-----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, W1LJ83CwmmRJITywC8R81e1+74UOYHHKbQHXmY9REFWO0UhrphIERBbUAuzEoc3K FwaPe3Bo0V0b5fT6NY4Xcg== 0000072741-99-000205.txt : 19991118 0000072741-99-000205.hdr.sgml : 19991118 ACCESSION NUMBER: 0000072741-99-000205 CONFORMED SUBMISSION TYPE: U-1/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19991117 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: U-1/A SEC ACT: SEC FILE NUMBER: 070-09543 FILM NUMBER: 99759380 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 U-1/A 1 AMENDMENT NO. 3 TO FORM U-1 FILE NO.70-9543 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------------------------ AMENDMENT NO. 3 TO FORM U-1 APPLICATION/DECLARATION UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 NORTHEAST UTILITIES NORTHEAST GENERATION SERVICES 174 Brush Hill Avenue COMPANY West Springfield, MA 01090-0010 107 Selden Street Berlin, CT 06037 (Name of companies filing this statement and addresses of principal executive offices) NORTHEAST UTILITIES (Name of top registered holding company) Cheryl W. Grise, Esq. Senior Vice President, Secretary and General Counsel Northeast Utilities Service Company P.O. Box 270 Hartford, Connecticut 06141-0270 (Name and address of agent for service) The Commission is requested to mail signed copies of all orders, notices and communications to David R. McHale Jeffrey C. Miller, Esq. Vice President and Treasurer Assistant General Counsel Northeast Utilities Northeast Utilities Service Company Service Company P.O. Box 270 P.O. Box 270 Hartford, Connecticut Hartford, Connecticut 06141-0270 06141-0270 Table of Contents Item 1. Description of the Proposed Transaction Introduction - Paragraph 1 Background - Paragraphs 2-6 Prior Orders - Paragraph 7 Description of the Transactio - Paragraphs 8-13 Item 2. Fees, Commissions and Expenses - Paragraphs 14-15 Item 3. Applicable Statutory Provisions - Paragraph 16 EWG Investment - Paragraphs 17-47 Service Agreement - Paragraphs 48-50 Item 4. Regulatory Approvals - Paragraph 51 Item 5. Procedures - Paragraph 52 Item 6 Exhibits and Financial Statements a. Exhibits b.1 Form of Proposed Service Agreement b.3 Assumption Agreement d.1 Connecticut Department of Public Utility Control Order d.2 Massachusetts Department of Telecommunications and Energy Order d.3 New Hampshire Public Utility Commission Order f.1 Legal Opinion g Financial Data Schedule h.2 Form of Notice b. Financial Statements Item 7. Information as to Environmental Effects - Paragraph 53 The Application/Declaration in this File, as amended, is hereby amended and restated as follows: Paragraphs 1 through 53 are deleted and replaced in their entirety as follows: ITEM 1 DESCRIPTION OF PROPOSED TRANSACTION Introduction 1. The Applicants are seeking authority under the Public Utility Holding Company Act of 1935 (the "1935 Act" or "Act") in connection with the acquisition by Northeast Generation Company ("NGC") of certain generating assets that are currently owned by The Connecticut Light and Power Company ("CL&P) and Western Massachusetts Electric Company ("WMECO"). Specifically, Northeast Utilities ("NU") requests authority to enter into two assumption agreements (collectively, the "Assumption Agreement") in connection with the acquisition by NGC, its indirect subsidiary (the "Transaction"). In addition, NU requests an order modifying the percentage limitation on investments in Exempt Wholesale Generator ("EWG") which may be made. Specifically, NU requests authority to invest in and guarantee the obligations of NGC to the extent necessary for NGC to consummate the Transaction, but which, when aggregated with NU's "aggregate investment" in EWGs would not exceed 100% of its consolidated retained earnings. Finally, to the extent such transaction is not authorized by rule or otherwise, the Applicants seek authority for Northeast Generation Services Company ("NGS") to provide certain services to NGC at other than cost. Background 2. NU is a registered holding company under the Act that is engaged through its utility subsidiaries in the generation, transmission, distribution, and sale of electric energy to customers in portions of the states of Connecticut, Massachusetts and New Hampshire. The utility operating companies of NU, each of which is wholly-owned, are CL&P, WMECO, Public Service Company of New Hampshire ("PSNH") and North Atlantic Energy Corporation ("NAEC") (each individually an "NU Operating Company" and collectively, the "NU Operating Companies"). NU also furnishes retail electric service to a limited number of customers through a wholly-owned subsidiary, Holyoke Water Power Company. 3. NU also has a number of direct and indirect non-utility subsidiaries. NU Enterprises, Inc. ("NUEI") is a wholly-owned direct subsidiary of NU and acts as the holding company for the NU system's unregulated companies. Among the subsidiaries of NUEI are Select Energy, Inc., a marketing and brokering Rule 58 subsidiary ("Select"), NGC, intended to be NU's competitive generating company, and NGS, a Rule 58 generation operation and services company. 4. As a Connecticut utility, CL&P is subject to the jurisdiction of the Connecticut Department of Public Utility Control (the "DPUC"). In April 1998, the State of Connecticut enacted comprehensive electric utility restructuring legislation. CL&P is subject to this legislation. In particular, the law provides, among other things, that CL&P divest its non- nuclear generating assets (the "CL&P Assets") by January 2000 and its nuclear generating assets by January 2004 in order to recover stranded costs. Under the law, affiliates of CL&P were allowed to bid in both auctions. The auction for the CL&P Assets took place in the spring and summer of 1999. In addition the law allows for the issuance of rate reduction bonds ("RRBs") to finance portions of a utility's stranded costs through securitization transactions. WMECO is subject to similar legislation in Massachusetts and sold its fossil fueled and a small portion of its hydroelectric generating plants in the summer of 1999.(1) The Massachusetts law also allows RRBs to be issued. The remaining non-nuclear generating plants of WMECO; a hydroelectric pumped storage generating plant jointly owned with CL&P, and two adjacent hydroelectric plants (the "WMECO Assets"), were included in the auction with the CL&P Assets. _______________________________ (1) PSNH and NAEC are subject to similar restructuring laws in New Hampshire. Under New Hampshire law, generation assets must be divested and RRBs may also be issued. 5. On October 1, 1998, CL&P filed a plan with the DPUC to auction the CL&P Assets and functionally unbundle its operations. On July 6, 1999, CL&P and WMECO announced that NGC, which is presently seeking EWG status, was the winning bidder for 1,329 megawatts ("MW") of hydroelectric and pumped storage generating assets in Connecticut and Massachusetts , which comprised all of the WMECO Assets and the hydroelectric portion of the CL&P Assets (collectively with the WMECO Assets, the "Utility Assets"). NRG Energy, Inc., a subsidiary of Northern States Power Company, won the bidding for the remainder of the CL&P Assets. 6. The NU Operating Companies plan to use a portion of the proceeds from asset sales and from the RRBs to retire outstanding debt and preferred stock and to buy down existing power purchase contracts with independent power producers. To reduce their respective common equity capitalizations, the NU Operating Companies also plan to use a portion of their restructuring proceeds either (i) to pay dividends to NU, (ii) to buy back a portion of their outstanding common stock owned by NU and/or (iii) to effect capital reductions through a combination of dividends and stock repurchases. NU and the NU Operating Companies currently expect that the aggregate amount of funds channeled to NU through these methods will be approximately $915 million. These transactions are the subject of a related filing with the Commission. See Northeast Utilities, File No. 70-09541 (August 26, 1999). Prior Orders 7. By Order dated November 12, 1998 (HCAR No. 35-26939), in File No. 70-09343, the Commission, among other things, authorized (i) the formation and financing by NU of a nonutility subsidiary company (which is referred to therein as "Newco" but which is now known as NUEI) to engage, through multiple subsidiaries, in a variety of energy related and other activities and (ii) the acquisition by NUEI of, among other things, the securities of GENCO (now known as NGC) and NGS. The Commission also authorized NU and NUEI to issue guarantees or provide other forms of credit support or enhancements (collectively, "Guarantees") to or for the benefit of NUEI, NGS, NGC, NU's other unregulated subsidiaries and NU's other direct or indirect Rule 58 subsidiaries to be formed by NU, in an aggregate amount not to exceed $75 million. The amount of the guarantee authority was increased to $250 million pursuant to a supplemental Order of the Commission dated May 19,1999 (HCAR No. 35-27029) in File No. 70-09343 (the "Supplemental Order"). NU and NUEI filed an amendment to the Application in File No. 70-9343 seeking increased guaranty authority to $500 million on August 23, 1999. Description of the Transaction 8. As indicated above, in July 1999, CL&P and WMECO contracted to sell the Utility Assets to NGC as the result of an auction conducted by J.P. Morgan Securities, Inc. ("J.P. Morgan"), an independent consultant retained by the DPUC to sell the Utility Assets for the benefit of CL&P and WMECO. NGC's bid of $865.5 million was for 10 hydroelectric facilities owned by CL&P in Connecticut; the Northfield Mountain pumped storage station (owned 81% by CL&P and 19% by WMECO) in Massachusetts and the Cabot and Turners Falls No. 1 hydroelectric stations located in Massachusetts and owned by WMECO. Subsequent to the auction, NGC executed a purchase and sale agreement with CL&P for the assets owned by CL&P (the "CL&P PSA") and a purchase and sale agreement with WMECO for the assets owned by WMECO (the "WMECO PSA", and collectively with the CL&P PSA, the "PSA"). 9. In connection with the Transaction, NGC intends to file for EWG status with FERC under Section 32(a) of the Act. Section 32(c)(B) of the Act provides that Commission approval is not required for the transfer of generating assets to an EWG where the affected state regulators have found that the transfer (i) will benefit consumers, (ii) is in the public interest, and (iii) does not violate state law. The required filings have been made with the relevant State commissions. Copies of the state orders will be attached by amendment as Exhibits d.1, d.2 and d.3. Accordingly, CL&P and WMECO are not required to seek Commission approval of the sale of the Utility Assets to NGC. 10. NGS will operate the Utility Assets pursuant to a service agreement with NGC (the "Service Agreement"), a proposed form of which is filed as Exhibit b.1, under Rules 87(b)(1) and 90(d)(1). While the Applicants believe that this transaction is duly authorized under the Commission's rules, they nonetheless request such additional authority as the Commission believes may be required. Further, NGC currently intends to contract with its affiliate, Select, to market the power generated by the Utility Assets pursuant to a power marketing agreement with NGC. This agreement will be filed for approval with the Federal Energy Regulatory Commission ("FERC") and is not subject to 1935 Act jurisdiction. 11. Because NGC is a newly formed company with no financial resources (see Northeast Utilities, HCAR 35-26939), NU was required to execute the Assumption Agreement in connection with the Transaction, the form of which is attached as Exhibit b.3. Pursuant to the Assumption Agreement, NU agreed, subject to regulatory approvals, to perform the obligations set out in the PSA as if it were the purchaser if NGC does not perform such obligations. Under the terms of the PSA, the purchaser is not required to perform its obligations thereunder if it does not receive all the required regulatory approvals (including the approval of the Commission). Accordingly, NU would only be required to perform under the PSA pursuant to the terms of the Assumption Agreement if all regulatory approvals (including that of the Commission) were obtained. Once all regulatory approvals are received, NU would be obligated to perform all obligations of NGC under the PSA if NGC did not perform. NU estimates its obligations under the Assumption Agreement at $13 million. NU hereby seeks approval of its obligations under the Assumption Agreement pursuant to Section 12(b) of the Act and Rule 45 thereunder. 