2,082,296 ========== ==========
The accompanying notes are an integral part of these financial statements. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
- ----------------------------------------------------------------------------------------------------------- Accumulated Capital Other Common Surplus, Retained Comprehensive Total Stock Paid In Earnings Income/(Loss) (a) - ----------------------------------------------------------------------------------------------------------- (Thousands of Dollars) Balance at January 1, 1999............. $ 1 $ 424,250 $ 252,912 $1,004 $ 678,167 Net income for 1999.................. 84,209 84,209 Cash dividends on preferred stock.... (6,625) (6,625) Capital stock expenses, net.......... 404 404 Allocation of benefits - ESOP (b).... (10,558) (10,558) Other comprehensive income........... 70 70 --- --------- --------- ------ --------- Balance at December 31, 1999........... 1 424,654 319,938 1,074 745,667 Net loss for 2000.................... (146,666) (146,666) Cash dividends on preferred stock.... (3,962) (3,962) Cash dividends on common stock....... (50,000) (50,000) Capital stock expenses, net.......... 255 255 Allocation of benefits - ESOP (b).... 3,867 3,867 Other comprehensive income........... 133 133 --- --------- --------- ------ --------- Balance at December 31, 2000........... 1 424,909 123,177 1,207 549,294 Net income for 2001.................. 81,776 81,776 Cash dividends on preferred stock.... (1,286) (1,286) Cash dividends on common stock....... (27,000) (27,000) Repurchase of common stock........... (1) (259,999) (260,000) Capital stock expenses, net.......... 90 90 Allocation of benefits - ESOP (b).... (248) (248) Other comprehensive loss............. (801) (801) --- --------- --------- ------ --------- Balance at December 31, 2001........... $ - $ 165,000 $ 176,419 $ 406 $ 341,825 === ========= ========= ======= =========
(a) The company has no dividend restrictions. However, the company has two tests it must meet before it can pay out any dividends. The most restrictive of which limits the company to paying out no greater than $99.6 million of equity at December 31, 2001. (b) In June 1999, PSNH paid NU parent $10.6 million for NU shares issued from 1992 through 1998 on behalf of its employees in accordance with NU's 401(k) plan. This transaction resulted in a reduction of the NU parent loss and a tax benefit to PSNH. The amount in 2000 represents the remaining previously allocated 1993 through 1999 NU parent losses. The accompanying notes are an integral part of these financial statements. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------ For the Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------ (Thousands of Dollars) Operating activities: Income before extraordinary loss ................................. $ 81,776 $ 67,551 $ 84,209 Adjustments to reconcile to net cash flows provided by operating activities: Depreciation.................................................... 39,741 43,873 47,695 Deferred income taxes and investment tax credits, net........... 195,422 (521) (5,304) Net (deferral)/amortization of recoverable energy costs, net.... (21,234) (35,886) 27,065 Amortization of regulatory assets, net.......................... 65,445 45,874 34,915 Net other (uses)/sources of cash................................ (83,746) 43,412 38,601 Changes in working capital: Receivables and unbilled revenues, net ......................... 3,212 20,597 5,987 Fuel, materials and supplies.................................... (13,287) 9,316 (1,434) Accounts payable................................................ (48,888) 23,110 22,307 Accrued taxes................................................... 1,624 (33,048) (49,385) Other working capital (excludes cash)........................... 31,095 6,646 (5,496) ---------- --------- --------- Net cash flows provided by operating activities..................... 251,160 190,924 199,160 ---------- --------- --------- Investing Activities: Investments in regulated plant: Electric utility plant.......................................... (92,626) (69,500) (46,096) Nuclear fuel.................................................... (37) (1,153) (1,168) ---------- --------- --------- Net cash flows used for investments in regulated plant............ (92,663) (70,653) (47,264) Investments in nuclear decommissioning trusts..................... (137) (686) (678) Other investment activities, net.................................. (30,906) 2,268 2,214 Net proceeds from the sale of utility plant....................... 24,888 - - Buyout of IPP contract............................................ (48,164) - - ---------- --------- --------- Net cash flows used in investing activities......................... (146,982) (69,071) (45,728) ---------- --------- --------- Financing Activities: Repurchase of common stock........................................ (260,000) - - Issuance of long-term debt........................................ 287,485 - - Issuance of rate reduction bonds.................................. 525,000 - - Retirement of rate reduction bonds................................ (17,619) - - Net increase in short-term debt................................... 83,500 - - Reacquisitions and retirements of long-term debt.................. (287,485) (109,200) Reacquisitions and retirements of preferred stock................. (24,268) (25,732) (25,000) Buydown of capital lease obligation............................... (497,508) - - Cash dividends on preferred stock................................. (1,286) (3,962) (6,625) Cash dividends on common stock.................................... (27,000) (50,000) - ---------- --------- --------- Net cash flows used in financing activities......................... (219,181) (188,894) (31,625) ---------- --------- --------- Net (decrease)/increase in cash .................................... (115,003) (67,041) 121,807 Cash - beginning of year............................................ 116,482 183,523 61,716 ---------- --------- --------- Cash - end of year.................................................. $ 1,479 $ 116,482 $ 183,523 ========== ========= ========= Supplemental Cash Flow Information: Cash paid during the year for: Interest, net of amounts capitalized............................. $ 47,369 $ 38,819 $ 39,895 ========== ========== ========= Income taxes...................................................... $ 168,021 $ 22,575 $ 38,942 ========== ========== ========= Decrease in obligations: Seabrook Power Contracts.......................................... $ (517,998) $ (96,208) $(115,065) ========== ========== =========
The accompanying notes are an integral part of these financial statements. - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. About Public Service Company of New Hampshire Public Service Company of New Hampshire (PSNH or the company) along with The Connecticut Light and Power Company (CL&P), Western Massachusetts Electric Company (WMECO), North Atlantic Energy Corporation (NAEC), Holyoke Water Power Company (HWP), and Yankee Energy System, Inc. (Yankee) are the operating companies comprising the Northeast Utilities system (NU system) and are wholly owned by Northeast Utilities (NU). The NU system furnishes franchised retail electric service in New Hampshire, Connecticut, and western Massachusetts through PSNH, CL&P and WMECO. NAEC sells all of its entitlement to the capacity and output of Seabrook Station nuclear unit (Seabrook) to PSNH under the terms of two life-of-unit, full cost recovery contracts (Seabrook Power Contacts). HWP also is engaged in the production of electric power. Yankee, the parent company of Yankee Gas Services Company (Yankee Gas), is Connecticut's largest natural gas distribution system. NU is registered with the Securities and Exchange Commission (SEC) as a holding company under the Public Utility Holding Company Act of 1935 (1935 Act) and the NU system, including PSNH, is subject to the provisions of the 1935 Act. Arrangements among the NU system companies, outside agencies and other utilities covering interconnections, interchange of electric power and sales of utility property are subject to regulation by the Federal Energy Regulatory Commission (FERC) and/or the SEC. PSNH is subject to further regulation for rates, accounting and other matters by the FERC and the New Hampshire Public Utilities Commission (NHPUC). Several wholly owned subsidiaries of NU provide support services for the NU system companies, including PSNH, and, in some cases, for other New England utilities. Northeast Utilities Service Company (NUSCO) provides centralized accounting, administrative, engineering, financial, information resources, legal, operational, planning, purchasing, and other services to the NU system companies, including PSNH. North Atlantic Energy Service Corporation has operational responsibility for Seabrook. In addition, PSNH has established two special purpose subsidiaries whose operations are solely related to the issuance of rate reduction bonds. B. Presentation The consolidated financial statements of PSNH include the accounts of all subsidiaries. Intercompany transactions have been eliminated in consolidation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications of prior years' data have been made to conform with the current year's presentation. All transactions among affiliated companies are on a recovery of cost basis which may include amounts representing a return on equity and are subject to approval by various federal and state regulatory agencies and the NHPUC. C. New Accounting Standards Asset Retirement Obligations: In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and applies to (a) all entities and (b) legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a long- lived asset, except for certain obligations of lessees. SFAS No. 143 is effective for PSNH's 2003 calendar year. Upon adoption of SFAS No. 143, there may be an impact on PSNH's consolidated financial statements which management has not estimated at this time. Long-Lived Assets: In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement modifies financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 is effective for PSNH's 2002 calendar year. Currently, management does not expect the adoption of SFAS No. 144 to have a material impact on PSNH's consolidated financial statements. D. Investments and Jointly Owned Electric Utility Plant Regional Nuclear Generating Companies: PSNH owns common stock in four regional nuclear companies (Yankee Companies). PSNH's ownership interests in the Yankee Companies at December 31, 2001 and 2000, which are accounted for on the equity method due to PSNH's ability to exercise significant influence over their operating and financial policies are 5 percent of the Connecticut Yankee Atomic Power Company (CYAPC), 7 percent of the Yankee Atomic Electric Company (YAEC), 5 percent of Maine Yankee Atomic Power Company (MYAPC), and 4 percent of Vermont Yankee Nuclear Power Corporation (VYNPC). PSNH's total equity investment in the Yankee Companies at December 31, 2001 and 2000 is $8.5 million and $10 million, respectively. Each Yankee Company owns a single nuclear generating unit. However, VYNPC was the only unit still in operation at December 31, 2001. Wyman Unit 4: PSNH has a 3.14 percent ownership interest in Wyman Unit 4, a 632 megawatt oil-fired generating unit. At December 31, 2001 and 2000, plant-in-service included $6.1 million and the accumulated provision for depreciation included $4.5 million and $4.3 million, respectively, related to Wyman Unit 4. E. Depreciation The provision for depreciation is calculated using the straight-line method based on the estimated remaining useful lives of depreciable utility plant-in-service, adjusted for salvage value and removal costs, as approved by the appropriate regulatory agency where applicable. Depreciation rates are applied to plant-in-service from the time they are placed in service. When plant is retired from service, the original cost of the plant, including costs of removal less salvage, is charged to the accumulated provision for depreciation. The depreciation rates for the several classes of electric plant-in-service are equivalent to a composite rate of 3 percent in 2001, 3.2 percent in 2000 and 3.7 percent in 1999. F. Revenues Revenues are based on authorized rates applied to each customer's use of energy. In general, rates can be changed only through a formal proceeding before the NHPUC. Regulatory commissions also