12. To finance the acquisition of the Utility Assets, NGC negotiated a financing transaction with several financial institutions ("Banks"), whereby Banks would provide financing to NGC in two separate tranches. Tranche A would consist of a credit facility of up to $415 million. This amount would be repaid concurrently with the funding of the credit facility, using funds provided to NGC by NU, through NUEI, pursuant to Section 12(b) and Rule 45(b)(4) thereunder.(2) Tranche B would consist of a senior secured 364-day loan facility in an amount up to $500 million from Banks. Both Tranche A and Tranche B will be secured by various means, including by a mortgage on the Utility Assets. NGC presently plans to repay the funds provided under tranche B from the proceeds of a capital markets transaction pursuant to authority available under Rule 52. ___________________________________ (2) NU would obtain the necessary funds to make such contribution to NUEI out of a combination of (i) dividends paid to NU by CL&P and WMECO, (ii) the repurchase from NU of a portion of the stock of CL&P and WMECO by the respective companies and (iii) to the extent necessary, funds available to it from other sources. CL&P and WMECO would use approximately $400 million of the proceeds from the sale of the Utility Assets to make such payments. CL&P and WMECO are filing a separate application/declaration on Form U-1 for authorization to upstream the Returned Capital to NU in this fashion. See, Northeast Utilities, File No 70-09541 (August 26, 1999). 13. NU will contribute up to $475 million (including the $415 million referenced in paragraph 12 above) to NUEI, which will, in turn, contribute it to NGC (the "Equity Investment"). NGC will concurrently apply these funds to repay tranche A to Banks, pay additional transaction costs and retain the balance for working capital purposes. ITEM 2 FEES, COMMISSIONS AND EXPENSES 14. The fees, commissions and expenses paid or incurred, or to be paid or incurred, directly or indirectly, in connection with the proposed transaction by the Applicants are as follows: Legal fees $* Accounting fees $* Miscellaneous costs $* NUSCO Fees $* * to be filed by Amendment 15. None of such fees, commission or expenses will be paid to any associate company or affiliate of the Applicants except for payments by the Applicants for financial and other services, to be performed at cost by Northeast Utilities Service Company ("NUSCO"), an affiliated service company. ITEM 3 APPLICABLE STATUTORY PROVISIONS 16. The following sections of the Act and the Commission's rules thereunder are or may be applicable to the authorization being sought hereunder by the Applicants: Sections 6(a), 7, 12(b), 13 and 32 of the Act and Rules 45, 53, 54, 87 and 90 promulgated thereunder. To the extent that other sections of the Act or the Commission's rules thereunder are deemed applicable to the proposed transactions for which Commission authorization is sought, such sections and rules should be considered to be set forth in this Item 3. EWG Investment 17. Rule 53 provides that, if each of the conditions of paragraph (a) thereof is met, and none of the conditions of paragraph (b) thereof is applicable, then the Commission may not make a finding that the guarantee of a security of an EWG by a registered holding company is not reasonably adapted to the earning power of such company or to the security structure of the companies in the holding company system, or that the circumstances are such as to constitute the making of such guarantee an improper risk for the company. 18. Giving effect to the proposals contained herein and assuming the amount of the Assumption Agreement and the Equity Investment are all included in the calculation of EWG investment, NU will satisfy all of the conditions of Rule 53(a) except for clause (1) thereof, which requires that the aggregate at risk investment of the registered holding company in EWGs and FUCOs not exceed 50% of the holding company system's Consolidated Retained Earnings ("CREs"). None of the conditions specified in Rule 53(b) is or will be applicable. 19. As of June 30, 1999, NU's aggregate investment in EWGs and FUCOs was approximately $6 million, or 1% of its average CREs of approximately $579 million. The Equity Investment ($475 million), when aggregated with NU's outstanding EWG/FUCO investment at that date ($6 million) and the value of the Assumption Agreement ($13 million) is equal to approximately 85% of NU's CREs as of June 30, 1999 ($494 million divided by $579 million). NU seeks authority to invest an amount up to 100% of its CREs to enable NGC to consummate the Transaction. The rationale forthis proposal is as follows: (a) The Rule 53(a)(1) issue is largely accounting-driven. The divestiture required in the three states, combined with the authorization to issue the RRBs, leave the NU Operating Companies in a unique financial position in that they will experience a significant decrease in the amount of tangible assets that they own and receive a substantial influx of cash almost simultaneously. However, neither the proceeds from the divestiture of the NU Operating Companies' generation assets nor the proceeds from the RRBs will have any effect on the net incomes of the NU Operating Companies. Accordingly, while the NU Operating Companies will experience a substantial influx of cash from these transactions, none of that cash will be treated as "earnings" on their respective financial statements. In addition, the proposed EWG investment is in generating assets that have been owned and operated by affiliates for many years in the historic service territories of the NU system. These circumstances significantly mitigate the risk associated with many other EWG and FUCO investments outside the traditional service territories of other utilities. (b) Approximately $400 million of capital from the proceeds of the sale of the Utility Assets is expected to be returned to NU by CL&P and WMECO through the combination of stock purchases and dividend payments (the "Returned Capital"). Although the Returned Capital will not, for accounting reasons, count as retained earnings of NU available for EWG and FUCO investment under Rule 53, it will nonetheless represent cash available to NU to be expended on other investments just as if it were retained earnings dividended up to NU by NU's subsidiaries. The Equity Investment being made by NU in NGC is mostly the intrasystem reallocation of equity from two companies within the NU system (CL&P and WMECO) to another system company (NGC). 20. Rule 53(c) states that, in connection with a proposal to issue and sell securities to finance an investment in an EWG, or to guarantee the securities of an EWG, a registered holding company that is unable to satisfy, among other provisions, the provision that such investments may not exceed 50% of CREs, must "affirmatively demonstrate" that such proposal: (i) will not have a substantial adverse impact upon the financial integrity of the registered holding company system; and (ii) will not have an adverse impact on any utility subsidiary of the registered holding company, or its customers, or on the ability of State commissions to protect such subsidiary or customers. 21. The Commission has performed an analysis of the requirements of Rule 53(c) with respect to applications/declarations filed by a number of the registered holding companies. See The Southern Company ("Southern"), Holding Co. Act Release No. 26501 (April 1, 1996); Central and South West Corporation ("CSW"), Holding Co. Act Release No. 26653 (Jan. 24, 1997); GPU, Inc. ("GPU"), Holding Co. Act Release No. 26779 (Nov. 17, 1997); Cinergy, Inc. ("Cinergy"), Holding Co. Act Release No.26848 (March 23, 1998); American Electric Power Company, Inc. ("AEP"), Holding Co. Act Release No. 26864 (April 27, 1998); and New Century Energies, Inc. ("New Century"), Holding Co. Act Release No. 26982 (February 26, 1999) (collectively, the "100% Orders"). 22. Unlike the 100% Orders, which were intended largely to facilitate foreign investment, the authority sought in this matter is related to an investment in one specific EWG, not EWGs generally, which is being acquired in the wake of the state-ordered divestiture of two of NU Operating Companies' generating assets. 23. NU addresses the requirement of Rule 53(c)(i), the impact upon the financial integrity of the registered holding company system, as follows: The proposed investment in NGC by NU, in an amount up to 100% of NU's consolidated retained earnings will not have a "substantial adverse impact" on the financial integrity of the NU System. The lack of any "substantial adverse impact" on NU's financial integrity as a result of the investment in NGC can be demonstrated in several ways, including by analyses of the circumstances surrounding the acquisition of utility assets by NGC which precipitates NU's investment, specifically the fact that the Utility Assets have been owned and operated by the NU system for many years and will continue to be maintained and operated by the same NU organization after the sale; thus, "country," construction and operating risks are non-factors here. In addition, the power generated by the Utility Assets will be competitively marketed in the Northeast region, where NU has long been a leading energy marketer, first through certain of the NU Operating Companies and in the future through Select, its competitive energy marketing affiliate. Further the Utility Assets consist mainly of the Northfield Mountain pumped storage facility, which NU considers the premier generating property in New England due to its unique operating characteristics and history of reliable service. Consideration of these and other relevant factors supports the conclusion that the proposed investment by NU in NGC in an amount exceeding the 50% consolidated retained earnings limitation in Rule 53(a)(1) will not have a "substantial adverse impact" on the financial integrity of the NU System. 24. The following paragraphs provide data analyzing the impact of the proposed investment on the NU system in light of the tests developed by the staff in the course of adopting the 100% Orders. These tests involve analysis of: i. Ratios of EWG/FUCO investment (at 100% of CREs) to * Consolidated Capitalization * Consolidated Net Utility Plant * Total Consolidated Assets * Market Value of Outstanding Stock ii. The Applicant's CRE Growth iii. The Applicant's Stock Price to Earnings Ratio iv. The Applicant's Market to Book Ratio v. The Applicant's Dividend Payout Ratio vi. The Applicant's Capitalization Ratios 25. Capitalization Ratios. NU's aggregate investments in EWGs equal to 100% of CREs would represent a relatively small commitment of NU capital for a company the size of NU, based on various financial ratios at June 30, 1999. For example, investments of this amount would be equal to only approximately 10.5% of NU's total consolidated capitalization ($5.5 billion), 9.5% of consolidated net utility plant ($6.1 billion), 5.6% of total consolidated assets ($10.3 billion), and 24.1% of the market value of NU's outstanding common stock ($2.4 billion) as of August 20, 1999. The table below illustrates that NU's exposure to EWG/FUCO investments will be measurably smaller than the companies who received the 100% orders. Investments in EWGs and FUCOs* as a percentage of: Company Consolidated Consolidated Total Market Value of Capitalization Net Utility Consoli- Outstanding Common Plant dated Assets Stock Southern 16.3% 15.4% 11.0% 20.4% CSW 23.0% 23.0% 14.0% 31.0% GPU 24.9% 34.2% 19.4% 49.8% Cinergy 16.0% 16.0% 11.0% 19.0% AEP 16.0% 13.8% 9.8% 18.5% New Century 15.5 12.9 9.8 13.5 Average of above 18.6% 19.2% 12.5% 25.4% NU 10.5.% 9.5% 5.6% 24.1% * Assuming the investment equals 100% of CREs 26. This comparison verifies that an aggregate investment of $579 million by NU would involve a relatively small commitment of capital for a company of NU's size. Moreover, in every category the NU percentage is lower than or substantially equal to the applicable percentage for the other registered systems that have 100% Orders except for the comparison of the investment to the market value of outstanding stock. 27. Consolidated Retained Earnings Growth. NU's CREs have declined for each of the past three years. This decrease is primarily attributable to the years of losses incurred while the NU system was solving its problems at the Millstone Point Nuclear Power plants. As the Commission is aware, all three nuclear units at Millstone ("Millstone 1", "Millstone 2" and "Millstone 3"), in which CL&P owns 81%, 81% and 53% interests, respectively, and in which WMECO owns 19%, 19% and 13% interests, respectively, were shut down in 1996. In 1998, NU determined that it would not be economical to restart Millstone 1 and instead chose to prepare for decommissioning the unit. These shutdowns had an adverse effect on the NU system as a whole. Millstone 3 was returned to service in July 1998. Millstone 2 returned to service and was restored to rate base in 1999. The resolution of the various operational and regulatory issues and the enhanced competitive position of NU in the Northeast after its restructuring are expected to have a positive effect on earnings and CREs. 28. Share Price to Earnings Ratio. Due to recent poor earnings performance, and the market's perception that NU is on the upswing, NU's share price to earnings ratio is not comparable to industry peers because NU's earnings were negative for the 12 month period ending June 30, 1999. 29. Market to Book Ratio. NU's market to book ratio is currently 1.1 based on book value of $16.81 as of June 30, 1999 and a market price of $18.4375 as of October 6,1999. This ratio is below the industry average, which was 1.72 as of June 30, 1999, again primarily because of the operational issues referred to above which have caused NU's stock price to remain low. 30. Dividend Payout Ratio. NU's current payout ratio is in excess of 100% of current earnings due to historic low earnings due to the operational issues referred to above. NU is scheduled to pay a $.10/share dividend in December, its first in 2 years. Going forward, assuming earnings from continuing operations continue to improve, NU expects to bring its dividend payout ratio up to an amount in line with current industry trends of instituting payout ratios lower than historic industry norms. 31. Capitalization Ratios. NU's corporate credit rating is currently BB+ from S&P and Ba3 from Moody's. Its consolidated capitalization and interest coverage ratios for 1998 were below industry averages. These ratios are as follows: Actual 1998 Capitalization and Interest Coverage Ratios (Excluding Non-Recourse Project Debt): Total Debt/Capital 62.2% EBIT/Cash Interest (times) .6 Funds from Operations/Interest (times) 2.6 Industry Ratios for BB+ Rated Utilities* Average High Low Total Debt/Capital 50.2% 90.7% 34.4% EBIT/Cash Interest (times) 2.7 4.9 -0.1 Funds from Operations/Interest (times) 4.4 8.2 1.5 *(Source: Moody's Investors Service Electric Utility Sourcebook, October 1998) 32. Rule 53(B) Factors. With respect to the relevant financial benchmarks specifically contemplated by Rule 53(b), none is applicable: (1) there has been no bankruptcy of an NU associate company (Rule 53(b)(1)); (2) although NU's average CREs for the four most recent quarterly periods have decreased by more than 10% from the average for the preceding four quarterly periods (Rule 53(b)(2)), NU's aggregate investment in EWGs and FUCOs at June 30, 1999, did not exceed 2% of NU's consolidated capital invested in utility operations; and (3) in the previous fiscal year, NU did not report operating losses attributable to its direct or indirect investments in EWGs and FUCOs that exceeded an amount equal to 5% of CREs (Rule 53(b)(3)). 33. NU undertakes to notify the Commission by filing a post-effective amendment in this proceeding in the event that any of the circumstances described in Rule 53(b) arise during the authorization period. 34. NU addresses the requirement of Rule 53(c)(ii), the impact of the proposed investment on the NU Operating Companies, as follows: NU's request in this Application/Declaration to raise NU's investment limits in EWGs and FUCOs to an amount in excess of 50% of its CREs will not have an "adverse impact" on any of NU's Operating Companies, their respective customers, or on the ability of the three State commissions having jurisdiction over the NU Operating Companies to protect such NU Operating Companies or such customers. 35. This conclusion is supported by (i) the insulation of the NU Operating Companies and their customers from potential direct adverse effects of NU's investments in EWGs and FUCOs; (ii) the NU Operating Companies' current financial health and (iii) the proven effectiveness of state commission oversight together with the affirmation by the state commissions of Connecticut, Massachusetts and New Hampshire that they have authority and jurisdiction, and will exercise such authority, to protect customers in their respective states from any adverse impact. 36. Insulation from Risk. All of NU's investments in EWGs and FUCOs are, and in the future will remain, segregated from the NU Operating Companies. Any losses that may be incurred by such EWGs and FUCOs would have no effect on the rates of any NU Operating Company. NU represents that it will not seek recovery through higher rates from the NU Operating Companies' utility customers in order to compensate NU for any possible losses that it or NGC may sustain on the investment in NGC or for any inadequate returns on such investments. 37. Moreover, to the extent that there may be indirect impacts on the NU Operating Companies from NU's EWG and FUCO investments through effects on NU's capital costs, the state commissions regulating the NU Operating Companies have broad discretion to set the cost of capital for them by a variety of accepted means and are free to exclude any adverse impacts due to EWGs and FUCOs. Therefore, the state commissions have the authority and the mechanism to prevent any adverse effects on the cost of capital due to investments in EWGs and FUCOs from being passed on to customers. 38. NU has complied and will continue to comply with the requirements of Rule 53(a)(3) regarding the limitation on the use of NU Operating Company employees in connection with providing services to EWGs and FUCOs. The purchase by NGC of the Utility Assets is not anticipated to have any impact on utilization of NU Operating Company employees. As part of the acquisition, NGC committed to offer employment to certain employees of CL&P and WMECO. Accordingly, NGC will have sufficient employees to operate the Utility Assets, if required beyond the services to be provided by NGC. The NU Operating Companies have not and will not increase staffing levels to support the operations of NGC. NU and NGC expect that certain operations services for NGC will largely be performed by NGS and some by outside consultants engaged by NGC. It is expected that NUSCO will also be called upon to provide some services. Accordingly, NGC's need for the support of personnel provided by the NU Operating Companies is expected to be modest. 39. Finally, NU has complied and will continue to comply with the other conditions of Rule 53(a) providing specific protections to customers of the NU Operating Companies and their state commissions, in particular, the requirements of Rule 53(a)(1) regarding the preparation and making available of books and records and financial reports regarding EWGs and FUCOs, and the requirements of Rule 53(a)(4) regarding filing of copies of applications and reports with other regulatory commissions. 40. NU Operating Company Financial Health. As indicated earlier in this Application/Declaration, the reduced CREs of NU are mainly the result of the problems at and shut-down of the Millstone nuclear power units. The shutdown of the Millstone units created a substantial drain on the financial resources of the NU Operating Companies, as CL&P and WMECO were forced to purchase power from third parties and incurred significant operations and maintenance costs for the Millstone units. The return of Millstone 2 and 3 is expected to continue to enhance the NU Operating Companies' financial health. 41. The improved financial health outlook of the NU Operating Companies is evidenced by the recent increase in ratings and positive outlook assigned by the credit ratings agencies. Standard &Poor's raised CL&P and WMECO's senior secured ratings from BB+ to BBB- in May 1999, and Moody's raised CL&P's and WMECO's senior secured ratings from Ba2 to Baa3 at the same time. Fitch IBCA also upgraded CL&P and WMECO's senior secured ratings and placed NU on "alert" for a possible upgrade. 42. The NU Operating Companies' senior secured ratings as of June 30, 1999 are as follows: S&P Moody's Fitch CL&P BBB- Baa3 BB+ WMECO BBB- Baa3 BB+ PSNH BBB- Ba3 BB+ NAEC BB- B1 BB- 43. The Debt (including short-term debt) ratios of CL&P, WMECO, PSNH and NAEC are 63.9%, 64.3%, 40.7% and 70%, respectively. These ratios are within the industry range for like-rated electric utilities but, with the exception of PSNH, are high compared to their peers. However, the debt ratios of each of these companies are expected to improve as the respective companies apply restructuring proceeds to pay down debt. 44. The proposed investment in NGC will also not have any negative impact on the NU Operating Companies' ability to fund operations and growth. Current projections indicate that the NU Operating Companies will continue to fund operations and construction expenditures primarily from internal sources of cash, credit facilities, asset sales and securitization proceeds. Moreover, there is ongoing evidence that the NU Operating Companies can access capital markets as needed, although the Operating Companies' ability to issue debt and preferred equity securities in the future depends upon earnings coverages at the time such securities are issued. 45. Adequacy Of State Commission Oversight. The three state commissions having jurisdiction over the NU Operating Companies, namely Connecticut, Massachusetts and New Hampshire (collectively, "State Commissions") are able to protect utility customers within their respective states. The State Commissions are actively encouraging competition in the industry and have promulgated regulations concerning competition. In addition, the State Commissions have approved the sale of the Utility Assets to third parties. The acquisition of the Utility Assets by NGC must be specifically approved by the State Commissions which must make determinations that the ownership of the Utility Assets by NGC will (i) benefit consumers, (ii) is in the public interest and (iii) does not violate state law. 46. For these reasons, the State Commissions will have adequate authority to protect NU Operating Company customers from any adverse effect associated with NU and NU Company investments in NGC. 47. Accordingly, NU asks the Commission to grant it an exception to the requirements of Rule 53(a)(1) in connection with the proposed Transaction. The Service Agreement 48. As described above, it is proposed that under the Service Agreement, NGS will provide NGC with a variety of administrative, operation, management and support services. These services are expected to include, without limitation, services relating to information systems, meters, transportation, electric system maintenance, marketing and customer relations, engineering and construction services, materials management, facilities, power planning, environmental affairs and fuels. The Service Agreement as proposed would allow these services to be provided at other than cost. It is currently anticipated that NGS will not have any of its own employees performing these services. Instead the services will be performed by NGS using employees of NUSCO, NGS' service affiliate, pursuant to the existing service agreement between NUSCO and NGS which has been in existence since the formation of NGS. 49. Section 13(b) of the Act allows the Commission to exempt transactions, by rule, regulation or order, from the provisions of Section 13(b) and the "at cost" rules promulgated thereunder if such transactions: (a) are with any associate company which does not derive, directly or indirectly, any material part of its income from sources within the United States and which is not a public utility company operating within the United States, or (b) involve special or unusual circumstances or are not in the ordinary course of business. 