have authority over the terms and conditions of nontraditional rate-making arrangements. At the end of each accounting period, PSNH accrues a revenue estimate for the amount of energy delivered but unbilled. G. Regulatory Accounting and Assets The accounting policies of PSNH conform to accounting principles generally accepted in the United States applicable to rate-regulated enterprises and historically reflect the effects of the rate-making process in accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." PSNH's transmission and distribution business continues to be cost-of- service rate regulated, and management believes the application of SFAS No. 71 continues to be appropriate. Management also believes it is probable that PSNH will recover its investments in long-lived assets, including regulatory assets. PSNH has three categories of stranded costs. Part 1 costs are securitized regulatory assets that are recovered over the life of the rate reduction bonds. Part 2 costs are ongoing costs consisting of nuclear decommissioning and independent power producer costs that are recovered as incurred, over the time period PSNH is responsible for those costs. Part 3 costs are nonsecuritized regulatory assets which must be recovered by a recovery end date to be determined in accordance with the "Agreement to Settle PSNH Restructuring" (Settlement Agreement) or which will be written off as stipulated by that Settlement Agreement. Based on current projections, PSNH expects to fully recover all of its Part 3 costs by the recovery end date. In addition, all material regulatory assets are earning a return. The components of PSNH's regulatory assets are as follows: ----------------------------------------------------------------------- At December 31, 2001 2000 ----------------------------------------------------------------------- (Millions of Dollars) Recoverable nuclear costs.................. $ 29.0 $484.7 Securitized regulatory assets.............. 498.2 - Income taxes, net.......................... 99.4 68.1 Unrecovered contractual obligations........ 38.8 41.5 Recoverable energy costs, net.............. 251.6 230.3 Other...................................... 129.8 100.2 ----------------------------------------------------------------------- Totals..................................... $1,046.8 $924.8 ----------------------------------------------------------------------- In March 2001, PSNH recorded a regulatory asset in the amount of $46.5 million in conjunction with the sale of the Millstone units. A portion of the Millstone regulatory asset has been securitized and the remaining unamortized balance of $29 million as of December 31, 2001, is included in recoverable nuclear costs. In 2000, PSNH discontinued the application of SFAS No. 71 for its generation business, and created a regulatory asset for Seabrook over market generation, which was classified as recoverable nuclear costs. The unamortized balance of the regulatory asset created was $484.7 million as of December 31, 2000. In April 2001, PSNH issued rate reduction bonds in the amount of $525 million. PSNH used the majority of this amount to buydown its power contracts with NAEC. The Seabrook over market generation was securitized at that time and was reclassified as a securitized regulatory asset as of December 31, 2001. PSNH, under the terms of contracts with the Yankee Companies, is responsible for its proportionate share of the remaining costs of the units, including decommissioning. These amounts are recorded as unrecovered contractual obligations. A portion of these obligations was securitized in 2001 and is included in securitized regulatory assets. PSNH, under the Energy Policy Act of 1992 (Energy Act), is assessed for its proportionate share of the costs of decontaminating and decommissioning uranium enrichment plants owned by the United States Department of Energy (DOE) (D&D Assessment). The Energy Act requires that regulators treat D&D Assessments as a reasonable and necessary current cost of fuel, to be fully recovered in rates like any other fuel cost. PSNH is currently recovering these costs through rates. As of December 31, 2001 and 2000, the PSNH's total D&D Assessment deferrals were $0.2 million, and have been recorded as recoverable energy costs, net. In conjunction with the implementation of restructuring under the Settlement Agreement on May 1, 2001, the fuel and purchased-power adjustment clause (FPPAC) was discontinued. At December 31, 2001 and 2000, PSNH had $251.4 million and $230.1 million, respectively, of recoverable energy costs deferred under the FPPAC, including previous deferrals of purchases from independent power producers. Under the Settlement Agreement, the FPPAC deferrals are recovered as a Part 3 regulatory asset through a transition charge, subject to a prudence determination by the NHPUC. H. Income Taxes The tax effect of temporary differences (differences between the periods in which transactions affect income in the financial statements and the periods in which they affect the determination of taxable income) is accounted for in accordance with the rate-making treatment of the applicable regulatory commissions. The tax effect of temporary differences, including timing differences accrued under previously approved accounting standards, that give rise to the accumulated deferred tax obligation including the impacts of the buydown of the Seabrook Power Contracts and the sale of the Millstone units, is as follows: ----------------------------------------------------------------------- At December 31, 2001 2000 ----------------------------------------------------------------------- (Millions of Dollars) Accelerated depreciation and other plant-related differences............... $ 85.8 $ 93.8 Regulatory assets: Securitized contract termination costs and other....................... 177.9 - Income tax gross-up..................... 37.8 25.1 Other..................................... 121.6 61.0 ----------------------------------------------------------------------- Totals.................................... $423.1 $179.9 ----------------------------------------------------------------------- I. Other Income, Net The components of PSNH's other income, net items are as follows: ----------------------------------------------------------------------- For the Years Ended December 31, ----------------------------------------------------------------------- 2001 2000 1999 ----------------------------------------------------------------------- (Millions of Dollars) Gain related to Millstone sale..... $25.9 $ - $ - Other, net......................... 10.7 14.4 5.8 ----------------------------------------------------------------------- Totals............................. $36.6 $14.4 $5.8 ----------------------------------------------------------------------- 2. SEABROOK POWER CONTRACTS PSNH and NAEC have entered into two power contracts that obligate PSNH to purchase NAEC's 35.98 percent ownership of the capacity and output of Seabrook for the term of Seabrook's operating license. Under these power contracts, PSNH is obligated to pay NAEC's cost of service during this period, regardless of whether Seabrook is operating. NAEC's cost of service includes all of its Seabrook-related costs, including operation and maintenance (O&M) expenses, fuel expense, income and property tax expense, depreciation expense, certain overhead and other costs, and a return on its allowed investment. With the implementation of the Settlement Agreement, PSNH and NAEC restructured the power contracts and bought down the value of the Seabrook plant asset, as defined within the Settlement Agreement, to $100 million. The Settlement Agreement also requires NAEC to sell via public auction its share of Seabrook, with the sale to occur no later than December 31, 2003. NAEC expects to sell its investment in Seabrook around the end of 2002 through a public auction. Upon a successful sale of NAEC's share of Seabrook, the existing Seabrook Power Contracts between PSNH and NAEC will be terminated. PSNH has included its right to buy power from NAEC on its balance sheet as part of utility plant with a corresponding obligation. Under the current Seabrook Power Contracts which will be terminated following the sale of Seabrook, if Seabrook is shut down prior to the expiration of its operating license, PSNH will be unconditionally required to pay NAEC termination costs for 39 years, less the period during which Seabrook has operated. These termination costs will reimburse NAEC for its share of Seabrook shut-down and decommissioning costs, and will pay NAEC a return of and on any undepreciated balance of its initial investment over the remaining term of the power contracts, and the return of and on any capital additions to the plant made after the acquisition date over a period of five years after shut down (net of any tax benefits to NAEC attributable to the cancellation). Contract payments, excluding the buydown of the Seabrook plant asset in 2001, charged to operating expenses in 2001, 2000 and 1999 were $158.6 million, $268 million and $280 million, respectively. Interest included in the contract payments in 2001, 2000 and 1999 was $21.8 million, $44 million and $49 million, respectively. 3. SHORT-TERM DEBT Limits: The amount of short-term borrowings that may be incurred by PSNH is subject to periodic approval by either the SEC under the 1935 Act or by the respective state regulators. PSNH is authorized by the NHPUC to incur short-term borrowings up to a maximum of $100 million. Credit Agreement: On November 16, 2001, PSNH, CL&P, WMECO, and Yankee Gas entered into a 364-day unsecured revolving credit facility for $350 million. PSNH may draw up to $100 million under the facility, subject to the maximum facility limit of $350 million. Unless extended, the credit facility will expire on November 15, 2002. At December 31, 2001 and 2000, there were $60.5 million and no borrowings, respectively, in borrowings under these facilities. Under the aforementioned credit agreement, PSNH may borrow at fixed or variable rates plus an applicable margin based upon certain debt ratings, as rated by the lower of Standard and Poor's or Moody's Investors Service. The weighted average interest rate on PSNH's notes payable to banks outstanding on December 31, 2001 was 2.9 percent. This credit agreement provides that PSNH must comply with certain financial and nonfinancial covenants as are customarily included in such agreements, including, but not limited to, consolidated debt ratios and interest coverage ratios. PSNH currently is and expects to remain in compliance with these covenants. Money Pool: Certain subsidiaries of NU, including PSNH, are members of the Northeast Utilities System Money Pool (Pool). The Pool provides a more efficient use of the cash resources of the NU system and reduces outside short-term borrowings. NUSCO administers the Pool as agent for the member companies. Short-term borrowing needs of the member companies are first met with available funds of other member companies, including funds borrowed by NU parent. NU parent may lend to the Pool but may not borrow. Funds may be withdrawn from or repaid to the Pool at any time without prior notice. Investing and borrowing subsidiaries receive or pay interest based on the average daily federal funds rate. Borrowings based on loans from NU parent, however, bear interest at NU parent's cost and must be repaid based upon the terms of NU parent's original borrowing. At December 31, 2001 and 2000, PSNH had $23 million in borrowings from and no borrowings from/lendings to the Pool, respectively. The interest rate on borrowings from the Pool at December 31, 2001 was 1.5 percent. 4. LEASES PSNH has entered into lease agreements, some of which are capital leases, for the use of data processing and office equipment, vehicles and office space. The provisions of these lease agreements generally provide for renewal options. Capital lease rental payments charged to operating expense were $0.7 million in 2001, $1 million in 2000, and $1.5 million in 1999. Interest included in capital lease rental payments was $0.3 million in 2001 and 2000, and $0.4 million in 1999. Operating lease rental payments charged to expense were $3.9 million in 2001, $3.5 million in 2000, and $3.1 million in 1999. Future minimum rental payments, excluding executory costs, such as property taxes, state use taxes, insurance, and maintenance, under long- term noncancelable leases, as of December 31, 2001, are as follows: --------------------------------------------------------------------------- Year Capital Leases Operating Leases --------------------------------------------------------------------------- (Millions of Dollars) 2002............................. $0.4 $ 5.9 2003............................. 