50. The Applicants hereby request on behalf of NGS an exemption under Section 13 of the Act and Rule 90(d)(1) thereunder from the at-cost requirements in connection with the provision of services by NGS to NGC at other than "cost". Neither NGC nor NGS is (i) a public utility or holding company, (ii) an investment company or investment trust, (iii) a company engaged in the business of selling goods to associate companies or performing services or construction or (iv) a company controlling such a company. The Applicants believe that the Service Agreement is structured so as to comply with Section 13 of the Act and the Commission's rules and regulations thereunder. To the extent Commission approval is required, NGS hereby requests authorization and approval of the Service Agreement . Item 4. REGULATORY APPROVALS 51. No regulatory approvals, other than those of the Commission requested herein are required for the proposed activities for which Commission authorization is sought herein. Item 5. PROCEDURE 52. The Applicants hereby request that the Commission publish a notice under Rule 23 with respect to the filing of this Application/Declaration as soon as practicable and that the Commission's order be issued as soon as possible. A form of notice suitable for publication in the Federal Register is attached hereto as Exhibit h.1. The Applicants respectfully request the Commission's approval, pursuant to this Application/Declaration, of all proposed transactions described herein, whether under the sections of the Act and Rules thereunder enumerated in Item 3 or otherwise. It is further requested that the Commission issue an order authorizing such proposed transactions at the earliest practicable date but in any event not later than November 1, 1999. Additionally, the Applicants (i) request that there not be any recommended decision by a hearing officer or by any responsible officer of the Commission, (ii) consent to the Office of Public Utility Regulation within the Division of Investment Management assisting in the preparation of the Commission's decision, and (iii) waive the 30-day waiting period between the issuance of the Commission's order and the date on which it is to become effective, since it is desired that the Commission's order, when issued, become effective immediately. Item 6. EXHIBITS AND FINANCIAL STATEMENT (a) Exhibits b.1 Form of Proposed Service Agreement b.3 Assumption Agreement** d.1 Connecticut Department of Public Utility Control Order* d.2 Massachusetts Department of Telecommunications and Energy Order* d.3 New Hampshire Public Utility Commission Order* f.1 Legal Opinion** g Financial Data Schedule** h.2 Form of Notice** (b) Financial Statements * To be filed by amendment ** Previously filed Item 7. Information as to Environmental Effects 53. The proposed transactions neither involve a "major federal action" nor "significantly affect the quality of the human environment" as those terms are used in Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C. Sec. 4321 et seq. Consummation of the proposed transactions will not result in changes in the operations of NU or any of its respective subsidiaries that would have any impact on the environment. No federal agency is preparing an environmental impact statement with respect to this matter. SIGNATURES Pursuant to the requirements of the Public Utility Holding Company Act of 1935, as amended, the undersigned companies have duly caused this Amendment to be signed on their behalf by the undersigned thereunto duly authorized. Date: November 17, 1999 NORTHEAST UTILITIES NORTHEAST GENERATION SERVICES COMPANY By: /S/ David R. McHale Name: David R. McHale Title: Vice President and Treasurer EX-10 2 EXHIBIT B.1 TO U-1 Exhibit b.1 NORTHEAST GENERATION COMPANY-NORTHEAST GENERATION SERVICES COMPANY MANAGEMENT AND OPERATION AGREEMENT MANAGEMENT AND OPERATION AGREEMENT ("Agreement") made and entered into as of the __ day of _________, 1999, by and between NORTHEAST GENERATION COMPANY, a Connecticut corporation with its principal place of business in Berlin Connecticut ("NGC"), and NORTHEAST GENERATION SERVICES COMPANY, a Connecticut corporation with its principal place of business in Rocky Hill, Connecticut ("NGS"). NGC and NGS shall be referred to individually as the "Party" and collectively as the "Parties". WHEREAS, NGC and NGS are wholly-owned subsidiaries of NU Enterprises, Inc., which in turn are wholly-owned by Northeast Utilities; and WHEREAS, NGC has acquired through a public auction process certain electric generation facilities listed on Exhibit 1 hereto (the "Facilities") from The Connecticut Light and Power Company ("CL&P") and Western Massachusetts Electric Company ("WMECO"), which NGC intends to own and operate as exempt wholesale generators ("EWGs); and WHEREAS, NGC desires to have NGS manage and operate the Facilities on behalf of and as agent for NGC on the terms and conditions stated in this Agreement and NGS has agreed to do so. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein, it is agreed as follows: SECTION 1 - DEFINED TERMS 1.1 Definitions. For the purposes of this Agreement, the following terms shall have the following meanings: "Affiliate" means, with respect to any entity, any other entity that, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, such entity. For this purpose, "control" means the direct or indirect ownership of fifty percent (50%) or more of the outstanding capital stock or other equity interests having ordinary voting power. "Bankrupt" means with respect to a Party, such Party (i) files a petition or otherwise commences a proceeding under any bankruptcy, insolvency, reorganization or similar law, or has any such petition filed or commenced against it, (ii) makes an assignment or any general arrangement (other than an assignment undertaken in connection with a financing) for the benefit of creditors, (iii) otherwise becomes bankrupt or insolvent (however evidenced), (iv) has a liquidator, administrator, receiver, trustee, conservator or similar official appointed with respect to it or any substantial portion of its property or assets, or (v) is generally unable to pay its debts as they fall due. "Business Day" means any day except Saturday, Sunday, a Federal Reserve Bank holiday or a holiday according to the North American Electric Reliability Council or any successor organization thereto; and a Business Day shall open at 8:00 a.m. and close at 5:00 p.m. Eastern Standard (or Daylight) time. "Buyer" means the entity or entities (which may or may not be Affiliates of NGC), with which NGC has designated and contracted to sell or broker Products from the Facilities. "Delivery Point" means the point(s) at which the Energy of the Facilities will be delivered by NGS and received by NGC or its designee specified in writing to NGS, which may be Buyer, ("the Designee"). For the purposes of this Agreement, the Delivery Point shall be the high side of the step-up transformer in the switchyard for each Facility. "Designee" means the corporate entity (which may or may not be an Affiliate) which NGC has designated in writing to NGS to exercise certain specified rights and duties of NGC under this Agreement "Energy" means electric energy in the form of merchantable electricity expressed in megawatt hours and shall be three-phase, 60-cycle alternating current. "FERC" means the Federal Energy Regulatory Commission or any successor government agency. "Fuel Delivery Point" means the inlet flange of the jet fuel tank at the Tunnel Jet site. "Good Industry Practice" means any of the practices, methods, and acts engaged in or approved by a significant portion of the electric generation facility operation industry during the relevant time period, or any of the practices, methods, and acts which, in the exercise of reasonable judgment in light of the facts known or that should have been known at the time a decision was made, could have been reasonably expected to accomplish the desired result at a reasonable cost consistent with full compliance with applicable laws and regulations, good practices, reliability, safety, environmental protection, sound business practices and expedition. Good Industry Practice is not limited to a single, optimum practice, method or act to the exclusion of others, but rather is intended to include all acceptable practices, methods or acts generally accepted in the industry. With respect to the Facilities, Good Industry Practice includes but is not limited to taking reasonable steps to ensure that: (1) Adequate materials, resources and supplies are available to meet the Facility's needs. (2) Sufficient operating personnel are available and are adequately experienced and trained to operate the Facilities properly and efficiently and are capable of responding to emergency conditions. (3) Preventive, routine and non-routine maintenance and repairs are performed on a basis that ensures reliable long-term and safe operation, and are performed by knowledgeable, trained and experienced personnel utilizing proper equipment and tools. (4) Appropriate monitoring and testing is done to ensure equipment is functioning as designed and to provide assurance that equipment will function properly under both normal and emergency conditions. (5) Equipment is not operated in a reckless manner, or in a manner unsafe to workers or the general public or without regard to defined limitations such as operating voltage, current, frequency, rotational speed, synchronization and control system limits. "Interest Rate" means, for any date, the per annum rate of interest equal to the prime lending rate as may from time to time be published in the Wall Street Journal under "Money Rates"; "ISO-NE" means the New England Independent System Operator, or its successor. "Lead Participant" shall have the meaning stated in the NEPOOL Market Rules. "Lender" means any financial institution or other entity or individual providing financing or refinancing to NGC for any or all of the Facilities, whether on a senior or subordinated basis. "NEPOOL" means the New England Power Pool or its successor in interest. "NEPOOL Agreement" means the Restated NEPOOL Agreement, dated as of December 1, 1996 as amended from time to time. "NEPOOL Standards" means all Criteria, Rules, Standards, NEPOOL Automated Billing System Procedures, NEPOOL Operating Procedures and NEPOOL Market Rules issued or adopted by NEPOOL, ISO-NE and their satellite agencies, or their successors, as amended from time to time. "Participant" shall have the meaning stated in the NEPOOL Agreement. "Product" means the various electrical products, services, and capabilities (including, but not limited to, for example, energy-related products, capacity-related products, and generation ancillary services related products) recognized as market products that can be produced or offered by the Facilities. "Schedule" or "Scheduling" means the acts of NGC, its Designee and/or their designated representatives, if applicable, of notifying, requesting and confirming to each other the quantity and type of Product to be provided from each Facility on any given day or days. SECTION 2 - TERM OF THE AGREEMENT 2.1 Term. The term of this Agreement ("Term") shall commence on the date that NGC first obtains ownership of any or all of the Facilities, shall remain in effect for an initial period of four (4) years (the "Initial Period"), and shall continue thereafter on a year-to-year basis from the end of the Initial Period unless and until terminated by either Party by one (1) year advance written notice by that Party to the other Party given prior to the commencement of the next year. Provided, however that the Parties' obligations under this Agreement with respect to a particular Facility shall not commence until the date NGC obtains full ownership of that Facility. In the event that a termination notice is given by one Party to the other Party, the Parties shall reasonably cooperate to ensure a smooth transition to a new manager and operator without adversely affecting the physical condition, operations or costs of the Facilities. 2.2 Material Changes. In the event that any regulatory agency with jurisdiction over this Agreement makes substantial changes or modifications to any of the terms or conditions contained herein, the Parties shall cooperate to make such changes as will keep the Parties on substantially the same economic terms as contained herein. If the Parties cannot reach agreement, either Party may terminate this Agreement, without further obligation, upon sixty (60) days prior written notice. Such termination will result in a payment to NGS of its actual incremental demobilization costs, not to exceed ten (10) percent of the average annual fixed fee described in Section 4.2. 