0.4 4.3 2004............................. 0.4 3.8 2005............................. 0.4 3.2 2006............................. 0.3 2.8 After 2006....................... 0.4 4.6 --------------------------------------------------------------------------- Future minimum lease payments.... 2.3 $24.6 Less amount representing interest.......... 0.9 --------------------------------------------------------------------------- Present value of future minimum lease payments......... $1.4 --------------------------------------------------------------------------- 5. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION Details of preferred stock subject to mandatory redemption are as follows: --------------------------------------------------------------------------- Shares December 31, Outstanding -------------------- Description December 31, 2001 2001 2000 --------------------------------------------------------------------------- (Millions of Dollars) 10.60% Series A of 1991 - $ - $24.3 Less preferred stock to be redeemed within one year - - 24.3 --------------------------------------------------------------------------- Totals - $ - $ - --------------------------------------------------------------------------- 6. LONG-TERM DEBT Details of long-term debt outstanding are as follows: --------------------------------------------------------------------------- At December 31, 2001 2000 --------------------------------------------------------------------------- (Millions of Dollars) Pollution Control Revenue Bonds: 7.65% Tax-Exempt Series A, due 2021.............. $ - $ 66.0 7.50% Tax-Exempt Series B, due 2021.............. - 109.0 7.65% Tax-Exempt Series C, due 2021.............. - 112.5 6.00% Tax-Exempt Series D, due 2021.............. 75.0 75.0 6.00% Tax-Exempt Series E, due 2021.............. 44.8 44.8 Adjustable Rate, Series A, due 2021.............. 89.3 - Adjustable Rate, Series B, due 2021.............. 89.3 - 5.45% Tax-Exempt Series C, due 2021.............. 108.9 - --------------------------------------------------------------------------- Long-term debt................................... $407.3 $407.3 --------------------------------------------------------------------------- There are no cash sinking fund requirements or debt maturities for the years 2002 through 2006. There are annual renewal and replacement fund requirements equal to 2.25 percent of the average of net depreciable utility property owned by PSNH at the reorganization date, plus cumulative gross property additions thereafter. PSNH expects to meet these future fund requirements by certifying property additions. Any deficiency would need to be satisfied by the deposit of cash or bonds. Essentially, all utility plant of PSNH is subject to the liens of the company's first mortgage bond indenture. PSNH entered into financing arrangements with the Business Finance Authority (BFA) of the state of New Hampshire. Pursuant to which the BFA issued five series of Pollution Control Revenue Bonds (PCRBs) and loaned the proceeds to PSNH. PSNH's obligation to repay each series of PCRBs is secured by bond insurance and the first mortgage bonds. Each such series of first mortgage bonds contains similar terms and provisions as the applicable series of PCRBs. For financial reporting purposes, these first mortgage bonds would not be considered outstanding unless PSNH failed to meet its obligations under the PCRBs. The average effective interest rates on the variable-rate pollution control notes was 1.6 percent in 2001 and ranged from 5.9 percent to 6.8 percent in 2000. 7. INCOME TAX EXPENSE The components of the federal and state income tax provisions were charged/(credited) to operations as follows: --------------------------------------------------------------------------- For the Years Ended December 31, 2001 2000 1999 --------------------------------------------------------------------------- (Millions of Dollars) Current income taxes: Federal.............................. $(143.5) $41.8 $41.4 State................................ (13.4) 4.0 5.0 ------- ----- ----- Total current...................... (156.9) 45.8 46.4 ------- ----- ----- Deferred income taxes, net: Federal.............................. 197.3 6.7 4.6 State................................ 13.5 0.8 (2.2) ------- ----- ----- Total deferred..................... 210.8 7.5 2.4 ------- ----- ----- Investment tax credits, net............ (15.3) (8.0) (7.7) --------------------------------------------------------------------------- Total income tax expense............... $ 38.6 $45.3 $41.1 --------------------------------------------------------------------------- Deferred income taxes are comprised of the tax effects of temporary differences as follows: --------------------------------------------------------------------------- For the Years Ended December 31, 2001 2000 1999 --------------------------------------------------------------------------- (Millions of Dollars) Depreciation............................ $ 1.9 $(1.0) $ (6.5) Regulatory deferral..................... 13.3 6.9 (12.6) State net operating loss carryforward... - - 29.5 Regulatory disallowance................. 2.3 - (2.3) Contractual settlements................. 6.7 - (6.7) Securitized contract costs and other.... 177.9 - - Other................................... 8.7 1.6 1.0 --------------------------------------------------------------------------- Deferred income taxes, net.............. $210.8 $ 7.5 $ 2.4 --------------------------------------------------------------------------- A reconciliation between income tax expense and the expected tax expense at the statutory rate is as follows: --------------------------------------------------------------------------- For the Years Ended December 31, 2001 2000 1999 --------------------------------------------------------------------------- (Millions of Dollars) Expected federal income tax............. $42.1 $39.4 $43.7 Tax effect of differences: Depreciation.......................... 0.7 0.3 0.9 Amortization of regulatory assets..... 6.3 9.9 9.9 Investment tax credit amortization.... (15.3) (8.0) (7.7) State income taxes, net of federal benefit..................... 0.1 2.9 1.6 Adjustment to tax asset valuation allowance................. - - (7.4) Seabrook intercompany gains and losses.......................... - 5.0 0.8 Allocation of parent company loss..... - (4.2) - Other, net............................ 4.7 - (0.7) --------------------------------------------------------------------------- Total income tax expense................ $38.6 $45.3 $41.1 --------------------------------------------------------------------------- 8. PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The NU system companies, including PSNH, participate in a uniform noncontributory defined benefit retirement plan covering substantially all regular NU system employees. Benefits are based on years of service and the employees' highest eligible compensation during 60 consecutive months of employment. PSNH's portion of the NU system's pension credit, part of which was credited to utility plant, was $4.7 million in 2001, $4.3 million in 2000 and $0.5 million in 1999. Currently, PSNH's policy is to annually fund an amount at least equal to that which will satisfy the requirements of the Employee Retirement Income Security Act and Internal Revenue Code. The NU system companies, including PSNH, also provide certain health care benefits, primarily medical and dental, and life insurance benefits through a benefit plan to retired employees. These benefits are available for employees retiring from PSNH who have met specified service requirements. For current employees and certain retirees, the total benefit is limited to two times the 1993 per retiree health care cost. These costs are charged to expense over the estimated work life of the employee. PSNH annually funds postretirement costs through external trusts with amounts that have been rate-recovered and which also are tax deductible. Pension and trust assets are invested primarily in domestic and international equity securities and bonds. The following table represents information on the plans' benefit obligation, fair value of plan assets, and the respective plans' funded status:
------------------------------------------------------------------------------- At December 31, ------------------------------------------------------------------------------- Postretirement Pension Benefits Benefits ------------------------------------------------------------------------------- (Millions of Dollars) 2001 2000 2001 2000 ------------------------------------------------------------------------------- Change in benefit obligation Benefit obligation at beginning of year........... $(211.1) $ (201.5) $(52.9) $(51.2) Service cost..................... (5.0) (4.8) (1.1) (0.9) Interest cost.................... (15.8) (15.0) (4.3) (3.9) Transfers........................ 0.1 0.1 - - Actuarial loss................... (9.5) (1.0) (12.4) (1.1) Benefits paid.................... 15.1 11.1 5.3 4.2 Settlements and other............ (1.7) - (0.1) - ------------------------------------------------------------------------------- Benefit obligation at end of year................. $(227.9) $(211.1) $(65.5) $(52.9) ------------------------------------------------------------------------------- Change in plan assets Fair value of plan assets at beginning of year........... $ 221.8 $ 233.8 $ 32.4 $ 30.6 Actual return on plan assets..... (10.0) (0.8) (2.9) 1.5 Employer contribution............ - - 4.3 4.5 Benefits paid.................... (15.1) (11.1) (5.3) (4.2) Transfers........................ (0.1) (0.1) - - ------------------------------------------------------------------------------- Fair value of plan assets at end of year................. $ 196.6 $ 221.8 $ 28.5 $ 32.4 ------------------------------------------------------------------------------- Funded status at December 31..... $ (31.3) $ 10.7 $(37.0) $(20.5) Unrecognized transition obligation..................... 2.7 3.0 32.2 35.3 Unrecognized prior service cost.. 14.1 15.5 - - Unrecognized net (gain)/loss..... (22.8) (70.4) 4.6 (14.8) ------------------------------------------------------------------------------- Accrued benefit cost............. $ (37.3) $ (41.2) $ (0.2) $ - -------------------------------------------------------------------------------
The following actuarial assumptions were used in calculating the plans' year end funded status: -------------------------------------------------------------------------- At December 31, -------------------------------------------------------------------------- Postretirement Pension Benefits Benefits -------------------------------------------------------------------------- 2001 2000 2001 2000 -------------------------------------------------------------------------- Discount rate.................. 7.25% 7.50% 7.25% 7.50% Compensation/progression rate.. 4.25 4.50 4.25 4.50 Health care cost trend rate (a)............... N/A N/A 11.00 5.26 -------------------------------------------------------------------------- (a) The annual per capita cost of covered health care benefits was assumed to decrease to 5.00 percent by 2007. The components of net periodic benefit (credit)/cost are:
---------------------------------------------------------------------------------------- For the Years Ended December 31, ---------------------------------------------------------------------------------------- Pension Benefits Postretirement Benefits ---------------------------------------------------------------------------------------- (Millions of Dollars) 2001 2000 1999 2001 2000 1999 ---------------------------------------------------------------------------------------- Service cost................ $ 5.0 $ 4.8 $ 4.9 $ 1.1 $ 0.9 $ 1.0 Interest cost............... 15.8 15.0 14.3 4.3 3.9 3.6 Expected return on plan assets............ (20.9) (19.7) (17.7) (2.9) (2.6) (2.1) Amortization of unrecognized net transition obligation................ 0.3 0.3 0.3 2.9 2.9 2.9 Amortization of prior service cost........ 1.3 1.3 1.3 - - - Amortization of actuarial gain............ (5.4) (6.0) (3.6) - - - Other amortization, net..... - - - (1.1) (0.6) (0.5) Settlements and other....... (0.8) - - - - - ---------------------------------------------------------------------------------------- Net periodic benefit (credit)/cost............. $(4.7) $ (4.3) $ (0.5) $ 4.3 $ 4.5 $ 4.9 ----------------------------------------------------------------------------------------