2.3 Termination Rights. Termination by either Party in accordance with the terms of this Agreement shall not affect or excuse the performance of either Party under any provision of this Agreement that by its terms survives any such termination, including, but not limited to billings, and indemnification and liability. SECTION 3 - SCOPE OF SERVICES 3.1 General Scope of Services. For the Term of this Agreement, NGS will manage, operate, and maintain the Facilities and provide the administrative services required for the Facilities, on behalf of and as agent for NGC as more fully described in Exhibit 2 hereto (the "Services"). The Services shall be provided in accordance with Good Industry Practice and NEPOOL Standards. NGS's obligations to NGC shall pertain solely to the Services provided under this Agreement's, and NGS shall not be deemed to be assuming any of the risks of ownership of the Facilities. 3.2 Specific Purchase and Sale Agreement Obligations. NGS recognizes that NGC in its Purchase and Sales Agreements with CL&P and WMECO, each dated July 2, 1999 (the "PSAs") has agreed to certain continuing obligations to CL&P and WMECO. NGS agrees to comply with, and assist NGC in complying with the obligations listed on Exhibit 3 hereto in the course of providing the Services to NGC with respect to the Facilities. 3.3 Excluded Costs. Exhibit 4 lists cost items ("Excluded Costs") which NGS will not be responsible for paying or bearing, unless otherwise agreed by the Parties. If NGS pays any such Excluded Cost as part of its Services, it shall invoice NGC, which shall reimburse NGS within thirty (30) days of its receipt of such invoice. In addition, NGS will not pay or bear the cost of (a) any unanticipated major repairs requiring single occurrence cost of greater than $100,000, or (b) any Approved Capital Expenditures set forth in Exhibit 5 hereto or other capital expenditures. 3.4 Additional Capital Expenditures. NGC, or its Designee with NGC's consent, shall have the right to request NGS to incur additional capital expenditures beyond those included in the Approved Capital Expenditures in Exhibit 5 during a particular year, as long as NGC pays the associated capital cost. 3.5 Additional Operation and Maintenance Costs. NGC, or its Designee with NGC's consent, shall have the right to request NGS to make changes in its operation or maintenance practices for the Facilities or to undertake additional activities not required by Section 3 of this Agreement or by Good Industry Practice. NGS shall make such change, or undertake such additional activities, provided that NGC fully compensates NGS for any incremental costs it incurs and that such change is consistent with Good Industry Practice. Additionally, if NGC fails to fund any Approved Capital Expenditures and such failure results in additional operating and maintenance costs to NGS, NGC shall fully compensate NGS for any resulting incremental costs NGS incurs. 3.6 Maintenance Schedules. The annual fixed fee and Approved Capital Expenditures were developed based upon an Assumed Maintenance Schedule contained in Exhibit 7 hereto and the scope of Services to be provided. Any deviations from such schedule or scope, are subject to the approval of NGC. The Parties shall mutually agree to adjustments to the annual fixed fee to reflect the economic impacts of any such change in schedule or scope. NGS shall use all reasonable efforts to not schedule maintenance during peak production periods, except with the consent of NGC or as required by Good Industry Practice. SECTION 4 - PAYMENTS 4.1 Payments. The payments from NGC to NGS for the Services NGS provides under Section 3 of this Agreement shall consist of two (2) components: an annual fixed fee as described in Section 4.2 to be paid in monthly installments, and an annual incentive payment or penalty as described in Section 4.3. 4.2 Annual Fixed Fee. NGC shall pay NGS the annual fixed fee stated on Exhibit 6 applicable for each Facility owned by NGC for each calendar year for the services NGS provides under Section 3 of this Agreement. The fixed fee for a calendar year shall be paid by NGC in twelve (12) equal annual monthly installments on the first business day of each month for that month, or in amounts predetermined and agreed upon by the Parties based on scheduled maintenance activity. Except as otherwise specifically stated in this agreement, the fixed fee will cover all Services rendered by NGS under this Agreement. No later than eighteen (18) months prior to the end of the Initial Period, the Parties will negotiate in good faith the annual fixed fee(s) for any extension of the Initial Period. Either Party may terminate this Agreement if the Parties fail to come to Agreement to such fixed fee(s) within one (1) year of the end of the Term. 4.3 Annual Incentive Payment or Penalty. In addition to the annual fixed fee, NGC shall pay NGS an annual incentive payment for each calendar year of up to ten (10) percent, of the applicable year's fixed fees or assess an incentive penalty on NGS of up to five (5) percent of the applicable years' fixed fee based on the formula described in Exhibit 6 or using such other incentive payment formula agreed to by the Parties in writing. Any incentive payment shall be made within sixty (60 ) days after the end of the calendar year. Any incentive penalty shall be applied as a reduction to the annual fixed fee within sixty (60) days after the end of a calendar year. NGS will calculate the appropriate Incentive Payment or Penalty as an invoice charge or credit to NGC. 4.4 Billing and Payment. 4.4.1 All payments required under this Agreement shall be made no later than the date required by this Agreement, or if no date is specifically required, within thirty (30) days of receipt by the Party being charged of an invoice or bill from the other Party. Each Party will make payments by wire transfer, or by other mutually agreeable method(s), to the account designated by the other Party. Any amounts, both principal and interest, not paid by the due date will be deemed delinquent and will accrue interest at the Interest Rate, such interest to be calculated from the due date to the date the unpaid amount is paid in full. 4.5 Disputes and Adjustments of Invoices. A Party may, in good faith, challenge the correctness of any invoice rendered under the Agreement or adjust any invoice for any arithmetic or computational error within six (6) months of the date the invoice was rendered. In the event an invoice or portion thereof, or any other claim or adjustment arising hereunder, is challenged, payment of the invoice in full shall be made when due, with notice of the objection as to the disputed portion given to the other Party at the same time. Any billing challenge or billing adjustment shall be in writing and shall state the specific basis for the challenge or adjustment. If it is determined that an adjustment to the invoice is appropriate, then such payment shall be made within two (2) Business Days of such determination along with interest accrued at the Interest Rate from the due date until the date paid. An invoice rendered under the Agreement shall be binding unless challenged in accordance with this subsection within six (6) months after the invoice is rendered or any specific adjustment to the invoice made by such Party prior to such time. SECTION 5 - COORDINATION WITH NGC, BUYER AND ISO-NE 5.1 Capacity Audits. NGC may request and NGS shall perform capacity audits of the Facilities at least annually and NGS shall submit the result of such audits to ISO-NE in accordance with NEPOOL procedures in effect from time to time. In the event that any capacity audit results in a change in the capacity rating of a Facility, NGS will promptly advise NGC and Buyer of the change. 5.2 Generation Qualification. NGS shall have sole responsibility for the qualification of each of the Facilities with the ISO-NE as a generation resource in New England and compliance with applicable NEPOOL Standards. 5.3 Dispatch. Subject to Good Industry Practice, NGC, or its Designee, shall have sole discretion to request commitment and dispatch of the Products from each Facility, up to the capacity available from the Facilities at the time. 5.4 Bidding and Scheduling Authority. NGC, or its Designee, shall be designated by NGC as the Lead Participant for the Facilities with the ISO-NE. NGC, or its Designee, shall have sole right and responsibility for bidding and scheduling of the Facilities with the ISO-NE in accordance with the NEPOOL Agreement. NGC, or its Designee, shall communicate to NGS all scheduling and bidding information in a manner consistent with the timing requirements of the ISO-NE and NEPOOL. NGS shall provide such support, as may be reasonably requested by, in order to enable NGC, or its Designee, to perform such obligations. All bidding and scheduling set by NGC, or its Designee, shall be based upon operating parameters set by NGS in accordance with the operation and maintenance of each of the Facilities as specified herein. 5.5 Emergency Curtailment. NGS may curtail, reduce or interrupt its delivery of all or a portion of the Product of any of the Facilities whenever: (a) continued operation of such Facility would result in damage to the Facility or to a transmission or distribution system with which such Facility is directly interconnected, or (b) if a transmission or distribution system with which such Facility is directly interconnected experiences an emergency, as designated by the affected utility, or (c) whenever it is necessary to aid in the restoration of service on a system with which such Facility is directly or indirectly interconnected, or (d) whenever requested by ISO-NE or a governmental authority with applicable jurisdiction, or (e) as required by Good Industry Practice. NGS shall notify NGC, or its Designee, as soon as reasonably practicable of any such curtailment, reduction or interruption, it being understood that it may not be reasonably practicable to provide such notice in advance of such an event. Such notice may be either written or oral with length and content as mutually agreed by the Parties depending on the nature of the incident. Any such curtailment, reduction or interruption shall continue only for as long as reasonably necessary. 5.6 Communications With ISO-NE. NGS shall be responsible for direct communications with ISO-NE or its satellite operator with regards to the hourly actual operation of each of the Facilities. NGS shall be responsible for communications with NGC, or its Designee, regarding any and all directions received from the ISO-NE or its satellite operator. NGC, or its Designee shall have sole responsibility for direct communications with ISO-NE regarding bidding and scheduling of each of the Facilities. SECTION 6 - PUMPING POWER AND FUEL 6.1 Northfield and Rocky River Facilities. NGC, or its Designee, shall bear the cost of and make appropriate arrangements for supplying electrical energy for pumping operation and for the associated pumping costs for the Northfield Facility and the Rocky River Facility. NGC, or its Designee, shall communicate to NGS all pumping scheduling information in a manner consistent with the timing requirements of ISO-NE and NEPOOL. 6.2 Tunnel Jet Fuel. NGC, or its Designee, shall supply and deliver to the Fuel Delivery Point the fuel required to operate the Tunnel Jet Facility. NGS will be responsible for the safe and efficient handling of such fuel after the Fuel Delivery Point. NGC, or its Designee, will coordinate the schedule of such fuel deliveries with NGS to provide for the efficient and reliable acquisition and delivery of fuel for the Tunnel Jet Facility. SECTION 7 - BUDGETING 7.1 Annual Budget. On or before October 1 of each year of this Agreement, NGS will provide NGC and its Designee with a estimated budget of NGC's costs under Sections 3 and 4 of this Agreement, including NGC's operating and maintenance costs, capital costs, and other costs, if any, of the Facilities on a Facility by Facility basis. 7.2 Additional Budget and Planning Information. To assist NGC and its Designee with their financial planning, and budget management, NGS shall respond to any reasonable requests from NGC and its Designee for additional budget and projected cost information such as five (5) year budget planning assumptions and projections. SECTION 8 - REPORTING 8.1 General Reporting. NGS will provide NGC and its Designee with any and all reports reasonably necessary to fulfill Lender, ISO-NE, regulatory, legal or other requirements. 