For calculating pension and postretirement benefit costs, the following assumptions were used: -------------------------------------------------------------------------- For the Years Ended December 31, -------------------------------------------------------------------------- Postretirement Pension Benefits Benefits 2001 2000 1999 2001 2000 1999 -------------------------------------------------------------------------- Discount rate............. 7.50% 7.75% 7.00% 7.50% 7.75% 7.00% Expected long-term rate of return.......... 9.50 9.50 9.50 N/A N/A N/A Compensation/ progression rate........ 4.50 4.75 4.25 4.50 4.75 4.25 Long-term rate of return - Health assets, net of tax.......... N/A N/A N/A 7.50 7.50 7.50 Life assets........... N/A N/A N/A 9.50 9.50 9.50 -------------------------------------------------------------------------- Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The effect of changing the assumed health care cost trend rate by one percentage point in each year would have the following effects: -------------------------------------------------------------------------- One Percentage One Percentage (Millions of Dollars) Point Increase Point Decrease -------------------------------------------------------------------------- Effect on total service and interest cost components......... $0.2 $(0.2) Effect on postretirement benefit obligation............... $3.0 $(2.7) -------------------------------------------------------------------------- The trust holding the health plan assets is subject to federal income taxes. 9. NUCLEAR GENERATION ASSETS DIVESTITURE On March 31, 2001, PSNH, CL&P and WMECO sold their ownership interests in Millstone 3 to a subsidiary of Dominion Resources, Inc., Dominion Nuclear Connecticut, Inc. (DNCI). This sale included all of the respective joint ownership interests of PSNH, CL&P and WMECO in Millstone 3. PSNH received approximately $25 million of cash proceeds from the sale and applied the proceeds to taxes and reductions of debt and equity. As part of the sale, DNCI assumed responsibility for decommissioning the three Millstone units. 10. COMMITMENTS AND CONTINGENCIES A. Restructuring In July 2001, the NHPUC opened a docket to review the FPPAC cost accruals between August 2, 1999, and April 30, 2001. Hearings at the NHPUC are expected to be held during the spring of 2002. Under the Settlement Agreement, the FPPAC deferrals are recovered as a Part 3 regulatory asset through a stranded cost recovery charge. At December 31, 2001 and 2000, PSNH had $183.3 million and $145.9 million, respectively, of recoverable deferred energy costs deferred under the FPPAC, excluding previous deferrals of purchases from independent power producers. Management does not expect the outcome of these hearings to have a material impact on its earnings. B. Environmental Matters The NU system, including PSNH, is subject to environmental laws and regulations intended to mitigate or remove the effect of past operations and improve or maintain the quality of the environment. As such, the NU system, including PSNH, has active environmental auditing and training programs and believes it is substantially in compliance with the current laws and regulations. However, the normal course of operations may necessarily involve activities and substances that expose PSNH to potential liabilities of which management cannot determine the outcome. Additionally, management cannot determine the outcome for liabilities that may be imposed for past acts, even though such past acts may have been lawful at the time they occurred. Management does not believe, however, that this will have a material impact on PSNH's consolidated financial statements. Based upon currently available information for the estimated remediation costs as of December 31, 2001 and 2000, the liability recorded by PSNH for its estimated environmental remediation costs amounted to $11.4 million and $9.7 million, respectively. C. Spent Nuclear Fuel Disposal Costs Under the Nuclear Waste Policy Act of 1982, PSNH must pay the DOE for the disposal of spent nuclear fuel and high-level radioactive waste. The DOE is responsible for the selection and development of repositories for, and the disposal of, spent nuclear fuel and high- level radioactive waste. Fees for nuclear fuel burned on or after April 7, 1983, are billed currently to customers and paid to the DOE on a quarterly basis. PSNH remains responsible for fees to be paid for fuel burned until the divestiture of the Millstone and Seabrook nuclear units. D. Nuclear Insurance Contingencies Insurance policies covering PSNH's ownership share of the NU system's nuclear facilities have been purchased for the primary cost of repair, replacement or decontamination of utility property, certain extra costs incurred in obtaining replacement power during prolonged accidental outages and the excess cost of repair, replacement or decontamination or premature decommissioning of utility property. PSNH is subject to retroactive assessments if losses under those policies exceed the accumulated funds available to the insurer. The maximum potential assessments with respect to losses arising during the current policy year for the primary property insurance program, the replacement power policies and the excess property damage policies are $0.2 million, $1.3 million and $0.5 million, respectively. In addition, insurance has been purchased in the aggregate amount of $200 million on an industry basis by the NU system for coverage of worker claims. Under certain circumstances, in the event of a nuclear incident at one of the nuclear facilities covered by the federal government's third-party liability indemnification program, the NU system, including PSNH, could be assessed liabilities in proportion to its ownership interest in each of its nuclear units up to $83.9 million. The NU system's payment of this assessment would be limited to, in proportion to its ownership interest in each of its nuclear units, $10 million in any one year per nuclear unit. In addition, if the sum of all claims and costs from any one nuclear incident exceeds the maximum amount of financial protection, the NU system, including PSNH would be subject to an additional 5 percent or $4.2 million liability, in proportion to its ownership interests in each of its nuclear units. Under the terms of the Seabrook Power Contracts, PSNH could be obligated to pay for any assessment charged to NAEC as a cost of service. Based upon NAEC's ownership interest in Seabrook, PSNH's maximum liability, including any additional assessments, would be $31.3 million per incident, of which payments would be limited to $3.6 million per year. In addition, through purchased-power contracts with VYNPC, PSNH would be responsible for up to an additional assessment of $3.5 million per incident, of which payments would be limited to $0.3 million per year. PSNH expects to terminate its nuclear insurance upon the divestiture of its remaining nuclear units. E. Long-Term Contractual Arrangements Yankee Companies: Under the terms of its agreement, PSNH paid its ownership (or entitlement) shares of costs, which included depreciation, O&M expenses, taxes, the estimated cost of decommissioning, and a return on invested capital. These costs were recorded as purchased-power expenses. PSNH's cost of purchases under contracts with VYNPC amounted to $6.5 million in 2001, $6.4 million in 2000 and $7.5 million in 1999. VYNPC is in the process of selling its nuclear unit. Upon completion of the sale, it is expected that these long-term contracts will be replaced with different contracts with the new buyer. Energy Procurement Contracts: PSNH has entered into various arrangements for the purchase of capacity and energy. PSNH's total cost of purchases under these arrangements amounted to $144.4 million in 2001, $144.9 million in 2000 and $139.8 million in 1999. Hydro-Quebec: Along with other New England utilities, PSNH has entered into an agreement to support transmission and terminal facilities to import electricity from the Hydro-Quebec system in Canada. PSNH is obligated to pay, over a 30-year period ending in 2020, its proportionate share of the annual O&M expenses and capital costs of those facilities. Estimated Annual Costs: The estimated annual costs of PSNH's significant long-term contractual arrangements, absent the effects of any contract terminations, buydowns or buyouts, or sales of generation assets are as follows: --------------------------------------------------------------------- 2002 2003 2004 2005 2006 Totals --------------------------------------------------------------------- (Millions of Dollars) VYNPC........... $ 7.7 $ 7.3 $ 8.4 $ 8.5 $ 7.7 $ 39.6 Energy Procurement Contracts..... 135.5 139.3 142.8 144.3 140.4 702.3 Hydro-Quebec.... 8.4 8.1 7.8 7.5 6.7 38.5 --------------------------------------------------------------------- Totals.......... $151.6 $154.7 $159.0 $160.3 $154.8 $780.4 --------------------------------------------------------------------- 11. NUCLEAR DECOMMISSIONING AND PLANT CLOSURE COSTS Seabrook: PSNH is obligated to pay NAEC's share of Seabrook's decommissioning costs, even if the unit is shut down prior to the expiration of its operating license. Accordingly, NAEC bills PSNH directly for its share of the costs of decommissioning Seabrook. PSNH records its Seabrook decommissioning costs as a component of purchased- power expense. These costs are recovered through a stranded cost recovery charge. The Seabrook decommissioning costs will continue to be increased annually by its respective escalation rates until the unit is sold. Under New Hampshire law, Seabrook's decommissioning funding requirements are set by the New Hampshire Nuclear Decommissioning Financing Committee (NDFC). During November 2001, the NDFC issued an order that decreased the decommissioning funding requirements from previously approved levels as a result of revisions in the decommissioning standard required by state statutes and an increase in the NDFC's estimate of the energy producing life of Seabrook to 2026. As a result, nuclear decommissioning costs are being accrued over the expected service life of the unit. PSNH's estimated cost of decommissioning NAEC's ownership share of Seabrook, in year end 2001 dollars, is $199.9 million. PSNH payments for NAEC's ownership share of the cost of decommissioning Seabrook are paid by NAEC to an independent decommissioning financing fund managed by the state of New Hampshire. As of December 31, 2001 and 2000, NAEC has paid approximately $46.6 million and $39.6 million, respectively, (including payments made prior to the acquisition date by PSNH) into Seabrook's decommissioning fund. Earnings on the decommissioning trust increase the decommissioning trust balance and the accumulated provision for depreciation. Unrealized gains and losses associated with the decommissioning trust also impact the balance of the trust and the accumulated provision for depreciation. The fair values of the amounts in the Seabrook external decommissioning trust were $55.5 million and $50.8 million at December 31, 2001 and 2000, respectively. Upon divestiture, the balance in the Seabrook decommissioning trust will be transferred to the buyer. Yankee Companies: VYNPC owns and operates a nuclear generating unit with a service life that is expected to end in 2012. PSNH's ownership share of estimated costs, in year end 2001 dollars, of decommissioning this unit is $18.9 million. In August 2001, VYNPC agreed to sell its nuclear generating unit for $180 million, including $35 million for nuclear fuel, to an unaffiliated company. Among other commitments, the acquiring company agreed to assume the obligation to decommission the unit after it is taken out of service and provide the current level of output from the unit through 2012. The sale is subject to the approval of the Vermont Public Service Board, the Nuclear Regulatory Commission, the FERC, and other regulatory authorities. The closing on the sale is expected to be in the first half of 2002. As of December 31, 2001 and 2000, PSNH's remaining estimated obligation, including decommissioning for the units owned by CYAPC, YAEC and MYAPC, which have been shut down was $37.7 million and $41.5 million, respectively. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each of the following financial instruments: Nuclear Decommissioning Trusts: PSNH's portion of the investments held in the NU system companies' nuclear decommissioning trusts were transferred to DNCI in 2001 in conjunction with the sale of the Millstone units. These investments were marked-to-market by a positive $2.3 million as of December 31, 2000, with corresponding offsets to the accumulated provision for depreciation. Preferred Stock and Long-Term Debt: The fair value of PSNH's fixed-rate securities is based upon the quoted market price for those issues or similar issues. Adjustable rate securities are assumed to have a fair value equal to their carrying value. The carrying amounts of PSNH's financial instruments and the estimated fair values are as follows: -------------------------------------------------------------------------- At December 31, 2001 -------------------------------------------------------------------------- Carrying Fair (Millions of Dollars) Amount Value -------------------------------------------------------------------------- Long-term debt - Other long-term debt..................... $407.3 $410.0 Rate reduction bonds....................... 507.4 519.4 -------------------------------------------------------------------------- -------------------------------------------------------------------------- At December 31, 2000 -------------------------------------------------------------------------- Carrying Fair (Millions of Dollars) Amount Value -------------------------------------------------------------------------- Preferred stock subject to mandatory redemption..................... $ 24.3 $ 25.5 Long-term debt - Other long-term debt..................... 407.3 401.9 -------------------------------------------------------------------------- 13. OTHER COMPREHENSIVE INCOME The accumulated balance for each other comprehensive income item is as follows: -------------------------------------------------------------------------- Current December 31, Period December 31, (Millions of Dollars) 2000 Change 2001 -------------------------------------------------------------------------- Unrealized gains on securities................ $1.4 $(0.8) $0.6 Minimum pension liability adjustments........ (0.2) - (0.2) -------------------------------------------------------------------------- Accumulated other comprehensive income/(loss).. $1.2 $(0.8) $0.4 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Current December 31, Period December 31, (Millions of Dollars) 1999 Change 2000 -------------------------------------------------------------------------- Unrealized gains on securities............... $1.3 $0.1 $1.4 Minimum pension liability adjustments....... (0.2) - (0.2) -------------------------------------------------------------------------- Accumulated other comprehensive income........ $1.1 $0.1 $1.2 -------------------------------------------------------------------------- The changes in the components of other comprehensive income are reported net of the following income tax effects: -------------------------------------------------------------------------- (Millions of Dollars) 2001 2000 1999 -------------------------------------------------------------------------- Unrealized gains on securities............... $0.4 $ - $ - Minimum pension liability adjustments....... - - - -------------------------------------------------------------------------- Other comprehensive income/(loss)............... $0.4 $ - $ - -------------------------------------------------------------------------- 14. SEGMENT INFORMATION The NU system is organized between regulated utilities (electric and gas since March 1, 2000) and competitive energy subsidiaries. PSNH is included in the regulated utilities segment of the NU system and has no other reportable segments. Public Service Company of New Hampshire and Subsidiaries
- ------------------------------------------------------------------------------------------------------ SELECTED CONSOLIDATED FINANCIAL DATA 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------ (Thousands of Dollars) Operating Revenues.................... $1,171,686 $1,291,332 $1,160,589 $1,087,247 $1,108,459 Net Income/(Loss)..................... 81,776 (146,666) 84,209 91,686 92,172 Cash Dividends on Common Stock........ 27,000 50,000 - - 85,000 Total Assets.......................... 2,094,514 2,082,296 2,622,433 2,681,595 2,837,159 Rate Reduction Bonds.................. 507,381 - - - - Long-Term Debt (a).................... 407,285 407,285 516,485 516,485 686,485 Preferred Stock Subject to Mandatory Redemption (a)............ - 24,268 50,000 75,000 100,000 Obligations Under Seabrook Power Contracts and Other Capital Leases (a).......................... 110,275 629,230 726,153 842,223 921,813
- --------------------------------------------------------------------------------------- QUARTERLY FINANCIAL DATA (Unaudited) - --------------------------------------------------------------------------------------- Quarter Ended - --------------------------------------------------------------------------------------- 2001 March 31 June 30 September 30 December 31 - --------------------------------------------------------------------------------------- (Thousands of Dollars) Operating Revenues $340,835 $286,799 $299,711 $ 244,341 ======== ======== ======== ========= Operating Income $ 23,222 $ 31,008 $ 45,564 $ 34,854 ======== ======== ======== ========= Net Income $ 28,362 $ 15,517 $ 21,630 $ 16,267 ======== ======== ======== ========= - --------------------------------------------------------------------------------------- 2000 - --------------------------------------------------------------------------------------- Operating Revenues $328,707 $326,471 $337,878 $ 298,276 ======== ======== ======== ========= Operating Income $ 38,577 $ 37,407 $ 33,724 $ 26,296 ======== ======== ======== ========= Net Income/(Loss) $ 17,431 $ 14,252 $ 28,733 $(207,082) ======== ======== ======== =========
(a) Includes portions due within one year. Public Service Company of New Hampshire and Subsidiaries - ------------------------------------------------------------------------------- CONSOLIDATED STATISTICS (Unaudited) - ------------------------------------------------------------------------------- Average Gross Electric Annual Utility Plant Use Per December 31, kWh Residential Electric (Thousands of Sales Customer Customers Employees Dollars) (Millions) (kWh) (Average) December 31, - ------------------------------------------------------------------------------- 2001 $1,492,916 14,953 6,868 439,750 1,241 2000 1,535,343 17,143 6,644 433,937 1,227 1999 2,283,187 12,832 6,665 427,694 1,258 1998 2,302,254 12,579 6,347 421,602 1,265 1997 2,312,628 13,340 6,528 407,642 1,254 EX-13.5 38 ngc2001.txt EXHIBIT 13.5 2001 Annual Report Northeast Generation Company Index Contents Page - -------- ---- Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 1 Report of Independent Public Accountants..................... 6 Statements of Income......................................... 7 Statements of Comprehensive Income........................... 7 Balance Sheets............................................... 8-9 Statements of Common Stockholder's Equity.................... 10 Statements of Cash Flows..................................... 11 Notes to Financial Statements................................ 12 Selected Financial Data...................................... 23 Quarterly Financial Data (Unaudited)......................... 23 Bondholder Information....................................... Back Cover Northeast Generation Company - ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- FINANCIAL CONDITION - ------------------- Overview - -------- Northeast Generation Company (NGC or the company) is a subsidiary of NU Enterprises, Inc. (NUEI), a wholly owned subsidiary of Northeast Utilities (NU). NGC is a competitive business affiliate formed to acquire and manage generation facilities. In March 2000, NGC acquired 1,289 megawatts (MW) of primarily hydroelectric generation assets in Connecticut and Massachusetts from The Connecticut Light and Power Company (CL&P) and Western Massachusetts Electric Company (WMECO), two affiliated companies. The acquisition was completed through an independent auction overseen by the Connecticut Department of Public Utility Control and an independent investment banking firm. NGC has contracted to sell all of the energy and capacity of these generation assets to Select Energy, Inc. (Select Energy) its competitive energy marketing affiliate, through December 31, 2005. Additionally, NGC has contracted with Northeast Generation Services Company, another affiliate, to operate, manage and maintain its generation assets. NGC also contracted with Northeast Utilities Service Company, another affiliate, for corporate services. Prior to the acquisition of the facilities from CL&P and WMECO, the facilities were operated by their former owners on a fully-integrated basis with the other assets and operations of those former owners. Therefore, no historical financial information is available that would be meaningful or indicative of the future results that may be achieved through the operation of the facilities in light of the regulatory and market environments in which NGC operates its generation assets. NGC's earnings totaled $42.3 million for the year ended December 31, 2001, compared with $26.4 million for the same period of 2000, and a loss of $3.2 million for the same period of 1999. NGC benefited in 2001 and 2000 from the favorable terms under the aforementioned contract with Select Energy, to sell all of the output and capacity of its generation facilities to Select Energy for a term expiring on December 31, 2005. This contract is at above-market prices and Select Energy's performance under the contract is guaranteed by NU. For the year ended December 31, 2001, NGC's revenues amounted to $129.7 million, compared with $108.5 million for the same period of 2000, and no revenues for the same period of 1999. This growth in revenues is attributable to the aforementioned generation asset transfer and contract with Select Energy for a term expiring on December 31, 2005. Prior to March 2000, NGC had no sources of revenue. Liquidity - --------- On October 18, 2001, NGC issued $440 million of amortizing senior secured debt. The $440 million includes $120 million of bonds that mature on October 15, 2005, at an interest rate of 4.998 percent, and $320 million of bonds that mature on October 15, 2026, at an interest rate of 8.812 percent. Proceeds from the issuance plus cash on hand were used to return $75 million to NUEI through a combination of capital and common dividends and to repay bank borrowings NGC had incurred to acquire its 1,289 MW of generation assets in March of 2000. NGC's net cash flows provided by operating activities totaled $58.7 million for the year ended December 31, 2001, compared with $43 million for the same period of 2000, and net cash flows used in operating activities of $6.5 million for the same period of 1999. This growth is attributable to the aforementioned contract with Select Energy for 12 months in 2001, as compared to approximately 9 months in 2000, resulting in a $15.8 million increase in net income for the year ended December 31, 2001, compared with the same period of 2000, and a $29.6 million increase in net income for the year ended December 31, 2000, compared with the same period in 1999. NGC has $24 million of sinking fund obligations due in 2002. Management expects to meet those obligations through operating cash flows. NGC's net cash flows used in investing activities totaled $23.3 million for the year ended December 31, 2001, compared with $871.2 million for the same period in 2000, and no cash flows from investing activities in 1999. The decrease in cash flows used in investing activities for the year ended December 31, 2001, compared with the same period for 2000, primarily relates to the net cash payment for the transfer of generation assets from CL&P and WMECO in March 2000. Financing activities for the year ended December 31, 2001, included the issuance of $440 million in senior secured debt. The proceeds from the issuance, along with cash on hand, were used primarily to repay $346.5 million of short-term debt related to NGC's purchase of the generation assets, and return $75 million to NUEI through a combination of capital and common dividends. In March 2000, NGC financed the asset