8.2 Incident Reports. NGS will promptly inform NGC and its Designee of any existing or potential permit violations or incidents, or operating deficiencies which may materially impede plant operation, materially add to cost or result in potential legal claims or actions. Such notification may be either written or oral, with length and content as mutually agreed by the Parties. 8.3 Regular, Periodic Reports. NGS shall furnish to NGC in writing a report as soon as available but in no event more than thirty (30) days after the end of each calendar quarter of each fiscal year, in a form agreed to by the Parties, a summary of such quarter's operations and a summary of the calendar year-to-date operations compared to the budget and forecasts delivered pursuant to Section 7.1 and 7.2 of this Agreement, including information in reasonable detail concerning (i) each Facility's production and availability during such period, (ii) NGC operating costs during such period as compared to the NGC operating budget last delivered to NGC under Section 7.1, (iii) capital expenditures during such period as compared to the capital additions and replacement budget last delivered to NGC under Section 7.1 and (iv) any material developments during such period in the operations of each of the Facilities, including material technical problems, discovery of any material defects in the physical plants and equipment of the Facilities material, material interruptions to operation, material disputes with any governmental body (including tax authorities) or material labor difficulties. In the event of a material deviation of NGC operating or capital costs from budgets and forecasts delivered pursuant to Section 7.1 or 7.2, NGS shall promptly notify NGC describing such deviation in reasonable detail and together with such notice or as soon thereafter as possible, a description of the action, if any that NGS proposes to take with respect thereto. 8.4 Notices of Material Events. NGS shall furnish to NGC in writing, promptly after NGS obtains knowledge thereof, notice of: (a) all legal or arbitral proceedings, and of all proceedings by or before any governmental or regulatory authority or agency, and of any material development in such legal or other proceedings, materially affecting any of the Facilities, including without limitation, any pending or threatened environmental claim. (b) any other development that results in, or could reasonably be expected to result in, a material adverse effect on any of the Facilities. (c) any Event of Default, together with a description of any action being taken or proposed to be taken with respect thereto. (d) any casualty, damage or loss to the Facilities, whether or not insured, through fire, theft, other hazard or casualty, involving a probable loss of [500,000 or more (such amount to be deemed increased annually consistent with increases in the consumer price index on each anniversary of the execution hereof). (e) any cancellation, notice of threatened or potential cancellation or material change in the terms, coverage or amounts of any policy of insurance required to be maintained by NGS hereunder. (f) any event, occurrence or circumstance that reasonably could be expected to render NGS incapable of or prevent NGS from performing the Services hereunder. (g) any fact, circumstance, condition or occurrence at, on, or arising from, any Facility that results in noncompliance with any environmental law that has resulted or could reasonably be expected to result in a material adverse effect on the operations of any Facility. (h) any material lien, except liens incurred in the ordinary course of business such as mechanics liens, unless such liens are discharged in the ordinary course of business. Each notice delivered under this Section shall be accompanied by a statement from NGS setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto. 8.5 Other Requested Information. Subject to the requirements of Section 3.5, throughout the period of this Agreement, the Parties shall negotiate, discuss and work together in good faith, and exchange and provide each other with such information as they can reasonably provide and which would or might assist the other in performing its obligations under this Agreement or NGC in satisfying any of its obligations under any of the financing documents to which it is a party. In particular, NGS shall keep NGC reasonably informed of matters relating to the Facilities, the business of NGC relating to the Facilities and the Services, and shall provide NGC with the relevant documentation to the extent that such information and documentation is reasonably available to NGS and provision thereof may occur without material additional work or cost to NGS. SECTION 9 - SUBCONTRACTS 9.1 Subcontracts. NGS may not subcontract Services which aggregate $1 million or greater per calendar year for any single non-Affiliate subcontractor or vendor, or $5 million in total for all non-Affiliate subcontractors and vendors in a calendar year without prior written consent of NGC. In any case, NGS is solely responsible to NGC for the management and operations of the Facilities, subcontracting the Services or any portion thereof to a non-Affiliate shall not relieve NGS of any of its duties, liabilities or obligations under this Agreement, and NGS shall remain directly liable to NGC for the performance of such subcontracted Services as if such services had been performed directly by NGS and not by a non-Affiliate. SECTION 10 - INSURANCE 10.1 Insurance. NGS shall obtain and maintain, at NGS's sole cost and expense, Employer's Liability and/or Worker's Compensation insurance, in accordance with applicable laws, in statutory amounts. NGS will obtain and maintain Automobile Liability and Commercial General Liability insurance in such amounts and form as NGC may reasonably require. Upon NGC's request, NGS will provide copies of policies or other proof of insurance coverage as NGC may reasonably require. With NGC's consent, NGS may self-insure such exposures. All policies, other than Worker's Compensation, shall be endorsed to name NGC as an additional insured with respect to any and all third party bodily injury and/or property damage claims arising from NGS's performance hereunder. SECTION 11 - TITLE 11.1 Title. Title to all capitalized equipment and tools and to all materials and supplies and fuel held in inventory, provided or procured by NGS pursuant to this Agreement for the Facilities will pass to NGC immediately upon delivery of the materials to NGS or the applicable Facility site (whichever occurs first). SECTION 12 - ENVIRONMENTAL 12.1 Environmental Liability. Subject to the limitations in Section 14, NGS shall be liable to NGC for, hold NGC harmless against and indemnify NGC against any on or off-site environmental liabilities attributable to negligence, gross negligence or wanton or willful misconduct by NGS. NGS shall not be liable to NGC, hold NGC harmless against or indemnify NGC with respect to any other environmental liabilities. SECTION 13 - EVENTS OF DEFAULT; REMEDIES 13.1 Events of Default. An "Event of Default" shall mean, with respect to a Party ("Defaulting Party"), the occurrence of any of the following: (a) the failure to make, when due, any payment required pursuant to this Agreement, except if such payment is being contested in good faith pursuant to Sections 4.5 and 15, if such failure is not remedied within sixty (60) Business Days after written notice of such failure; (b) any representation or warranty made by the Defaulting Party herein shall be false or misleading in any material respect when made or when deemed to be repeated; (c) the willful contravention of any applicable law or regulation relating to the operation of the Facilities; (d) the failure to perform any material obligation set forth in this Agreement (other than the events that are otherwise specifically covered as a separate Event of Default, and such failure is not cured within sixty (60) Business Days after written notice of such failure); or (e) a Party shall be Bankrupt. 13.2 Remedies. Upon an Event of Default, the non-Defaulting Party has the right to terminate this Agreement upon thirty (30) days written notice to the Defaulting Party. This Agreement will be reinstated if the default is cured within the thirty (30) day period. SECTION 14 - LIABILITY AND DAMAGES 14.1 Limitation of Liability. Notwithstanding anything to the contrary express or implied in this Agreement, direct actual damages only, neither Party shall be liable to the other Party hereto in tort, contract, indemnity provision under statute or otherwise in law or equity or by contract for any indirect, consequential, incidental, punitive or exemplary damages, lost profits or other business interruption damages. 14.2 Limitation of Damages. Notwithstanding anything to the contrary expressed or implied in this Agreement, in no event shall either Party be liable to the other Party for damages for all events and occurrences that occur in a calendar year that exceed the sum of the annual amounts paid by NGC to NGS for that calendar year pursuant to Section 4 plus any applicable insurance proceeds. SECTION 15 - DISPUTE RESOLUTION 15.1 Step Negotiation. In the event of a dispute regarding this Agreement, the Parties shall attempt, in good faith, to resolve the dispute amicably and promptly by appointing a senior executive of each Party to attempt to mutually agree upon a resolution. Either Party may give the other Party written notice of any dispute or claim. Within ten (10) days after delivery of said notice, the executives will meet at a mutually acceptable time and place and thereafter as often as they reasonably deem necessary to exchange information and attempt to resolve the dispute or claim within thirty (30) days. If the two senior executives cannot reach a resolution, the dispute may be set for arbitration as defined herein. 15.2 Arbitration. If the senior executives of the Parties are unable to resolve the dispute, and adjudication of the dispute is not within the exclusive jurisdiction of the FERC, the dispute may be submitted upon request of either Party to binding arbitration by one arbitrator who has not previously been employed by either Party, and does not have a direct or indirect interest in either Party or the subject matter of the arbitration. Such arbitrator shall either be as mutually agreed by the Parties within thirty (30) days after written notice from either Party requesting arbitration, or failing agreement, shall be selected under the expedited rules of the American Arbitration Association (the "AAA") unless otherwise agreed by the Parties. Such arbitration shall be held in alternating locations of the home offices of the Parties or in any other mutually agreed upon location. The rules of the AAA shall apply to the extent not inconsistent with the rules herein specified. The judgment rendered by the arbitrator may be enforced in any court having jurisdiction of the subject matter and the Parties. All costs of the arbitration shall be paid equally by the Parties, unless the award shall specify a different division of the costs. Each Party shall be responsible for its own expenses, including attorney's fees. Both Parties shall be afforded adequate opportunity to present information in support of its position on the dispute being arbitrated. The arbitrator may also request additional information from the Parties. 15.3 Arbitration Rules. The arbitrator shall be bound by the terms of this Agreement and may not detract from or add to its terms. The Parties may by mutual agreement specify the rules that are to govern the arbitration proceedings and limit the matters to be considered. The findings and award of the arbitrator shall be final and conclusive and shall be binding upon the Parties, except as otherwise provided by law. Each Party agrees that it will not bring a lawsuit concerning any dispute covered by this arbitration provision. Any monetary award of the arbitrator may be enforced by the Party in whose favor such monetary award is made in any court of competent jurisdiction. SECTION 16 - FORCE MAJEURE 16.1 Force Majeure. As used in this Agreement, "Force Majeure" means an event or circumstances which prevents one party from performing its obligations under this Agreement, which event or circumstances was not anticipated as of the date of the Agreement and is not within the reasonable control of, and without fault or negligence of, the Party claiming Force Majeure (the "Claiming Party"), and which, by the exercise of due diligence, the Claiming Party is unable to overcome or avoid or cause to be avoided. Consistent with the above, Force Majeure includes, without limitation, sabotage, strikes or other labor difficulties, riots or civil disturbance, acts of God, act of public enemy, drought, earthquake, flood, explosion, fire, lightning, landslide, or similarly cataclysmic occurrence, or appropriation or diversion of electricity by sale or binding order of any court or governmental authority having jurisdiction thereof (so long as the Claiming Party has not applied for or assisted in the application for such Court or government action or any other case, whether of the kind herein enumerated or otherwise). In the event of a strike or other labor difficulties, NGS will use all reasonable efforts to ensure that the Facilities are operated as if there were no strike or other labor difficulties during the time such events exist. 16.2 Procedure on Force Majeure Claim. (a) If a Claiming Party wishes to claim relief by reason of Force Majeure, it shall give written notice stating the date of commencement of such Force Majeure event and the predicted extent, estimated consequences and the cause thereof, to the other Party as soon as reasonably possible and in any case within ten (10) days of it becoming aware of such event or circumstances, time being of the essence. (b) The Claiming Party shall keep the other Party fully informed of any developments with respect to the Force Majeure. (c) If either Party claims relief for Force Majeure pursuant to Section 16.1 and the other Party disputes the existence, nature, extent or condition of the event of circumstances giving rise to such claim for relief, then such dispute shall be resolved pursuant to Section 15. (i) the Parties shall meet promptly in order to resolve such dispute within such period as the Parties hereto may agree (or, failing agreement, within thirty (30) days); and (ii) if such dispute is not resolved by the Parties pursuant to paragraph (i) above, then such dispute shall be resolved pursuant to Section 15. (d) The Claiming Party shall give notice to the other Party of the cessation of the relevant event or circumstances of Force Majeure as soon as practicable after becoming aware of such cessation. (e) In the event that Force Majeure causes any Party to be unable to serve any notice hereunder, the period for the serving of such notice if any) shall be extended for every day while such event or circumstance of Force Majeure prevents the service of such notice. 16.3 Effects of Force Majeure. If either Party to this Agreement is rendered wholly or partly unable to perform its obligations hereunder because of Force Majeure as defined above, that Party shall be excused from whatever performance is affected by the Force Majeure to the extent so affected, provided that: (a) the non-performing Party promptly, but in no case longer than ten (10) Business Days after the occurrence of the Force Majeure, gives the other Party written notice describing the particulars of the occurrence; (b) the suspension of performance shall be of no greater scope and of no longer duration than is reasonably required by the Force Majeure; and (c) the non-performing Party uses due diligence to remedy its inability to perform. In the event that the Force Majeure is of a duration greater than ninety (90) days, the performing Party may terminate this Agreement with respect to the Facility or Facilities whose performance is affected by the Force Majeure upon ninety (90) days prior written notice, unless the Force Majeure has been cured within that later ninety (90) day period. SECTION 17 - NO NGS WARRANTIES EXCEPT AS PROVIDED IN SECTION 3 OF THIS AGREEMENT, NGS MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, FOR THE BENEFIT OF NGC OR ANY THIRD PARTY CONCERNING THE QUALITY, MERCHANTABILITY AND FITNESS FOR ITS INTENDED PURPOSE OF THE SERVICES IT PROVIDES UNDER THIS AGREEMENT. SECTION 18 - INSPECTION AND AUDIT RIGHTS 18.1 Audit Rights. NGC shall have the right throughout the Term and for a period of three (3) years following the end of the Term, upon reasonable prior notice, to inspect the Facilities, to request copies of and review documents and to examine the books and records of NGS to the extent reasonably necessary to verify the accuracy and basis for any claim by NGS for payments from NGC or to determine NGS's compliance with the terms of this Agreement. NGS shall make all such records available as appropriate at each Facility or NGS's office in Rocky Hill, Connecticut during normal business hours. SECTION 19 - INDEMNIFICATION 19.1 Indemnification. NGC and NGS shall each be liable to, indemnify, defend and hold the other Party, its directors, officers, employees and agents (including but not limited to affiliates and contractors and their employees), harmless from and against all third party liabilities, damages, losses, penalties, claims, demands, suits, expenses, attorneys' fees and proceedings of any nature whatsoever for personal injury (including death) or property damage that arise out of or are in any manner connected with the performance of this Agreement by that party, except to the extent that such injury or damage may be attributable to the negligence, gross negligence or willful misconduct of the Party seeking to be indemnified. In the case of NGS, its indemnification obligation shall be limited to the amounts described in Section 14. 19.2 Employee Obligations. NGS, either directly or through its Affiliate service company, Northeast Utilities Service Company ("NUSCO") shall be solely responsible for employing the employees who shall perform the Services and other obligations hereunder on behalf of NGS (the "Employees") and shall maintain employment of Employees with such qualifications and expertise as necessary for NGS to provide the Services to NGC pursuant hereto. NGS, either directly or through NUSCO, shall be responsible for the payment of all salaries and benefits, whether contractual or statutory, associated with the employment of the Employees, including but not limited to, expense reimbursements, health insurance, workers compensation and social security, and NGS shall indemnify and hold harmless NGC from and against all claims, demands, costs, expenses (including reasonable attorneys' fees) as incurred, liabilities and losses which may result from the failure of NGS to comply with such responsibilities in connection with its employees. 19.3 Proceedings. The indemnifying Party shall be promptly notified of any claim made against the indemnified Party arising out of the matters specified in this Section 19. 19.4 (a) The indemnifying Party may at its own cost conduct negotiations for the settlement of any claim made against the indemnified Party arising out of the matters specified in this Section 19 and any litigation that may arise therefrom in such reasonable manner as the indemnified Party shall from time to time approve (such approval not to be unreasonably withheld). 19.4 (b) The indemnified Party shall not make any admission which might be prejudicial to the indemnifying Party unless the indemnifying Party has failed to take over the conduct of the negotiations or litigation or provide security under this Section 19.4 within a reasonable time of having been so requested. SECTION 20 - INTELLECTUAL PROPERTY 20. 1 "Intellectual Property Rights" means: (a) (i) patents, trade marks, service marks, rights in designs, trade names, copyrights and topography rights, in each case whether registered or not; (ii) applications for registration of any of the above; (iii) rights under licenses and consents in relation to any of the above; and (iv) all forms of protection of a similar nature or having equivalent or similar effect to any of them which may subsist anywhere in the world. (b) NGC Intellectual Property. Designs, drawings, specifications, instructions, manuals and other documents created, produced or commissioned by NGC and relating to the Facilities and to the carrying out of the Services at the Facilities and copyright therein and all Intellectual Property Rights relating thereto ("NGC Intellectual Party") are, shall be, and shall remain the property of NGC. NGC hereby grants to NGS a revocable, non- exclusive, royalty free, non-transferable license to use NGC Intellectual Property in connection with the providing of the Services to NGC only. (c) Operator Intellectual Property. NGS hereby grants to NGC an irrevocable, non-exclusive, royalty-free, transferable license to use solely with regard to the providing of Services to NGC any Intellectual Property Rights owned by NGS required in connection with the Services. (d) Third Party Intellectual Property. Prior to concluding any contract with any third parties relating to the supply of materials or services specifically created by third parties for the purposes of providing the Services, NGS shall use reasonable efforts to provide that such third party grant irrevocable non-exclusive, royalty-free licenses to each of NGS and NGC to use all Intellectual Property Rights pertaining to such contract with the right for NGC to assign such license to, or grant a sub-license to, any person appointed operator of the Facilities from time to time. SECTION 21 - MISCELLANEOUS 21.1 Amendments. This Agreement may be amended only by a writing executed by the Parties hereto. 21.2 Governing Law. 21.2.1. Choice of Law and Jurisdiction. This Agreement and the rights and duties of the parties hereunder shall be governed by and construed, enforced and performed in accordance with the laws of the State of Connecticut, without regard to principles of conflicts of law. Each Party waives its respective right to any jury trial with respect to any litigation arising under or in connection with this Agreement. 21.2.2. Applicable Laws, Regulations, Orders, Approvals and Permits. This Agreement is made subject to all existing or future applicable federal, state, and local laws and to all existing or future duly promulgated orders or other duly authorized actions of governmental authorities having jurisdiction over the matters contained in this Agreement. 21.3 Notices. All notices, requests, statements, or payments required to be made under this Agreement shall be made as specified below. Notices required to be in writing shall be delivered in person, by letter, facsimile or other documentary form. Notice by facsimile or hand delivery shall be deemed to have been received by the close of the Business Day on which it was transmitted or hand delivered (unless transmitted or hand delivered after close, in which case it shall be deemed received by the close of the next Business Day). Notice by overnight mail or courier shall be deemed to have been received the next Business Day after it was sent. A Party may change its addresses by providing notice of same in accordance herewith: To NGC: Northeast Generation Company 107 Selden Street Berlin, CT 06037 Attn: Asset Management Division, Joseph J. Staszowski, Director FAX: (860) 665-5798 To NGS: Northeast Generation Services Company 273 Dividend Road Rocky Hill, CT 06067 Attn: William J. Nadeau Vice President and Chief Operating Officer FAX: (860) 665-6263 Either Party by written notice to the other Party may change the address or the persons to whom notices or copies thereof shall be directed. 21.4 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of which together shall constitute one and the same instrument. 21.5 Assignment. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of each Party hereto. Neither Party shall assign its obligations hereunder to any other Person without the prior written consent of the other Party, which in the case of a proposed assignment by NGS may be withheld by NGC in its sole discretion, and in the case of a proposed assignment by NGC may not be unreasonably withheld by NGS; provided, however, that NGC may assign its rights hereunder to an Affiliate or to a Lender in connection with financing or refinancing of the Facilities. 21.6 Waivers. The failure of either Party hereto to enforce at any time any provision of this Agreement shall not be construed to be a waiver of such provision, nor in any way to affect the validity of this Agreement or any part hereof or the right of a Party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to constitute a waiver of any other or subsequent breach. 