transfer with a short-term credit agreement collateralized by the generation assets transferred and an equity infusion from NU. NGC's financing activities for the year ended December 31, 2000, included a $402.4 million increase in short-term debt and $463 million in capital contributions, compared with the same period in 1999. Over the coming years, NGC is expected to pay annual dividends to NUEI, as allowed by the bond covenants contained in its 2001 bond indenture. NGC's capital requirements are expected to consist primarily of expenditures to maintain the operation of the existing facilities, including expenditures for replacement and refurbishment of equipment and environmental compliance. NGC currently forecasts construction expenditures of up to $14 million for the year 2002. Other Matters - ------------- Other Commitments and Contingencies: For further information regarding other commitments and contingencies, see Note 6, "Commitments and Contingencies," to the financial statements. Forward Looking Statements: This discussion and analysis includes forward looking statements, which are statements of future expectations and not facts including, but not limited to, statements regarding future earnings and refinancings. Words such as estimates, expects, anticipates, intends, plans, and similar expressions identify forward looking statements. Actual results or outcomes could differ materially as a result of further actions by state and federal regulatory bodies, competition and industry restructuring, changes in economic conditions, changes in historical weather patterns, changes in laws, developments in legal or public policy doctrines, technological developments, and other presently unknown or unforeseen factors. RESULTS OF OPERATIONS - --------------------- The components of significant income statement variances for the past two years are provided in the table below. Income Statement Variances (Millions of Dollars) 2001 over/(under) 2000 2000 over/(under) 1999 ---------------------- ---------------------- Amount Percent Amount Percent ------ ------- ------ ------- Operating Revenues $21 20% $108 (a)% --- --- ---- --- Operating Expenses: Other operation 3 30 7 (a) Maintenance (2) (24) 9 (a) Depreciation 1 26 2 (a) Taxes other than income taxes 1 30 6 (a) --- --- ---- --- Total operating expenses 3 13 24 (a) --- --- ---- --- Operating income 18 22 84 (a) Other income/(loss), net - - 1 (a) Interest expense, net (9) (25) 36 (a) --- --- ---- --- Income before income tax expense 27 61 49 (a) Income tax expense 11 62 19 (a) --- --- ---- --- Net income/(loss) $16 60% $ 30 (a) === === ==== === (a) Percent greater than 100. Operating Revenues Operating revenues increased by $21 million in 2001 over 2000, primarily due to a full twelve months of revenues in 2001, as compared to approximately nine months of revenues in 2000. Revenues from Select Energy represented close to 100 percent of NGC's operating revenues in 2001 and 2000. Operating revenues increased by $108 million in 2000 over 1999, primarily due to the acquisition of 1,289 MW of generation assets by NGC from CL&P and WMECO in March 2000, and NGC's contract with Select Energy to sell all of NGC's output and capacity to Select Energy for a period ending December 31, 2005. Operation and Maintenance Expenses Operation expenses increased in 2001 and 2000, primarily due to a full year of expense in 2001 as compared to nine months of expenses in 2000, resulting from the March 2000 acquisition of 1,289 MW of generation assets. Maintenance expenses were higher in 2000 and lower in 2001 due to the timing of maintenance work at the generation facilities. Depreciation and Taxes Other Than Income Taxes Depreciation and taxes other than income taxes were higher in 2000 over 1999 due to the acquisition of generation assets in March 2000. Interest Expense, Net Interest expense, net decreased by $9 million in 2001, primarily due to a decrease in short-term debt outstanding as a result of debt repayments made during 2001. Interest expense increased by $36 million in 2000, primarily due to an increase in short-term debt related to the financing of the acquisition of the generation assets in 2000. Income Tax Expense Income tax expense increased in 2001 and 2000 primarily due to higher book taxable income. Northeast Generation Company - ------------------------------------------------------------------------------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - ------------------------------------------------------------------------------- To the Board of Directors of Northeast Generation Company: We have audited the accompanying balance sheets of Northeast Generation Company (a Connecticut corporation and a wholly owned indirect subsidiary of Northeast Utilities) as of December 31, 2001 and 2000, and the related statements of income, comprehensive income, common stockholder's equity and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Northeast Generation Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Hartford, Connecticut February 5, 2002 NORTHEAST GENERATION COMPANY STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------------------------ For the Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------ (Thousands of Dollars) Operating Revenues..................................................... $129,681 $108,473 $ - -------- -------- -------- Operating Expenses: Operation - Other............................................................. 15,426 11,855 5,229 Maintenance.......................................................... 6,902 9,092 3 Depreciation......................................................... 3,040 2,417 - Taxes other than income taxes........................................ 7,375 5,690 74 -------- -------- -------- Total operating expenses........................................... 32,743 29,054 5,306 -------- -------- -------- Operating Income/(Loss)................................................ 96,938 79,419 (5,306) Other Income, Net...................................................... 1,113 1,061 - -------- -------- -------- Income/(Loss) Before Interest and Income Tax Expense/(Benefit)......... 98,051 80,480 (5,306) -------- -------- -------- Interest Expense: Interest on long-term debt........................................... 7,396 - - Other interest....................................................... 19,966 36,542 1 -------- -------- -------- Interest expense, net.............................................. 27,362 36,542 1 -------- -------- -------- Income/(Loss) Before Income Tax Expense/(Benefit)...................... 70,689 43,938 (5,307) Income Tax Expense/(Benefit)........................................... 28,432 17,522 (2,151) -------- -------- -------- Net Income/(Loss)...................................................... $ 42,257 $ 26,416 $ (3,156) ======== ======== ======== STATEMENTS OF COMPREHENSIVE INCOME Net Income/(Loss)...................................................... $ 42,257 $ 26,416 $ (3,156) -------- -------- -------- Other comprehensive loss, net of tax: Qualified cash flow hedging investments.............................. (1,941) - - -------- -------- -------- Comprehensive Income/(Loss)............................................ $ 40,316 $ 26,416 $ (3,156) ======== ======== ========
The accompanying notes are an integral part of these financial statements. NORTHEAST GENERATION COMPANY BALANCE SHEETS
- ----------------------------------------------------------------------------------------- At December 31, 2001 2000 - ----------------------------------------------------------------------------------------- (Thousands of Dollars) ASSETS - ------ Current Assets: Cash and cash equivalents.................................... $ 35,217 $ 37,177 Notes receivable from affiliated companies................... 9,900 - Accounts receivable from affiliated companies................ 10,642 11,419 Taxes receivable ............................................ 4,217 - Materials and supplies, at average cost...................... 1,793 1,935 Prepayments and other........................................ 392 1,626 -------- -------- 62,161 52,157 -------- -------- Property, Plant and Equipment: Competitive energy........................................... 265,309 264,855 Less: Accumulated provision for depreciation............. 150,294 147,216 -------- -------- 115,015 117,639 Construction work in progress................................ 21,055 8,094 -------- -------- 136,070 125,733 -------- -------- Deferred Debits and Other Assets: Accumulated deferred income taxes............................ 256,049 278,320 Other ....................................................... 10,688 4,851 -------- -------- 266,737 283,171 -------- -------- Total Assets................................................... $464,968 $461,061 ======== ========
The accompanying notes are an integral part of these financial statements. NORTHEAST GENERATION COMPANY BALANCE SHEETS
- ----------------------------------------------------------------------------------------- At December 31, 2001 2000 - ----------------------------------------------------------------------------------------- (Thousands of Dollars) LIABILITIES AND CAPITALIZATION - ------------------------------ Current Liabilities: Notes payable to banks...................................... $ - $402,377 Long-term debt - current portion............................ 24,000 - Accounts payable............................................ 1,759 1,771 Accounts payable to affiliated companies.................... 1,297 732 Accrued taxes............................................... 794 5,840 Accrued interest............................................ 7,029 1,893 Other....................................................... 1,138 813 -------- -------- 36,017 413,426 -------- -------- Capitalization: Long-Term Debt............................................. 416,000 - -------- -------- Common Stockholder's Equity: Common stock, $1 par value - authorized 20,000 shares; 6 shares outstanding in 2001 and 100 shares outstanding in 2000............... - - Capital surplus, paid in.................................. 3,039 24,375 Retained earnings......................................... 11,853 23,260 Accumulated other comprehensive loss...................... (1,941) - -------- -------- Common Stockholder's Equity................................. 12,951 47,635 -------- -------- Total Capitalization......................................... 428,951 47,635 -------- -------- Commitments and Contingencies (Note 6) Total Liabilities and Capitalization......................... $464,968 $461,061 ======== ========
The accompanying notes are an integral part of these financial statements. NORTHEAST GENERATION COMPANY STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
- ----------------------------------------------------------------------------------------------------------- Accumulated Capital Other Common Surplus, Retained Comprehensive Stock Paid In Earnings Loss Total - ----------------------------------------------------------------------------------------------------------- (Thousands of Dollars) Balance at January 1, 1999............. $ - $ - $ - $ - $ - Net loss for 1999.................... (3,156) (3,156) Capital contribution from Northeast Utilities........... 6,500 6,500 Other................................ 10 10 -------- ---------- -------- ------- --------- Balance at December 31, 1999........... - 6,510 (3,156) - 3,354 Net income for 2000.................. 26,416 26,416 Capital contribution from Northeast Utilities............ 463,000 463,000 Excess paid over carrying value of assets transferred (Note 5)...... (445,135) (445,135) -------- ---------- -------- ------- --------- Balance at December 31, 2000........... - 24,375 23,260 - 47,635 Net income for 2001.................. 42,257 42,257 Cash dividends on common stock....... (53,664) (53,664) Repurchase of common stock........... - (21,336) (21,336) Other comprehensive loss............. (1,941) (1,941) -------- ---------- -------- ------- --------- Balance at December 31, 2001........... $ - $ 3,039 $ 11,853 $(1,941) $ 12,951 ======== ========== ======== ======= =========