21.7 No Third Party Beneficiaries. Nothing in this Agreement, whether express or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any persons other than the Parties and their respective permitted successors and assigns, nor is anything in this Agreement intended to relieve or discharge the obligation or liability of any third persons to either Party, nor to give any third persons any right of subrogation or action against either Party.. 21.8 Section Headings. The section headings used in this Agreement are for convenience only and shall not be deemed to be a binding portion of this Agreement. 21.9 Independent Contractors. The Parties are independent contractors. Except as otherwise specified in this Agreement, nothing contained herein shall be deemed to create association, joint venture, partnership or principal/agent relationship between the Parties hereto or impose any partnership obligation or liability on either Party, and neither Party shall have any right, power or authority to enter into any agreement or commitment, act on behalf of or otherwise bind the other Party in any way. 21.10 Successors Included. Reference to any individual, corporation or other entity shall be deemed a reference to such individual, corporation or other entity, together with its successors and permitted assigns from time to time. 21.11 Entire Agreement. This Agreement (including the Schedules hereto) constitute the entire agreement between the Parties relating to the subject matter contemplated by this Agreement. This Agreement shall be considered for all purposes as prepared through the joint efforts of the parties and shall not be construed against one party or the other as a result of the preparation, substitution, submission or other event of negotiation, drafting or execution hereof. 21.12 Partial Invalidity. Wherever possible, each provision hereof shall be interpreted in such manner as to be effective and valid under applicable law, and any provision declared or rendered unlawful by any applicable court of law or regulatory agency or deemed unlawful because of a statutory change will not otherwise affect the remaining lawful obligations that arise under this Agreement, unless such a construction of the remainder of the Agreement would be unreasonable or deprive a Party of a material benefit under this Agreement. In such event, the Parties shall seek to amend this Agreement to remove the invalid provision and otherwise provide the benefit unless prohibited by law. 21.13 Surviving Rights. All indemnity and audit rights shall survive the termination of this Agreement for three (3) years. SECTION 22 - REPRESENTATIONS AND WARRANTIES On the date of this Agreement, each Party represents and warrants to the other Party that: (i) it is duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation, (ii) it has all regulatory authorizations necessary for it to legally perform its obligations under this Agreement and any other documentation relating to this Agreement to which it is a party, (iii) the execution, delivery and performance of this Agreement and any other documentation relating to this Agreement to which it is a party are within its powers, have been duly authorized by all necessary action and do not violate any of the terms and conditions in its governing documents, any contracts to which it is a party or any law, rule, regulation, order or the like applicable to it, (iv) this Agreement and each other document executed and delivered in accordance with this Agreement constitutes its legally valid and binding obligation enforceable against it in accordance with its terms, (v) there are no bankruptcy proceedings pending or being contemplated by it or, to its knowledge, threatened against it, (vi) there is not pending or, to its knowledge, threatened against it any legal proceedings that could materially adversely affect its ability to perform its obligations under this Agreement or any other document relating to this Agreement to which it is a party, (vii) no Event of Default or event which, absent a cure, with the giving of notice or lapse of time, or both, would constitute an Event of Default with respect to it has occurred and is continuing and no such event or circumstance would occur as a result of its entering into or performing its obligations under this Agreement or any other document relating to this Agreement. IN WITNESS WHEREOF the Parties have executed this Agreement as of the day and year first above written. Northeast Generation Company By: _____________________________ Name: Title: Northeast Generation Services Company By: _____________________________ Name: Title: EXHIBIT 1 ELECTRIC GENERATING FACILITIES HOUSATONIC HYDROELECTRIC SYSTEM Falls Village Station Bulls Bridge Station Rocky River Station Shepaug Station Stevenson Station Robertsville Station Bantam Station EASTERN HYDROELECTRIC SYSTEM Tunnel Station Taftville Station Scotland Station Tunnel ICU NORTHFIELD MOUNTAIN HYDROELECTRIC SYSTEM Northfield Mountain Pumped Storage Station Cabot Station Turner Falls #1 Station Northfield Environmental Recreational Center EXHIBIT 2 SCOPE OF SERVICES The Services provided under Section 3 of the Agreement include management, operations, maintenance, administrative, labor, consumable materials (except station services for electrical needs and fuel for electric generation), water, supervision and other goods and services necessary for the safe, efficient, and reliable management, operation and maintenance of the Facilities on a daily basis. The scope of services includes, the following: A. Facility Management 1. Recruiting, hiring and training of qualified personnel, vendors and subcontractors; 2. Strategic planning to ensure that the Facilities' day-to-day and long- term operational and maintenance needs are satisfied; 3. Compliance with and maintenance of standard operating procedures; 4. Preparation and maintenance of operating and maintenance records and reports; 5. Preparation and processing of invoices to support payments by NGC of items directly charged to NGC; 6. Procurement and payment for goods, services and supplies provided by vendors, suppliers and contractors; 7. Development and implementation of policies and procedures relating to safety, environmental and security practices; 8. Development and maintenance of an effective inventory management system; 9. Supervision of all personnel, vendors and subcontractors; 10. Development of operating reports and budgets for NGC costs; 11. Development of recommendations for Facility capital improvements and programs which may be of benefit to NGC; 12. Reasonable coordination with NGC and Buyer; 13. Development and implementation of an effective maintenance process including all necessary procedures; 14. Utilization of predictive maintenance program; 15. Utilization of computer based maintenance management system; 16. Inspection of dams as required; 17. Operation and Maintenance of all recreational facilities associated with the Facilities; 18. Provision of hand tools and equipment determined to be less than units of property under NGC's retirement catalogue; 19. Administration and assurance of compliance with and maintenance of all licenses, permits, leases, and contracts associated with the Facilities; 20. Coordinating with CL&P, WMECO, NGC and Buyer under the terms of the Interconnection Agreements with NGC dated 7/2/99; 21. Community Relations. B. Operations NGS will provide all services necessary to operate the Facilities in strict compliance with all legal requirements and government authorizations or licenses and in accordance with Good Industry Practices and NEPOOL Standards. Operations shall include, but not be limited to the following: 1. Operating the hydroelectric, pumped storage and jet plants with Good Industry Practice; this includes all auxiliary systems, motor control centers and electrical switchgear; 2. Scheduling of operations and personnel; 3. Coordinating with transmission/distribution tagging; 4. Removal of debris and ice from trash racks; 5. Operation of intakes, spillways, gateways and outlet works; 6. Public notification of draw down events; 7. Assuring compliance with applicable environmental, safety and health regulations; 8. Maintenance of NGC's spare parts inventory to enable performance of all maintenance and continued operations; 9. Operation of lubrication and control systems; 10. Performance of equipment testing and adjustments; 11. Providing Facility security; 12. Caring for Facilities and grounds, including housekeeping. C. Maintenance To ensure the long-term operability of systems and equipment, NGS will provide services necessary to maintain the Facilities' equipment, including on-site electrical interconnection Facilities owned by NGC, in proper working condition under the current mode of operation as of the effective date of this Agreement. Maintenance includes but not be limited to the following: 1. Ordinary Maintenance - daily repairs, maintenance and upkeep of the Facilities to maintain plant capacity and uninterrupted, economical production and delivery of electricity. 2. Scheduled Maintenance - overhauls, repairs, maintenance and upkeep to the Facilities at scheduled intervals to preserve and maintain plant capacity and uninterrupted and economical production and delivery of electricity. 3. Forced Maintenance - repairs and maintenance of the Facilities not reasonably anticipated which must be performed to preserve and maintain plant capacity and uninterrupted economical production of electricity and energy products. 4. Facility Maintenance - inspection, and minor maintenance and repair of all buildings, structures, facilities and grounds. EXHIBIT 3 ONGOING PURCHASE AND SALE AGREEMENT OBLIGATION CL&P and WMECO PSAs Section 5.7 Employee Matters Section 5.8 Access After Closing to Records and Employees Section 5.13 Discharge of Environmental Liabilities Section 7.0 Confidentiality Section 11.1 Press Releases and Public Announcement Exhibit E - Interconnection Agreements Dated 7/2/99 EXHIBIT 4 NGS EXCLUDED COSTS NGS will not be responsible for paying or bearing the costs of the following items, although NGS may process invoices or bills for such costs for payment by NGC as part of the administrative service it provides: 1. Fuel, fuel testing, and emission fees for the Tunnel Jet Facility. 2. Pumping Costs for either the Rocky River facility or Northfield Mountain facility 3. Property taxes for the Facilities 4. Insurance premiums for property, liability or business interruption insurance for the Facilities 5. Costs associated with any headwater or backwater benefit agreements entered into by NGC for the Facilities, including fees for FERC gauging stations. 6. Inventory carrying charges associated with the Facilities. 7. Costs associated with Stand-By/Back-up Services for the Facilities and those related for use of non-PTF or distribution Facilities. 8. FERC annual hydroelectric license fee. 9. FERC hydroelectric license related expenses beyond those required for compliance on a daily basis with the FERC licenses which are not included in the Annual Fee in Exhibit 6. 10. Environmental fees for the Facilities which are not included in the Annual Fee in Exhibit 6. 11. Costs payable under contracts that are not included in the Annual Fee in Exhibit 6. 12. Sales, gross receipts, value added and similar taxes. EXHIBIT 5 APPROVED CAPITAL EXPENDITURES Year Approved Capital Expenditures 2000 2001 2002 2003 [By Facility] EXHIBIT 6 PAYMENTS a. Fixed Fee Annual Fee - All Facilities Monthly Payment - All Facilities 1999 - - 2000 - - 2001 - - 2002 - - 2003 - - ** The fixed fee for a calendar year shall be paid by NGC in twelve (12) equal annual monthly installments on the first business day of each month for that month, or in amounts predetermined and agreed upon by the Parties based on scheduled maintenance activity. Payment for any partial month shall be prorated based on the number of days in a month that NGS operates a Facility as a percentage of the total number of days in that month. b. Incentive Payment/Penalty Component NGC will pay NGS an annual incentive payment of up to ten (10) percent or impose an annual incentive penalty of up to five (5) percent of the Fixed Fee based on NGS's performance against performance goals such as: 1. Overall availability of the Facilities 2. Availability of the Facilities during peak periods 3. Northfield Mountain Facility only - availability during 200 annual highest price hours NGC and NGS will work collaboratively to design and implement the specific performance goals and incentive calculation. EXHIBIT 7 ASSUMED MAINTENANCE SCHEDULE BY FACILITY 2000 2001 2002 2003 -----END PRIVACY-ENHANCED MESSAGE-----