The accompanying notes are an integral part of these financial statements. NORTHEAST GENERATION COMPANY STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------- For the Years Ended December 31, 2001 2000 1999 - -------------------------------------------------------------------------------------------------------- (Thousands of Dollars) Operating Activities: Net income/(loss)........................................... $ 42,257 $ 26,416 $ (3,156) Adjustments to reconcile to net cash flows provided by/(used in) operating activities: Depreciation.............................................. 3,040 2,417 - Deferred income taxes..................................... 23,565 19,245 (1,530) Net other (uses)/sources of cash.......................... (9,035) 1,533 (6,379) Changes in working capital: Accounts receivable from affiliated companies............. 777 (11,419) - Materials and supplies.................................... 142 (62) - Accounts payable.......................................... 553 (780) 3,283 Accrued taxes............................................. (5,046) 5,840 1,899 Other working capital (excludes cash)..................... 2,478 (202) (617) --------- --------- -------- Net cash flows provided by/(used in) operating activities..... 58,731 42,988 (6,500) --------- --------- -------- Investing Activities: Investments in competitive energy plant..................... (13,414) (1,394) - Investment in NU system Money Pool.......................... (9,900) - - Net cash payment for the transfer of assets................. - (869,794) - --------- --------- -------- Net cash flows used in investing activities................... (23,314) (871,188) - --------- --------- -------- Financing Activities: Repurchase of common stock.................................. (21,336) - - Issuance of long-term debt.................................. 440,000 - - Net (decrease)/increase in short-term debt.................. (402,377) 402,377 - Cash dividends on common stock.............................. (53,664) - - Capital contributions from Northeast Utilities.............. - 463,000 6,500 --------- --------- -------- Net cash flows (used in)/provided by financing activities..... (37,377) 865,377 6,500 --------- --------- -------- Net (decrease)/increase in cash and cash equivalents.......... (1,960) 37,177 - Cash and cash equivalents - beginning of year................. 37,177 - - --------- --------- -------- Cash and cash equivalents - end of year....................... $ 35,217 $ 37,177 $ - ========= ========= ======== Supplemental Cash Flow Information: Cash paid/(refunded) during the year for: Interest, net of amounts capitalized........................ $ 22,726 $ 29,286 $(1,899) ========= ========= ======== Income taxes................................................ $ 12,901 $ (7,725) $ - ========= ========= ========
The accompanying notes are an integral part of these financial statements. - ------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. About Northeast Generation Company Northeast Generation Company (NGC) is a subsidiary of NU Enterprises, Inc., a wholly owned subsidiary of Northeast Utilities (NU). NGC is a competitive business affiliate formed to acquire and manage generation facilities. In March 2000, NGC acquired 1,289 megawatts (MW) of primarily hydroelectric generation assets in Connecticut and Massachusetts from The Connecticut Light and Power Company (CL&P) and Western Massachusetts Electric Company (WMECO), two affiliated companies. The acquisition was completed through an independent auction overseen by the Connecticut Department of Public Utility Control and an independent investment banking firm. NGC has entered into support services arrangements with Northeast Utilities Service Company (NUSCO) for certain services, including centralized accounting, administrative, engineering, financial, information resources, legal, operational, planning, purchasing, and other services billed at cost. NGC has no employees. NGC has contracted with Select Energy, Inc. (Select Energy), its competitive energy marketing affiliate, to purchase and market all of the energy and capacity of NGC's 1,289 MW of generation assets for a term expiring on December 31, 2005. Revenues from Select Energy represented close to 100 percent of NGC's operating revenues in 2001 and 2000. Additionally, NGC has contracted with Northeast Generation Services Company, another affiliate, to operate, manage and maintain its generation assets for a term expiring on March 14, 2006. In connection with the acquisition of the generation assets, NGC entered into an interconnection agreement with CL&P and WMECO to provide interconnection services, where applicable, and to define the continuing responsibilities and obligations of each party with respect to the other's property, assets and facilities. Under this agreement, NGC is obligated to pay all costs related to the use of these interconnection facilities through an interconnection facilities charge. B. Presentation The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications of prior years' data have been made to conform with the current year's presentation. C. New Accounting Standards Derivative Instruments: Effective January 1, 2001, NGC adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. For those derivative instruments which are hedging an identified risk, NGC has designated and documented all hedging relationships. The adoption of this new standard did not have a material impact on NGC's financial position or results of operations. Asset Retirement Obligations: Also in June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and applies to (a) all entities and (b) legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS No. 143 is effective for NGC's 2003 calendar year. Upon adoption of SFAS No. 143, there may be an impact on NGC's financial statements which management has not estimated at this time. Long-Lived Assets: In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement modifies financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 is effective for NGC's 2002 calendar year. Currently, management does not expect the adoption of SFAS No. 144 to have an impact on NGC's financial statements. D. Depreciation Plant is being depreciated over the estimated useful lives of the assets, primarily 40 years from the date of transfer, using the straight-line method. E. Revenues Revenues for NGC are recognized when the energy is delivered. Revenues are primarily in the form of predetermined fixed monthly payments based on the capacity of the generation assets. Other revenues are in the form of monthly payments at predetermined rates per unit of actual energy output. F. Income Taxes The tax effect of temporary differences (differences between the periods in which transactions affect income in the financial statements and the periods in which they affect the determination of taxable income) is accounted for in accordance with SFAS No. 109, "Accounting for Income Taxes." The tax effect of temporary differences that give rise to the accumulated deferred tax asset is as follows: --------------------------------------------------------------------- At December 31, 2001 2000 --------------------------------------------------------------------- (Millions of Dollars) Basis step-up depreciation................ $257.8 $280.4 Property taxes............................ (1.6) (1.2) Other depreciation........................ (1.2) (0.9) Deferred financing costs.................. (0.3) - Other..................................... 1.3 - --------------------------------------------------------------------- Totals.................................... $256.0 $278.3 --------------------------------------------------------------------- G. Cash and Cash Equivalents Cash and cash equivalents includes cash on hand and short-term cash investments which are highly liquid in nature and have original maturities of three months or less. 2. GENERATION ASSET TRANSFER In March 2000, NGC acquired 1,289 MW of primarily hydroelectric generation assets in Connecticut and Massachusetts from CL&P and WMECO originally for approximately $865.5 million, subject to certain adjustments. These assets include six hydroelectric facilities and one pumped storage facility along the Housatonic River system, three conventional hydroelectric facilities and one turbine facility comprising the Eastern Connecticut System, the Northfield Mountain pumped storage station, and the Cabot and Turners Falls No. 1 hydroelectric stations located in Massachusetts. In connection with this transfer, NGC generally assumed all environmental liabilities associated with the acquired assets. In December 1999, NGC contracted with Select Energy to purchase and market all of the energy and capacity of NGC's 1,289 MW of generation assets for a term expiring on December 31, 2005. For further information see Note 5, "Business Segment Reporting," to the financial statements. 3. DEBT OBLIGATIONS Credit Agreement: To finance the aforementioned transfer, on March 9, 2000, NGC entered into a short-term credit agreement with a total commitment amount of $865.5 million with several financial institutions, collateralized by the generation assets transferred. Under the short-term credit agreement, the $865.5 million was funded on March 14, 2000, and $435.5 million of the commitment also matured and was repaid on March 14, 2000. In October 2001, this remaining short-term debt was refinanced through the issuance of $440 million of senior secured bonds. At December 31, 2000, there were $402.4 million in borrowings under the credit agreement, bearing interest at 8.64 percent. Senior Secured Bonds: Details of long-term debt outstanding are as follows: -------------------------------------------------------------------------- At December 31, 2001 2000 -------------------------------------------------------------------------- (Millions of Dollars) Senior Secured Bonds: 4.998% Series A, due 2005..................... $120.0 $ - 8.812% Series B, due 2026..................... 320.0 - ------ ----- 440.0 - Less amounts due within one year.............. 24.0 - -------------------------------------------------------------------------- Long-term debt, net........................... $416.0 $ - -------------------------------------------------------------------------- Long-term debt maturities and cash sinking fund requirements on debt outstanding at December 31, 2001, for the years 2002 through 2006 are $24 million, $27 million, $31.5 million, $37.5 million and no requirements for 2006, respectively. Essentially all plant of NGC is subject to the liens of its first mortgage bond indenture. Money Pool: Certain subsidiaries of NU, including NGC, are members of the Northeast Utilities System Money Pool (Pool). The Pool provides a more efficient use of the cash resources of the NU system and reduces outside short-term borrowings. NUSCO administers the Pool as agent for the member companies. Short-term borrowing needs of the member companies are first met with available funds of other member companies, including funds borrowed by NU parent. NU parent may lend to the Pool but may not borrow. Funds may be withdrawn from or repaid to the Pool at any time without prior notice. Investing and borrowing subsidiaries receive or pay interest based on the average daily federal funds rate. Borrowings based on loans from NU parent, however, bear interest at NU parent's cost and must be repaid based upon the terms of NU parent's original borrowing. NGC does not have the authorization from the Securities and Exchange Commission to borrow from the Pool. In addition, NGC's bond covenants contain certain limitations on its investments, which impact the amount that it may invest in the Pool. At December 31, 2001 and 2000, NGC had $9.9 million of lendings to and no lendings to/borrowings from the Pool, respectively. The interest rate on lendings to the Pool at December 31, 2001, was 1.5 percent. 4. INCOME TAX EXPENSE/(BENEFIT) The components of the federal and state income tax expense/(benefit) were charged/(credited) to operations as follows: -------------------------------------------------------------------------- For the Years Ended December 31, 2001 2000 1999 -------------------------------------------------------------------------- (Millions of Dollars) Current income taxes: Federal.............................. $ 3.9 $(1.4) $(0.5) State................................ 1.0 (0.4) (0.2) ----- ----- ----- Total current...................... 4.9 (1.8) (0.7) ----- ----- ----- Deferred income taxes, net: Federal.............................. 18.8 15.6 (1.2) State................................ 4.7 3.7 (0.3) ----- ----- ----- Total deferred..................... 23.5 19.3 (1.5) -------------------------------------------------------------------------- Total income tax expense/(benefit)..... $28.4 $17.5 $(2.2) -------------------------------------------------------------------------- Deferred income taxes are comprised of the tax effects of temporary differences as follows: -------------------------------------------------------------------------- For the Years Ended December 31, 2001 2000 1999 -------------------------------------------------------------------------- (Millions of Dollars) Depreciation........................... $23.1 $16.5 $ - Deferred financing costs............... - 1.5 (1.5) Property taxes......................... - 1.3 - Other.................................. 0.4 - - -------------------------------------------------------------------------- Deferred income taxes, net............. $23.5 $19.3 $(1.5) -------------------------------------------------------------------------- A reconciliation between the income tax expense/(benefit) and the expected income tax expense/(benefit) at the statutory rate is as follows: -------------------------------------------------------------------------- For the Years Ended December 31, 2001 2000 1999 -------------------------------------------------------------------------- (Millions of Dollars) Expected federal income tax expense/(benefit).................... $24.7 $15.4 $(1.9) Tax effect of differences: State income taxes, net of federal benefit.................... 3.7 2.1 (0.3) -------------------------------------------------------------------------- Total income tax expense/(benefit).................... $28.4 $17.5 $(2.2) -------------------------------------------------------------------------- NGC, as a wholly owned subsidiary of NU, is included in NU's consolidated tax return. 5. BUSINESS SEGMENT REPORTING The following business segment balance sheets and statements of income have been presented to comply with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The business segment balance sheets and statements of income are currently utilized by management to make decisions about NGC's operating matters and allocating resources. NGC operates in one business segment, the sale of electricity and capacity. In accordance with accounting principles generally accepted in the United States, since NGC, CL&P and WMECO are all wholly owned by NU, the assets have been recorded in the accompanying financial statements at CL&P's and WMECO's book value just prior to the transfer. However, management, in currently evaluating operating results, believes reflecting the assets at NGC's purchase price is more meaningful. The following business segment information represents NGC's balance sheets at December 31, 2001 and 2000, and statements of income for the years then ended, as if the assets had been valued at NGC's purchase price rather than CL&P's and WMECO's book value: SEGMENT INFORMATION BALANCE SHEETS - ------------------------------------------------------------------------------- At December 31, 2001 2000 - ------------------------------------------------------------------------------- (Millions of Dollars) ASSETS - ------ Current Assets: Cash and cash equivalents........................ $ 35.2 $ 37.2 Notes receivable from affiliated companies....... 9.9 - Accounts receivable from affiliated companies.... 10.6 11.4 Taxes receivable from affiliated companies....... 3.4 - Materials and supplies, at average cost.......... 1.8 1.9 Prepayments and other............................ 0.4 1.6 -------- -------- 61.3 52.1 -------- -------- Competitive energy plant........................... 1,006.5 1,006.0 Less: Accumulated provision for depreciation.... 183.7 161.9 -------- -------- 822.8 844.1 Construction work in progress...................... 21.1 8.1 -------- -------- 843.9 852.2 -------- -------- Deferred Debits and Other Assets: Accumulated deferred income taxes................ 11.6 3.7 Other............................................ 10.7 4.9 -------- -------- 22.3 8.6 -------- -------- Total Assets....................................... $ 927.5 $ 912.9 ======== ======== - ------------------------------------------------------------------------------- SEGMENT INFORMATION BALANCE SHEETS - ------------------------------------------------------------------------------- At December 31, 2001 2000 - ------------------------------------------------------------------------------- (Millions of Dollars) LIABILITIES AND CAPITALIZATION: - ------------------------------ Current Liabilities: Notes payable to banks........................... $ - $402.4 Long-term debt - current portion................. 24.0 - Accounts payable................................. 1.8 1.8 Accounts payable to affiliated companies......... 1.3 0.7 Accrued taxes.................................... - 5.8 Accrued interest................................. 7.0 1.9 Other............................................ 1.1 0.8 ------ ------ 35.2 413.4 ------ ------ Capitalization: Long-Term Debt.................................. 416.0 - ------ ------ Common Stockholder's Equity: Common stock.................................... - - Capital surplus, paid in........................ 448.1 469.5 Retained earnings............................... 30.1 30.0 Accumulated other comprehensive loss............ (1.9) - ------ ------ Common stockholder's equity..................... 476.3 499.5 ------ ------ Total Capitalization.............................. 892.3 499.5 ------ ------ Total Liabilities and Capitalization.............. $927.5 $912.9 ====== ====== - ------------------------------------------------------------------------------- SEGMENT INFORMATION STATEMENTS OF INCOME - ------------------------------------------------------------------------------- At December 31, 2001 2000 - ------------------------------------------------------------------------------- (Millions of Dollars) Operating Revenues................................ $129.7 $108.5 ------ ------ Operating Expenses: Operation - other............................... 15.4 11.9 Maintenance..................................... 6.9 9.1 Depreciation.................................... 21.7 17.2 Taxes other than income taxes................... 7.4 5.7 ------ ------ Total operating expenses..................... 51.4 43.9 ------ ------ Operating Income.................................. 78.3 64.6 ------ ------ Other Income, Net................................. 1.1 1.1 Interest Expense, Net............................. 27.4 36.5 Income Tax Expense................................ 20.9 11.6 ------ ------ Net Income........................................ $ 31.1 $ 17.6 ====== ====== 6. COMMITMENTS AND CONTINGENCIES A. Legal Issues NGC is involved in various lawsuits incidental to its business. NGC believes that these proceedings, in the aggregate, will not have a material adverse effect on NGC's financial position, results of operations or cash flows. The Connecticut Department of Revenue Services has challenged the computation of real estate conveyance taxes due in connection with NGC's acquisition of facilities from CL&P in March 2000. The issue relates to how much of the acquisition price was attributable to real estate as opposed to other assets. The deficiency claimed by the Connecticut Department of Revenue Services is approximately $0.6 million. NGC is currently unable to predict the outcome of this dispute. B. FERC Licenses NGC's Federal Energy Regulatory Commission (FERC) licenses for operation of the Falls Village and Housatonic hydroelectric projects expired in August 2001. Annual operating licenses allow NGC to continue plant operations until a new license is issued for the projects. A license application, which proposed to combine both projects under one license, was submitted to the FERC in August 1999. Although NGC cannot predict with certainty the outcome of the FERC relicensing proceeding, at this time NGC does not believe that the final terms and conditions of the new FERC license will have a material adverse effect on NGC's financial position, results of operations or cash flows. 7. MARKET RISK AND RISK MANAGEMENT INSTRUMENTS NGC has entered into an interest rate sensitive derivative. NGC used treasury lock instruments with financial institutions to secure a fixed interest rate on the bonds that were issued in October 2001. These instruments lock in a fixed interest rate today rather than waiting until the bonds are issued at the current market rate. At the end of the agreement, NGC either receives or pays the difference between the fixed interest rate and the current market rate. In October 2001, the agreement ended and NGC paid $3.3 million to the financial institutions. In accordance with SFAS No. 133, the $3.3 million payment, net of tax, will be amortized from other comprehensive loss over the term of the bonds. 8. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each of the following financial instruments: Cash and Cash Equivalents: The carrying amounts approximate fair value due to the short-term nature of cash and cash equivalents. Long-Term Debt: The fair value of NGC's fixed-rate securities is based upon the quoted market price for those issues or similar issues. The carrying amounts of NGC's financial instruments and the estimated fair values are as follows: -------------------------------------------------------------------------- At December 31, 2001 -------------------------------------------------------------------------- Carrying Fair (Millions of Dollars) Amount Value -------------------------------------------------------------------------- Long-term debt - First mortgage bonds........................ $440.0 $467.3 -------------------------------------------------------------------------- 9. OTHER COMPREHENSIVE LOSS The accumulated balance for each other comprehensive loss item is as follows: -------------------------------------------------------------------------- Current December 31, Period December 31, (Millions of Dollars) 2000 Change 2001 -------------------------------------------------------------------------- Qualified cash flow hedging instruments........ $ - $(1.9) $(1.9) -------------------------------------------------------------------------- Accumulated other comprehensive loss......... $ - $(1.9) $(1.9) -------------------------------------------------------------------------- The changes in the components of other comprehensive loss are reported net of the following income tax effects: -------------------------------------------------------------------------- (Millions of Dollars) 2001 -------------------------------------------------------------------------- Qualified cash flow hedging instruments............................... $1.3 -------------------------------------------------------------------------- Other comprehensive income.......................... $1.3 -------------------------------------------------------------------------- Northeast Generation Company - ------------------------------------------------------------------------------- SELECTED FINANCIAL DATA 2001 2000 1999 - ------------------------------------------------------------------------------- (Thousands of Dollars) Operating Revenues...................... $129,681 $108,473 $ - Operating Income/(Loss)................. 96,938 79,419 (5,306) Net Income/(Loss)....................... 42,257 26,416 (3,156) Cash Dividends on Common Stock.......... 53,664 - - Total Assets............................ 464,968 461,061 8,540 Long-Term Debt (a)...................... 440,000 - - - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- QUARTERLY FINANCIAL DATA (Unaudited) - ------------------------------------------------------------------------------- Quarter Ended - ------------------------------------------------------------------------------- 2001 March 31 June 30 September 30 December 31 - ------------------------------------------------------------------------------- (Thousands of Dollars) Operating Revenues $34,001 $35,222 $30,177 $30,281 ======= ======= ======= ======= Operating Income $25,399 $27,534 $22,035 $21,970 ======= ======= ======= ======= Net Income $10,721 $13,214 $ 9,766 $ 8,556 ======= ======= ======= ======= - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 2000 - ------------------------------------------------------------------------------- Operating Revenues $ 6,835 $36,180 $32,574 $32,884 ======= ======= ======= ======= Operating Income $ 2,741 $27,234 $24,999 $24,445 ======= ======= ======= ======= Net Income $ 2,556 $ 7,574 $ 8,181 $ 8,105 ======= ======= ======= ======= (a) Includes portion due within one year. -----END PRIVACY-ENHANCED MESSAGE-----